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on Banking |
| By: | Elliott, David; Meisenzahl, Ralf; Peydró, José Luis; Turner, Bryce C. |
| Abstract: | We show that credit supply effects and associated real effects of monetary policy depend on the size of nonbank presence in the respective lending market. Nonbank presence also alters how monetary policy affects the distribution of risk. For identification, we use exhaustive loan-level data since the 1990s and Gertler-Karadi (2015) monetary policy shocks. First, different from the literature showing that low monetary policy rates increase credit supply and risk-taking by banks, we find that higher monetary policy rates shifts credit supply for corporates, mortgages, and consumers shifts from regulated banks to less regulated, more fragile nonbanks. Moreover, this shift is more pronounced for ex-ante riskier borrowers. Second, nonbanks reduce the effectiveness of the bank lending channel of monetary policy at the loan-level. However, this reduction varies substantially across lending markets. Total credit and real effects are largely neutralized in consumer loans and the associated consumption, but not in corporate loans and investment. |
| Keywords: | consumer loans; monetary policy; Mortgages; Nonbank lending; Shadow banks; syndicated loans |
| JEL: | E51 E52 G21 G23 G28 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14989&r= |
| By: | de Haas, Ralph; Lu, Liping; Ongena, Steven |
| Abstract: | We interview 379 European bank CEOs to identify their banks' main competitors. We then provide evidence on the drivers of bilateral bank competition, construct a novel competition measure at the locality level, and assess how well it explains variation in firms' credit constraints. We find that banks identify another bank as a main competitor in small-business lending when their branch networks overlap, when both are foreign owned or relationship oriented, or when the potential competitor has fewer hierarchical layers. Intense bilateral bank competition increases local credit constraints, especially for small firms, as competition may impede the formation of lending relationships. |
| Keywords: | Bilateral bank competition; credit constraints; multimarket contact |
| JEL: | D22 D40 F36 G21 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15015&r= |
| By: | Martinez Miera, David; Repullo, Rafael |
| Abstract: | This paper shows the relevance of market power to assess the effects of safe interest rates on financial intermediaries' risk-taking decisions. We consider an economy where (i) intermediaries have market power in granting loans, (ii) intermediaries monitor borrowers which lowers their probability of default, and (iii) monitoring is costly and unobservable which creates a moral hazard problem with uninsured depositors. We show that lower safe rates lead to lower intermediation margins and higher risk-taking when intermediaries have low market power, but the result reverses for high market power. We examine the robustness of this result to introducing non-monitored market finance, heterogeneity in monitoring costs, and entry and exit of intermediaries. We also consider the effect of replacing uninsured by insured deposits, market power in raising deposits, and funding with both deposits and capital. |
| Keywords: | Bank monitoring; bank risk-taking; Imperfect Competition; intermediation margins; monetary policy |
| JEL: | E52 G21 L13 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15063&r= |
| By: | Andreas Fuster; Tan Schelling; Pascal Towbin |
| Abstract: | As negative interest rates exert pressure on bank profitability, several central banks have introduced reserve tiering systems to lessen the burden. Reserve tiering means that banks are only charged the negative policy rate above a certain threshold of reserves. Altering the threshold affects bank profits and therefore has potential effects on the macroeconomy and financial stability. However, assessing these effects is challenging, because the introduction or modification of reserve tiers has usually been accompanied by other monetary policy actions, such as rate changes or quantitative easing measures. We are able to circumvent these issues by exploiting an unexpected decision by the Swiss National Bank in September 2019 to change the threshold calculation without taking any other policy actions. This change led to a large increase in overall exemptions, but with variation across banks. Using a difference-in-differences approach, we find that banks that experience a larger increase in their exemption threshold tend to raise their SNB sight deposit holdings, funded through more interbank borrowing and more customer deposits. The interbank market is important for the funding choice: banks with low collateral holdings (a proxy for market access) use less interbank borrowing and instead grow their customer deposits; they also pass on negative rates on a smaller share of their deposits. Effects on bank lending behavior are moderate; if anything, banks that benefit from a larger increase in the exemption threshold tend to charge higher spreads and take less risk. |
| Keywords: | Reserve tiering, negative interest rates, banking, risk-taking channel |
| JEL: | E52 G21 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2021-10&r= |
| By: | Acharya, Viral V.; Jager, Maximilian; Steffen, Sascha; Steinruecke, Lea |
| Abstract: | We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments "kicked the can down the road" by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank. |
| Keywords: | Bank Recapitalization; evergreening; fiscal constraints; Forbearance; political economy; sovereign debt crisis; zombie lending |
| JEL: | E44 G21 G28 G32 G34 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15009&r= |
| By: | Lapid , Ana Kristel (Asian Development Bank); Mercado, Jr. , Rogelio (Asian Development Bank); Rosenkranz, Peter (Asian Development Bank) |
| Abstract: | Cross-border bank positions in Asia and the Pacific remain highly concentrated to few counterparties, exposing the region to financial risks and policy spillovers. Consequently, assessing the determinants and impacts of the region’s cross-border banking concentration is relevant to the design of appropriate policies for promoting financial development and safeguarding financial stability. To this end, we construct cross-border bank concentration measures for 47 economies in Asia and the Pacific from 2000 to 2019. The results show that higher openness of capital account and trade, as well as better per capita income, are significantly associated with lower cross-border bank concentration. Moreover, elevated cross-border bank concentration tends to lower domestic credit growth and nonperforming loans. We find no impact on bank profitability for the region. |
| Keywords: | Asia and the Pacific; bank profitability; credit growth; cross-border bank concentration; cross-border bank exposures; nonperforming loans |
| JEL: | E44 F36 G21 O16 |
| Date: | 2021–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0636&r= |
| By: | Cecilia Caglio; Adam Copeland; Antoine Martin |
| Abstract: | We use confidential and novel data to measure the benefit to broker-dealers of being affiliated with a bank holding company and the resulting access to internal sources of funding. We accomplish this by comparing the balance sheets of broker-dealers that are associated with bank holding companies to those that are not and we find that the latter dramatically re-structured their balance sheets during the 2007-09 financial crisis, pivoting away from trading illiquid assets and toward more liquid government securities. Specifically, we estimate that broker-dealers that are not associated with bank holding companies both increased repo as a share of total assets by 10 percentage points and also increased the share of long inventory devoted to government securities by 15 percentage points, relative to broker-dealers associated with bank holding companies. |
| Keywords: | broker-dealers; shadow banking; liquidity risk; repo market |
| JEL: | G2 G21 G23 |
| Date: | 2021–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:92032&r= |
| By: | Monnet, Eric; Vari, Miklos |
| Abstract: | History suggests a conflict between current Basel III liquidity ratios and monetary policy, which we call the liquidity regulation dilemma. Although forgotten, liquidity ratios, named "securities-reserve requirements", were widely used historically, but for monetary policy (not regulatory) reasons, as central bankers recognized the contractionary effects of these ratios. We build a model rationalizing historical policies: a tighter ratio reduces the quantity of assets that banks can pledge as collateral, thus increasing interest rates. Tighter liquidity regulation paradoxically increases the need for central bank's interventions. Liquidity ratios were also used to keep yields on government bonds low when monetary policy tightened |
| Keywords: | Basel III; central bank history; Liquidity coverage ratio (LCR); liquidity ratios; Monetary policy implementation; reserve requirements |
| JEL: | E43 E52 E58 G28 N10 N20 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15001&r= |
| By: | Bubeck, Johannes; Maddaloni, Angela; Peydró, José Luis |
| Abstract: | We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans. |
| Keywords: | banks; negative rates; Non-Standard Monetary Policy; reach-for-yield; securities |
| JEL: | E43 E52 E58 G01 G21 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14988&r= |
| By: | Andrew F. Haughwout; Donghoon Lee; Joelle Scally; Wilbert Van der Klaauw |
| Abstract: | As we discussed in our previous post, millions of mortgage borrowers have entered forbearance since the beginning of the pandemic, and more than 2 million remain in a program as of March 2021. In this post, we use our Consumer Credit Panel (CCP) data to examine borrower behavior while in forbearance. The credit bureau data are ideal for this purpose because they allow us to follow borrowers over time, and to connect developments on the mortgage with those on other credit products. We find that forbearance results in reduced mortgage delinquencies and is associated with increased paydown of other debts, suggesting that these programs have significantly improved the financial positions of the borrowers who received them. |
| Keywords: | mortgage forbearance; credit cards |
| JEL: | D14 |
| Date: | 2021–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:91819&r= |
| By: | Hendershott, Terrence; Li, Dan; Livdan, Dmitry; Schürhoff, Norman |
| Abstract: | Traditional liquidity measures can provide a false impression of the liquidity and stability of financial market trading. Using data on auctions (bids wanted in competition; BWICs) from the collateralized loan obligation (CLO) market, we show that a standard measure of liquidity, the effective bid-ask spread, dramatically underestimates the true cost of immediacy because it does not account for failed attempts to trade. The true cost of immediacy is substantially higher than the observed costs for successful BWICs. This cost gap is higher in lower-rated CLOs and stressful market conditions when failure rates exceed 50%. Across our 2012-2020 sample period for trades in senior CLOs, the observed cost is four basis points (bps) while the true cost of immediacy is 13bps. In stressful periods, such as the COVID-19 pandemic, for junior tranches the observed cost of trading increases from an average of 12bps to 25bps while the true cost of immediacy increases from less than 3% to almost 15%. |
| Keywords: | bids-wanted-in-competition; Collateralized loan obligations; financial fragility; liquidity; Over-the-counter markets |
| JEL: | G12 G14 G24 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15205&r= |
| By: | Andreas Fuster; Aurel Hizmo; Lauren Lambie-Hanson; James Vickery; Paul S. Willen |
| Abstract: | We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on “plain-vanilla” conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment. |
| Keywords: | mortgage; credit; financial intermediation; fintech; COVID-19 |
| JEL: | G21 G23 G28 |
| Date: | 2021–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:91746&r= |
| By: | Jessica Lu; Wilbert Van der Klaauw |
| Abstract: | It is common during recessions to observe significant slowdowns in credit flows to consumers. It is more difficult to establish how much of these declines are the consequence of a decrease in credit demand versus a tightening in supply. In this post, we draw on survey data to examine how consumer credit demand and supply have changed since the start of the COVID-19 pandemic. The evidence reveals a clear initial decline and recent rebound in consumer credit demand. We also observe a modest but persistent tightening in credit supply during the pandemic, especially for credit cards. Mortgage refinance applications are the main exception to this general pattern, showing a steep increase in demand and some easing in availability. Despite tightened standards, we find no evidence of a meaningful increase in unmet credit need. |
| Keywords: | credit demand; credit access; pandemic; COVID-19 |
| JEL: | D14 |
| Date: | 2021–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:91822&r= |
| By: | Lee, Seungcheol; Luetticke, Ralph; Ravn, Morten O |
| Abstract: | We examine the impact of frictional financial intermediation in a HANK model. An incentive problem restricts banking sector leverage and gives rise to an equilibrium spread between the returns on savings and debt. The size of this spread impacts on the wealth distribution and movements in it subject borrowers and savers to different intertemporal prices. The model generates a financial accelerator that is larger than in a representative agent setting, derives mainly from consumption rather than investment, and works through a countercyclical interest rate spread. Credit policy can mute this mechanism while stricter regulation of banking sector leverage inhibits households' ability to smooth consumption in response to idiosyncratic risk. Thus, although leverage restrictions stabilize at the aggregate level, we find substantial welfare costs. |
| Keywords: | business cycles; Financial Frictions; incomplete markets; macroprudential policy; monetary policy |
| JEL: | C11 D31 E32 E63 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15133&r= |