Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of "rainy day" equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that "buffer-constrained" banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to SME firms by an average of 1.4 percent more (quarterly) and were 4 percent more likely to end pre-existing lending relationships during the pandemic as compared to "buffer-unconstrained" banks (those entering the pandemic with capital ratios far from the regulatory capital buffer region). We further find heterogenous effects across firms, as buffer-constrained banks disproportionately curtailed credit to three types of borrowers: (1) private, bank-dependent SME firms, (2) firms whose lending relationships were relatively young, and (3) firms whose pre-pandemic credit lines contractually matured at the start of the pandemic (and thus were up for renegotiation). While the post-2008 period saw the rise of banking system capital to historically high levels, these capital buffers went effectively unused during the pandemic. To the best of our knowledge, our study is the first to: (1) empirically test the usability of these Basel III regulatory buffers in a downturn, and (2) contribute a bank capital-based transmission channel to the literature studying how the pandemic transmitted shocks to SME firms.
{"title":"Un-Used Bank Capital Buffers and Credit Supply Shocks at SMEs During the Pandemic","authors":"J. Berrospide, Arun Gupta, Matthew P. Seay","doi":"10.17016/FEDS.2021.043","DOIUrl":"https://doi.org/10.17016/FEDS.2021.043","url":null,"abstract":"Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of \"rainy day\" equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that \"buffer-constrained\" banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to SME firms by an average of 1.4 percent more (quarterly) and were 4 percent more likely to end pre-existing lending relationships during the pandemic as compared to \"buffer-unconstrained\" banks (those entering the pandemic with capital ratios far from the regulatory capital buffer region). We further find heterogenous effects across firms, as buffer-constrained banks disproportionately curtailed credit to three types of borrowers: (1) private, bank-dependent SME firms, (2) firms whose lending relationships were relatively young, and (3) firms whose pre-pandemic credit lines contractually matured at the start of the pandemic (and thus were up for renegotiation). While the post-2008 period saw the rise of banking system capital to historically high levels, these capital buffers went effectively unused during the pandemic. To the best of our knowledge, our study is the first to: (1) empirically test the usability of these Basel III regulatory buffers in a downturn, and (2) contribute a bank capital-based transmission channel to the literature studying how the pandemic transmitted shocks to SME firms.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129249496","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 a model based on a target-zone approach in which the dynamics of government bond yields follow a quasi-bounded process, such that the zero lower bound (ZLB) can be breached if the probability leakage condition of the dynamics is met. A one-sided U-shaped bond yield distribution illustrates accumulation of probability at the ZLB. Allowing the expected return and variance of the market’s return proportional to the square of the state variable governing changes in production and investment opportunities over time suggests the state variable following an asymmetric mean-reverting process with strong counteracting force at the ZLB representing the credibility of the bound committed by a central bank. Empirical calibrations of the proposed process for the US and French government bond yields show that the process can adequately describe their dynamics. While the yields were bounded above the ZLB during most of the time, as indicated by their dynamics, the conditions for breaching the bound were met in January 2013 for the French government bond and March 2020 for the US Treasury using only information until those points. The economic and financial condition uncertainties are negatively co-integrated with the mean reversion in the dynamics, suggesting increased likelihood of the yield breaching the ZLB and erosion of the credibility of the bound amid higher uncertainties.
{"title":"Are Government Bond Yields Bounded or Quasi-Bounded at the Zero? – Credibility of Central Banks' Commitments","authors":"C. Hui, C. Lo, Ho-Yan Ip","doi":"10.2139/ssrn.3894746","DOIUrl":"https://doi.org/10.2139/ssrn.3894746","url":null,"abstract":"This paper develops a model based on a target-zone approach in which the dynamics of government bond yields follow a quasi-bounded process, such that the zero lower bound (ZLB) can be breached if the probability leakage condition of the dynamics is met. A one-sided U-shaped bond yield distribution illustrates accumulation of probability at the ZLB. Allowing the expected return and variance of the market’s return proportional to the square of the state variable governing changes in production and investment opportunities over time suggests the state variable following an asymmetric mean-reverting process with strong counteracting force at the ZLB representing the credibility of the bound committed by a central bank. Empirical calibrations of the proposed process for the US and French government bond yields show that the process can adequately describe their dynamics. While the yields were bounded above the ZLB during most of the time, as indicated by their dynamics, the conditions for breaching the bound were met in January 2013 for the French government bond and March 2020 for the US Treasury using only information until those points. The economic and financial condition uncertainties are negatively co-integrated with the mean reversion in the dynamics, suggesting increased likelihood of the yield breaching the ZLB and erosion of the credibility of the bound amid higher uncertainties.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134193991","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}
C. Gortsos, W. Ringe, Filippo Annunziata, E. Avgouleas, R. Ayadi, Marco Bodellini, C. Bosque, Concetta Brescia Morra, D. Busch, B. Casu, Blanaid Clarke, L. Enriques, G. Ferri, Claudio Frigeni, Willem Pieter De Groen, Seraina N. Grunewald, R. Haselmann, B. Joosen, Marco Lamandini, Matthias B. Lehmann, L. S. Morais, David Ramos Muñoz, M. Pagano, Juana Pulgar Ezquerra, Antonella Sciarrone Alibrandi, Ignacio Signes de Mesa, M. Siri, Tobias H. Troeger, Charles Wyplosz
The pandemic crisis, which broke out in early 2020, is still affecting human lives and economic activity around the globe, causing unprecedented transformations which were not foreseen just before its onset. The European Union, its citizens and the financial and non-financial firms active therein have also been negatively affected (albeit to a varying degree). Nevertheless, unlike in the two previous, most recent economic crises, namely the 2007-2009 Global Financial Crisis (GFC) and the 2010-2018 sovereign debt crisis in the Eurozone, the impact on the stability of the EU financial system has been comparatively mild so far. This is due to several reasons: most importantly, the root-cause of the pandemic was not attributed to any sector of the financial system but originated in the real economy. Further, the financial regulatory framework had become much more robust in the meantime (albeit also much more complicated to comply with), credit institutions in particular are better capitalised now than in 2008, with (almost across the board) lower ratios of non-performing loans (NPLs) and significantly stronger liquidity, while financial supervision has also been enhanced and the macro-prudential financial framework adopted in the wake of the GFC was fully activated. Finally, many EU Member States and the EU itself acted decisively, and proactively pumped billions of Euros of support programmes into the real economy to prevent an economic meltdown. During the last 15 months, national and EU institutions and agencies have orchestrated their efforts towards establishing an appropriate framework in order to primarily support those parts of the population and of the businesses most severely affected by the pandemic and to contain its negative effects. This included a combination of fiscal policy, monetary policy and financial policy measures; new instruments and rescue funds were introduced, flexibility in the application of several existing rules has been applied to the extent necessary and feasible, and some ‘quick-fix’ legislative actions supplemented the pandemic crisis management toolbox. When we published the first edition of this EBI e-book in May 2020 (‘Pandemic Crisis and Financial Stability’, https://ssrn.com/abstract=3607930), the world seemed to be on the brink of collapse. Reflecting the positive developments over the past year, this second edition supports a more optimistic approach on the further evolution of the pandemic. Entitled ‘Financial stability amidst the pandemic crisis: On top of the wave’, the key assumption is that the various infection waves of the crisis will not be followed by another severe one, as are we gradually reaching a much-desired point of ‘new normality’. And yet, we are ‘on top of the wave’ of the crisis as a whole, as our book title suggests. Therefore, challenges in relation to financial stability should not be underestimated, especially in (but not limited to) the field of NPLs, a new wave of which is emerging d
这场于2020年初爆发的大流行病危机仍在影响着全球的人类生活和经济活动，造成了前所未有的变革，这是在疫情爆发前无法预见的。欧洲联盟、其公民以及在其中活动的金融和非金融公司也受到不利影响(尽管程度不同)。然而，与前两次最近的经济危机，即2007-2009年全球金融危机(GFC)和2010-2018年欧元区主权债务危机不同，迄今为止，对欧盟金融体系稳定性的影响相对温和。这有几个原因:最重要的是，疫情的根源不在于金融体系的任何部门，而在于实体经济。此外，与此同时，金融监管框架变得更加稳健(尽管遵守起来也复杂得多)，尤其是信贷机构，现在的资本状况比2008年更好，(几乎全面)不良贷款率(NPLs)下降，流动性明显增强，同时金融监管也得到了加强，全球金融危机后采用的宏观审慎金融框架得到了全面启动。最后，许多欧盟成员国和欧盟本身采取果断行动，主动向实体经济注入数十亿欧元的支持计划，以防止经济崩溃。在过去15个月里，各国和欧盟各机构协调努力，建立一个适当的框架，以便主要支持受这一流行病影响最严重的人群和企业，并遏制其负面影响。这包括财政政策、货币政策和金融政策措施的组合;引入了新的工具和救助资金，在必要和可行的范围内灵活适用了若干现行规则，一些"速成"立法行动补充了大流行病危机管理工具箱。当我们在2020年5月出版这本EBI电子书的第一版(“大流行危机和金融稳定”，https://ssrn.com/abstract=3607930)时，世界似乎处于崩溃的边缘。第二版反映了过去一年的积极事态发展，支持对该流行病的进一步演变采取更加乐观的态度。题为“大流行危机中的金融稳定:在浪潮之上”的关键假设是，危机的各种感染浪潮之后不会出现另一场严重的感染浪潮，因为我们正在逐渐达到人们渴望的“新常态”点。然而，正如我们的书名所示，我们总体上处于危机的“浪尖上”。因此，不应低估与金融稳定有关的挑战，特别是在(但不限于)不良贷款领域，由于大流行病对受影响最大的企业和家庭的影响，新的一波不良贷款正在出现。此外，常规和非常规的宽松货币政策措施、财政刺激和临时金融措施也将取消，这意味着大流行期间嵌入体制和监管框架的若干安全网组成部分将不再支持稳定的经济(包括金融)活动。此外，关于气候变化等相关挑战的讨论比以往任何时候都更加集中，采取措施减轻相关风险已成为政策制定者和金融监管机构的重要议程。我们真诚地希望这本书将有助于这场辩论，并可能成为一个对话平台，以反思正确的前进道路。本出版物包含17篇文章，分为5个部分，并讨论了上述所有注意事项。我们感谢所有作者，他们中的大多数是欧洲银行学会学术委员会的成员，他们参与了这项学术工作，并做出了宝贵的贡献。它们是在长期大流行引起的各种监管方面发展起来的，与金融稳定的各个方面有关，而此时(可能是危险的)感觉是我们即将回归新常态。作者还讨论了疫情对银行和金融市场的长期影响，以及(或)回到大流行后时期的过渡安排。内容:第一节:总体概述。新冠肺炎带来的一线希望:长期停滞的结束(查尔斯·维普洛斯)何时以及如何解除对银行体系的covid - 19支持措施?(Rainer Haselmann & Tobias Tröger)大流行给欧洲金融带来的教训:向绿色技术的双重转型(沃尔夫-乔治·林格)不稳定时期的欧盟金融监管(Danny Busch)第二部分:不良贷款 6.不良贷款:新的风险和政策(Emilios Avgouleas, Rim Ayadi, Marco Bodellini, Giovanni Ferri, Barbara Casu & Willem Peter de Groen)。不确定时期的银行监管:不良贷款案例(Concetta Brescia Morra)大流行病危机中的不良贷款和预防性企业重组指令(胡安娜·普尔加·埃兹奎拉和伊格纳西奥·塞涅斯·德梅萨)第三节:欧洲央行的作用9.欧洲央行应对新冠肺炎危机及其在绿色复苏中的作用(Seraina gr<s:1> newald)10.大流行病危机爆发以来单一货币政策的实施及其对金融稳定影响的一些考虑(克里斯托斯·戈尔特索斯)下一代欧盟:其意义、挑战和与可持续性的联系(Carlos Bosque, David Ramos Muñoz， & Marco Lamandini)第四部分:银行监管357 11。COVID-19大流行后的可释放性综合缓冲要求(Bart Joosen)大流行期间限制银行资本薪酬:对未来的教训还是彻头彻尾的非常规措施?(Antonella sciarone Alibrandi & Claudio Frigeni)爱尔兰银行的文化改革——流行病报告卡(布兰奈德·克拉克)封锁经济和对银行的影响(马蒂亚斯·莱曼)新冠肺炎疫情后改革的欧盟:维护金融稳定和银行业未来的新财政政策(Luis Morais)第五部分:资本市场监管17.股票交易的紧急措施:反对卖空禁令和证券交易所关闭的案例(卢卡·恩里克和马尔科·帕加诺)在疫情期间修复欧盟资本市场立法的核心:临时行动还是长期路径?(Filippo Annunziata & Michele Siri)
{"title":"Financial Stability Amidst the Pandemic Crisis: On Top of the Wave","authors":"C. Gortsos, W. Ringe, Filippo Annunziata, E. Avgouleas, R. Ayadi, Marco Bodellini, C. Bosque, Concetta Brescia Morra, D. Busch, B. Casu, Blanaid Clarke, L. Enriques, G. Ferri, Claudio Frigeni, Willem Pieter De Groen, Seraina N. Grunewald, R. Haselmann, B. Joosen, Marco Lamandini, Matthias B. Lehmann, L. S. Morais, David Ramos Muñoz, M. Pagano, Juana Pulgar Ezquerra, Antonella Sciarrone Alibrandi, Ignacio Signes de Mesa, M. Siri, Tobias H. Troeger, Charles Wyplosz","doi":"10.2139/ssrn.3877946","DOIUrl":"https://doi.org/10.2139/ssrn.3877946","url":null,"abstract":"The pandemic crisis, which broke out in early 2020, is still affecting human lives and economic activity around the globe, causing unprecedented transformations which were not foreseen just before its onset. The European Union, its citizens and the financial and non-financial firms active therein have also been negatively affected (albeit to a varying degree). Nevertheless, unlike in the two previous, most recent economic crises, namely the 2007-2009 Global Financial Crisis (GFC) and the 2010-2018 sovereign debt crisis in the Eurozone, the impact on the stability of the EU financial system has been comparatively mild so far. This is due to several reasons: most importantly, the root-cause of the pandemic was not attributed to any sector of the financial system but originated in the real economy. Further, the financial regulatory framework had become much more robust in the meantime (albeit also much more complicated to comply with), credit institutions in particular are better capitalised now than in 2008, with (almost across the board) lower ratios of non-performing loans (NPLs) and significantly stronger liquidity, while financial supervision has also been enhanced and the macro-prudential financial framework adopted in the wake of the GFC was fully activated. Finally, many EU Member States and the EU itself acted decisively, and proactively pumped billions of Euros of support programmes into the real economy to prevent an economic meltdown. During the last 15 months, national and EU institutions and agencies have orchestrated their efforts towards establishing an appropriate framework in order to primarily support those parts of the population and of the businesses most severely affected by the pandemic and to contain its negative effects. This included a combination of fiscal policy, monetary policy and financial policy measures; new instruments and rescue funds were introduced, flexibility in the application of several existing rules has been applied to the extent necessary and feasible, and some ‘quick-fix’ legislative actions supplemented the pandemic crisis management toolbox. When we published the first edition of this EBI e-book in May 2020 (‘Pandemic Crisis and Financial Stability’, https://ssrn.com/abstract=3607930), the world seemed to be on the brink of collapse. Reflecting the positive developments over the past year, this second edition supports a more optimistic approach on the further evolution of the pandemic. Entitled ‘Financial stability amidst the pandemic crisis: On top of the wave’, the key assumption is that the various infection waves of the crisis will not be followed by another severe one, as are we gradually reaching a much-desired point of ‘new normality’. And yet, we are ‘on top of the wave’ of the crisis as a whole, as our book title suggests. Therefore, challenges in relation to financial stability should not be underestimated, especially in (but not limited to) the field of NPLs, a new wave of which is emerging d","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114551095","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 Global Financial Crisis (GFC) disrupted the real estate (RE) debt market and triggered a retrenchment by traditional lenders such as commercial banks. Since then, this financing void has been filled by private fund vehicles – particularly within the core+ RE market – which has enabled growing institutional investor allocations to private RE debt. CIOs managing a multi-asset portfolio with allocations to both liquid and illiquid assets need to evaluate the cash flows from each asset class to better understand their portfolio’s liquidity risk. However, due to the specific cash flow pattern of core+ RE debt funds, and a lack of publicly available data, commonly used cash flow models for other private assets such as private equity (PE) are not suitable. We present a new cash flow model for private core+ RE debt funds. Our aim is to model a fund’s key cash flow dynamics using reasonable, practitioner supplied parameter estimates. As data become available, we expect to update the parameter values. The model incorporates sensitivity to the economic environment both at fund launch and over the fund’s life. This core+ RE debt cash flow model can be integrated into a multi-asset portfolio analytics tool such as the PGIM IAS asset allocation framework OASIS TM to help CIOs evaluate the diversification and liquidity management potential that private core+ RE debt may bring to their portfolios.
{"title":"A Rising Private Asset Class: Core+ Real Estate Debt","authors":"Michelle Teng, Wenbo Zhang, Jonathan Kohana","doi":"10.2139/ssrn.3899209","DOIUrl":"https://doi.org/10.2139/ssrn.3899209","url":null,"abstract":"The Global Financial Crisis (GFC) disrupted the real estate (RE) debt market and triggered a retrenchment by traditional lenders such as commercial banks. Since then, this financing void has been filled by private fund vehicles – particularly within the core+ RE market – which has enabled growing institutional investor allocations to private RE debt. CIOs managing a multi-asset portfolio with allocations to both liquid and illiquid assets need to evaluate the cash flows from each asset class to better understand their portfolio’s liquidity risk. However, due to the specific cash flow pattern of core+ RE debt funds, and a lack of publicly available data, commonly used cash flow models for other private assets such as private equity (PE) are not suitable. We present a new cash flow model for private core+ RE debt funds. Our aim is to model a fund’s key cash flow dynamics using reasonable, practitioner supplied parameter estimates. As data become available, we expect to update the parameter values. The model incorporates sensitivity to the economic environment both at fund launch and over the fund’s life. This core+ RE debt cash flow model can be integrated into a multi-asset portfolio analytics tool such as the PGIM IAS asset allocation framework OASIS TM to help CIOs evaluate the diversification and liquidity management potential that private core+ RE debt may bring to their portfolios.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123332472","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 develop a tractable dynamic theory linking endogenous credit cycles with conditions in the labor market, in which a pandemic may cripple credit markets and even cause a credit collapse by freezing the labor supply. We execute the idea in a general equilibrium framework with banks and financially constrained heterogeneous firms. In the static model, a modest pandemic disrupts the credit markets only at the intensive margin by decreasing the labor supply. A worsening pandemic can trigger a credit crisis, followed by a discontinuous sharp fall in aggregate output. By extending to a dynamic general equilibrium setting, we show that this mechanism can generate endogenous boom-bust credit cycles. Credit injection per se cannot adequately stabilize the economy. The lockdown policy combined with subsidizing firms turns out to be an efficient policy package to curb pandemic-induced recession.
{"title":"A Theory of Credit Cycles under Pandemic","authors":"Feng Dong, Pengfei Wang, Zhiwei Xu","doi":"10.2139/ssrn.3876824","DOIUrl":"https://doi.org/10.2139/ssrn.3876824","url":null,"abstract":"We develop a tractable dynamic theory linking endogenous credit cycles with conditions in the labor market, in which a pandemic may cripple credit markets and even cause a credit collapse by freezing the labor supply. We execute the idea in a general equilibrium framework with banks and financially constrained heterogeneous firms. In the static model, a modest pandemic disrupts the credit markets only at the intensive margin by decreasing the labor supply. A worsening pandemic can trigger a credit crisis, followed by a discontinuous sharp fall in aggregate output. By extending to a dynamic general equilibrium setting, we show that this mechanism can generate endogenous boom-bust credit cycles. Credit injection per se cannot adequately stabilize the economy. The lockdown policy combined with subsidizing firms turns out to be an efficient policy package to curb pandemic-induced recession.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115207384","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}
How does creditor health affect the pass-through of monetary policy to households? Using data on the universe of U.S. credit unions, I document that creditor asset losses increase the sensitivity of consumer credit to monetary policy. Identification exploits plausibly exogenous variation in asset losses and high-frequency identification of monetary policy shocks. Weaker lenders can respond more if they face financial frictions that easing alleviates. The estimates imply constraints on monetary policy become more costly in financial crises featuring creditor asset losses and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses.
{"title":"Financial Crises and the Transmission of Monetary Policy to Consumer Credit Markets","authors":"Sasha Indarte","doi":"10.2139/ssrn.2705008","DOIUrl":"https://doi.org/10.2139/ssrn.2705008","url":null,"abstract":"\u0000 How does creditor health affect the pass-through of monetary policy to households? Using data on the universe of U.S. credit unions, I document that creditor asset losses increase the sensitivity of consumer credit to monetary policy. Identification exploits plausibly exogenous variation in asset losses and high-frequency identification of monetary policy shocks. Weaker lenders can respond more if they face financial frictions that easing alleviates. The estimates imply constraints on monetary policy become more costly in financial crises featuring creditor asset losses and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133721454","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 role, informative or persuasive, of brand names in driving purchasing decisions is very much under debate. We exploit the rebranding of a mortgage lender to analyse households’ choice behaviour in response to brand popularity. Loan-level data on new mortgages suggest that (1) brand awareness reduces the equilibrium price of residential mortgage contracts and (2) the reduction mainly reflects consumers’ selection of cheaper products due to better information. Our calibrated model implies an overall gain equal to 6 per cent of the initial loan amount and a roughly 10 percentage point increase in the share of households that shift to cheaper lenders.
{"title":"Information or Persuasion in the Mortgage Market: The Role of Brand Names","authors":"V. Michelangeli, A. Carella","doi":"10.2139/ssrn.3891594","DOIUrl":"https://doi.org/10.2139/ssrn.3891594","url":null,"abstract":"The role, informative or persuasive, of brand names in driving purchasing decisions is very much under debate. We exploit the rebranding of a mortgage lender to analyse households’ choice behaviour in response to brand popularity. Loan-level data on new mortgages suggest that (1) brand awareness reduces the equilibrium price of residential mortgage contracts and (2) the reduction mainly reflects consumers’ selection of cheaper products due to better information. Our calibrated model implies an overall gain equal to 6 per cent of the initial loan amount and a roughly 10 percentage point increase in the share of households that shift to cheaper lenders.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123741998","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}
So-called `latency' refers to the various small but significant time delays that occur in the course of the communications between a trader and a market. Such delays happen between the time an exchange streams market data to a trader, the time at which the trader processes the information and decides to trade, and the time at which the exchange receives and processes the order from the trader. Latency is a challenge faced by all traders and is of great importance in modern financial markets. In the present work, we develop mathematical models to solve a variety of problems faced by liquidity takers regarding uncertainty in executions.
Firstly, we devise a model for computing the price that traders are willing to pay to reduce their latency. This latency-optimal strategy balances the tradeoff, over a period of time, between the costs of walking the limit order book and the percentage of orders filled. This work may lead to social benefits, since it offers a way to stop the arms race to being faster in the marketplace.
Secondly, we develop a latency-optimal trading strategy that improves the marksmanship of liquidity takers. We make use of the techniques of variational analysis to obtain the optimal price limit of each marketable limit order (MLO) that the trader sends. The price limit of each MLO is characterized as the solution to a new class of forward-backward stochastic differential equations (FBSDEs) driven by random measures. We prove the existence and uniqueness of the FBSDE solution and solve the FBSDE numerically to illustrate the performance of the strategies.
Finally, we show how traders can optimally liquidate a position over a trading window when there is latency in the marketplace. We frame our model as an impulse control problem with stochastic delay -- this work contributes to the stochastic control literature by allowing one to have random delays before the impulses take place. We show that impatient liquidity takers submit MLOs that may walk the book (capped by the limit price) to increase the probability of filling the trades. Patient traders who are fast do not use their speed to hit the quotes they observe, nor to finish the execution programme early: they use speed to complete the execution with as many speculative MLOs as possible. We use foreign exchange data to implement the random-latency-optimal strategy and to compare it with various benchmarks. We find that for patient traders, the random-latency optimal strategy outperforms the bechmarks that do not account for latency by a quantity that is greater than the transaction costs paid by liquidity takers. Around news announcements, the value of the outperformance significantly increases. The superiority of the latency-optimal strategies is due to both the speculative MLOs that are filled and the price protection of the MLOs.
{"title":"Uncertain Execution in Order-Driven Markets","authors":"Leandro Sánchez-Betancourt","doi":"10.2139/ssrn.3871298","DOIUrl":"https://doi.org/10.2139/ssrn.3871298","url":null,"abstract":"So-called `latency' refers to the various small but significant time delays that occur in the course of the communications between a trader and a market. Such delays happen between the time an exchange streams market data to a trader, the time at which the trader processes the information and decides to trade, and the time at which the exchange receives and processes the order from the trader. Latency is a challenge faced by all traders and is of great importance in modern financial markets. In the present work, we develop mathematical models to solve a variety of problems faced by liquidity takers regarding uncertainty in executions.<br><br>Firstly, we devise a model for computing the price that traders are willing to pay to reduce their latency. This latency-optimal strategy balances the tradeoff, over a period of time, between the costs of walking the limit order book and the percentage of orders filled. This work may lead to social benefits, since it offers a way to stop the arms race to being faster in the marketplace. <br><br>Secondly, we develop a latency-optimal trading strategy that improves the marksmanship of liquidity takers. We make use of the techniques of variational analysis to obtain the optimal price limit of each marketable limit order (MLO) that the trader sends. The price limit of each MLO is characterized as the solution to a new class of forward-backward stochastic differential equations (FBSDEs) driven by random measures. We prove the existence and uniqueness of the FBSDE solution and solve the FBSDE numerically to illustrate the performance of the strategies.<br><br>Finally, we show how traders can optimally liquidate a position over a trading window when there is latency in the marketplace. We frame our model as an impulse control problem with stochastic delay -- this work contributes to the stochastic control literature by allowing one to have random delays before the impulses take place. We show that impatient liquidity takers submit MLOs that may walk the book (capped by the limit price) to increase the probability of filling the trades. Patient traders who are fast do not use their speed to hit the quotes they observe, nor to finish the execution programme early: they use speed to complete the execution with as many speculative MLOs as possible. We use foreign exchange data to implement the random-latency-optimal strategy and to compare it with various benchmarks. We find that for patient traders, the random-latency optimal strategy outperforms the bechmarks that do not account for latency by a quantity that is greater than the transaction costs paid by liquidity takers. Around news announcements, the value of the outperformance significantly increases. The superiority of the latency-optimal strategies is due to both the speculative MLOs that are filled and the price protection of the MLOs.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122588219","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 study bank responses to the Paycheck Protection Program (PPP) and its effects on lender balance sheets and profitability. To address the endogeneity between bank decisions and balance sheet effects, we develop a Bayesian joint model that examines the decision to participate, the intensity of participation, and ultimate balance sheet outcomes. Overall, lenders were driven by risk-aversion and funding capacity rather than profitability in their decision to participate and the intensity of their participation. Indeed, with greater participation intensity, banks experienced sizable growth in their loan portfolios but a decline in their interest margins. In counterfactual exercises, we show that the PPP offset a large potential contraction in business lending, and that bank margins would have fallen even more precipitously if lenders had not participated in the program. Although the PPP was intended as a credit support program for small firms, the program indirectly supported the margins of banks that channeled these loans.
{"title":"Government Loan Guarantees during a Crisis: The Effect of the PPP on Bank Lending and Profitability","authors":"W. Marsh, Padma Sharma","doi":"10.2139/ssrn.3890319","DOIUrl":"https://doi.org/10.2139/ssrn.3890319","url":null,"abstract":"We study bank responses to the Paycheck Protection Program (PPP) and its effects on lender balance sheets and profitability. To address the endogeneity between bank decisions and balance sheet effects, we develop a Bayesian joint model that examines the decision to participate, the intensity of participation, and ultimate balance sheet outcomes. Overall, lenders were driven by risk-aversion and funding capacity rather than profitability in their decision to participate and the intensity of their participation. Indeed, with greater participation intensity, banks experienced sizable growth in their loan portfolios but a decline in their interest margins. In counterfactual exercises, we show that the PPP offset a large potential contraction in business lending, and that bank margins would have fallen even more precipitously if lenders had not participated in the program. Although the PPP was intended as a credit support program for small firms, the program indirectly supported the margins of banks that channeled these loans.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114850442","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}
A puzzle of China’s shadow banking system is its stark growth since the 2008 Subprime Crisis, which is in sharp contrast to most of countries. We present a model to explain why the shadow banking activities have been allowed to expand with the full awareness of regulators in China. In the presence of local government intervention, which tends to distort the banks’ portfolio choices towards inefficient low-quality projects, the policy combination of formal banking sector credit tightening and shadow banking sector loosening forces banks to improve credit quality. This is because shadow banking assets are less diversified than commercial bank assets, thereby subject to higher bank run risk, which forces banks to improve the quality of shadow banking assets. Negative shocks to project quality may trigger information production in the shadow banking sector and prevent banks from providing funding to efficient projects, which creates additional welfare losses. This result provides a rationale for China's new regulations on shadow banking sector since 2018 in the background of increasing risks.
{"title":"Optimal Shadow Banking","authors":"Zehao Liu, Jinfan Zhang","doi":"10.2139/ssrn.3830240","DOIUrl":"https://doi.org/10.2139/ssrn.3830240","url":null,"abstract":"A puzzle of China’s shadow banking system is its stark growth since the 2008 Subprime Crisis, which is in sharp contrast to most of countries. We present a model to explain why the shadow banking activities have been allowed to expand with the full awareness of regulators in China. In the presence of local government intervention, which tends to distort the banks’ portfolio choices towards inefficient low-quality projects, the policy combination of formal banking sector credit tightening and shadow banking sector loosening forces banks to improve credit quality. This is because shadow banking assets are less diversified than commercial bank assets, thereby subject to higher bank run risk, which forces banks to improve the quality of shadow banking assets. Negative shocks to project quality may trigger information production in the shadow banking sector and prevent banks from providing funding to efficient projects, which creates additional welfare losses. This result provides a rationale for China's new regulations on shadow banking sector since 2018 in the background of increasing risks.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131075776","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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