Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views
Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle, Kim Ristolainen
Journal of Financial Stability,
October
2020
Abstract
We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
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Do Conventional Monetary Policy Instruments Matter in Unconventional Times?
Manuel Buchholz, Kirsten Schmidt, Lena Tonzer
Journal of Banking and Finance,
September
2020
Abstract
This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks’ incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.
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The Cleansing Effect of Banking Crises
Reint E. Gropp, Steven Ongena, Jörg Rocholl, Vahid Saadi
Abstract
We assess the cleansing effects of the recent banking crisis. In U.S. regions with higher levels of supervisory forbearance on distressed banks during the crisis, there is less restructuring in the real sector and the banking sector remains less healthy for several years after the crisis. Regions with less supervisory forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Supervisory forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks, while recapitalisation of distressed banks through TARP does not facilitate cleansing.
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The Cleansing Effect of Banking Crises
Reint E. Gropp, Steven Ongena, Jörg Rocholl, Vahid Saadi
Abstract
We assess the cleansing effects of the recent banking crisis. In U.S. regions with higher levels of supervisory forbearance on distressed banks during the crisis, there is less restructuring in the real sector and the banking sector remains less healthy for several years after the crisis. Regions with less supervisory forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Supervisory forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks, while recapitalization of distressed banks through TARP does not facilitate cleansing.
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06.07.2020 • 13/2020
IWH issues warning of a new banking crisis
The coronavirus recession could mean the end for dozens of banks across Germany – even if Germany survives the economic crisis relatively unscathed. An analysis by the Halle Institute for Economic Research (IWH) shows that many savings banks and cooperative banks are particularly at risk. Loans worth hundreds of billions of euros are on the balance sheets of the financial institutions concerned. IWH President Gropp warns of a potentially high additional burden for the already weakened real economy.
Reint E. Gropp
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The Corona Recession and Bank Stress in Germany
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
No. 4,
2020
Abstract
We conduct stress tests for a large sample of German banks across different recoveries from the Corona recession. We find that, depending on how quickly the economy recovers, between 6% to 28% of banks could become distressed from defaulting corporate borrowers alone. Many of these banks are likely to require regulatory intervention or may even fail. Even in our most optimistic scenario, bank capital ratios decline by nearly 24%. The sum of total loans held by distressed banks could plausibly range from 127 to 624 billion Euros and it may take years before the full extent of this stress is observable. Hence, the current recession could result in an acute contraction in lending to the real economy, thereby worsening the current recession , decelerating the recovery, or perhaps even causing a “double dip” recession. Additionally, we show that the corporate portfolio of savings and cooperative banks is more than five times as exposed to small firms as that of commercial banks and Landesbanken. The preliminary evidence indicates small firms are particularly exposed to the current crisis, which implies that cooperative and savings banks are at especially high risk of becoming distressed. Given that the financial difficulties may seriously impair the recovery from the Covid-19 crisis, the pressure to bail out large parts of the banking system will be strong. Recent research suggests that the long run benefits of largely resisting these pressures may be high and could result in a more efficient economy.
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IWH-Transfertagung „Europas Finanzmarkt: Zwangsehe oder lose Bekanntschaft?“
Sithara Thies
Wirtschaft im Wandel,
No. 1,
2020
Abstract
Ein Jahrzehnt nach der weltweiten Finanzkrise steht das Finanzsystem noch immer vor enormen Herausforderungen. Wie diese in Europa gemeistert werden können, war Thema einer hochkarätig besetzten Tagung, die am 26. Februar 2020 am Leibniz-Institut für Wirtschaftsforschung Halle (IWH) stattfand.
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Banks’ Funding Stress, Lending Supply, and Consumption Expenditure
H. Evren Damar, Reint E. Gropp, Adi Mordel
Journal of Money, Credit and Banking,
No. 4,
2020
Abstract
We employ a unique identification strategy linking survey data on household consumption expenditure to bank‐level data to estimate the effects of bank funding stress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of nonmortgage liabilities. This, however, only translates into lower levels of consumption for low‐income households. Hence, adverse credit supply shocks are associated with significant heterogeneous effects.
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The Dilemma of International Diversification: Evidence from the European Sovereign Debt Crisis
Bill Francis, Iftekhar Hasan, Gergana L. Kostova, Sami Ben Naceur
Asia-Pacific Journal of Financial Studies,
No. 2,
2020
Abstract
This paper tests how capital markets value the international diversification of banks in good and in bad economic times by investigating changes in domestic and foreign sovereign debt ratings before and during the European sovereign debt crisis. Tracing 320 European banks in 29 countries and 226 credit rating announcements for European sovereigns between 1 January 2001 and 15 August 2012, we show that the market values banks with access to foreign funds. Despite occasional adverse effects immediately following negative news regarding sovereign credit rating changes, international diversification was found to be beneficial to European banks, especially during periods of distress.
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Banks’ Equity Performance and the Term Structure of Interest Rates
Elyas Elyasiani, Iftekhar Hasan, Elena Kalotychou, Panos K. Pouliasis, Sotiris Staikouras
Financial Markets, Institutions and Instruments,
No. 2,
2020
Abstract
Using an extensive global sample, this paper investigates the impact of the term structure of interest rates on bank equity returns. Decomposing the yield curve to its three constituents (level, slope and curvature), the paper evaluates the time-varying sensitivity of the bank’s equity returns to these constituents by using a diagonal dynamic conditional correlation multivariate GARCH framework. Evidence reveals that the empirical proxies for the three factors explain the variations in equity returns above and beyond the market-wide effect. More specifically, shocks to the long-term (level) and short-term (slope) factors have a statistically significant impact on equity returns, while those on the medium-term (curvature) factor are less clear-cut. Bank size plays an important role in the sense that exposures are higher for SIFIs and large banks compared to medium and small banks. Moreover, banks exhibit greater sensitivities to all risk factors during the crisis and postcrisis periods compared to the pre-crisis period; though these sensitivities do not differ for market-oriented and bank-oriented financial systems.
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