An increase in collateral availability can reduce the need for bank auditing. We test this hypothesis using reforms which expanded the set of pledgeable assets in secured lending, and find heterogeneous effects in the cross-section of banks. Smaller (relationship) banks are safer and earn a lower risk-adjusted net interest income post-reform, after controlling for lending volume; a fall in their operating costs offsets the negative effect. Larger (arm's-length) banks increase lending volume but are not more profitable. We guide our empirical analysis using an adverse selection lending model in which collateral and auditing are substitute screening devices.
{"title":"Pledgeability and Bank Lending Technology","authors":"Swarnava Biswas, T. Dieler, Wei Zhai","doi":"10.2139/ssrn.3801622","DOIUrl":"https://doi.org/10.2139/ssrn.3801622","url":null,"abstract":"An increase in collateral availability can reduce the need for bank auditing. We test this hypothesis using reforms which expanded the set of pledgeable assets in secured lending, and find heterogeneous effects in the cross-section of banks. Smaller (relationship) banks are safer and earn a lower risk-adjusted net interest income post-reform, after controlling for lending volume; a fall in their operating costs offsets the negative effect. Larger (arm's-length) banks increase lending volume but are not more profitable. We guide our empirical analysis using an adverse selection lending model in which collateral and auditing are substitute screening devices.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"37 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81858955","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Utilizing a change to bankruptcy treatment of repo collateral, I provide causal evidence that strengthened creditor rights increase credit supply and financial instability by increasing the reuse of collateral. I use the 2000’s housing boom and bust as a laboratory and collect data linking dealers’ repledgeable collateral to their lending to mortgage companies. Exposed dealers increased their repledgeable collateral and credit provision to mortgage companies. Mortgage companies responded by increasing originations and pivoting toward non-traditional products. I estimate that the expansion in credit drove a 9% increase in originations and accounted for 38% of defaults, consistent with a financial accelerator.
{"title":"Creditor Rights, Collateral Reuse, and Credit Supply","authors":"B. Lewis","doi":"10.2139/ssrn.3773311","DOIUrl":"https://doi.org/10.2139/ssrn.3773311","url":null,"abstract":"Utilizing a change to bankruptcy treatment of repo collateral, I provide causal evidence that strengthened creditor rights increase credit supply and financial instability by increasing the reuse of collateral. I use the 2000’s housing boom and bust as a laboratory and collect data linking dealers’ repledgeable collateral to their lending to mortgage companies. Exposed dealers increased their repledgeable collateral and credit provision to mortgage companies. Mortgage companies responded by increasing originations and pivoting toward non-traditional products. I estimate that the expansion in credit drove a 9% increase in originations and accounted for 38% of defaults, consistent with a financial accelerator.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84132679","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper identifies two theoretical mechanisms that relate the regulatory arbitrage behavior of internationally active banks (IABs) to global financial conditions. According to the first mechanism, regulation becomes more binding during adverse financial conditions. Under these conditions, IABs face higher compliance costs in more regulated markets. According to the second mechanism, higher regulation suppresses the degree of risk-taking and asset returns so that highly-regulated nations are more insulated from global financial risk. These results are reversed in less-regulated nations. We use a panel of bilateral BIS banking statistics and a unique empirical strategy to find that the first of the two theoretical mechanisms above is more prevalent. Specifically, IABs expand their claims more rapidly in less-regulated nations when global perception of financial risk is higher. The direction of arbitrage is reversed under loose conditions. This evidence is corroborated by the inferences from a structural vector autoregressive model fitted to data from individual countries.
{"title":"Regulatory Arbitrage and Global Push Factors","authors":"U. Aysun, M. Tseng","doi":"10.2139/ssrn.3767504","DOIUrl":"https://doi.org/10.2139/ssrn.3767504","url":null,"abstract":"This paper identifies two theoretical mechanisms that relate the regulatory arbitrage behavior of internationally active banks (IABs) to global financial conditions. According to the first mechanism, regulation becomes more binding during adverse financial conditions. Under these conditions, IABs face higher compliance costs in more regulated markets. According to the second mechanism, higher regulation suppresses the degree of risk-taking and asset returns so that highly-regulated nations are more insulated from global financial risk. These results are reversed in less-regulated nations. We use a panel of bilateral BIS banking statistics and a unique empirical strategy to find that the first of the two theoretical mechanisms above is more prevalent. Specifically, IABs expand their claims more rapidly in less-regulated nations when global perception of financial risk is higher. The direction of arbitrage is reversed under loose conditions. This evidence is corroborated by the inferences from a structural vector autoregressive model fitted to data from individual countries.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-01-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79990206","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper aims to examine the degree of dispersion in the loan pricing of commercial banks and its association with competitive conditions. To this end, an indexation mechanism processing a novel bank-level dataset is proposed to quantify the lending rate variability in general-purpose, vehicle, and housing loans for the period January 2007-April 2020. In panel convergence tests, we show that there exists heterogeneity in long-term co-movements in banks’ loan pricing, while periods following the tightening in financial conditions display short-term deviations from general tendencies demonstrated by dispersion indices. The methodological setting also entails the construction of competition indicators for total and segment-based credit market developments. The competitive conditions monitored by Herfindahl-Hirschman Indicator (HHI) present that housing and vehicle loan segments have been concentrated in recent years. Quantile regression results further validate that improvements in the competition are associated with a lower level of lending rate dispersion in housing and vehicle segments in a statistically significant manner, whereas this relation is not applicable for general-purpose loans.
{"title":"Consumer Loan Rate Dispersion and the Role of Competition: Evidence from the Turkish Banking Sector","authors":"S. Baziki, Yavuz Kılıç, M. H. Yılmaz","doi":"10.2139/ssrn.3756276","DOIUrl":"https://doi.org/10.2139/ssrn.3756276","url":null,"abstract":"This paper aims to examine the degree of dispersion in the loan pricing of commercial banks and its association with competitive conditions. To this end, an indexation mechanism processing a novel bank-level dataset is proposed to quantify the lending rate variability in general-purpose, vehicle, and housing loans for the period January 2007-April 2020. In panel convergence tests, we show that there exists heterogeneity in long-term co-movements in banks’ loan pricing, while periods following the tightening in financial conditions display short-term deviations from general tendencies demonstrated by dispersion indices. The methodological setting also entails the construction of competition indicators for total and segment-based credit market developments. The competitive conditions monitored by Herfindahl-Hirschman Indicator (HHI) present that housing and vehicle loan segments have been concentrated in recent years. Quantile regression results further validate that improvements in the competition are associated with a lower level of lending rate dispersion in housing and vehicle segments in a statistically significant manner, whereas this relation is not applicable for general-purpose loans.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"36 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85627104","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the role of board directors from financial institutions (financial interlocks) on the relationship between ownership structure and the cost of debt. In Italy, ownership is largely concentrated often in families, and financial institutions are the primary source of funding for firms. These characteristics offer a context to examine debt-equity agency conflicts and whether having direct internal monitoring channels such as financial interlocks reduces a firm’s cost of debt. We show that while concentrated ownership has an increasing effect on the cost of debt, financial interlocks moderate this relationship. Further, we find that financial interlocks act as an even more important tool in mitigating the agency cost of debt in cases of family ownership. Our results are robust to a set of firm-specific characteristics and support the idea that financial interlocks provide firms with a monitoring device that could resolve some of the debt-equity agency conflicts.
{"title":"Financial Interlocks and the Cost of Debt in a Setting with Concentrated Family Ownership","authors":"Valeria Volpentesta, P. André, S. Morricone","doi":"10.2139/ssrn.3770508","DOIUrl":"https://doi.org/10.2139/ssrn.3770508","url":null,"abstract":"We investigate the role of board directors from financial institutions (financial interlocks) on the relationship between ownership structure and the cost of debt. In Italy, ownership is largely concentrated often in families, and financial institutions are the primary source of funding for firms. These characteristics offer a context to examine debt-equity agency conflicts and whether having direct internal monitoring channels such as financial interlocks reduces a firm’s cost of debt. We show that while concentrated ownership has an increasing effect on the cost of debt, financial interlocks moderate this relationship. Further, we find that financial interlocks act as an even more important tool in mitigating the agency cost of debt in cases of family ownership. Our results are robust to a set of firm-specific characteristics and support the idea that financial interlocks provide firms with a monitoring device that could resolve some of the debt-equity agency conflicts.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"30 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90544947","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Drechsler, Savov, and Schnabl (2017) present a novel reformulation of the bank lending channel of monetary transmission based on market power in local deposits markets, which they term the deposits channel. In this paper we perform a successful narrow replication. We then further their study by reconciling their results on lending with two strands of related literature. First, recent studies have pointed out the unique dynamics of credit card loans in Community Reinvestment Act loan origination data. When accounting for this heterogeneity, we find some key results are sensitive to the inclusion of credit card banks. This confirms the importance of accounting for credit card loans when using CRA data. Second, we show that inconsistencies with related empirical studies can be explained by differences in market power measure, sample period, and the inclusion of alternative control variables. These results highlight that market power on opposing sides of bank balance sheets can impact monetary transmission through alternative channels.
{"title":"The Deposits Channel Revisited","authors":"M. Schaffer, Nimrod Segev","doi":"10.2139/ssrn.3746618","DOIUrl":"https://doi.org/10.2139/ssrn.3746618","url":null,"abstract":"Drechsler, Savov, and Schnabl (2017) present a novel reformulation of the bank lending channel of monetary transmission based on market power in local deposits markets, which they term the deposits channel. In this paper we perform a successful narrow replication. We then further their study by reconciling their results on lending with two strands of related literature. First, recent studies have pointed out the unique dynamics of credit card loans in Community Reinvestment Act loan origination data. When accounting for this heterogeneity, we find some key results are sensitive to the inclusion of credit card banks. This confirms the importance of accounting for credit card loans when using CRA data. Second, we show that inconsistencies with related empirical studies can be explained by differences in market power measure, sample period, and the inclusion of alternative control variables. These results highlight that market power on opposing sides of bank balance sheets can impact monetary transmission through alternative channels.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"37 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82779567","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Allen N. Berger, Xinming Li, Herman Saheruddin, Daxuan Zhao
Governments provide guarantees to banks, such as deposit insurance, often increasing them during financial crises. While risk effects are well researched, impacts on bank output remain largely unexplored. We investigate bank output effects using data from 75 countries on bank liquidity creation, a comprehensive bank output measure. We address the reverse-causality identification challenge by examining effects of home country guarantees on liquidity creation by subsidiary banks in foreign host nations, and tackle omitted-variables concerns by specifying host country × year fixed effects. Our striking findings suggest that home-country guarantees increase decrease subsidiary bank liquidity creation by as much as 15%.
{"title":"Government Guarantees and Bank Liquidity Creation Around the World","authors":"Allen N. Berger, Xinming Li, Herman Saheruddin, Daxuan Zhao","doi":"10.2139/ssrn.3729115","DOIUrl":"https://doi.org/10.2139/ssrn.3729115","url":null,"abstract":"Governments provide guarantees to banks, such as deposit insurance, often increasing them during financial crises. While risk effects are well researched, impacts on bank output remain largely unexplored. We investigate bank output effects using data from 75 countries on bank liquidity creation, a comprehensive bank output measure. We address the reverse-causality identification challenge by examining effects of home country guarantees on liquidity creation by subsidiary banks in foreign host nations, and tackle omitted-variables concerns by specifying host country × year fixed effects. Our striking findings suggest that home-country guarantees increase decrease subsidiary bank liquidity creation by as much as 15%.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"23 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85800958","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this study we provide a practical framework and methodology for analyzing the effects of banking shocks (economic or financial in nature) on bank fundamentals, that avoids the use of complicated econometrics methods. For this, we focus our attention to the effects of the 2007-2008 global financial crisis on the four largest US banks and examine the variation of trends in the select financial ratios for those institutions using quarterly regulatory data running from 2002-Q4 to 2020-Q2. We start by plotting time series charts of those financial ratios for each bank and compare the before-crisis, transition and after-crisis periods. For this, we simply fit trend lines with three parameters of shift, slope, and volatility to the banking data. The shift parameter describes the level change of the variable when before- and after-crisis periods are compared. The slope parameter pronounces the difference in steepness of the trend lines, while the volatility parameter is associated with all three periods and describe the variation in the data during each period. Our results indicate that capital ratios, an important regulatory financial ratio, are higher across the board in the after-crisis period compared to before-crisis period, suggesting a positive shift. We don’t see significant changes in slope parameter for the capital ratio series leading us to suggest the use of dummy variable regression model where slope is treated as a fixed constant. We further show that pre-crisis and transition periods are characterized by higher volatilities that ultimately subside in the after-crisis period. Lastly, we conclude by suggesting that financial practitioners use the shift, slope and volatility parameters in understanding trends in financial time series data since it is easy to implement and interpret the results compared to more sophisticated econometric models.
{"title":"Analyzing Impact of a Crisis on Bank Financial Ratios","authors":"Osman Nal, A. Cai","doi":"10.2139/ssrn.3730205","DOIUrl":"https://doi.org/10.2139/ssrn.3730205","url":null,"abstract":"In this study we provide a practical framework and methodology for analyzing the effects of banking shocks (economic or financial in nature) on bank fundamentals, that avoids the use of complicated econometrics methods. For this, we focus our attention to the effects of the 2007-2008 global financial crisis on the four largest US banks and examine the variation of trends in the select financial ratios for those institutions using quarterly regulatory data running from 2002-Q4 to 2020-Q2. We start by plotting time series charts of those financial ratios for each bank and compare the before-crisis, transition and after-crisis periods. For this, we simply fit trend lines with three parameters of shift, slope, and volatility to the banking data. The shift parameter describes the level change of the variable when before- and after-crisis periods are compared. The slope parameter pronounces the difference in steepness of the trend lines, while the volatility parameter is associated with all three periods and describe the variation in the data during each period. Our results indicate that capital ratios, an important regulatory financial ratio, are higher across the board in the after-crisis period compared to before-crisis period, suggesting a positive shift. We don’t see significant changes in slope parameter for the capital ratio series leading us to suggest the use of dummy variable regression model where slope is treated as a fixed constant. We further show that pre-crisis and transition periods are characterized by higher volatilities that ultimately subside in the after-crisis period. Lastly, we conclude by suggesting that financial practitioners use the shift, slope and volatility parameters in understanding trends in financial time series data since it is easy to implement and interpret the results compared to more sophisticated econometric models.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"48 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78579387","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper argues that banks should not be treated as intermediaries of loanable funds in order to determine optimal bank capital structure. This is because banks create deposits through the process of lending. The Modigliani–Miller analysis cannot be applied to banks because when lending creates deposits the asset side of banks varies together with the liability side and equity behaves more like a sticky variable. In this setting, aggregate procyclical high leverage in the banking sector emerges almost automatically. The paper provides some empirical evidence consistent with this view and discusses implications with respect to bank regulation.
{"title":"Bank Capital and the Modigliani-Miller Theorem When Loans Create Deposits","authors":"George Dotsis","doi":"10.2139/ssrn.3347104","DOIUrl":"https://doi.org/10.2139/ssrn.3347104","url":null,"abstract":"This paper argues that banks should not be treated as intermediaries of loanable funds in order to determine optimal bank capital structure. This is because banks create deposits through the process of lending. The Modigliani–Miller analysis cannot be applied to banks because when lending creates deposits the asset side of banks varies together with the liability side and equity behaves more like a sticky variable. In this setting, aggregate procyclical high leverage in the banking sector emerges almost automatically. The paper provides some empirical evidence consistent with this view and discusses implications with respect to bank regulation.<br>","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"43 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82024325","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using micro-level household mortgage data, I measure dispersion in the credit quality of borrowers in the housing market and show that it forecasts regional real economic activity. I provide empirical evidence that associates the predictive power of dispersion with heterogeneity in the exposure of households' labor income to economy-wide shocks. I explain these observations in a model featuring time-varying risk premia, incomplete markets, and household heterogeneity. Due to risk aversion, the consumption and investment responses of households have a convex association with their labor income exposure to aggregate risks. As a result, dispersion forecasts the aggregate output more strongly in more heterogeneous regions, consistent with the data.
{"title":"Can Time‐Varying Risk Premia and Household Heterogeneity Explain Credit Cycles?","authors":"Mohammad Ghaderi","doi":"10.2139/ssrn.3709547","DOIUrl":"https://doi.org/10.2139/ssrn.3709547","url":null,"abstract":"Using micro-level household mortgage data, I measure dispersion in the credit quality of borrowers in the housing market and show that it forecasts regional real economic activity. I provide empirical evidence that associates the predictive power of dispersion with heterogeneity in the exposure of households' labor income to economy-wide shocks. I explain these observations in a model featuring time-varying risk premia, incomplete markets, and household heterogeneity. Due to risk aversion, the consumption and investment responses of households have a convex association with their labor income exposure to aggregate risks. As a result, dispersion forecasts the aggregate output more strongly in more heterogeneous regions, consistent with the data.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"14 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90255836","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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