nep-ban New Economics Papers
on Banking
Issue of 2021‒07‒26
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Un-used Bank Capital Buffers and Credit Supply Shocks at SMEs during the Pandemic By Jose M. Berrospide; Arun Gupta; Matthew P. Seay
  2. Capital ratios and banking crises in the European Union By Raphaël Cardot-Martin; Fabien Labondance; Catherine Refait-Alexandre
  3. Bail-in and Bank Funding Costs By Vittoria Cerasi; Paola Galfrascoli
  4. Introduction of additional Tier 1 capital By Heidorn, Thomas; Pottmeyer, Andreas
  5. Hierarchical contagions in the interdependent financial network By William A. Barnett; Xue Wang; Hai-Chuan Xu; Wei-Xing Zhou
  6. Oligopoly Banking, Risky Investment, and Monetary Policy By Altermatt, Lukas; Wang, Zijian
  7. Do CDS maturities matter in the evaluation of the information content of regulatory banking stress tests? Evidence from European and US stress tests By Amavi Agbodji; Emmanuelle Nys; Alain Sauviat
  8. Capital Requirements and Claims Recovery: A New Perspective on Solvency Regulation By Cosimo Munari; Lutz Wilhelmy; Stefan Weber
  9. L'impatto della pandemia sull'uso degli strumenti di pagamento in Italia By Ardizzi Guerino; Alessandro Gambini; Andrea Nobili; Emanuele Pimpini; Giorgia Rocco
  10. The rich, the poor, and the middle class: banking crises and income distribution By Mehdi El Herradi; Aurélien Leroy
  11. What are the main differences between the practice of supervising large banks in the UK and in the euro area, and what are the main risks of regulatory divergence? By Haselmann, Rainer; Tröger, Tobias
  12. Adaptive Stress Testing for Adversarial Learning in a Financial Environment By Khalid El-Awady
  13. Risk contributions of lambda quantiles By Akif Ince; Ilaria Peri; Silvana Pesenti
  14. Does the Age at Which a Consumer Gets Their First Credit Matter? Credit Bureau Entry Age and First Credit Type Effects on Credit Score By Lucas Nathe
  15. Do COVID-19 Containment Measures Work? Evidence from Switzerland By Regina Pleninger; Sina Streicher; Jan-Egbert Sturm

  1. By: Jose M. Berrospide; Arun Gupta; Matthew P. Seay
    Abstract: Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of “rainy day†equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that “buffer-constrained†banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to SME firms by an average of 1.4 percent more (quarterly) and were 4 percent more likely to end pre-existing lending relationships during the pandemic as compared to “buffer-unconstrained†banks (those entering the pandemic with capital ratios far from the regulatory capital buffer region). We further find heterogenous effects across firms, as buffer-constrained banks disproportionately curtailed credit to three types of borrowers: (1) private, bank-dependent SME firms, (2) firms whose lending relationships were relatively young, and (3) firms whose pre-pandemic credit lines contractually matured at the start of the pandemic (and thus were up for renegotiation). While the post-2008 period saw the rise of banking system capital to historically high levels, these capital buffers went effectively unused during the pandemic. To the best of our knowledge, our study is the first to: (1) empirically test the usability of these Basel III regulatory buffers in a downturn, and (2) contribute a bank capital-based transmission channel to the literature studying the effects of the pandemic on SME firms.
    Keywords: Financial institutions; Capital regulation; Procyclicality; COVID-19
    JEL: G20 G21 G28
    Date: 2021–07–15
  2. By: Raphaël Cardot-Martin (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France); Fabien Labondance (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France); Catherine Refait-Alexandre (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France)
    Abstract: We assess if capital ratios reduced the occurrence of banking crises in the European Union from 1998 to 2017. We use a Probit model and estimate the effect of two measures: the bank capital to total assets ratio and the bank regulatory capital to Risk Weighted Assets (RWA). We found that both measures affect negatively the probability of crisis. This result is robust to the exclusion of outliers, to the inclusion of various control variables for banking, financial and macroeconomic risks. Finally, we show that while the bank regulatory capital to RWA has always a negative effect on the probability of crisis, the bank capital to total assets ratio is only significant above a threshold, estimated between 10% and 12%.
    Keywords: Unconventional measures, retail interest rate, Heterogeneous panel
    JEL: G21 E44
    Date: 2021–07
  3. By: Vittoria Cerasi; Paola Galfrascoli
    Abstract: We empirically evaluate the impact of the new resolution policy, the so-called Bank Recovery and Resolution Directive (BRRD) enacted in 2016, on the cost of funding for EU banks. We first measure the change in the spreads of credit default swaps on subordinated and senior bonds issued by EU banks around the period when the policy became effective and provide evidence of a greater increase in the risk premia of more junior bail-in-able bonds than for senior bonds. We then investigate the reasons for the different intensities by which this policy has affected the banks in our sample. We uncover specific characteristics of banks and macroeconomic factors to explain this heterogeneity. Banks with more problematic loans, that are less capitalized, and that are headquartered in countries with a higher risk premium on sovereign debt have experienced a greater rise in the cost of their funds; conversely, larger banks with a greater proportion of domestic over total subsidiaries were less affected. Moreover, we show that the low-interest-rate environment has increased the riskiness of all the banks in our sample. Overall, our paper provides evidence that market discipline has been reinforced by the adoption of the BRRD.
    Keywords: Bank resolution; Credit Default Swaps; Market discipline.
    JEL: G28 G21 G14
    Date: 2021–07
  4. By: Heidorn, Thomas; Pottmeyer, Andreas
    Abstract: The aim of this working paper is to introduce the reader to the relatively new instrument of AT 1 bonds. For this purpose, the strict regulatory requirements for the instrument class are explained and the capital requirements of banks are outlined. Afterwards, the market for AT 1 bonds is analyzed and the interests of the respective market participants are discussed. Finally, the Credit Derivatives Model, the Equity Derivatives Model and the Value at Risk model are applied to 20 AT 1 bonds issued by various European banks in order to find the extra credit spread and to determine the risk associated with this bond class.
    Keywords: AT1,Additional Tier 1,Regulatory Requirements,Bank Capital Management,Capital Buffer,Capital Requirements Regulation (CRR),Capital Requirements Directive IV,Hybrid Tier 1,Pillar 1 Requirements
    JEL: G12 G18 G28
    Date: 2020
  5. By: William A. Barnett; Xue Wang; Hai-Chuan Xu; Wei-Xing Zhou
    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 three reconstruction methods, called $\textit{Anan}$, $\textit{Ha\l{}a}$ and $\textit{Maxe}$. Then we combine the external portfolio holdings of each bank to compute the interdependency matrix. The interdependency network is much denser 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.
    Date: 2021–06
  6. By: Altermatt, Lukas; Wang, Zijian
    Abstract: Oligopolistic competition in the banking sector and risk in the real economy are important characteristics of developed economies, but have so far mostly been abstracted from in monetary economics. We build a dynamic general equilibrium model of monetary policy transmission that incorporates both of these features and document that including them leads to important insights in our understanding of the transmission mechanism. Various equilibrium cases can occur, and policies have differing effects in these cases. We calibrate the model to the U.S. economy in 2016-2019 in order to study how changes in the degree of banking competition or the policy rate would have affected equilibrium outcomes. We find that doubling banking competition would have increased welfare by 1.02\%, but at the cost of increasing the probability of bank default from 0.02\% to 0.44\%. We further find that the policy rate was set optimally to minimize the probability of bank default, but that a decrease in the policy rate by 1pp would have increased welfare by 0.40\%. We also show that bank profits are increasing in the policy rate, in particular when interest rates are low. Thus, a 1pp reduction in the policy rate would have reduced profits per bank by 35.5\% in our calibrated economy. Finally, we document that monetary policy pass-through is incomplete under imperfect competition in the banking sector, as a change in the policy rate by 1pp leads to a change of only 0.92pp in the loan rate, while pass-through to the deposit rate is nearly complete for rate increases, but almost zero for rate reductions due to the zero-lower bound.
    Keywords: Oligopoly competition, Risky investment, Monetary policy, Financial intermediation
    Date: 2021–07–13
  7. By: Amavi Agbodji (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Emmanuelle Nys (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Alain Sauviat (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)
    Abstract: This paper questions the relevance of using only the 5-year maturity CDS spreads to examine the CDS market response to the disclosure of a regulatory stress test results. Since the stress testing exercises are performed on short-term forward-looking stressed scenarios (1 to 3 years), we assume that short-term CDS maturities (from 6-month to 3-year) should better reflect the CDS market response compared to the 5-year maturity. Based on ten regulatory stress tests carried out in Europe and in the US in the time period from 2009 to 2017, we analyze the CDS market response by investigating its reaction through all the different CDS maturities. Our results show that after the results' disclosure, the CDS market reacts by correcting the CDS spreads of tested banks (upward or downward correction), at the level of all maturities. More precisely, we evidence that for a given stress test, the nature of the correction (upward or downward) is the same for all CDS maturities while the extent of the correction differs between shortterm maturities (from 6-month to 3-year) and the 5-year maturity or more. Indeed, we find that the extent is higher on short-term maturities and in most cases, the lower the maturity of the CDS, the higher the extent of the correction (i.e. the stronger the market reaction). We therefore argue that the only use of the 5-year maturity is not suitable. Short-term CDS maturities matter since they better reflect the CDS market response. Also, the use of these short-term maturities show that the information content of the different stress tests is more diverse than what is highlighted in the existing literature.
    Keywords: Regulatory stress tests,CDS maturities,Market reaction,Event study,Disclosure
    Date: 2021–06–22
  8. By: Cosimo Munari; Lutz Wilhelmy; Stefan Weber
    Abstract: Protection of creditors is a key objective of financial regulation. Where the protection needs are high, i.e., in banking and insurance, regulatory solvency requirements are an instrument to prevent that creditors incur losses on their claims. The current regulatory requirements based on Value at Risk and Average Value at Risk limit the probability of default of financial institutions, but they fail to control the size of recovery on creditors' claims in the case of default. We resolve this failure by developing a novel risk measure, Recovery Value at Risk. Our conceptual approach can flexibly be extended and allows the construction of general recovery risk measures for various risk management purposes. By design, these risk measures control recovery on creditors' claims and integrate the protection needs of creditors into the incentive structure of the management. We provide detailed case studies and applications: We analyze how recovery risk measures react to the joint distributions of assets and liabilities on firms' balance sheets and compare the corresponding capital requirements with the current regulatory benchmarks based on Value at Risk and Average Value at Risk. We discuss how to calibrate recovery risk measures to historic regulatory standards. Finally, we show that recovery risk measures can be applied to performance-based management of business divisions of firms and that they allow for a tractable characterization of optimal tradeoffs between risk and return in the context of investment management.
    Date: 2021–07
  9. By: Ardizzi Guerino (Bank of Italy); Alessandro Gambini (Bank of Italy); Andrea Nobili (Bank of Italy); Emanuele Pimpini (Bank of Italy); Giorgia Rocco (Bank of Italy)
    Abstract: This paper evaluates the impact of the COVID-19 pandemic on the use of retail payment instruments in Italy. After a brief overview of the trends prevailing in Italy before the spread of the pandemic, we analyse the dynamics of the main indicators on payment habits during the two waves of infection that have affected the country. We estimate the effects on the payment industry using different measures of the intensity of the pandemic in order to capture the impact of fears of contagion on the behaviour of households and businesses and the impact of the measures taken to contain the infection, which imposed constraints on social mobility and productive and commercial activities. The estimates show that the pandemic has increased the use of cards compared with cash at the physical point of sale and has encouraged transactions through more innovative payment technologies that allow physical distancing, such as purchases with contactless cards, those on e-commerce sites, and those made by bank transfer. Moreover, the analysis at the regional level suggests that the increase in more innovative electronic payments was more marked in Central and Southern Italy, areas in which, before the pandemic, the diffusion of electronic means of payment was more contained in comparison with the North of the country. The frequency of online purchases, on the other hand, has grown more in the North, which has a more evolved digital ecosystem and has been more severely affected by health emergency and, therefore, by stricter restrictions.
    Keywords: Covid-19, cash, payment cards, other payment instruments
    JEL: E41 E42 G2 O3
    Date: 2021–07
  10. By: Mehdi El Herradi (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Aurélien Leroy (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Abstract: How do banking crises a ect rich, middle-class and poor households? This paper quanti es the distributional implications of banking crises for a panel of 140 economies over the 1970-2017 period. We rely on di erent empirical settings, including an instrumental variable approach, that exploit the geographical di usion of banking crises across borders. Our results show that banking crises systematically reduce the income share of rich households and positively a ect middle-class households. We also nd that income inequality increases during periods preceding the triggering of a banking crisis.
    Keywords: banking crises,income distribution,inequality
    Date: 2021–06
  11. By: Haselmann, Rainer; Tröger, Tobias
    Abstract: This in-depth analysis provides evidence on differences in the practice of supervising large banks in the UK and in the euro area. It identifies the diverging institutional architecture (partially supranationalised vs. national oversight) as a pivotal determinant for a higher effectiveness of supervisory decision making in the UK. The ECB is likely to take a more stringent stance in prudential supervision than UK authorities. The setting of risk weights and the design of macroprudential stress test scenarios document this hypothesis. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.
    Keywords: Bank Supervision,Economic Governance,Banking Union,Brexit
    Date: 2021
  12. By: Khalid El-Awady
    Abstract: We demonstrate the use of Adaptive Stress Testing to detect and address potential vulnerabilities in a financial environment. We develop a simplified model for credit card fraud detection that utilizes a linear regression classifier based on historical payment transaction data coupled with business rules. We then apply the reinforcement learning model known as Adaptive Stress Testing to train an agent, that can be thought of as a potential fraudster, to find the most likely path to system failure -- successfully defrauding the system. We show the connection between this most likely failure path and the limits of the classifier and discuss how the fraud detection system's business rules can be further augmented to mitigate these failure modes.
    Date: 2021–07
  13. By: Akif Ince; Ilaria Peri; Silvana Pesenti
    Abstract: Risk contributions of portfolios form an indispensable part of risk adjusted performance measurement. The risk contribution of a portfolio, e.g., in the Euler or Aumann-Shapley framework, is given by the partial derivatives of a risk measure applied to the portfolio return in direction of the asset weights. For risk measures that are not positively homogeneous of degree 1, however, known capital allocation principles do not apply. We study the class of lambda quantile risk measures, that includes the well-known Value-at-Risk as a special case, but for which no known allocation rule is applicable. We prove differentiability and derive explicit formulae of the derivatives of lambda quantiles with respect to their portfolio composition, that is their risk contribution. For this purpose, we define lambda quantiles on the space of portfolio compositions and consider generic (also non-linear) portfolio operators. We further derive the Euler decomposition of lambda quantiles for generic portfolios and show that lambda quantiles are homogeneous in the space of portfolio compositions, with a homogeneity degree that depends on the portfolio composition and the lambda function. This result is in stark contrast to the positive homogeneity properties of risk measures defined on the space of random variables which admit a constant homogeneity degree. We introduce a generalised version of Euler contributions and Euler allocation rule, which are compatible with risk measures of any homogeneity degree and non-linear portfolios. We further provide financial interpretations of the homogeneity degree of lambda quantiles and introduce the notion of event-specific homogeneity of portfolio operators.
    Date: 2021–06
  14. By: Lucas Nathe
    Abstract: The consumer credit market plays a prominent role in the financial life of U.S. households. Consumers' credit histories and, in particular their credit scores, are key factors that determine their access to credit and the price at which they borrow.
    Date: 2021–07–15
  15. By: Regina Pleninger (ETH Zurich, Switzerland); Sina Streicher (ETH Zurich, Switzerland); Jan-Egbert Sturm (ETH Zurich, Switzerland)
    Abstract: We study the interplay of non-pharmaceutical containment measures, human behavior, and the spread of COVID-19 in Switzerland. First, we collect sub-national data and construct indices that capture the stringency of containment measures at the cantonal level. Second, we use a vector autoregressive (VAR) model to analyze feedback effects between our variables of interest via structural impulse responses. Our results suggest that increases in the stringency of containment measures lead to a significant reduction of weekly infections as well as debit card transactions, which serve as a proxy for behavioral changes in the population. Furthermore, analyzing different policy measures individually shows that business closures, recommendations to work from home, and restrictions on gatherings have been particularly effective in containing the spread of COVID-19 in Switzerland. Finally, our findings indicate a sizeable voluntary reduction in debit card transactions in response to a positive infection shock.
    Keywords: COVID-19, Reproduction Rate, Stringency, Switzerland
    JEL: H12 H51 H73 H75 I18 R59
    Date: 2021–06

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