We find that the viewership of business television raises the propensity of households to refinance their homes when doing so is financially advantageous. To estimate the effect of business TV, we exploit the staggered entry of Fox Business Network (FBN) into zip codes across the U.S. Exposure to FBN is associated with a 14% increase in local refinancing volume in response to a 100 bps drop in mortgage interest rates. We confirm the media effect on refinancing by using an instrument for TV viewership, which exploits exogenous variation in the channels’ ordinal positions. The media influence is stronger for minority and lower-income applicants. Overall, business TV likely raises financial awareness and serves as a nudge against inertia.
{"title":"Financial Media as a Money Doctor: Evidence from Refinancing Decisions","authors":"Lin Hu, Kun Li, P. Ngo, D. Sosyura","doi":"10.2139/ssrn.3679875","DOIUrl":"https://doi.org/10.2139/ssrn.3679875","url":null,"abstract":"We find that the viewership of business television raises the propensity of households to refinance their homes when doing so is financially advantageous. To estimate the effect of business TV, we exploit the staggered entry of Fox Business Network (FBN) into zip codes across the U.S. Exposure to FBN is associated with a 14% increase in local refinancing volume in response to a 100 bps drop in mortgage interest rates. We confirm the media effect on refinancing by using an instrument for TV viewership, which exploits exogenous variation in the channels’ ordinal positions. The media influence is stronger for minority and lower-income applicants. Overall, business TV likely raises financial awareness and serves as a nudge against inertia.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"54 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88694856","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 studies the role of credit market competition in explaining consumer bankruptcy filings. I exploit variation in bank competition induced by large bank mergers to establish that personal bankruptcy rates are significantly higher in more competitive local banking markets. Higher competition prompts banks to take more risks by increasing credit supply and lowering their credit standards. Finally, using bank balance sheet data, I demonstrate that banks that operate in more competitive counties have higher credit supply and exhibit a greater loan loss rate, consistent with the bank risk-taking channel.
{"title":"Bank Competition and Personal Bankruptcy: Evidence from Large Bank Mergers","authors":"Dheeraj Chaudhary","doi":"10.2139/ssrn.3934196","DOIUrl":"https://doi.org/10.2139/ssrn.3934196","url":null,"abstract":"This paper studies the role of credit market competition in explaining consumer bankruptcy filings. I exploit variation in bank competition induced by large bank mergers to establish that personal bankruptcy rates are significantly higher in more competitive local banking markets. Higher competition prompts banks to take more risks by increasing credit supply and lowering their credit standards. Finally, using bank balance sheet data, I demonstrate that banks that operate in more competitive counties have higher credit supply and exhibit a greater loan loss rate, consistent with the bank risk-taking channel.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"27 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85434095","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}
Maria Rocamora Fernandez, Nuria Suárez, Manuel Monjas
We examine the risk sensitiveness of minimum requirement for own funds and eligible liabilities (MREL)‐eligible debt yields in a sample of 63 European banking groups during the period 2009Q3–2019Q2 in 14 European countries. We conclude that MREL‐eligible debt is risk sensitive, as investors closely monitor indicators related to individual banks, issuance characteristics, market risk variables and the features of the banking system potentially affecting MREL‐eligible debt default risk. Our results, however, are not homogeneous across banks, time periods or types of debt product. In particular, we find evidence of higher risk sensitiveness in other systemically important institutions and non‐ systemic banks. We also identify higher levels of risk sensitiveness after the entry into force of the first Bank Recovery and Resolution Directive. However, we observe less risk sensitiveness during periods when targeted longer term refinancing operations were under way, in particularregarding bank and marketrisk variables. Our model also suggests that investors closely monitor senior non‐preferred issuers. This means that the market discipline that has traditionally been exercised through subordinated debt is currently exercised through senior non‐preferred issuances. Credit ratings are seen as a high‐credibility tool, helping investors in the market to better exercise market discipline.
{"title":"What Are the Determinants of Mrel- Eligible Debt Yields? Evidence From the EU Banking Sector","authors":"Maria Rocamora Fernandez, Nuria Suárez, Manuel Monjas","doi":"10.2139/ssrn.3749293","DOIUrl":"https://doi.org/10.2139/ssrn.3749293","url":null,"abstract":"We examine the risk sensitiveness of minimum requirement for own funds and eligible liabilities (MREL)‐eligible debt yields in a sample of 63 European banking groups during the period 2009Q3–2019Q2 in 14 European countries. We conclude that MREL‐eligible debt is risk sensitive, as investors closely monitor indicators related to individual banks, issuance characteristics, market risk variables and the features of the banking system potentially affecting MREL‐eligible debt default risk. Our results, however, are not homogeneous across banks, time periods or types of debt product. In particular, we find evidence of higher risk sensitiveness in other systemically important institutions and non‐ systemic banks. We also identify higher levels of risk sensitiveness after the entry into force of the first Bank Recovery and Resolution Directive. However, we observe less risk sensitiveness during periods when targeted longer term refinancing operations were under way, in particularregarding bank and marketrisk variables. Our model also suggests that investors closely monitor senior non‐preferred issuers. This means that the market discipline that has traditionally been exercised through subordinated debt is currently exercised through senior non‐preferred issuances. Credit ratings are seen as a high‐credibility tool, helping investors in the market to better exercise market discipline.<br>","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"139 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86621801","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}
What is the social impact of the financial intermediation sector? I analyze the aggregate and the redistribution impact of financial intermediaries in an economy with a set of potential entrepreneurs. The intermediation sector endogenously develops to relax credit constraints by monitoring a borrowing entrepreneur. Competitive intermediaries i) eradicate non-fundamental-based income inequality by spreading economic opportunity to financially constrained individuals—the redistribution impact, and ii) boost entrepreneurship and restore the socially optimal occupational pattern—the job-creation impact. Although the job-creation impact is socially beneficial, the redistribution impact is not—social surplus declines overall due to a pecuniary externality associated with the redistribution function of the financial intermediation sector. Monopoly intermediation limits the redistribution impact and may raise the utilitarian welfare.
{"title":"Financial Intermediation and Income Distribution","authors":"M. Ebrahimian","doi":"10.2139/ssrn.3465204","DOIUrl":"https://doi.org/10.2139/ssrn.3465204","url":null,"abstract":"What is the social impact of the financial intermediation sector? I analyze the aggregate and the redistribution impact of financial intermediaries in an economy with a set of potential entrepreneurs. The intermediation sector endogenously develops to relax credit constraints by monitoring a borrowing entrepreneur. Competitive intermediaries i) eradicate non-fundamental-based income inequality by spreading economic opportunity to financially constrained individuals—the redistribution impact, and ii) boost entrepreneurship and restore the socially optimal occupational pattern—the job-creation impact. Although the job-creation impact is socially beneficial, the redistribution impact is not—social surplus declines overall due to a pecuniary externality associated with the redistribution function of the financial intermediation sector. Monopoly intermediation limits the redistribution impact and may raise the utilitarian welfare.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"16 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77825825","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}
The risk of financial crisis fuelled by 'inflated ratings' is recognised but underestimated. Firstly, the manufacturing of inflated ratings is not fully within the control of credit rating agencies and is linked to arbitrage, which operates unless all avenues are sealed off. Secondly, the arbitrage is poorly understood for inside certain well-known but fake arbitrages there is a `hidden' real one. Ratings arbitrage (investing in credits with `inflated' ratings) is not an economic arbitrage but with Basel II-type capital requirements linked to credit ratings it became one for e.g. banks, because it creates higher financial leverage, a shareholder wealth arbitrage due to the government put, provided market inconsistent ratings exist, which is bound to be the case and of which inflated ratings is a subset. Thus, a Trojan horse was drafted into solvency regulation. Arbitrage emanating from this regulatory design-flaw is prone to spiral into financial crises and was plausibly the ultimate cause of the 2008 Financial Crisis.
{"title":"On the Origin of Financial Crises and the Survival of the Unfittest","authors":"Harald Astrup Haugli","doi":"10.2139/ssrn.3674629","DOIUrl":"https://doi.org/10.2139/ssrn.3674629","url":null,"abstract":"The risk of financial crisis fuelled by 'inflated ratings' is recognised but underestimated. Firstly, the manufacturing of inflated ratings is not fully within the control of credit rating agencies and is linked to arbitrage, which operates unless all avenues are sealed off. Secondly, the arbitrage is poorly understood for inside certain well-known but fake arbitrages there is a `hidden' real one. Ratings arbitrage (investing in credits with `inflated' ratings) is not an economic arbitrage but with Basel II-type capital requirements linked to credit ratings it became one for e.g. banks, because it creates higher financial leverage, a shareholder wealth arbitrage due to the government put, provided market inconsistent ratings exist, which is bound to be the case and of which inflated ratings is a subset. Thus, a Trojan horse was drafted into solvency regulation. Arbitrage emanating from this regulatory design-flaw is prone to spiral into financial crises and was plausibly the ultimate cause of the 2008 Financial Crisis.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"5 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84770636","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}
What is the role of production networks in inducing self-fulfilling business cycles? We build a continuous-time multisector business cycle model with input-output linkages and credit constraints to study this. Credit constraints faced by productive firms endogenously create self-fulfilling business cycles: an expected decline in firm value tightens constraints and further depresses equity value, generating a financial multiplier and thus self-fulfilling business cycles. Theoretically, we derive that the financial multiplier nests the input-output multiplier. We illustrate that the likelihood of self-fulfilling business cycles depends on intermediate input share through a "size effect" and a "diluting effect": the combination of two effects has a U-shaped relation with the financial multiplier. We also illustrate that the network structure has an important but ambiguous impact on self-fulfilling business cycles. Quantitatively, we demonstrate that tightening credit constraints in sectors with higher Domar weights in the production network is more likely to lead to a self-fulfilling equilibrium.
{"title":"Self-fulfilling Business Cycles with Production Networks","authors":"Feng Dong, Fei Zhou","doi":"10.2139/ssrn.3672280","DOIUrl":"https://doi.org/10.2139/ssrn.3672280","url":null,"abstract":"What is the role of production networks in inducing self-fulfilling business cycles? We build a continuous-time multisector business cycle model with input-output linkages and credit constraints to study this. Credit constraints faced by productive firms endogenously create self-fulfilling business cycles: an expected decline in firm value tightens constraints and further depresses equity value, generating a financial multiplier and thus self-fulfilling business cycles. Theoretically, we derive that the financial multiplier nests the input-output multiplier. We illustrate that the likelihood of self-fulfilling business cycles depends on intermediate input share through a \"size effect\" and a \"diluting effect\": the combination of two effects has a U-shaped relation with the financial multiplier. We also illustrate that the network structure has an important but ambiguous impact on self-fulfilling business cycles. Quantitatively, we demonstrate that tightening credit constraints in sectors with higher Domar weights in the production network is more likely to lead to a self-fulfilling equilibrium.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"21 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86891503","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}
Pub Date : 2020-08-10DOI: 10.22541/au.159715019.99711401
Eric Jing
The goal of this paper is to explore the relationship between the specific non-performing loan ratio (NPL ratio) and the corresponding impact on the bank’s profitability and lending behavior. It also seeks to investigate the macroeconomic impacts of economies with excessively high NPL ratios as well as the efficacy and impact of alleviation measures used by banks and governments around the world to help facilitate a decrease in high NPL ratios. The possible implications and effects of the COVID-19 pandemic on NPL ratios is also addressed in this paper. It is found that when excessively high NPL ratios go unaddressed, the economy tends to suffer. On the other hand, this study shows that when measures are taken to reduce or eliminate the high NPL ratios, economic performance improves, and the reduction has a clear positive impact on the economy.
{"title":"Impact of High Non-Performing Loan Ratios on Bank Lending Trends and Profitability","authors":"Eric Jing","doi":"10.22541/au.159715019.99711401","DOIUrl":"https://doi.org/10.22541/au.159715019.99711401","url":null,"abstract":"\u0000 The goal of this paper is to explore the relationship between the specific non-performing loan ratio (NPL ratio) and the corresponding impact on the bank’s profitability and lending behavior. It also seeks to investigate the macroeconomic impacts of economies with excessively high NPL ratios as well as the efficacy and impact of alleviation measures used by banks and governments around the world to help facilitate a decrease in high NPL ratios. The possible implications and effects of the COVID-19 pandemic on NPL ratios is also addressed in this paper. It is found that when excessively high NPL ratios go unaddressed, the economy tends to suffer. On the other hand, this study shows that when measures are taken to reduce or eliminate the high NPL ratios, economic performance improves, and the reduction has a clear positive impact on the economy.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"11 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76443941","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 develops and estimates a macroeconomic model of real-financial markets interactions in which the behavior of banks generates endogenous business cycles. We do so in the context of a computational agent-based framework, where the channeling of funds from depositors to investors occurring through intermediaries is affected by information and matching frictions. Since banks compete in both deposit and credit markets, the whole dynamic is driven by endogenous fluctuations in their profits. In particular, we assume that intermediaries adopt a simple learning process, which consists of copying the strategy of the most profitable competitors while setting their interest rates. Accordingly, the emergence of strategic complementarity in the behavior of banks - mainly due to the accumulation of information capital - leads to periods of sustained growth followed by sharp recessions in the simulated economy.
{"title":"Search for Profits and Business Fluctuations: How Banks' Behaviour Explain Cycles?","authors":"Emanuele Ciola, E. Gaffeo, M. Gallegati","doi":"10.2139/ssrn.3656325","DOIUrl":"https://doi.org/10.2139/ssrn.3656325","url":null,"abstract":"This paper develops and estimates a macroeconomic model of real-financial markets interactions in which the behavior of banks generates endogenous business cycles. We do so in the context of a computational agent-based framework, where the channeling of funds from depositors to investors occurring through intermediaries is affected by information and matching frictions. Since banks compete in both deposit and credit markets, the whole dynamic is driven by endogenous fluctuations in their profits. In particular, we assume that intermediaries adopt a simple learning process, which consists of copying the strategy of the most profitable competitors while setting their interest rates. Accordingly, the emergence of strategic complementarity in the behavior of banks - mainly due to the accumulation of information capital - leads to periods of sustained growth followed by sharp recessions in the simulated economy.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"129 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86799421","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 examines the link between bank liquidity and exposure to industry-level shocks. Using a unique dataset of borrower industry affiliations, we propose a new measure of industry-level shocks calculated at bank-level. First, we construct bank-specific loan portfolio weights for each industry. Then, we apply these weights to two industry-level indices – cost-effectiveness and production – to calculate the bank shock exposure. Our estimates reveal the negative link between bank liquidity and industry shocks. This could be explained by precautionary reasons as large negative industry-level shocks are likely to induce banks to hoard liquid assets. The relationship is also channelized through the lending behavior of banks. The sensitivity of liquidity to bank exposure is higher for more liquid, better capitalized and smaller banks, which might be explained by the capability of displacing funds either for precautionary reasons, or for loan financing.
{"title":"Bank Liquidity and Exposure to Industry Shocks","authors":"José Arias, Oleksandr Talavera, Andriy Tsapin","doi":"10.2139/ssrn.3649566","DOIUrl":"https://doi.org/10.2139/ssrn.3649566","url":null,"abstract":"This paper examines the link between bank liquidity and exposure to industry-level shocks. Using a unique dataset of borrower industry affiliations, we propose a new measure of industry-level shocks calculated at bank-level. First, we construct bank-specific loan portfolio weights for each industry. Then, we apply these weights to two industry-level indices – cost-effectiveness and production – to calculate the bank shock exposure. Our estimates reveal the negative link between bank liquidity and industry shocks. This could be explained by precautionary reasons as large negative industry-level shocks are likely to induce banks to hoard liquid assets. The relationship is also channelized through the lending behavior of banks. The sensitivity of liquidity to bank exposure is higher for more liquid, better capitalized and smaller banks, which might be explained by the capability of displacing funds either for precautionary reasons, or for loan financing.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83122132","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}
The COVID crisis raises important questions about the role of stress testing during periods of systemic distress. Should stress testing of banks be abandoned? Modified? Proceed as scheduled? Different jurisdictions have taken different tacks, reflecting contestation over these fundamental issues. This essay argues that stress tests become more important, not less, in the midst of systemic distress, but only if the stress scenarios are modified to reflect the distinct challenges an economy is facing. Well-designed stress tests can provide critical information to policy makers and others, promoting more timely efforts to address underlying weaknesses. Given that regulators will rationally be hesitant to produce, much less disclose, information that could exacerbate the very crisis regulators are seeking to contain, crisis-time stress testing is only viable if regulators also have the tools needed to address any bad news the testing may reveal.
{"title":"Stress Testing During Times of War","authors":"Kathryn Judge","doi":"10.2139/ssrn.3633310","DOIUrl":"https://doi.org/10.2139/ssrn.3633310","url":null,"abstract":"The COVID crisis raises important questions about the role of stress testing during periods of systemic distress. Should stress testing of banks be abandoned? Modified? Proceed as scheduled? Different jurisdictions have taken different tacks, reflecting contestation over these fundamental issues. This essay argues that stress tests become more important, not less, in the midst of systemic distress, but only if the stress scenarios are modified to reflect the distinct challenges an economy is facing. Well-designed stress tests can provide critical information to policy makers and others, promoting more timely efforts to address underlying weaknesses. Given that regulators will rationally be hesitant to produce, much less disclose, information that could exacerbate the very crisis regulators are seeking to contain, crisis-time stress testing is only viable if regulators also have the tools needed to address any bad news the testing may reveal.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"16 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-06-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88109331","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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