nep-ban New Economics Papers
on Banking
Issue of 2021‒05‒17
27 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bewley Banks By Jamilov, Rustam; Monacelli, Tommaso
  2. Banks' complexity-risk nexus and the role of regulation By Martynova, Natalya; Vogel, Ursula
  3. Deposit competition and the securitisation boom By McGowan, Danny; Nguyen, Huyen
  4. Monetary and Macroprudential Policy Complementarities: evidence from European credit registers By Altavilla, Carlo; Laeven, Luc; Peydró, José Luis
  5. Does CFPB Oversight Crimp Credit? By Fuster, Andreas; Plosser, Matthew; Vickery, James
  6. Who Lends Before Banking Crises? Evidence from the International Syndicated Loan Market By Giannetti, Mariassunta; Jang, Yeejin
  7. Financial Crisis and Non-performing Exposures in Greece By Gikas A. Hardouvelis
  8. Low price-to-book ratios and bank dividend payout policies By Gambacorta, Leonardo; Oliviero, Tommaso; Shin, Hyun Song
  9. High Cost Lenders and the Geographic Concentration of Foreclosures By Stephen L. Ross; Yuan Wang
  10. Optimal bailouts in banking and sovereign crises By Sewon Hur; César Sosa-Padilla; Zeynep Yom
  11. Investing in crises By Baron, Matthew; Laeven, Luc; Pénasse, Julien; Usenko, Yevhenii
  12. Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises By Peydró, José Luis; Polo, Andrea; Sette, Enrico
  13. Consumer Credit with Over-Optimistic Borrowers By Exler, Florian; Livshits, Igor; MacGee, Jim; Tertilt, Michèle
  14. Are Bigger Banks Better? Firm-Level Evidence from Germany By Kilian Huber
  15. Deposit Insurance, Bank Ownership and Depositor Behavior By Atmaca, Sumeyra; Kirschenmann, Karolin; Ongena, Steven; Schoors, Koen
  16. Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks By Yavuz Arslan; Ahmet Degerli; Gazi Kabaş
  17. Optimal Monetary and Macroprudential Policies By Josef Schroth
  18. The Deposits Channel of Monetary Policy: A Critical Review By Repullo, Rafael
  19. Banks and negative interest rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  20. Unearthing Zombies By Nirupama Kulkarni; S.K. Ritadhi; Siddharth Vij; Katherine Waldock
  21. Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis By Emily Johnston-Ross; Song Ma; Manju Puri
  22. Inside the Regulatory Sandbox: Effects on Fintech Funding By Cornelli, Giulio; Doerr, Sebastian; Gambacorta, Leonardo; Merrouche, Ouarda
  23. Monetary Policy, Interbank Liquidity and Lending Behaviour of Banks in India By Md Gyasuddin Ansari; Rudra Sensarma
  24. Forward Looking Loan Provisions: Credit Supply and Risk-Taking By Bernardo Morais; Gaizka Ormazabal; José-Luis Peydró; Mónica Roa; Miguel Sarmiento
  25. The financial inclusion agenda: Examining the role of conventional banks in deepening access to formal credit By Abdul Malik Iddrisu; Michael Danquah
  26. Payments on Digital Platforms: Resiliency, Interoperability and Welfare By Jonathan Chiu; Russell Wong
  27. Technology Adoption and Leapfrogging: Racing for Mobile Payments By Pengfei Han; Zhu Wang

  1. By: Jamilov, Rustam; Monacelli, Tommaso
    Abstract: We develop a non-linear, quantitative macroeconomic model with heterogeneous monopolistic financial intermediaries, incomplete markets, default risk, endogenous bank entry, and aggregate uncertainty. The model generates a bank net worth distribution fluctuation problem analogous to the canonical Bewley-Huggett-Aiyagari-Imrohoglu environment. Our framework nests Gertler-Kyiotaki (2010) and the standard Real Business Cycle model as special cases. We present four general results. First, relative to the GK benchmark, banks' balance sheet-driven recessions can be significantly amplified, depending on the interaction of endogenous credit margins, the cyclicality of a precautionary lending motive and the (counter-) cyclicality of intermediaries' idiosyncratic risk. Second, equilibrium responses to aggregate exogenous shocks depend explicitly on the conditional distributions of bank net worth and leverage, which are endogenous time-varying objects. Aggregate shocks to banks' balance sheets that hit a concentrated and fragile banking distribution cause significantly larger recessions. A persistent consolidation in the U.S. banking sector that matches the one observed over 1980-2020 generates a large economic contraction and an increase in financial instability. Third, we document, and match, novel stylized facts on both the cross-section of credit margins and the cyclical properties of the first three moments of the cross-sectional distributions of financial intermediary assets, net worth, leverage, loan margins, and default risk. We find that shocks to capital quality and to leverage constraint tightness (``financial shocks'') can match fluctuations in the U.S. financial sector very well. Finally, we use the model to identify and characterize episodes of systemic banking crises. Such events are associated with large economic recessions, spikes in bank leverage, and large drops in the number of intermediaries.
    Keywords: Aggregate fluctuations; financial intermediaries; Heterogeneity; incomplete markets; monopolistic competition
    JEL: E32 E44
    Date: 2020–11
  2. By: Martynova, Natalya; Vogel, Ursula
    Abstract: We investigate the relationship between bank complexity and bank risk-taking using German banking data over the period 2005-2017. We find that more complex banking organizations tend to take on more risk, but that this complexity-risk nexus decreases over time. We study how regulatory tightenings inherent in this period, and addressing systemically important banks (SIBs) in general and complexity more specifically, alter banks' choices of complexity and risk. Banks reduce their complexity in response to regulatory tightenings, as these increase the related regulatory costs. Surprisingly, for SIBs in particular, the reduction of regulatory costs is associated with an increase in diversification benefits. As a result, they are able to lower their idiosyncratic risk more than other banks. The overall complexity-risk nexus is lower after regulatory tightenings. Thus, our results indicate that post-crisis regulation is effective in reducing banks' complexity-risk nexus.
    Keywords: bank complexity,bank risk-taking,bank regulation,too-big-to-fail
    JEL: G21 G28 G30
    Date: 2021
  3. By: McGowan, Danny; Nguyen, Huyen
    Abstract: We provide novel evidence that regulatory-induced deposit market competition provoked banks to enter the securitisation market. Exploiting the state-specific removal of interstate bank branching restrictions across U.S states between 1994 and 2006 as an exogenous source of deposit competition, we document four key results. First, the interstate branching deregulation leads to an intensification of deposit market competition. Second, this rise in the cost of deposits increases the probability that a bank operates an 'originate-to-distribute' model by 6%. Third, the securitisation effect holds across bank asset classes but is most pronounced for mortgages. Finally, the results are strongest among small and single state banks owing to their reliance on deposit funding. The evidence is consistent with theories where increasing the cost of deposits creates incentives for banks to use securitisation as a cheaper loan funding model. The findings highlight a hitherto neglected supply-side explanation for the rapid expansion in securitisation before the financial crisis and speak to the debate about banking competition policy.
    Keywords: competition,deregulation,OTD,securitisation
    JEL: G21 G28 K11
    Date: 2021
  4. By: Altavilla, Carlo; Laeven, Luc; Peydró, José Luis
    Abstract: We document that there are strong complementarities between monetary policy and macroprudential policy in shaping the evolution of bank credit. We use a unique loan-level dataset comprising multiple credit registers from several European countries and different types of loans, including corporate loans, mortgages and consumer credit. We merge this rich information with borrower and bank-level characteristics and with indicators summarising macroprudential and monetary policy actions. We find that monetary policy easing increases both bank lending and lending to riskier borrowers, especially when there is a more accommodative macroprudential environment. These effects are stronger for less capitalised banks. Results apply to both household and firm lending, but they are stronger for consumer and corporate loans than for mortgages. Finally, for firms, the overall increase in bank lending induced by an accommodative policy mix is stronger for more (ex-ante) productive firms than firms with high ex ante credit risk, except for banks with low capital.
    Keywords: E51; E52; E58; G21; G28
    JEL: E51 E52 E58 G21 G28
    Date: 2020–12
  5. By: Fuster, Andreas; Plosser, Matthew; Vickery, James
    Abstract: We study how regulatory oversight by the Consumer Financial Protection Bureau (CFPB) affects mortgage credit supply and other aspects of bank behavior. We use a difference-in-differences approach exploiting changes in regulatory intensity and a size cutoff below which banks are exempt from CFPB scrutiny. CFPB oversight leads to a reduction in lending in the Federal Housing Administration (FHA) market, which primarily serves riskier borrowers. However, it is also associated with a lower transition probability from moderate to serious delinquency, suggesting that tighter regulatory oversight may reduce foreclosures. Our results underscore the trade-off between protecting borrowers and maintaining access to credit.
    Keywords: Consumer financial protection; credit supply; Mortgages; Regulation; Servicing
    JEL: D18 G21 G28
    Date: 2021–01
  6. By: Giannetti, Mariassunta; Jang, Yeejin
    Abstract: We show that foreign lenders and low market share lenders extend more credit in comparison to other lenders during lending booms leading to banking crises, but not during other credit expansions. Less established lenders also increase the amount of credit they extend to riskier borrowers, without asking for collateral or imposing covenants and higher interest rates. Our results suggest that taking lenders' characteristics into account could provide an indicator for how much risk an economy is accumulating and be a useful barometer for macroprudential policies.
    Keywords: Credit Booms; Crises; foreign banks
    JEL: F3 G21
    Date: 2021–01
  7. By: Gikas A. Hardouvelis
    Abstract: The paper provides a brief history of the decade long Greek banking crisis, which reshaped the banking system into essentially four systemic banks, owning 96% of total assets. The crisis also led bank stock prices to a value of almost zero twice in a row, once in early 2012 after the PSI bond haircut, and again in late 2015, after the politically generated recession and the GREXIT fears of the first semester of the year. Today the amount of legacy non-performing loans (NPLs) or exposures (NPEs) is enormous and by far the highest in Europe. It has to decline fast to non-crisis levels for the banks to be able to provide fresh credit and support the economy. A rapid reduction of NPEs is hampered by two key obstacles: First, the NPE reduction causes a loss in equity capital, which could lead to a violation of the Basel III capital requirements; and second, the NPE reduction can easily lead to negative annual profitability, which could force dilution of private sector stock ownership, caused by the 2014 legislation of Deferred Tax Credit (DTC). The higher the NPEs and the lower the provisions of banks, the higher their need for fresh capital. Banks differ in those characteristics and some may not avoid an eventual recapitalization in 2021. The stricter regulators are in their minimum capital ratio requirements or the more pessimistic private investors are on their valuations of the bank NPEs, the higher the need for fresh capital for the banks. A sensitivity analysis of the bank capital needs to these two exogenous variables (Table 2.2), reveals a fragile situation, in which capital needs can easily sky-rocket. In the medium term, the drive to increase annual profitability remains a strategic one-way street for banks. The challenges Greek banks face are very similar to those of European banks, though with some distinct features. The environment of low interest rates, intense competition with technology companies that are gradually penetrating retail banking, and the constant tightening of the supervisory framework, is putting pressure on their profitability. Additional Greek pressures arise from (i) the negative impact of reduced NPEs on accounting profitability; (ii) the digital transformation of the economy, which entails massive increases in investment in IT projects and in executivesÕ training; (iii) a switch of traditional bank customers towards alternative sources of financing; (iv) the high operating costs, which are inherited from the earlier prosperous times, and so on.
    Keywords: Greece, banking crisis, financial crisis, non-performing loans (NPLs), non-performing exposures (NPEs)
    Date: 2021–05
  8. By: Gambacorta, Leonardo; Oliviero, Tommaso; Shin, Hyun Song
    Abstract: Banks with a low price-to-book ratio have a greater propensity to pay out dividends. This propensity is especially marked for banks with a price-to-book ratio below a threshold of 0.7. As a sector, banks also tend to have higher dividend payout ratios than non-financial firms. We demonstrate these features using data for 271 advanced economy banks in 30 jurisdictions. Dividend payouts as a proportion of profits rise in a non-linear way as the price-to-book ratio falls below 0.7. In a hypothetical exercise with fixed balance sheet ratios, we find that a complete suspension of bank dividends in 2020 during the Covid-19 pandemic would have added, under different stress scenario, an additional US$ 0.8â??1.1 trillion of bank lending capacity in our sample, equivalent to 1.1â??1.6% of total GDP.
    Keywords: banks; COVID-19 crisis; dividend payout policy; Low interest rates
    JEL: G21 G35
    Date: 2020–12
  9. By: Stephen L. Ross; Yuan Wang
    Abstract: We define high cost lenders as lenders that issue a disproportionate number of high cost loans. We develop a shift-share measure to capture the market representation of these high cost lenders in housing submarkets. After conditioning on housing submarket fixed effects, origination year fixed effects and trends over origination years based on housing submarket attributes, the magnitude of the estimated relationship is very stable as detailed controls for borrower attributes, credit score and loan terms are added. The relationship between the representation of high cost lenders and foreclosure is broad based across borrowers and types of loans, but is strongest for loans originated by high cost lenders whether or not the loans themselves are high cost. We investigate three potential mechanisms: reverse causality where high cost lenders respond to an increase in demand from higher risk borrowers, the types of mortgages issued when high cost lenders increase their market presence, and the behavior of loan servicers when a cohort of loans contains a large number of loans issued by high cost lenders. While we do not have direct information on loan servicers, our evidence points towards foreclosure decisions during the crisis as the primary mechanism behind our findings.
    JEL: D14 G01 G21 R21 R23
    Date: 2021–05
  10. By: Sewon Hur (Federal Reserve Bank of Dallas); César Sosa-Padilla (University of Notre Dame/NBER); Zeynep Yom (Villanova University)
    Abstract: We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions and increase output, but also imply increasing government fiscal needs and possible heightened default risk (i.e., they create a ‘diabolic loop’). We find that the optimal bailouts exhibit clear properties. Other things equal, the fraction of banking losses that the bailouts would cover is: (i) decreasing in the level of government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of the bank- ing crisis. Even though bailouts mitigate the adverse effects of banking crises, we find that the economy is ex ante better off without bailouts: the ‘diabolic loop’ they create is too costly.
    Keywords: Bailouts Sovereign Defaults Banking Crises Conditional Transfers Sovereign-bank diabolic loop
    JEL: E32 E62 F34 F41 G01 G15 H63
    Date: 2021–04
  11. By: Baron, Matthew; Laeven, Luc; Pénasse, Julien; Usenko, Yevhenii
    Abstract: We investigate asset returns around banking crises in 44 advanced and emerging economies from 1960 to 2018. In contrast to the view that buying assets during banking crises is a profitable long-run strategy, we find returns of equity and other asset classes generally underperform after banking crises. While prices are depressed during crises and partially recover after acute stress ends, consistent with theories of fire sales and intermediary-based asset pricing, we argue that investors do not fully anticipate the consequences of debt overhang, which result in lower long-run dividends. Our results on bank stock underperformance suggest that government-funded bank recapitalizations can often lead to substantial taxpayer losses. JEL Classification: G11, G14, G15, G41
    Keywords: financial crises, fire sales, investments, returns
    Date: 2021–05
  12. By: Peydró, José Luis; Polo, Andrea; Sette, Enrico
    Abstract: We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests â?? based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value â?? suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.
    Keywords: bank capital; concentration risk; COVID-19; held to maturity; interbank funding; risk shifting; risk weights; trading book; uncertainty
    JEL: G01 G21 G28
    Date: 2020–11
  13. By: Exler, Florian; Livshits, Igor; MacGee, Jim; Tertilt, Michèle
    Abstract: There is active debate over whether borrowers' cognitive biases create a need for regulation to limit the misuse of credit. To tackle this question, we incorporate over-optimistic borrowers into an incomplete markets model with consumer bankruptcy. Lenders price loans, forming beliefs - type scores - about borrowers' types. Since over-optimistic borrowers face worse income risk but incorrectly believe they are rational, both types behave identically. This gives rise to a tractable theory of type scoring as lenders cannot screen borrower types. Since rationals default less often, the partial pooling of borrowers generates cross-subsidization whereby over-optimists face lower than actuarially fair interest rates. Over-optimists make financial mistakes: they borrow too much and default too late. We calibrate the model to the US and quantitatively evaluate several policies to address these frictions: reducing the cost of default, increasing borrowing costs, imposing debt limits, and providing financial literacy education. While some policies lower debt and filings, they do not reduce overborrowing. Financial literacy education can eliminate financial mistakes, but it also reduces behavioral borrowers' welfare by ending cross-subsidization. Score-dependent borrowing limits can reduce financial mistakes but lower welfare.
    Keywords: bankruptcy; Consumer credit; Cross-subsidization; financial literacy; Financial Mistakes; financial regulation; Over-Optimism; Type Score
    JEL: E21 E49 G18 K35
    Date: 2020–12
  14. By: Kilian Huber
    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.
    JEL: E24 E44 G21 G28 L11 L25 N14 N24 N84
    Date: 2021–05
  15. By: Atmaca, Sumeyra; Kirschenmann, Karolin; Ongena, Steven; Schoors, Koen
    Abstract: We employ proprietary data from a large bank to analyze how (in times of crisis) depositors react to a bank nationalization, re-privatization and an accompanying increase in deposit insurance. Nationalization slows depositors fleeing the bank, provided they have sufficient trust in the national government, while the increase in deposit insurance spurs depositors below the new 100K limit to deposit more. Prior to nationalization, depositors bunch just below the then-prevailing 20K limit. But they abandon bunching entirely during state-ownership, to return to bunching below the new 100K limit after re-privatization. Especially depositors with low switching costs are moving money around.
    Keywords: bank nationalization; coverage limit; deposit insurance; depositor heterogeneity
    JEL: G21 G28 H13 N23
    Date: 2020–12
  16. By: Yavuz Arslan; Ahmet Degerli; Gazi Kabaş
    Abstract: We use disaggregated U.S. data and a border discontinuity design to show that more generous unemployment insurance (UI) policies lower bank deposits. We test several channels that could explain this decline and find evidence consistent with households lowering their precautionary savings. Since deposits are the largest and most stable source of funding for banks, the decrease in deposits affects bank lending. Banks that raise deposits in states with generous UI policies squeeze their small business lending. Furthermore, counties that are served by these banks experience a higher unemployment rate and lower wage growth.
    Keywords: Bank funding; Bank lending; Labor; Precautionary saving; Unemployment insurance
    JEL: D14 G21 J20 J65
    Date: 2021–04–30
  17. By: Josef Schroth
    Abstract: This paper studies monetary policy in an economy where banks make risky loans to firms and provide liquidity services in the form of deposits to households. For given bank equity, market discipline implies that banks can take more deposits when assets are safer or more profitable. Banks respond to loan losses by making their balance sheets safer—i.e., they reduce risky lending sharply and accumulate more safe bonds. In contrast, a social planner would respond by making banks temporarily more profitable such that a riskier balance sheet can be maintained. A planner would temporarily reduce the expansiveness of monetary policy to avoid bonds becoming too liquid in support of the liquidity premium banks earn via deposits. Specifically, when bank equity is low, then optimal monetary policy stabilizes output by supporting bank lending rather than employment.
    Keywords: Credit and credit aggregates; Financial stability; Financial system regulation and policies; Inflation targets; Monetary policy
    JEL: E60 G28
    Date: 2021–05
  18. By: Repullo, Rafael
    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: banks' market power; deposits channel; monetary policy transmission
    JEL: E52 G21 L13
    Date: 2020–12
  19. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize existing work on the impact of negative rates on banks’ lending and securities portfolios, and the consequences for the real economy. Finally, we discuss the role of different “initial” conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies. JEL Classification: E44, E52, E58, G20, G21
    Keywords: bank lending, bank risk taking, deposits, euro-area heterogeneity, negative interest rates, zero lower bound
    Date: 2021–05
  20. By: Nirupama Kulkarni (CAFRAL); S.K. Ritadhi (Ashoka University); Siddharth Vij (University of Georgia); Katherine Waldock (Columbia University)
    Abstract: Since ineffective debt resolution perpetuates zombie lending, bankruptcy reform has emerged as a solution. We show, however, that lender-based frictions can limit reform impact. Exploiting a unique empirical setting and novel supervisory data from India, we document that a new bankruptcy law had muted effects on lenders recognizing zombie borrowers as non-performing. A subsequent unexpected regulation, targeting perverse lender incentives to continue concealing zombies, increased zombie recognition particularly for undercapitalized and government-owned banks, highlighting the role of bank capital and political frictions in sustaining zombie lending. Resolving zombie loans allowed lenders to reallocate credit to healthier borrowers who increased investment.
    Keywords: Zombie; Bankruptcy; Banking Regulation; India; Creative Destruction
    Date: 2021–05
  21. By: Emily Johnston-Ross; Song Ma; Manju Puri
    Abstract: This paper investigates the role of private equity (PE) in failed bank resolutions after the 2008 financial crisis, using proprietary FDIC failed bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi-random empirical design based on detailed bidding information, we show PE-acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors had a positive role in stabilizing the financial system through their involvement in failed bank resolution.
    JEL: E65 G18 G21
    Date: 2021–05
  22. By: Cornelli, Giulio; Doerr, Sebastian; Gambacorta, Leonardo; Merrouche, Ouarda
    Abstract: Policymakers around the world are adopting regulatory sandboxes as a tool for spurring innovation in the financial sector while keeping alert to emerging risks. Using unique data for the UK, this paper provides first evidence on the effectiveness of the world's first sandbox in improving fintechs' access to finance. Firms entering the sandbox see a significant increase of 15% in capital raised post-entry, relative to firms that did not enter; and their probability of raising capital increases by 50%. Our results suggest that the sandbox facilitates access to capital through two channels: reduced asymmetric information and reduced regulatory costs or uncertainty. Our results are similar when we exploit the staggered introduction of the sandbox and compare firms in earlier to those in later sandbox cohorts, and when we compare participating firms to a matched set of comparable firms that never enters the sandbox.
    Keywords: Fintech; regulatory sandbox; Startups; venture capital
    JEL: G32 G38 M13 O3
    Date: 2020–11
  23. By: Md Gyasuddin Ansari (Indian Institute of Management Kozhikode); Rudra Sensarma (Indian Institute of Management Kozhikode)
    Abstract: In this paper we investigate the role of interbank liquidity in monetary policy transmission in India. We employ standard and dynamic panel regression methods to analyze data for 40 commercial banks during the period 1999-2018. We find a significant role of interbank liquidity in easing the negative impact of monetary policy tightening on bank lending. We also find heterogenous role of interbank liquidity in monetary policy transmission across public sector and private sector banks. The policy implication for the monetary authority in India is that managing net liquidity positions of banks is necessary to realize the desired effects of monetary policy.
    Keywords: Monetary policy transmission, Interbank Liquidity, Bank Lending.
    Date: 2021–03
  24. By: Bernardo Morais; Gaizka Ormazabal; José-Luis Peydró; Mónica Roa; Miguel Sarmiento
    Abstract: We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected—rather than incurred—credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms—SMEs with shorter credit history, less tangible assets or more defaulted loans—but engage in “search-for-yield” within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification. **** RESUMEN: Este documento analiza los efectos reales, financieros y de toma de riesgos bancarios asociados al cambio en el cálculo de las provisiones de los préstamos con base en pérdidas esperadas a las calculadas con base en pérdidas incurridas. En nuestra identificación explotamos características únicas de una reforma regulatoria en Colombia usando datos a nivel de préstamos banco-firma. Encontramos que el cambio regulatorio condujo a un importante incremento en las provisiones bancarias. Asimismo, los bancos endurecieron los estándares de crédito, afectando negativamente a las firmas deudoras con efectos más fuertes sobre las firmas riesgosas. Para reducir el nivel de provisiones, los bancos más afectados (menos capitalizados) redujeron la oferta de crédito a las firmas riesgosas (firmas pequeñas con menor historia crediticia, menores activos tangibles o mayores préstamos en mora) y a su vez, incrementaron la búsqueda de retorno dentro del sector menos afectado por la regulación, aumentaron así la concentración del portafolio de créditos y por ende reduciendo la diversificación del riesgo.
    Keywords: Loan provisions, IFRS9, ECL, corporate credit, real effects, bank risk-taking, Provisiones de préstamos, crédito corporativo, efectos reales, toma de riesgos bancarios
    JEL: E31 G21 G18 G28
    Date: 2021–05
  25. By: Abdul Malik Iddrisu; Michael Danquah
    Abstract: Using a unique district-level panel dataset, we investigate the effect of banking system penetration on financial inclusion in Ghana. To purge potential endogeneity bias in the underlying relationship, we exploit a change in the policy environment of the Ghanaian banking system to instrument for banking system penetration. We show, first, that the switch from a compartmentalized system of banking to a universal banking system in Ghana has resulted in an expansion of banks' branch networks, which has benefited hitherto financially less developed districts.
    Keywords: Banking, Financial inclusion, Access to credit, Ghana, Financial institutions, Formal credit, Panel
    Date: 2021
  26. By: Jonathan Chiu; Russell Wong
    Abstract: Digital platforms, such as Alibaba and Amazon, operate an online marketplace to facilitate transactions. This paper studies a platform’s business model choice between accepting cash and issuing tokens, as well as the implications for welfare, resiliency, and interoperability. A cash platform free rides on the existing payment infrastructure and profits from collecting transaction fees. A token platform earns seigniorage, albeit bearing the costs of setting up the system and holding reserves to mitigate the cyber risk. Tokens earn consumers a return, insulating transactions from the liquidity costs of using cash, but also expose them to the remaining cyber risk. The platform issues tokens if the interest rate is high, the platform scope is large, and the cyber risk is small. Unbacked floating tokens with zero transaction fees or interest-bearing stablecoins can implement the equilibrium business model, which is not necessarily socially optimal because the platform does not internalize its impacts on off-platform activities. The model explains why Amazon does not issue tokens, but Alipay issues tokens circulatable outside its Alibaba platforms. Regulations such as a minimum reserve requirement can reduce welfare
    Keywords: Digital tokens; Payments; Platforms; Money; Regulation
    JEL: E1 E25 G28
    Date: 2021–02–17
  27. By: Pengfei Han; Zhu Wang
    Abstract: Paying with a mobile phone is a cutting-edge innovation transforming the global payments industry. However, some advanced economies like the U.S. are lagging behind in mobile payment adoption. We construct a dynamic model with sequential payment innovations to explain this puzzle, which uncovers how advanced economies' past success in adopting card-payment technology holds them back in the mobile-payment race. Our calibrated model matches the cross-country adoption patterns of card and mobile payments and also explains why advanced and developing countries favor different mobile payment solutions. Based on the model, we conduct several quantitative exercises for welfare and policy analyses.
    Keywords: Technology adoption; Sunk cost; Payment system
    JEL: E4 G2 O3
    Date: 2021–03–01

This nep-ban issue is ©2021 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.