nep-ban New Economics Papers
on Banking
Issue of 2021‒08‒16
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Long-Term Effects of Capital Requirements By Gianni De Nicolo; Nataliya Klimenko; Sebastian Pfeil; Jean-Charles Rochet
  2. The Impacts of Strengthening Regulatory Surveillance on Bank Behavior: A Dynamic Analysis from Incomplete to Complete Enforcement of Capital Regulation in Microprudential Policy By NAKASHIMA, KIYOTAKA; Ogawa, Toshiaki
  3. Measuring heterogeneity in banks’ interest rate setting in Russia By Anna Burova; Alexey Ponomarenko; Svetlana Popova; Andrey Sinyakov; Yulia Ushakova
  4. Observing Enforcement: Evidence from Banking By Anya V. Kleymenova; Rimmy E. Tomy
  5. Bank Credit and Market-Based Finance for Corporations: The Effects of Minibond Issuances By Steven Ongena; Sara Pinoli; Paola Rossi; Alessandro Scopelliti
  6. German banks' behavior in the low interest rate environment By Busch, Ramona; Littke, Helge; Memmel, Christoph; Niederauer, Simon
  7. Economic Support during the COVID Crisis. Quantitative Easing and Lending Support Schemes in the UK By Mahmoud Fatouh; Simone Giansante; Steven Ongena
  8. The impact of complex financial instruments on banks’ vulnerability: empirical evidence on SSM banks By Tommaso Perez; Francesco Potente; Andrea Carboni; Alberto Di Iorio; Jacopo Raponi
  9. Main challenges and prospects for the European banking sector: a critical review of the ongoing debate By Salvatore Cardillo; Raffaele Gallo; Francesco Guarino
  10. Reversal interest rate and macroprudential policy By Darracq Pariès, Matthieu; Kok Sørensen, Christoffer; Rottner, Matthias
  11. Deposit Insurance, Bank Ownership and Depositor Behavior By Sumeyra Atmaca; Karolin Kirschenmann; Steven Ongena; Koen J. L. Schoors
  12. FinTech Credit and Entrepreneurial Growth By Harald Hau; Yi Huang; Hongzhe Shan; Zixia Sheng
  13. Bank and non-bank financial institutions’ crossborder linkages: New evidence from international banking data By Emter, Lorenz; Killeen, Neill; McQuade, Peter
  14. Imperfect pass-through to deposit rates and monetary policy transmission By Polo, Alberto
  15. 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
  16. COVID-19 and Auto Loan Origination Trends By Jose J. Canals-Cerda; Brian Jonghwan Lee
  17. Capital Requirements and Claims Recovery: A New Perspective on Solvency Regulation By Cosimo Munari; Stefan Weber; Lutz Wilhelmy
  18. A New Look at the Effects of the Interest Rate Ceiling in Arkansas By Gregory E. Elliehausen; Simona Hannon; Thomas W. Miller, Jr.
  19. Why do Bank Boards have Risk Committees? By René M. Stulz; James G. Tompkins; Rohan Williamson; Zhongxia (Shelly) Ye
  20. Relationship Capital and Financing Decisions By Thomas Geelen; Erwan Morellec; Natalia Rostova
  21. The impact of borrower-based instruments on household vulnerability in Germany By Barasinska, Nataliya; Ludwig, Johannes; Vogel, Edgar
  22. Credit Enhancement Mechanism in Loan Securitization and Its Implication to Systemic Risk By Katerina Ivanov
  23. A Brief History of the U.S. Regulatory Perimeter By Katherine Di Lucido; Nicholas K. Tabor; Jeffery Y. Zhang
  24. Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation By Bernardo Morais; José-Luis Peydró; Claudia Ruiz-Ortega

  1. By: Gianni De Nicolo (Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)); Nataliya Klimenko (University of Zurich); Sebastian Pfeil (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)); Jean-Charles Rochet (Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute (GFRI); University of Zurich - Swiss Banking Institute (ISB))
    Abstract: We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.
    Keywords: Bank capital requirements, credit crunch, systemic risk
    JEL: E21 E32 F44 G21 G28
    Date: 2021–06
  2. By: NAKASHIMA, KIYOTAKA; Ogawa, Toshiaki
    Abstract: This study examines the impact of strengthening bank capital supervision on bank behavior in the incomplete enforcement of regulations. In a dynamic model of banks facing persistent idiosyncratic shocks, banks accumulate regulatory capital and decrease charter value and lending in the short run, while in the long run, the banking system achieves stability. To test the short-run implications, we utilize the introduction of the prompt corrective action program in Japan as a quasi-natural experiment. Using some empirical specifications with bank- and loan-level data, we find empirical evidence consistent with the theoretical predictions.
    Keywords: regulatory surveillance; incomplete enforcement; heterogeneous bank model; prompt corrective action; bank capital ratio; credit crunch
    JEL: G00 G21 G28
    Date: 2021–08–11
  3. By: Anna Burova (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Svetlana Popova (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation); Yulia Ushakova (Bank of Russia, Russian Federation)
    Abstract: We use credit registry data on all corporate loans issued by all Russian banks since 2017 to decompose the bank interest spreads into a common factor, as well as borrower and lender-related components while controlling for loan characteristics. We find that variation in loan rates associated with lender-specific factors (heterogeneity of banks) and borrower-specific factors (heterogeneity of borrowers) is substantial. We use the identified bank-specific components to measure fragmentation of the corporate credit market in Russia. We illustrate the developments in the Russian credit market during the pandemic using the obtained estimates. The results indicate that heterogeneity in banks’ interest rate setting is high and increased in the early stage of the pandemic. The range of borrower-related premiums charged by banks also widened (mostly due to increase in rates of loans to companies in sectors presumably affected by the pandemic). Finally, our results suggest that banks tightened non-interest loan conditions during the pandemic.
    Keywords: bank interest margin, bank interest spread, corporate credit, credit registry, financial stability, credit market fragmentation, Russian banking sector in the pandemic.
    JEL: E44 E51 E52 E58 G21 G28
    Date: 2021–07
  4. By: Anya V. Kleymenova; Rimmy E. Tomy
    Abstract: This paper finds that the disclosure of supervisory actions is associated with changes in regulators' enforcement behavior. Using a novel sample of enforcement decisions and orders (EDOs) and the setting of the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which required the public disclosure of EDOs, we find that U.S. bank regulators issue more EDOs, intervene sooner, and rely more on publicly observable signals after the disclosure regime change. The content of EDOs also changes, with documents becoming more complex and boilerplate. Our results are stronger in counties with higher news circulation, indicating that disclosure plays an incremental role in regulators' changing behavior. We evaluate the main potentially confounding changes around FIRREA, including the S\\&L crisis and competition from thrifts, and find robust results. We also study changes in bank outcomes following the regime change and find that uninsured deposits decline at EDO banks, especially for banks with EDOs covered in the news. Finally, we observe that bank failure accelerates despite improvements in capital ratios and asset quality.
    Keywords: Disclosure; Enforcement actions; Regulatory incentives; Banking
    JEL: G21 G28
    Date: 2021–08–02
  5. By: Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Sara Pinoli (Bank of Italy); Paola Rossi (Bank of Italy); Alessandro Scopelliti (European Central Bank (ECB) - Directorate General Economics; University of Zurich - Department of Banking and Finance)
    Abstract: We study the effects of diversifying funding sources on the financing conditions for firms. We exploit a regulatory reform that took place in Italy in 2012, i.e. the introduction of ‘minibonds’, which opened a new market-based funding opportunity for unlisted firms. Using the Italian Credit Register, we investigate the impact of minibond issuance on bank credit conditions for issuer firms, both at the firm-bank and firm level. We compare new loans granted to issuer firms with new loans concurrently granted to similar non-issuer firms. We find that issuer firms obtain lower interest rates on bank loans of the same maturity than non-issuer firms do, suggesting an improvement in their bargaining power with banks. In addition, issuer firms reduce the amount of used bank credit but increase the overall amount of available external funds, pointing to a substitution with bank credit and to a diversification of corporate funding sources. Studying their ex-post performance, we find that issuer firms expand their total assets and fixed assets, and also raise their leverage.
    Keywords: bank credit, capital markets, minibonds, loan pricing, SME finance
    JEL: G21 G23 G32 G38
    Date: 2021–04
  6. By: Busch, Ramona; Littke, Helge; Memmel, Christoph; Niederauer, Simon
    Abstract: Using data from a quantitative survey of German banks at three points in time (2015, 2017 and 2019), we analyze the impact of changes in the interest rate level on banks' net interest income and the countermeasures they take. A decline in the interest rate level has a more negative impact on net interest income, the longer the decline lasts and the lower the interest rate level is. This impact softens with increasing risk of changes in the present value of banking books. We do not find that banks generally increase their risks following a drop in income. However, poorly capitalized banks subsequently increase the credit risk of their bond portfolio. After a fall in operational income, banks increase their fee and commission income and reduce their costs. In addition, banks tend to extend their mortgage lending after a drop in their interest income.
    Keywords: Banks' net interest margin,Fee and commission income,Low interest rate environment,Risk-taking,Administrative costs
    JEL: G21
    Date: 2021
  7. By: Mahmoud Fatouh (Bank of England); Simone Giansante (University of Bath - School of Management); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We investigate how the interaction of the Brexit and COVID waves of the Bank of England’s quantitative easing with the leverage ratio capital requirements or government COVID lending support schemes affected bank business lending. We find that the former QE programme was particularly successful in increasing lending to nonfinancial businesses, except for QE-banks subject to the UK leverage ratio, suggesting that the latter ratio incentivized QE-banks to lend to business anyway. The government schemes helped expand lending especially to SMEs post QE COVID, indicating that complementing QE with other credit easing programmes can improve its impact on lending to the real economy. During COVID-stress, changes to the UK leverage ratio supported better market-making in securities markets, and additional QE liquidity boosted stronger repo market intermediation.
    Keywords: Monetary policy, quantitative easing, bank lending, COVID-19
    JEL: E51 G21
    Date: 2021–04
  8. By: Tommaso Perez (Bank of Italy); Francesco Potente (Bank of Italy); Andrea Carboni (Bank of Italy); Alberto Di Iorio (Bank of Italy); Jacopo Raponi (Bank of Italy)
    Abstract: Level 2 (L2) and Level 3 (L3) assets and liabilities represent a substantial portion of European banks’ balance sheets, and valuing them is extremely difficult, since no liquid market prices are available. This paper relies on a large panel of euro-area banks between 2014 and 2019, and two different econometric frameworks, in order to estimate the relationship between the holdings of selected instruments (L2, L3 and Non-Performing Loans, NPLs) and banks’ key performance and risk profile metrics, namely Credit Default Swaps (CDSs), Price-to-Book (PtB) ratios and Z-scores. It finds that larger holdings of L2 tend to be associated with higher CDSs, at least in the short run, while larger amounts of NPLs and L3 tend to characterize banks with higher CDSs, lower PtB ratios and worse Z-scores, other things being equal.
    Keywords: fair value accounting, level 2 instruments, level 3 instruments, non-performing loans, prudential regulation, panel data models
    JEL: G21 G28 C33 M41
    Date: 2021–07
  9. By: Salvatore Cardillo (Bank of Italy); Raffaele Gallo (Bank of Italy); Francesco Guarino (Bank of Italy)
    Abstract: This paper discusses the competing forces that are reshaping the European banking industry and the medium-term consequences for profitability and competition within the sector. The paper highlights that banks are rethinking their business model to address four challenges to emerge in the last decade: low interest rates, tighter regulation, technological innovation, and increasing competition from non-bank intermediaries. The shock generated by the Covid-19 pandemic adds to those developments and has the potential to accelerate them. Our analysis suggests that in order to successfully compete in the medium term banks will likely have to exploit the benefits of digitization, mainly deriving from the reduction in operating costs and the increase in the scale of production. Accommodating the surging demand for green finance is also likely to represent an important source of profits, resulting from the growth of the green market and the development of new specialized products and advisory services. Success in these strategies will presumably require a significant reorganization of banks’ activities to leverage on economies of scale and scope.
    Keywords: banking sector, bank business model, bank profitability, Covid-19, digitization
    JEL: G21 G28
    Date: 2021–07
  10. By: Darracq Pariès, Matthieu; Kok Sørensen, Christoffer; Rottner, Matthias
    Abstract: Could a monetary policy loosening in a low interest rate environment have unintended recessionary effects? Using a non-linear macroeconomic model fitted to the euro area economy, we show that the effectiveness of monetary policy can decline in negative territory until it reaches a turning point, where monetary policy becomes contractionary. The framework demonstrates that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector. The possibility of the reversal interest rate gives rise to a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, substantially mitigates the probability of encountering the reversal rate and increases the effectiveness of negative interest rate policies. This new motive emphasizes the strategic complementarities between monetary policy and macroprudential policy.
    Keywords: Reversal Interest Rate,Negative Interest Rates,MacroprudentialPolicy,Monetary Policy,ZLB
    JEL: E32 E44 E52 E58 G21
    Date: 2021
  11. By: Sumeyra Atmaca (Ghent University); Karolin Kirschenmann (ZEW – Leibniz Centre for European Economic Research); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Koen J. L. Schoors (Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE); Ghent University - Department of General Economics)
    Abstract: We employ proprietary data from a large bank to analyze how – in times of crisis – depositors react to a bank nationalization, re-privatization and an accompanying increase in deposit insurance. Nationalization slows depositors fleeing the bank, provided they have sufficient trust in the national government, while the increase in deposit insurance spurs depositors below the new 100K limit to deposit more. Prior to nationalization, depositors bunch just below the then-prevailing 20K limit. But they abandon bunching entirely during state-ownership, to return to bunching below the new 100K limit after re-privatization. Especially depositors with low switching costs are moving money around.
    Keywords: deposit insurance; coverage limit; bank nationalization; depositor heterogeneity
    JEL: G21 G28 H13 N23
    Date: 2021–01
  12. By: Harald Hau (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)); Yi Huang (Graduate Institute of International and CEPR); Hongzhe Shan (Swiss Finance Institute, Swiss Finance Institute, Students); Zixia Sheng (New Hope Financial Services)
    Abstract: Based on automated credit lines to more than two million vendors trading on Alibaba’s online retail platform, we show how the take-up of FinTech credit varies with the entrepreneur’s bank distance. Proximity to the branches of the five largest stateowned banks correlates positively with the take-up of FinTech credit and suggests more severe credit frictions for Chinese e-commerce vendors close to such banks. We use a discontinuity in the credit decision algorithm to document that a firm’s credit approval and credit use boost a vendor’s sales and transaction growth. Entrepreneurial growth after access to FinTech credit is largest for younger e-commerce firms and in the month of first-time credit approval.
    Keywords: FinTech, credit constraints, micro credit, entrepreneurship
    JEL: G20 G21 O43
    Date: 2021–03
  13. By: Emter, Lorenz (Central Bank of Ireland); Killeen, Neill (Central Bank of Ireland); McQuade, Peter (Central Bank of Ireland)
    Abstract: This Note examines the factors associated with global banks’ cross-border claims on non-bank financial institutions. In line with the substantial growth of non-bank financial intermediation internationally, banks’ cross-border claims on non-bank financial institutions have grown rapidly in recent years. As a global hub for non-bank financial intermediation, Ireland hosts a large share of the non-bank financial institutions captured within these international banking data. Our results suggest that tightening (loosening) monetary policy can decrease (increase) cross-border bank claims on non-bank financial institutions at a global level. Moreover, we find that the tightening of borrower-based macroprudential policies is associated with an increase in cross-border bank flows to non-bank financial institutions. Our findings illustrate the potential for cross-border spillovers from changes to monetary and macroprudential policies and the importance of closely monitoring cross-border linkages between banks and non-bank financial institutions. Our findings also highlight the need for developing and operationalising the macroprudential policy framework for non-bank financial intermediation given the potential for spillover effects across the financial system.
    Date: 2021–06
  14. By: Polo, Alberto (Bank of England)
    Abstract: I document three salient features of the transmission of monetary policy shocks: imperfect pass-through to deposit rates, impact on credit spreads, and substitution between deposits and other bank liabilities. I develop a monetary model consistent with these facts, where banks have market power on deposits, a duration-mismatched balance sheet, and a dividend-smoothing motive. Deposit demand has a dynamic component, as in the literature on customer markets. A financial friction makes non-deposit funding supply imperfectly elastic. The model indicates that imperfect pass-through to deposit rates is an important source of amplification of monetary policy shocks.
    Keywords: Monetary policy transmission; deposit rates; banks; market power
    JEL: E43 E52 G21
    Date: 2021–07–30
  15. By: Andreas Fuster; Aurel Hizmo; Lauren Lambie-Hanson; James Vickery; Paul S. Willen
    Abstract: We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.
    Keywords: Mortgage; Credit; Financial intermediation; Fintech; COVID-19
    JEL: G21 G23 G28
    Date: 2021–07–30
  16. By: Jose J. Canals-Cerda; Brian Jonghwan Lee
    Abstract: We study the impact of the COVID-19 crisis on auto loan origination activity during 2020. We focus on the dynamic impact of the crisis across lending channels, Equifax Risk Score (Risk Score) segments, and relevant geographic characteristics such as urbanization rate. We measure a significant drop in auto loan originations in March‒April followed by a near rebound in May‒June. Originations remain slightly depressed until October and fall again in November‒December. We document the largest drop and the smallest rebound in the subprime segment. We do not find any suggestive evidence that used car loan originations exhibited patterns significantly different from the rest of the market. We also document a more pronounced impact in the Northeast and the Pacific, seemingly influenced by the higher urbanization rate in these regions. Bank-financed originations experienced the largest drop and the smallest rebound, thus resulting in a loss of market share and continuing a 10-year trend of bank share loss in auto lending. We find that the drop in auto loans originated by banks was particularly significant among subprime borrowers. The impact of the COVID-19 crisis across origination channels contrasts with the experience during the Great Recession when banks contributed the largest support to the auto loan origination segment during periods of stress and finance company-originated auto loans were depressed.
    Keywords: auto loans; loan originations; COVID-19; consumer credit; bank and non-bank finance
    JEL: G01 G21 G23 L62
    Date: 2021–08–12
  17. By: Cosimo Munari (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Stefan Weber (Leibniz Universität Hannover - House of Insurance); Lutz Wilhelmy (Swiss Re)
    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 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: 2021–04
  18. By: Gregory E. Elliehausen; Simona Hannon; Thomas W. Miller, Jr.
    Abstract: Arkansas has been a popular place to study the effects of rate ceilings because of its exceptionally low interest rate ceiling. This paper examines the effects of the Arkansas rate ceiling on credit use by risky nonprime Arkansas consumers, which are especially vulnerable to credit rationing because of the low ceiling. We compare the level and composition of consumer debt of nonprime consumers in Arkansas with that of prime Arkansas consumers and also nonprime consumers in the neighboring states. We find that nonprime Arkansas consumers are less likely to have consumer debt and, conditional on having debt, have lower, but not much lower, levels of consumer debt than prime Arkansas consumers and nonprime consumers in neighboring states. Types of credit used by nonprime Arkansas consumers tend to differ from those of our comparison groups. Notable is much lower use of consumer finance loans, traditionally an important source of credit for higher risk consumers. This finding suggests rate-based rationing of risky consumers. Also notable is lower use of bank credit despite federal preemption of the rate ceiling for banks. This result is consistent with banks’ traditional avoidance of risky lending.
    Keywords: Consumer Credit; Access to Credit; Interest Rate Cap; Financial Regulation
    JEL: D14 G20
    Date: 2021–07–30
  19. By: René M. Stulz; James G. Tompkins; Rohan Williamson; Zhongxia (Shelly) Ye
    Abstract: We develop a theory of bank board risk committees. With this theory, such committees are valuable even though there is no expectation that bank risk is lower if the bank has a well-functioning risk committee. As predicted by our theory (1) many large and complex banks voluntarily chose to have a risk committee before the Dodd-Frank Act forced bank holding companies with assets in excess of $10 billion to have a board risk committee, and (2) establishing a board risk committee does not reduce a bank’s risk on average. Using unique interview data, we show that the work of risk committees is consistent with our theory in part.
    JEL: G21 G28 G34
    Date: 2021–07
  20. By: Thomas Geelen (Copenhagen Business School - Department of Finance; Danish Finance Institute); Erwan Morellec (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute); Natalia Rostova (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)
    Abstract: Lending relationships matter for firm financing. In a model of debt dynamics, we study how lending relationships are formed and how they impact leverage and debt maturity choices. In the model, lending relationships evolve through repeated interactions between firms and debt investors. Stronger lending relationships lead firms to adopt higher leverage ratios, issue longer term debt, and raise funds from non-relationship lenders when relationship quality is sufficiently high. The maturity of debt contracts issued to non-relationship investors is higher than that of relationship investors. Negative shocks to relationship lenders drastically affect the financing choices of firms with intermediate relationship quality.
    Keywords: relationship lending, capital structure, debt maturity, default
    JEL: G20 G32 G33
    Date: 2021–07
  21. By: Barasinska, Nataliya; Ludwig, Johannes; Vogel, Edgar
    Abstract: Excessive household borrowing has been identified as an important determinant of financial crises. Borrower-based macroprudential instruments have been proposed as a possible remedy. In Germany, two instruments have been available to macroprudential supervisors since 2017: a cap on the loan-to-value (LTV) ratio and an amortization requirement, but none of them has been activated so far. Therefore, this paper presents a simulation tool that allows the impact of activating of borrower-based instruments to be evaluated ex ante. The simulation is based on microdata from the German Panel on Household Finances (PHF) and is at the same time calibrated to match aggregate developments in the residential real estate market. This micro-macro consistent simulation approach can be used to detect vulnerabilities in household balance sheets and perform an ex ante analysis of the activation and calibration of borrower-based macroprudential instruments. An illustrative example of a hypothetical activation shows that the introduction of a cap on the loan-to-value (LTV) ratio of new mortgage loans in Germany could improve important indicators of household vulnerability.
    Keywords: Household finance,mortgages,macroprudential policy,borrower-based instruments,financial stability
    JEL: D14 G17 G21 G28 R21
    Date: 2021
  22. By: Katerina Ivanov (McColl School of Business, Queens University of Charlotte)
    Abstract: This paper examines the relationship between different forms of credit enhancement and bank contribution to systemic crashes. The findings demonstrate that the overall level of contractual retained interests and guarantees offered to own securitization structures poses a significant threat to financial system stability, although this varies for different types of the underlying assets as well as subordinated structure of interest retention. The amount of credit exposure arising from credit enhancements increases BHCs' contribution to market crashes, while ownership interest in loans and obligations to provide funding do not seem to affect the level of risk BHCs inject into the system. Recourse credit enhancement in mortgage and consumer securitizations is a significant determinant of systemic risks injected by banks into the market with the former one having the strongest economic impact. The implicit credit enhancement in commercial loans tends to decrease systemic risk contribution. The results are not driven by the level of securitization activities, although the economic effect is stronger for large securitizers. The findings have direct implications for the most recent changes in legislation requiring originating banks to retain a material portion of credit risks of securitized loans through retained interests mechanisms.
    Date: 2021
  23. By: Katherine Di Lucido; Nicholas K. Tabor; Jeffery Y. Zhang
    Abstract: This paper provides a brief history of the U.S. financial regulatory perimeter, a legal cordon comprised of “positive†and “negative†restrictions on the conduct of banking organizations. Today’s regulatory perimeter faces a wide range of challenges, from disaggregation, to new commercial entrants, to new varieties of charters (and new uses of legacy charters). We situate these challenges in the longer history of American banking, identifying a pattern in debates about the nature, shape, and position of the perimeter: outside-in pressure, inside-out pressure, and reform and expansion. We also observe a shift in this pattern, beginning roughly three decades ago, which gradually made the perimeter broader, more complex, and arguably more permeable. We show this trend graphically in an animation accompanying this paper.
    Keywords: Regulatory perimeter; Banking regulation; Law and economics; Non-bank financial intermediation
    JEL: K20 K40 N20 N40
    Date: 2021–08–02
  24. By: Bernardo Morais; José-Luis Peydró; Claudia Ruiz-Ortega
    Abstract: We study the impact of public debt limits on economic growth exploiting the introduction of a Mexican law capping the debt of subnational governments. Despite larger fiscal consolidation, states with higher ex-ante public debt grew substantially faster after the law, albeit at the expense of increased extreme poverty. Credit registry data suggests that the mechanism behind this result is a reduction in crowding out. After the law, banks operating in more indebted states reallocate credit away from local governments and into private firms. The unwinding of crowding out is stronger for riskier firms, firms borrowing from banks more exposed to local public debt, and for firms operating in states with lower public spending on infrastructure projects.
    Keywords: Crowding out; Government lending; Subnational debt; Banks; Emerging markets
    JEL: D72 G21 L33 P16
    Date: 2021–08–04

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