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on Banking |
| By: | Leonardo Gambacorta; Tommaso Oliviero; Tommaso Hyun Song Shin |
| Abstract: | Banks with a low price-to-book ratio have a greater propensity to pay out dividends. This propensity is especially marked for banks with a price-to-book ratio below a threshold of 0.7. As a sector, banks also tend to have higher dividend payout ratios than non-financial firms. We demonstrate these features using data for 271 advanced economy banks in 30 jurisdictions. Dividend payouts as a proportion of profits rise in a non-linear way as the price-to-book ratio falls below 0.7. In a hypothetical exercise with fixed balance sheet ratios, we find that a complete suspension of bank dividends in 2020 during the Covid-19 pandemic would have added, under different stress scenario, an additional US$ 0.8–1.1 trillion of bank lending capacity in our sample, equivalent to 1.1–1.6% of total GDP. |
| Keywords: | dividend payout policy, banks, low interest rates, Covid-19 crisis |
| JEL: | G21 G35 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:907&r=all |
| By: | Falk Bräuning; Jose Fillat |
| Abstract: | We use an expansive regulatory loan-level data set to analyze how the portfolios of the largest US banks have changed in response to the Dodd-Frank Act Stress Test (DFAST) requirements. We find that the portfolios of the largest banks, which are subject to stress-testing, have become more similar to each other since DFAST was implemented in 2011. We also find that banks with poor stress-test results tend to adjust their portfolios in a way that makes them more similar to the portfolios of banks that performed well in the stress-testing. In general, stress-testing has resulted in more diversified bank portfolios in terms of sectoral and regional composition. However, we also find that all the large banks diversified in a similar way, creating a more concentrated systemic portfolio in the aggregate. Finally, we analyze the effects of stress-testing and portfolio sensitivity to macroeconomic scenarios on credit supply. Our findings indicate that banks that experience worse results in the stress tests cut lending relative to their peers and specifically in loans that are most sensitive to the stress-test scenarios. At the borrower level, firms that rely more on credit from banks with poor stress-test results are not able to substitute lost funding and therefore face a larger reduction in credit and cut back investment. These results highlight a macroprudential effect of stress-testing: Credit growth is curtailed during a credit expansion in those banks holding a portfolio that is more sensitive to stressful scenarios. Hence, these banks are expected to be in a more resilient position at the onset of a downturn. |
| Keywords: | banking; regulation; stress testing; portfolio similarity; credit supply |
| JEL: | G20 G21 G28 |
| Date: | 2020–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:89225&r=all |
| By: | ; ; Fumiko Hayashi; Joanna Stavins |
| Abstract: | Using data from the United States and Canada, we quantify consumers’ net pecuniary cost of using cash, credit cards, and debit cards for purchases across income cohorts. The net cost includes fees paid to financial institutions, rewards received from credit or debit card issuers, and the merchant cost of accepting payments that is passed on to consumers as higher retail prices. Even though credit cards are more expensive for merchants to accept compared with other payment methods, merchants typically do not differentiate prices at checkout, but instead pass through their costs to all consumers. As a result, credit card transactions are cross-subsidized by cheaper debit and cash payments. Card rewards and consumer fees paid to financial institutions are additional sources of cross-subsidies. We find that consumers in the lowest-income cohort pay the highest net pecuniary cost as a percentage of transaction value, while consumers in the highest-income cohort pay the lowest. This result is robust under various scenarios and assumptions, suggesting payment card pricing and merchant cost pass-through have regressive distributional effects in the United States and Canada. |
| Keywords: | regressive effects; rewards; credit cards; interchange fees; pass-through |
| JEL: | D12 D31 G21 L81 |
| Date: | 2020–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:89226&r=all |
| By: | Bratsiotis, George (Department of Economics, University of Manchester); Theodoridis, Konstantinos (Cardiff Business School) |
| Abstract: | This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the reluctance of the banking sector to "lend" to the real economy induced by an exogenous change in financial intermediaries' preference for "high" liquid assets. The identified shock has sizeable and state (volatility) dependent effects on the real economy. To understand the transmission of the shock, we develop a DSGE model of financial intermediation with credit and liquidity frictions. The precautionary liquidity shock is shown to work through two channels: it increases the level of reserves and the deposit rate. The former is a balance sheet effect, which reduces the loan-to-deposit ratio. The higher deposit rate affects the intertemporal decisions of households and the cost of borrowing to firms. The overall effect is a downward co-movement in output, consumption, investment and prices, which is amplified the higher are the long-run risks in the economy and the responsiveness of banks to potential risk. |
| Keywords: | House Prices, SVAR; Sign and Zero Restrictions; DSGE; Precautionary Liquidity Shock; Excess Reserves; Deposit Rate; Risk, Financial Intermediation. |
| JEL: | C10 C32 E30 E43 E51 G21 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2020/15&r=all |
| By: | Egle Jakucionyte (Bank of Lithuania, Vilnius University); Swapnil Singh (Bank of Lithuania, Kaunas University of Technology) |
| Abstract: | Using the universe of mortgage applications data and detailed credit performance data, we document that since the early 1990s there was a significant decline in the share of mortgages with co-borrowers. Although the decline was an almost universal phenomenon across different regions of the US, the rate of the decline showed significant spatial heterogeneity and in turn had implications for regional differences in economic activity. We show that the presence of a co-borrower reduces the mortgage default probability by more than 50 percent for both prime and subprime loans and those regions that had a lower co-borrower share prior to the crisis experienced higher mortgage default rates over the period 2007-2010. Higher default rates created spillovers on economic activity during the Great Recession: a lower co-borrower share at the regional level was also related to persistently lower house price growth, refinancing growth and mortgage credit growth. These results imply that the decrease in the share of mortgages with co-borrowers made the US mortgage market more vulnerable to the financial crisis and contributed to the divergence in economic outcomes across different regions. |
| Keywords: | Residential mortgages, Foreclosure, Non-banks Lending |
| JEL: | G21 G51 R21 |
| Date: | 2020–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:78&r=all |
| By: | Juselius, Mikael; Tarashev, Nikola |
| Abstract: | Extending a standard credit-risk model illustrates that a single factor can drive both expected losses and the extent to which they may be exceeded in extreme scenarios, ie “unexpected losses.” This leads us to develop a framework for forecasting these losses jointly. In an application to quarterly US data on loan charge-offs from 1985 to 2019, we find that financial-cycle indicators – notably, the debt service ratio and credit-to-GDP gap – deliver reliable real-time forecasts, signalling turning points up to three years in advance. Provisions and capital that reflect such forecasts would help reduce the procyclicality of banks’ loss-absorbing resources. |
| JEL: | G17 G21 G28 |
| Date: | 2020–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2020_018&r=all |
| By: | Alexandra ZINS (LaRGE Research Center, Université de Strasbourg); Laurent WEILL (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper investigates cyclicality of Islamic banking relative to conventional banking. We examine whether loan growth and profitability have a different sensitivity to economic growth for Islamic banks and for conventional banks. We use panel data from 525 banks covering 16 countries with dual banking systems spanning the period from 2008 to 2018. We find no difference in lending cyclicality: Islamic banks and conventional banks have both a procyclical lending behavior. Profitability is procyclical for Islamic banks but not for conventional banks. Our findings support the view that Islamic banking presence does not contribute to strengthen economic stability. |
| Keywords: | Islamic banking, loan growth, financial stability, bank profitability, business cycles, procyclicality. |
| JEL: | G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2020-03&r=all |
| By: | Financial System and Bank Examination Department of the Bank of Japan (Bank of Japan); Strategy Development and Management Bureau, and Supervision Bureau of the Financial Services Agency (Financial Services Agency) |
| Abstract: | In light of the experience of the 2008 global financial crisis, the use of stress testing has become widespread among financial authorities in major jurisdictions as a central tool in assessing the resilience of systemically important financial institutions. In Japan, too, given that major banks' risk profiles have become more diversified and complex in recent years as they have expanded their overseas activities and non-commercial banking businesses within their groups, it is becoming ever more important to use stress testing for assessing banks' resilience and ensuring that risk management capabilities are put in place. This paper outlines the supervisory simultaneous stress testing based on common scenarios, an exercise newly started by the Bank of Japan and the Financial Services Agency, describing its background, differences in the institutional arrangements from the United States and Europe, and the role of benchmarking and horizontal reviews. |
| Date: | 2020–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojrev:rev20e09&r=all |
| By: | Francis OSEI-TUTU (LaRGE Research Center, Université de Strasbourg); Laurent WEILL (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper examines the impact of bank efficiency on access to credit. We test the hypothesis that higher bank efficiency, meaning better ability of banks to operate at lower costs, favors access to credit for firms. To this end, we perform a cross-country analysis with firm-level data on access to credit and bank-level data to compute bank efficiency, using a sample of about 54,000 firms from 76 countries. We find that greater bank efficiency improves access to credit for firms. The beneficial impact of bank efficiency to alleviate credit constraints takes place through the demand channel by reducing borrower discouragement to apply for a loan. Whereas the positive impact of bank efficiency on credit access is observed for firms of all sizes, the effect tends to be more pronounced in countries with better economic and institutional framework. Our results therefore support policies favoring bank efficiency to enhance access to credit. |
| Keywords: | bank efficiency, access to credit, borrower discouragement. |
| JEL: | G21 O16 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2020-05&r=all |
| By: | Fernando E. Alvarez; David O. Argente |
| Abstract: | We estimate the private benefits for Uber riders from using alternative payment methods. We focus on Mexico where riders have the option to use cash or credit cards to pay for rides. We use three field experiments involving approximately 400,000 riders to estimate the loss of private benefits for riders if a ban on cash payments is implemented. We find that Uber riders, using cash as means of payment either sometimes or exclusively, suffer an average loss of approximately 50% of their expenditures on trips paid in cash before the ban. |
| JEL: | E4 E5 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28133&r=all |
| By: | Aleksander Berentsen; Hugo van Buggenum; Romina Ruprecht |
| Abstract: | Major central banks remunerate reserves at negative interest rates and it is increasingly likely that they will keep rates negative for many more years. To study the long run implications of negative rates, we construct a dynamic general equilibrium model with commercial banks funding investment projects and a central bank issuing reserves. Negative rates distort investment decisions resulting in lower output and welfare. These findings sharply contrast the short-run expansionary effects ascribed to negative rate policies by most of the existing literature. Negative rates also reduce commercial bank profitability. Exempting a fraction of reserves from negative rates can resolve profitability concerns without affecting the central bank's ability to control the money market rate. However, exemption thresholds do no mitigate the investment distortions created by negative rates. |
| Keywords: | Negative interest rate, money market, monetary policy, interest rates |
| JEL: | E40 E42 E43 E50 E58 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:372&r=all |
| By: | Olena Havrylchyk (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - UP1 - Université Panthéon-Sorbonne); Aref Mahdavi-Ardekani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper explores the short_term impact of borrowing via lending_based crowdfunding on performance and health of small and medium enterprises (SMEs) in France. We find that firms borrowing from lending-based crowdfunding platforms are more dynamic (higher asset growth and higher profitability) and innovative, but they have lower leverage, less cash, higher funding costs and less tangible assets that could be pledged as as collateral. To account for this selection bias, we construct three control groups by using Propensity Score Matching, Mahalanobis Distance Matching and Coarsened Exact Matching methods and then run difference-in-difference regressions. We find that borrowing via lending-based crowdfunding platforms increases SMEs' leverage and interest rate burden in the short-term, but these impacts disappear after two years. We observe asset growth during the year of borrowing, but no impact on sales growth, investment, employment or profitability. |
| Keywords: | lending-based crowdfunding,firm financing,firm performance,informational asymmetry |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-02994903&r=all |
| By: | Dietsch Michel; Fraisse Henri; Lé Mathias; Lecarpentier Sandrine |
| Abstract: | Starting in 2014 with the implementation of the European Commission Capital Requirement Directive, banks operating in the Euro area were benefiting from a 25% reduction (the Supporting Factor or "SF" hereafter) in their own funds requirements against Small and Medium-sized enterprises ("SMEs" hereafter) loans. We investigate empirically whether this reduction has supported SME financing and to which extent it is consistent with SME credit risk. Economic capital computations based on multifactor models do confirm that capital requirements should be lower for SMEs. Taking into account the uncertainty surrounding their estimates and adopting a conservative approach, we show that the SF is consistent with the difference in economic capital between SMEs and large corporates. As for the impact on credit distribution, our difference-in-differences specification enables us to find a positive and significant impact of the SF on the credit supply. |
| Keywords: | SME finance, Credit supply, Basel III, Credit risk modelling, Capital requirement. |
| JEL: | C13 G21 G33 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:789&r=all |
| By: | Hamza Bennani; Matthias Neuenkirch |
| Abstract: | We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area over the period 2003Q1–2019Q4 with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states (e.g., a normal state and a crisis state), using an underlying logit model determining the relative weight of these states over time. We show that shocks to the credit spread and shocks to credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. Credit standards and the credit spread are also the key determinants of the underlying state of the economy in the logit submodel. Together with a more pronounced transmission of monetary policy shocks in the crisis state, this provides further evidence for a financial accelerator in the euro area. Finally, the detrimental effect of credit conditions is also reflected in the labor market. |
| Keywords: | credit growth, credit spread, credit standards, euro area, financial accelerator, mixture VAR, monetary policy transmission |
| JEL: | E44 E52 E58 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8740&r=all |
| By: | Guerino Ardizzi (Bank of Italy); Andrea Nobili (Bank of Italy); Giorgia Rocco (Bank of Italy) |
| Abstract: | We explore the relationship between cash and other payment instruments using the outbreak of the COVID-19 pandemic as a natural experiment exogenously affecting both the payment industry and consumers’ habits. We rely on Google search data, as well as on the official series of new cases of infection to measure the intensity of the pandemic, and apply local projection methods to assess the effects on payment habits. We find a large and persistent substitution effect from cash to card-based transactions, especially using contactless and e-commerce options. The fear of infection has led to a new implicit cost associated to each payment instrument, thus affecting payment choices from the demand-side and boosting consumption with non-cash transactions. Moreover, technical constraints on the cash cycle and the lockdown measures have increased the demand for cash for precautionary purposes. Policies aiming at accelerating the digital economy and the most innovative means of payment can potentially make economic activity more resilient to adverse shocks. At the same time, ensuring the adequate and efficient availability of cash remains essential from a social and economic perspective. |
| Keywords: | COVID-19 pandemic, cash, payment habits, unconventional data |
| JEL: | E41 E42 G2 O3 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_591_20&r=all |