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.     

Discretion in bank loan loss allowance,risk taking and earnings management

We study whether banks use the allowance for loan losses (ALL) for efficiency or for opportunistic reasons. We find that banks that had higher abnormal ALL during the period prior to the 2007–2009 crisis engaged in less risk taking during the pre‐crisis period and had a lower probability of failure during the crisis period. In testing earnings management to meet or beat earnings benchmarks, we find that abnormal ALL is unrelated to next period's loss avoidance and just meeting or beating the prior year's earnings. Our results suggest that banks use ALL for efficiency and not for opportunistic purposes.     

Finding the core: Network structure in interbank markets

This paper investigates the network structure of interbank markets. Using a dataset of interbank exposures in the Netherlands, we corroborate the recent hypothesis that the core periphery model is a ‘stylised fact’ of interbank markets. We find a core of highly connected banks intermediating between periphery banks and pay particular attention to model selection. Our analysis can help improve systemic risk assessments, especially as more granular data is becoming available.     

Repayment behavior in peer‐to‐peer microfinancing: Empirical evidence from Kiva

Based on a sample of microloans (to individuals and to groups) that were refinanced through the peer-to-peer microfinancing platform Kiva, we study the determinants of the repayment behavior of micro-entrepreneurs whose loans are available to international charitable lenders. We perform binary regressions and account for influential factors such as the time required for funding or the type of entrepreneurial activity. The screening and monitoring quality of the microfinance institution which selects the borrowers is a main driver of credit default. We find evidence that the loan size, the loan term and the length of a possible grace period influence the probability of default. Moreover, women demonstrate better repayment behavior which is, however, not the case for groups of women.     

The rise in student loan defaults

We examine the rise in student loan defaults in the Great Recession by linking administrative student loan data at the individual borrower level to student loan borrowers’ individual tax records. A Blinder-Oaxaca style decomposition shows that shifts in the composition of student loan borrowers and the massive collapse in home prices during the Great Recession can each account for approximately 30% of the rise in student loan defaults. Falling home prices affect student loan defaults by impairing individuals’ labor earnings, especially for low income jobs. By contrast, when comparing the default sensitivities of homeowners and renters, we find no evidence that falling home prices affect student loan defaults through a home equity-based liquidity channel. The Income Based Repayment (IBR) program introduced by the federal government in the wake of the Great Recession reduced both student loan defaults and their sensitivity to home price fluctuations, thus providing student loan borrowers with valuable insurance against negative shocks.     

Loan officers and loan ‘delinquency’ in Microfinance: A Zambian case

The paper seeks to promote greater understanding of the importance of loan officers in group-based microfinance by explaining their actual roles, dilemmas and tensions when working with poor clients. Few existing studies have used data outside Bangladesh and most focus upon relatively well-performing institutions. Using data from Zambia this study focuses on the recent crisis of Christian Enterprise Trust of Zambia (CETZAM) and the effects of its practices for accounting for and dealing with defaulters. The findings firstly show that loan officers faced powerful hierarchical accountability pressures and pursued inappropriate methods to compel further repayments to resolve this crisis. Its approach to borrower default was found to be stressful for loan officers and potentially detrimental for CETZAM's own short and long-term survival by reducing client loyalty and trust.     

Information, Credit Risk, Lender Specialization and Loan Pricing: Evidence from the DIP Financing Market

We provide an empirical support for theories of lender specialization using the recently developed market for Debtor-in-Possession (DIP) financing. The legal environment in which DIP financing operates represents a natural laboratory for testing determinants of lending specialization (e.g. lender choice). We find that the choice of lender is not driven by credit risk, but by information considerations and that this lending specialization has loan pricing effects. In short, banks (non-bank lenders) lend to more (less) transparent firms and at lower (higher) loan spreads. Our results are consistent with the interpretation that banks provide important and useful services.

The procyclicality of loan loss provisions in Islamic banks

From a sample of Islamic banks around the world from 1997 to 2012, this paper examines whether loan loss provisioning in Islamic banks is procyclical. Our empirical findings highlight that loan loss provisioning in Islamic banks remains procyclical, although the ‘expected’ loan loss model (E-LLM) has been implemented for Islamic banks in several countries. A closer investigation further documents that Islamic banks also use loan loss provisions for discretionary managerial actions, especially related to capital management in which loan loss reserves and provisions are inflated when bank capitalization declines. Eventually, this paper highlights that higher capitalization can mitigate the procyclicality of loan loss provisions in Islamic banks. In other words, loan loss provisioning becomes countercyclical for Islamic banks with higher capitalization. This paper therefore casts doubts on the adoption of the E-LLM for Islamic banks to promote countercyclical effects, because the E-LLM may be influenced by managerial discretion, including opportunistic capital management using loan loss provisions that may undermine the importance of maintaining bank capitalization.     

Information Monopoly and Commitment in Intermediary-Firm Relationships

A bank may use the private information that it acquires through monitoring to hold up borrowers. This information monopoly of the bank may inefficiently distort the borrowers investment decisions in environments where moral hazard is prevalent. The paper analyses how this problem is resolved within bank-firm relationships. In the benchmark case when the bank can contractually commit to future actions, the optimal contract turns out to be ambiguous in nature. When commitment contracts cannot be written, firms have an incentive to develop multiple banking relationships in order to decrease the inside banks bargaining power. However, with costly monitoring, this may defeat the initial purpose for contracting with a financial intermediary, namely information production. The paper argues that when contractual commitment is not feasible, bank size may serve as an alternative commitment device that prevents the bank from holding up borrowers in the future.     

Macroprudential policy and intra-group dynamics: The effects of reserve requirements in Brazil

We examine whether liquidity dynamics within banking groups matter for the transmission of macroprudential policy. Using matched bank headquarters-branch data for identification, we find a lending channel of reserve requirements for municipal branches whose headquarters are more exposed to the policy tool. The result is driven by the 2008–2009 crisis and is stronger for state-owned branches, especially when being less profitable and liquidity constrained. These findings suggest the presence of cross-regional distributional effects of macroprudential policies operating via internal capital markets.     

从美国次贷危机看金融创新与金融监管的关系

2007年爆发的美国次贷危机,是一场在高度证券化和高度衍生产品化的金融体系中,由金融创新所引发、因货币政策和政府监管失误所造成的系统性金融危机。本文通过美国次贷危机中暴露出来的金融创新与金融监管问题,提出了加强对金融创新监管的对策。     

Herding behaviour in the Australian loan market and its impact on bank loan quality

We examine the effect of herding behaviour on the credit quality of bank loans in Australia. We find that bank herding varies with different types of loans. It tends to be more prevalent in owner‐occupied housing loans and credit cards than other types of loans. During the global financial crisis period, herding in owner‐occupied housing loans was most pronounced due to the flight‐to‐quality phenomenon in the housing sector. Furthermore, we find that the big four banks tend to herd more than smaller and regional banks. Bank herding behaviour is countercyclical, as it is negatively related to real GDP growth and the cost of funding but is positively related to market risk. Regulatory capital requirements may also encourage herding as banks are required to hold less risk‐weighted capital for residential loans. Most importantly, bank herding is related to higher impaired assets and therefore lower loan quality. Our findings may have implications for policymakers and bank regulators.     

Digital currencies in financial networks

We introduce a central bank digital currency (CBDC) in the network of financial accounts. Simulating a shift of deposits by both households and non-financial corporations from the banking sector to the central bank, we model the different responses of the affected institutional sectors. We find that the introduction of CBDC generates funding shortages in banks, which may propagate to other sectors. In addition, significant adjustments in the balance sheets of all sectors trigger large moves in securities prices and induce changes in the financial network structure. Finally, we extend the analysis to the introduction of a crypto financial asset (stablecoin) issued by either a domestic or a foreign entity.     

Default contagion and systemic risk in loan guarantee networks

This paper studies systemic risk in the Chinese debt market stemming from inter‐corporate loan guarantees using field data from Zhejiang Province. We apply a weighted and directed network model to analyse the implications for default contagion and systemic risk under different stress testing scenarios. The empirical results indicate that the topology of the loan guarantee network is close to a ‘scale‐free’ structure, which is known to be robust against accidental failures but vulnerable to coordinated attacks. Hence, the network is able to cope with idiosyncratic shocks resulting from single company failures, but can easily suffer from more widespread contagion if a group of systemically important companies are hit by a targeted shock. We further demonstrate that within our sample of small and medium‐sized enterprise (SME) companies, increasing leverage reduces network stability and exacerbates the effects of contagion. More lenient bank lending policies increase the survival rate of sample companies and thereby reduce the losses from default contagion.     

New evidence on nominal exchange rate predictability

The Meese–Rogoff puzzle, one of the well-known puzzles in international economics, concerns the weak relationship between nominal exchange rates and market fundamentals. The purpose of this paper is to show that market fundamentals do in fact matter in forecasting nominal exchange rates. In particular, we emphasize the importance of the Harrod–Balassa–Samuelson effect in modeling deviations from purchasing power parity. Based on the post-Bretton Woods period, we provide solid out-of-sample evidence that rejects the random walk forecast model at medium-term and long-term forecast horizons. We also find mild evidence for out-of-sample predictability of nominal exchange rates over the short term.     

Information content and recency effect of the audit report in loan rating decisions

We examined the significance of the audit report in loan rating decisions using the belief revision model. We designed a laboratory experiment where the sign of the audit report is mixed with other annual financial information in a series of sequential evidence. The results of an experimental design, using 106 loan officers from international financial institutions, support the hypothesis that the qualified audit report appears to be an independent and useful piece of evidence when it is contrary to favourable financial expectations. Our findings also support that the ‘recency effect’ might influence international commercial loan officers’ perception of the qualified audit report.     

Female CFOs and loan contracting: Financial conservatism or gender discrimination? – An empirical test based on collateral clauses

Based on signaling and gender discrimination theory, we examine whether chief financial officer(CFO) gender matters to bank–firm relationships and the designing...     

The bright side of market power in Asian banking: Implications of bank capitalization and financial freedom

Using a sample of listed banks in the Asia-Pacific region from 2000 to 2016, this paper documents that higher market power reduces risk taking but increases loan growth and performance in banking. This highlights the "bright side" of bank market power in general. However, the positive effect of market power on bank stability is more pronounced for well-capitalized banks, although their performance tends to decline, and loan growth is unaffected by market power. Hence, bank capitalization plays an important role in strengthening financial stability due to an increase in bank market power. Moreover, banks with higher market power located in countries with a lower degree of financial freedom exhibit lower riskiness, higher loan growth, and better performance. Greater control by authorities in the financial sector is essential, not only to enhance financial stability, but also to boost financial intermediation and bank performance following an increase in bank market power.     

Random walk or a run. Market microstructure analysis of foreign exchange rate movements based on conditional probability

Using tick-by-tick data for the dollar–yen and euro–dollar exchange rates recorded on the actual transaction platform, a ‘run’—continuous increases or decreases in deal prices for the past several ticks—does have some predictable information on the direction of the next price movement. Deal price movements, that are consistent with order flows, tend to continue a run once it is started. Indeed, conditional probabilities of a run continuing in the same direction after several consecutive observations exceed 0.5. However, quote prices do not show such a run tendency. Hence, a random walk hypothesis is refuted in a simple test of a run using tick-by-tick data. In addition, a longer continuous increase of the price tends to be followed by a larger reversal. The findings suggest that those market participants who have access to real-time, tick-by-tick transaction data may have an advantage in predicting exchange rate movements. The findings reported here also lend support to the momentum trading strategy.     

金融调控中的物价稳定与金融稳定:从分离到融合的逻辑演进

从历史上考察,中央银行实施货币政策和充当最后贷款人,客观上使其具有了保持物价稳定和维护金融稳定的职能。20世纪80年代以后,许多国家的金融调控出现了明显变化,逐步向稳定物价的单一目标方向发展,金融监管则出现了"去央行化"的趋势,使中央银行失去了维护金融稳定的能力和手段。经济全球化产生了很多影响物价稳定与金融稳定的新因素,要求中央银行在保持物价稳定的同时,对金融稳定给予更多关注。全球金融危机后,国际社会和主要经济体加快了宏观审慎管理体系的构建,这为解决物价稳定与金融稳定的协调配合提供了新思路。如果将物价稳定与金融稳定纳入到宏观审慎管理的视野,就有可能在金融调控中二者兼顾,建立起新的金融调控范式。