nep-ban New Economics Papers
on Banking
Issue of 2021‒02‒01
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Do bank insiders impede equity issuances? By Goetz, Martin; Laeven, Luc; Levine, Ross
  2. The Role of Collateral in Borrowing By Nicholas Garvin; David W Hughes; José-Luis Peydró
  3. What do bankrupcty prediction models tell us about banking regulation? Evidence from statistical and learning approaches By Pierre Durand; Gaëtan Le Quang
  4. Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada By Marie-Hélène Felt; Fumiko Hayashi; Joanna Stavins; Angelika Welte
  5. Aggregate Implications of Credit Relationship Flows: a Tale of Two Margin By Yasser Boualam; Clément Mazet-Sonilhac
  6. Market Integration and Bank Risk-Taking By ; Rajdeep Sengupta
  7. Forecasting expected and unexpected losses By Mikael Juselius; Nikola Tarashev
  8. How dark is the dark side of diversification? By Pedro Cadenas; Henryk Gzyl; Hyun Woong Park
  9. Regulatory capital, market capital and risk taking in international bank lending By Stefan Avdjiev; José María Serena Garralda
  10. The implications of liquidity regulation for monetary policy implementation and the central bank balance sheet size: an empirical analysis of the euro area By Kedan, Danielle; Veghazy, Alexia Ventula
  11. Shadow Bank Runs By David Andolfatto; Ed Nosal
  12. Measuring the cost of equity of euro area banks By Altavilla, Carlo; Bochmann, Paul; De Ryck, Jeroen; Dumitru, Ana-Maria; Grodzicki, Maciej; Kick, Heinrich; Fernandes, Cecilia Melo; Mosthaf, Jonas; O’Donnell, Charles; Palligkinis, Spyros
  13. Drivers of Financial Access: the Role of Macroprudential Policies By Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu
  14. Bank Capital and the Cost of Equity By Mohamed Belkhir; Sami Ben Naceur; Ralph Chami; Anis Semet
  15. Fintech Lending and Sales Manipulation By Rishabh, Kumar; Schäublin, Jorma
  16. Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability By Selim Elekdag; Sheheryar Malik; Srobona Mitra
  17. Risk aversion and bank loan pricing By Camba-Méndez, Gonzalo; Mongelli, Francesco Paolo
  18. Liquidity at Risk: Joint Stress Testing of Solvency and Liquidity By Rama Cont; Artur Kotlicki; Laura Valderrama
  19. Do Remittances Enhance Financial Inclusion in LMICs and in Fragile States? By Sami Ben Naceur; Ralph Chami; Mohamed Trabelsi
  20. Leverage and risk relativity: how to beat an index By Bermin, Hans-Peter; Holm, Magnus
  21. Who Supplies PPP Loans (And Does it Matter)? Banks, Relationships and the COVID Crisis By Lei Li; Philip Strahan
  22. Weekly dynamic conditional correlations among cryptocurrencies and traditional assets By Aslanidis, Nektarios; Fernández Bariviera, Aurelio; Savva, Christos S.

  1. By: Goetz, Martin; Laeven, Luc; Levine, Ross
    Abstract: We evaluate the role of insider ownership in shaping banks’ equity issuances in response to the global financial crisis. We construct a unique dataset on the ownership structure of U.S. banks and their equity issuances and discover that greater insider ownership leads to less equity issuances. Several tests are consistent with the view that bank insiders are reluctant to reduce their private benefits of control by diluting their ownership through equity issuances. Given the connection between bank equity and lending, the results stress that ownership structure can shape the resilience of banks—and hence the entire economy—to aggregate shocks. JEL Classification: G32, G21, G28
    Keywords: banking, equity issuances, financial crisis, ownership structure, regulation
    Date: 2021–01
  2. By: Nicholas Garvin (Reserve Bank of Australia); David W Hughes (Massachusetts Institute of Technology); José-Luis Peydró (Universitat Pompeu Fabra, Barcelona Graduate School of Economics)
    Abstract: This paper studies the role of collateral in credit markets under stress. Australian interbank markets at the time of the Lehman Brothers failure present a platform for identification, because the collateral is liquid and homogenous across borrowers (unlike in retail credit markets), the shock is large and exogenous (unlike in countries with bank failures), and there is comprehensive administrative collateralised and uncollateralised loan-level data. After the exogenous shock, collateralised and uncollateralised borrowing compositions diverge. Uncollateralised borrowing declines ex ante riskier borrowers while collateralised borrowing increases for borrowers ex ante holding more high-quality collateral. Moreover, riskier banks with sufficient high-quality collateral substitute from uncollateralised to collateralised borrowing. In aggregate, collateralised borrowing expands substantially, predominantly collateralised against second-best (but still high quality) collateral, while interest rates on loans against first-best collateral fall substantially, indicating scarcity of the most-liquid safe assets. This liquid asset demand encourages collateralised lending, contrary to cash hoarding.
    Keywords: collateral; repo; safe assets; credit crunch; unsecured versus secured loans
    JEL: G01 G10 G21 G28 H63
    Date: 2021–01
  3. By: Pierre Durand; Gaëtan Le Quang
    Abstract: Prudential regulation is supposed to strengthen financial stability and banks' resilience to new economic shocks. We tackle this issue by evaluating the impact of leverage, capital, and liquidity ratios on banks default probability. To this aim, we use logistic regression, random forest classification, and artificial neural networks applied on the United-States and European samples over the 2000-2018 period. Our results are based on 4707 banks in the US and 3529 banks in Europe, among which 454 and 205 defaults respectively. We show that, in the US sample, capital and equity ratios have strong negative impact on default probability. Liquidity ratio has a positive effect which can be justified by the low returns associated with liquid assets. Overall, our investigation suggests that fewer prudential rules and higher leverage ratio should reinforce the banking system's resilience. Because of the lack of official failed banks list in Europe, our findings on this sample are more delicate to interpret.
    Keywords: Banking regulation ; Capital requirements ; Basel III ; Logistic ; Statistical learning classification ; Bankruptcy prediction models.
    JEL: C44 G21 G28
    Date: 2021
  4. By: Marie-Hélène Felt; Fumiko Hayashi; Joanna Stavins; Angelika Welte
    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 higher retail prices passed on to consumers to cover merchants’ payment processing costs. 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 net cost. 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; Credit Cards; Rewards; Interchage Fees; Pass-through
    JEL: D12 D31 G21 L81
    Date: 2020–12–18
  5. By: Yasser Boualam; Clément Mazet-Sonilhac
    Abstract: This paper documents the aggregate properties of credit relationship flows within the commercial loan market in France from 1998 through 2018. Using detailed bank-firm level data from the French Credit Register, we show that banks actively and continuously adjust their credit supply along both intensive and extensive margins. We particularly highlight the importance of gross flows associated with credit relationships and show that they are (i) volatile and pervasive throughout the cycle, and (ii) can account for up to 48 percent of the cyclical and 90 percent of the long-run variations in aggregate bank credit.
    Keywords: Credit Flows, Financial Institutions, Relationship Lending, Search and Matching.
    JEL: E51 G21 E52 E32
    Date: 2021
  6. By: ; Rajdeep Sengupta
    Abstract: Using a workhorse model of bank competition and risk-taking, we show that increased competition from market integration affects bank risk-taking in ways beyond a simple increase in the number of competitor banks. Research has shown that increased competition in the form of an increase in the number of competitor banks can reduce risk-taking—the bank-competitor effect. Market integration not only increases the number of banks, but also the number of potential customers (depositors and borrowers) available to each bank. Increases in the potential customer base induces banks to behave more like price-takers in both deposit and loan markets. We show that increased competition in the form of convergence toward banks’ price-taking behavior can either increase or decrease bank risk-taking—the bank customer effect. When these effects oppose each other, increased competition from market integration can potentially increase, rather than decrease, bank risk-taking. Even in the absence of the bank-customer effect, we show that market integration also affects risk-taking by facilitating bank mergers. By increasing concentration, bank mergers can potentially reverse the bank-competitor effect.
    Keywords: Bank Competition; Market Integration
    JEL: D82 G21 L13
    Date: 2020–12–30
  7. By: Mikael Juselius; Nikola Tarashev
    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.
    Keywords: loss rate forecasts, cyclical turning points, expected loss provisioning, bank capital
    JEL: G17 G21 G28
    Date: 2020–12
  8. By: Pedro Cadenas (Denison University); Henryk Gzyl (IESA); Hyun Woong Park (Denison University)
    Abstract: Against the widely held belief that diversification at banking institutions contributes to the stability of the financial system, Wagner (2010) found that diversification actually makes systemic crisis more likely. While it is true, as Wagner asserts, that the probability of joint default of the diversified portfolios is larger; we contend that, as common practice, the effect of diversification is examined with respect to a risk measure like VaR. We find that when banks use VaR, diversification does reduce individual and systemic risk. This, in turn, generates a different set of incentives for banks and regulators.
    Date: 2020–12
  9. By: Stefan Avdjiev; José María Serena Garralda
    Abstract: We investigate the links among US monetary policy, bank capital, and risk taking in international bank lending. Using syndicated loan data, we find that low US interest rates spur the origination of risky dollar-denominated international loans through two distinct mechanisms. First, consistent with the existence of a regulatory capital channel, banks with higher levels of regulatory capital originate riskier loans when interest rates decline. Second, banks with low levels of market capital have a higher propensity to extend riskier loans in response to falling interest rates. This finding implies the existence of a market capital channel, which operates in the opposite direction to the regulatory capital channel.
    Keywords: interest rates, bank capital, risk taking, international leveraged loans
    JEL: G21 G32
    Date: 2020–12
  10. By: Kedan, Danielle; Veghazy, Alexia Ventula
    Abstract: We analyse the impact of the Liquidity Coverage Ratio (LCR) on the demand for central bank reserves in the euro area with difference-in-differences estimation techniques. Using a novel dataset and an identification strategy that exploits the cross-country heterogeneity in the regulatory treatment of reserves for LCR purposes prior to the announcement of a harmonised euro area standard as a quasi-natural experiment, we find evidence that points to LCR-induced demand for reserves. Specifically, our results suggest that banks with low LCRs relative to peers increased their central bank reserve holdings as a result of the LCR regulation. Our findings have economically meaningful implications for the operational framework of monetary policy and imply that the Eurosystem’s balance sheet may need to remain larger than it was prior to the financial crisis and the associated introduction of new liquidity regulation. JEL Classification: C23, E52, G28
    Keywords: Basel III, central bank operational framework, ECB, liquidity coverage ratio, monetary policy
    Date: 2021–01
  11. By: David Andolfatto; Ed Nosal
    Abstract: Short-term debt is commonly used to fund illiquid assets. A conventional view asserts that such arrangements are run-prone in part because redemptions must be processed on a first-come, first-served basis. This sequential service protocol, however, appears absent in the wholesale banking sector—and yet, shadow banks appear vulnerable to runs. We explain how banking arrangements that fund fixed-cost operations using short-term debt can be run-prone even in the absence of sequential service. Interventions designed to eliminate run risk may or may not improve depositor welfare. We describe how optimal policies vary under different conditions and compare these to recent policy interventions by the Securities and Exchange Commission and the Federal Reserve. We conclude that the conventional view concerning the societal benefits of liquidity transformation and its recommendations for prudential policy extend far beyond their application to depository institutions.
    Keywords: shadow banks; bank runs; short-term debt
    JEL: G01 G21 G28
    Date: 2020–08–21
  12. By: Altavilla, Carlo; Bochmann, Paul; De Ryck, Jeroen; Dumitru, Ana-Maria; Grodzicki, Maciej; Kick, Heinrich; Fernandes, Cecilia Melo; Mosthaf, Jonas; O’Donnell, Charles; Palligkinis, Spyros
    Abstract: The cost of equity for banks equates to the compensation that market participants demand for investing in and holding banks’ equity, and has important implications for the transmission of monetary policy and for financial stability. Notwithstanding its importance, the cost of equity is unobservable and therefore needs to be estimated. This occasional paper provides estimates of the cost of equity for listed and unlisted euro area banks using a three-step methodology. In the first step, ten different models are estimated. In the second step, the models’ results are combined applying an equal-weighting procedure. In the third step, the combined costs of equity for individual banks are aggregated at the euro area level and according to banks’ business models. The results suggest that, since the Great Financial Crisis of 2007-08, the premia that investors demand to compensate them for the risk they bear when financing banks’ equity has been persistently higher than the return on equity (ROE) generated by banks. We show that our estimates of cost of equity have plausible relationships to banks’ fundamentals. The cost of equity tends to be higher for banks that are riskier (higher non-performing loan ratios), less efficient (higher cost-to-income ratio), and with more unstable funding sources (higher relative reliance on interbank deposits). Finally, we use bank fundamentals to estimate the cost of equity for unlisted banks. In general, unlisted banks are found to have a somewhat lower cost of equity compared to listed banks, with business model characteristics accounting for part of the estimated difference. JEL Classification: G20, G21, E44, G1
    Keywords: banking supervision, cost of equity, financial stability, monetary policy
    Date: 2021–01
  13. By: Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu
    Abstract: This study analyzes the drivers of the use of formal vs. informal financial services in emerging and developing countries using the 2017 Global FINDEX data. In particular, we investigate whether individuals’ choice of financial services correlates with macro-financial and macro-structural policies and conditions, in addition to individual and country characteristics. We start our analysis on middle and low-income countries, and then zoom in on sub-Saharan Africa, currently the region that most relies on informal financial services, and which has the largest uptake of mobile banking. We find robust evidence of an association between macroprudential policies and individuals’ choice of financial access after controlling for personal and country-level characteristics. In particular, macroprudential policies aimed at controlling credit supply seem to be associated with greater resort to informal financial services compared with formal, bank-based access. This highlights the importance for central bankers and financial sector regulators to consider the potential spillovers of monetary policy and financial stability measures on financial inclusion.
    Keywords: Financial services;Financial inclusion;Mobile banking;Macroprudential policy;Macroprudential policy instruments;WP,informal financial service
    Date: 2020–05–29
  14. By: Mohamed Belkhir; Sami Ben Naceur; Ralph Chami; Anis Semet
    Abstract: Using a sample of publicly listed banks from 62 countries over the 1991-2017 period, we investigate the impact of capital on banks’ cost of equity. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms’ costs of equity, we find that better capitalized banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks’ cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks’ funding costs.
    Keywords: Stocks;Banking;Capital adequacy requirements;Stock markets;Return on investment;WP,bank capital,capital requirement,financial risk,capital measure
    Date: 2019–12–04
  15. By: Rishabh, Kumar (University of Basel); Schäublin, Jorma
    Abstract: Fintech payment companies acting as lenders possess a potential solution to weak debt enforcement. Their location in the payment chain yields them a senior position in the revenue stream of the borrowing merchant, as the payment company can deduct part of the merchant's sales it processes to amortize the loan. Our analysis of the transactions processed through a fintech company offering such sales-linked loans suggests that some borrowers discontinuously reduce sales processed through the company immediately after the loan disbursal to strategically default. We find that competition from other lenders and cash limits the effectiveness of this enforcement technology.
    Keywords: Fintech lending, limited enforcement, sales manipulation, regression discontinuity
    JEL: G20 G21 G23
    Date: 2021–01–19
  16. By: Selim Elekdag; Sheheryar Malik; Srobona Mitra
    Abstract: This paper explores the determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions. Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability. However, the estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery. Therefore, for some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability.
    Keywords: Banking;Bank soundness;Nonperforming loans;Personal income;Yield curve;WP,profitability distribution,bank profitability,NPL ratio,standard deviation
    Date: 2019–11–22
  17. By: Camba-Méndez, Gonzalo; Mongelli, Francesco Paolo
    Abstract: How much of the heterogeneity in bank loan pricing is explained by disparities in banks’ attitude towards risk? The answer to this question is not simple because there are only very weak proxies for gauging the degree of a bank’s risk aversion. We handle this constraint by means of a novel econometric approach that allows us to disentangle the amount of risk faced by banks and the price they charge for holding that risk. Some of our results are aligned with previous studies and confirm that disparities in market power, banks’ funding costs, and banks’ funding risks are reflected in bank lending rates. However, our new modelling framework reveals that the heterogeneity in bank lending rates is also a reflection of the non-negligible disparities in banks’ risk aversion. JEL Classification: C23, E58, G21
    Keywords: bank loan pricing, risk aversion
    Date: 2021–01
  18. By: Rama Cont; Artur Kotlicki; Laura Valderrama
    Abstract: The traditional approach to the stress testing of financial institutions focuses on capital adequacy and solvency. Liquidity stress tests have been applied in parallel to and independently from solvency stress tests, based on scenarios which may not be consistent with those used in solvency stress tests. We propose a structural framework for the joint stress testing of solvency and liquidity: our approach exploits the mechanisms underlying the solvency-liquidity nexus to derive relations between solvency shocks and liquidity shocks. These relations are then used to model liquidity and solvency risk in a coherent framework, involving external shocks to solvency and endogenous liquidity shocks arising from these solvency shocks. We define the concept of ‘Liquidity at Risk’, which quantifies the liquidity resources required for a financial institution facing a stress scenario. Finally, we show that the interaction of liquidity and solvency may lead to the amplification of equity losses due to funding costs which arise from liquidity needs. The approach described in this study provides in particular a clear methodology for quantifying the impact of economic shocks resulting from the ongoing COVID-19 crisis on the solvency and liquidity of financial institutions and may serve as a useful tool for calibrating policy responses.
    Keywords: Financial statements;Liquidity risk;Liquidity;Stress testing;Solvency;WP,balance sheet,variation margin,amount
    Date: 2020–06–05
  19. By: Sami Ben Naceur; Ralph Chami; Mohamed Trabelsi
    Abstract: This paper explores the relationship between remittances and financial inclusion for a sample of 187 countries over the period 2004-2015, using cross-country as well as dynamic panel GMM regressions. At low levels of remittances-to-GDP, these flows act as a substitute to formal financial channels, thereby reducing financial inclusion. In contrast, when remittance-to-GDP ratio is high, above 13% on average, they tend to complement formal access and usage channels, thus enhancing financial inclusion. This “U shaped” relationship highlights the role of remittance flows in financing household consumption at low levels, while raising formal household bank savings and allowing for more intermediation, at high levels of remittance-to-GDP.
    Keywords: Financial inclusion;Remittances;Financial services;Commercial banks;Financial sector development;WP,remittance inflow
    Date: 2020–05–22
  20. By: Bermin, Hans-Peter (Knut Wicksell Centre for Financial Studies, Lund University); Holm, Magnus (Hilbert Capital)
    Abstract: In this paper we show that risk associated with leverage is fundamentally relative to an arbitrary choice of reference asset or portfolio. We characterize leverage risk as a drawdown risk measure relative to the chosen reference asset. We further prove that the growth optimal Kelly portfolio is the only portfolio for which the relative drawdown risk is not dependent on the choice of the reference asset. Additionally, we show how to translate an investor’s viewpoint from one choice of reference asset to another and establish conditions for when two investors can be said to face identical leverage risk. We also prove that, for a given reference asset, the correlation between two arbitrary portfolios with identical leverage risk equals the ratio of their Sharpe ratios if and only if the leverage risk is consistently traded. More surprisingly, we observe that leverage applied to the growth optimal Kelly strategy affects the drawdown risk in much the same way as the speed of light affects velocities in Einstein’s theory of special relativity. Finally, we provide details on how to trade in order to beat an arbitrary index for a given leverage risk target.
    Keywords: Leverage; Drawdown risk; Generalized Kelly strategy; Numéraire invariance; Risk relativity
    JEL: E20
    Date: 2021–01–25
  21. By: Lei Li; Philip Strahan
    Abstract: We analyze bank supply of credit under the Paycheck Protection Program (PPP). The literature emphasizes relationships as a means to improve lender information, which helps banks manage credit risk. Despite imposing no risk, however, PPP supply reflects traditional measures of relationship lending: decreasing in bank size; increasing in prior experience, in commitment lending, and in core deposits. Our results suggest a new benefit of bank relationships, as they help firms access government-subsidized lending. Consistent with this benefit, we show that bank PPP supply, based on the structure of the local banking sector, alleviates increases in unemployment.
    JEL: G2
    Date: 2020–12
  22. By: Aslanidis, Nektarios; Fernández Bariviera, Aurelio; Savva, Christos S.
    Abstract: This paper adopts a versatile multivariate conditional correlation model to estimate daily seasonality in the returns, the volatility, and the correlations between stocks, bonds, gold and Bitcoin. Besides the well known seasonality in stocks and bonds, the day-of-the-week effect is also present in Bitcoin. Mondays are associated with higher Bitcoin returns, while Wednesdays with higher Bitcoin volatility. As opposed to previous literature, our results indicate strong evidence of Bitcoin’s leverage effect. Moreover, we show that daily correlations between Bitcoin and traditional assets are higher at the beginning of the week, while the volatility of these correlations decreases over the week. Our results offer interesting insights in terms of investment and portfolio diversification, that can be applied to the analysis of systematic risk asset allocation and hedging. Keywords: Day-of-the-week effect; dynamic conditional correlation; Bitcoin; volatility seasonality. JEL codes: G01; G10; G12; G22
    Keywords: Bitcoin, Mercats financers, 336 - Finances. Banca. Moneda. Borsa,
    Date: 2020

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