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on Banking |
| By: | Takeo Hoshi (The University of Tokyo); Ke Wang (Federal Reserve Board) |
| Abstract: | This paper addresses the concerns on correlated risks across banks that tightening regulation may have induced. Facing higher required capital ratio after the global financial crisis, a bank can reduce the risk-weighted assets by shifting its portfolios from asset classes with high risk-weights to asset classes with low risk-weights. This may reduce the risk exposures of individual banks, but may end up concentrating various banks’ assets to the same set of low risk assets, hence increase the joint default probability and systemic risk of the banking system. Using risk-weighted asset data in Form FFIEC101, reported by the U.S. banks that are allowed to use the advanced approach, we show banks’ average risk weights indeed declined since 2010, partly due to portfolio shifts in credit allocation. We measure the convergence in credit allocation by the cosine similarity of portfolio compositions for pairs of banks. We document that the average cosine similarity across the advanced approach banks rose monotonically and significantly since 2010, which coincides with a period of tightened capital regulations. Finally, we observe that the two prevailing systemic risk measures –SRISK and CoVaR –also show signs of convergence among banks during the same time period. We conclude that the capital regulation may have unintended consequences on systemic risk by encouraging herd behavior across regulated banks. |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf506&r=all |
| By: | Marie-Hélène Felt; Fumiko Hayashi; Joanna Stavins; Angelika Welte |
| Abstract: | Using data from Canada and the United States, 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 merchant cost of accepting payments that is passed on to consumers as higher retail prices. 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. This result is robust under various scenarios and assumptions, suggesting payment card pricing and merchant cost pass-through have regressive distributional effects in Canada and the United States. |
| Keywords: | Bank notes; Financial institutions; Financial services; Market structure and pricing; Payment clearing and settlement systems |
| JEL: | D12 D23 D31 E42 G21 L81 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-8&r=all |
| By: | Anna Burova (Bank of Russia, Russian Federation); Henry Penikas (Bank of Russia, Russian Federation); Svetlana Popova (Bank of Russia, Russian Federation) |
| Abstract: | A genuine measure of an ex ante credit risk links borrowers’ financial position with the odds of default. Comprehension of borrower’s financial position is proxied by the derivatives of its filled financial statements, i.e. financial ratios. To measure an ex ante credit risk, one needs a forward-looking estimate. We identify statistically significant relationships between the shortlisted financial ratios and the subsequent default events. To estimate the odds of the borrower to default on its obligations, we simulate its probability of default at a horizon of one year. We horse run the constructed PD model against the alternative measures of ex ante credit risk that the related literature on bank risk-taking widely uses: credit quality groups and credit spreads in interest rates. We compare the results obtained with the PD model, and with the alternative approaches. We find that the PD model predicts the default event more accurately at a horizon of one year. We conclude that the developed measure of ex ante credit risk is feasible for estimating the risk-taking behaviour by banks and analysing the shifts in portfolio composition with the sufficient degree of granularity. The model could be used in applied research as the tool for measuring ex ante credit risk based on micro level data (credit registry). |
| Keywords: | ex ante probability of default, corporate credit, credit registry, probability of default mode, credit quality groups, credit spreads |
| JEL: | E44 E51 E52 E58 G21 G28 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps66&r=all |
| By: | Jonathan Benchimol (Bank of Israel); Gamrasni Inon (Bank of Israel); Kahn Michael (Bank of Israel); Ribon Sigal (Bank of Israel); Saadon Yossi (Bank of Israel); Ben-ZeâEv Noam (Bank of Israel); Segal Asaf (Bank of Israel); Shizgal Yitzchak (Bank of Israel) |
| Abstract: | We examine the impact of domestic macroprudential (MaP) policy measures targeted at the banking sector, alongside the impact of domestic monetary policy on housing, consumer, and business bank credit dynamics, using individual bank panel data for the period 2004â19. We find that domestic MaP measures targeting housing sector credit reduced the growth rate of housing credit and contributed to business credit growth. Other general MaP measures reduced growth of credit to the business sector. Monetary policy was generally found to be effective, with a significant negative impact on bank credit before the Global Financial Crisis (GFC). The interaction between monetary policy and MaP highlights the role of monetary policy after 2008, and the effect of accommodative monetary policy on consumer and business credit fostered by housing MaP measures. We found that the impact of foreign monetary policy on credit growth is negative, as is the impact of domestic monetary policy, suggesting its capacity to function as a leading indicator for domestic monetary policy. |
| Keywords: | financial stability, policy evaluation, banking sector, credit markets, regulation, global financial crisis |
| JEL: | E51 E52 E58 G01 G21 G28 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2021.02&r=all |
| By: | Zhiguo He (University of Chicago - Booth School of Business; NBER); Jing Huang (University of Chicago - Booth School of Business); Jidong Zhou (Yale University - School of Business) |
| 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 fintech entrants. We study lending market competition when sharing banks’ customer data enables better borrower screening or targeting by fintech lenders. Open banking could make the entire financial 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 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2020-168&r=all |
| By: | Sewon Hur; César Sosa-Padilla; Zeynep Yom |
| 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: | 2021–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:89754&r=all |
| By: | Knut Are Aastveit; Ragnar Enger Juelsrud; Ella Getz Wold |
| Abstract: | We evaluate the impact of mortgage regulation on credit volumes, household balance sheets and the reaction to adverse economic shocks. Using a comprehensive dataset of all housing transactions in Norway matched with buyers' balance sheet information from official tax records, we identify causal effects of mortgage loan-to-value (LTV) limits. Our results show that LTV-requirements have substantial effects on credit volumes, especially on the extensive margin. As a result, such requirements contribute to dampening aggregate credit growth. We find that affected households lower their debt uptake and face lower interest expenses, thereby reducing their vulnerability to adverse shocks. However, affected households also deplete liquid assets when purchasing a home, in order to meet the new requirement. This negative effect on liquid savings persists in the years following the house purchase, suggesting that the impact on financial vulnerability at the household level is in fact ambiguous. We illustrate this further by documenting that households affected by the regulation are more likely to sell their home when becoming unemployed compared to non-affected households. |
| Keywords: | household leverage, financial regulation, macroprudential policy, mortgage markets |
| JEL: | E21 E58 G21 G28 G51 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2020_06&r=all |
| By: | Tal Gross (Boston University;NBER); Raymond Kluender (Harvard University - Harvard Business School); Feng Liu (Consumer Financial Protection Bureau); Matthew J. Notowidigdo (University of Chicago - Booth School of Business; NBER); Jialan Wang (University of Illinois at Urbana-Champaign) |
| Abstract: | A more generous consumer bankruptcy system provides greater insurance against financial risks but may also raise the cost of credit. We study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which increased the costs of filing for bankruptcy. We identify the effects of BAPCPA on borrowing costs using variation in the effects of the reform across credit scores. We find that a one-percentage-point reduction in bankruptcy-filing risk decreased credit-card interest rates by 70{90 basis points. Conversely, BAPCPA reduced the insurance value of bankruptcy, with uninsured hospitalizations 70 percent less likely to obtain bankruptcy relief after the reform. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2020-164&r=all |
| By: | Ricardo Correa (Board of Governors of the Federal Reserve System); Wenxin Du (University of Chicago - Booth School of Business; NBER); Gordon Liao (Board of Governors of the Federal Reserve System) |
| Abstract: | We characterize how U.S. global systemically important banks (GSIBs) supply short-term dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-last-resort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subsequent response of U.S. GSIBs to recent policy interventions by the Federal Reserve. |
| Keywords: | Liquidity, global banks, repos, reserves, covered interest rate parity |
| JEL: | G2 F3 E4 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2020-89&r=all |
| By: | Kilian Huber (University of Chicago - Booth School of Business) |
| Abstract: | The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in postwar Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers. |
| JEL: | E24 E44 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2020-172&r=all |
| By: | Edoardo Rainone (Bank of Italy) |
| Abstract: | We propose a method based on control charts to identify in real-time sudden deposits' outflows through payment systems. The performance of the methodology is assessed with both Monte Carlo simulations and real transaction-level TARGET2 data for a large sample of Italian banks. We identify a set of idiosyncratic bank stress episodes and show that deposits are generally shifted to other banks, mainly large and domestic, generating a size premium; only a limited amount migrates to foreign banks. Under the fixed-rate, full allotment regime, the liquidity drain is mostly offset through open market operations. |
| Keywords: | depositors' trust, interbank networks, payment systems, money, control charts, digital economy, financial stability |
| JEL: | E50 E40 G01 G10 G21 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1319_21&r=all |
| By: | Tobias Adrian |
| Abstract: | The COVID-19 pandemic is causing an unprecedented worldwide economic contraction, leading central banks to reduce interest rates to historically low levels and making unconventional monetary policies—including “low for long” interest rates and asset purchases—increasingly common. Arguably, however, the policies implemented are efficient because they encourage increased risk-taking, and they may have, if unintentionally, increase medium- and long-run macro-financial vulnerabilities. This paper argues that the resulting trade-offs need to be carefully accounted for in monetary policy models and outlines how that can be achieved in practice. |
| Keywords: | Monetary policy;Financial risk;Financial stability;Monetary Policy;Risk-Taking;Financial Stability |
| Date: | 2020–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfdps:2020/015&r=all |