nep-ban New Economics Papers
on Banking
Issue of 2021‒04‒05
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Opacity and risk-taking: Evidence from Norway By Jin Cao; Ragnar E. Juelsrud
  2. What ‘special purposes’ explain cross-border debt funding by banks? Evidence from Ireland By Golden, Brian; Maqui, Eduardo
  3. Optimal capital adequacy ratio: an investigation of Vietnamese commercial banks using two-stage DEA By Phuong Anh Nguyen; Bich Le Tran; Michel Simioni
  4. Granular credit risk By Sigurd Galaasen; Rustam Jamilov; Hélène Rey; Ragnar Juelsrud
  5. Regulators vs. markets: Are lending terms influenced by different perceptions of bank risk? By Delis, Manthos; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza
  6. Countercyclical capital requirement reductions, state dependence and macroeconomic outcomes By Elif C. Arbatli-Saxegaard; Ragnar E. Juelsrud
  7. Regulatory and Bailout Decisions in a Banking Union By Andreas Haufler
  8. Foreign Bank Assets and Presence on Banking Stability in Africa: Does Strong and Weak Corporate Governance Systems under different Regulatory Regimes Matter? By Baah Aye Kusi; Elikplimi Agbloyor; Simplice A. Asongu; Joshua Yindenaba Abor
  9. Multiple credit constraints and timevarying macroeconomic dynamics By Ingholt, Marcus Mølbak
  10. The Cost of Information in the Blockchain: A Discussion of Routledge and Zetlin-Jones By Bruno Sultanum
  11. Analysis and management of credit risk in Morocco By Yousra El Hajel; Abdenbi El Marzouki; Hassane Zouiri
  12. Monetary and macroprudential policy complementarities: Evidence from European credit registers By Carlo Altavilla; Luc Laeven; José-Luis Peydró
  13. Non-bank financial intermediation in Canada: a pulse check By Rohan Arora; Guillaume Bédard-Pagé; Philippe Besnier; Hayden Ford; Alan Walsh
  14. Asset managers, market liquidity and bank regulation By Iñaki Aldasoro; Wenqian Huang; Nikola Tarashev
  15. Efficient Computation of Portfolio Credit Risk with Chain Default By Ikeda, Yuki
  16. Limit Theorems for Default Contagion and Systemic Risk By Hamed Amini; Zhongyuan Cao; Agnes Sulem

  1. By: Jin Cao; Ragnar E. Juelsrud
    Abstract: This paper investigates how balance sheet opacity affects banks' risk-taking behavior. We measure bank balance sheet opacity according to two metrics: the ratio of available-for-sale (AFS) securities and the ratio of off-balance sheet items. We show that balance sheet opacity is positively correlated with realized bank risk. Specifically, banks with more AFS securities have lower realized risk, while banks with more off-balance sheet items have higher realized risk. The correlation between opacity and risk depends on both macroeconomic variables and bank characteristics. The positive relationship between bank opacity and bank risk is weaker for better capitalized banks and banks that are subject to more market discipline. The relationship is also weaker during periods of favorable market conditions. Motivated by this analysis, we then investigate how regulation affects bank opacity. We show that higher capital requirements reduce bank opacity and bank risk through a portfolio rebalancing channel.
    Keywords: opacity, transparency, available-for-sale securities, off-balance sheet items, risktaking
    JEL: G21 G23 G28
    Date: 2020–10–07
  2. By: Golden, Brian (Central Bank of Ireland); Maqui, Eduardo (Central Bank of Ireland)
    Abstract: The factors driving debt issuance by banks are known to relate to their risk profiles. This appears to be particularly true when it comes to cross-border issuance and issuing debt through the special purpose entity (SPE) channel. Both of these areas are relatively unexplored, however, particularly the latter. We examine a key global channel, namely international banks issuing debt through Irish-resident SPEs for determinants of both the decision to issue debt and volumes issued. At the bank-level, we find that debt issuance through SPEs is consistently explained by larger bank size and higher loan loss provisioning, and, for banks from advanced economies, higher regulatory capital. At the country-level, we find spillover effects from higher levels of both capital flow and macro-prudential regulation in the bank’s home country and, for banks from advanced economies, higher domestic corporate taxation was also an important determinant. Therefore, a cross-border SPE could act as a risk indicator for financial stability analysis and regulatory monitoring.
    Keywords: International banking, cross-border debt funding, special purpose entities (SPEs), Irish non-bank financial sector.
    JEL: G21 G01 G15
    Date: 2020–12
  3. By: Phuong Anh Nguyen (VNU-HCM - Vietnam National University - Ho Chi Minh City); Bich Le Tran (VNU-HCM - Vietnam National University - Ho Chi Minh City); Michel Simioni (UMR MoISA - Montpellier Interdisciplinary center on Sustainable Agri-food systems (Social and nutritional sciences) - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - CIHEAM-IAMM - Centre International de Hautes Etudes Agronomiques Méditerranéennes - Institut Agronomique Méditerranéen de Montpellier - CIHEAM - Centre International de Hautes Études Agronomiques Méditerranéennes - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Over the last years the Vietnamese banking system has been struggling to restructure, reform governance, consolidate financial statements and build up merge and acquisition, in line with international standards. The Bank for International Settlements (BIS) proposed BASEL III in 2010, whereby banks must increase their minimum Capital Adequacy Ratios (CAR) year by year with a goal of 10.5% by 2019. The objective of this paper is to address the questions: (1) what are the optimal CAR levels for Vietnamese Commercial Banks (2) whether the minimum required CARs stipulated in the Basel II and III are reasonable for Vietnam banking system? The data set consists of a sample of Vietnamese commercial banks over the six-year period from 2010 to 2015. The optimal CARs of banks are calculated using the nonparametric two-stage Data Envelopment Analysis (DEA) model, with two inputs: fixed assets, employee expense and two outputs: interest income, non-interest income. The findings indicate that 92.4% of the banks have the optimal CAR higher than the minimum ratio 10.5% defined in BASEL III. Moreover, 57.98% of the banks should raise their current level of CAR to reach their optimal ones. To conclude, this paper will provide a guideline for Vietnamese banks to decide their optimal CAR to reach the efficiency frontier.
    Keywords: Vietnam banking system,Two-stage DEA,BASEL II,BASEL III,Capital adequacy ratios
    Date: 2021–01–01
  4. By: Sigurd Galaasen; Rustam Jamilov; Hélène Rey; Ragnar Juelsrud
    Abstract: What is the impact of granular credit risk on banks and on the economy? We provide the ?rst causal identi?cation of single-name counterparty exposure risk in bank portfolios by applying a new empirical approach on an administrative matched bank-?rm dataset from Norway. Exploiting the fat tail properties of the loan share distribution we use a Gabaix and Koijen (2020a,b) granular instrumental variable strategy to show that idiosyncratic borrower risk survives aggregation in banks portfolios. We also ?nd that this granular credit risk spills over from affected banks to ?rms, decreases investment, and increases the probability of default of non-granular borrowers, thereby sizably affecting the macroeconomy.
    Keywords: granular credit risk, credit concentration, granular borrowers, large exposures regulation, granular instrumental variable, granular hypothesis
    Date: 2020–10–15
  5. By: Delis, Manthos; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza
    Abstract: In this paper we quantify the differences between market and regulatory assessments of bank portfolio risk, and thereby demonstrate that larger differences significantly reduce corporate lending rates. Specifically, to entice borrowers, banks reduce spreads by approximately 4.3% following a one standard deviation increase in our measure for bank asset-risk differences. This is equivalent to an interest income loss of USD 2.03 million on a loan of average size and duration. The separate effects of market and regulatory risk are much less potent. Our study reveals a disciplinary-competition effect in favor of corporate borrowers when there is information asymmetry between investors and bank regulators.
    Keywords: bank portfolio risk; markets vs. regulators; syndicated loans; cost of credit; market discipline; competition
    JEL: G2 G21 G33 G34
    Date: 2020–10
  6. By: Elif C. Arbatli-Saxegaard; Ragnar E. Juelsrud
    Abstract: We use bank-, loan- and firm-level data together with a quasi-natural experiment to estimate the impact of capital requirement reductions on bank lending and real economic outcomes. We find that capital requirement reductions increase lending both to households and firms at the bank- and loan-level, and that the increased lending to firms translates into higher capital investment at the firm-level. Furthermore, the transmission of lower capital requirements to the real economy has a "double state-dependence". The first state-dependence relates to the characteristics of banks. Specifically, the transmission of lower capital requirements to lending is stronger for banks with lower capital ratios. We interpret this result as capital requirement reductions having a larger effect when they are more binding. The second state-dependence relates to the characteristics of the corporate sector. Specifically, the transmission of lower capital requirements to real economic outcomes - via bank lending - is weaker for firms with higher default risk or more leverage, suggesting that capital requirement reductions is most effective in terms of boosting real economic outcomes when firms are financially sound.
    Keywords: banking, capital requirements, macroprudential regulation
    JEL: E51 G21 G28
    Date: 2020–08
  7. By: Andreas Haufler
    Abstract: We model a banking union of two countries whose banking sectors differ in their average probability of failure and externalities between the two countries arise from cross-border bank ownership. The two countries face (i) a regulatory decision of which banks are to be shut down before they can go bankrupt, and (ii) a loss allocation – or bailout – decision of who pays for banks that have failed despite regulatory oversight. Each of these choices can either be taken in a centralized or in a decentralized way. In our benchmark model the two countries always agree on a centralized regulation policy. In contrast, bailout policies are centralized only when international spillovers from cross-border bank ownership are strong, and banking sectors are highly profitable.
    Keywords: banking union, bank regulation, bailout policies
    JEL: G28 F33 H87
    Date: 2021
  8. By: Baah Aye Kusi (University of Ghana Business School, Ghana); Elikplimi Agbloyor (University of Ghana Business School, Ghana); Simplice A. Asongu (Yaoundé, Cameroon); Joshua Yindenaba Abor (University of Ghana Business School, Ghana)
    Abstract: This study examines the effect of foreign bank assets and presence on banking stability in the economies with strong and weak country-level corporate governance in Africa between 2006 and 2015. Employing a Prais-Winsten panel data model on 86 banks in about 30 African economies, the findings on how foreign bank assets and presence influence banking stability in strong and weak corporate governance economies under different regulatory regimes are reported for the first time in Africa. The initial findings show that foreign bank presence and assets promote banking stability. However, the positive effect of foreign bank assets and presence is enhanced in economies with strong country-level corporate governance, while the positive effect of foreign bank assets and presence is weakened in economies with weak country-level corporate governance. After introducing different regulatory variables (regimes), it is observed that the enhancing effect of foreign bank presence and assets on banking stability in the full sample and economies with strong and weak country level corporate governance systems is deepened or improved under loan loss provision regulation regime. However, under the private and public sector-led financial transparency regulations, the reducing effect of foreign bank presence and assets on banking stability in economies with weak corporate governance systems is further dampened. These findings show that the relationship between foreign bank presence and assets is deeply shaped by corporate governance systems and regulatory regimes in Africa. Hence, policymakers must build strong corporate governance and sound regulatory regimes to enhance how foreign bank operations promote banking stability.
    Keywords: Stability; Foreign banks; Regulation, Corporate governance; Africa
    JEL: G0 G2 G3
    Date: 2021–01
  9. By: Ingholt, Marcus Mølbak
    Abstract: I explore the macroeconomic implications of borrowers facing both loan-to-value (LTV) and debt-service-to-income (DTI) limits, using an estimated DSGE model. I identify when each constraint dominated over the period 1984-2019: LTV constraints dominate in contractions, when house prices are relatively low – and DTI constraints dominate in expansions, when interest rates are relatively high. I also find that DTI standards were relaxed during the mid-2000s’ boom, and that lower DTI limits or higher interest rates, but not lower LTV limits, would have prevented the boom. Finally, county panel data attest to multiple credit constraints as a source of nonlinear dynamics.
    Keywords: multiple credit constraints, nonlinear estimation of DSGE models, state-dependent credit origination
    JEL: C33 D58 E32 E44
    Date: 2020–08–28
  10. By: Bruno Sultanum
    Abstract: The volatility of crypto currencies hinders their ability to be media of exchange or stores of value, leading to the implementation of exchange-rate pegs in an attempt to stabilize these currencies. This strategy has been used by crypto currencies such as US Dollar Tether, Steem Backed Dollar and TrueUSD; and was previously adopted in countries such as Brazil, Mexico and Argentina. However, an exchangerate peg is vulnerable to speculative attacks if it is not 100% backed by reserves, as discussed in Obstfeld (1996). Using insights from the bank-run literature, Routledge and Zetlin-Jones (2018) build on Green and Lin (2003) and propose a model of speculative attacks. They show that adjustments to the exchange rate can prevent speculative attacks in equilibrium. They also show how to implement such contracts using blockchain technology. In this discussion paper, I provide a cautionary tale. I show also in a version of Green and Lin (2003) that the information content in the blockchain prevents agents from attaining all the gains from risk sharing— highlighting the downsides of too much public information.
    Keywords: Blockchain; Currencies; Information
    Date: 2021–01–21
  11. By: Yousra El Hajel (Université Mohammed V); Abdenbi El Marzouki (Université Mohammed V); Hassane Zouiri (Université Mohammed V)
    Abstract: Risk is inherent in all human activity, especially when doing business. In banking, risk is an element that we experience on a daily basis. Indeed, the bank's main activity being to distribute credit, the risk of non-repayment is omnipresent. Credit is a recurring operation, especially in our environment where liquidity is almost non-existent among customers (companies, individuals). Indeed, they always have needs to satisfy such as financing their operations, their consumption, payment of salaries and taxes, etc.. Therefore, the bank-client relationship is better expressed in the facilities, which is why the bank must set limits to counteract the excesses and defaults that may occur during the relationship. In general, the main default borne by the bank is the credit risk that it must circumscribe by a good definition and a good analysis in order to have a correct measurement when it lends to such or such customer (individual or company). Thus, the purpose of this paper is to analyze the evolution of credit risk management in Morocco. It is, first of all, to make a credit progression in a fragile banking system in Morocco, then, The management of credit risk in Morocco and the conclusion
    Abstract: Le risque est inhérent à toute activité humaine, notamment lorsqu'on fait des affaires. Dans les métiers de la banque, le risque est un élément que l'on vit au quotidien. En effet l'activité principale de la banque étant de distribuer du crédit, le risque de non remboursement est omniprésent. Le crédit est une opération récurrente surtout dans notre environnement ou la liquidité est presque chose inexistante chez les clients (entreprise, particulier). En effet, ceux-ci ont toujours des besoins à satisfaire comme le financement de leur exploitation ; de leur consommation le paiement des salaires et impôts ; etc. Par conséquent la relation banque client s'exprime mieux dans les facilités c'est pourquoi la banque doit fixer des limites pour contrecarrer les excès et le défaut pouvant survenir durant la relation. En général, le principal défaut supporté par la banque est le risque de crédit qu'il doit circonscrire par une bonne définition et une bonne analyse à fin d'en avoir une mesure assez correcte lorsqu'elle prête à tel ou tel client (particulier ou entreprise) Ainsi, l'objet de ce papier est d'analyser L'évolution de la gestion du risque de crédit au Maroc. Il s'agit, tout d'abord, de faire une progression de crédit dans un système bancaire fragile au Maroc, ensuite, La gestion du risque crédit au Maroc et la conclusion
    Keywords: Risk Management,Credit Risk,Compliance with Prudential Regulations,Moroccan Banks
    Date: 2020–10–22
  12. By: Carlo Altavilla; Luc Laeven; José-Luis Peydró
    Abstract: We show strong complementarities between monetary and macroprudential policies in influencing credit. We exploit credit register data - crucially from multiple (European) countries and for both corporate and household credit - in conjunction with monetary policy surprises and indicators of macroprudential policy actions. Expansive monetary policy boosts lending more in accommodative macroprudential environments. This complementary effect of monetary and macroprudential policy is stronger for: (i) expansionary (as opposed to contractionary) monetary policy; (ii) riskier borrowers; (iii) less capitalized banks (especially when lending to riskier borrowers); (iv) consumer and corporate loans (rather than mortgages); and (v) more (ex-ante) productive firms (especially for less capitalized banks).
    Keywords: credit registers, household loans, corporate loans, monetary policy, macroprudential policy
    JEL: G21 G28 G32 G51 E58
    Date: 2021–03
  13. By: Rohan Arora; Guillaume Bédard-Pagé; Philippe Besnier; Hayden Ford; Alan Walsh
    Abstract: The Canadian non-bank financial intermediation (NBFI) sector saw strong growth in 2018 and 2019. In 2020, COVID‑19 caused a financial shock. We provide a preliminary analysis on the impact of COVID‑19 on the sector as well as an update on its growth.
    Keywords: Coronavirus disease (COVID-19); Financial institutions; Financial markets; Financial stability
    JEL: G01 G20 G23
    Date: 2021–03
  14. By: Iñaki Aldasoro; Wenqian Huang; Nikola Tarashev
    Abstract: We challenge the argument that bank regulation amplifies the adverse effect of asset managers' fire sales. Evidence from investments by US money market funds over the past decade is consistent with asset managers herding for reputational reasons. In the presence of such herding, we derive that the asset management sector may take on too much liquidity risk from a social perspective. Importantly, asset managers' investment decisions today are affected by the spread that banks will charge for absorbing fire sales tomorrow. When regulation constrains banks' balance-sheet space, the resulting higher spread reins in asset managers' excessive risk-taking, thus raising social welfare.
    Keywords: investment funds, herding, bank regulation, leverage ratio, social welfare
    JEL: G21 G23 G28 D62
    Date: 2021–03
  15. By: Ikeda, Yuki
    Abstract: Many banks consider the chain default or bankruptcy when they compute the credit loss distribution. One way to consider the chain default is the good-old Monte Carlo simulation, however, it is typically time-consuming. In this paper, we extend the efficient Monte Carlo simulation using the importance sampling introduced by Glasserman and Li (2005) to realize an efficient Monte Carlo simulation of the Value at Risk (VaR) that allows the chain defaults. In addition, we see that another method, the saddle point approximation, can also be modified for the case of the chain defaults. Moreover, we give a simple method of shifting the means of the multivariate factors using the well-known EM-algorithm to further reduce the variance of the simulated VaR. Simulation studies show that these proposed methods have superior numerical performance.
    Keywords: Value-at-risk; Risk contributions; Importance sampling; Saddle point approximation; EM-algorithm
    JEL: C58 C63
    Date: 2021–03–16
  16. By: Hamed Amini; Zhongyuan Cao; Agnes Sulem
    Abstract: We consider a general tractable model for default contagion and systemic risk in a heterogeneous financial network, subject to an exogenous macroeconomic shock. We show that, under some regularity assumptions, the default cascade model could be transferred to a death process problem represented by balls-and-bins model. We also reduce the dimension of the problem by classifying banks according to different types, in an appropriate type space. These types may be calibrated to real-world data by using machine learning techniques. We then state various limit theorems regarding the final size of default cascade over different types. In particular, under suitable assumptions on the degree and threshold distributions, we show that the final size of default cascade has asymptotically Gaussian fluctuations. We next state limit theorems for different system-wide wealth aggregation functions and show how the systemic risk measure, in a given stress test scenario, could be related to the structure and heterogeneity of financial networks. We finally show how these results could be used by a social planner to optimally target interventions during a financial crisis, with a budget constraint and under partial information of the financial network.
    Date: 2021–04

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