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We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the January 2006 to June 2010 period. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks, even as it lowers deposit rates for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, lower capital expenditures, and lower employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank lending channel and the effectiveness of the central bank as a lender of last resort.
A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints provides insurance against aggregate shocks and commands a lower risk compensation compared with non-collateralizable assets. We show that a longshort portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.
We uncover a new channel for spillovers of funding dry-ups. The 2016 US money market fund (MMF) reform exogenously reduced unsecured MMF funding for some banks. We use novel data to trace those banks to a platform for corporate deposit funding. We show that intensified competition for corporate deposits spilled the funding squeeze over to other banks with no MMF exposure. These banks paid more for deposits, and their pool of funding providers deteriorated. Moreover, their lending volumes and margins declined, and their stocks underperformed. Our results suggest that banks' competitiveness in funding markets affect their competitiveness in lending markets.
Discussions about the banking union have restarted. Its success so far is limited: national banking sectors are still overwhelmingly exposed to their own countries’ economies, cross border banking has not increased and capital and liquidity remain locked within national boundaries. The policy letter highlights that the current debate, centered on sovereign exposures and deposit insurance, misses critical underlying problems in the supervision and resolution frameworks. The ECB supervisors’ efforts to facilitate cross-border banking have been hampered by national ringfencing. The resolution framework is not up to its task: limited powers of the SRB, prohibitive access conditions and limited size of the Single Resolution Fund limit its effectiveness. A lack of a coherent European framework for insolvency unlevels the regulatory field and creates incentives to bypass European rules. The new Commission and European Parliament, with the new ECB leadership, provide a unique opportunity to address these shortcomings and make the banking union work.
We investigate the default probability, recovery rates and loss distribution of a portfolio of securitised loans granted to Italian small and medium enterprises (SMEs). To this end, we use loan level data information provided by the European DataWarehouse platform and employ a logistic regression to estimate the company default probability. We include loan-level default probabilities and recovery rates to estimate the loss distribution of the underlying assets. We find that bank securitised loans are less risky, compared to the average bank lending to small and medium enterprises.
Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from NYSE Euronext Paris, we show that an exogenous increase in competition among DMMs leads to a significant decrease in quoted and effective spreads, mainly through a reduction in adverse selection costs. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. Our results are of relevance for designing optimal contracts between exchanges and DMMs and for regulatory market oversight.
This paper examines how networks of professional contacts contribute to the development of the careers of executives of North American and European companies. We build a dynamic model of career progression in which career moves may both depend upon existing networks and contribute to the development of future networks. We test the theory on an original dataset of nearly 73 000 executives in over 10 000 _rms. In principle professional networks could be relevant both because they are rewarded by the employer and because they facilitate job mobility. Our econometric analysis suggests that, although there is a substantial positive correlation between network size and executive compensation, with an elasticity of around 20%, almost all of this is due to unobserved individual characteristics. The true causal impact of networks on compensation is closer to an elasticity of 1 or 2% on average, all of this due to enhanced probability of moving to a higher-paid job. And there appear to be strongly diminishing returns to network size.
We propose a shrinkage and selection methodology specifically designed for network inference using high dimensional data through a regularised linear regression model with Spike-and-Slab prior on the parameters. The approach extends the case where the error terms are heteroscedastic, by adding an ARCH-type equation through an approximate Expectation-Maximisation algorithm. The proposed model accounts for two sets of covariates. The first set contains predetermined variables which are not penalised in the model (i.e., the autoregressive component and common factors) while the second set of variables contains all the (lagged) financial institutions in the system, included with a given probability. The financial linkages are expressed in terms of inclusion probabilities resulting in a weighted directed network where the adjacency matrix is built “row by row". In the empirical application, we estimate the network over time using a rolling window approach on 1248 world financial firms (banks, insurances, brokers and other financial services) both active and dead from 29 December 2000 to 6 October 2017 at a weekly frequency. Findings show that over time the shape of the out degree distribution exhibits the typical behavior of financial stress indicators and represents a significant predictor of market returns at the first lag (one week) and the fourth lag (one month).
In this paper, we investigate the relation between buildings' energy efficiency and the probability of mortgage default. To this end, we construct a novel panel dataset by combining Dutch loan-level mortgage information with provisional building energy ratings that are calculated by the Netherlands Enterprise Agency. By employing the Logistic regression and the extended Cox model, we find that buildings' energy efficiency is associated with lower likelihood of mortgage default. The results hold for a battery of robustness checks. Additional findings indicate that credit risk varies with the degree of energy efficiency.
In this exploratory article, we consider the future of Deutsche Bank and Commerzbank and develop a new approach to the topic: instead of a merger of DB and CB we propose to consider a partial merger of the IT and related back office functions in order to create the basis for an Open Banking platform in Germany. Such a platform would act as a cross-institutional infrastructure company in which the participating banks develop a common data and IT platform (while respecting the data protection regulations). Significant parts of the transaction processes would be pooled by the institutions and executed by the Open Banking platform. Moreover, the institutions remain legally independent and compete with each other at the level of products and services that are developed and produced using just this common data and IT platform – “national champions” would not be created.
But such an “Open Banking Platform” could become even the nucleus of a European Banking platform that could be competitive with existing global data platforms from the USA and China which are already offering financial services and are likely to expand their offerings in the foreseeable future. The proposed model of an open data platform for banks prevents the emergence of national champions and supports the main goal of the banking union: creation of a financial system, in which single banks can be resolved without provoking a systemic crisis and forcing taxpayers to finance bailouts.