TARP funds distribution and bank loan supply

This paper investigates the determinants of the Troubled Asset Relief Program (TARP) funds distribution to banks and the stimulus effect of TARP investments on credit supply in the economy. Using banks’ political and regulatory connections as instruments, this paper finds that TARP investments increased bank loan supply by an annualized rate of 6.36% for banks with below median Tier 1 capital ratios. This increase is found in all major types of loans and can be translated into $404 billion of additional loans for all TARP banks. On average, TARP banks employed about one-third of their TARP capital to support new loans and kept the rest to strengthen their balance sheets. Furthermore, there is little evidence that loans made by TARP banks had lower quality than those by non-TARP banks. In sum, this paper shows a positive stimulus effect of TARP on credit supply during the 2008–2009 financial crisis.     

Capital shocks, bank asset allocation, and the revised Basel Accord

In contrast to the 1988 Basel Accord (Basel I), the revised risk-based capital standards (Basel II) propose regulatory capital requirements based on credit ratings. This paper develops a theoretical model to analyze how banks will adjust their low and high credit risk commercial loans under the proposed newer standard. Capital-constrained banks respond to an adverse capital shock by reducing high credit risk loans, while under certain circumstances, low credit risk loans may actually increase. When compared to Basel I, it is shown that high-risk loans are reduced more under Basel II, but whether a bank reduces total lending more under Basel I or under the revised standards depends on a complex interaction of factors.     

Procyclical Capital Regulation and Lending

We use a quasi‐experimental research design to examine the effect of model‐based capital regulation on the procyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model‐based regulation increased by 0.5 percentage points. As a consequence, banks reduced the amount of these loans by 2.1 to 3.9 percentage points more than for loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that microprudential capital regulation can have sizeable real effects.     

Credit derivatives and loan pricing

This paper examines the relation between the new markets for credit default swaps (CDS) and banks’ pricing of syndicated loans to US corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000–2005. Moreover, when compared to traditional explanatory factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that CDS prices contain, beyond general credit risk, to a substantial extent information relevant for bank lending. We also find that, over time, new information from CDS markets is faster incorporated into loans, but information from other markets is not. Overall, our results indicate that the markets for CDS have gained an important role for banks.     

Herd behavior in the Japanese loan market: Evidence from bank panel data

This paper investigates whether Japanese banks had been following herd behavior in the domestic loan market from 1975 through 2000. Applying the technique developed by Lakonishok, Shleifer, and Vishny [Lakonishok, J., Shleifer, A., Vishny, R.V., 1992. The impact of institutional trading on stock prices, J. Finan. Econ. 32, 23–43] to the data from loans outstanding to different types of borrowers, we obtain evidence indicative of the existence of herding. City banks in Japan had been following a cyclical pattern of herding with one of the peaks around the bubble period in the late 1980s. Adjusting further for herding resulting from rational behavior, evidence indicative of the existence of irrational herding was observed only in the bubble period. Our estimate indicates that a total of some 5 trillion yen of loan increase by city banks during the period of 1987–1989 can be attributed to irrational herd behavior. The results imply that irrational bank behavior in the late 1980s might have contributed to the problems Japanese banks had with non-performing loans. We also obtained evidence for herding among regional banks and among geographically proximate banks.     

The impact of loan prepayment risk and deposit withdrawal risk on the optimal intermediation margin

Numerous studies have analyzed how a bank's intermediation margin varies with respect to such factors as credit quality, funding risk, bank capital, deposit insurance and other factors. However, these studies ignore the potential that loans tend to prepay if interest rates decline and deposits tend to be withdrawn if interest rates rise. Taking this very fundamental fact into account, we derive optimal loan rates and deposit rates when the bank is subject to loan prepayments and deposit withdrawals. Among other things, we find that greater volatility of interest rates tends to increase the margin. The strength of the correlation between the level of interest rates and the propensity to prepay loans (withdraw deposits) also plays an interesting role.     

资本计量方法改革、商业银行风险偏好与信贷配置

为提高银行业风险管理水平与信贷配置效率,监管部门于2014年开展了资本管理高级方法的试点工作。本文基于上市银行2010至2016年的微观数据,与银监会公布的行业信贷风险进行匹配,采用双重差分和三重差分法,实证分析前述改革如何影响试点银行的风险偏好和信贷调配。研究发现,在资本管理高级方法实施后:(1)试点银行显著降低了风险加权资产的规模;(2)试点银行风险偏好的变化存在非线性的特征,在调减高风险行业贷款的同时,并未显著增加最安全行业的贷款,而是增加了风险略高行业的贷款,体现出试点银行对风险与收益的权衡;(3)进一步将行业划分为“虚”与“实”,研究发现试点银行减少了房地产业(“虚”)、制造业(“实”)和建筑业(“实”)贷款,显著增加了金融业(“虚”)贷款。本文研究不仅丰富了资本监管方面的文献,也对金融支持供给侧结构性改革具有启示意义。     

Derivatives holdings and systemic risk in the U.S. banking sector

This paper studies the impact of the banks’ portfolio holdings of financial derivatives on the banks’ individual contribution to systemic risk over and above the effect of variables related to size, interconnectedness, substitutability, and other balance sheet information. Using a sample of 95 U.S. bank holding companies from 2002 to 2011, we compare five measures of the banks’ contribution to systemic risk and find that the new measure proposed in this study, Net Shapley Value, outperforms the others. Using this measure we find that banks’ aggregate holdings of five classes of derivatives do not exhibit a significant effect on the bank’s contribution to systemic risk. On the contrary, the banks’ holdings of certain specific types of derivatives such as foreign exchange and credit derivatives increase the banks contributions to systemic risk whereas holdings of interest rate derivatives decrease it. Nevertheless, the proportion of non-performing loans over total loans and the leverage ratio have much stronger impact on systemic risk than derivatives holdings. Therefore, the derivatives’ impact plays a second fiddle in comparison with traditional banking activities related to the former two items.     

The effect of bank capital on lending: Does liquidity matter?

This paper uses a sample of quarterly observations of insured US commercial banks to examine whether the effect of bank capital on lending differs depending upon the level of bank liquidity. We find that the effect of an increase in bank capital on credit growth, defined as growth rate of net loans and unused commitments, is positively associated with the level of bank liquidity only for large banks and that this positive relationship has been more substantial during the recent financial crisis period. This result suggests that bank capital exerts a significantly positive effect on lending only after large banks retain sufficient liquid assets.     

The impact of bank regulation on the cost of credit: Evidence from a discontinuity in capital requirements

We study the effect on credit relationships of the Small and Medium Enterprises Supporting Factor (SME-SF), a regulatory risk weight reduction on small loans to SMEs. Employing a regression discontinuity design and matched bank-firm data from Italy, we find that a 1 percent drop in capital requirements causes an average 13 basis points reduction in the cost of credit. Moreover, with a novel measure of bank regulatory capital scarcity, we show that the drop is larger for banks facing tighter constraints. Furthermore, the drop is larger for firms with low switching costs, while the sharp assignment rule may have led to the rationing of marginal borrowers. Such findings indicate that the entire distribution of firms and banks’ characteristics plays a crucial role in determining the impact of regulatory capital changes.     

Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks

Although credit risk is an important factor that financial institutions must cope with, the determinants of bank problem loans have been little studied. Using panel data, we compare the determinants of problem loans of Spanish commercial and savings banks in the period 1985–1997, taking into account both macroeconomic and individual bank level variables. The GDP growth rate, firms, and family indebtedness, rapid past credit or branch expansion, inefficiency, portfolio composition, size, net interest margin, capital ratio, and market power are variables that explain credit risk. However, there are significant differences between commercial and savings banks, which confirm the relevance of the institutional form in the management of credit risk. Our findings raise important bank supervisory policy issues: the use of bank level variables as early warning indicators, the advantages of bank mergers from different regions, and the role of banking competition and ownership in determining credit risk.     

The non-monotonic impact of bank size on their default swap spreads: Cross-country evidence

This paper studies the drivers of bank's credit default swap (CDS) spread, taken as a measure of credit risk, by considering the impact of housing market along with a number of bank level determinants, such as regulatory capital, leverage, size, liquidity, asset quality and operations income ratio. We build upon a unique dataset consisting of 115 banks (during pre- and post-crisis periods) headquartered in 30 countries from both developed and emerging countries. Results suggest that CDS spread is driven by asset quality, liquidity and operations income ratio, while bank size is found to have a non-monotonic impact on CDS spread. If the bank is small, an increase in size reduces the average credit risk. If the bank is large enough, an increase in size raises the latter. From our results we derive the level of bank size that minimizes the CDS spreads. Financial institutions growing beyond this threshold are subject to higher credit risk, implying that smaller and medium sized banks are safer than large banks. When considering the estimates in the periods before and after the 2007 crisis, we further find a different extreme point of bank size in the former (approximately 1642 billion Euros) relative to a significantly lower level of optimal bank size (around 70 billion) in the post-crisis period, implying too-big-to-fail and too-big-to-save in the pre-crisis regime.     

The effects of loan portfolio concentration on Brazilian banks’ return and risk

This paper tests whether diversification of the credit portfolio at the bank level leads to better performance and lower risk. We employ a new high frequency (monthly) panel data for the Brazilian banking system with information at the bank level for loans by economic sector. We find that loan portfolio concentration increases returns and also reduces default risk; the impact of concentration on bank’s return is decreasing on bank’s risk; there are significant size effects; foreign and state-owned banks seem to be less affected by the degree of diversification. An important additional finding is that there is an increasing concentration trend after the breakout of the recent international financial crisis, specially after the failure of Lehman Brothers.     

The transformation of banking: Tying loan interest rates to borrowers' CDS spreads

We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected bank financing. We find that market-based pricing is associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.     

Optimal credit risk transfer, monitored finance, and banks

We examine the implications of optimal credit risk transfer (CRT) for bank-loan monitoring, and the incentives for banks to engage in optimal CRT. In our model, properly designed CRT instruments allow banks to insure themselves against loan losses precisely in those states that signal monitoring. We find that optimal CRT enhances loan monitoring and expands financial intermediation, in contrast to the findings of the previous literature. Optimal CRT instruments are based on loan portfolios rather than individual loans and have credit-enhancement guarantees, pretty much as banks do in practice. But the extent of credit enhancement needs to be precisely delimited. Above that exact level, monitoring incentives are undermined (loan quality deteriorates) and wealth is transferred from the bank's financiers to the bank. Properly designed risk-based capital requirements are shown to prevent such a wealth transfer and to provide banks with the incentive to engage in optimal CRT.     

Reliability of Banks' Fair Value Disclosure for Loans

This study investigates whether banks manage the disclosed fair value of their major asset, the loan portfolio. Using two cross-section samples, I find evidence that suggests banks manage the fair value of loans. The estimated extent of overstatement of loans' fair value is negatively related to regulatory capital, asset growth, liquidity and the gross book value of loans, and positively related to the change in the rate of credit losses. These relations imply that some banks overstate the disclosed fair value of loans in an attempt to favorably affect the market assessment of their risk and performance.     

Quality of information disclosure,property rights,and bank loans: A bank heterogeneity perspective

Using the context of the financial reform and the development of the non-state sector in China in the past decade, we examine the roles that the quality of information disclosure and property rights play in the allocation of different types of bank credit. We find that foreign banks and policy banks exercise “financial discrimination,” and that local commercial banks, large state-owned commercial banks, national joint-stock banks, local city commercial banks, and rural commercial banks not only exercise financial discrimination but also provide significant “financial support” to non-state-owned enterprises by providing more lending opportunities and larger loans. However, when enterprises commit information disclosure violations, the local commercial banks, national joint-stock banks, local city commercial banks, and rural commercial banks reverse their credit decisions and begin to exercise financial discrimination against non-state-owned enterprises. At the same time, large state-owned commercial banks continue to provide financial support to non-state-owned enterprises. We also find that the quality of the information disclosed by enterprises has a moderating effect rather than an intermediary effect on the relationship between property rights and bank loans. Overall, the results of this paper shine new light on the market-oriented reform of the banking industry, and provide new empirical evidence for the presence of financial discrimination in the supply of bank credit. Our findings also have practical implications for solving the financing difficulties of non-state-owned enterprises.     

Competition,financial innovation and commercial bank loan portfolios

I examine how US commercial bank loan portfolios change in response to the rise of securitization markets and banking market deregulations over 1976–2003. Banks increasingly tilt their portfolios toward real-estate-backed loans. However, there are significant differences across banks. Larger banks and younger banks disproportionately shift their lending toward real-estate-backed loans, particularly commercial real-estate-backed loans, whereas smaller banks and older banks maintain greater shares of their loan portfolios in commercial and personal loans. When larger banks make more real-estate-backed loans, they charge lower interest rates, consistent with these banks lowering the costs of lending and expanding credit for borrowers. In contrast, smaller banks charge higher interest rates, consistent with these banks restricting lending to a select group of borrowers.     

Capital regulation,heterogeneous monitoring costs,and aggregate loan quality

This paper develops a banking-sector framework with heterogeneous loan monitoring costs. Banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to eliminate this exposure. After analyzing an unregulated banking system, we examine several cases in which regulatory capital requirements bind the notional loan supplies of various subsets of banks. To gauge the impact of capital requirements, we define loan ‘quality’ in terms of either the ratio of monitored to total loans or the ratio of monitoring banks to total bank population. Under the assumption of a specific cross-sectional distribution of banks, our simulations show that the imposition of binding capital requirements on a previously unregulated banking system unambiguously increases the market loan rate and reduces aggregate lending, but has an ambiguous effect on loan ‘quality’. Nevertheless, once capital requirements are in place, the simulations indicate that regulators can contribute to higher overall loan ‘quality’ by toughening capital requirements.     

Bank Capital and Lending Relationships

This paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for lending relationships, bank capital, and credit provision. I find that bank‐dependent firms borrow from well‐capitalized banks, while firms with access to the bond market borrow from banks with less capital. This matching of bank‐dependent firms with stable banks smooths cyclicality in aggregate credit provision and mitigates the effects of bank shocks on the real economy.