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on Banking |
| By: | Vazquez, Francisco |
| Abstract: | This paper studies episodes in which aggregate bank credit contracts alongside expanding economic activity—credit reversals. Using data for 179 countries during 1960‒2017, the paper finds that reversals are a relatively common phenomenon--on average, they occur every five years. By comparison, banking crises take place every eight years on average. Credit reversals and banking crises also appear related to each other: reversals become more likely in the aftermath of banking crises, while the likelihood of crises drops following reversals. Reversals are shown to be very costly in terms of foregone economic activity—about two-thirds of the costs of banking crises, after taking into account their relative frequencies. |
| Keywords: | Credit reversals, credit booms, credit crunches, credit cycles, banking crises, financial stability |
| JEL: | E32 E44 E51 G01 G21 |
| Date: | 2020–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:104869&r=all |
| By: | Guillaume Arnould (Bank of England; Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES)); Benjamin Guin (Bank of England); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Paolo Siciliani (Bank of England) |
| Abstract: | We study how banks react to policy announcements during a representative policy cycle involving consultation and publication using a novel dataset on the population of all mortgage transactions and regulatory risk assessments of banks. We demonstrate that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low risk assets after the publication of the policy. In contrast, there is no evidence that they already reacted to the early step of the development of the policy, the publication of the consultation paper. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain. |
| Keywords: | Bank regulation, mortgage lending, supervisory review process, capital requirements |
| JEL: | G21 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp20113&r=all |
| By: | van der Plaat, Mark; Spierdijk, Laura |
| Abstract: | Recourse is often included in loan sales and securitization in order to reduce potential problems arising from information asymmetries. Recent literature has shown, however, that recourse was ineffective in preventing such problems. In this paper we empirically study the recourse cyclicality hypothesis, which states that recourse is only effective in signaling asset quality and thereby reducing information asymmetries in a recession. Using data between 2001 and 2016 on U.S. commercial banks, we find that recourse is only effective in signaling asset quality during a recession. When the economy is booming, recourse is ineffective and cannot prevent the build-up of risky assets on- and off-balance sheet of banks. Our results are robust to several specifications. |
| Keywords: | Recourse; Loan Sales; Securitization; Asymmetric Information; Adverse Selection; Moral Hazard; Credit Risk; Banking; Cyclicality |
| JEL: | G21 G32 |
| Date: | 2020–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:104718&r=all |
| By: | Chepngenoh, Florence; Muriu, Peter W; Institute of Research, Asian |
| Abstract: | In pursuit of financial intermediation between borrowers and savers banks are exposed to various risks which affect efficiency. Using annual panel data for the period 2010 to 2019, this paper investigates the influence of risk-taking behaviour on bank efficiency in a developing economy. Data envelopment analysis technique was used to obtain the profit efficiency scores of each bank and Tobit regression to estimate the impact of various components of bank risks on profit efficiency. Estimation results established that credit and liquidity risks, significantly influence bank efficiency. Therefore, banks should maintain quality assets and a stable liquidity position as they significantly impact on efficiency. |
| Date: | 2020–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:n7r2c&r=all |
| By: | Brandon Tan; Maria Soledad Martinez Peria; Nicola Pierri; Andrea F Presbitero |
| Abstract: | The COVID-19 pandemic could result in large government interventions in the banking industry. To shed light on the possible consequences on market power, we rely on the experience of the global financial crisis and exploit granular data on government interventions in more than 800 banks across 27 countries between 2007 and 2017. For identification, we use a multivariate matching method. We find that intervened banks experience a significant decline in market power with respect to matched non-intervened banks. This effect is more pronounced for larger and longer interventions and is driven by a rise in costs—mostly because of higher loan impairment charges—which is not followed by a similar increase in prices. |
| Date: | 2020–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/275&r=all |
| By: | Shusen Qi (Xiamen University - School of Management); Shu Chen (Fujian Business University); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Jiaxing You (Xiamen University) |
| Abstract: | Does failure in a marriage foretell failure to repay credit? Analyzing the loan portfolio of a representative bank, we find no significant differences in the probability of default between divorcees and others, but we do find evidence for taste-based discrimination against divorcees. Compared to their peers, divorcees pay 8.7 basis points more in interest. This discrimination against divorcees is mainly effectuated in localities where traditional culture is more dominant and banking competition is limited, and by loan officers who are male, are older, and have been longer on the job. These findings provide valuable insights for policymakers to reduce discrimination. |
| Keywords: | discrimination, divorced borrower, loan officer |
| JEL: | G21 G51 J12 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp20116&r=all |
| By: | Reint Gropp (Halle Institute for Economic Research); Thomas C. Mosk (University of Zurich, Research Center SAFE); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Carlo Wix (Board of Governors of the Federal Reserve System); Ines Simac (KU Leuven) |
| Abstract: | We study how higher capital requirements introduced at the supranational level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that treated banks exploit discretion in the calculation of regulatory capital to inflate their capital ratios without a commensurate increase in their book equity and without a reduction in bank risk. Regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations. |
| Keywords: | Bank capital requirements, regulatory forbearance |
| JEL: | G21 G28 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp20112&r=all |
| By: | Andras Borsos (Magyar Nemzeti Bank (Central Bank of Hungary)); Bence Mero (Magyar Nemzeti Bank (Central Bank of Hungary)) |
| Abstract: | In this paper we develop a model of shock propagation in the banking system with feedback channels towards the real economy. Our framework incorporates the interactions between the network of banks (exhibiting contagion mechanisms among them) and the network of firms (transmitting shocks to each other along the supply chain) which systems are linked together via loan-contracts. Our hypothesis was, that the feedback mechanisms in these coupled networks could amplify the losses in the economy beyond the shortfalls expected when we consider the subsystems in isolation. As a test for this, we embedded the model into a liquidity stress testing framework of the Central Bank of Hungary, and our results proved the importance of the real economy feedback channel, which almost doubled the system-wide losses. To illustrate the versatility of our modeling framework, we presented two further applications for different policy purposes: (i) We elaborated a way to use the model for SIFI identification, (ii) and we showed an example of assessing the impact of shocks originated in the real economy. |
| Keywords: | systemic risk,financial network, production network, contagion |
| JEL: | G01 G21 G28 C63 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2020/6&r=all |
| By: | David Newton (University of Bath - School of Management); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Ru Xie (University of Bath, School of management); Binru Zhao (University of Bath - School of Management) |
| Abstract: | The economic downturn caused by the Covid-19 pandemic accentuates extant concerns about the leveraged loan market. Using a novel dataset, we show that leveraged loan spreads have declined for nonbank-facilities since the introduction of the Interagency Guidance on Leveraged Lending (IGLL) and the ensuing “frequently asked questions for implementing the March 2013 guidance”. The decline in leveraged loan spreads is significant for highly leveraged borrowers, especially when involving term loans. We further demonstrate that risk shifting issues associated with the high level of Collateralized Loan Obligations issuance strongly explain the decline of nonbank leveraged loan spreads. In addition, a higher degree of information asymmetry, driven by an increase in covenant-lite loan issuance and weaker investor protection, are strongly associated with the narrowed leverage risk premium. |
| Keywords: | Leverage Risk, Syndicated Loan Pricing, Leveraged Loan, Risk Shifting |
| JEL: | G21 D82 G34 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp20111&r=all |
| By: | Matthew O. Jackson; Agathe Pernoud |
| Abstract: | We provide an overview of the relationship between financial networks and systemic risk. We present a taxonomy of different types of systemic risk, differentiating between direct externalities between financial organizations (e.g., defaults, correlated portfolios and firesales), and perceptions and feedback effects (e.g., bank runs, credit freezes). We also discuss optimal regulation and bailouts, measurements of systemic risk and financial centrality, choices by banks' regarding their portfolios and partnerships, and the changing nature of financial networks. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.12702&r=all |
| By: | Bhupal Singh |
| Abstract: | This paper examines the efficacy of macroprudential policies in addressing housing prices in a developing country while underscoring the importance of fundamental factors. The estimated models using city-level data for India suggest a strong influence of fundamental factors in driving housing prices. There is compelling evidence of the effectiveness of macroprudential tools viz., Loan-to-value (LTV) ratio, risk weights, and provisioning requirements, in influencing housing price movements. A granular analysis suggests an even stronger impact on housing prices of a change in the regulatory LTV ratio for large-sized vis-à-vis small-sized mortgages, which buttresses their potency in fighting house price speculations. A tightening of the risk weights on the housing assets of banks causes significant downward pressure on house prices. Similarly, regulatory changes in standard asset provisioning on housing loans also influence house prices. |
| Date: | 2020–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/291&r=all |
| By: | Olivier de Bandt; Sandrine Lecarpentier; Cyril Pouvelle |
| Abstract: | The paper investigates the impact of solvency and liquidity regulation on banks' balance sheet structure. The Covid-19 pandemics shows that periods of sharp increase in risk aversion often result in liquidity strains for banks due to the volatility of long-term funding markets (both money and bond funding markets). According to a simple portfolio allocation model banks’ liquidity increases when the regulatory constraint is binding. We provide evidence, using the “liquidity coefficient” implemented in France ahead of Basel III's Liquidity Coverage Ratio, of a positive effect of the solvency ratio on the liquidity coefficient. We also show that in times of crisis, measured by financial variables, French banks actually decreased the liquidity coefficient, with the transmission channel materialising mainly on the liability side. <p> Ce papier examine l’impact de la réglementation du capital et de la liquidité sur la structure des bilans bancaires. La pandémie de Covid-19 montre que les périodes d'augmentation brutale de l'aversion pour le risque occasionnent souvent des problèmes de liquidité pour les banques en raison de la volatilité des marchés de financement à long terme (aussi bien pour les marchés monétaires qu’obligataires). D’après un modèle simple d’allocation de portefeuille, la liquidité bancaire augmente lorsque la norme réglementaire est contraignante. Nous montrons un effet positif du ratio de solvabilité sur la liquidité, en utilisant le "coefficient de liquidité" appliqué en France avant le Ratio de Couverture de Liquidité (LCR) de Bâle 3. Nous montrons également qu’en temps de crise, mesurée par des variables financières, les banques françaises ont en fait décru leur coefficient de liquidité, le canal de transmission se matérialisant principalement du côté du passif. |
| Keywords: | Bank Capital Regulation, Bank Liquidity Regulation, Basel III, stress tests; Réglementation du capital bancaire, réglementation de la liquidité bancaire, Bâle 3, tests de résistance . |
| JEL: | G28 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:decfin:35&r=all |
| By: | Kilian Huber |
| Abstract: | The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in postwar Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers. |
| JEL: | E24 E44 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8746&r=all |
| By: | Tomas Reichenbachas (Bank of Lithuania) |
| Abstract: | In this paper, we adopt a dual micro-and-macro simulation strategy to assess the impact of introducing (or changing) the LTV limit. Due to the nature of borrower-based macroprudential measures, to assess this impact we need to use borrower-level micro data. Tightening (or loosening) the LTV limit increases the share of borrowers constrained by the policy measure in question; thus, the overall impact depends on initial market conditions. We find that the introduction of an LTV limit of 85 % in 2011 had a modest short-term impact on economic activity because the new regulatory limit was non-binding for most borrowers at the time. We estimate that if the LTV limit would not have been introduced, the household loan portfolio would have grown on average 1.5 percentage points faster per year (over 2012-2014). This would have led to a 0.5 percentage point higher housing price growth and a 0.2 percentage point higher real GDP growth. When the macroprudential LTV limit is binding for a significant portion of borrowers, lowering the LTV limit at current market conditions has a much more pronounced effect. We show that if the LTV limit had been implemented at the end of 2004, it would have substantially helped in tempering the credit and housing boom, albeit at the cost of lowering economic growth. |
| Keywords: | Financial stability, Macroprudential policy, Borrower-based macroprudential policy instruments, LTV limit |
| JEL: | C32 C53 E58 G28 |
| Date: | 2020–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:80&r=all |
| By: | Carlos Madeira |
| Abstract: | This study analyses the potential impact of a recent Financial Portability Law in Chile, which substantially reduces the monetary and time costs of mortgage modification. I show that mortgage refinancing is positively associated with financial education, liquidity needs and the timing for optimal refinancing. A counterfactual exercise shows that the new legislation can substantially increase refinancing rates and bring significant welfare gains, especially if it lowers the cognitive costs of the process. Welfare gains are larger for owners of second properties and top valued homes. Finally, bank switching decisions for consumer loans are found to be unaffected by mortgage refinancing. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:894&r=all |
| By: | Abigail McKnight; Mark Rucci |
| Abstract: | Some households are less resilient to financial shocks than others. This may be because they have low levels of savings, have limited access to affordable credit, already hold high levels of debt or lack the skills required to manage household budgets. Financial resilience is difficult to estimate because it is a dynamic concept - the ability to recover quickly from an income or expenditure shock. This means that we have to turn to indicators of resilience. In this paper we present new estimates using harmonised micro-data for 22 countries and a number of different indicators focusing on households' savings and debt relative to their income. The results show considerable variation across countries and between households within countries. Some of this variation is likely to be due to differences in financial institutions, welfare states and cultural norms. This research was conducted prior to the Covid-19 pandemic but these baseline statistics on the financial resilience of households highlight just how vulnerable some households were to the financial shocks that followed. In 15 out of the 22 countries included in this research fewer than half of all households held sufficient savings to cover the value of three months' income and many were already over-indebted. How countries respond to the pandemic in terms of protecting households' livelihoods will be an important factor affecting households' resilience and longer term prospects. |
| Keywords: | financial resilience, income, savings, debt |
| JEL: | D14 D31 I31 I32 I38 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:sticas:/219&r=all |
| By: | Sümeyra Atmaca; Karolin Kirschenmann; Steven Ongena; Koen Schoors (-) |
| Abstract: | We employ proprietary data from a large bank to analyze how – in times of crisis – depositors react to a bank nationalization, re-privatization and an accompanying increase in deposit insurance. Nationalization slows depositors fleeing the bank, provided they have sufficient trust in the national government, while the increase in deposit insurance spurs depositors below the new 100K limit to deposit more. Prior to nationalization, depositors bunch just below the thenprevailing 20K limit. But they abandon bunching entirely during state-ownership, to return to bunching below the new 100K limit after re-privatization. Especially depositors with low switching costs are moving money around. |
| Keywords: | deposit insurance, coverage limit, bank nationalization, depositor heterogeneity |
| JEL: | G21 G28 H13 N23 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:20/1008&r=all |