nep-ban New Economics Papers
on Banking
Issue of 2021‒03‒08
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The more the merrier? Evidence from the global financial crisis on the value of multiple requirements in bank regulation By Buckmann, Marcus; Gallego Marquez, Paula; Gimpelewicz, Mariana; Kapadia, Sujit; Rismanchi, Katie
  2. Disrupted lending relationship and borrower's strategic default: evidence from the tourism industry during the Greek economic crisis By Panagiotis Avramidis; Ioannis Asimakopoulos; Dimitris Malliaropulos
  3. Solvency distress contagion risk: network structure, bank heterogeneity and systemic resilience By Abduraimova, Kumushoy; Nahai-Williamson, Paul
  4. Precision of Public Information Disclosures, Banks’ Stability and Welfare By Moreno, Diego; Takalo, Tuomas
  5. The pitfalls of pledgeable cash flows : soft budget constraints, zombie lending and under-investment By Bernhardt, Dan; Koufopoulos, Kostas; Trigilia, Giulio
  6. Do Lenders Still Discriminate? A Robust Approach for Assessing Differences in Menus By Paul S. Willen; David Hao Zhang
  7. When Pro-Poor Microcredit Institutions Favor Richer Borrowers - A Moral Hazard Story By Sara Biancini; David Ettinger; Baptiste Venet
  8. A note of caution on quantifying banks' recapitalization effects By Schmidt, Kirsten; Noth, Felix; Tonzer, Lena
  9. On the origin of systemic risk By Montagna, Mattia; Torri, Gabriele; Covi, Giovanni
  10. The Japanese banks in the lasting low-, zero- and negative-interest rate environment By Schnabl, Gunther; Murai, Taiki
  11. Reporting behavior and transparency in European banks' country-by-country reports By Dutt, Verena K.; Nicolay, Katharina; Spengel, Christoph
  12. Macroprudential policy interactions in a sectoral DSGE model with staggered interest rates By Hinterschweiger, Marc; Khairnar, Kunal; Ozden, Tolga; Stratton, Tom
  13. Promoting from the poor in competitive lending markets with adverse selection By Bernhardt, Dan; Koufopoulos, Kostas; Trigilia, Giulio
  14. Machine Learning and Credit Risk: Empirical Evidence from SMEs By Alessandro Bitetto; Paola Cerchiello; Stefano Filomeni; Alessandra Tanda; Barbara Tarantino
  15. Real estate transaction taxes and credit supply By Koetter, Michael; Marek, Philipp; Mavropoulos, Antonios
  16. Deposit Insurance and Depositor Behavior: Evidence from Colombia By Nicolás de Roux; Nicola Limodio
  17. Estimating the Value at Risk of a bank’s portfolio in sovereign bonds using a DCC-Copula model By Gomez-Gonzalez, Jose Eduardo; Gualtero-Briceño, Daniela; Melo-Velandia, Luis Fernando
  18. Microfinance et échelle d'intermédiation: l'industrie est-elle toujours dans l'enfance By Célestin Mayoukou
  19. The role of banking and credit in business cycle fluctuations in Kazakhstan By Nurdaulet Abilov
  20. Greening (runnable) brown assets with a liquidity backstop By Eric Jondeau; Benoit Mojon; Cyril Monnet

  1. By: Buckmann, Marcus (Bank of England); Gallego Marquez, Paula (Bank of England); Gimpelewicz, Mariana (Bank of England); Kapadia, Sujit (European Central Bank); Rismanchi, Katie (Bank of England)
    Abstract: This paper assesses the value of multiple requirements in bank regulation using a novel empirical rule‑based methodology. Exploiting a dataset of capital and liquidity ratios for a sample of global banks in 2005 and 2006, we apply simple threshold-based rules to assess how different regulations individually and in combination might have identified banks that subsequently failed during the global financial crisis. Our results generally support the case for a small portfolio of different regulatory metrics. Under the objective of correctly identifying a high proportion of banks which subsequently failed, we find that a portfolio of a leverage ratio, a risk-weighted capital ratio, and a net stable funding ratio yields fewer false alarms than any of these metrics individually – and at less stringent calibrations of each individual regulatory metric. We also discuss how these results apply in different robustness exercises, including out-of-sample evaluations. Finally, we consider the potential role of market-based measures of bank capitalisation, showing that they provide complementary value to their accounting-based counterparts.
    Keywords: Banking regulation; Basel III; bank failure; global financial crisis; marketbased metrics; regulatory complexity
    JEL: G01 G18 G21 G28
    Date: 2021–01–29
  2. By: Panagiotis Avramidis (Alba Graduate Business School, The American College of Greece); Ioannis Asimakopoulos (Bank of Greece); Dimitris Malliaropulos (Bank of Greece and University of Piraeus)
    Abstract: Using a sample of bank loans to firms operating in the tourism industry for the period 2010-2015, and regional variation of tourism activities to identify the strategic defaulted firms, we examine the impact of Greek banks consolidation on the firms’ payment behavior. We show that a merger-induced impairment of the lending relationship is related to a higher likelihood of strategic default by the target bank’s borrowers. In contrast, mergers with a limited impact on the lending relationship have no effect on the probability of strategic default of target bank’s borrowers. The results highlight the importance of relationship lending benefits in strategic default decisions. Our findings are robust to the alternative interpretation of soft budget constraints.
    Keywords: Bank consolidation; strategic default; lending relationship.
    JEL: G21 G32 G33
    Date: 2021–01
  3. By: Abduraimova, Kumushoy (Imperial College Business School); Nahai-Williamson, Paul (Bank of England)
    Abstract: We systematically analyse how network structure and bank characteristics affect solvency distress contagion risk in interbank networks. As interbank networks become more connected and more regular in structure, the contagion risk of system-wide shocks and individual bank defaults initially increases and then decreases, all else being equal. The low density heterogeneous network structures that typify real interbank networks are particularly prone to solvency distress contagion risk, when banks are similar in balance sheet size and capitalisation. However, when networks are calibrated to UK data, the higher capitalisation of large, highly-connected banks relative to their interbank exposures significantly increases the resilience of the system and reduces the importance of network structure. These findings reinforce the importance and effectiveness of imposing higher capital buffers on systemically important banks and of policies that limit interbank exposures. We also demonstrate that for real-world interbank networks, simple network metrics other than individual bank connectedness do not provide robust indicators for monitoring solvency contagion risk, suggesting that policymakers should continue efforts to model these risks explicitly rather than rely on simple aggregate indicators.
    Keywords: Financial networks; systemic risk; financial contagion; banking policy
    JEL: C54 D85 G01 G21 G28
    Date: 2021–02–26
  4. By: Moreno, Diego; Takalo, Tuomas
    Abstract: We study the optimal precision of public information disclosures about banks assets quality. In our model the precision of information affects banks' cost of raising funding and asset profile riskiness. In an imperfectly competitive banking sector, banks'stability and social surplus are non-monotonic functions of precision: an intermediate precision (or low-to-intermediate precision if banks contract their repayment promises on public information) maximizes stability, and also yields the maximum surplus when the social cost of bank failure c is large. When c is small and the banks' asset risk taking is not too sensitive to changes in the precision, the maximum surplus (and maximum risk) are reached at maximal precision. In a perfectly competitive banking sector in which banks' asset risk taking is not too sensitive to the precision of information, the maximum surplus (and maximum risk) are reached at maximal precision, while maximum stability is reached at minimal precision.
    JEL: G21 G28 D83
    Date: 2021–03–04
  5. By: Bernhardt, Dan (University of Illinois and University of Warwick); Koufopoulos, Kostas (University of York); Trigilia, Giulio (University of Rochester)
    Abstract: We show that when borrowers are privately informed about their creditworthiness and lenders have a soft budget constraint, efficient investment requires a limit on the fraction of a firm's cash flows that can be pledged to outsiders. That is, pledgeability should neither be too low nor too high. An increase in pledgeability, or, more broadly, creditor rights, can either promote re-investment in zombie firms, which increases other firms' cost of capital, or it can lead to inesufficient underinvestment, depending on the composition of equilibrium credit demand. Thus, greater pledgeability can reduce net social surplus, and even trigger a Pareto loss. JEL Classification: G21 ; G32 ; G33 ; G38
    Keywords: Pledgeability ; Investment efficiency ; Soft budget constraint ; Asymmetric information ; Collateral ; Zombie lending ; Under-investment
    Date: 2021
  6. By: Paul S. Willen; David Hao Zhang
    Abstract: We use a new methodology to assess mortgage pricing discrimination faced by minority borrowers. We identify a “menu problem” that comes from the multidimensional nature of mortgage pricing: When getting a mortgage, borrowers can choose to avoid closing costs and pay a high interest rate or contribute to closing costs to get a lower rate. While data on both dimensions of mortgage pricing are by now often available, intuitively attractive metrics of lender pricing discrimination used in the literature can lead to both false and contradictory results. For example, it is sometimes observed that conditional on rate, minority borrowers pay the same closing costs as white borrowers, but conditional on closing costs, minority borrowers pay a higher rate. Though generally underappreciated, the menu problem is broadly relevant in economic assessments of differences in opportunity given data on outcomes. We develop a solution to the menu problem by defining (1) a test statistic for equality in menus and (2) a difference in menus (DIM) metric for assessing whether one group of borrowers would prefer to switch to another group’s menus, both based on pairwise dominance relationships in the data. Our proposed solution is robust to arbitrary heterogeneity in borrower preferences across racial groups. We show how our metrics can be computed using methods from optimal transport and also devise a new procedure for hypothesis testing in this class of problems based on directional differentiation. Finally, we implement our methodology on a data set linking 2018–2019 Home Mortgage Disclosure Act (HMDA) data to Optimal Blue rate locks, and present novel results on mortgage pricing discrimination.
    Keywords: mortgage pricing discrimination; minority borrowers; Home Mortgage Disclosure Act
    JEL: G21 G51
    Date: 2020–12–01
  7. By: Sara Biancini; David Ettinger; Baptiste Venet
    Abstract: We suggest an explanation for the existence of “mission drift”, the tendency for Microfinance Institutions (MFIs) to lend money to wealthier borrowers rather than to the very poor. We focus on the relationship between MFIs and external funding institutions. We assume that both the MFIs and the funding institutions are pro-poor and agree on the optimal proportion of funds to be granted to the poorer borrower. However, asymmetric information on the effort chosen by the MFI to identify higher quality projects may increase the share of loans attributed to wealthier borrowers. This occurs because funding institutions have to build incentives for MFIs, creating a trade off between the quality of the funded projects and the attribution of loans to poorer borrowers.
    Keywords: microfinance, mission drift, moral hazard
    JEL: O12 O16 G21
    Date: 2021
  8. By: Schmidt, Kirsten; Noth, Felix; Tonzer, Lena
    Abstract: Unconventional monetary policy measures like asset purchase programs aim to reduce certain securities' yield and alter financial institutions' investment behavior. These measures increase the institutions' market value of securities and add to their equity positions. We show that the extent of this recapitalization effect crucially depends on the securities' accounting and valuation methods, country-level regulation, and maturity structure. We argue that future research needs to consider these factors when quantifying banks' recapitalization effects and consequent changes in banks' lending decisions to the real sector.
    Keywords: Unconventional monetary policy,security valuation,capital regulation
    JEL: G21 G28 E52 E58
    Date: 2021
  9. By: Montagna, Mattia (European Central Bank); Torri, Gabriele (University of Bergamo); Covi, Giovanni (Bank of England)
    Abstract: Systemic risk in the banking sector is usually associated with long periods of economic downturn and very large social costs. On one hand, shocks coming from correlated exposures towards the real economy may induce correlation in banks’ default probabilities thereby increasing the likelihood for systemic tail events like the 2008 Great Financial Crisis. On the other hand, financial contagion also plays an important role in generating large-scale market failures, amplifying the initial shocks coming from the real economy. To study the sources of these rare phenomena, we propose a new definition of systemic risk (ie the probability of a large number of banks going into distress simultaneously) and thus we develop a multilayer microstructural model to study empirically the determinants of systemic risk. The model is then calibrated on the most comprehensive granular dataset for the euro-area banking sector, capturing roughly 96% or €23.2 trillion of euro-area banks’ total assets over the period 2014–2018. The outputs of the model decompose and quantify the sources of systemic risk showing that correlated economic shocks, financial contagion mechanisms, and their interaction are the main sources of systemic events. The results obtained with the simulation engine resemble common market-based systemic risk indicators and empirically corroborate findings from existing literature. This framework gives regulators and central bankers a tool to study systemic risk and its developments, pointing out that systemic events and banks’ idiosyncratic defaults have different drivers, hence implying different policy responses.
    Keywords: Systemic risk; financial contagion; microstructural models
    JEL: D85 G17 G33 L14
    Date: 2021–01–29
  10. By: Schnabl, Gunther; Murai, Taiki
    Abstract: The bursting of the Japanese bubble economy in the early 1990s put the stage for a lasting lowzero-, and negative-interest rate environment, which fundamentally changed the business environment for the Japanese commercial banks. On the income side, with interest margins becoming increasingly depressed, net interest revenues declined, which forced the banks to expand revenues from fees and commissions. The banks had to cut costs by reducing the number of employees, closing branches and merging into larger banks. The gradual concentration process has most recently cumulated in the relaxation of the monopoly law. With the capital allocation function of banks being undermined, the Japanese economy has become zombified, suffering from anemic growth.
    Keywords: Japan,Bank of Japan,monetary policy,banks,interest margin,financial repression,concentration,regional banks
    JEL: E50 E52 G21
    Date: 2020
  11. By: Dutt, Verena K.; Nicolay, Katharina; Spengel, Christoph
    Abstract: The public CbCR requirement for EU financial institutions leaves leeway to the reporting firms as regards the calculating and presentation of the data. Based on a sample of CbCRs published by EU-headquartered multinational bank groups, we analyze the reporting behavior and the degree of transparency across the reports. We observe a large heterogeneity with respect to the place of publication of the CbCR, its content, the readability of the data tables as well as the list of entities that should be published together with the by-country data. We also identify differences between headquarter countries, with CbCRs prepared by bank groups from the United Kingdom and Germany being the most transparent. Inconsistencies in reporting inhibit the interpretability and the comparability of the data. We conclude that the specification of the underlying data source and of the applicable consolidation scope as well the establishment of uniform definitions of the reportable items are essential for an appropriate consideration of the reports by all addressees. Our analyses are particularly important in light of the proposal for a public CbCR for large multinational firms in the EU.
    Keywords: Country-by-Country Reporting,Financial Institutions,Public Disclosure,Reporting Behavior,Tax Transparency
    JEL: H25 H26 G21 G28
    Date: 2021
  12. By: Hinterschweiger, Marc (Bank of England); Khairnar, Kunal (Toulouse School of Economics); Ozden, Tolga (University of Amsterdam); Stratton, Tom (Bank of England)
    Abstract: We develop a two-sector DSGE model with a detailed banking sector along the lines of Clerc et al (2015) to assess the impact of macroprudential tools (minimum, countercyclical and sectoral capital requirements, as well as a loan-to-value limit) on key macroeconomic and financial variables. The banking sector features residential mortgages and corporate lending subject to staggered interest rates à la Calvo (1983), which is motivated by the sluggish movement of lending rates due to fixed interest rate loan contracts. Other distortions in the model include limited liability, bankruptcy costs and penalty costs for deviations from regulatory capital. We estimate the model using Bayesian methods based on quarterly UK data over 1998 Q1–2016 Q2. Our contributions are threefold. We show that: (i) co-ordination of macroprudential tools may have a welfare-improving effect, (ii) macroprudential tools would have improved some macroeconomic indicators but, within our model, not have prevented the Global Financial Crisis, (iii) staggered interest rates may alter the transmission of macroprudential tools that work through interest rates.
    Keywords: Sectoral DSGE model; macroprudential policy; interest rate stickiness
    JEL: E32 E58 G18 G21
    Date: 2021–01–22
  13. By: Bernhardt, Dan (University of Illinois and University of Warwick); Koufopoulos, Kostas (University of York); Trigilia, Giulio (University of Rochester)
    Abstract: We provide theoretical foundations for positive lender profits in competitive credit markets with asymmetric information, where potential borrowers have scarce collateralizable assets. Strikingly, when some borrowers have negative net present value projects, an equilibrium always exists in which lenders make positive profits, despite their lack of `soft' information and free entry of competitors. We then establish that greater access to collateral for borrowers reduces lender profits, and we relate our findings to the empirical evidence on micro-credit, payday lending, and, more broadly, retail and small business financing. JEL Classification: D82 ; D86
    Keywords: Adverse selection ; positive profits ; collateral ; free entry ; market breakdown ; credit markets
    Date: 2021
  14. By: Alessandro Bitetto (University of Pavia); Paola Cerchiello (University of Pavia); Stefano Filomeni (University of Essex); Alessandra Tanda (University of Pavia); Barbara Tarantino (University of Pavia)
    Abstract: In this paper we assess credit risk of SMEs by testing and comparing a classic parametric approach fitting an ordered probit model with a non-parametric one calibrating a machine learning historical random forest (HRF) model. We do so by exploiting a unique and proprietary dataset comprising granular firm-level quarterly data collected from a large European bank and an international insurance company on a sample of 810 Italian small- and medium-sized enterprises (SMEs) over the time period 2015-2017. Our results provide novel evidence that a dynamic Historical Random Forest (HRF) approach outperforms the traditional ordered probit model, highlighting how advanced estimation methodologies that use machine learning techniques can be successfully implemented to predict SME credit risk. Moreover, by using Shapley values for the first time, we are able to assess the relevance of each variable in predicting SME credit risk. Traditionally, credit risk evaluation of informationally-opaque SMEs has relied on soft information-intensive relationship banking. However, the advent of large banking conglomerates and the limits to successfully "harden" and transmit soft information across large banking organizations, challenge the traditional role of relationship banking, urging the need to evaluate SME credit risk by implementing alternative methodologies mostly based on hard information.
    Keywords: Credit Rating, SME, Historical Random Forest, Machine Learning, Relationship Banking, Soft Information
    JEL: C52 C53 D82 D83 G21 G22
    Date: 2021–02
  15. By: Koetter, Michael; Marek, Philipp; Mavropoulos, Antonios
    Abstract: We exploit staggered real estate transaction tax (RETT) hikes across German states to identify the effect of house price changes on mortgage credit supply. Based on approximately 33 million real estate online listings, we construct a quarterly hedonic house price index (HPI) between 2008:q1 and 2017:q4, which we instrument with state-specific RETT changes to isolate the effect on mortgage credit supply by all local German banks. First, a RETT hike by one percentage point reduces HPI by 1.2%. This effect is driven by listings in rural regions. Second, a 1% contraction of HPI induced by an increase in the RETT leads to a 1.4% decline in mortgage lending. This transmission of fiscal policy to mortgage credit supply is effective across almost the entire bank capitalization distribution.
    Keywords: Fiscal Shocks,Real Estate Markets,Mortgage Lending,Price-to-Rentratio
    JEL: H30 R00 R31
    Date: 2021
  16. By: Nicolás de Roux; Nicola Limodio
    Abstract: We exploit a large and unexpected increase in the Colombian insurance threshold to investigate how depositors respond to higher deposit insurance. Monthly depositor-level records from a major bank show that the level and growth rate of deposits rise with higher coverage. Individuals who were fully and nearly-fully insured before the policy drive this increment. A survey of bank customers indicates that higher deposits were replenished by lowering cash and other assets. We estimate an elasticity of deposit growth to deposit insurance of 0.4%, and fi nd a similar fi gure in the United States by leveraging the 2008 increase in deposit insurance.
    Keywords: Banking, Financial Regulation, Household Saving.
    JEL: G21 G28 G51
    Date: 2021–02–17
  17. By: Gomez-Gonzalez, Jose Eduardo; Gualtero-Briceño, Daniela; Melo-Velandia, Luis Fernando
    Abstract: Rises in sovereign risk adversely affect banks reducing their profits and increasing their funding costs. Impacts are specially strong on banks holding important positions of government debt in the investment portfolios. This study applies a DCC-Copula model to estimate the VaR for a portfolio composed of 30 sovereign bonds from ten different countries and three different maturities. Results indicate that the model proposed in this study outperforms competing benchmark models under various back-testing criteria. The method here developed is useful for global banks holding a diversified portfolio of sovereign bonds, especially in emerging market countries in which banks mostly invest in public debt.
    Keywords: Value at Risk; Banks' market risk; Dynamic copula models; Back-testing
    JEL: C46 C52 C58 G32
    Date: 2021–02
  18. By: Célestin Mayoukou (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université)
    Abstract: Microfinance industry is changing progressively during this last thirty years. The depth of is intermediation is growing. Serving at the beginning of the informal customers ; he serves since several years yet, small and medium enterprise (SME). Multinational banks and international funds had also entering the microfinance industry by granting loans to microfinance institutions. The digital innovation had disrupted the sector who become adult.
    Abstract: L'industrie de la microfinance connait depuis 30 ans une mutation perpétuelle. L'échelle de son intermédiation s'est progressivement élargie. Centrée à ses débuts sur des acteurs du secteur informel ; cette activité touche désormais une large clientèle englobant même des PME exportatrices. Son mode de refinancement s'étend désormais au marché international des capitaux, puisque des Fonds d'investissement et des Banques multinationales alimentent les IMF en capitaux. La digitalisation et les plateformes de crédits en ligne ont aussi fait leur entrée dans la microfinance. Cette industrie n'est plus désormais une industrie dans l'enfance
    Keywords: Microfinance,intermediation,microfinance industry,intermadiation,industrie microfinancière
    Date: 2019–05–09
  19. By: Nurdaulet Abilov (NAC Analytica, Nazarbayev University)
    Abstract: We analyze the role of banking sector and credit in business cycle fluctuations in Kazakhstan by adopting the dynamic stochastic general equilibium (DSGE) model with financial frictions and banks. We introduce financial frictions that lead to the amplification of the effects of shocks in the economy. We find that bank capital adjustment costs are essential in the model due to the large capital adjustment cost parameter. This implies that banks' capital adjusts very slowly to exogenous shocks in the economy. We also analyze impulse responses of endogenous variables to exogenous shocks, including a negative bank capital shock, in order to understand the propagation mechanisms of the shocks. The results from the historical decomposition exercise show us that the financial shocks have played an important role in business cycle fluctuations in Kazakhstan since 2015.
    Keywords: DSGE; financial frictions; banking sector; Kazakhstan
    JEL: C11 E32 E37 E44 E51
    Date: 2020–12
  20. By: Eric Jondeau; Benoit Mojon; Cyril Monnet
    Abstract: The momentum toward greening the economy implies transition risks that are new threats to financial stability. In particular, the expectation that other investors may exclude high carbon corporate emitters from their portfolio creates a risk of runs on brown assets. We show that runs can be contained by a liquidity backstop with an access fee that is based on the firm's carbon intensity, while the interest rate on the liquidity lent through this facility is independent from its carbon intensity.
    Keywords: green finance, financial stability, bank runs, brown assets, liquidity provision
    JEL: G01 G18 G28
    Date: 2021–03

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