nep-ban New Economics Papers
on Banking
Issue of 2021‒01‒25
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Allocating Losses: Bail-ins, Bailouts and Bank Regulation By Todd Keister; Yuliyan Mitkov
  2. Forbearance Patterns in the Post-Crisis Period By Katharina Bergant
  3. The macroprudential toolkit: effectiveness and interactions By Millard, Stephen; Rubio, Margarita; Varadi, Alexandra
  4. Surety bonds and moral hazard in banking By Gerald P. Dwyer; Augusto Hasman; Margarita Samartín
  5. Optimizing Credit Gaps for Predicting Financial Crises: Modelling Choices and Tradeoffs By ; Daniel O. Beltran; Mohammad R. Jahan-Parvar
  6. Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity By Deniz O Igan; Ali Mirzaei
  7. Credit Crunch: The Role of Household Lending Capacity in the Dutch Housing Boom and Bust 1995-2018 By Menno Schellekens; Taha Yasseri
  8. Open Banking: Credit Market Competition When Borrowers Own the Data By Zhiguo He; Jing Huang; Jidong Zhou
  9. Global Banks’ Dollar Funding: A Source of Financial Vulnerability By Adolfo Barajas; Andrea Deghi; Claudio Raddatz; Dulani Seneviratne; Peichu Xie; Yizhi Xu
  10. Non-Primary Home Buyers, Shadow Banking, and the US Housing Market By Adrian Alter; Zaki Dernaoui
  11. Exchange Rates and Domestic Credit—Can Macroprudential Policy Reduce the Link? By Erlend Nier; Thorvardur Tjoervi Olafsson; Yuan Gao Rollinson
  12. Banking sector earnings management using loan loss provisions in the Fintech era By Ozili, Peterson K
  13. Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)? By Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
  14. Deposit insurance, bank ownership and depositor behavior By Atmaca, Sümeyra; Kirschenmann, Karolin; Ongena, Steven; Schoors, Koen
  15. Filling the Gap: Digital Credit and Financial Inclusion By Majid Bazarbash; Kimberly Beaton
  16. Expected Credit Loss Modeling from a Top-Down Stress Testing Perspective By Marco Gross; Dimitrios Laliotis; Mindaugas Leika; Pavel Lukyantsau
  17. Corona and banking: A financial crisis in slow motion? An evaluation of the policy options By Boot, Arnoud W. A.; Carletti, Elena; Kotz, Hans-Helmut; Krahnen, Jan Pieter; Pelizzon, Loriana; Subrahmanyam, Marti G.

  1. By: Todd Keister (Rutgers University); Yuliyan Mitkov (University of Bonn)
    Abstract: We study the interaction between a government's bailout policy and banks' willingness to impose losses on (or \bail in") their investors. The government has limited commitment and may choose to bail out banks facing large losses. The anticipation of this bailout undermines a bank's private incentive to impose a bail-in. In the resulting equilibrium, bail-ins are too small and bailouts are too large. Some banks may also face a run by informed investors, creating further distortions and leading to larger bailouts. We show how a regulator with limited information can raise welfare and improve financial stability by imposing a system-wide, mandatory bail-in at the onset of a crisis. In some situations, allowing banks to choose between meeting a minimum bail-in and opting out can raise welfare further.
    Keywords: Bank bailouts, moral hazard, financial stability, banking regulation
    JEL: E61 G18 G28
    Date: 2020–12
  2. By: Katharina Bergant
    Abstract: Using supervisory loan-level data on corporate loans, we show that banks facing high levels of non-performing loans relative to their capital and provisions were more likely to grant forbearance measures to the riskiest group of borrowers. More specifically, we find that risky borrowers are more likely to get an increase in the overall limit or the maturity of a loan product from a distressed lender. As a second step, we analyse the effectiveness of this practice in reducing the probability of default. We show that the most common measure of forbearance is effective in the short run but no forbearance measure significantly reduces the probability of default in the long run. Our evidence also suggests that forbearance and new lending are substitutes for banks, as high shares of forbearance are negatively correlated with new lending to the same group of borrowers. Taken together, these findings can help policy makers shape surveillance and regulation in a future recovery from the Covid-19 pandemic.
    Keywords: Loans;Banking;Nonperforming loans;Capital adequacy requirements;Credit;WP,risky borrower,outstanding balance,x Time,bank characteristic,borrower rating,interest rate,Time level
    Date: 2020–07–24
  3. By: Millard, Stephen (Bank of England); Rubio, Margarita (Nottingham University); Varadi, Alexandra (Bank of England)
    Abstract: We use a DSGE model with financial frictions, leverage limits on banks, loan to value (LTV) limits and debt‑service ratio (DSR) limits on mortgage borrowing to examine: i) the effects of different macroprudential policies on key macro aggregates; ii) their interaction with each other and with monetary policy; and iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements can nullify the effects of financial frictions and reduce the effects of shocks emanating from the financial sector on the real economy. LTV limits, on their own, are not sufficient to constrain household indebtedness in booms, though can be used with capital requirements to keep DSRs under control. Finally, DSR limits lead to a significant decrease in the volatility of lending, consumption and inflation, since they disconnect the housing market from the real economy. Overall, DSR limits are welfare improving relative to any other macroprudential tool.
    Keywords: Macroprudential policy; monetary policy; leverage ratio; affordability constraint; collateral constraint
    JEL: E44 E58 G21 G28
    Date: 2021–01–15
  4. By: Gerald P. Dwyer; Augusto Hasman; Margarita Samartín
    Abstract: We examine a policy in which owners of banks provide funds in the form of a surety bond in addition to equity capital. This policy would require banks to provide the regulator with funds that could be invested in marketable securities. Investors in the bank receive the income from the surety bond as long as the bank is in business. The capital value could be used by bank regulators to pay off the banks’ liabilities in case of bank failure. After paying depositors, investors would receive the remaining funds, if any. Analytically, this instrument is a way of creating charter value but, as opposed to Keeley (1990) and Hellman, Murdock and Stiglitz (2000), restrictions on competition are not necessary to generate positive rents. We demonstrate that capital requirements alone cannot prevent the moral hazard problem arising from deposit insurance. A sufficiently high level of the surety bond with deposit insurance, though, can prevent bank runs and does not introduce moral hazard.
    Keywords: Banking crises, Capital requirements, Government Intervention, Moral hazard, Surety bond.
    JEL: G21 G28
    Date: 2020–12
  5. By: ; Daniel O. Beltran; Mohammad R. Jahan-Parvar
    Abstract: Credit gaps are good predictors for financial crises, and banking regulators recommend using them to inform countercyclical capital buffers for banks. Researchers typically create credit gap measures using trend-cycle decomposition methods, which require many modelling choices, such as the method used, and the smoothness of the underlying trend. Other choices hinge on the tradeoffs implicit in how gaps are used as early warning indicators (EWIs) for predicting crises, such as the preference over false positives and false negatives. We evaluate how the performance of credit-gap-based EWIs for predicting crises is influenced by these modelling choices. For the most common trend-cycle decomposition methods used to recover credit gaps, we find that optimally smoothing the trend enhances out-of-sample prediction. We also show that out-of sample performance improves further when we consider a preference for robustness of the credit gap estimates to the arrival of new information, which is important as any EWI should work in real-time. We offer several practical implications.
    Keywords: Credit; Credit Gap; Optimization; Predictive Power; Robustness; Trend-cycle decomposition
    JEL: C22 E39 G28
    Date: 2021–01–06
  6. By: Deniz O Igan; Ali Mirzaei
    Abstract: Whether and to what extent tougher bank regulation weighs on economic growth is an open empirical question. Using data from 28 manufacturing industries in 50 countries, we explore the extent to which cross-country differences in bank liquidity and capital levels were related to differences in sectoral activity around the period of the global financial crisis. We find that industries which are more dependent on external finance, in countries where banks had higher liquidity and capital ratios, performed relatively better during the crisis, with regard to investment rates and the creation of new enterprises. This relationship, however, exists only for bank-based systems and emerging market economies. In the pre-crisis period, we find only a marginal link to bank capital. These findings survive a battery of robustness checks and provide some solid support for the tighter prudential measures introduced under Basel III.
    Keywords: Banking;Liquidity requirements;Liquidity;Capital adequacy requirements;Financial crises;WP,capital level,economic activity,capital requirement,capital position
    Date: 2020–06–19
  7. By: Menno Schellekens; Taha Yasseri
    Abstract: What causes house prices to rise and fall? Economists identify household access to credit as a crucial factor. "Loan-to-Value" and "Debt-to-GDP" ratios are the standard measures for credit access. However, these measures fail to explain the depth of the Dutch housing bust after the 2009 Financial Crisis. This work is the first to model household lending capacity based on the formulas that Dutch banks use in the mortgage application process. We compare the ability of regression models to forecast housing prices when different measures of credit access are utilised. We show that our measure of household lending capacity is a forward-looking, highly predictive variable that outperforms `Loan-to-Value' and debt ratios in forecasting the Dutch crisis. Sharp declines in lending capacity foreshadow the market deceleration.
    Date: 2021–01
  8. By: Zhiguo He (University of Chicago, Booth School of Business); Jing Huang (University of Chicago, Booth School of Business); Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: Open banking facilitates data sharing consented by customers who generate the data, with a regulatory goal of promoting competition between traditional banks and challenger ï¬ ntech entrants. We study lending market competition when sharing banks’ customer data enables better borrower screening or targeting by ï¬ ntech lenders. Open banking could make the entire ï¬ nancial industry better off yet leave all borrowers worse off, even if borrowers could choose whether to share their data. We highlight the importance of equilibrium credit quality inference from borrowers’ endogenous sign-up decisions. When data sharing triggers privacy concerns by facilitating exploitative targeted loans, the equilibrium sign-up population can grow with the degree of privacy concerns.
    Keywords: Open banking, Data sharing, Banking competition, Digital economy, Winner's curse, Privacy, Precision marketing
    Date: 2020–11
  9. By: Adolfo Barajas; Andrea Deghi; Claudio Raddatz; Dulani Seneviratne; Peichu Xie; Yizhi Xu
    Abstract: Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.
    Keywords: Banking;Commercial banks;Currencies;Liquidity requirements;Liquidity indicators;WP,dollar,return on assets,USD lending
    Date: 2020–07–03
  10. By: Adrian Alter; Zaki Dernaoui
    Abstract: This paper studies the US housing market using a proprietary and comprehensive dataset covering nearly 90 million residential transactions over 1998–2018. First, we document the evolution of different types of investment purchases such as those conducted by short-term buyers, out-of-state buyers, and corporate cash investors. Second, we quantify the contributions of non-primary home buyers to the housing cycle. Our findings suggest that the share of short-term investors grew substantially in the run-up to the global financial crisis (GFC), which amplified the boom-bust cycle, while out-of-state buyers propped up prices in some areas during the recession. An instrumental variable approach is employed to establish a causal relationship between housing investors and prices. Finally, we show that the recent rise of shadow bank lending in the residential market is associated with riskier mortgages, and explore its implications for non-primary home buyers and its effects on house prices and rents.
    Keywords: Housing prices;Mortgages;Housing;Currencies;Shadow banking;WP,house price,out-of-state buyer,zip code
    Date: 2020–08–28
  11. By: Erlend Nier; Thorvardur Tjoervi Olafsson; Yuan Gao Rollinson
    Abstract: This paper examines empirically the role of macroprudential policy in addressing the effects of external shocks on financial stability. In a sample of 62 economies over the period of 2000: Q1–2016: Q4, our dynamic panel regressions show that an appreciation of the local exchange rate is associated with a subsequent increase in the domestic credit gap, while a prior tightening of macroprudential policies dampens this effect. These results are strong for small open economies, and robust when we explicitly account for potential simultaneity and reverse causality biases. We also examine a feedback effect where strong domestic credit pulls in additional cross-border funding, potentially further increasing systemic risk, and find that targeted capital controls can play a complementary role in alleviating this effect.
    Keywords: Macroprudential policy;Credit gaps;Domestic credit;Capital controls;Real exchange rates;WP,exchange rate,monetary policy,currency appreciation,real GDP
    Date: 2020–09–11
  12. By: Ozili, Peterson K
    Abstract: This paper analyse banking sector earnings management using loan loss provisions in the Fintech era. The findings show evidence for bank income smoothing using loan loss provisions. There is greater income smoothing in the second-wave Fintech era compared to the first-wave Fintech era, and the presence of strong institutions did not lower income smoothing in the second wave era. Bank income smoothing is also greater in (i) BIS and EU countries than in non-EU countries and G7 countries, (ii) well-capitalised banking sectors, and (iii) during economic booms, in the second wave Fintech era. The implication is that the competition for loans and deposits by banks and Fintech lenders in the second-wave Fintech era created additional incentives for banks to engage in income smoothing to report competitive and stable earnings
    Keywords: banking sector, income smoothing, regulatory quality, legal quality, market power, Fintech, nonperforming loans, earnings smoothing, loan loss provisions, earnings management, digital finance.
    JEL: G21 G23 M0 M4 M41 M42
    Date: 2021
  13. By: Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
    Abstract: We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
    Keywords: Capital controls;Central bank policy rate;Emerging and frontier financial markets;Capital outflows;Capital flows;WP,capital control,real GDP,net capital,output gap
    Date: 2020–06–26
  14. By: Atmaca, Sümeyra; Kirschenmann, Karolin; Ongena, Steven; Schoors, Koen
    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 then-prevailing 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
  15. By: Majid Bazarbash; Kimberly Beaton
    Abstract: Can fintech credit fill the credit gap in the consumer and business segments? There are few cross-country studies that explore this question. Focusing on marketplace lending, an important part of fintech credit, we use data for 109 countries from 2015 to 2017 to study the relationship between fintech credit to businesses and consumers and various aspects of financial development. Marketplace lending to consumers grows in countries where financial depth declines highlighting the role of fintech credit in filling the credit gap by traditional lenders. This result is particularly strong in low-income countries. In the business segment, marketplace lending expands where financial efficiency declines. Our findings show that low-income countries take advantage of the fintech credit opportunity in the consumer segment but face important challenges in the business segment.
    Keywords: Credit;Fintech;Financial sector development;Banking;Peer-to-peer lending;WP,marketplace lending,fintech lending,cross-country difference,balance sheet lending,consumer lending
    Date: 2020–08–07
  16. By: Marco Gross; Dimitrios Laliotis; Mindaugas Leika; Pavel Lukyantsau
    Abstract: The objective of this paper is to present an integrated tool suite for IFRS 9- and CECL-compatible estimation in top-down solvency stress tests. The tool suite serves as an illustration for institutions wishing to include accounting-based approaches for credit risk modeling in top-down stress tests.
    Keywords: International Financial Reporting Standards;Stress testing;Stocks;Loans;Banking;WP,transition matrix,financial asset,balance sheet
    Date: 2020–07–03
  17. By: Boot, Arnoud W. A.; Carletti, Elena; Kotz, Hans-Helmut; Krahnen, Jan Pieter; Pelizzon, Loriana; Subrahmanyam, Marti G.
    Abstract: With the second wave of the Covid-19 pandemic in full swing, banks face a challenging environment. They will need to address disappointing results and adverse balance sheet restatements, the intensity of which depends on the evolution of the euro area economies. At the same time, vulnerable banks reinforce real economy deficiencies. The contribution of this paper is to provide a comparative assessment of the various policy responses to address a looming banking crisis. Such a crisis will fully materialize when non-performing assets drag down banks simultaneously, raising the specter of a fullblown systemic crisis. The policy responses available range from forbearance, recapitalization (with public or private resources), asset separation (bad banks, at national or EU level), to debt conversion schemes. We evaluate these responses according to a set of five criteria that define the efficacy of each. These responses are not mutually exclusive, in practice, as they have never been. They may also go hand in hand with other restructuring initiatives, including potential consolidation in the banking sector. Although we do not make a specific recommendation, we provide a framework for policymakers to guide them in their decision making.
    Date: 2021

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