Banks Response to Higher Capital Requirements: Evidence from a Quasi-natural Experiment
Reint E. Gropp, Thomas Mosk, Steven Ongena, Carlo Wix
Review of Financial Studies,
No. 1,
2019
Abstract
We study the impact of higher capital requirements on banks’ balance sheets and their transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets, not by raising their levels of equity, consistent with debt overhang. Banks reduce lending to corporate and retail customers, resulting in lower asset, investment, and sales growth for firms obtaining a larger share of their bank credit from the treated banks.
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Senior Debt and Market Discipline: Evidence from Bank-to-bank Loans
Bill Francis, Iftekhar Hasan, Liuling Liu, Haizhi Wang
Journal of Banking and Finance,
2019
Abstract
We empirically investigate whether taking senior bank loans would enhance market discipline and control risk-taking among borrowing banks. Controlling for endogeneity concern arising from borrowing bank self-select into taking senior bank debt, we document that both the spreads and covenants in loan contracts are sensitive to bank risk variables. Our analysis also reveals that borrowing banks reduce their risk exposure after their first issuance of senior bank debt. We also find that lending banks significantly increase their collaboration with borrowing banks and increase their presence in the home markets of borrowing banks.
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Trust in Banks
Zuzana Fungáčová, Iftekhar Hasan, Laurent Weill
Journal of Economic Behavior and Organization,
2019
Abstract
Trust in banks is considered essential for an effective financial system, yet little is known about what determines trust in banks. Only a handful of single-country studies discuss the topic, so this paper aims to fill the gap by providing a cross-country analysis on the level and determinants of trust in banks. Using World Values Survey data covering 52 countries during the period 2010–2014, we observe large cross-country differences in trust in banks and confirm the influence of several sociodemographic indicators. Our main findings include: women tend to trust banks more than men; trust in banks tends to increase with income, but decrease with age and education; and access to television enhances trust, while internet access erodes trust. Additionally, religious, political, and economic values affect trust in banks. Notably, religious individuals tend to put greater trust in banks, but differences are observed across denominations. The holding of pro-market economic views is also associated with greater trust in banks.
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Politics, Banks, and Sub-sovereign Debt: Unholy Trinity or Divine Coincidence?
Michael Koetter, Alexander Popov
Deutsche Bundesbank Discussion Paper,
No. 53,
2018
Abstract
We exploit election-driven turnover in State and local governments in Germany to study how banks adjust their securities portfolios in response to the loss of political connections. We find that local savings banks, which are owned by their host county and supervised by local politicians, increase significantly their holdings of home-State sovereign bonds when the local government and the State government are dominated by different political parties. Banks' holdings of other securities, like federal bonds, bonds issued by other States, or stocks, are not affected by election outcomes. We argue that banks use sub-sovereign bond purchases to gain access to politically distant government authorities.
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May the Force Be with You: Exit Barriers, Governance Shocks, and Profitability Sclerosis in Banking
Michael Koetter, Carola Müller, Felix Noth, Benedikt Fritz
Deutsche Bundesbank Discussion Paper,
No. 49,
2018
Abstract
We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of government-owned banks: the unification of counties. County mergers lead to enforced government-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.
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Avoiding the Fall into the Loop: Isolating the Transmission of Bank-to-Sovereign Distress in the Euro Area and its Drivers
Hannes Böhm, Stefan Eichler
Abstract
We isolate the direct bank-to-sovereign distress channel within the eurozone’s sovereign-bank-loop by exploiting the global, non-eurozone related variation in stock prices. We instrument banking sector stock returns in the eurozone with exposure-weighted stock market returns from non-eurozone countries and take further precautions to remove any eurozone crisis-related variation. We find that the transmission of instrumented bank distress, while economically relevant, is significantly smaller than the corresponding coefficient in the unadjusted OLS framework, confirming concerns on reverse causality and omitted variables in previous studies. Furthermore, we show that the spillover of bank distress is significantly stronger for countries with poorer macroeconomic performances, weaker financial sectors and financial regulation and during times of elevated political uncertainty.
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Crises and Rescues: Liquidity Transmission Through Global Banks
Michael Koetter, Claudia M. Buch, C. T. Koch
International Journal of Central Banking,
No. 4,
2018
Abstract
This paper shows that global banks transmit liquidity shocks via their network of foreign affiliates. We use the (unexpected) access of German banks' affiliates located in the United States to the Federal Reserve's Term Auction Facility. We condition on the parent banks' U.S. dollar funding needs in order to examine how affiliates located outside the United States adjusted their balance sheets when the U.S. affiliate of the same parent tapped into TAF liquidity. Our research has three main findings. First, affiliates tied to parents with higher U.S. dollar funding needs expanded their foreign assets during periods of active TAF borrowing. Second, the overall effects are driven by affiliates located in financial centers. Third, U.S.- dollar-denominated lending particularly increased in response to the TAF program.
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Banks Fearing the Drought? Liquidity Hoarding as a Response to Idiosyncratic Interbank Funding Dry-ups
Helge Littke, Matias Ossandon Busch
IWH Discussion Papers,
No. 12,
2018
Abstract
Since the global financial crisis, economic literature has highlighted banks’ inclination to bolster up their liquid asset positions once the aggregate interbank funding market experiences a dry-up. To this regard, we show that liquidity hoarding and its detrimental effects on credit can also be triggered by idiosyncratic, i.e. bankspecific, interbank funding shocks with implications for monetary policy. Combining a unique data set of the Brazilian banking sector with a novel identification strategy enables us to overcome previous limitations for studying this phenomenon as a bankspecific event. This strategy further helps us to analyse how disruptions in the bank headquarters’ interbank market can lead to liquidity and lending adjustments at the regional bank branch level. From the perspective of the policy maker, understanding this market-to-market spillover effect is important as local bank branch markets are characterised by market concentration and relationship lending.
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Channeling the Iron Ore Super-cycle: The Role of Regional Bank Branch Networks in Emerging Markets
Helge Littke
IWH Discussion Papers,
No. 11,
2018
Abstract
The role of the financial system to absorb and to intermediate commodity boom induced windfall gains efficiently presents one of the most pressing issues for developing economies. Using an exogenous increase in iron ore prices in March 2005, I analyse the role of regional bank branch networks in Brazil in reallocating capital from affected to non-affected regions. For the period from March 2004 to March 2006, I find that branches directly exposed to this shock by their geographical location experience an increase in deposit growth in the post-shock period relative to non-affected branches. Given that these deposits are not reinvested locally, I further show that branches located in the non-affected region increase lending growth depending on their indirect exposure to the booming regions via their branch network. Even tough, these results provide evidence against a Dutch Disease type crowding out of the non-iron ore sector, further evidence suggests that this capital reallocation is far from being optimal.
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