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on Banking |
| By: | Gounopoulos, Dimitrios; Luo, Kaisheng; Nicolae, Anamaria; Paltalidis, Nikos |
| Abstract: | How banks managed the COVID-19 pandemic shock? The eruption of the financial crisis in 2007 evolved to a crisis of banks as liquidity providers (Acharya and Mora, 2015). The COVID-19 pandemic shock was associated with a surge in households’ deposits and a subsequent liquidity injection by the Federal Reserve. We show how the pandemic affected banks’ liquidity management and therefore by extension, the creation of new loans. We empirically evaluate the creation and management of banks’ liquidity through three well established mechanisms: market discipline (supply-side), internal capital markets (demand-side), and the balance-sheet mechanism which captures banks’ exposure to liquidity demand risk. We provide novel empirical evidence showing that households increased savings as a precaution against future declines in their income. Also, depositors did not discipline riskier banks, and the internal capital market mechanism was not in work during the pandemic. Hence, weakly-capitalized banks were not forced to offer higher deposit rates to stem deposit outflows. Furthermore, weakly-capitalized banks increased lending in the first phase of the pandemic, while in the midst of the pandemic, they cut back new lending origination and increased their exposure to Fed’s liquidity facilities. Well-capitalized banks on the other hand, increased lending in line with the increase in their deposits. Banks with higher exposure to liquidity risk were vulnerable to deposit outflows and increased their exposure in Fed’s liquidity facilities significantly more than low-commitments exposed banks. |
| Keywords: | Financial Institutions; Liquidity Risk; Bank Lending; COVID-19; Monetary Policy |
| JEL: | E51 E58 G21 |
| Date: | 2021–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108219&r= |
| By: | Barnett, William A.; Wang, Xue; Xu, Hai-Chuan; Zhou, Wei-Xing |
| Abstract: | We model hierarchical cascades of failures among banks linked through an interdependent network. The interaction among banks include not only direct cross-holding, but also indirect dependency by holding mutual assets outside the banking system. Using data extracted from the European Banking Authority, we present the interdependency network composed of 48 banks and 21 asset classes. Since interbank exposures are not public, we first reconstruct the asset/liability cross-holding network using the aggregated claims. For the robustness, we employ 3 reconstruction methods, called Anan, Hała and Maxe. Then we combine the external portfolio holdings of each bank to compute the interdependency matrix. The interdependency network is much more dense than the direct cross-holding network, showing the complex latent interaction among banks. Finally, we perform macroprudential stress tests for the European banking system, using the adverse scenario in EBA stress test as the initial shock. For different reconstructed networks, we illustrate the hierarchical cascades and show that the failure hierarchies are roughly the same except for a few banks, reflecting the overlapping portfolio holding accounts for the majority of defaults. Understanding the interdependency network and the hierarchy of the cascades should help to improve policy intervention and implement rescue strategy. |
| Keywords: | financial network, interdependent network, contagions, stress test, macroprudential |
| JEL: | D85 G01 G21 G32 G33 |
| Date: | 2021–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108421&r= |
| By: | López-Espinosa, Germán; Ormazabal, Gaizka; Sakasai, Yuki |
| Abstract: | This paper provides early evidence on the effect of global regulation mandating a switch from loan loss provisioning (LLP) based on incurred credit losses (ICL) to LLP based on expected credit losses (ECL). Using a sample of systemically important banks from 74 countries, we find that ECL provisions are more predictive of future bank risk than ICL provisions. To corroborate that the switch to ECL provisioning results in more information to assess bank risk, we analyze the market reaction to disclosures on the first-time impact of the accounting change; we find that a higher impact on loan loss allowances elicits lower stock returns, higher changes in CDS spreads, and higher changes in bid-ask spreads. Critically, these patterns are most pronounced when credit conditions deteriorate. Finally, we also find evidence that, as credit conditions worsen, the rule change induces an increase in provisions and a contraction of credit. Our study contributes to the debate on the effect of the ECL model on procyclicality, an especially pressing issue in the context of the current pandemic. |
| Keywords: | bank accounting; expected credit losses; loan loss provision |
| JEL: | G21 M41 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14803&r= |
| By: | William Barnett (Department of Economics, University of Kansas, USA); Xue Wang (Institute of Chinese Financial Studies, Southwestern University of Finance and Economics, Chengdu, China and Department of Economics, Emory University, USA); Hai-Chuan Xu (Department of Finance and Research Center for Econophysics, East China University of Science and Technology, Shanghai, China); Wei-Xing Zhou (Department of Finance and Research Center for Econophysics, East China University of Science and Technology, Shanghai, China) |
| Abstract: | We model hierarchical cascades of failures among banks linked through an interdependent network. The interaction among banks include not only direct cross-holding, but also indirect dependency by holding mutual assets outside the banking system. Using data extracted from the European Banking Authority, we present the interdependency network composed of 48 banks and 21 asset classes. Since interbank exposures are not public, we first reconstruct the asset/liability cross-holding network using the aggregated claims. For the robustness, we employ 3 reconstruction methods, called Anan, Hała and Maxe. Then we combine the external portfolio holdings of each bank to compute the interdependency matrix. The interdependency network is much more dense than the direct cross-holding network, showing the complex latent interaction among banks. Finally, we perform macro-prudential stress tests for the Euro- pean banking system, using the adverse scenario in EBA stress test as the initial shock. For different reconstructed networks, we illustrate the hierarchical cascades and show that the failure hierarchies are roughly the same except for a few banks, reflecting the overlapping portfolio holding accounts for the majority of defaults. Understanding the interdependency network and the hierarchy of the cascades should help to improve policy intervention and implement rescue strategy. |
| Keywords: | financial network, interdependent network, contagions, stress test, macro-prudential. |
| JEL: | G01 G21 G32 G33 D85 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:202113&r= |
| By: | Nuno Coimbra; Daisoon Kim; Hélène Rey |
| Abstract: | Before the 2008 crisis, the cross-sectional skewness of banks’ leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks’ risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability. |
| JEL: | E0 E5 F3 G01 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28907&r= |
| By: | Sriya Anbil; Mark A. Carlson; Mary-Frances Styczynski |
| Abstract: | We analyze whether the Federal Reserve's Paycheck Protection Program Liquidity Facility (PPPLF) was successful in bolstering the ability of commercial banks to provide credit to small businesses under the Small Business Administration's Paycheck Protection Program (PPP). Using an instrumental variables approach, we find a causal effect of the facility boosting PPP lending. On average, commercial banks that used the PPPLF extended over twice as many PPP loans, relative to their total assets, as banks that did not use the PPPLF. Our instrument is a measure of banks' familiarity with the operation of the Federal Reserve’s discount window; this measure is strongly related to both the propensity to sign up for and to utilize the PPPLF. Further, using a similar instrumental variables approach, we find evidence that the availability of the facility as a backstop source of funds may also have supported bank PPP lending, especially for larger banks. |
| Keywords: | COVID-19; PPP; PPPLF; Federal Reserve; Central bank lending |
| JEL: | E58 G21 H81 |
| Date: | 2021–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-30&r= |
| By: | Alyssa G. Anderson; Wenxin Du; Bernd Schlusche |
| Abstract: | We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions---in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision. |
| Keywords: | Money market mutual funds; Wholesale funding; Arbitrage |
| JEL: | G20 F30 E40 |
| Date: | 2021–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-32&r= |
| By: | Robert M. Adams; Kenneth P. Brevoort; John C. Driscoll |
| Abstract: | Has information technology improved small businesses' access to credit by hardening the information used in loan underwriting and reducing the importance of proximity to lenders? Previous research, pointing to increasing average lending distances, suggests that it has. But this conclusion can obscure differences across loans and lenders. Using over 20 years of Community Reinvestment Act data on small business lending, we find that while average distances have increased substantially, distances at individual banks remain unchanged. Instead, average distance has increased because a small group of lenders specializing in high-volume, small-loan lending nationwide have increased their share of small business lending by 10 percentage points. Our findings imply that small businesses continue to depend on local banks. |
| Keywords: | Banks; Credit Card; Small Business Lending |
| JEL: | R21 G21 G38 L25 |
| Date: | 2021–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-11&r= |
| By: | Luca Guerrieri; James Collin Harkrader |
| Abstract: | Focusing on some key metrics of bank performance, such as revenues and loan charge-off rates, we estimate the fraction of the observed variation in these metrics that can be attributed to changes in economic conditions. Macroeconomic factors can explain the preponderance of the fluctuations in charge-off rates. By contrast, bank-specific, idiosyncratic factors account for a sizable share of the variation in bank revenues. These results point to importance of bank-specific business models as a driver of performance. |
| Keywords: | Pre-provision net revenues; Backcasting; Banking factors; Charge-offs; Macroeconomic factors; Principal components |
| JEL: | E30 G21 |
| Date: | 2021–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-09&r= |
| By: | Gandré, Pauline; Mariathasan, Mike; Merrouche, Ouarda; Ongena, Steven |
| Abstract: | We investigate regulatory arbitrage during the G20's global derivatives market reform. We hand-collect comprehensive data on the staggered reform process and show that its progress is primarily driven by structural time-invariant factors. Following the reform banks shift up to 70 percent of their derivatives activity towards less regulated jurisdictions. This shift is driven by reform items â?? such as the promotion of central clearing â?? that are costly, but do not directly benefit them. Subsidiaries in jurisdictions with more regulatory progress shift into riskier portfolios. |
| Keywords: | Bank Regulation; Cross-border financial institutions; Derivatives; Financial risk; OTC markets; regulatory arbitrage |
| JEL: | G15 G18 G21 G23 G28 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14802&r= |
| By: | Konstantin Makrelov; Neryvia Pillay; Bojosi Morule |
| Abstract: | South Africa’s fiscal balances have deteriorated significantly over the last decade, while the economy has been recording disappointing economic growth rates even prior to the COVID-19 crisis. In this paper, we estimate a series of equations using the Arellano and Bond (1991) estimator to test how sovereign risk premia affect capital buffers, while controlling for variables identified in the literature, such as size of banks, the economic cycle, competition and equity prices. Unlike other studies, we use actual capital buffers provided by the South African Prudential Authority. We show that these are substantively different to the proxy buffers calculated using the common approach in the literature, indicating that results based on proxy measures should be interpreted with caution. Our overall results show a positive relationship between the sovereign risk premium and capital buffers, and the results are robust across different specifications. This suggests that banks are accumulating capital to mitigate against fiscal and other domestic policy risks, and the related financial stability issues. It is likely that this is contributing to higher lending rates. |
| Keywords: | fiscal policy, capital buffers, Financial Regulation, sovereign-bank nexus, South Africa |
| JEL: | C23 E62 H32 G28 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:862&r= |
| By: | Luca Guerrieri; Michele Modugno |
| Abstract: | We exploit institutional features of the U.S. banking stress tests to disentangle different types of information garnered by market participants when the stress test results are released. By examining the reaction of different asset prices, we find evidence that market participants value the stress test announcements not only for the information on possible future capital distributions but also for the signals about bank resilience. These results back the use of stress tests by central banks to inform the broader public about the soundness of the banking system. |
| Keywords: | Stress tests; Event study; Banks; Overnight stock returns; CDS spreads |
| JEL: | E58 G21 |
| Date: | 2021–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-12&r= |
| By: | Lucas Avezum; Vítor Oliveira; Diogo Serra |
| Abstract: | In this paper we assess the effectiveness of the macroprudential capital buffers’ release on loans granted to households, implemented in the context of the Covid-19 pandemic. We obtain causal estimates by exploring differences in the availability of regulatory buffers prior to the pandemic shock among European countries and accounting for the time-varying effect of unobservable confounding variables with the synthetic control method. We find evidence that the buffers releases contributed, on average, to mitigate the procyclicality of credit to households, specifically for house purchase and for small businesses purposes. For the aggregate household lending, we find that the average treatment effect for both the release of the CCyB and that of the SyRB were positive. However, the results suggest that, for credit associated to small businesses purposes, only the release of the CCyB had an effect. |
| JEL: | E51 G28 H12 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202107&r= |
| By: | Katsafados, Apostolos G.; Leledakis, George N.; Pyrgiotakis, Emmanouil G.; Androutsopoulos, Ion; Fergadiotis, Manos |
| Abstract: | This paper investigates the role of textual information in a U.S. bank merger prediction task. Our intuition behind this approach is that text could reduce bank opacity and allow us to understand better the strategic options of banking firms. We retrieve textual information from bank annual reports using a sample of 9,207 U.S. bank-year observations during the period 1994-2016. To predict bidders and targets, we use textual information along with financial variables as inputs to several machine learning models. Our key findings suggest that: (1) when textual information is used as a single type of input, the predictive accuracy of our models is similar, or even better, compared to the models using only financial variables as inputs, and (2) when we jointly use textual information and financial variables as inputs, the predictive accuracy of our models is substantially improved compared to models using a single type of input. Therefore, our findings highlight the importance of textual information in a bank merger prediction task. |
| Keywords: | Bank merger prediction; Textual analysis; Natural language processing; Machine learning |
| JEL: | C38 C45 G1 G2 G21 G3 G34 |
| Date: | 2021–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108272&r= |
| By: | Lijun Bo; Tongqing Li; Xiang Yu |
| Abstract: | This paper studies a systemic risk control problem by the central bank, which dynamically plans monetary supply for the interbank system with borrowing and lending activities. Facing both heterogeneity among banks and the common noise, the central bank aims to find an optimal strategy to minimize the average distance between log-monetary reserves and some prescribed capital levels for all banks. A relaxed control approach is adopted, and an optimal randomized control can be obtained in the system with finite banks by applying Ekeland's variational principle. As the number of banks grows large, we further prove the convergence of optimal strategies using the Gamma-convergence arguments, which yields an optimal relaxed control in the mean field model. It is shown that the limiting optimal relaxed control is linked to a solution of a stochastic Fokker-Planck-Kolmogorov (FPK) equation. The uniqueness of the solution to the stochastic FPK equation is also established under some mild conditions. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2106.09978&r= |
| By: | Aldasoro, Inaki; Gambacorta, Leonardo; giudici, paolo; Leach, Thomas |
| Abstract: | Cyber incidents are becoming more sophisticated and their costs difficult to quantify. Using a unique database of more than 100,000 cyber events across sectors, we document the characteristics of cyber incidents. Cyber costs are higher for larger firms and for incidents that impact several organisations simultaneously. The financial sector is exposed to a larger number of cyber attacks but suffers lower costs, on average, thanks to proportionately greater investment in information technology (IT) security. The use of cloud services is associated with lower costs, especially when cyber incidents are relatively small. As cloud providers become systemically important, cloud dependence is likely to increase tail risks. Crypto-related activities, which are largely unregulated, are particularly vulnerable to cyber attacks. |
| Keywords: | Bitcoin; cloud services; cryptocurrencies; cyber cost; cyber regulation; cyber risk; financial institutions |
| JEL: | D5 D62 D82 G2 H41 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14805&r= |
| By: | Sy-Hoa Ho; Jamel Saadaoui |
| Abstract: | While it is widely recognized that the development of a sound financial system may contribute to foster economic growth, the relation between economic growth and financial activities is complex. In this perspective, our contribution investigates the existence of threshold effects in the relationship between economic growth and bank credit. Our sample of ASEAN countries is examined over the period spanning from 1993 to 2019. We use the approach of Kremer et al. (2013) to estimate threshold effects in a dynamic panel where a group of explanatory variables can be endogenous. Our results do not confirm the vanishing effect of finance on economic growth. We found a threshold of 96.5% (significant at the 5% level) for the credit-to-GDP ratio, the threshold variable. In the short run, for observations inferior or equal to the threshold, the positive effect of bank credit expansion on economic growth is around 0.08 (significant at the 1% level). Whereas, for observations superior to the threshold, the positive effect of bank credit expansion on economic growth is around 0.02 (significant at the 1% level). The role of exporting firms is essential in ASEAN countries as they are more export-oriented than other regions in the world economy. Our results may indicate that the beneficiary of the credit (firms versus households), the structural features (export-led growth), and the regional heterogeneity have to be considered in empirical investigations of threshold effects in the relation between economic growth and bank credit. This empirical evidence may help to formulate sound policy recommendations. |
| Keywords: | Bank Credit, Economic Growth, Dynamic Threshold Estimation, ASEAN. |
| JEL: | C23 G21 O41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2021-24&r= |
| By: | Georgescu, Oana-Maria; Martín, Diego Vila |
| Abstract: | Borrower-based macroprudential (MP) policies - such as caps on loan-to-value (LTV) ratios and debt-service-to-income (DSTI) limits - contain the build-up of systemic risk by reducing the probability and conditional impact of a crisis. While LTV/DSTI limits can increase inequality at introduction, they can dampen the increase in inequality under adverse macroeconomic conditions. The relative size of these opposing effects is an empirical question. We conduct counterfactual simulations under different macroeconomic and macroprudential policy scenarios using granular income and wealth data from the Households Finance and Consumption Survey (HFCS) for Ireland, Italy, Netherlands and Portugal. Simulation results show that borrower-based measures have a moderate negative welfare impact in terms of wealth inequality and a negligible impact on income inequality. JEL Classification: G21, G28, G51 |
| Keywords: | household debt, inequality, macroprudential policy |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212567&r= |
| By: | Basiri, Kiana; Mahmoudi, Babak |
| Abstract: | We construct a measure of possible income misstatement (PIM) for first-time homebuyers by quantifying the gap between growth in incomes reported on mortgage applications and growth in incomes reported on tax files from 2004 to 2014 in Canada. Using a two-stage least square framework to correct for the endogenous nature of house prices and PIM, we find robust evidence that part of the observed dispersion in PIM is caused by house price variation. This suggests borrowers have greater incentive to misstate income in high-priced markets. We report evidence that markets with a tendency for income misstatement also had higher default rates. |
| Keywords: | Income Misstatement, Mortgage lending, Default |
| JEL: | G21 R21 R28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108450&r= |
| By: | Beni Egressy; Roger Wattenhofer |
| Abstract: | We consider networks of banks with assets and liabilities. Some banks may be insolvent, and a central bank can decide which insolvent banks, if any, to bail out. We view bailouts as an optimization problem where the central bank has given resources at its disposal and an objective it wants to maximize. We show that under various assumptions and for various natural objectives this optimization problem is NP-hard, and in some cases even hard to approximate. Furthermore, we also show that given a fixed central bank bailout objective, banks in the network can make new debt contracts to increase their own market value in the event of a bailout (at the expense of the central bank). |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2106.12315&r= |
| By: | Areski Cousin (IRMA - Institut de Recherche Mathématique Avancée - UNISTRA - Université de Strasbourg - CNRS - Centre National de la Recherche Scientifique); Ying Jiao (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Christian Robert (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Olivier David Zerbib |
| Abstract: | This paper investigates the optimal asset allocation of a financial institution whose customers are free to withdraw their capital-guaranteed financial contracts at any time. Accounting for asset-liability mismatch risk of the institution, we present a general utility optimization problem in discrete time setting and provide a dynamic programming principle for the optimal investment strategies. Furthermore, we consider an explicit context, including liquidity risk, interest rate and credit intensity fluctuations, and show, by numerical results, that the optimal strategy improves the solvency and the asset returns of the institution compared to the baseline asset allocation. |
| Keywords: | Asset allocation,asset-liability management,withdrawal risk,liquidity risk,utility maximization |
| Date: | 2021–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03244380&r= |
| By: | Jiri Witzany (Faculty of Finance and Accounting, Prague University of Business and Economics, Czech Republic,); Martin Divis (Faculty of Finance and Accounting, Prague University of Business and Economics, Czech Republic) |
| Abstract: | Interest rate risk measurement and management of non-maturity deposit balances presents a challenge for practitioners and academic researchers as well. The paper provides a review of several methodological approaches focusing on the area of savings accounts rate sensitivity modeling and estimation. The proposed models are tested on a Czech banking sector dataset providing mixed results regarding the cointegration type models generally recommended in the literature. On the other hand, the analysis shows that simpler regression models may provide more robust results if the cointegration tests between the saving accounts rate and the market rate series fail. |
| Keywords: | Interest rate risk, savings accounts, non-maturity deposits, cointegration, pass through rate |
| JEL: | C32 E43 E58 G21 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2021_21&r= |
| By: | José R. Maria; Paulo Júlio; Sílvia Santos |
| Abstract: | We use a dynamic stochastic general equilibrium model endowed with a complex banking system—in which due loans, occasionally binding credit restrictions, a cost of borrowing channel, and regulatory (capital and impairment) requirements coexist—to analyze the performance of various policy options impacting impairment recognition by banks. We discuss how looser or tighter policy designs affect output and welfare—both in the steady state and alongside dynamics—and the main driving forces that lie beneath the effects. The holding cost of due loans, restrictions to credit, dividend strategy, and the cure rate are key components of the driveshaft propelling policies to outcomes. We find that looser policies outperform tighter ones only if reflected into higher capital buffers (extra income is retained and not distributed as dividends) and for sufficiently low values of the holding cost. Higher cure rates increase the effectiveness of looser policies—they dominate for a wider range of holding costs—by raising the benefits of delaying impairment recognition. A policy targeting impairment recognition seems to take the upper edge due to its combined steady-state and business-cycle effects, but a policy that allows the regulatory impairment recognition to respond to the cycle is more effective from a business-cycle stabilization standpoint. Occasionally binding credit restrictions boost the effectiveness of looser policies during recessions due to its asymmetric effects over the cycle, pushing the mean output upwards. |
| JEL: | E32 E44 H62 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202108&r= |
| By: | Mishra, Mrinal; Ongena, Steven |
| Abstract: | We study the effect of armed conflict on loan officers and their actual lending decisions. Following mortar shelling of Indian border areas in the state of Jammu & Kashmir, we document that after repeated incidences of shelling the loan rates set by the loan officers exponentially increase. While the immediate effect may be driven by a rational response due to altering beliefs, the later rate hikes suggest an "overreaction". Our study reveals that the real costs of armed conflict through loan pricing are not trivial, and what we document is informative about liquidity shortfalls or credit spirals arising from non-conflictuous political, economic or pandemic shocks. |
| Keywords: | bank lending; interest rate; war |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14925&r= |
| By: | Luojia Hu; Xing Huang; Andrei Simonov |
| Abstract: | We study how the existence of cutoffs in credit scores affects the behavior of homebuyers. Borrowers are more likely to purchase houses after their credit scores cross over a cutoff to qualify them for a higher credit score bin. However, the credit accounts of these individuals (crossover group) are more likely to become delinquent within four years following home purchases than the accounts of those who had stayed in the same bin (non-crossover group). The effect is not only concentrated in subprime bins, but in other bins as well. It is neither limited to pre-crisis period nor curtailed by post-bust reforms. Using recent house price growth to proxy for the incentives for home purchases, we find that the gap in the delinquency rates between crossover and non-crossover groups is larger for areas with higher recent house price growth. Overall, our results indicate that the credit score at the time of home purchase may not be sufficiently informative because of individuals' strategic behavior, and suggest the importance of using the longer history of credit scores rather than just the latest draw in making lending decisions. |
| Keywords: | Mortgage lending; Credit score; Strategic behavior |
| JEL: | G18 G21 G50 |
| Date: | 2020–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:92773&r= |
| By: | Kaihua Qin; Liyi Zhou; Pablo Gamito; Philipp Jovanovic; Arthur Gervais |
| Abstract: | Financial speculators often seek to increase their potential gains with leverage. Debt is a popular form of leverage, and with over 39.88B USD of total value locked (TVL), the Decentralized Finance (DeFi) lending markets are thriving. Debts, however, entail the risks of liquidation, the process of selling the debt collateral at a discount to liquidators. Nevertheless, few quantitative insights are known about the existing liquidation mechanisms. In this paper, to the best of our knowledge, we are the first to study the breadth of the borrowing and lending markets of the Ethereum DeFi ecosystem. We focus on Aave, Compound, MakerDAO, and dYdX, which collectively represent over 85% of the lending market on Ethereum. Given extensive liquidation data measurements and insights, we systematize the prevalent liquidation mechanisms and are the first to provide a methodology to compare them objectively. We find that the existing liquidation designs well incentivize liquidators but sell excessive amounts of discounted collateral at the borrowers' expenses. We measure various risks that liquidation participants are exposed to and quantify the instabilities of existing lending protocols. Moreover, we propose an optimal strategy that allows liquidators to increase their liquidation profit, which may aggravate the loss of borrowers. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2106.06389&r= |
| By: | Schularick, Moritz; Ter Steege, Lucas; Ward, Felix |
| Abstract: | Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial crisis risk. Based on the near-universe of advanced economy financial cycles since the 19th century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them. |
| Keywords: | Financial Stability; local projections; monetary policy |
| JEL: | E44 E50 G01 G15 N10 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14797&r= |
| By: | Bertrand Achou (Retirement and Savings Institute HEC Montréal); Hippolyte d'Albis (CNRS and Paris School of Economics); Eleni Iliopulos (EPEE, University of Evry, Univ. Paris-Saclay and Cepremap.) |
| Abstract: | In this work we introduce a general equilibrium model with landlords, indebted owner-occupiers and renters to study housing markets' dynamics. We estimate it by using standard Bayesian methods and match the US data of the last decades. This framework is particularly suited to explain current trends on housing markets. We highlight the crucial relationship between interest rates, house prices and rents, and argue that it helps understanding the main driving forces. Our analysis suggests that current developments on housing markets can play a role for a recovery from the Covid pandemic as they have an expansionary effect on aggregate output. Moreover, we account for the heterogeneous impact of crisis-induced policies depending on agents' status on the housing market. We show how, despite an increase in housing prices, the welfare of landlords has been negatively hit. This is associated to the joint decrease in returns on housing and financial assets that reduces their financial incomes. |
| Keywords: | Housing, Rental Markets, Collateral Constraints, Financial Frictions, HANK Models |
| JEL: | E3 G1 C1 I3 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:21-02&r= |
| By: | Yesol Huh; You Suk Kim |
| Abstract: | We study optimal securitization and its impact on market quality when the secondary market structure leads to cheapest-to-deliver pricing in the context of agency mortgage-backed securities (MBS). A majority of MBS are traded in the to-be-announced (TBA) market, which concentrates trading of heterogeneous MBS into a few liquid TBA contracts but induces adverse selection. We find that lenders segregate loans of like values into separate pools and tend to trade low-value MBS in the TBA market and high-value MBS outside the TBA market. We then present a model of optimal securitization for agency MBS. Lenders do not internalize the negative impact of such pooling and trading strategies on TBA market quality and thus create too many high-value MBS, which leads to more heterogeneity in MBS values, more adverse selection, and lower TBA liquidity. Lastly, we provide empirical evidence consistent with model predictions on how MBS pooling changes with trading costs and underlying loan value dispersion and how pooling practices affect MBS heterogeneity and TBA market adverse selection. |
| Keywords: | Agency Mortgage-Backed Securities; Liquidity; Securitization; TBA Trades |
| JEL: | G21 G10 |
| Date: | 2021–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-31&r= |