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on Banking |
| By: | Alogoskoufis, Spyros; Langfield, Sam |
| Abstract: | Euro area governments have committed to break the doom loop between bank risk and sovereign risk. But policymakers have not reached consensus on whether and how to reform the regulatory treatment of banks’ sovereign exposures. To inform policy discussions, this paper simulates portfolio reallocations by euro area banks under scenarios for regulatory reform. Simulations highlight a tension in regulatory design between concentration and credit risk. An area-wide low-risk asset—created by pooling and tranching cross-border portfolios of government debt securities— would resolve this tension by expanding the portfolio opportunity set. Banks could therefore reinvest into an asset that has both low concentration and low credit risk. JEL Classification: G01, G11, G21, G28 |
| Keywords: | bank regulation, sovereign risk, systemic risk |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201874&r=ban |
| By: | Irani, Rustom M; Iyer, Rajkamal; Meisenzahl, Ralf; Peydró, José Luis |
| Abstract: | We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed-effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention and nonbanks step in, particularly among loans with higher capital requirements and at times when capital is scarce. This reallocation has important spillovers: loans funded by nonbanks with fragile liabilities experience greater sales and price volatility during the 2008 crisis. |
| Keywords: | Basel III; Distressed debt; Interactions between banks and nonbanks; Risk-based capital regulation; Shadow banks; Trading by banks |
| JEL: | G01 G21 G23 G28 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12913&r=ban |
| By: | Gareth Anderson (Centre for Macroeconomics (CFM); University of Oxford); Saleem Bahaj (Bank of England; Centre for Macroeconomics (CFM)); Matthieu Chavaz (Bank of England); Angus Foulis (Bank of England; Centre for Macroeconomics (CFM)); Gabor Pinter (Bank of England; Centre for Macroeconomics (CFM)) |
| Abstract: | This paper shows that lending relationships insulate corporate investment from shocks to collateral values. We construct a novel database covering the banking relationships of UK firms, as well as those of their board members and executives. We find that the sensitivity of corporate investment to shocks to real estate collateral value is halved when the length of the bank-firm relationship increases from the 25th to the 75th percentile. This effect is substantially reduced for firms whose executives have a personal mortgage relationship with their firm’s bank. Our findings provide support for theories where collateral and private information are substitutes in mitigating credit frictions over the cycle. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1813&r=ban |
| By: | Cao, Qingqing (Michigan State University); Minetti, Raoul (Michigan State University); Olivero, Maria (Drexel University) |
| Abstract: | We study the role of multinational banks in the propagation of business cycles in host countries. In our economy, multinational banks can transfer liquidity across borders through internal capital markets. However, their scarce knowledge of local firms' collateral hinders their allocation of liquidity to firms. We find that, through the interaction between the "liquidity origination" advantage and the "liquidity allocation" disadvantage, multinational banks can act as a short-run stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks effective stabilization tool. |
| Keywords: | Multinational Banks; Macroeconomic Stability; Business Cycle |
| JEL: | E44 |
| Date: | 2018–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2018_006&r=ban |
| By: | Li, Ye (Ohio State University) |
| Abstract: | Banks are important because firms hold their debt ("inside money") as liquidity buffer. Banking crises are costly because the contraction of inside money supply compromises firms' liquidity management and hurts investment. By highlighting the interaction between banks and firms in the money market, this paper offers a theory of procyclical inside money creation and the resulting instability. It sheds light on the cyclicality of bank leverage, and how it affects the frequency and duration of banking crises. Introducing outside money (government debt) to alleviate liquidity shortage can be counterproductive, because its competition with inside money destabilizes the banking sector. |
| JEL: | E02 E22 E32 E41 E43 E44 E51 E58 E61 E62 G01 G12 G18 G20 G30 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-24&r=ban |
| By: | Gebhardt, Günther; Novotny-Farkas, Zoltán |
| Abstract: | We investigate whether and how the shift from discretionary forward-looking provisioning to the restrictive incurred loss approach under International Financial Reporting Standards (IFRS) in the European Union (EU) affects the cross-country comparability and predictive ability of loan loss allowances. Given bank supervisors' keen interest in comparable and adequate loan loss allowances, we also examine the role of supervisors in determining financial statement effects around IFRS adoption. We find that the application of the incurred loss approach has led to more comparable loan loss allowances. However, some differences persist in countries where supervisors were reluctant to enforce the incurred loss approach. Our results also suggest that the predictive ability of loan loss allowances improved following IFRS adoption. Finally, in supplemental analyses we document that increased comparability of loan loss allowances is associated with the cross-country convergence of the risk sensitivity of bank leverage indicating an improvement in the effectiveness of market discipline in the EU. |
| Keywords: | comparability,loan loss allowances,IFRS,bank accounting,supervisory intervention |
| JEL: | M41 M48 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:591&r=ban |
| By: | Andrew Filardo; Pierre Siklos |
| Abstract: | This paper argues that a measure of lending conditions - Senior Loan Officer (SLO) surveys - offers important insights into the monetary transmission mechanism. Using a Global VAR (GVAR) and SLO survey data from 16 countries, we document bank lending standards' significant role in explaining the dynamics of domestic credit conditions. Changes in lending attitudes lead to spillovers of financial conditions to other advanced and emerging market economies. We also examine the interaction of unconventional monetary policies (UMPs) and lending attitudes by using an external high frequency instrument. Looking through this lens of UMPs, we see that expansionary monetary policy led to a lowering of domestic credit standards which amplified the impact of the initial monetary stimulus. However, we also find evidence that the need to resort to UMPs also brought about a decline in lending demand, raising questions about whether the signaling channel of monetary policy unintentionally worked at cross purposes by sapping the full effectiveness of these policies. The varied experiences in the United States and euro area draw attention to the relative importance of bank intermediation in determining the strength of the bank lending channel of monetary policy. |
| Keywords: | global VAR, lending standards and credit conditions, unconventional monetary policies, spillovers |
| JEL: | F44 F36 F15 E5 E32 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:723&r=ban |
| By: | Marcel Bräutigam (LabEx MME-DII - UCP - Université de Cergy Pontoise - Université Paris-Seine, ESSEC Business School - Essec Business School, LPSM UMR 8001 - Laboratoire de Probabilités, Statistique et Modélisation - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique); Michel Dacorogna (SCOR SE - SCOR SE, DEAR Consulting); Marie Kratz (SID - Information Systems, Decision Sciences and Statistics Department - Essec Business School) |
| Abstract: | In this study we consider the risk estimation as a stochastic process based on the Sample Quantile Process (SQP) - which is a generalization of the Value-at-Risk calculated on a rolling sample. Using SQP's, we are able to show and quantify the pro-cyclicality of the current way nancial institutions measure their risk. Analysing 11 stock indices, we show that, if the past volatility is low, the historical computation of the risk measure underestimates the future risk, while in periods of high volatility, the risk measure overestimates the risk. Moreover, using a simple GARCH(1,1) model, we conclude that this pro-cyclical e ect is related to the clustering of volatility. We argue that this has important consequences for the regulation in times of crisis. |
| Keywords: | risk measure,sample quantile process,stochastic model,VaR,volatility |
| Date: | 2018–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01791026&r=ban |
| By: | Signe Krogstrup (International Monetary Fund); Cédric Tille (The Graduate Institute of International and Development Studies); |
| Abstract: | The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. Analysis of data on European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area. |
| Keywords: | Currency mismatch, capital flows, push factors, spillovers, cross-border transmission of shocks, European bank balance sheets |
| JEL: | F32 F34 F36 |
| Date: | 2018–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp09-2018&r=ban |
| By: | Sebastian Doerr; Philipp Schaz |
| Abstract: | We classify a large sample of banks according to the geographic diversification of their international syndicated loan portfolio. Our results show that diversified banks maintain higher loan supply during banking crises in borrower countries. The positive loan supply effects lead to higher investment and employment growth for firms. Diversified banks are stabilizing due to their ability to raise additional funding during times of distress, which also shields connected markets from spillovers. Further distinguishing banks by nationality reveals a pecking order: diversified domestic banks are the most stable source of funding, while foreign banks with little diversification are the most fickle. Our findings suggest that the decline in financial integration since the recent crisis increases countries' vulnerability to local shocks. |
| Keywords: | Diversification, Global Banking, Financial Stability, Syndicated Loan Market, Banking Crisis |
| JEL: | F21 F36 G21 G30 O16 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:288&r=ban |
| By: | Bardosci, Marco (Bank of England); Bianconi, Ginestra (School of Mathematical Sciences, Queen Mary University of London); Ferrara, Gerardo (Bank of England) |
| Abstract: | In this paper, we analyse the network of exposures constructed by using the UK trade repository data for three different categories of contracts: interest rate, credit, and foreign exchange derivatives. We study how liquidity shocks related to variation margins propagate across the network and translate into payment deficiencies. A key finding of the paper is that, in extreme theoretical scenarios where liquidity buffers are small, a handful of institutions may experience significant spillover effects due to the directionality of their portfolios. Additionally, we show that a variant of a recently introduced centrality measure — Functional Multiplex PageRank — can be used as a proxy of the vulnerability of financial institutions, outperforming in this respect the commonly used eigenvector centrality. |
| Keywords: | Central counterparty (CCP); liquidity shock; multiplex networks; systemic risk; financial networks |
| JEL: | D85 G01 G17 L14 |
| Date: | 2018–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0726&r=ban |