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on Banking |
| By: | Patrick Bolton; Ye Li; Neng Wang; Jinqiang Yang |
| Abstract: | We propose a dynamic theory of banking where the role of deposits is akin to that of productive capital in the classical Q-theory of investment for non-financial firms. As a key source of leverage, deposits create value for well-capitalized banks. However, unlike productive capital of nonfinancial firms that typically has a positive marginal q, the deposit q can turn negative for undercapitalized banks. Demand deposit accounts commit banks to allow holders to withdraw or deposit funds at will, so banks cannot perfectly control leverage. Therefore, for banks with insufficient capital to buffer risk, deposit inflow destroys value through the uncertainty it brings in future leverage. This intertemporal channel complements the focus of static models on value destruction of deposit outflow and bank run. Our model predictions on bank valuation and dynamic asset-liability management are broadly consistent with the evidence. Moreover, our model lends itself to a re-evaluation of the costs and benefits of leverage regulation, offers alternative perspectives on banking in a low interest rate environment, and reveals new aspects of deposit market power that has unique implications on bank franchise value. |
| JEL: | E44 G21 G32 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28298&r=all |
| By: | Morrison, Alan D; Wang, Tianxi |
| Abstract: | Why are bank deposits demandable when they are also negotiable? We present a General Equilibrium model in which demandable debt exposes banks to liquidity risk so that they can signal their types and ensure that their liabilities can circulate as a means of payment. Banks can manage their liquidity risk by altering their deposit rate and their lending scale. When banks are transparent, so that depositors have homogenous information about their assets, they use only the former tool: their lending scale is effcient, and they do not experience liquidity crisis. When banks are opaque, so that depositors receive private signals of their quality, they ineffciently shrink the scale of their lending. A bank's stock of liquid assets affects its capacity for risk taking. A "bad bank" policy can resolve liquidity crises by reducing the opacity of the bank's assets. |
| Keywords: | Liquidity crises, demandable deposits, negotiable deposits, bad bank policies |
| Date: | 2021–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:29501&r=all |
| By: | Duquerroy Anne; Adrien Matray; Saidi Farzad |
| Abstract: | This paper documents that monetary policy affects credit supply through banks’ cost of funding. Using administrative credit-registry and regulatory bank data, we find that banks can incur an increase in their funding costs of at least 30 basis points before they adjust their lending. For identification, we exploit the existence of regulated-deposit accounts in France whose interest rates are set by the government and are, thus, not directly affected by the monetary-policy rate. When banks’ funding cost increases and they contract their lending, we observe portfolio reallocations consistent with risk shifting: banks that depend on regulated deposits lend less to large firms, and relatively more to small firms and entrepreneurs. |
| Keywords: | Sticky Deposit Rates and Allocative Effects of Monetary Policy |
| JEL: | E23 E32 E44 G20 G21 L14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:794&r=all |
| By: | Sînziana Kroon; Clemens Bonner; Iman van Lelyveld; Jan Wrampelmeyer |
| Abstract: | We analyze the impact of a requirement similar to the Basel III Liquidity Coverage Ratio (LCR) on conventional monetary policy implementation. Combining unique data sets of Dutch banks from 2002 to 2005, we find that the introduction of the LCR impacts banks' behaviour in open market operations. After the introduction of the LCR, banks bid for higher volumes and pay higher interest rates for central bank funds. In line with theory, banks reduce their reliance on overnight and short term unsecured funding. We do not observe a worsening of collateral quality pledged in open market operations. Thus, to correctly anticipate an open market operation's effect on interest rates, monetary policy requires central banks to consider not only the size of the operation, but also how it impacts banks' liquidity management and compliance with the LCR. |
| Keywords: | Liquidity regulation; monetary policy implementation; financial intermediation; banks; open market operations |
| JEL: | G18 G21 E42 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:703&r=all |
| By: | Chikako Baba; Cristina Batog; Enrique Flores; Borja Gracia; Izabela Karpowicz; Piotr Kopyrski; James Roaf; Anna Shabunina; Rachel Elkan; Xin Cindy Xu |
| Abstract: | Europe’s high pre-existing level of financial development can partly account for the relatively smaller reach of fintech payment and lending activities compared to some other regions. But fintech activity is growing rapidly. Digital payment schemes are expanding within countries, although cross-border and pan-euro area instruments are not yet widespread, notwithstanding important enabling EU level regulation and the establishment of instant payments by the ECB. Automated lending models are developing but remain limited mainly to unsecured consumer lending. While start-ups are pursuing platform-based approaches under minimal regulation, there is a clear trend for fintech companies to acquire balance sheets and, relatedly, banking licenses as they expand. Meanwhile, competition is pushing many traditional banks to adopt fintech instruments, either in-house or by acquisition, thereby causing them to increasingly resemble balanced sheet-based fintech companies. These developments could improve the efficiency and reach of financial intermediation while also adding to profitability pressures for some banks. Although the COVID-19 pandemic could call into question the viability of platform-based lending fintechs funding models given that investors could face much higher delinquencies, it may also offer growth opportunities to those fintechs that are positioned to take advantage of the ongoing structural shift in demand toward virtual finance. |
| Keywords: | Fintech;Peer-to-peer lending;Loans;Financial statements;Crowdfunding;lending,payment system,European Union,Payments Directive,PSD2,WP,Fintech company,direct debit,micro-enterprise lending,individual investor,Big-tech company,crowdfunding firm,due diligence,payment company,value chain,venture capital |
| Date: | 2020–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/241&r=all |
| By: | Altavilla, Carlo; Laeven, Luc; Peydró, José-Luis |
| Abstract: | We document that there are strong complementarities between monetary policy and macroprudential policy in shaping the evolution of bank credit. We use a unique loan-level dataset comprising multiple credit registers from several European countries and different types of loans, including corporate loans, mortgages and consumer credit. We merge this rich information with borrower and bank-level characteristics and with indicators summarising macroprudential and monetary policy actions. We find that monetary policy easing increases both bank lending and lending to riskier borrowers, especially when there is a more accommodative macroprudential environment. These effects are stronger for less capitalised banks. Results apply to both household and firm lending, but they are stronger for consumer and corporate loans than for mortgages. Finally, for firms, the overall increase in bank lending induced by an accommodative policy mix is stronger for more (ex ante) productive firms than firms with high ex ante credit risk, except for banks with low capital. JEL Classification: E51, E52, E58, G21, G28 |
| Keywords: | corporate and household credit, euro area, macroprudential policy, monetary policy |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202504&r=all |
| By: | Ongena, Steven; Pinoli, Sara; Rossi, Paola; Scopelliti, Alessandro |
| Abstract: | We study the effects of the diversification of funding sources on the financing conditions for firms. We exploit a regulatory reform which took place in Italy in 2012, i.e., the introduction of “minibonds”, which opened a new market-based funding opportunity for unlisted firms. Using the Italian Credit Register, we investigate the impact of minibond issuance on bank credit conditions for issuer firms, both at the firm-bank and firm level. We compare new loans granted to issuer firms with new loans concurrently granted to similar non-issuer firms. We find that issuer firms obtain lower interest rates on bank loans of the same maturity than non-issuer firms, suggesting an improvement in their bargaining power with banks. In addition, issuer firms reduce the amount of used bank credit but increase the overall amount of available external funds, pointing to a substitution with bank credit and to a diversification of corporate funding sources. Studying their ex-post performance, we find that issuer firms expand their total assets and fixed assets, and also raise their leverage. JEL Classification: G21, G23, G32, G38 |
| Keywords: | bank credit, capital markets, loan pricing, minibonds, SME finance |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202508&r=all |
| By: | Yiping Huang; Longmei Zhang; Zhenhua Li; Han Qiu; Tao Sun; Xue Wang |
| Abstract: | Promoting credit services to small and medium-size enterprises (SMEs) has been a perennial challenge for policy makers globally due to high information costs. Recent fintech developments may be able to mitigate this problem. By leveraging big data or digital footprints on existing platforms, some big technology (BigTech) firms have extended short-term loans to millions of small firms. By analyzing 1.8 million loan transactions of a leading Chinese online bank, this paper compares the fintech approach to assessing credit risk using big data and machine learning models with the bank approach using traditional financial data and scorecard models. The study shows that the fintech approach yields better prediction of loan defaults during normal times and periods of large exogenous shocks, reflecting information and modeling advantages. BigTech’s proprietary information can complement or, where necessary, substitute credit history in risk assessment, allowing unbanked firms to borrow. Furthermore, the fintech approach benefits SMEs that are smaller and in smaller cities, hence complementing the role of banks by reaching underserved customers. With more effective and balanced policy support, BigTech lenders could help promote financial inclusion worldwide. |
| Keywords: | Fintech;Machine learning;Bank credit;Loans;Credit risk;WP,credit history,Fintech firm,house ownership,internet company,real-time customer rating |
| Date: | 2020–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/193&r=all |
| By: | Wang, Tianxi |
| Abstract: | This paper studies non-neutrality of monetary policy in a model where fiat money is used by banks to meet liquidity demand and a government bond to collateralize reserve borrowing. It finds that if some banks are liquidity constrained, any monetary policy that alters the bond-to-fiat money ratio moves the interbank rate and is non-neutral in the steady state. Moreover, the effect for liquidity un-constrained banks is the opposite of that for the maximally constrained. Lastly, if the expansion of digital ways of payment eliminates depositor withdrawals, fiat money will stop circulation and a bullion standard will probably return. |
| Date: | 2021–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:29502&r=all |
| By: | Gropp, Reint; Mosk, Thomas; Ongena, Steven; Simac, Ines; Wix, Carlo |
| 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. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:296&r=all |
| By: | Byström, Hans (Department of Economics, Lund University) |
| Abstract: | Using different measures of how the Covid-19 pandemic progresses we find that the level of credit risk among US blue chip companies increases in tandem with the Covid-19 virus spreading. The credit risk increases dramatically during the pandemic, but we find it to be short of the levels seen during the 2008–2009 financial crisis. Furthermore, we find weekly ups and downs in credit risk and virus impact to be significantly positively correlated throughout the pandemic. Finally, Basel II capital requirements increase drastically when the pandemic strikes but, again, not to the levels seen during the financial crisis. |
| Keywords: | credit risk; Covid-19; equity market; debt market; CDS; Merton model; Basel II |
| JEL: | G10 G33 I18 |
| Date: | 2021–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2021_001&r=all |
| By: | Emanuele Ciola (Department of Economics, Universitat Jaume I, Castellón, Spain and Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona-Italy); Gabriele Tedeschi (Department of Economics, Universitat Jaume I, Castellón, Spain) |
| Abstract: | In this paper, we develop a macroeconomic model with heterogeneous interacting agents to study the effects of different configurations of the interbank network on the overall performance of the economy. Specifically, we implement a simple decentralized matching model in which deposit, credit and interbank relations evolve endogenously via a fitness measure. Our findings confirm the importance of the interbank market as an indisputable source of economic stability able to counterbalance deposit withdrawal and stabilize the credit allocation. However, when highly centralized, this market can amplify the effects of shocks in the economy due to coordination failures of core banks. |
| Keywords: | Interbank network; Business Fluctuations; Financial crises |
| JEL: | C63 E44 E32 G01 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2021/01&r=all |
| By: | Serhan Cevik |
| Abstract: | The coronavirus pandemic is a global crisis like no other in modern times, and there is a growing apprehension about handling potentially contaminated cash. This paper is the first empirical attempt in the literature to investigate whether the risk of infectious diseases affects demand for physical cash. Since the intensity of cash use may influence the spread of infectious diseases, this paper utilizes two-stage least squares (2SLS) methodology with instrumental variable (IV) to address omitted variable bias and account for potential endogeneity. The analysis indicates that the spread of infectious diseases lowers demand for physical cash, after controlling for macroeconomic, financial, and technological factors. While the transactional constraints imposed by the COVID-19 pandemic could become a catalyst for the use of digital technologies around the world, electronic payment methods may not be universally available in every country owing to financial and technological bottlenecks. |
| Keywords: | Communicable diseases;Currencies;COVID-19 ;Deposit rates;Ebola;Demand for cash,currency-in-circulation,digital money,infectious diseases,WP,cash use,handling cash,cash transfer,store of value,infectious-disease outbreak |
| Date: | 2020–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/255&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:journl:halshs-02994903&r=all |
| By: | Leonardo E. Torre Cepeda; Miguel A. Flores Segovia |
| Abstract: | The paper investigates the effect of banking credit to private agriculture, industrial and services sectors, on per capita GDP growth in Mexico using panel data at the state level for the period 2005-2018. The estimation controls for variables related to infrastructure, public expenditure, exports, inflation, human capital, a dummy for the 2008-2009 global financial crisis, and introduces a lag of the dependent variable in order to consider its likely persistence. Using the Generalized Method of Moments in order to control for possible endogenous effects among the variables, it is estimated that a 10% increase in the ratio of banking credit to GDP increases per capita GDP growth at the state level between 0.61 and 0.81 percentage points. These results underline the relevance of policy measures designed to promote a healthy functioning of the financial system in Mexico. |
| JEL: | O47 G21 R11 R15 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2020-17&r=all |
| By: | Montagna, Mattia; Torri, Gabriele; Covi, Giovanni |
| Abstract: | Systemic risk in the banking sector is usually associated with long periods of economic downturn and very large social costs. On one hand, shocks coming from correlated exposures towards the real economy may induce correlation in banks' default probabilities thereby increasing the likelihood for systemic-tail events like the 2008 Great Financial Crisis. On the other hand, financial contagion also plays an important role in generating large-scale market failures, amplifying the initial shocks coming from the real economy. To study the sources of these rare phenomena, we propose a new definition of systemic risk (i.e. the probability of a large number of banks going into distress simultaneously) and thus we develop a multilayer microstructural model to study empirically the determinants of systemic risk. The model is then calibrated on the most comprehensive granular dataset for the euro area banking sector, capturing roughly 96% or EUR 23.2 trillion of euro area banks' total assets over the period 2014-2018. The output of the model decompose and quantify the sources of systemic risk showing that correlated economic shocks, financial contagion mechanisms, and their interaction are the main sources of systemic events. The results obtained with the simulation engine resemble common market-based systemic risk indicators and empirically corroborate findings from existing literature. This framework gives regulators and central bankers a tool to study systemic risk and its developments, pointing out that systemic events and banks’ idiosyncratic defaults have different drivers, hence implying different policy responses. JEL Classification: D85, G17, G33, L14 |
| Keywords: | financial contagion, microstructural models, systemic risk |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202502&r=all |
| By: | Eugenio M Cerutti; Catherine Koch; Swapan-Kumar Pradhan |
| Abstract: | We explore the global footprint of Chinese banks and compare it with that of other bank nationalities. Chinese banks have become the largest cross-border creditors for almost half of all emerging market and developing economies (EMDEs). Their global reach resembles that of banks from advanced economies (AEs). We take a nationality approach as international banks, and Chinese banks in particular, grant a substantial share of their cross-border loans from affiliates located abroad. But differences remain. Using a gravity model with a novel measure of distance capturing the role of foreign affiliates across all bank nationalities, we find that larger distances deter cross-border bank lending to EMDEs more than to AEs. For Chinese banks, however, distance deters lending to EMDEs less than for peer EMDE banks. We show that for all banks combined, bilateral economic interactions like trade, FDI and portfolio investment, positively correlate with lending. Chinese banks’ lending to EMDEs also strongly correlates with trade, but not with FDI and, unlike other banks, it correlates negatively with portfolio investment. |
| Keywords: | Bank credit;Portfolio investment;Cross-border banking;Foreign direct investment;Foreign banks;Chinese banks,Trade,FDI,Gravity model,WP,borrower country,cross-border lending,EMDE borrower,bank lending,lending bank,parent country |
| Date: | 2020–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/249&r=all |