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on Banking |
| By: | Bolton, Patrick (Columbia U and Imperial College London); Li, Ye (Ohio State U); Wang, Neng (Columbia U); Yang, Jinqiang (Shanghai U of Finance and Economics) |
| 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: | E4 E5 G21 G3 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2020-13&r=all |
| By: | Coste, Charles-Enguerrand; Tcheng, Céline; Vansieleghem, Ingmar |
| Abstract: | Custodians play a key but discrete role in the global financial market infrastructure. In Europe, they are licensed as “credit institutions ”, a legal requirement for European deposit-taking institutions, and therefore they face the same prudential requirements as “traditional” banks. However, their business model and risk profile are different from those of traditional banks since the core of their activity does not encompass balance sheet transformation and the associated risks. JEL Classification: G15, G21, G28, L22 |
| Keywords: | bank, credit institution, custodian, prudential supervision |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021256&r=all |
| By: | Susan F. Cherry; Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru |
| Abstract: | We follow a representative panel of US borrowers to study the suspension of household debt payments (debt forbearance) during the COVID-19 pandemic. Between March and October of 2020, loans worth $2 trillion entered forbearance. On average, cumulative payments missed per individual in forbearance during this period were largest for mortgage ($3,200) and auto ($430) borrowers. We estimate that more than 60 million borrowers will miss $70 billion on their debt payments by the end of 2021:Q1. This large amount of debt relief significantly dampened the household debt distress, which can help explain household delinquencies below pre-pandemic levels—a significant difference from other economic crises when delinquencies sharply increased along with unemployment. Forbearance thus may have had potentially large aggregate consequences for house prices and economic activity. Relief flows more to higher income individuals than those receiving stimulus checks, partially due to their higher debt balances: 60% of aggregate forbearance is provided to above median income borrowers. On the other hand, forbearance rates are higher among the more vulnerable populations: individuals with lower credit scores and lower incomes. Borrowers in regions with a higher likelihood of COVID-19 related economic shocks and higher shares of minorities were more likely to obtain debt relief. One third of borrowers in forbearance continued making full payments, suggesting that forbearance acts as a credit line, allowing borrowers to “draw” on payment deferral if needed. More than a quarter of total debt relief was provided by the private sector outside of the government mandates. Exploiting a discontinuity in mortgage eligibility under the CARES Act we estimate that implicit government debt relief subsidies increase the rate of forbearance by about 25%. Government and private relief follow similar patterns across income and creditworthiness, suggesting that borrower self-selection in requesting forbearance is an important determinant of debt relief incidence, and drives the distribution of relief across different population strata. Government relief is provided through private intermediaries, which differ in their propensity to supply relief, with shadow banks less likely to provide forbearance than traditional banks. |
| JEL: | G00 G01 G18 G2 G21 G23 G38 G5 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28357&r=all |
| By: | Yuliyan Mitkov; Ulrich Schüwer |
| Abstract: | We provide evidence that regions in the U.S. with higher income inequality tend to have a riskier banking sector. However, not all banks are more risky, as reflected in a higher dispersion of bank risk. We show how a model based on risk-shifting incentives where banks channel insured deposits into subprime loans can account for both findings. In equilibrium, a competition to risk-shift emerges, leading to a subprime lending boom in which loans to high-risk borrowers carry negative NPVs. Some banks engage in risk-shifting by lending to high-risk subprime borrowers, while the rest specialize in lending to low-risk prime borrowers. |
| Keywords: | Inequality, Financial stability, Agency costs, Composition of credit, Banking competition |
| JEL: | G11 G21 G28 G51 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_261&r=all |
| By: | Will Kerry |
| Abstract: | This paper measures the performance of different metrics in assessing banking system vulnerabilities. It finds that metrics based on equity market valuations of bank capital are better than regulatory capital ratios, and other metrics, in spotting banks that failed (bad apples). This paper proposes that these market-based ratios could be used as a surveillance tool to assess vulnerabilities in the banking sector. While the measures may provide a somewhat fuzzy signal, it is better to have a strategy for identifying bad apples, even if sometimes the apples turn out to be fine, than not being able to spot any bad apples before the barrel has been spoiled. |
| Keywords: | Banking;Capital adequacy requirements;Credit default swap;Distressed institutions;Stock markets;WP,bank,market,problem bank |
| Date: | 2019–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/180&r=all |
| By: | Minton, Bernadette A. (Ohio State U); Taboada, Alvaro G. (Mississippi State U); Williamson, Rohan (Georgetown U) |
| Abstract: | Using a sample of 3,964 bank mergers during the 1999-2016 period, we examine the effects of merger and local market characteristics on local small business lending through banks' dependence on soft information acquisition relative to technology driven lending. Mergers involving small or in-state acquirers are positively associated with small business loan (SBL) originations in counties where the target bank has a presence, particularly in counties with a larger number of small firms. In contrast, mergers involving large acquirers are associated with fewer SBL originations while those involving out-of-state acquirers have no impact on SBL originations. Analyses of acquirer bank SBL origination activity post-merger corroborate our county-level results. Post-merger, small bank acquirers increase in SBL originations, while large acquirers do not. Examining the behavior of local competitor banks shows that competitors of small acquirers decrease SBL originations, partially offsetting the positive effect associated small bank acquirers. Taken together, our findings underscore the importance of soft information acquisition in small business lending and suggest one-size-fits-all policy solutions are not likely to lead to common outcomes at the local level. Encouraging mergers by small banks and by in-state acquirers can positively affect small business lending and community investment, particularly in counties with a large fraction of small firms. |
| JEL: | G20 G21 G34 O16 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2020-12&r=all |
| By: | Robert C. Merton; Richard T. Thakor |
| Abstract: | This paper analyzes the costs and benefits of a no-fault-default debt structure as an alternative to the typical bankruptcy process. We show that the deadweight costs of bankruptcy can be avoided or substantially reduced through no-fault-default debt, which permits a relatively seamless transfer of ownership from shareholders to bondholders in certain states of the world. We show that potential costs introduced by this scheme due to risk shifting can be attenuated via convertible debt, and we discuss the relationship of this to bail-in debt and contingent convertible (CoCo) debt for financial institutions. We then explore how, despite the advantages of no-fault-default debt, there may still be a functional role for the bankruptcy process to efficiently allow the renegotiation of labor contracts in certain cases. In sharp contrast to the human-capital-based theories of optimal capital structure in which the renegotiation of labor contract in bankruptcy is a cost associated with leverage, we show that it is a benefit. The normative implication of our analysis is that no-fault-default debt, when combined with specific features of the bankruptcy process, may reduce the deadweight costs associated with bankruptcy. We discuss how an orderly process for transfer of control and a predetermined admissibility of renegotiation of labor contracts can be a useful tool for resolving financial institution failure without harming financial stability. |
| JEL: | D21 G21 G23 G32 G33 G38 K12 L22 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28341&r=all |
| By: | Eric Monnet; Miklos Vari |
| Abstract: | This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce. |
| Keywords: | Banking;Reserve requirements;Liquidity requirements;Liquidity indicators;Government securities;WP,discount window,money market,bank liquidity,discount rate |
| Date: | 2019–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/176&r=all |
| By: | Hajime Tomura (Faculty of Political Science and Economics, Waseda University) |
| Abstract: | This paper presents a three-period model to endogenize the need for bank notes given the availability of trade credit. The model shows that banks can improve risk sharing in the economy by discounting commercial bills to issue bank notes, because bank notes can serve as payment instruments backed by a diversified pool of commercial bills issued by payers. This characteristic of bank notes, however, can cause a self-fulfilling mass refusal of bank notes by payees due to endogenous default on commercial bills. This result holds even if bank notes are not redeemable on demand before maturity. The model shows that a capital requirement is not sufficient for preventing a self-fulfilling mass refusal of bank notes, while a reserve requirement is. |
| Keywords: | Bank notes; Trade credit; Commercial bills; Bank run; Reserves; Payment system |
| JEL: | E42 G21 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:wap:wpaper:1922&r=all |
| By: | Alexei Karas; William Pyle; Koen Schoors |
| Abstract: | Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on variation in the ratio of firm deposits to total household and firm deposits before the announcement of deposit insurance, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which private domestic banks serve as the treatment group and state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control group. |
| Keywords: | deposit insurance, market discipline, moral hazard, risk taking, banks, Russia |
| JEL: | G21 G28 P34 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8867&r=all |
| By: | Lorenzo Bretscher (University of Lausanne and Swiss Finance Institute); Peter Feldhütter (Copenhagen Business School); Andrew Kane (Duke University, Fuqua School of Business, Students); Lukas Schmid (University of Southern California - Marshall School of Business) |
| Abstract: | Models of capital structure and credit risk make predictions about market valuations of debt, but are routinely tested on the basis of book debt from common data sources. In this paper, we propose to close this gap. We construct a rich data set on firm level debt market valuations by carefully matching data on corporate bond and loan secondary market transactions. We document significant discrepancies between market and book values, especially for distressed firms. We use our dataset to i) provide novel rules of thumb on how to adjust leverage and unlever returns using standard datasets, and ii) to revisit a number of prominent empirical patterns involving corporate debt. Using a market-based measure of Tobin's Q, we find little evidence for investment cash-flow sensitivity in our data. We find that using market debt values significantly improves default prediction, and do not detect a credit spread puzzle. In asset pricing tests, we find a leverage premium, but no evidence for a value premium after controlling for market leverage. Moreover, a novel measure of financial distress, namely market-to-book debt, predicts stock returns positively in the cross-section, inconsistent with a financial distress puzzle. |
| Keywords: | Corporate Debt Valuations, Tobin's Q, Leverage Premium |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2106&r=all |
| By: | Andrea Bellucci (European Commission, Joint Research Centre (JRC)); Alexander Borisov (Carl H. Lindner College of Business, University of Cincinnati); Germana Giombini (Department of Economics, Society and Politics, University of Urbino Carlo Bo); Alberto Zazzaro (Department of Economics and Statistics, University of Naples Federico II) |
| Abstract: | This paper uses a variety of estimation methods to explore the empirical relationship between interest rate and collateral requirements in bank loan contracts. Methods that do not allow for endogenous contract terms detect a positive reciprocal association between interest rate and collateral. Methods that allow for endogenous contract terms point to a strong positive effect of interest rate on collateral but the effect of collateral on interest rate is much weaker. This highlights the importance of incorporating the endogenous nature of contract terms in empirical work. |
| Keywords: | Bank lending, Collateral, Interest rate |
| JEL: | G21 G32 L11 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:168&r=all |
| By: | Erel, Isil (Ohio State U and European Corporate Governance Institute); Liebersohn, Jack (U of California, Irvine) |
| Abstract: | New technology promises to expand the supply of financial services to small businesses poorly served by the banking system. Does it succeed? We study the response of FinTech to financial services demand created by the introduction of the Paycheck Protection Program (PPP). We find that FinTech is disproportionately used in ZIP codes with fewer bank branches, lower incomes, and a larger minority share of the population, as well as in industries with little ex ante small-business lending. FinTech's role in PPP provision is also greater in counties where the economic effects of the COVID-19 pandemic were more severe. We estimate that more PPP provision by traditional banks causes sta- tistically significant but economically small substitution away from FinTechs, implying that FinTech mostly expands the overall supply of financial services, rather than redistributing it. |
| JEL: | E6 G21 G23 G28 G38 H25 H32 I38 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2020-16&r=all |
| By: | Marco Di Maggio; Angela T. Ma; Emily Williams |
| Abstract: | The reordering of transactions from "high-to-low" is a controversial bank practice thought to maximize fees paid by low-income customers on overdrawn accounts. We exploit multiple class-action lawsuits resulting in mandatory changes to this practice, coupled with payday lending data, to show that after banks cease high-to-low reordering, low-income individuals reduce borrowing from alternative lenders. These consumers increase consumption, experience long-term improvements in overall financial health, and gain access to lower-cost loans in the traditional system. These findings highlight that aggressive bank practices create a demand for alternative financial services, highlighting an important link between the traditional and alternative financial systems. |
| JEL: | G21 G38 G51 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28242&r=all |
| By: | Chawla, Aditi; Manjhi, Ganesh; Bhattacharya, Gaurav |
| Abstract: | This paper explores the `latent economy' of online transaction failure that prevails in the digital payment system. A two-variant model of profit, with a different cost function in each variant, has been proposed to examine the profit of commercial banks. The model considers that when an online transaction fails, banks use the money held in the Unified Payment System to earn revenue in the form of interest income by investing the same. The theoretical exposition of the model has been corroborated by simulation by assuming feasible parametric restrictions and exogenous values. The paper finds that commercial banks make profit by using the held amount at the existing cost. As the proportion of the held money used by the banks increases, their profits increase and the commercial banks incur losses when an `alternative cost' with stricter penalties is imposed. |
| Keywords: | Digital Payments, Transaction Failure, UPI Payment Failure |
| JEL: | E58 G18 G28 L51 |
| Date: | 2021–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105285&r=all |
| By: | Jeon, Bang (School of Economics); Yao, Yao (Research Institute of Economics and Management); Chen, Minghua (Research Institute of Economics and Management); Wu, Ji (Research Institute of Economics and Management) |
| Abstract: | This paper examines the impact of macroprudential policies on bank risk under economic uncertainty in emerging Asian economies. By using bank-level panel data for selected emerging Asian economies during the period 2000-2016, we present consistent evidence that bank risk increases with economic uncertainty, while macroprudential measures play an ameliorative role to the uncertainty-induced bank risk. We confirm that these findings are robust against a series of alternative measures of economic uncertainty and bank risk, and alternative econometric tools to address possible endogeneity concerns. |
| Keywords: | Economic uncertainty; bank risk; macroprudential policy; emerging Asia |
| JEL: | G15 G21 |
| Date: | 2021–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2021_006&r=all |
| By: | Marília Pinheiro Ohlson; Gerlando Augusto Sampaio Franco de Lima; Tony Takeda |
| Abstract: | This study seeks to assess the phenomenon of market discipline in Brazil and analyze whether the increase in deposit insurance coverage in 2013 and the role of brokerage firms in the funding market changed this discipline. The database includes accounting information of Brazilian banks from 2010 to 2017. We calculated the parameters using the Systemic Generalized Method of Moments (GMM-Sys). We found evidence of market discipline through interest rate and maturity of deposits, with the size of banks and their capitalization being the main disciplining factors. Deposit insurance has reduced market discipline for both interest rate and maturity mechanisms, while brokerage firms have reduced the size and capitalization advantages of banks. The results did not indicate the existence of market discipline through the quantity mechanism and deposit insurance did not change this scenario. Brokerage firms also reduced the size and capitalization advantages on this mechanism. However, significant indicators in the market discipline literature, mainly related to banks' credit portfolios, were not relevant in the Brazilian market, indicating discipline might be reinforced. The results were similar in the analysis excluding “too-big-to-fail” banks, with slightly higher parameters, indicating the discipline is stronger for smaller banks. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:542&r=all |
| By: | Romain Bouis |
| Abstract: | This paper studies the relationship between banks’ holdings of domestic sovereign securities and credit growth to the private sector in emerging market and developing economies. Higher banks’ holdings of government debt are associated with a lower credit growth to the private sector and with a higher return on assets of the banking sector. Analysis suggests that the negative relationship between banks’ claims on the government and private sector credit growth mainly reflects a portfolio rebalancing of banks towards safer, more liquid public assets in stress times and provides only limited evidence of a crowding-out effect due to financial repression. |
| Keywords: | Banking;Public debt;Credit;Government securities;Commercial banks;WP,return on assets,banks' claim |
| Date: | 2019–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/224&r=all |
| By: | Linda Schilling; Jesús Fernández-Villaverde; Harald Uhlig |
| Abstract: | A central bank digital currency, or CBDC, may provide an attractive alternative to traditional demand deposits held in private banks. When offering CBDC accounts, the central bank needs to confront classic issues of banking: conducting maturity transformation while providing liquidity to private customers who suffer “spending” shocks. We analyze these issues in a nominal version of a Diamond and Dybvig (1983) model, with an additional and exogenous price stability objective for the central bank. While the central bank can always deliver on its nominal obligations, runs can nonetheless occur, manifesting themselves either as excessive real asset liquidation or as a failure to maintain price stability. We demonstrate an impossibility result that we call the CBDC trilemma: of the three goals of efficiency, financial stability (i.e., absence of runs), and price stability, the central bank can achieve at most two. |
| JEL: | E58 G21 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28237&r=all |