The role of banks in the Czech monetary policy transmission mechanism

With this work, I aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996–2001, I study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market's supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. I find that changes in monetary policy alter the growth rate of loans, with considerably stronger magnitude in the period 1999–2001 than in the period 1996–1998. From the analysis intended to capture the characteristics of the supply of loans, I conclude that the lending channel was operative in the period 1996–1998: I find cross‐sectional differences in the lending reactions to monetary policy shocks due to the degree of capitalization and to liquidity. For the subsequent period 1999–2001, the results also show distributional effects of monetary policy due to bank size and its bank's proportion of classified loans. In the context of steadily decreasing interest rates, this can bolster the supposition of financial frictions between borrowers and lenders and hence, that of an operative broad credit channel.     

Cyclical behavior of the financial stability of eurozone commercial banks

In light of the financial crisis and the European sovereign debt crisis, we investigate the cyclical behavior of the financial stability of banks of the Eurozone, using an unbalanced dynamic panel of 722 commercial banks covering the period 1999–2013, and the generalized method of moments system. We find a negative relationship between business cycle and bank risk-taking, indicating that financial stability is procyclical. In addition, the study shows that lending activity increases risk-taking while rising capital requirements boost financial stability. Moreover, our findings suggest positive co-movements between the business cycle and lending, compared to bank's capital, whereby the procyclicality of lending and bank capital have negative effects on the financial stability of commercial banks in the Eurozone. We notice then that the cyclical behavior of commercial banks, in terms of capital requirements and lending activities, depends on their size. Therefore, lending and capital of smaller banks are procyclical while lending and capital of larger banks are countercyclical. Finally, we find the Troika institutions’ bailouts programs significantly impacted banking stability in the Eurozone.     

The relevance of supply shocks for inflation: the spanish case

A retrenchment in crossborder credit is under way, the product of both market forces and political pressure on international banks to lend at home (Economist, 2009). In addition, banks, particularly the largest, have also dramatically expanded their retail banking operations over the past few years (Hirtle and Stiroh, 2007). Our goal, in this article, is to study the effects of default risk on equity returns through bank interest margin management under a renewed focus on domestic retail banking, a trend often attributed to the stability of banking activities. Specifically, this article explores the determinants of optimal bank interest margins based on an option-based firm-theoretical model with multiple sources of structural breaks due to political pressure. The model demonstrates how capital regulation and political pressure on foreign lending return and risk conditions jointly determine the optimal bank interest margin decision. We show that a more stringent capital requirement is linked with lower equity return, but higher default risk of the bank in the return to domestic retail banking. An increased focus on the political pressure on foreign lending return is linked with higher equity return and default risk of the bank. It is also showed that an increased focus on the political pressure on foreign lending risk decreases the bank's equity return and default risk. We conclude that the return to domestic retail banking may be a relatively stable activity when the political pressure decision impacts only the expected risk of the bank's foreign lending and not the return.     

The transmission of financial shocks in an estimated DSGE model with housing and banking

We develop a dynamic stochastic general equilibrium (DSGE) model with housing and banking to study the transmission of financial shocks between the financial and real sectors. A deterioration in the bank's balance sheet induced by financial shocks could have amplified and persistent impacts on real activities. The amplification of the shocks are originated from financial frictions tied to households and banks. We find that a disruption in bank net worth initiated by capital quality shocks generates a decline in household loans, house prices and output. Bank liquidity shocks also have negative effects on these variables. Housing preference shocks could generate a positive comovement between house prices and output. All these findings are qualitatively consistent with empirical evidence, suggesting that these financial shocks are critical to the dynamics of house prices and other macroeconomic variables.     

A Theory of Conflicts of Interest in Banking Relationships

Abstract

This paper highlights a dark side of banking relationships by elucidating the conditions under which a pre-existing relationship between a lending bank and a borrower can be detrimental to positive valuation effects of loan announcements. The effect of a pre-existing relationship is more likely to be negative when the pre-existing loans are large and firms' screening costs are low. A theoretical model shows that loan announcement's positive effect on borrowers' value due to the standard information advantage can be more than offset by the bank's conflict of interest when the bank's asset quality reputation is poor, i.e. when the probability of the bank holding a bad loan is large.     

THE NEW THEORY OF COMMERCIAL BANKING AND BANK LENDING BEHAVIOR

This paper studies the bank's lending decision, based on three observed phenomena: banks earn substantial profits from off‐balance sheet activities and services, which they take into account in their lending decisions. Secondly, the critical point in the customer relation is the loan decision: the probability of the customer staying with the bank is a function of the loan extended each time one is applied for. Third, what is at stake in the loan decision is the expected value of the entire customer relation, which is the probability times the present value of expected future profits. The bank is a maximizer of this expected present value, while making decisions on individual loan applications. It is shown that the bank is in a corner solution with respect to its good customers, and other customers often have an incentive to get to a corner. Therefore, corner solutions may be the rule rather than the exception in the bank's customer relations, and there is no mechanism making the bank indifferent, at the margin, between lending to different customers. It can be optimal to extend loans to (present and expected future) good customers at an interest rate loss. A rationed customer with a concave enough probability function can receive a larger loan by asking for less. Loyalty increases the customer's value to the bank but improves its loan terms only if the customer makes it conditional on the loan extended.     

The Role of Banks in Monetary Policy Transmission: Empirical Evidence from Russia

This paper focuses on the role of the banking sector in monetary policy transmission in an emerging economy with a rapidly developing financial system. Specifically, we examine whether the central bank's monetary policy stance affects banks' lending behavior. Based on a comprehensive quarterly dataset on all Russian banks from 1Q1999 to 1Q2007, we find evidence for the existence of a bank lending channel in Russia. Contrary to several studies on developed economies, the level of a bank's capitalization matters for the transmission process. Better capitalized banks are less likely to adjust their lending practices following a change in the monetary policy stance.     

International knowledge spillovers through the import of information technology commodities

Since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. We explore this function under a cap-based valuation. We find that (i) the strike price of the cap-based valuation increases the bank's liquid asset holdings by increasing its loan rate and loan commitment rate (with the strategic rate-adjustment complements) and decreases the bank's external finance need by increasing its deposit rate, when the bank realizes a less risky state of the world and (ii) the number of caplet days decreases the bank's liquid asset holdings by decreasing its loan rate and loan commitment rate (with the strategic rate-adjustment complements and the strategic timing substitutes) and increases the bank's external finance need by decreasing its deposit rate (with the strategic timing substitutes), when the bank realizes a more risky state. Our findings provide alternative explanations concerning the bank's liquidity function under the cap-based optimization.     

Bank lending channel in India: evidence from state-level analysis

This paper seeks to answer two questions: first, do monetary policy shocks affect the size of bank loans, and second, do bank loans affect real economic activity? Using annual panel data on the Indian states from 1996 to 2008, we find that money demand shocks have large and statistically significant impact on bank loans. Furthermore, using money demand shocks as instruments for bank lending à la Driscoll (J Monet Econ 51:451–471, 2004), we find an economically large and statistically significant effect of bank loans on output. Our findings, to some extent, reflect the dominant role played by banks in the India’s overall financial system.     

The effect of US stress tests on monetary policy spillovers to emerging markets

This paper explores the transmission of US monetary policy through US banks to emerging market economies (EMEs) and the role that stress tests play in this transmission. Data on US banks’ monthly commercial and industrial loan originations shows that: (a) US bank lending to EMEs was sensitive to domestic monetary policy changes during the zero‐lower bound period. (b) Effects of monetary easing were heterogeneous across banks and depended on banks’ stress test results, a proxy for their capital strength. Only banks that comfortably passed the stress tests issued more loans to EME borrowers. (c) Effects of monetary tightening were more similar across banks. (d) Banks shifted their lending to safer borrowers within EMEs in response to monetary easing, leaving the risk of their overall loan books unchanged. These results support the hypothesis that bank capital affects the transmission of easier monetary policy, including across borders. We conjecture that bank lending to EMEs during the zero‐lower bound period would have been even higher had the United States not introduced stress tests for their banks.     

The supply of and demand for accounting information

The article analyzes the use of accounting information in Russia. We assess reporting behaviour in the lending process for a sample of Russian companies in the years 1999–2004 and postulate that Russian companies manage their earnings in order to avoid showing losses when applying for bank financing. Once a credit has been granted, companies are predicted to manage earnings because of the bank's monitoring activities. By means of univariate and multivariate analysis we are able to attribute the discontinuity around a zero target in the earnings distribution with firms’ response to the banks’ assessment of accounting performance. This implies that financing considerations affect the reporting incentives of Russian companies.     

Pyramidal group structure and bank risk in Thailand

This paper investigates how banks and finance companies operate in business groups. Using uniquely detailed ownership data from Thailand, we find that the controlling shareholders extensively use pyramids to control banks and finance companies and assign different lending strategies across pyramidal tiers. Lower-tier banks tend to extend loans more aggressively and perform more poorly, while upper tier banks carry out more profitable investments. After the crisis hit, upper-tier banks survived and almost all lower-tier banks went bankrupt. Our results suggest that the multilayer organizational structure of bank ownership can affect a bank’s lending behavior and its resistance to economic shocks.     

Lending conditions in EU: The role of credit demand and supply

We analyse the bank lending activity after the financial crisis and focus on bank-specific supply factors. Using a rich microeconomic dataset from Bankscope and macroeconomic shocks data, we employ OLS and 2SLS fixed effects models with banking controls, macroeconomic shocks and institutional quality. The banks’ loan-rate spreads increased despite the recent policy of low interest rates and quantitative easing. We use the bank asset quality as instruments to capture exogenous changes in loan supply. The empirical evidence shows that loan-rate spread and through this the supply of loans is negatively affected by a low asset quality and capital ratios.     

Monetary Policy Shocks and Heterogeneous Finance Decisions: A Model of Hidden Effort Choice and Financial Intermediation

Abstract. The paper investigates how monetary policy shocks influence the composition of firms' external finance given that firms are heterogeneous. Heterogeneity stems from differences in the availability of internal funds and in the monitoring costs associated with bank finance. These costs are determined by the intensity of the lending relationship. By using a delegated monitoring approach it is found that bank loans serve as a substitute for internal funds if the lending relationship is sufficiently close. Moreover, banks with strong credit ties to their customers are not only able to protect borrowers from liquidity constraints following a monetary tightening but are even able to extend their business lending.     

How have banks fared following a borrower's financial distress?

This paper is the first to study the impact of a borrower's reorganization filing on its lead lending bank and second lending bank. This study analyzes 96 reorganization filings in Taiwan during the period 1995–2006. It is substantiated that the market's reaction to these filings is not indiscriminate and that the forbearance lending to a reorganization filing borrower suggests the lead bank's little concern for its shareholder wealth.     

Does corruption hamper bank lending? Macro and micro evidence

The aim of this paper is to analyze the effect of corruption in bank lending. Corruption is expected to hamper bank lending, as it is closely related to legal enforcement, which has been shown to promote banks’ willingness to lend. Nevertheless the similarities between the consequences for bank lending of law enforcement and corruption are misleading, as they consider only judiciary corruption. Corruption can also occur in lending and may then be beneficial for bank lending via bribes given by borrowers to enhance their chances of receiving loans. This assumption may be validated particularly in the presence of pronounced risk aversion by banks, resulting in greater reluctance on the part of banks to grant loans. We perform country-level and bank-level estimations to investigate these assumptions. Corruption reduces bank lending in both sets of estimations. However, bank-level estimations show that the detrimental effect of corruption is reduced when bank risk aversion increases, even leading at times to situations wherein corruption fosters bank lending. Additional controls show that corruption does not increase bank credit by favoring only bad loans. Therefore, our findings show that while the overall effect of corruption is to hamper bank lending, it can alleviate firm’s financing obstacles.     

A QUEST FOR UNFETTERED CREDIT: HOW MONETARY POLICY DRIVES CREDIT RISK TRANSFER OF STRUCTURED FINANCE PRODUCTS

This study examines the effects of monetary policy contractions on bank loans to households and firms and instruments in three different credit risk transfer (CRT) capital markets over two separate time periods (1995–2006 and 2007–2015). The findings show that in both periods, banks decrease business lending but increase lending to consumers through a combination of mortgage, auto, credit card, and student loans from more liquidity produced by consumer‐related CRT activity. Additional results reveal relative CRT movements toward securitized mortgages from bank mortgage debt over both periods and toward securitized and insured business loans from bank business debt in the latter period, which suggest vulnerabilities among interconnected credit markets. (JEL E44, E51, G21, G23)     

The transmission of bank capital requirements and monetary policy to bank lending in Germany

We investigate the transmission of changes in bank capital requirements and monetary policy, and their interaction, on German banks’ corporate loan growth and lending rates. Our results show that increases in capital requirements are associated with an immediate decrease in total domestic and cross‐border bank lending. Changes in the euro area's monetary policy stance are positively related to corporate loan interest rates in general. Regarding the interacting effect of national bank capital requirements and euro area monetary policy, we observe that the transmission of accommodative euro area monetary policy to corporate lending rates can be attenuated by contemporaneous increases in bank capital requirements. Moreover, more strongly capitalized banks increase their loan growth in response to accommodative monetary policy whereas, for weaker banks, increasing capital requirements implies a decrease in their corporate loan growth. Our results confirm a tradeoff between higher capital requirements and accommodating monetary policy originating from banks’ capital constraints.     

Home sweet host: A cross‐country perspective on prudential and monetary policy spillovers through global banks

Prudential regulation of banks is multi‐layered: policy changes by home‐country authorities affect banks’ global operations across many jurisdictions; policy changes by host‐country authorities shape banks’ operations in the host jurisdiction regardless of the nationality of the parent bank. Do these policies create (unintended) cross‐border spillovers? Similarly, monetary policy actions by major central banks may also have effects on the behaviour of banks in other countries. This paper examines the effect that changes in home‐ and host‐country prudential measures have on cross‐border dollar credit provision, and how these interact with US monetary policy. We first run panel regressions with both layers of regulation, to examine which has a greater effect on cross‐border lending. We then use a novel approach to decompose growth in cross‐border bank lending into separate home, host and common components, and then match each with the corresponding home or host policies. Our results suggest that prudential policies can have spillover effects, which depend on the instrument used and on whether a bank's home or host country implemented them. Home policies tend to have larger spillovers on cross‐border US dollar lending than host policies. We also find that a tightening of US monetary policy can compound the spillovers of some prudential measures.     

A bank lending channel or a credit supply shock?

Shifts in credit supply could have a bearing on house prices e.g. through financial innovations and changes in regulation independently of the existence of a bank lending channel of monetary policy. This paper assesses the responses of US house prices to an exogenous credit supply shock and compares them with the effects from variations in credit supply associated with a bank lending channel. The contribution of the study is twofold. First, innovations in credit supply are identified using a mortgage mix variable, thereby accounting for the market-based financial intermediaries. As a robustness check a survey variable of bank lending standards for mortgage loans is also used. Second, the policy-induced credit supply effect on house prices is disentangled and compared with the effect from an exogenous credit supply shock. It is shown that in the first 3 years credit supply shocks affect house prices exogenously rather than through the bank lending channel. Monetary policy has still a large impact on house prices, even when the bank lending channel is ‘turned off’.