nep-ban New Economics Papers
on Banking
Issue of 2021‒04‒26
six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Loan syndication under Basel II: How do firm credit ratings affect the cost of credit? By Hasan, Iftekhar; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza
  2. Bank credit and market-based finance for corporations: the effects of minibond issuances By Steven Ongena; Sara Pinoli; Paola Rossi; Alessandro Scopelliti
  3. Arbitrage Capital of Global Banks By Alyssa G. Anderson; Wenxin Du; Bernd Schlusche
  4. Bank Credit Risk Events and Peers’ Equity Value By Ana-Maria Fuertes; Maria-Dolores Robles
  5. Optimal Deposit Insurance By Eduardo Dávila; Itay Goldstein
  6. Can internet banking affect households' participation in financial markets and financial awareness? By Valentina Michelangeli; Eliana Viviano

  1. By: Hasan, Iftekhar; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza
    Abstract: This paper investigates how lenders react to borrowers’ rating changes under heterogeneous conditions and different regulatory regimes. Our findings suggest that corporate downgrades that increase capital requirements for lending banks under the Basel II framework are associated with increased loan spreads and deteriorating non-price loan terms relative to downgrades that do not affect capital requirements. Ratings exert an asymmetric impact on loan spreads, as these remain unresponsive to rating upgrades, even when the latter are associated with a reduction in risk weights for corporate loans. The increase in firm borrowing costs is mitigated in the presence of previous bank-firm lending relationships and for borrowers with relatively strong performance, high cash flows and low leverage.
    Keywords: corporate credit ratings, cost of credit, rating-contingent regulation, capital requirements, Basel II
    JEL: G21 G24 G28 G32
    Date: 2021–03
  2. By: Steven Ongena (University of Zurich, Swiss Finance Institute, KU Leuven and CEPR); Sara Pinoli (Bank of Italy); Paola Rossi (Bank of Italy); Alessandro Scopelliti (European Central Bank and University of Zurich)
    Abstract: We study the effects of diversifying funding sources on the financing conditions for firms. We exploit a regulatory reform that took place in Italy in 2012, i.e. the introduction of �minibonds�, which opened a new market-based funding opportunity for unlisted firms. Using the Italian Credit Register, we investigate the impact of minibond issuance on bank credit conditions for issuer firms, both at the firm-bank and firm level. We compare new loans granted to issuer firms with new loans concurrently granted to similar non-issuer firms. We find that issuer firms obtain lower interest rates on bank loans of the same maturity than non-issuer firms do, suggesting an improvement in their bargaining power with banks. In addition, issuer firms reduce the amount of used bank credit but increase the overall amount of available external funds, pointing to a substitution with bank credit and to a diversification of corporate funding sources. Studying their ex-post performance, we find that issuer firms expand their total assets and fixed assets, and also raise their leverage.
    Keywords: bank credit, capital markets, minibonds, loan pricing, SME finance
    JEL: G21 G23 G32 G38
    Date: 2021–02
  3. By: Alyssa G. Anderson; Wenxin Du; Bernd Schlusche
    Abstract: We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions—in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision.
    JEL: E4 F3 G2
    Date: 2021–04
  4. By: Ana-Maria Fuertes (Cass Business School, City, University of London, ECIY.); Maria-Dolores Robles (Universidad Complutense de Madrid (UCM).)
    Abstract: This paper documents a negative cross-transmission of bank-idiosyncratic credit risk events to the equity value of peers comprising other banks, insurance and real estate firms inter alia. Large jumps in the idiosyncratic component of bank CDS spreads significantly reduce the equity value of peers, particularly on the event day. The negative externality does not hinge on the “information connectedness” between the two entities as proxied by characteristics such as common core line of business, common country or region, and inter-country common legal tradition. The negative externality is stronger in turmoil market conditions when risk-aversion levels are higher and/or investors are subject to pessimism. The more fragile the risk profile of the event bank and peer firm prior to the event the stronger the cross-transmission. The findings lend support to the wake-up call paradigm at micro level, and are insightful towards a better assessment of the vulnerability of the financial system.
    Keywords: Credit Risk Events; Credit Default Swaps; Equity value; European banking; Cross-transmission; Wake-up Call.
    JEL: C13 C58 G14 G20
    Date: 2021–03
  5. By: Eduardo Dávila; Itay Goldstein
    Abstract: This paper studies the optimal determination of deposit insurance when bank runs are possible. We show that the welfare impact of changes in the level of deposit insurance coverage can be generally expressed in terms of a small number of sufficient statistics, which include the level of losses in specific scenarios and the probability of bank failure. We characterize the wedges that determine the optimal ex-ante regulation, which map to asset- and liability-side regulation. We demonstrate how to employ our framework in an application to the most recent change in coverage, which took place in 2008.
    JEL: G01 G21 G28
    Date: 2021–04
  6. By: Valentina Michelangeli (Bank of Italy); Eliana Viviano (Bank of Italy)
    Abstract: We are in a digital era. Internet banking has been increasingly offered by banks (through simple websites and easy-to-use mobile apps) and demanded by customers for managing their own finances without going to the physical branch. The availability of this new channel to interact with financial intermediaries can reduce households' cost of acquiring information and the time spent for financial transactions; therefore, it could also impact on households' choice to start investing in financial markets. As the decisions to adopt Internet banking and to entry into financial markets could be jointly determined, we derive a measure of bank supply of Internet-based services, which constitutes our instrumental variable and it is assigned to each household in the sample. We find that the adoption of Internet banking induces households to participate in financial markets and, in particular, to hold short term assets with a low risk/return profile. Over time the adoption of Internet banking also drives a higher understanding of basic standard financial concepts.
    Keywords: Internet banking, financial market participation, household finance
    JEL: D14 G11 O33
    Date: 2021–04

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