nep-ban New Economics Papers
on Banking
Issue of 2021‒02‒22
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banks, shadow banks, and business cycles By Becard, Yvan; Gauthier, David
  2. Limited liability, strategic default and bargaining power By Balatti, Mirco; López-Quiles, Carolina
  3. Monetary Policy, Credit Risk, and Profitability: The Influence of Relationship Lending on Cooperative Banks' Performance By Bruno de Menna
  4. The COVID-19 Shock and Consumer Credit: Evidence from Credit Card Data By ; ; Benjamin S. Kay
  5. Does bank efficiency affect the bank lending channel in China? By Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
  6. The Joint Impact of Bank Capital and Funding Liquidity on the Monetary Policy's Risk-Taking Channel By Bruno de Menna
  7. Policy uncertainty, lender of last resort and the real economy By Jasova, Martina; Mendicino, Caterina; Supera, Dominik
  8. Optimal Bailouts in Banking and Sovereign Crises By Sewon Hur; César Sosa-Padilla; Zeynep Yom
  9. Stress-testing net trading income: the case of European banks By Giglio, Carla; Shaw, Frances; Syrichas, Nicolas; Cappelletti, Giuseppe
  10. Did Subsidies to Too-Big-To-Fail Banks Increase during the COVID-19 Pandemic? By Asani Sarkar
  11. A Leverage-Based Measure of Financial Stability By Adrian, Tobias; Borowiecki, Karol Jan; Tepper, Alexander
  12. Conditions for Effective Macroprudential Policy Interventions By Khan, Fahad; Ramayandi, Arief; Schröder, Marcel
  13. Explainable models of credit losses By João A. Bastos; Sara M. Matos
  14. The Transmission of Monetary Policy via the Banks' Balance Sheet - Does Bank Size Matter? By Tumisang Loate; Nicola Viegi
  15. Banking Supervision and Risk-Adjusted Performance inthe Host Country Environment By Karel Janda; Oleg Kravtsov
  16. Financial crises, macroprudential policy and the reliability of credit-to-GDP gaps By Alessandri, Piergiorgio; Bologna, Pierluigi; Galardo, Maddalena

  1. By: Becard, Yvan (PUC-Rio); Gauthier, David (Bank of England)
    Abstract: Credit spreads on household and business loans move in lockstep and spike in every recession. We propose a theory as to why banks tighten their lending standards following a drop in market sentiment. The key feature is a procyclical shadow banking sector that shifts risk from traditional banks to investors through securitisation. We fit the model to euro‑area data and find that market sentiment shocks are the main driver of business and financial cycles over the past two decades.
    Keywords: Credit spreads; shadow banks; business cycles; financial shocks
    JEL: E32 E44 G21 G23
    Date: 2021–02–12
  2. By: Balatti, Mirco; López-Quiles, Carolina
    Abstract: In this paper we examine the effects of limited liability on mortgage dynamics. While the literature has focused on default rates, renegotiation, or loan rates individually, we study them together as equilibrium outcomes of the strategic interaction between lenders and borrowers. We present a simple model of default and renegotiation where the degree of limited liability plays a key role in agents' strategies. We then use Fannie Mae loan performance data to test the predictions of the model. We focus on Metropolitan Statistical Areas that are crossed by a State border in order to exploit the discontinuity in regulation around the borders of States. As predicted by the model, we find that limited liability results in higher default rates and renegotiation rates. Regarding loan pricing, while the model predicts higher interest rates for limited liability loans, we find no such evidence in the Fannie Mae data. We further investigate this by using loan application data, which contains the interest rates on loans sold to private vs public investors. We find that private investors do price in the difference in ex-ante predictable default risk for limited liability loans. JEL Classification: D10, E40, G21, R20, R30
    Keywords: debt repudiation, discontinuity, lender recourse, mortgage contracts, renegotiation
    Date: 2021–01
  3. By: Bruno de Menna (IEP Toulouse - Sciences Po Toulouse - Institut d'études politiques de Toulouse, LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: Financial theory indicates that low interest rates hamper credit risk and profitability, two interrelated components of banks' balance sheets. Using a simultaneous equations framework, we investigate the effects of euro area monetary easing on cooperative banks' performance depending on their commitment to relationship lending. First, we find no evidence of a risk-taking channel of monetary policy for consolidated cooperative banks. Further, the profitability of relationship-based cooperative banks is more severely hit in a low interest rate environment than that of consolidated cooperative banks. This raises issues about the middle-term durability of relationship lending when rates hold "low-for-long". Finally, non-cooperative banks and relationship-based cooperative banks both increase credit risk under accommodating monetary policy. However, we suggest that these similarities do not occur for the same reasons: while non-cooperative banks prioritize profitability through higher credit risk when interest rates fall, relationship-based cooperative banks instead increase their capital buffers to ensure credit access to their customers, which mainly comprise small businesses and high-risk firms.
    Keywords: Monetary policy,Credit risk,Profitability,Cooperative banks,Relationship lending
    Date: 2021–02–11
  4. By: ; ; Benjamin S. Kay
    Abstract: We use credit card data from the Federal Reserve Board's FR Y-14M reports to study the impact of the COVID-19 shock on the use and availability of consumer credit across borrower types from March through August 2020. We document an initial sharp decrease in credit card transactions and outstanding balances in March and April. While spending starts to recover by May, especially for risky borrowers, balances remain depressed overall. We find a strong negative impact of local pandemic severity on credit use, which becomes smaller over time, consistent with pandemic fatigue. Restrictive public health interventions also negatively affect credit use, but the pandemic itself is the main driver. We further document a large reduction in credit card originations, especially to risky borrowers. Consistent with a tightening of credit supply and a flight-to-safety response of banks, we find an increase in interest rates of newly issued credit cards to less creditworthy borrowers.
    Keywords: COVID-19; Bank lending; Consumer credit; Credit cards; Credit supply; Household spending
    JEL: E21 G21 G51 I18
    Date: 2021–02–02
  5. By: Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
    Abstract: This work examines the impact of bank efficiency on the bank lending channel in China. Using a sample of 175 Chinese banks over the period 2006–2017, we investigate how the reaction of the loan supply to monetary policy actions depends on a bank’s efficiency. While bank efficiency does not exert an impact on the effectiveness of monetary policy transmission overall, it does favor the transmission of monetary policy for banks with low loan-to-deposit ratios. In addition, the expansion of shadow banking activities has been associated with a positive impact of bank efficiency on monetary policy transmission. These results suggest that bank efficiency may influence the bank lending channel in certain cases.
    JEL: E52 G21
    Date: 2021–02–08
  6. By: Bruno de Menna (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: Despite an extensive literature on the risk–taking channel of monetary policy, the joint impact of bank capital and deposits on the latter remains poorly documented. Yet that prospect is essential for monetary policy taking action under the Basel III framework involving concomitant capital and funding liquidity standards. Using data on euro area from 1999 to 2018 and triple interactions between monetary policy, equity and funding liquidity, we shed light on a "crowding–out of deposits" effect prior to the 2008 GFC which supports the need for simultaneous capital and funding liquidity ratios to mitigate the monetary transmission to bank credit risk. Interestingly, our findings also highlight a missing "crowding–out of deposits" effect amongst poorly efficient banks in the aftermath of the GFC. As a result, a trade-off arises between financial stability and increased funding liquidity for these financial intermediaries, making a special treatment required for inefficient banks operating in a low interest rate environment. These results challenge the implementation of uniform funding liquidity requirements across the euro area.
    Keywords: Credit risk,Monetary policy transmission,Capital buffer,Funding liquidity
    Date: 2021–02–11
  7. By: Jasova, Martina; Mendicino, Caterina; Supera, Dominik
    Abstract: We show that a reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks’ exposure to uncertainty and find that the size of the haircut subsidy - the gap between private market and central bank security valuations - plays a key role in the propagation of the shock to lending and the real economy. JEL Classification: E44, E52, E58, G21, G32
    Keywords: bank credit, central bank liquidity, firm-level employment and investment, haircut subsidy, policy uncertainty
    Date: 2021–02
  8. By: Sewon Hur (Federal Reserve Bank of Dallas); César Sosa-Padilla (University of Notre Dame and NBER); Zeynep Yom (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions and increase output, but also imply increasing government fiscal needs and possible heightened default risk (i.e., they create a 'diabolic loop'). We find that the optimal bailouts exhibit clear properties. Other things equal, the fraction of banking losses that the bailouts would cover is: (i) decreasing in the level of government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of the banking crisis. Even though bailouts mitigate the adverse effects of banking crises, we find that the economy is ex ante better off without bailouts: the 'diabolic loop' they create is too costly.
    Keywords: Bailouts; Sovereign Defaults; Banking Crises; Conditional Transfers; Sovereign-bank diabolic loop
    JEL: E32 E62 F34 F41 G01 G15 H63
    Date: 2021–01
  9. By: Giglio, Carla; Shaw, Frances; Syrichas, Nicolas; Cappelletti, Giuseppe
    Abstract: Net trading income is an important but volatile source of income for many euro area banks, highly sensitive to changes in financial market conditions. Using a representative sample of European banks, we study the distribution of net trading income (normalized by total assets) conditional to changes in key macro-financial risk factors. To map the linkages of net trading income with financial risk factors and capture non-linear effects, we implement a dynamic fixed effects quantile model using the method of moments approach. We use the model to empirically estimate and forecast the conditional net trading income distribution from which we quantify tail risk measures and expected losses across banks. We find a heterogeneous and asymmetric impact of the risk factors on the distribution of net trading income. Credit and interest rate spreads affect lower quantiles of the net trading income distribution while stock returns are an important determinant of the upper quantiles. We also find that the onset of the Covid-19 pandemic resulted in a significant increase in the 5th and 10th percentile expected capital shortfall. Moreover, adverse scenario forecasts show a wide dispersion of losses and a long-left tail is evident especially in the most severe scenarios. Our findings highlight strong inter-linkages between financial risk factors and trading income and suggest that this tractable methodology is ideal for use as an additional tool in stress test exercises. JEL Classification: C21, C23, G21, G28
    Keywords: capital shortfall, net trading income, quantile panel regression, stress testing
    Date: 2021–02
  10. By: Asani Sarkar
    Abstract: Once a bank grows beyond a certain size or becomes too complex and interconnected, investors often perceive that it is “too big to fail” (TBTF), meaning that if the bank were to become distressed, the government would likely bail it out. In a recent post, I showed that the implicit funding subsidies to systemically important banks (SIBs) declined, on average, after a set of reforms for eliminating TBTF perceptions was implemented. In this post, I discuss whether these subsidies increased again during the COVID-19 pandemic and, if so, whether the increase accrued to large firms in all sectors of the economy.
    Keywords: Too-Big-To-Fail; global banks; systemic risk; Financial Stability Board; COVID-19
    JEL: G32 G21
    Date: 2021–02–11
  11. By: Adrian, Tobias (Monetary and Capital Markets Department); Borowiecki, Karol Jan (Department of Business and Economics); Tepper, Alexander (Columbia University)
    Abstract: The size and the leverage of financial market investors and the elasticity of demand of unlevered investors define MinMaSS, the smallest market size that can support a given degree of leverage. The financial system's potential for financial crises can be measured by the stability ratio, the fraction of total market size to MinMaSS. We use that financial stability metric to gauge the buildup of vulnerability in the run-up to the 1998 Long-Term Capital Management crisis and argue that policymakers could have detected the potential for the crisis.
    Keywords: Leverage; financial crisis; financial stability; minimum market size for stability; MinMaSS; stability ratio; Long-Term Capital Management; LTCM
    JEL: G01 G10 G20 G21
    Date: 2021–02–17
  12. By: Khan, Fahad (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Schröder, Marcel (Lebanese American University)
    Abstract: This paper aims at identifying effective macroprudential policy (MPP) interventions and analysing the macroeconomic conditions that promote them. We define effective MPP interventions as those that stabilize its underlying target variable, such as credit growth, house price growth, etc. For our analysis, we construct a new database that documents the use of a large number of MPP instruments for 61 advanced and emerging market economies from 2000 to 2016. The new feature of the database is that it maps every recorded MPP intervention in these economies and over this period to stabilize a specific target variable category for banking, health, domestic loans, the exchange rate, foreign capital movements, and house prices. Using this dataset, we introduce a practical way for defining the macroprudential policy effectiveness. We find that MPP interventions are more likely to be effective when several prudential measures are taken together, but at the same time avoid the diminishing returns of repeated MPP tightening. Monetary tightening seems to override the effectiveness of MPP instruments. The output gap, credit cycle, external debt, current account, and global risk appetite also count for the likelihood of MPP successes. The paper provides a guideline for the effective conduct of MPPs.
    Keywords: effectiveness; financial stability; macroprudential policy; probabilistic analysis
    JEL: E32 E58 G15 G28
    Date: 2020–02–25
  13. By: João A. Bastos; Sara M. Matos
    Abstract: Credit risk management is an area where regulators expect banks to have trans-parent and auditable risk models, which would preclude the use of more accurate black-box models. Furthermore, the opaqueness of these models may hide unknownbiases that may lead to unfair lending decisions. In this study, we show that banksdo not have to sacrifice prediction accuracy at the cost of model transparency tobe compliant with regulatory requirements. We illustrate this by showing that the predictions of credit losses given by a black-box model can be easily explained in terms of their inputs. Because black-box models are better at uncovering complex patterns in the data, banks should consider the determinants of credit losses suggested by these models in lending decisions and pricing of credit exposures.
    Keywords: Credit risk·Loss given default·Recovery rates·Explainable machine learning·Forecasting
    Date: 2021–02
  14. By: Tumisang Loate (Department of Economics, University of Pretoria); Nicola Viegi (SARB Chair in Monetary Economics, Department of Economics, University of Pretoria)
    Abstract: We study the credit channel of monetary policy in South Africa between 2002 and 2019 using banks' balance sheets. We show that there is a significant heterogeneity within the banking sector in both the loan and deposit sides of the banks' balance sheets. In response to a contractionary monetary policy shock, big banks adjust their loan portfolio by lending to businesses and reducing lending to households whereas for small banks we find the opposite. The increase in corporate lending amid declining inventories is consistent with the hypothesis of ``hedging and safeguarding the capital adequacy ratio" rather than funding business inventories. This paper highlights the importance of heterogeneity in customers, market power and business models in the banking sector, which characterises the socio-demographics dynamics in South Africa.
    Keywords: Credit channel, banks balance sheets, monetary policy
    JEL: E32 E52 G21
    Date: 2021–01
  15. By: Karel Janda; Oleg Kravtsov
    Abstract: In this paper, we examine the impact of the supervision as a monitoring activity and regulatory scrutiny on the performance and riskiness of the financial institutions in countries of Central, Eastern and South-Eastern Europe, whose banking sectors are characterized by foreign-bank dominated systems. For a dataset of 450 banks from 20 economies of the region, we use statistics from the World Bank-Bank Regulation and Supervisory Survey to construct the measures of the supervision activities, capital regulation stringency and supervisory power. We find that a higher intensity of supervision monitoring activities, especially by the centralized form of supervision, contributes to the decline of the bank's riskiness in case of larger banks while not affecting their economic performance. The regulatory power and stringency indicate a positive effect on the risk-adjusted performance for capital constrained banks, but moderately decrease the economic benefit for larger banks. The findings highlight the potential area of attention for regulators and policymakers and thus, contribute to the designing of effective supervision mechanism in the region.
    Keywords: supervision, financial regulation, RAROC, causal mediation analysis, moderation analysis, Central Eastern and South-Eastern Europe
    JEL: G20 G21 G28
    Date: 2020–11–19
  16. By: Alessandri, Piergiorgio; Bologna, Pierluigi; Galardo, Maddalena
    Abstract: The Basel III regulation explicitly prescribes the use of Hodrick-Prescott filters to estimate credit cycles and calibrate countercyclical capital buffers. However, the filter has been found to suffer from large ex-post revisions, raising concerns on its fitness for policy use. To investigate this problem we study credit cycles in a panel of 26 countries between 1971 and 2018. We reach two conclusions. The bad news is that the limitations of the one-side HP filter are serious and pervasive. The good news is that they can be easily mitigated. The filtering errors are persistent and hence predictable. This can be exploited to construct real-time estimates of the cycle that are less subject to ex-post revisions, forecast financial crises more reliably, and stimulate the build-up of bank capital before a crisis. JEL Classification: E32, G01, G21, G28
    Keywords: credit cycle, Hodrick-Prescott filter, macroprudential policy
    Date: 2021–02

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