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on Banking |
| 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_2021_261&r=all |
| By: | Viral V. Acharya; Robert F. Engle III; Sascha Steffen |
| Abstract: | We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel”. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests. |
| JEL: | G01 G21 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28559&r=all |
| By: | Paolo Coccorese; Claudia Girardone; Sherrill Shaffer |
| Abstract: | In this study we explore market power in 13 EU banking sectors for the years 2007 to 2019 by estimating a structural model with demand and supply equations, where the mark-up of price over marginal cost is parameterized as a measure of banks’ conduct that depends on selected factors. Our evidence indicates that EU banks enjoy a significant degree of market power, which shows a decreasing trend over time and some difference across countries. More competition is associated with higher bank density, lower bank capitalization, more efficient and stable banking systems, and better macroeconomic conditions. Finally, a clear convergence pattern emerges in the behaviour of EU banks. |
| Keywords: | Banking, Market power, European integration |
| JEL: | C36 F36 G21 L10 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-15&r=all |
| By: | Giulia Canzian; Antonella Rita Ferrara |
| Abstract: | We exploit the outset of a regulation seeking to improve judicial efficiency through the rearrangement of courts’ geography in Italy to provide causal evidence on the relationship between judiciary structural reforms and banks financial stability. To this end, we apply a difference-in-differences approach on a dataset on annual proceedings handled by each court over the period 2010-2017, complemented by banks balance sheet information. Our findings yield a negative effect of the reform on both judicial efficiency and Non-Performing Loans ratio. Furthermore, we identify heterogeneous effects based on the existing capacity of the courts to dispose of pending proceedings and geographical location. Digging deeper into this mechanism, we set up a causal mediation analysis to prove that the judicial system affects banks credit risk exposure both indirectly (through judicial efficiency) and directly, thereby influencing borrowers who react to the perceived enforcement. |
| Keywords: | judicial efficiency, non-performing loans, justice reform, difference-in-differences, mediation analysis |
| JEL: | D04 G21 P43 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8930&r=all |
| By: | David Martinez-Miera (Universidad Carlos III de Madrid); Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | This paper shows the relevance of market power to assess the effects of safe interest rates on financial intermediaries' risk-taking decisions. We consider an economy where (i) intermediaries have market power in granting loans, (ii) intermediaries monitor borrowers which lowers their probability of default, and (iii) monitoring is costly and unobservable which creates a moral hazard problem with uninsured depositors. We show that lower safe rates lead to lower intermediation margins and higher risk-taking when intermediaries have low market power, but the result reverses for high market power. We examine the robustness of this result to introducing non-monitored market finance, heterogeneity in monitoring costs, and entry and exit of intermediaries. We also consider the effect of replacing uninsured by insured deposits, market power in raising deposits, and funding with both deposits and capital. |
| Keywords: | Imperfect competition, intermediation margins, bank monitoring, bank risk-taking, monetary policy. |
| JEL: | G21 L13 E52 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2020_2017&r=all |
| By: | Wang, Tianxi |
| Abstract: | As a means of payment, bank liability circulates in a cycle. A fraction of one bank's liability naturally flows out to another, creating a network of interbank connections. We demonstrate how this network is determined by the production technologies, the resources distribution and the Input-Output network of the real economy. We find banks with a smaller outflow fraction see their funding costs less dependent on the interbank interest rate; the heterogeneity in banks' outflow fraction causes lending ine¢ ciency; and the identities of depositors and borrowers matter. These results will not arise if banks are modelled as intermediaries of loanable funds. |
| Keywords: | circulation of bank liability, interbank network, outflow fraction, identities of depositors and borrowers |
| Date: | 2021–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:30021&r=all |
| By: | Gregor Dorfleitner; Davide Forcella; Quynh Anh Nguyen |
| Abstract: | While the role of digital solutions to foster financial inclusion and the development of the microfinance sector are widely acknowledged, questions concerning the variation in the ability and willingness of microfinance institutions’ (MFIs) adoption of these tools remain unanswered. This paper studies the determinant of the use of digital support solutions in the microfinance sector by using a global sample of MFIs derived from a survey by YAPU Solutions on rural lending and IT solutions. We discover the evidence that suggests the adoption of these tools is consistent with the social performance of MFIs. Furthermore, the results of the study indicate that the profitability of the institutions is associated with a larger application of digital support solutions. Macroeconomic factors, the development of the country in which the institution is located, also impact MFIs’ decisions regarding integrating digital solutions into their services and internal operational processes. |
| Keywords: | Microfinance institutions; Fintech; Digital solutions; Social performance; Digitization |
| JEL: | G21 O33 |
| Date: | 2021–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/320683&r=all |
| By: | Caterina Mendicino (European Central Bank); Kalin Nikolov (European Central Bank); Juan Rubio-Ramirez (Emory University); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros); Dominik Supera (Wharton School) |
| Abstract: | We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises - simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency. |
| Keywords: | Bank default, firm default, financial crises, bank capital requirements. |
| JEL: | G01 G28 E44 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2020_2006&r=all |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | This paper reviews the analysis in Brunnermeier and Koby (2018), showing that lower monetary policy rates can only lead to lower bank lending if there is a binding capital constraint and the bank is a net investor in debt securities, a condition typically satisfied by high deposit banks. It next notes that BK’s capital constraint features the future value of the bank’s capital, not the current value as in standard regulation. Then, it sets up an alternative model with a standard capital requirement in which profitability matters because bank capital is endogenously provided by shareholders, showing that in this model there is no reversal rate. |
| Keywords: | Monetary policy, reversal rate, negative interest rates, bank profitability, bank market power, capital requirements. |
| JEL: | E52 G21 L13 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2020_2021&r=all |
| By: | Youngjin Yun (Bank of Korea); Byoungsoo Cho (Bank of Korea) |
| Abstract: | Monetary policy may affect bank lending differently depending on who the borrower is. We examine both the price and quantity of bank loans in Korea for the 10 years between 2010 and 2019 to study whether the bank lending channel differs for households and firms. Identifying the channel by comparing banks with different amounts of security holdings, we find that the monetary policy effect is significant in business loans, but not in household loans. Evidence suggests that the difference in loan maturities is the reason behind it. Business loans typically have shorter maturities than household loans. Thus, the share of new or refinancing loans, which are more directly influenced by monetary policy shocks, is higher in business loans than in household loans. Our findings provide important policy implications for the cases where household and business sector debts evolve in different directions. |
| Keywords: | monetary policy, bank lending channel, business loans, household loans |
| JEL: | E3 E5 G2 |
| Date: | 2021–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2021_001&r=all |
| By: | Mathias Hoffmann (University of Zurich); Iryna Stewen (Johannes Gutenberg University); Michael Stiefel (University of Zurich) |
| Abstract: | Using a firm-bank panel of more than 1m German firms over 2010-2016, we document that local public bank lending to municipalities crowds out private investment. Our results show how crowding-out can happen in a developed economy characterized by low interest rates and fiscal austerity. Our mechanism relies on two structural features of Germany’s banking landscape: First, the geographical segmentation of credit markets for small and medium firms (SME) which are dominated by local banks. Secondly, a special statutory mandate requiring local public banks to lend to municipalities. With yields on local government debt declining to all-time lows, local public banks tried to alleviate stress on their balance sheets by using their local market power to charge higher rates on their SME customers. This crowded out firm investment. Perversely, fiscal consolidation at the state and federal levels contributed to this effect by putting pressure on the budgets of municipal governments which increasingly borrowed from local public banks. Crowding-out lowered aggregate private investment by around 30-40 bio euros per year (or 1 percent of GDP). Thus, we identify a novel channel through which low interest rates can adversely affect bank lending and firm performance. Our results also illustrate how segmented credit markets can amplify negative multiplier effects from fiscal austerity |
| Keywords: | local public finance, firm-level investment, crowding-out, fiscal austerity, global and intra-European imbalances |
| JEL: | E62 G21 F21 F32 H32 |
| Date: | 2021–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:jgu:wpaper:2103&r=all |
| By: | Massimiliano Affinito (Bank of Italy); Giorgio Meucci (Bank of Italy) |
| Abstract: | Unlikely to pay loans (UTPs) are non-performing loans (NPLs) that have a non-zero probability of returning to the performing state. This paper draws on Italian Central Credit Register data on the entire population of Italian UTP firms from 2005 to 2019, matched with firm and bank balance sheet data, to detect the characteristics of UTP firms that have returned to the performing state. During the crises, even in the most acute phases, the share of UTP firms returning to the performing state has never been negligible. This suggests that the analysis of the factors most closely related to the return of UTP firms to the performing state could also provide policy guidance during the pandemic. Our results show that the factors that have a stronger statistical and economic correlation with the probability of a UTP firm recovering are (negatively) its size and the absolute value of its debt, and (positively) its capital. Results are strongly heterogeneous over time and across economic sectors and Italian regions. Lending bank characteristics matter, but less than firm characteristics. |
| Keywords: | non-performing loans, firm distress, firm recovery |
| JEL: | G21 G33 C23 C24 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_601_21&r=all |
| By: | Hassink, Wolter (Utrecht University); Millone, Matteo (De Nederlandsche Bank); Mocking, Remco (Dutch Ministry of Finance); Vogt, Benedikt (CPB Netherlands Bureau for Economic Policy Analysis) |
| Abstract: | This paper studies the effects of private real estate collateral on entrepreneurial lending and entrepreneurial activity in the Netherlands. The residential collateral channel is especially relevant for sole-proprietors who own a business with unlimited liability. We used administrative data on outstanding bank credit based on all Dutch sole-proprietorships in the 2007-2013 period. Our results indicate that, during a severe economic crisis, home-owning entrepreneurs are affected less severely than renting entrepreneurs. Home ownership improved access to credit at the extensive and intensive margin, and it reduced the probability of exit. Positive home equity is the driving force behind this effect, as entrepreneurs with negative home equity are not treated significantly differently from renters. |
| Keywords: | collateral lending channel, house price shocks, negative home equity, entrepreneurial lending |
| JEL: | G23 L26 R2 R31 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14170&r=all |
| By: | Lyu, Juyi (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School) |
| Abstract: | This paper presents an institutional model to investigate the cooperation between a government and a central bank. The former selects the monetary policy and then delegates the organization of macroprudential policy to the latter. Their policy stances are the result of sequential constrained utility maximization. Using indirect inference, we find a set of coefficients that can capture the UK policy stances for 1993-2016. This suggests post-crisis regulation has been overly intrusive. Finally, we show that this regulatory dilemma can be avoided by committing to a highly stabilizing monetary regime that uses QE extensively. |
| Keywords: | Bank regulation; Financial stability; Monetary policy; Public choice theory |
| JEL: | E52 E58 G28 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2021/6&r=all |
| By: | Franziska Bremus; Thomas Krause; Felix Noth |
| Abstract: | This paper provides evidence for the propagation of idiosyncratic mortgage supply shocks to the macroeconomy. Based on micro-level data from the Home Mortgage Disclosure Act for the 1990-2016 period, our results suggest that lender-specific mortgage supply shocks affect aggregate mortgage, house price, and employment dynamics at the regional level. The larger the idiosyncratic shocks to newly issued mortgages, the stronger are mortgage, house price, and employment growth. While shocks at the level of shadow banks significantly affect mortgage and house price dynamics, too, they do not matter much for employment. |
| Keywords: | Credit supply shocks, mortgage market concentration, real effects from housing markets |
| JEL: | E44 G21 R20 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1936&r=all |
| By: | Mathias Hoffmann; Lilia Ruslanova |
| Abstract: | U.S. state-level banking deregulation during the 1980’s mitigated the impact of the China trade shock (CTS) on local economies (states and commuting zones) a decade later, in the 1990s. Local economies, where local banking markets opened up earlier, were also effectively financially more integrated by the 1990’s and saw smaller declines in house prices, wages, and income following the CTS. We explain this pattern in a theoretical model that emphasizes the stabilizing effect of financial integration on demand for housing and on housing prices: faced with an adverse shock to their region’s terms-of-trade (i.e. the CTS), households in more open states can more easily access credit to smooth consumption. This stabilizes consumer demand for housing, keeps the relative price of housing up, stabilizes wages in the non-tradable sector and thus facilitates the sectoral reallocation of labor away from import-exposed manufacturing towards the housing sector. This in turn stabilizes income and consumption. We corroborate these predictions of our model in state- and commuting zone level data. Then, using granular bank-county-level data, we show that household consumption smoothing in response to the CTS was easier in financially open areas, because geographically diversified banks were more elastic in their lending response to household’s increased demand for credit. Our findings highlight that household access to finance is important to ease adjustment after asymmetric terms-of-trade shocks in monetary unions, in particular when the geographical mobility of labor is limited. |
| Keywords: | banking deregulation, China trade shock, sectoral reallocation, house prices, consumer access to finance |
| JEL: | F16 F41 G18 G21 J20 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8913&r=all |
| By: | Mutarindwa, Samuel; Schäfer, Dorothea; Stephan, Andreas |
| Abstract: | This paper links banking system development to the colonial and legal history of African countries. Based on a sample of 40 African countries from 2000 to 2018, our empirical findings show a significant dependence of current financial institutions on the inherited legal origin and the colonization type. Findings also reveal that current financial legal institutions are not major determinants of banking system development, and that institutional development and governance quality are more important. A high share of government spending relative to GDP also positively affects banking system development in African countries. |
| Keywords: | Legal origin,colonial history,financial institutions,banking system,correlated random effects model |
| JEL: | G21 G38 G39 K15 K40 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:778&r=all |
| By: | Muhammad A Ingratubun (Agricultural University, Indonesia); Akhmad Fauzi (Agricultural University, Indonesia) |
| Abstract: | Compared with commercial banks that take one day, Asian Development Bank (ADB) loans take over 5-year before they are fully disbursed after the borrower signed the loan agreements, because of conditionalities. During which, the funds stay in the banks and gain compounded interest disfavoring Indonesia and affect its economic growth. Development aid studies have mostly overlooked these gains, and their impacts. We reviewed the financial costs of delays during project implementation in Indonesia and their impacts on GDP growth involving 325 ADB's loan projects with over 1,100 sub-loans, from 1969 to 2017 totaled over $33 billion. We applied a non-econometric, and quantitative attribution methodology, adopting project and portfolio management principles. The results show that 'if disbursed 100% in year-1', the ADB loans help Indonesia stabilizing growth at 6% per annum until they are at 1%-GDP. Because of disbursement delays, this is shortened by half with 60% volatility and declining at 0.42%-GDP (average ADB loans) due to ADB's standard implementation of 5-year and with 2-year delays (7-year). Growth sharply decays at 0.5%-GDP and reaches zero as ADB loans increase to 0.81%-GDP. Indonesia suffers a capital loss of $0.5 - $12 per $1 loan because of disbursement delays under today's prevalent banking practices. Accounting for these losses, ADB loans have severe negative impacts as growth suffers over 200% volatility because of disbursement delays. Fixing this is simple but requires a fundamental change. |
| Keywords: | Disbursement delays, growth, money creation, negative impact, volatility, bank |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:smo:conswp:029mi&r=all |
| By: | Jefferson Martínez (Pontificia Universidad Católica del Perú); Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú / Fiscal Council of Peru) |
| Abstract: | This paper quantifies and assesses the impact of an adverse loan supply (LS) shock on Peruís main macroeconomic aggregates using a Bayesian vector autoregressive (BVAR) model in combination with an identification scheme with sign restrictions. The main results indicate that an adverse LS shock: (i) reduces credit and real GDP growth by 372 and 75 basis points in the impact period, respectively; (ii) explains 11.2% of real GDP growth variability on average over the following 20 quarters; and (iii) explained a 180-basis point fall in real GDP growth on average during 2009Q1-2010Q1 in the wake of the Global Financial Crisis (GFC). Additionally, the sensitivity analysis shows that the results are robust to alternative identification schemes with sign restrictions; and that an adverse LS shock has a greater impact on non-primary real GDP growth. JEL Classification-JEL: C11, E32, E51. |
| Keywords: | Sistema Bancario, Choque de Oferta de Crédito, Modelo VAR Bayesiano, Restricciones de Signo, Economía Peruana |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00483&r=all |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | Drechsler, Savov, and Schnabl (2017) claim that increases in the monetary policy rate lead to reductions in bank deposits, which account for the negative effect on bank lending. This paper reviews their theoretical analysis, showing that the relationship between the policy rate and the equilibrium amount of deposits is in fact U-shaped. Then, it constructs an alternative model, based on a simple microfoundation for the households' demand for deposits, where an increase in the policy rate always increases the equilibrium amount of deposits. These results question the theoretical underpinnings of the "deposits channel" of monetary policy transmission. |
| Keywords: | Monetary policy transmission, banks' market power, deposits channel. |
| JEL: | E52 G21 L13 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2020_2025&r=all |
| By: | Panagiotis Lazaris (Bank of Greece); Anastasios Petropoulos (Bank of Greece); Vasileios Siakoulis (Bank of Greece); Evangelos Stavroulakis (Bank of Greece); Nikolaos Vlachogiannakis (Bank of Greece) |
| Abstract: | A core input in performing a regulatory stress test is the evolution of interest rates, as it affects the income generated from the assets’ side and the expenses from the liabilities’ side. In this work, we apply an autoregressive model with distributed lags (ADL) to quantify the pass through rates, that is, the degree and speed of incorporation of the changes of money market rates by banks into their customers deposit and loan rates. In doing so, for the liabilities’ side, we differentiate between open and term deposits, as well as between households and non-financial corporates. Our results indicate that for term deposits the long-term pass through rate is very high, exceeding 91% for non-financial corporate customers and 81% for households. For open deposits, the pass through rate dynamics appear less prevalent, amounting to 21% for non-financial corporate customers and 16% for households. When exploring the pass through rate dynamics in the assets’ side of the banks, we observe full long-term pass-through of money market rates, for mortgage and consumer loans. By contrast, the non-financial corporate loans rate is stickier and less reactive to money market rates changes, with long-term pass-through adjustment being approximately equal to 40%. Furthermore, our results provide evidence that the Greek sovereign spread movement has practically negligible pass through rate both for loan and deposit products. In particular, it hardly affects the pricing of new term deposits, with a pass through rate of around 5%. This finding can be attributed, among others factors, to the fact that the Greek sovereign credit spread has approached several times non-tradable territories, which makes it an insignificant variable in determining customer rates. |
| Keywords: | interest rate pass-through; bank products; stress testing. |
| JEL: | G14 G17 C22 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:287&r=all |