Time-varying Volatility, Financial Intermediation and Monetary Policy
S. Eickmeier, N. Metiu, Esteban Prieto
IWH Discussion Papers,
No. 19,
2016
Abstract
We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. Exogenous policy changes are identified by adapting an external instruments approach to the non-linear model. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which financial intermediaries endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, financial intermediaries lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods, banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. Hence, we provide a novel explanation for the non-linear effects of monetary stimuli observed in the data, linking the effectiveness of monetary policy to the procyclicality of leverage.
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Measuring Income Tax Evasion Using Bank Credit: Evidence from Greece
Nikolaos Artavanis, Adair Morse, Margarita Tsoutsoura
Quarterly Journal of Economics,
No. 2,
2016
Abstract
We document that in semiformal economies, banks lend to tax-evading individuals based on the bank’s assessment of the individual’s true income. This observation leads to a novel approach to estimate tax evasion. We use microdata on household credit from a Greek bank and replicate the bank underwriting model to infer the banks estimate of individuals’ true income. We estimate that 43–45% of self-employed income goes unreported and thus untaxed. For 2009, this implies €28.2 billion of unreported income, implying forgone tax revenues of over €11 billion or 30% of the deficit. Our method innovation allows for estimating the industry distribution of tax evasion in settings where uncovering the incidence of hidden cash transactions is difficult using other methods. Primary tax-evading industries are professional services—medicine, law, engineering, education, and media. We conclude with evidence that contemplates the importance of institutions, paper trail, and political willpower for the persistence of tax evasion.
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The Impact of Credit Default Swap Trading on Loan Syndication
Daniel Streitz
Review of Finance,
No. 1,
2016
Abstract
We analyze the impact of credit default swap (CDS) trading on bank syndication activity. Theoretically, the effect of CDS trading is ambiguous: on the one hand, CDS can improve risk-sharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower’s debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.
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Networks and the Macroeconomy: An Empirical Exploration
Daron Acemoglu, Ufuk Akcigit, William R. Kerr
NBER Macroeconomics Annual,
2015
Abstract
How small shocks are amplified and propagated through the economy to cause sizable fluctuations is at the heart of much macroeconomic research. Potential mechanisms that have been proposed range from investment and capital accumulation responses in real business-cycle models (e.g., Kydland and Prescott 1982) to Keynesian multipliers (e.g., Diamond 1982; Kiyotaki 1988; Blanchard and Kiyotaki 1987; Hall 2009; Christiano, Eichenbaum, and Rebelo 2011); to credit market frictions facing firms, households, or banks (e.g., Bernanke and Gertler 1989; Kiyotaki and Moore 1997; Guerrieri and Lorenzoni 2012; Mian, Rao, and Sufi 2013); to the role of real and nominal rigidities and their interplay (Ball and Romer 1990); and to the consequences of (potentially inappropriate or constrained) monetary policy (e.g., Friedman and Schwartz 1971; Eggertsson and Woodford 2003; Farhi and Werning 2013).
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How Effective is Macroprudential Policy during Financial Downturns? Evidence from Caps on Banks' Leverage
Manuel Buchholz
Working Papers of Eesti Pank,
No. 7,
2015
Abstract
This paper investigates the effect of a macroprudential policy instrument, caps on banks' leverage, on domestic credit to the private sector since the Global Financial Crisis. Applying a difference-in-differences approach to a panel of 69 advanced and emerging economies over 2002–2014, we show that real credit grew after the crisis at considerably higher rates in countries which had implemented the leverage cap prior to the crisis. This stabilising effect is more pronounced for countries in which banks had a higher pre-crisis capital ratio, which suggests that after the crisis, banks were able to draw on buffers built up prior to the crisis due to the regulation. The results are robust to different choices of subsamples as well as to competing explanations such as standard adjustment to the pre-crisis credit boom.
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A Review of Empirical Research on the Design and Impact of Regulation in the Banking Sector
Sanja Jakovljević, Hans Degryse, Steven Ongena
Annual Review of Financial Economics,
2015
Abstract
We review existing empirical research on the design and impact of regulation in the banking sector. The impact of each individual piece of regulation may inexorably depend on the set of regulations already in place, the characteristics of the banks involved (from their size or ownership structure to operational idiosyncrasies in terms of capitalization levels or risk-taking behavior), and the institutional development of the country where the regulation is introduced. This complexity is challenging for the econometrician, who relies either on single-country data to identify challenges for regulation or on cross-country data to assess the overall effects of regulation. It is also troubling for the policy maker, who has to optimally design regulation to avoid any unintended consequences, especially those that vary over the credit cycle such as the currently developing macroprudential frameworks.
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Electoral Credit Supply Cycles Among German Savings Banks
Reint E. Gropp, Vahid Saadi
IWH Online,
No. 11,
2015
Abstract
In this note we document political lending cycles for German savings banks. We find that savings banks on average increase supply of commercial loans by €7.6 million in the year of a local election in their respective county or municipality (Kommunalwahl). For all savings banks combined this amounts to €3.4 billion (0.4% of total credit supply in Germany in a complete electoral cycle) more credit in election years. Credit growth at savings banks increases by 0.7 percentage points, which corresponds to a 40% increase relative to non-election years. Consistent with this result, we also find that the performance of the savings banks follows the same electoral cycle. The loans that the savings banks generate during election years perform worse in the first three years of maturity and loan losses tend to be realized in the middle of the election cycle.
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26.11.2015 • 43/2015
Political lendings of German Savings Banks
A recent paper of the Halle Institute for Economic Research (IWH) suggests that German local politicians take advantage of their influence on the credit decisions of German savings banks. “German savings banks on average increase the supply of commercial loans by €7.6 million in the year of a local election”, says IWH president Reint E. Gropp. Loans that the savings banks generate during election years also perform worse and lead to lower interest income. The results suggest that local politicians take advantage of savings banks to further their chances of re-election.
Reint E. Gropp
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The Impact of Securitization on Credit Rationing: Empirical Evidence
Santiago Carbo-Valverde, Hans Degryse, Francisco Rodríguez-Fernández
Journal of Financial Stability,
2015
Abstract
We study whether banks’ involvement into different types of securitization activity – asset backed securities (ABS) and covered bonds – in Spain influences credit supply before and during the financial crisis. While both ABS and covered bonds were hit by the crisis, the former were hit more severely. Employing a disequilibrium model to identify credit rationing, we find that firms with banks that were more involved in securitization see their credit constraints more relaxed in normal periods. In contrast, only greater covered bonds issuance reduces credit rationing during crisis periods whereas ABS aggravates these firms’ credit rationing in crisis periods. Our results are in line with the theoretical predictions that a securitization instrument that retains risk (covered bond) may induce a more prudent risk behavior of banks than an instrument that provides risk transferring (ABS).
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Monetary Policy under the Microscope: Intra-bank Transmission of Asset Purchase Programs of the ECB
L. Cycon, Michael Koetter
IWH Discussion Papers,
No. 9,
2015
Abstract
With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins.
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