nep-ban New Economics Papers
on Banking
Issue of 2021‒05‒24
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Specialization in Banking By Kristian S. Blickle; Cecilia Parlatore; Anthony Saunders
  2. The crisis management framework for banks in the EU. How can we deal with the crisis of small and medium-sized banks? By Nicolas Veron; Anna Gelpern; Lynn Shibut; Marco Bodellini; Michael Schillig; Margit Vanberg; Sven Balder; Francisco Sotelo; Jens Verner Andersen; Mathias Semay Hovedskov; Fernando Restoy; Rastko Vrbaski; Ruth Walters
  3. The disciplining effect of supervisory scrutiny in the EU-wide stress test By Kok, Christoffer; Müller, Carola; Ongena, Steven; Pancaro, Cosimo
  4. Financial Stability with Fire Sale Externalities By Ryuichiro Izumi; Yang Li
  5. On the optimal control of interbank contagion in the euro area banking system By Fukker, Gábor; Kok, Christoffer
  6. The Reversal Interest Rate: A Critical Review By Repullo, Rafael
  7. The Great Lockdown: pandemic response policies and bank lending conditions By Altavilla, Carlo; Barbiero, Francesca; Boucinha, Miguel; Burlon, Lorenzo
  8. Macroprudential Policy, Mortgage Cycles and Distributional Effects: Evidence from the UK By Peydró, José Luis; Rodriguez Tous, Francesc; Tripathy, Jagdish; Uluc, Arzu
  9. The Financial (In)Stability Real Interest Rate, R** By Akinci, Ozge; Benigno, Gianluca; Del Negro, Marco; Queralto, Albert
  10. Forward looking loan provisions: Credit supply and risk-taking By Morais, Bernardo; Ormazabal, Gaizka; Peydró, José Luis; Roa, Monica; Sarmiento, Miguel
  11. Lending relationships in loan renegotiation: evidence from corporate loans By Papoutsi, Melina
  12. Fintech and big tech credit: a new database By Cornelli, Giulio; Frost, Jon; Gambacorta, Leonardo; Rau, Raghavendra; Wardrop, Robert; Ziegler, Tania
  13. Screening and Loan Origination Time: Lending Standards, Loan Defaults and Bank Failures By Bedayo, Mikel; Jiménez, Gabriel; Peydró, José Luis; Vegas, Raquel
  14. Media Capture by Banks By Durante, Ruben; Fabiani, Andrea; Peydró, José Luis
  15. Countercyclical Liquidity Policy and Credit Cycles: Evidence from Macroprudential and Monetary Policy in Brazil By Barbone Gonzalez, Rodrigo; Blanco Barroso, João Barata R.; Peydró, José Luis; van Doornik, Bernardus
  16. Monetary Policy with a Central Bank Digital Currency: The Short and the Long Term By Böser, Florian; Gersbach, Hans

  1. By: Kristian S. Blickle; Cecilia Parlatore; Anthony Saunders
    Abstract: Using highly detailed data on the loan portfolios of large U.S. banks, we document that these banks "specialize" by concentrating their lending disproportionately into one industry. This specialization improves a bank’s industry-specific knowledge and allows it to offer generous loan terms to borrowers, especially to firms with access to alternate sources of funding and during periods of greater nonbank lending. Superior industry-specific knowledge is further reflected in better loan and, ultimately, bank performance. Banks concentrate more on their primary industry in times of instability and relatively lower Tier 1 capital. Finally, specialization counteracts a well-documented trend in reduced lending by large banks to opaque small and medium-sized enterprises.
    Keywords: bank specialization; bank concentration; asymmetric information; loan performance; bank performance
    JEL: D4 G20 G21
    Date: 2021–05–01
  2. By: Nicolas Veron (Bruegel and Peterson Institute); Anna Gelpern (Georgetown University); Lynn Shibut (Federal Deposit Insurance Corporation); Marco Bodellini (Queen Mary University); Michael Schillig (King's College University); Margit Vanberg (Bafin); Sven Balder (Bafin); Francisco Sotelo (Bank of Spain); Jens Verner Andersen (Finansiel Stabilitet); Mathias Semay Hovedskov (Finansiel Stabilitet); Fernando Restoy (Financial Stability Institute); Rastko Vrbaski (Financial Stability Institute); Ruth Walters (Financial Stability Institute)
    Abstract: The volume is a collection of the papers presented at the workshop organized by the Bank of Italy on 'The crisis management framework for banks in the EU - how can we deal with the crisis of small and medium-sized banks?', held online on 15 January 2021.The workshop provided the opportunity to reflect on the possible reforms of EU rules to increase the capacity of the authorities to manage the crises of small and medium-sized banks so as to avoid a destroying-value peicemeal liquidation and the overall costs that it could generate
    Keywords: bank resolution, BRRD, bank insolvency, banking union, small banks, resolution framework
    JEL: G20 G21 G28 G01
    Date: 2021–05
  3. By: Kok, Christoffer; Müller, Carola; Ongena, Steven; Pancaro, Cosimo
    Abstract: Using a difference-in-differences approach and relying on confidential supervisory data and an unique proprietary data set available at the European Central Bank related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated to stress testing has a disciplining effect on bank risk. We find that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny that measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we find that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise. JEL Classification: G11, G21, G28
    Keywords: banking regulation, banking supervision, credit risk, internal models, stress testing
    Date: 2021–05
  4. By: Ryuichiro Izumi (Department of Economics, Wesleyan University); Yang Li (Nankai University)
    Abstract: Do policies that aim to mitigate firre sale externalities improve financial stability? We study this question in a model of financial intermediation where banks may sell long-term assets in financial markets subject to cash-in-the-market pricing and bank runs. In the absence of interventions, banks hold more long-term assets than is socially optimal, leading to ineciently large fire sales in a crisis. Regulating banks' short-term liabilities and portfolio choices can mitigate this externality. We show, however, that in economies with high market liquidity, such interventions actually increase financial fragility. In such a case, policymakers must balance the desire to mitigate the externality with financial stability considerations.
    Keywords: Fire sale, Pecuniary externalities, Macroprudential policies, Financial fragility
    JEL: G21 G28 E44
    Date: 2021–05
  5. By: Fukker, Gábor; Kok, Christoffer
    Abstract: In this paper we present a methodology of model-based calibration of additional capital needed in an interconnected financial system to minimize potential contagion losses. Building on ideas from combinatorial optimization tailored to controlling contagion in case of complete information about an interbank network, we augment the model with three plausible types of fire sale mechanisms. We then demonstrate the power of the methodology on the euro area banking system based on a network of 373 banks. On the basis of an exogenous shock leading to defaults of some banks in the network, we find that the contagion losses and the policy authority's ability to control them depend on the assumed fire sale mechanism and the fiscal budget constraint that may or may not restrain the policy authorities from infusing money to halt the contagion. The modelling framework could be used both as a crisis management tool to help inform decisions on capital/liquidity infusions in the context of resolutions and precautionary recapitalisations or as a crisis prevention tool to help calibrate capital buffer requirements to address systemic risks due to interconnectedness. JEL Classification: C61, D85, G01, G18, G21, G28, L14
    Keywords: contagion, fire sales, interbank networks, macroprudential policy, optimal control, stress testing
    Date: 2021–05
  6. By: Repullo, Rafael
    Abstract: This paper reviews the analysis in Brunnermeier and Koby (2018), showing that lower monetary policy rates can only lead to lower bank lending if there is a binding capital constraint and the bank is a net investor in debt securities, a condition typically satisfied by high deposit banks. It next notes that BK's capital constraint features the future value of the bank's capital, not the current value as in standard regulation. Then, it sets up an alternative model with a standard capital requirement in which profitability matters because bank capital is endogenously provided by shareholders, showing that in this model there is no reversal rate.
    Keywords: bank market power; Bank profitability; Capital requirements; monetary policy; Negative Interest Rates; reversal rate
    JEL: E52 G21 L13
    Date: 2020–10
  7. By: Altavilla, Carlo; Barbiero, Francesca; Boucinha, Miguel; Burlon, Lorenzo
    Abstract: This study analyses the policy measures taken in the euro area in response to the outbreak and the escalating diffusion of new coronavirus (COVID-19) pandemic. We focus on monetary, microprudential and macroprudential policies designed specifically to support bank lending conditions. For identification, we use proprietary data on participation in central bank liquidity operations, high-frequency reactions to monetary policy announcements, and confidential supervisory information on bank capital requirements. The results show that in the absence of the funding cost relief and capital relief associated with the pandemic response measures, banks' ability to supply credit would have been severely affected. The results also indicate that the coordinated intervention by monetary and prudential authorities amplified the effects of the individual measures in supporting liquidity conditions and helping to sustain the flow of credit to the private sector. Finally, we investigate the potential real effects of the joint pandemic response measures by estimating the adjustment in labour input variables for firms that in the past have been more exposed to similar policies. We find that, in absence of monetary and prudential policies, the pandemic would lead to a significantly larger decline in firms' employment.
    Keywords: bank lending; COVID-19 crisis; monetary policy; Prudential policy
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2020–09
  8. By: Peydró, José Luis; Rodriguez Tous, Francesc; Tripathy, Jagdish; Uluc, Arzu
    Abstract: Macroprudential regulators worldwide have introduced regulations to limit household leverage in light of existing evidence which suggests that high leverage is associated with household distress during crisis. We analyse the distributional effects of such a macroprudential policy on mortgage and house price cycles. For identification, we exploit the universe of UK mortgages and a 15%-limit imposed in 2014 on lenders-not households-for high loan-to-income ratio (LTI) mortgages. Despite some regulatory arbitrage (e.g. increases in LTV and average loan size), more-constrained lenders issue fewer high-LTI mortgages. Partial substitution by less-constrained lenders leads to overall credit contraction to low-income borrowers in local-areas more exposed to constrained-lenders, lowering house price growth. Following the Brexit referendum (which led to house-price correction), the 2014-policy strongly implies-via lower pre-correction debt-better house prices and mortgage defaults during an episode of house price correction.
    Keywords: Credit cycles; House Prices; inequality; macroprudential policy; Mortgages
    JEL: E5 G01 G21 G28 G51
    Date: 2020–09
  9. By: Akinci, Ozge; Benigno, Gianluca; Del Negro, Marco; Queralto, Albert
    Abstract: We introduce the concept of financial stability real interest rate using a macroeconomic banking model with an occasionally binding financing constraint as in Gertler and Kiyotaki (2010). The financial stability interest rate, r**, is the threshold interest rate that triggers the constraint being binding. Increasing imbalances in the financial sector measured by an increase in leverage are accompanied by a lower threshold that could trigger financial instability events. We also construct a theoretical implied financial condition index and show how it is related to the gap between the natural and financial stability interest rates.
    Keywords: Financial Amplification; financial crises; Occasionally Binding Credit Constraint; R**
    JEL: E41 F3 G01
    Date: 2020–11
  10. By: Morais, Bernardo; Ormazabal, Gaizka; Peydró, José Luis; Roa, Monica; Sarmiento, Miguel
    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.
    Keywords: bank risk-taking; corporate real and credit supply effects of accounting; ECL; IFRS9; loan provisions
    JEL: E31 G18 G21 G28
    Date: 2020–09
  11. By: Papoutsi, Melina
    Abstract: This paper presents evidence that personal relationships between corporate borrowers and bank loan officers improve the outcomes of loan renegotiation. Analysing a bank reorganization in Greece in the mid-2010s, I find that firms that experience an exogenous interruption in their loan officer relationship confront three consequences: one, the firms are less likely to renegotiate their loans; two, conditional on renegotiation, the firms are given tougher loan terms; and three, the firms are more likely to alter their capital structure. These results point to the importance of lending relationships in mitigating the cost of distress for borrowers in loan renegotiations. JEL Classification: G21, L14, E44, E58, O16
    Keywords: bank branch closures, corporate credit, loan officers, loan renegotiation
    Date: 2021–05
  12. By: Cornelli, Giulio; Frost, Jon; Gambacorta, Leonardo; Rau, Raghavendra; Wardrop, Robert; Ziegler, Tania
    Abstract: Fintech and big tech platforms have expanded their lending around the world. We estimate that the flow of these new forms of credit reached USD 223 billion and USD 572 billion in 2019, respectively. China, the United States and the United Kingdom are the largest markets for fintech credit. Big tech credit is growing fast in China, Japan, Korea, Southeast Asia and some countries in Africa and Latin America. Cross-country panel regressions show that such lending is more developed in countries with higher GDP per capita (at a declining rate), where banking sector mark-ups are higher and where banking regulation is less stringent. Fintech credit is larger where there are fewer bank branches per capita. We also find that fintech and big tech credit are more developed where the ease of doing business is greater, and investor protection disclosure and the efficiency of the judicial system are more advanced, the bank credit-to-deposit ratio is lower and where bond and equity markets are more developed. Overall, alternative credit seems to complement other forms of credit, rather than substitute for them.
    Keywords: big tech; credit; data; digital innovation; Fintech; technology
    JEL: E51 G23 O31
    Date: 2020–10
  13. By: Bedayo, Mikel; Jiménez, Gabriel; Peydró, José Luis; Vegas, Raquel
    Abstract: We show that loan origination time is key for bank lending standards, cycles, defaults and failures. We exploit the credit register from Spain, with the time of a loan application and its granting. When VIX is lower (booms), banks shorten loan origination time, especially to riskier firms. Bank incentives (capital and competition), capacity constraints, and borrower-lender information asymmetries are key mechanisms driving results. Moreover, shorter (loan-level) origination time is associated with higher ex-post defaults, also using variation from holidays. Finally, shorter precrisis origination time -more than other lending conditions- is associated with more bank-level failures in crises, consistent with lower screening.
    Keywords: bank failures; Credit cycles; Defaults; Lending standards; loan origination time; screening
    JEL: E44 E51 G01 G21 G28
    Date: 2020–11
  14. By: Durante, Ruben; Fabiani, Andrea; Peydró, José Luis
    Abstract: Do banks exploit lending relationships with media companies to promote favorable news coverage? To test this hypothesis we map the connections between banks and the top newspapers in several European countries and study how they affect news coverage of two important financial issues. First we look at bank earnings announcements and find that newspapers are significantly more likely to cover announcements by their lenders, relative to other banks, when they report profits than when they report losses. Such pro-lender bias applies to both general-interest and financial newspapers, and is stronger for newspapers and banks that are more financially vulnerable. Second, we look at a broader public interest issue: the Eurozone Sovereign Debt Crisis. We find that newspapers connected to banks more exposed to stressed sovereign bonds are more likely to promote a narrative of the crisis favorable to banks and to oppose debt-restructuring measures detrimental to creditors.
    Keywords: banks; Earnings reports; Eurobond crisis; media bias; newspapers
    JEL: G21 L82
    Date: 2020–09
  15. By: Barbone Gonzalez, Rodrigo; Blanco Barroso, João Barata R.; Peydró, José Luis; van Doornik, Bernardus
    Abstract: We show that countercyclical liquidity policy smooths credit supply cycles, with stronger crisis effects. For identification, we exploit the Brazilian supervisory credit register and liquidity policy changes on reserve requirements, that affected banks differentially and have a monetary and prudential purpose. Liquidity policy strongly attenuates both the credit crunch in bad times and high credit supply in booms. Strong economic effects are twice as large during the crisis easing than during the boom tightening. Finally, in crises, liquidity easing: increase less credit supply by more financially constrained banks; and collateral requirements increase substantially, especially by banks providing higher credit supply.
    Keywords: Credit cycles; liquidity; macroprudential and monetary policy; reserve requirements
    JEL: E51 E52 E58 G21 G28
    Date: 2020–09
  16. By: Böser, Florian; Gersbach, Hans
    Abstract: We examine how the introduction of an interest-bearing central bank digital currency (CBDC) impacts bank activities and monetary policy. Depositors can switch from bank deposits to CBDC as a safe medium of exchange at any time. As banks face digital runs, either because depositors have a preference for CBDC or fear bank insolvency, monetary policy can use collateral requirements (and default penalties) to initially increase bankers' monitoring incentives. This leads to higher aggregate productivity. However, the mass of households holding CBDC will increase over time, causing additional liquidity risk for banks. After a certain period, monetary policy with tight collateral requirements generating liquidity risk for banks and exposing bankers to default penalties would render banking non-viable and prompt the central bank to abandon such policies. Under these circumstances, bankers' monitoring incentives will revert to low levels. Accordingly, a CBDC can at best yield short-term welfare gains.
    Keywords: Central bank digital currency - Monetary policy - Banks - Deposits
    JEL: E42 E52 E58 G21 G28
    Date: 2020–09

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