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on Banking |
| By: | Sumit Agarwal; Thomas Kigabo; Camelia Minoiu; Andrea F. Presbitero; André F. Silva |
| Abstract: | A large-scale microcredit expansion program---together with a credit bureau accessible to all lenders---can enable unbanked borrowers to build a credit history, facilitating their transition to commercial banks. Loan-level data from Rwanda show the program improved access to credit and reduced poverty. A sizable share of first-time borrowers switched to commercial banks, which cream-skim less risky borrowers and grant them larger, cheaper, and longer-maturity loans. Switchers have lower default risk than non-switchers and are not riskier than other bank borrowers. Switchers also obtain better loan terms from banks compared with first-time bank borrowers without a credit history. |
| Keywords: | Access to credit; Microfinance; Unbanked; Credit bureau; Bank loans |
| JEL: | G21 O12 O55 |
| Date: | 2021–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-41&r= |
| By: | Grzegorz Halaj; Sofia Priazhkina |
| Abstract: | We model bank management actions in severe stress test conditions using a game-theoretical framework. Banks update their balance sheets to strategically maximize risk-adjusted returns to shareholders given three regulatory constraints and feedback effects related to fire sales, interactions of loan supply and demand, and deteriorating funding conditions. The framework allows us to study the role of strategic behaviors in amplifying or mitigating adverse macrofinancial shocks in a banking system and the role of macroprudential policies in the mitigation of systemic risk. In a macro-consistent stress testing application, we show that a trade-off can arise between banking stability (solvency) and macroeconomic stability (lending) and test whether the release of a countercyclical capital buffer can reduce systemic risk. |
| Keywords: | Central bank research; Economic models; Financial institutions; Financial stability; Financial system regulation and policies |
| JEL: | C72 G21 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-35&r= |
| By: | Eccles, Peter (Bank of England); Grout, Paul (Bank of England); Siciliani, Paolo (Bank of England); Zalewska, Anna (University of Bath) |
| Abstract: | There is evidence that machine learning (ML) can improve the screening of risky borrowers, but the empirical literature gives diverse answers as to the impact of ML on credit markets. We provide a model in which traditional banks compete with fintech (innovative) banks that screen borrowers using ML technology and show that the impact of the adoption of the ML technology on credit markets depends on the characteristics of the market (eg borrower mix, cost of innovation, the intensity of competition, precision of the innovative technology, etc.). We provide a series of scenarios. For example, we show that if implementing ML technology is relatively expensive and lower-risk borrowers are a significant proportion of all risky borrowers, then all risky borrowers will be worse off following the introduction of ML, even when the lower-risk borrowers can be separated perfectly from others. At the other extreme, we show that if costs of implementing ML are low and there are few lower-risk borrowers, then lower-risk borrowers gain from the introduction of ML, at the expense of higher-risk and safe borrowers. Implications for policy, including the potential for tension between micro and macroprudential policies, are explored. |
| Keywords: | Adverse selection; banking; big data; capital requirements; credit markets; fintech; machine learning; prudential regulation |
| JEL: | G21 G28 G32 |
| Date: | 2021–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0930&r= |
| By: | Selva Bahar Baziki; Tanju Capacioglu |
| Abstract: | We study the effect of two counter-cyclical credit policies on banks’ lending decisions using a unique matched bank-firm-loan micro level data. These two policy actions; the implementation of commercial real estate loan-to-value (LTV) ratio and an expansion of a collateral guarantee scheme, stand out as they give banks the freedom of choice over which customers would be subject to the policy and to what degree. When faced with a tightening LTV policy banks elect to issue loans above the LTV cap to firms with better credit history and with whom they had a longer established relationship while charging higher interest rates. Firms constrained by the policy see an increase in their other borrowing while the policy is in effect, suggesting the existence of credit spillover across loan types. In the second policy, banks again prefer firms with healthier credit histories and with whom they have a longer relationship into the credit guarantee scheme. In contrast to the existing literature, we do not see a preference for riskier firms under the scheme. At the same time, among the recipients of scheme loans, those with stronger relationships but relatively lower past credit performance have larger amounts of loans. Scheme loans are issued for larger amounts, longer periods and at higher interest rates compared to loans issued to non-participating firms during the same period. Finally, we show that the increase in scheme utilization has resulted in lower other corporate credit and general-purpose loans in banks with larger utilization rates. |
| Keywords: | Macroprudential policy, Commercial real estate, Corporate loans, Loan-to-value, Relationship banking, Credit guarantee funds |
| JEL: | E51 E61 G20 G21 G28 G32 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2120&r= |
| By: | Calza, Alessandro; Hey, Julius-Benjamin; Parrini, Alessandro; Sauer, Stephan |
| Abstract: | We use a unique dataset of ratings for euro area corporate loans from commercial banks’ internal rating-based (IRBs) systems and central banks’ in-house credit assessment systems (ICASs) to investigate whether banks’ IRB ratings underestimate the credit risk of their corporate loan portfolios when the latter are used as collateral in the Eurosystem’s monetary policy operations. We are able to identify systematic risk underestimation by comparing the IRB ratings with those produced for the same borrowers by the ICASs. Our results show that while they are on average more conservative than ICASs for the entire population of rated corporate loans, IRBs are significantly less conservative than ICASs for those loans that are actually used as Eurosystem collateral, particularly for large loans. The less conservative estimates of risk by IRBs relative to ICASs can be partly explained by banks’ liquidity constraints, but not by their degree of capitalisation. Overall, our findings suggest the existence of a collateral-related channel through which the use of IRB ratings may influence the internal estimation of risk by banks. JEL Classification: G21, G28 |
| Keywords: | banking regulation, central bank liquidity, internal ratings, probability of default |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212579&r= |
| By: | Joshua Bosshardt (Federal Housing Finance Agency); Ali Kakhbod (Rice University); Farzad Saidi (UniversityofBonn & CEPR) |
| Abstract: | We examine the system-wide effects of liquidity regulation on banks’ balance sheets. In the general equilibrium model, banks have to hold liquid assets, and choose among illiquid assets varying in the extent to which they are difficult to value before maturity, e.g., structured securities. By improving the liquidity of interbank markets, tighter liquidity requirements induce banks to invest in such complex assets. We evaluate the welfare properties of combining liquidity regulation with other financial-stability policies, and show that it can complement ex-ante policies, such as asset-specific taxes, whereas it can undermine the benefits of ex-post interventions, such as quantative easing. |
| Keywords: | liquidity regulation, securitization, interbank markets, financial stability, quantitative easing |
| JEL: | E44 G01 G21 G28 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:108&r= |
| By: | Nicholas Garvin (Reserve Bank of Australia); Alex Kearney (Reserve Bank of Australia); Corrine Rosé (Reserve Bank of Australia) |
| Abstract: | The Australian Prudential Regulation Authority implemented 2 credit limits between 2014 and 2018. Unlike similar policies in other countries, these imposed limits on particular mortgage products – first investor mortgages, then interest-only (IO) mortgages. With prudential bank-level panel data, we empirically identify banks' credit supply and interest rate responses and test for other effects of these policies. The policies quickly reduced growth in the targeted type of credit while total mortgage growth remained steady. Banks met the limits by raising interest rates on targeted mortgage products and this lifted their income temporarily. The largest banks substituted into non-targeted mortgage products while smaller banks did not. Practical implementation difficulties slowed effects of the (first) investor policy, and led to some disproportionate bank responses, but had largely been overcome by the time the (second) IO policy was implemented. |
| Keywords: | macroprudential policy; banks; mortgages; mortgage rates |
| JEL: | E43 E5 G21 G28 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2021-07&r= |
| By: | Anatoli Segura (Banca d’Italia); Alonso Villacorta (University of California Santa Cruz) |
| Abstract: | We develop a novel framework featuring loss amplification through firm-bank linkages. We use it to study optimal intervention in a lockdown situation that creates cash shortfalls for firms, which must resort to bank lending. Firms’ increased debt reduces their output due to moral hazard. Banks need safe collateral to raise funds. Without intervention, aggregate risk constrains bank lending, amplifying output losses. Optimal government support provides sufficient aggregate risk insurance, and is implemented through transfers to firms and fairly-priced guarantees on banks’ debt. When aggregate risk is not too large, such guarantees can be financed through a procyclical taxation of firms’ profits. |
| Keywords: | Covid-19, cash shortfall, firms' debt, moral hazard, bank equity, aggregate risk, government interventions. |
| JEL: | G01 G20 G28 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1343_21&r= |
| By: | Markus Eberhardt; Andrea F. Presbitero |
| Abstract: | Commodity prices are one of the most important drivers of output fluctuations in developing countries. We show that a major channel through which commodity price movements can affect the real economy is through their effect on banks' balance sheets and financial stability. Our analysis finds that the volatility of commodity prices is a significant predictor of banking crises in a sample of 60 low-income countries (LICs). In contrast to recent findings for advanced and emerging economies, credit booms and capital inflows do not play a significant role in predicting banking crises, consistent with a lack of de facto financial liberalization in LICs. We corroborate our main findings with historical data for 40 'peripheral' economies between 1848 and 1938. The effect of commodity price volatility on banking crises is concentrated in LICs with a fixed exchange rate regime and a high share of primary goods in production. We also find that commodity price volatility is likely to trigger financial instability through a reduction in government revenues and a shortening of sovereign debt maturity, which are likely to weaken banks' balance sheets. |
| Keywords: | banking crises, commodity prices, volatility, low income countries |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:2021/02&r= |
| By: | Aikman, David (King's College London); Bluwstein, Kristina (Bank of England); Karmakar, Sudipto (Bank of England) |
| Abstract: | We build a semi-structural New Keynesian model with financial frictions to study the drivers of macroeconomic tail risk (‘GDP-at-Risk’). We analyse the empirically observed fat left tail of the GDP distribution by modelling three key non-linearities emphasised in the literature: 1) an effective lower bound on nominal interest rates, 2) a credit crunch in bank credit supply when bank capital depletes, and 3) deleveraging by borrowers when debt service burdens become excessive. We obtain three key results. First, our model generates a significantly fat-tailed distribution of GDP – a finding that is absent in most linear New Keynesian and RBC models. Second, we show how these constraints interact with each other. We find that an economy prone to debt deleveraging will experience significantly more credit crunch and effective lower bound episodes than otherwise. Moreover, as the effective lower bound becomes more proximate, the frequency of credit crunch episodes increases significantly. As a rule of thumb, we find that each 50 basis point decline in monetary policy headroom requires additional capital buffers of 1% of assets or 2%–2.5% points lower debt service burdens to hold the risk level constant. Third, we use the model to generate a historical decomposition of GDP-at-Risk for the United Kingdom. The implied risk outlook deteriorates significantly in the run-up to the Global Financial Crisis, driven by depleted capital buffers and increasing debt burdens. Since then, GDP-at-Risk has remained elevated, with greater bank resilience and lower debt offset by the limited capacity of monetary policy to cushion adverse shocks. |
| Keywords: | Financial crises; bank capital; debt deleveraging; macroprudential policy; effective lower bound; GDP-at-Risk |
| JEL: | G01 G28 |
| Date: | 2021–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0931&r= |
| By: | Andreas Fuster (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)); Aurel Hizmo (Board of Governors of the Federal Reserve System); Lauren Lambie-Hanson (Federal Reserve Banks - Federal Reserve Bank of Philadelphia); James I. Vickery (Federal Reserve Bank of Philadelphia); Paul Willen (Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)) |
| 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. |
| JEL: | G21 G23 G28 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2141&r= |
| By: | Budnik, Katarzyna; Dimitrov, Ivan; Giglio, Carla; Groß, Johannes; Lampe, Max; Sarychev, Andrei; Tarbé, Matthieu; Vagliano, Gianluca; Volk, Matjaz |
| Abstract: | This paper assesses the macroeconomic implications of the Basel III finalisation for the euro area, employing a large-scale semi-structural model encompassing over 90 banks and 19-euro area economies. The new regulatory framework will influence banks’ reactions to economic conditions and, as a result, affect the ability of the banking system to amplify or dampen economic shocks. The assessment covers the entire distribution of conditional economic predictions to measure the cost and benefit of the reforms. Looking at the means of conditional forecasts of output growth provides an indication of the costs of the reform, namely a transitory reduction in euro area gross domestic product (GDP) and in lending to the non-financial private sector. Looking at the lower percentile of output growth forecasts, i.e. growth at risk, captures the long-term benefits of the Basel III finalisation package in terms of improved resilience and the ability of the banking system to supply lending to the real economy under adverse conditions. These permanent growth-at-risk benefits ultimately outweigh the short-term costs of the reform. JEL Classification: E37, E58, G21, G28 |
| Keywords: | banking sector, Basel III finalisation, impact assessment, real-financial feedback mechanism, regulatory policy |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021258&r= |
| By: | Carlos Castro-Iragorri; Julian Ramirez; Sebastian Velez |
| Abstract: | We provide an overview of decentralized protocols like Compound and Aave that offer collateralized loans for cryptoasset investors. Compound and Aave are two of the most important application in the decentralized finance (DeFi) ecosystem. Using publicly available information on rates, supply and borrow activity, and accounts we analyze different elements of the protocols. In particular, we estimate ex-post margins that give a comprehensive account of the cost of financial intermediation. We find that ex-post margins considering all markets are 1% and lower for stablecoin markets. In addition, we estimate quarterly indicators regarding solvency, asset quality, earnings and market risk similar to the ones used in traditional banking. This provides a first look at the use of these metrics and a comparison between the similarities and challenges to our understanding of financial intermediation in these protocols based on tools used for traditional banking. |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2107.14678&r= |
| By: | Gouriéroux, Christian; Monfort, Alain; Mouabbi, Sarah; Renne, Jean-Paul |
| Abstract: | We define a disastrous default as the default of a systemic entity, which has a negative effect on the economy and is contagious. Bringing macroeconomic structure to a no-arbitrage asset pricing framework, we exploit prices of disaster-exposed assets (credit and equity derivatives) to extract information on the expected (i) influence of a disastrous default on consumption and (ii) probability of a financial meltdown. Using European data, we find that the returns of disaster-exposed assets are consistent with a systemic default being followed by a 2% decrease in consumption. The recessionary influence of disastrous defaults implies that financial instruments whose payoffs are exposed to such credit events carry substantial risk premiums. We also produce systemic risk indicators based on the probability of observing a certain number of systemic defaults or a sharp drop of consumption. |
| JEL: | E43 E44 E47 G01 G12 |
| Date: | 2021–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:125843&r= |
| By: | Buesa, Alejandro; De Quinto, Alicia; Población García, Francisco Javier |
| Abstract: | This paper describes a novel methodology of measuring risky and conservative mortgage credit using household survey data for 18 European Union countries and the United Kingdom. In addition, we construct time series for both types of credit and embed them into a global vector autoregressive (GVAR) model, so as to study how shocks to both variables affect domestic output and propagate across countries through cross-border banking exposures. The results show that a decrease in risky credit can have long-lasting positive effects on GDP, both in the originating country and its most exposed peers, while a fall in conservative credit is detrimental. In some geographies, negative shocks to both types of credit reduce output, a feature linked to the lower relevance of homeownership which implies that mortgage credit plays a less prominent role in the domestic economy. JEL Classification: C32, F47, G21, G51 |
| Keywords: | borrower-based measures, cross-border spillovers, LTV limits, Mortgage rating |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2021123&r= |
| By: | Henry Penikas (Bank of Russia, Russian Federation); Anastasia Skarednova (Alfa-Bank, Russian Federation); Mikhail Surkov (Bank of Russia, Russian Federation) |
| Abstract: | The recently finalized Basel Framework continues allowing banks to use internal data and models to define risk estimates and use them for the capital adequacy ratio computation. World-wide there are above two thousand banks running the Basel internal models. However, there are countries that have none of such banks. For them there exists a dilemma. Namely, which transition path to adopt out of the two. The voluntarily one as in the EU or the mandatory one as in the US. Our objective is to take the investor perspective and benchmark those two modes. Thus, we wish to find whether there is a premium for any of them, or perhaps that they are equivalent. The novelty of our research is the robust estimate that investors prefer mandatory transition style to the voluntarily one. Such a preference is reflected in the rise of the mean return and decline in stock volatility for the transited banks in the US and right the opposite consequences in the EU. However, we should be cautious in interpreting our findings. Such a preference may not only be the premium for the breakage of the vicious cycle and the ultimate improvement in the banks’ risk-management systems and the overall financial stability. It may also hold true if and only if the mandatory transition for particular institutions is accompanied by a restriction for other banks in the region to transit. Our findings are of value primarily to the emerging economies like Argentine and Indonesia. |
| Keywords: | Basel II, Basel III, BCBS, CAR, difference-in-difference, D-SIB, G-SIB, IRB, risk-weight. |
| JEL: | C21 G12 G17 G18 G21 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps74&r= |