nep-ban New Economics Papers
on Banking
Issue of 2021‒06‒14
twenty-six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Capital Buffers in a Quantitative Model of Banking Industry Dynamics By Dean Corbae; Pablo D'Erasmo
  2. In the Shadow of Banks: Wealth Management Products and Issuing Banks' Risks in China By Acharya, Viral V.; Qian, Jun; Su, Yang; Yang, Zhishu
  3. Banks fearing the drought? Liquidity hoarding as a response to idiosyncratic interbank funding dry-ups By Littke, Helge; Ossandon Busch, Matias
  4. The Impact of Alternative Forms of Bank Consolidation on Credit Supply and Financial Stability By Mayordomo, Sergio; Pavanini, Nicola; Tarantino, Emanuele
  5. The Hidden Costs of Strategic Opacity By Babus, Ana; Farboodi, Maryam
  6. Sorting Out the Real Effects of Credit Supply By Briana Chang; Matthieu Gomez; Harrison Hong
  7. Piercing Through Opacity: Relationships and Credit Card Lending to Consumers and Small Businesses During Normal Times and the COVID-19 Crisis By Allen N. Berger; Christa H. S. Bouwman; Lars Norden; Raluca A. Roman; Gregory F. Udell; Teng Wang
  8. Measure for measure: evidence on the relative performance of regulatory requirements for small and large banks By Sanders, Austen; Willison, Matthew
  9. Income inequality, mortgage debt and house prices By Kösem, Sevim
  10. Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy By Andrea Fabiani; Martha López; José-Luis Peydró; Paul E. Soto
  11. Operational Risk Capital By Conlon, Thomas; Huan, Xing; Ongena, Steven
  12. The risk of being a fallen angel and the corporate dash for cash in the midst of COVID By Acharya, Viral V.; Steffen, Sascha
  13. The economics of deferral and clawback requirements By Hoffmann, Florian; Inderst, Roman; Opp, Marcus M.
  14. Income inequality, financial intermediation, and small firms By Sebastian Doerr; Thomas Drechsel; Donggyu Lee
  15. On the effectiveness of macroprudential policy By Ampudia, Miguel; Lo Duca, Marco; Farkas, Mátyás; Perez-Quiros, Gabriel; Pirovano, Mara; Rünstler, Gerhard; Tereanu, Eugen
  16. Contagious zombies By Bittner, Christian; Fecht, Falko; Georg, Co-Pierre
  17. Should card data storage with merchants, payment aggregators and payment gateways be prohibited? By Renuka Sane; Ajay Shah; Bhargavi Zaveri
  18. How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic By Andreas Fuster; Aurel Hizmo; Lauren Lambie-Hanson; James Vickery; Paul S. Willen
  19. Bank-Intermediated Arbitrage By Boyarchenko, Nina; Eisenbach, Thomas; Gupta, Pooja; Shachar, Or; Van Tassel, Peter
  20. Financial Reforms and Innovation: A Micro-Macro Perspective By Spyridon Boikos; Ioannis Bournakis; Dimitris Christopoulos; Peter McAdam
  21. Paying Too Much? Price Dispersion in the US Mortgage Market By Bhutta, Neil; Fuster, Andreas; Hizmo, Aurel
  22. Emerging Economies' Vulnerability to Changes in Capital Flows: The Role of Global and Local Factors By Yoshihiko Norimasa; Kazuki Ueda; Tomohiro Watanabe
  23. On Bank Pricing of Single-family Residential Home Loans: Are Australian Households Paying Too Much?​ By James D. Shilling; Piyush Tiwari
  24. Assessing the Economy-wide Impacts of Strengthened Bank Capital Requirements in Indonesia using a Financial Computable General Equilibrium Model By Arief Rasyid; Jason Nassios; Elizabeth L Roos; James Giesecke
  25. Financial deepening, Stock market, Inequality and Poverty: Some African Evidence By Jelson Serafim
  26. Determinants of Non-Performing Loans in Greece: the intricate role of fiscal expansion By Maria Karadima; Helen Louri

  1. By: Dean Corbae; Pablo D'Erasmo
    Abstract: We develop a model of banking industry dynamics to study the quantitative impact of regulatory policies on bank risk taking and market structure. Since our model is matched to U.S. data, we propose a market structure where big banks with market power interact with small, competitive fringe banks as well as non-bank lenders. Banks face idiosyncratic funding shocks in addition to aggregate shocks which affect the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of capital. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We find that regulatory policies can have an important impact on banking market structure, which, along with selection effects, can generate changes in allocative efficiency and stability.
    Keywords: Macroprudential policy; Bank size distribution; Industry dynamics with imperfect competition
    JEL: E44 G21 L11
    Date: 2021–05–26
  2. By: Acharya, Viral V.; Qian, Jun; Su, Yang; Yang, Zhishu
    Abstract: We study the rise and risks in bank issuance of Wealth Management Products (WMPs), which are off-balance-sheet substitutes for deposits without the regulatory interest rate ceilings and constitute the largest shadow banking segment in China. We show that competition for deposits has a causal effect on the WMP issuance of small and medium sized banks (SMBs), where we instrument deposit competition by SMBs' geographical exposure to the large (Big Four) banks. The Big Four banks substantially increased their loan supply to support the RMB 4 trillion stimulus initiated in response to the global financial crisis, and thereafter grew more aggressive in the deposit markets in order to stay below the regulatory ceiling on the loan-to-deposit ratio. In response, SMBs issued more WMPs and more frequently, besides also establishing fewer branches in cities with greater competition from the Big Four banks. We find that this growth of WMPs imposed rollover risks for all the bank issuers, as reflected in higher yields on new WMPs, higher borrowing rates in the inter-bank market, and adverse stock market performance of WMP-issuing banks on days with heightened rollover risks.
    Keywords: deposit competition; financial fragility; regulatory arbitrage; Rollover Risk; shadow banking
    JEL: E4 G2 L2
    Date: 2020–06
  3. By: Littke, Helge; Ossandon Busch, Matias
    Abstract: We investigate whether idiosyncratic interbank funding shocks affecting a bank headquarters can trigger a liquidity hoarding reaction by their regional branches. Shock-affected branches of Brazilian banks increase liquid assets and cut lending in the shocks' aftermath compared to non-affected branches within the same municipality, even in absence of a market-wide freeze. These effects increase in branches' reliance on internal funding and vary depending on banks' access to central bank emergency liquidity. Our findings suggest that the geographical fragmentation of branches' funding limits their ability to offset idiosyncratic funding shocks.
    Keywords: Interbank funding,Internal capital markets,Financial market structure,Liquidity risk,Central bank interventions
    JEL: G01 G11 G21
    Date: 2021
  4. By: Mayordomo, Sergio; Pavanini, Nicola; Tarantino, Emanuele
    Abstract: Between 2009 and 2011, the Spanish banking system underwent a restructuring process based on consolidation of savings banks. The program's design allows us to study how alternative forms of consolidation affect credit supply and financial stability. We show that banks consolidating via mergers or business groups are ex-ante comparable in terms of local market's overlap, financial and economic characteristics. We find that, relative to business groups, the market power of merged banks produces a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans. To determine the welfare effects of consolidation, we estimate a structural model of credit demand and supply. In our framework, banks compete on interest rates and can ration borrowers. We also allow borrower surplus to depend on banks' survival. Through counterfactuals, we quantify cost efficiencies and improvements in financial stability that consolidation should deliver to outweigh welfare losses from reduced credit supply.
    Date: 2020–07
  5. By: Babus, Ana; Farboodi, Maryam
    Abstract: We explore a model in which banks strategically hold interconnected and opaque portfolios, despite increasing the likelihood they are subject to financial crises. In our framework, banks choose their degree of exposure to other banks to influence how investors can use their information. In equilibrium banks choose portfolios which are neither fully opaque, nor fully transparent. However, their portfolios are excessively interconnected to obfuscate investor information. Banks can create a degree of opacity that decreases welfare, and makes bank crises more likely. Our model is suggestive about the implications of asset securitization, as well as government bailouts.
    Keywords: banking crises; interdependent portfolios; opacity
    JEL: D43 D82 G14 G21
    Date: 2020–07
  6. By: Briana Chang; Matthieu Gomez; Harrison Hong
    Abstract: We document that banks which cut lending more during the Great Recession were lending to riskier firms. To explain this evidence, we build a competitive matching model of bank-firm relationships in which risky firms borrow from banks with low holding costs. Based on default probabilities and equilibrium loan rates, we use our sorting model to recover the latent bank holding cost distribution. The measure of banks with low holding costs dropped during the Great Recession. This credit supply shift conservatively accounted for around 50% of the decline in corporate loans over this period. Our attribution cannot be captured by panel regression estimates from the bank lending channel literature.
    JEL: G0 G01 G2 G23
    Date: 2021–05
  7. By: Allen N. Berger; Christa H. S. Bouwman; Lars Norden; Raluca A. Roman; Gregory F. Udell; Teng Wang
    Abstract: We investigate bank relationships in a rarely considered context – consumer and small business credit cards. Using over one million accounts, we find during normal times, consumer relationship customers enjoy relatively favorable credit terms, consistent with the bright side of relationships, while the dark side dominates for small businesses. During the COVID-19 crisis, both groups benefit, reflecting intertemporal smoothing, with more benefits flowing to safer relationship customers. Conventional banking relationships benefit consumers more than credit card relationships, with mixed findings for small businesses. Important identification issues are addressed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act consumer-delinquency reporting impediments reduce the informational value of consumer credit scores, penalizing safer borrowers.
    Keywords: Credit cards; household finance; consumers; small businesses; relationship lending; banks
    JEL: D12 G01 G20 G28
    Date: 2021–05–27
  8. By: Sanders, Austen (Bank of England); Willison, Matthew (Bank of England)
    Abstract: This paper compares the performance of regulatory thresholds as predictors of distress for large banks with their performance for small banks. Using a data set of capital and liquidity ratios for a sample of UK‑focused banks in 2007, we apply simple threshold-based rules to assess how regulatory thresholds might have identified banks that subsequently became distressed. We compare results for large banks with results for small banks, optimising thresholds separately for the two groups. Our results suggest that the regulatory ratios we use are better aligned with risks which cause distress of large banks than with those which cause distress of small banks. We find that when thresholds are set to correctly identify a high proportion of banks which subsequently became distressed, they generate materially lower false alarm rates for large banks than for small. This result is robust to definitional choices and to resampling. We also test whether supervisors’ judgements about the quality of banks’ governance have predictive power with regard to distress. We find that adding supervisors’ judgements to regulatory ratios improves predictions for small banks but not for large banks.
    Keywords: Banking regulation; Basel III; bank failure; global financial crisis; regulatory complexity
    JEL: G01 G21 G28
    Date: 2021–05–28
  9. By: Kösem, Sevim (Bank of England)
    Abstract: This paper studies housing and credit market implications of increasing income inequality and discusses how a low interest rate environment can alter its consequences. I develop an analytical general equilibrium model with a novel borrower risk composition channel of income inequality. Following a rise in income inequality house prices and mortgage debt decline, and aggregate default risk increases. I then show that low real rates mitigate the depressing effect of inequality on house prices at the cost of amplifying the aggregate default risk. Using a panel of US states and instrumental variables approach, I verify the model’s predictions.
    Keywords: Income inequality; mortgage lending; mortgage default; house prices; real interest rates; risk taking; shift-share instruments
    JEL: D31 E44 E58 G21 R21
    Date: 2021–05–21
  10. By: Andrea Fabiani; Martha López; José-Luis Peydró; Paul E. Soto
    Abstract: We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels. **** RESUMEN: Estudiamos cómo los controles de capital y la política macroprudencial doméstica controlan el auge de la oferta de crédito, específicamente la deuda bancaria local y extranjera. Para lograr identificación, aprovechamos los datos del registro de crédito y los balances de los bancos, y la introducción simultánea de controles de capital en las entradas de deuda en moneda extranjera y un aumento de los requerimientos de reserva sobre los depósitos bancarios nacionales en Colombia durante un fuerte auge de crédito. Nuestros resultados sugieren que, en primer lugar, un aumento en la tasa de política monetaria local, que eleva la diferencial de la tasa de interés con Estados Unidos, permite que más bancos endeudados en moneda extranjera realicen operaciones con fondos cambiarios baratos con préstamos en pesos más caros, especialmente hacia empresas opacas y más riesgosas. Los controles de capitales gravan la deuda en moneda extranjera y rompen el carry trade. En segundo lugar, el aumento de los requerimientos de reserva sobre los depósitos internos reduce directamente la oferta de crédito, y más aún para las empresas opacas y más riesgosas, en lugar de mejorar la transmisión de las tasas monetarias sobre la oferta de crédito. Es importante destacar que diferentes bancos financian el crédito durante el auge con financiación nacional o extranjera. Por lo tanto, los controles de capital y la política macroprudencial interna mitigan de manera complementaria el auge y la asunción de riesgos asociada a través de dos canales distintos.
    Keywords: Capital controls, Macroprudential and monetary policy, Carry trade, Credit supply, Risk-taking, Controles de capital, políticas macroprudencial y monetaria, Carry trade, oferta de crédito, toma de riesgo
    JEL: E52 E58 F34 F38 G21 G28
    Date: 2021–06
  11. By: Conlon, Thomas; Huan, Xing; Ongena, Steven
    Abstract: We study the response of banks to the introduction of a new capital requirement relating to operational risk. To isolate the effect of this new regulation on realized operational risk losses, we take advantage of the partial US implementation relative to full European adoption. Operational risk losses are reduced in treated banks. The extent of loss reduction depends upon the measurement approach used to calibrate operational risk capital requirements. Banks with low institutional ownership and those without binding regulatory capital constraints also present significant loss reduction. We link these findings to incentives for improved risk management and governance post treatment.
    Keywords: Bank Regulation; Basel II; Measurement Approach; Monitoring; Operational Risk
    JEL: G21 G32
    Date: 2020–07
  12. By: Acharya, Viral V.; Steffen, Sascha
    Abstract: Data on firm-loan-level daily credit line drawdowns in the United States reveals a corporate "dash for cash" induced by COVID-19. In the first phase of extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase following the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings.
    Keywords: Bank lines of credit; cash holdings; liquidity; liquidity risk; Pandemic
    JEL: G01 G14 G32 G35
    Date: 2020–07
  13. By: Hoffmann, Florian; Inderst, Roman; Opp, Marcus M.
    Abstract: We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting (incentive) compensation of material risk-takers in the financial sector. Moderate deferral requirements have a robustly positive effect on equilibrium risk-management effort only if the bank manager's outside option is sufficiently high, else, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. We characterize when regulators should not impose any deferral regulation at all, when it can achieve second-best welfare, when additional clawback requirements are of value, and highlight the interaction with capital regulation.
    Keywords: bonus deferral; clawbacks; compensation regulation; moral hazard; principal-agent models with externalities; Short-termism
    JEL: D86 G21 G28
    Date: 2020–07
  14. By: Sebastian Doerr; Thomas Drechsel; Donggyu Lee
    Abstract: This paper shows that rising income inequality reduces job creation at small firms. High-income households save relatively less in the form of bank deposits while small firms depend on banks. We argue that a higher share of income accruing to top earners therefore erodes banks' deposit base and their lending capacity for small businesses, thus reducing job creation. Exploiting variation in top incomes across US states and an instrumental variable strategy, we establish that a 10 percentage point (pp) increase in income share of the top 10% reduces the net job creation rate of small firms by 1.5–2 pp, relative to large firms. The effects are stronger at smaller firms and in bank-dependent industries. Rising top incomes also reduce bank deposits and increase deposit rates, in line with a reduction in the supply of household deposits. We then build a general equilibrium model with heterogeneous households that face a portfolio choice between high-return investments and low-return deposits that insure against liquidity risk. Banks use deposits to lend to firms of different sizes subject to information frictions. We study job creation across firm sizes under counterfactual income distributions.
    Keywords: income inequality, job creation, small businesses, bank lending, household heterogeneity, financial frictions
    JEL: D22 D31 G21 L25
    Date: 2021–05
  15. By: Ampudia, Miguel; Lo Duca, Marco; Farkas, Mátyás; Perez-Quiros, Gabriel; Pirovano, Mara; Rünstler, Gerhard; Tereanu, Eugen
    Abstract: Since the global financial crises, many countries have implemented macroprudential policies with the aim to render the financial system more resilient to shocks and limit the procyclicality of the financial system. We present theoretical and empirical evidence on the effectiveness of macroprudential policy, on both, financial stability and economic growth focussing on capital measures and borrower-based measures. JEL Classification: G21
    Keywords: bank capital, borrowers, financial stability, macroprudential policy
    Date: 2021–05
  16. By: Bittner, Christian; Fecht, Falko; Georg, Co-Pierre
    Abstract: Does banks' zombie lending induced by unconventional monetary policy also allow zombie firms to leverage their trade credit borrowing? We first provide evidence suggesting that - even in Germany - particularly weak banks used the European Central Bank's very long-term refinancing operations (VLTROs) to evergreen exposures to zombie firms, which in turn elevated credit risk. Second, we show that zombie firms, which obtained additional funding from banks relying to a larger extent on VLTRO funding, also increased their accounts payable and advance payments received from downstream and upstream firms. And third, zombie firms that obtained further bank funding and such trade credit after the VLTROs had an elevated expected default probability even compared to average zombie firms. This suggests that suppliers relying on banks' lending decisions as a signal about borrowers' credit quality might be misled by banks' zombie lending to extend more trade credit to zombie firms exposing suppliers to elevated contagion risk.
    Keywords: unconventional monetary policy,zombie lending,trade credit
    JEL: G1 G20 E58
    Date: 2021
  17. By: Renuka Sane (NIPFP); Ajay Shah (xKDR Forum and Jindal Global University); Bhargavi Zaveri (xKDR Forum)
    Abstract: In March 2020, the Reserve Bank of India's guidelines on Payment Aggregators and Payment Gateways prohibited merchants from storing data on cards used by customers. This paper argues that a total prohibition on card data storage is problematic as it affects the ease of transactions for consumers, and effectively tilts consumer preference towards other payment instruments. This runs the risk of technological choices in the industry being made or substantially shaped by the regulator. The documents released lack a cost-benefit analysis of this prohibition and do not demonstrate that the chosen intervention is the best one. This raises concerns in the light of emerging Indian jurisprudence on the standards of regulatory governance to be met by statutory regulatory agencies. We show alternative approaches to address concerns relating data breaches of card information stored by consumers on websites. These include better security standards, tokenisation, and liability frameworks.
    JEL: H83 K22 K23
    Date: 2021–05
  18. 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 “plainvanilla” 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: 2021–05–27
  19. By: Boyarchenko, Nina; Eisenbach, Thomas; Gupta, Pooja; Shachar, Or; Van Tassel, Peter
    Abstract: We argue that post-crisis banking regulations pass through from regulated institutions to unregulated arbitrageurs. We document that, once post-crisis regulations bind post 2014, hedge funds use a larger number of prime brokers, diversify away from G-SIB affiliated prime brokers, and that the match to such prime brokers is more fragile. Tighter regulatory constraints disincentivize regulated institutions not only to engage in arbitrage activity themselves but also to provide leverage to other arbitrageurs. Indeed, we show that the maximum leverage allowed and the implied return on basis trades is considerably lower under post-crisis regulation, in spite of persistently wider spreads.
    Date: 2020–07
  20. By: Spyridon Boikos (Department of Economics, University of Macedonia); Ioannis Bournakis (Middlesex University and American University in Cairo,); Dimitris Christopoulos (Department of International and European Economic Studies, Athens University of Economics and Business); Peter McAdam (European Central Bank and UC Berkeley)
    Abstract: We develop a horizontal R&D growth model that allows us to investigate the different channels through which financial reforms affect R&D investment and patent activity. First, a “micro” reformthat abolishes barriers to entry in the banking sector produces a straightforward result: a decrease in lending rates which stimulates R&D investment and economic growth. Second, a “macro” reform that removes restrictions on banks’ reserves and credit controls. While this reform increases liquidity, it also increases the risk of default, potentially raising the cost of borrowing. This we dub the “reserves paradox” – this makes banks offset the rise in the default rate with a higher spread between loans and deposit rates. Thus our model suggests that whilst micro reforms boost innovation, macro reforms may appear negative. We test and find empirical support for these propositions using a sample of 21 OECD countries.
    Keywords: Finance; Growth; Patents; Monitoring; Reserves Paradox; Estimation.Conventional DEA Efficiency.
    JEL: G2 C23 E44 O43
    Date: 2021–06
  21. By: Bhutta, Neil; Fuster, Andreas; Hizmo, Aurel
    Abstract: We document wide dispersion in the mortgage rates that households pay on identical loans, and show that borrowers' financial sophistication is an important determinant of the rates obtained. We estimate a gap between the 10th and 90th percentile mortgage rate that borrowers with the same characteristics obtain for identical loans, in the same market, on the same day, of 54 basis points--equivalent to about $6,500 in upfront costs (points) for the average loan. Time-invariant lender attributes explain little of this rate dispersion, and considerable dispersion remains even within loan officer. Comparing the rates borrowers obtain to the real-time distribution of rates that lenders could offer for the same loan and borrower type, we find that borrowers who are likely to be the least financially savvy tend to substantially overpay relative to the rates available in the market. In the time series, the average overpayment decreases when overall market interest rates rise, suggesting that a rising level of borrowing costs encourages more search and negotiation. Furthermore, new survey data provide direct evidence that fiancial knowledge and shopping both affect the mortgage rates borrowers get, and that shopping activity increases with the level of market rates.
    Keywords: financial literacy; household finance; mortgage market; price dispersion
    JEL: E43 G21 G51 G53
    Date: 2020–06
  22. By: Yoshihiko Norimasa (Bank of Japan); Kazuki Ueda (Bank of Japan); Tomohiro Watanabe (Nippon Life Insurance Company)
    Abstract: This study uses panel quantile regression to examine the risk of capital outflows in times of stress (capital flows-at-risk, CFaR) for 16 emerging economies. Our analysis shows that changes in financial conditions in advanced economies and in the monetary policy stance of the United States affect the risk of large capital outflows for some countries. In particular, we find that tighter financial conditions in advanced economies during a phase when the U.S. monetary policy stance is changing significantly affect emerging economies' CFaR. Further, using government debt as a measure of emerging economies' structural vulnerability, we find that an increase in government debt substantially raises the risk of capital outflows in times of stress. Moreover, while in the case of debt investment, CFaR tend to be greater the higher the level of government debt, in the case of other investment (consisting mainly of bank lending), CFaR tend to increase when financial conditions in advanced economies deteriorate.
    Keywords: Risk of Capital Outflows (CFaR: Capital Flows-at-Risk); Global Factors; Local Factors; Panel Quantile Regression; Relative Entropy
    JEL: E52 F32 F34 F37
    Date: 2021–05–26
  23. By: James D. Shilling (DePaul University); Piyush Tiwari (University of Melbourne)
    Abstract: This paper focuses on understanding the observed differences in interest rates on single-family residential mortgages during September 2008 to December 2017. Exploiting the conceptual difference in risks associated with fixed rate and variable rate mortgages for lenders, we construct a synthetic variable rate. Synthetic variables are obtained from 3-year fixed rates by adjusting them for interest rate risks premium and call options that are embedded in fixed rates. Estimated error correction model for the difference between actual and synthetic mortgage rate reveals that the unbiasedness hypothesis is rejected and that the lenders in pricing actual variable rates have attached a risk premia of 90 to 150 basis points over synthetic rates. This requires further investigation into institutional arrangements, market structures, underwriting and lending practices of banks as these remain unexplained.
    Keywords: mortgage rate differences, swaps, swaptions, errors-in-variables
    JEL: G21
    Date: 2021–05–24
  24. By: Arief Rasyid; Jason Nassios; Elizabeth L Roos; James Giesecke
    Abstract: After the 2008 global financial crisis, authorities across the globe stressed the importance of equity capital to absorb losses. While many countries have raised bank capital adequacy requirements (CARs), the comprehensive impact assessment of this policy for emerging economies remains largely unexplored. We use a financial computable general equilibrium (FCGE) model of Indonesia called AMELIA-F to investigate the economy-wide impact of a 100 basis points increase in the CAR of Indonesian banks. We find that this causes small negative consequences on the economy. Bank balance sheets contract as they move away from holding riskier assets. This reduces investment in both non-housing and housing sectors, as equity financing raises banks weighted average costs of capital (WACC). The fall in real investment decreases foreign financing needs.
    Keywords: Financial CGE model weighted average cost of capital capital adequacy ratio macro prudential policy Indonesia
    JEL: C68 D58 E17 E44 G21
    Date: 2021–05
  25. By: Jelson Serafim
    Abstract: This study provides evidence for the relationship between private credit, stock market indicators, income inequality, and poverty. Using the annual data that ranges from 1992 to 2018 on 9 African economies. We had applied the estimation method of the Autoregressive Distributed Lag Model (ARDL) to model the long-run effect. Besides, we use Dumitrescu and Hurlin Panel causality to test for checking the direction of causality. The results of long-run estimates indicate that the stock market indicators have a significant positive impact on income inequalities, but have a negative and significant impact on poverty. Further, our findings show that private credit adversely reduces income inequalities. Our results also establish significant short-run causalities among stock market indicators, private credit, income inequalities, and Poverty.
    Keywords: Private Credit, Stock market, income inequality, poverty.
    JEL: G10 G20 I30
    Date: 2021–05
  26. By: Maria Karadima; Helen Louri
    Abstract: Following the financial and debt crises in the euro area and the delays in formulating a cohesive policy response, Greek banks faced serious problems with the increase in non-performing loans (NPLs) being the most threatening. In this study, we attempt to empirically investigate the determinants of NPLs in the Greek banking sector, using quarterly aggregate data for the period 2003Q1-2020Q2 and the autoregressive distributed lag (ARDL) bounds testing approach. We find that NPLs are determined mostly by factors related to macroeconomic conditions in Greece during the period under investigation, rather than by bank-related factors. Of particular interest is the case of government debt, which is found to exert a significant and positive long-term impact on NPLs irrespective of some short-term dynamics that appear to provide a temporary relief. The fiscal balance is also found to exert a negative long-term effect, justifying the quest for surpluses post-crisis. As debt accumulation is a policy followed by most countries in order to stabilize economies hit by the COVID-19 crisis, its long-term effects on the financial system should be taken into account and institutional measures introduced to face the new risk.
    Keywords: Greece, Non-performing loans, fiscal expansion, ARDL, Bounds testing
    Date: 2021–06

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.