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on Banking |
| By: | Acharya, Viral V.; Engle III, Robert F; Steffen, Sascha |
| 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. |
| Keywords: | bank capital; COVID-19; Credit lines; liquidity risk; loan supply; Pandemic; stress tests |
| JEL: | G01 G21 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15901&r= |
| By: | Claessens, Stijn; Cornelli, Giulio; Gambacorta, Leonardo; Manaresi, Francesco; Shiina, Yasushi |
| Abstract: | We analyse how macroprudential policies (MaPs), largely applied to banks and to a lesser extent borrowers, affect non-bank financial intermediation (NBFI). Using data for 24 of the jurisdictions participating in the Financial Stability Board's monitoring exercise over the period 2002â??17, we study the effects of MaP episodes on bank assets and on those NBFI activities that may involve bank-like financial stability risks (the narrow measure of NBFI). We find that a net tightening of domestic MaPs increases these NBFI activities and decreases bank assets, raising the NBFI share in total financial assets. By contrast, a net tightening of MaPs in foreign jurisdictions leads to a reduction of the NBFI share â?? the effect of a drop in NBFI activities and an increase in domestic banking assets. Tightening and easing MaPs have largely symmetric effects on NBFI. We find that the effect of MaPs (both domestic and foreign) is economically and statistically significant for all those NBFI economic functions that may pose risks to financial stability. |
| Keywords: | International spillovers; macroprudential policy; non-bank financial intermediation; shadow banking |
| JEL: | G10 G21 O16 O40 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15895&r= |
| By: | Madeira, João; Palma, Nuno Pedro G.; van der Kwaak, Christiaan |
| Abstract: | Advanced economies tend to have large but unstable intermediation sectors. We employ a DSGE model with banks featuring limited liability to investigate how risk shocks in the financial sector affect long-run macroeconomic outcomes. With full deposit insurance, banks expand balance sheets when risk increases, leading to higher investment and output. With no deposit insurance, we observe substantial drops in long-run credit provision, investment, and output. These differences provide a novel argument in favor of deposit insurance. Finally, our welfare analysis finds that increased risk reduces welfare, except when there is full deposit insurance and deadweight costs are small. |
| Keywords: | Costly state verification; deposit insurance; endogenous leverage; intermediation; investment; limited liability; Regulation; risk |
| JEL: | E22 E44 G21 O16 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15841&r= |
| By: | De Marco, Filippo; Sauvagnat, Julien; Sette, Enrico |
| Abstract: | We study how lenders respond to excessive optimism in the corporate sector. Our identification relies on plausibly exogenous variation in optimism across areas in Italy. We document that firms in optimistic areas hold favorable views about their own business, and that they are more likely to default on their debt. Banks are more likely to deny credit to firms in optimistic areas, but only for loans that cannot be easily collateralized. Our findings provide empirical support for the theoretical prediction that banks' collateral provision reduces the efficiency of the credit market when the corporate sector is prone to excessive optimism. |
| Keywords: | borrower default; business expectations; collateral requirements; loan applications; Optimism |
| JEL: | G21 G41 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15785&r= |
| By: | Larry D. Wall |
| Abstract: | The global financial crisis of 2007–09 revealed substantial weaknesses in large banks' capital adequacy and liquidity. Bank regulators responded with a variety of prudential measures intended to strengthen both. However, these prudential measures resulted in conflicts with the implementation of monetary policy that helped alter the way the Federal Reserve conducts monetary policy. I review three such conflicts: regulation inhibiting interest on excess reserves arbitrage starting in 2008, regulation inhibiting banks' operations in the repo market in 2019, and regulation inhibiting their operations in the Treasury securities market in 2020. The article concludes with a discussion of the issues associated with changing specific banking regulations and some more general suggestions for dealing with these types of conflicts. |
| Keywords: | banking regulation; capital adequacy; bank liquidity regulation; interest on reserves; Treasury market; repo market |
| JEL: | E52 E58 G28 |
| Date: | 2021–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:a00001:91177&r= |
| By: | Erik Dolson; Julapa Jagtiani |
| Abstract: | There has been a great deal of interest recently in understanding the potential role of fintech firms in expanding credit access to the underbanked and credit-constrained consumers. We explore the supply side of fintech credit, focusing on unsecured personal loans and mortgage loans. We investigate whether fintech firms are more likely than other lenders to reach out to “underserved consumers,” such as minorities; those with low income, low credit scores, or thin credit histories; or those who have a history of being denied for credit. Using a rich data set of credit offers from Mintel, in conjunction with credit information from TransUnion and other consumer credit data from the FRBNY/Equifax Consumer Credit Panel, we compare similar credit offers that were made by banks, fintech firms, and other nonbank lenders. Fintech firms are more likely than banks to offer mortgage credit to consumers with lower income, lower-credit scores, and those who have been denied credit in the recent past. Fintechs are also more likely than banks to offer personal loans to consumers who had filed for bankruptcy (thus also more likely to receive credit card offers overall) and those who had recently been denied credit. For both personal loans and mortgage loans, fintech firms are more likely than other lenders to reach out and offer credit to nonprime consumers. |
| Keywords: | fintech; P2P lending; consumer credit access; personal lending; credit cards; mortgage lending; online lending; credit offers |
| JEL: | G21 G23 G28 G51 |
| Date: | 2021–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:91246&r= |
| By: | van der Plaat, Mark |
| Abstract: | The distance between lenders and borrowers in the U.S. has increased considerably since the 1970s. This paper analyzes whether the use of loan sales by lenders has caused this increase. Using data on U.S. residential mortgage lending, we find that loan sales on average increase the lending distance with approximately 47%, which corresponds to 206.9 km (128.6 miles). Loan sales are able to increase lending distances because they allow lenders to reduce their loan rates, which allows them to compete for loans in remote markets. We find that loan sales almost completely offset higher loan rates of remote lenders. |
| Keywords: | Lending Distance; Remote Lending; Loan Sales; Securitization; Residential Mortgage Lending; Loan Rate Spreads; Great Recession; Multidimensional Panel Data |
| JEL: | C33 C55 G21 G23 R31 |
| Date: | 2020–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107519&r= |
| By: | Matthias Rottner |
| Abstract: | Motivated by the build-up of shadow bank leverage prior to the Great Recession, I develop a nonlinear macroeconomic model that features excessive leverage accumulation and show how this can cause a bank run. Introducing risk-shifting incentives to account for fluctuations in shadow bank leverage, I use the model to illustrate that extensive leverage makes the shadow banking system runnable, thereby raising the vulnerability of the economy to future financial crises. The model is taken to U.S. data with the objective of estimating the probability of a run in the years preceding the financial crisis of 2007-2008. According to the model, the estimated risk of a bank run was already considerable in 2004 and kept increasing due to the upsurge in leverage. I show that levying a leverage tax on shadow banks would have substantially lowered the probability of a bank run. Finally, I present reduced-form evidence that supports the tight link between leverage and the possibility of financial crises. |
| Keywords: | Financial crises, Shadow banks, Leverage, Credit booms, Bank runs |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2021/02&r= |
| By: | Huber, Kilian |
| 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. |
| Keywords: | Bank Regulation; Bank size; Economies of Scale; financial regulation; Firm Employment; German History; Large Firms; Manager Compensation; Too Big To Fail |
| JEL: | E24 E44 G21 G28 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15769&r= |
| By: | Chari, Anusha; Jain, Lakshita; Kulkarni, Nirupama |
| Abstract: | During the global financial crisis, the Reserve Bank of India enacted forbearance measures that lowered capital provisioning rates for loans under temporary liquidity stress. Matched bank-firm data reveal that troubled banks took advantage of the policy to also shield firms facing serious solvency issues. Perversely, in industries and bank portfolios with high proportions of failing firms, credit to healthy firms declined and was reallocated to the weakest firms. By incentivizing banks to hide true asset quality, the forbearance policy provided a license for regulatory arbitrage. The build-up of stressed assets in India's predominantly state-owned banking system is consistent with accounting subterfuge. |
| Keywords: | Non-performing Assets; Regulatory forbearance; Stressed Banks; zombie lending |
| JEL: | E58 G21 G28 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15773&r= |
| By: | de Haas, Ralph; Ongena, Steven; Qi, Shusen; Straetmans, Stefan |
| Abstract: | We study how information sharing between banks influences the geographical clustering of branches. A spatial oligopoly model first explains why branches cluster and how information sharing impacts price competition and equilibrium clustering. With data on 56,555 branches of 614 banks in 19 countries between 1995 and 2012, we test key model hypotheses. We find that information sharing increases branch clustering as banks open branches in localities that are new to them but that are already served by other banks. This branch clustering is associated with less spatial credit rationing as information sharing allows firms to borrow from more distant banks. |
| Keywords: | Branch clustering; information sharing; spatial oligopoly model |
| JEL: | D43 G21 G28 L13 R51 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15829&r= |
| By: | Gersbach, Hans |
| Abstract: | What happens when banks compete with deposit and loan contracts contingent on macroeconomic shocks? We show that the private sector insures the banking system efficiently against banking crises through such contracts when banks focus on expected profit maximization and failing banks go bankrupt. When risks are large, banks may shift part of the risk to depositors who receive state-contingent contracts. Repackaging of the risk among depositors can improve welfare. In contrast, when failing banks are rescued, new phenomena such as risk creation or magnification emerge, which would not occur with non-contingent contracts. In particular, depositors receive non-contingent contracts with comparatively high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment in bad times. As a result, banks overinvest and generate large macroeconomic risks, even if the underlying productivity risk is small or zero. |
| Keywords: | Financial intermediation - Macroeconomics risks - State-contingent contracts - Banking regulation |
| JEL: | D41 E4 G2 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15884&r= |
| By: | Dietrich, Diemo; Gehrig, Thomas |
| Abstract: | We demonstrate that the co-existence of different motives for liquidity preferences profoundly affects the efficiency of financial intermediation. Liquidity preferences arise because consumers wish to take precautions against sudden and unforeseen expenditure needs, and because investors want to speculate on future investment opportunities. Without further frictions, the co-existence of these motives enables banks to gain efficiencies from combining liquidity insurance and credit intermediation. With standard financial frictions, banks cannot reap such economies of scope. Indeed, the co-existence of a precautionary and a speculative motive can cause efficiency losses which would not occur if there were only a single motive. Specifically, if the arrival of profitable future investment opportunities is sufficiently likely, such co-existence implies inefficient separation, pooling, or even non-existence of pure strategy equilibria. This suggests that policy implications derived solely from a single motive for liquidity demand can be futile. |
| Keywords: | competitive bank business models; expenditure needs; Investment opportunities; liquidity insurance; Penalty rates |
| JEL: | D11 D86 E21 E22 G21 L22 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15827&r= |
| By: | Paul Gertler; Brett Green; Catherine Wolfram |
| Abstract: | A new form of secured lending utilizing “digital collateral” has recently emerged, most prominently in low and middle income countries. Digital collateral relies on “lockout” technology, which allows the lender to temporarily disable the flow value of the collateral to the borrower without physically repossessing it. We explore this new form of credit both in a model and in a field experiment using school-fee loans digitally secured with a solar home system. We find that securing a loan with digital collateral drastically reduces default rates (by 19 pp) and increases the lender’s rate of return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect and find that roughly one-third is attributable to (ex-ante) adverse selection and two-thirds is attributable to (interim or ex-post) moral hazard. Access to a school-fee loan significantly increases school enrollment and school-related expenditures without detrimental effects to households’ balance sheet. |
| JEL: | G20 I22 O16 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28724&r= |
| By: | Eberhardt, Markus; Presbitero, Andrea |
| Abstract: | Commodity prices are one of the most important drivers of output fluctuations in developing countries. We show that a major channel through which commodity price movements can affect the real economy is through their effect on banks' balance sheets and financial stability. Our analysis finds that the volatility of commodity prices is a significant predictor of banking crises in a sample of 60 low-income countries (LICs). In contrast to recent findings for advanced and emerging economies, credit booms and capital inflows do not play a significant role in predicting banking crises, consistent with a lack of de facto financial liberalization in LICs. We corroborate our main findings with historical data for 40 "peripheral" economies between 1848 and 1938. The effect of commodity price volatility on banking crises is concentrated in LICs with a fixed exchange rate regime and a high share of primary goods in production. We also find that commodity price volatility is likely to trigger financial instability through a reduction in government revenues and a shortening of sovereign debt maturity, which are likely to weaken banks' balance sheets. |
| Keywords: | banking crises; commodity prices; Low income countries; volatility |
| JEL: | F34 G01 Q02 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15959&r= |
| By: | Hoffmann, Mathias; Stewen, Iryna; Stiefel, Michael |
| 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: | Crowding-Out; firm-level investment; Fiscal austerity; global and intra-European imbalances; local public finance |
| JEL: | E62 F21 F32 G21 H32 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15912&r= |
| By: | Beck, Thorsten; Keil, Jan |
| Abstract: | Exploiting geographic variation in the exposure of U.S. banks to COVID-19 and lockdown policies we find that banks more exposed to pandemic and lockdown policies show an increase in loss provisions and non-performing loans. While we observe an increase in corporate, especially small business, lending growth, this is driven by government-guaranteed loans. Finally, we observe a reduction in the number and average amount of syndicated loans for banks more affected by the pandemic as well as an increase in interest spreads and decrease in maturities. These findings point to a negative impact of the pandemic and swift reactions by banks. |
| Keywords: | Banking; COVID-19 |
| JEL: | G21 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15869&r= |
| By: | Aikman, David; Bridges, Jonathan; Hacioglu Hoke, Sinem; O'Neill, Cian; Raja, Akash |
| Abstract: | Using quantile regressions applied to a panel dataset of 16 advanced economies, we examine how downside risk to growth over the medium term is affected by a set of macroprudential indicators. We find that credit and property price booms, and wide current account deficits increase downside risks 3 to 5 years ahead. However, such downside risks can be partially mitigated by increasing the capital ratio of the banking system. We show that GDP-at-Risk, defined as the the 5th quantile of the projected GDP growth distribution three years ahead, deteriorated in the US in the run-up to the Global Financial Crisis, driven by rapid growth in credit and house prices alongside a widening current account deficit. Our results suggest such indicators could provide useful information for the stance of macroprudential policy. |
| Keywords: | Financial Stability; GDP-at-Risk; local projections; macroprudential policy; quantile regressions |
| JEL: | G01 G18 G21 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15864&r= |
| By: | Juan David Vega Baquero (PhD student, University of Barcelona, Spain.); Miguel Santolino (Riskcenter, Department of Econometrics, University of Barcelona, Diagonal 690, 08034-Barcelona, Spain. Tel.:+34-93-4020484; fax: +34-93-4021983.) |
| Abstract: | Although still incipient in economics and finance, compositional data analysis (in which relative information is more important than absolute values) has become more relevant in statistical analysis in recent years. This article constructs a concentration index for financial/banking systems by means of compositional analysis, to establish the potential existence of too big to fail financial entities. The intention is to provide an early warning tool for regulators about this kind of institutions. The index has been applied to the Colombian banking system and assessed over time with a forecast to determine whether the system is becoming more concentrated or not. It was found that the concentration index has been decreasing in recent years and the model predicts that this trend will continue. In terms of the methodology used, compositional models were shown to be more stable and to lead to better prediction of the index than the classical multivariate methodologies. |
| Keywords: | Simplex, Aitchison geometry, Systematically important banks, Vector autoregresion. JEL classification: G17, G21, G28. |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:202111&r= |
| By: | Gottardi, Piero; Maurin, Vincent; Monnet, Cyril |
| Abstract: | We present a model of secured credit chains in which the circulation of risky collateral generates fragility. An intermediary stands between a borrower and a financier. The intermediary borrows to finance her own investment opportunity, subject to a moral hazard problem, and in addition, can intermediate funds. She will only do so if she can repledge to the financier the collateral pledged by the borrower. We show that when the repledged collateral is sufficiently risky and the loan that it secures is recourse, the circulation of collateral generates fragility in the chain, by undermining the intermediary's incentives. The arrival of news about the value of the repledged collateral further increases fragility. This fragility channel of collateral re-use generates a premium for safe or opaque collateral. The environment considered in our model applies to various situations, such as trade credit chains, securitization and repo markets. |
| Keywords: | Collateral; Credit chains; fragility; intermediation; Secured Lending |
| JEL: | G23 G30 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15757&r= |
| By: | Jagjit S. Chadha; Germana Corrado; Luisa Corrado; Ivan De Lorenzo Buratta |
| Abstract: | We develop a DSGE model with heterogeneous agents, where savers own firms and riskpricing banks while borrowers require loans to establish their consumption plans. The bank lends at an external finance premium (EFP) over the policy rate as a function of the asset price, housing collateral, the demand for loans and their perceived riskiness. We suggest that the close relationship between aggregate consumption and house prices is related to collateral effects. We also outline the role of the EFP in determining consumption spillovers between borrowers and lenders. We solve the model with occasionally-binding constraints to examine the redistributive role of macro-prudential policies in terms of welfare. Countercyclical deployment of the loan-to-value constraint placed on borrowers can limit the scale of the downturn from a negative house price shock. Furthermore, when the zero lower bound acts to constrain monetary policy, looser macroprudential policies can act as an effective substitute for lower policy rates. Finally, we show that co-ordinated macroprudential and fiscal policies can also attenuate the welfare losses that arise from uncertainty banks may face about default probabilities. |
| JEL: | E32 E44 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202103&r= |