“When the cat's away the mice will play”: Does regulation at home affect bank risk-taking abroad?

This paper provides the first empirical evidence that bank regulation is associated with cross-border spillover effects through the lending activities of large multinational banks. We analyze business lending by 155 banks to 9,613 firms in 1,976 different localities across 16 countries. We find that lower barriers to entry, tighter restrictions on bank activities, and to a lesser degree higher minimum capital requirements in domestic markets are associated with lower bank lending standards abroad. The effects are stronger when banks are less efficiently supervised at home, and are observed to exist independently from the impact of host-country regulation.     

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.     

Banks' option to lend,interest rate sensitivity,and credit availability

Interest rate risk is a major concern for banks because of the nominal nature of their assets and the asset-liability maturity mismatch. This paper proposes a new way to derive a bank's interest rate sensitivity, by examining separately the effects of interest rate changes on existing loans(loans-in-place) and potential loans (loans-in-process). A potential loan is shown to be equivalent to an American option to lend, and is valued using option theory. An increase in interest rates generally has a negative effect on existing loans. However, if both deposit and lending rates rise by the same amount, the value of a potential loan generally increases. Hence a bank's lending slack (or ratio of loans-in-process to loans-in-place) will determine its overall interest rate risk. Empirical evidence indicates that low-slack banks indeed have significantly more interest rate risk than high-slack banks. The model also makes predictions regarding the effect of deposit and lending rate parameters on bank credit availability. Empirical tests with quarterly data are generally supportive of these predictions. This revised version was published online in June 2006 with corrections to the Cover Date.     

借贷便利创新工具有效影响了商业银行贷款利率吗？

本文基于手工收集的2009—2017年中国银行业数据,利用我国借贷便利工具创新这一准自然实验,以借贷便利工具的运用需要商业银行提供合格担保品这一要求为切入点,考察了借贷便利工具对商业银行贷款利率的影响。研究发现,借贷便利工具创设后,商业银行持有的合格担保品规模越大,其贷款利率越低,且这一效应随着时间推移逐渐增强。进一步的作用机制检验发现,央行的借贷便利操作扩大了商业银行向中央银行借款规模和贷款投放规模,从而有效降低了商业银行贷款利率,也表明借贷便利工具可通过商业银行合格担保品渠道发挥作用。因此,可以通过调整借贷便利操作规模、操作利率以及合格担保品范围的方式有效影响商业银行贷款利率进而发挥对社会融资成本的调控作用。     

Monetary Policy and Global Banking

When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but—absent frictions—there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.     

Does bank ownership affect lending behavior? Evidence from the Euro area

We analyze the differences in lending policies across banks characterized by different types of ownership, using micro-level data on Euro area banks during the period 1999–2011 to detect possible variations in bank lending supply responses to changes in monetary policy. Our results identify a general difference between stakeholder and shareholder banks: following a monetary policy contraction, stakeholder banks decrease their loan supply to a lesser extent than shareholder banks. A detailed analysis of the effect among stakeholder banks reveals that cooperative banks continued to smooth the impact of tighter monetary policy on their lending during the crisis period (2008–2011), whereas savings banks did not. Stakeholder banks’ propensity to smooth their lending cycles suggests that their presence in the economy has the potential to reduce credit supply volatility.     

How changes in market conditions affect screening activity,credit risk,and the lending behaviour of banks

The global financial crisis dramatically transformed the market conditions in the banking industry. We construct a theoretical model of spatial competition that considers the differential information between lenders and loan applicants to explore how changes in the market structure affect the lending behaviour of banks and their incentives to invest in screening and how this, in turn, affects the level of credit risk in the economy. Our findings reveal that enhanced competition reduces lending cost thus encouraging the entry of new customers in credit markets. Also, that the transportation cost that loan applicants are required to pay to reach the bank of their interest shrinks with respect to the degree of competition. We further lend support to the view that stiffer competition has an increasing impact on the level of credit risk. Notably, we find that competition strengthens the incentives of banks to engage in screening activity and that screening serves as a protection mechanism that can provide banks with a shield against bad loans. Overall, when market conditions are substantially distorted, this has a dilutive impact on the incentives mechanism of banks to screen their applicants. We provide empirical evidence which is consistent with the conceptual underpinnings of our theoretical model and the obtained findings.     

What lies beneath—Negative interest rates and bank lending

We study the transmission of negative interest rates to bank lending around an unexpected policy rate cut into deep negative territory by the Swiss National Bank (−0.75%). We exploit a rich data set on transaction-level corporate loans matched with bank balance sheet data. We find that banks more affected by negative interest rates offer looser lending terms and lend more than other banks. This result is consistent with the risk-taking channel, where a lower policy rate spurs bank risk-taking to maintain profits. The result implies that, even in such deep negative territory, the reversal rate has not yet been hit.     

Asymmetric Information,Bank Lending,and Implicit Contracts: A Stylized Model of Customer Relationships

Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation.     

Interest rate derivatives at commercial banks: An empirical investigation

I analyze the effects of bank characteristics and macroeconomic shocks on interest rate risk-management behavior of commercial banks. My findings are consistent with hedging theories based on cost of financial distress and costly external financing. Banks with higher probability of financial distress manage their interest rate risk more aggressively, both by means of on-balance sheet and off-balance sheet instruments. As compared to the derivative users, the derivative non-user banks adopt conservative asset-liability management policies in tighter monetary policy regimes. Finally, I show that the derivative non-user bank's lending volume declines significantly with the contraction in the money supply. Derivative users, on the other hand, remain immune to the monetary policy shocks. My findings suggest that a potential benefit of derivatives usage is to minimize the effect of external shocks on a firm's operating policies.     

Does Macro‐Prudential Regulation Leak? Evidence from a UK Policy Experiment

The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro‐prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique data set. In the UK, regulators have imposed time‐varying, bank‐specific minimum capital requirements since Basel I. It is found that regulated banks (UK‐owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This “leakage” is substantial, amounting to about one‐third of the initial impulse from the regulatory change.     

Lending Booms and Lending Standards

We examine how the informational structure of loan markets interacts with banks' strategic behavior in determining lending standards, lending volume, and the aggregate allocation of credit. We show that, as banks obtain private information about borrowers and information asymmetries across banks decrease, banks may loosen their lending standards, leading to an equilibrium with deteriorated bank portfolios, lower profits, and expanded aggregate credit. These lower standards are associated with greater aggregate surplus and greater risk of financial instability. We therefore provide an explanation for the sequence of financial liberalization, lending booms, and banking crises observed in many emerging markets.     

State ownership and banks’ information rents: Evidence from China

In a lending relationship, a bank with an information advantage regarding its client tends to hold up the borrower and charge higher interest rates. We conjecture that state-owned enterprises (SOEs), with worse information asymmetry, are subject to greater information rents. State-owned banks place less emphasis on information production and hence extract lower rents compared to profit-maximizing private banks. We use the decline of loan interest rates around the borrowers’ equity initial public offerings (IPOs) as the proxy of banks’ information rents. We find SOEs in China experience larger declines in loan interest rates around their IPOs; the central government-controlled Big Four banks exhibit smaller declines in rates they charge, and their rate declines concentrate on loans made to SOEs.     

Ownership,evergreening and crisis: an analysis of bank–firm relationships in India

Employing data on publicly listed firms for 1995–2012, the article examines the behaviour of bank lending and interest cost and how it evolved during the crisis. The evidence suggests that high-Non-performing Loans (NPL) main banks raised their lending and lowered lending rates during the crisis, especially to risky, low-profit firms, indicative of a flight from quality. A disaggregation of the possible reasons for the flight from quality provides evidence in favour of short-termism behaviour by banks. The analysis also provides evidence in support of tunnelling by risky firms, which became amplified during the crisis. The net effect of these developments was a perceptible reduction in overall employment.     

Foreign bank entry,credit allocation and lending rates in emerging markets: Empirical evidence from Poland

Earlier studies have documented that foreign banks charge lower lending rates and interest spreads than domestic banks. We hypothesize that this may stem from the superior efficiency of foreign entrants that they decide to pass onto borrowers (“performance hypothesis”), but could also reflect a different loan allocation with respect to borrower transparency, loan maturity and currency (“portfolio composition hypothesis”). We are able to differentiate between the above hypotheses thanks to a novel dataset containing detailed bank-specific information for the Polish banking industry. Our findings demonstrate that banks differ significantly in terms of portfolio composition and we attest to the “portfolio composition hypothesis” by showing that, having controlled for portfolio composition, there are no differences in lending rates between banks.     

Bank lending in Switzerland: Driven by business models and exposed to uncertainty

We study the bank lending channel in Switzerland over three decades using unbalanced quarterly bank-individual data spanning 1987 to 2016. We take an agnostic stance on which bank characteristic drives the heterogeneous lending responses to interest rate changes, and estimate the relevant classification of banks. In addition, our empirical model allows for within-group regime-specific lending responses, determined by a latent, estimated state indicator. No single bank characteristic identifies clearly the relevant classification of banks, as several characteristics determining banks’ business models underlie banks’ heterogeneous lending responses. The bank lending channel does not prevail continuously over the observation period. The overall negative effect of interest rate changes on loan growth is partly muted during periods when uncertainty is unusually low or high.     

Balancing liquidity and returns through interbank markets: Endogenous interest rates and network structures

In this article, we develop a model of interbank lending based on liquidity and return on equity considerations of homogeneous banks. We derive the reservation prices of interbank lending and its properties before exploring how, because of an idiosyncratic liquidity shock, banks engage in bilateral lending to form an interbank network. We establish that the resulting networks exhibit realistic properties, including a core-periphery structure. Banks in the core and the periphery of this network differ not only in the amounts of interbank lending and borrowing but also in the interest rates applied to their transactions.     

Endogenous communication among lenders and entrepreneurial incentives

If banks have an informational monopoly about their clients,borrowers may curtail their effort level for fear of being exploitedvia high interest rates in the future. Banks can correct thisincentive problem by committing to share private informationwith other lenders. The fiercer competition triggered by informationsharing lowers future interest rates and future profits of banks.But, provided banks retain an initial informational advantage,their current profits are raised by the borrowers' higher effort.This trade-off determines the banks' willingness to share information.Their decision affects credit market competition, interest rates,volume of lending, and social welfare.     

Is there a tradeoff between bank competition and financial fragility?

We use a model of mean-shifting investment technologies to study the relationship between market structure, risk taking and social welfare in lending markets. Introduction of loan market competition is shown to reduce lending rates and to generate higher investments without increasing the equilibrium bankruptcy risk of borrowers. Hence, there need not be a tradeoff between lending market competition and financial fragility. Such a tradeoff may not emerge either when banks compete by conditioning interest rates on investment volumes irrespectively of whether credit rationing takes place or not.     

Bank and Nonbank Lenders and the Commercial Mortgage Market

This paper develops an equilibrium model of the commercial mortgage market that includes the sequence from commitment to origination and allows testing for differences by type of lender. From borrowers, loan demand is based on the income yield, capital gains, and expectations about return distributions. Lenders use prices such as mortgage rates and their distributions, and quantities in underwriting standards. There are separate equilibria in the markets for loan commitments and originations. Bank and nonbank lenders are not restricted to the same lending technology, nor to the weights placed on mortgage rates as opposed to underwriting standards. Empirical results for the United States commercial mortgage market indicate that banks use interest rates in allocating credit while nonbanks rely on underwriting standards, notably the loan-to-value ratio. A consequence is that nonbanks have a clientele incentive towards making low cap rate loans compensated by low loan-to-value ratios.