Interbank Loans Research Articles

The Impact of Seven Macroprudential Policy Instruments on Financial Stability in Six Euro Area Economies

Abstract The aim of this paper is to investigate whether macroprudential policy instruments can influence the credit growth rate and hence financial stability. We use a fixed effects panel regression model to test the following hypothesis for six euro area economies (Austria, Finland, Germany, Italy, Netherlands and Spain) during time span 2010 Q3 to 2018 Q4: “Macroprudential policy instruments (degree of maturity mismatch; interbank loans as a percentage of total loans; leverage ratio; non-deposit funding as a percentage of total funding; loan-to-value ratio; loan-to-deposit ratio; solvency ratio) enhance financial stability, as measured by credit growth”. Our empirical results suggest that the degree of maturity mismatch, non-deposit funding as a percentage of total funding, loan-to-value ratio and loan-to-deposit ratio exhibit the predicted impact on the credit growth rate and therefore on financial stability. On the other hand, interbank loans as a percentage of total loans, leverage ratio, and solvency ratio do not exhibit the expected impact on the response variable. Since only four regressors (out of seven) have the signs predicted by our hypothesis, we can only partly confirm it.

Banks’ interconnections and peer effects: Evidence from Chile

In this paper, we identify and quantify the importance of endogenous peer effects in the interbank market, allowing for varying degrees of intensity of these peer effects. We base our analysis on a unique dataset that includes all interbank loans that have taken place between 15 banks in the Chilean interbank market representing more than 95% of the market between 2009 and 2016. This approach contrasts sharply with the geographical definition of peers used by most of the literature. As an application of our model, we examine an episode of liquidity shortage experienced by one Chilean bank in the interbank market, with the lenses of our model. We show evidence consistent with a herding behavior of the lender banks which, according to our model, were peers of the stressed bank.

Exchange rate shocks in multicurrency interbank markets

We simulate the impact on the nonbank liabilities of banks in a multiplex interbank environment arising from changes in currency exposure. Currency shocks as a source of financial contagion in the banking sector have not, so far, been considered. Our model considers two sources of contagion: shocks to nonbank assets and exchange rate shocks. Interbank loans can mature at different times. We demonstrate that a dominant currency can be a significant source of financial contagion. We also find evidence of asymmetries in losses stemming from large currency depreciations versus appreciations. A variety of scenarios are considered allowing for differences in the sparsity of the banking network, the relative size and number of banks, changes in nonbank assets and equity, the possibility of bank breakups, and the dominance of a particular currency. Policy implications are also drawn.

Exchange rate shocks in multicurrency interbank markets

We simulate the impact on the nonbank liabilities of banks in a multiplex interbank environment arising from changes in currency exposure. Currency shocks as a source of financial contagion in the banking sector have not, so far, been considered. Our model considers two sources of contagion: shocks to nonbank assets and exchange rate shocks. Interbank loans can mature at different times. We demonstrate that a dominant currency can be a significant source of financial contagion. We also find evidence of asymmetries in losses stemming from large currency depreciations versus appreciations. A variety of scenarios are considered allowing for differences in the sparsity of the banking network, the relative size and number of banks, changes in nonbank assets and equity, the possibility of bank breakups, and the dominance of a particular currency. Policy implications are also drawn.

Have Too-Big-to-Fail Expectations Diminished? Evidence from the European Overnight Interbank Market

Using the Eurosystem’s proprietary interbank loan data from June 2008–June 2020, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for a large set of other factors but has decreased over time, especially in countries that were stricken by the Sovereign Debt Crisis. A difference-in-differences analysis suggests that the decline in the size premium is related to the actual bail-in events, not to the implementation dates of the Bank Recovery and Resolution Directive as such. This finding is robust to controlling for the effect of the ECB’s long-term refinancing operations. Overall, the results suggest that the regulatory move towards bail-in rather than bailout policies to deal with financially distressed banks has reduced the too-big-to-fail expectations concerning large banks.

Investors Activity and Contagion

The systemic risk induced by a connection among financial objects is generally measured by returns, volatility, interbank loans, etc. Nevertheless, these measures do not capture the microscale component of the interconnections induced by heterogeneous investor activity. In this paper, we exploit the information in the connectedness among heterogeneous investors to develop an alternative systemic risk measure. The interconnections embed the systemic risk induced by heterogeneous investors' trading activity because investor strategies incorporate information into stock prices in terms of market stability and information spillover in the network through the information-sharing process among different investor groups. We test whether systemic risk stems from heterogeneous investors' activity. We find that the retail investors with positive net information flows, which are defined as the source in an information network, engage in destabilization regardless of their market status, suggesting that retail investors could significantly contribute to market instability. The connectedness among investors disentangles the financial crisis period from the normal market states, quantifies the systemic risk associated with too interconnected to fail, and plays a detrimental role in financial stability. We find that the portfolio set constructed based on the systemic risk using the heterogeneous investor activity has a negative relationship with the expected returns. Our findings suggest that the connectedness among investor groups has a significant impact on systematic risk and would be crucial for regulations and policymaking.

The Industrial Organization of Financial Markets

This chapter discusses recent developments in the literature involving applications of industrial organization methods to finance. We structure our discussion around a simple model of a financial intermediary that concentrates its attention either on (i) the retail market and hence engages in a traditional maturity transformation business by accepting funds that can be used to invest in risky projects (loans), or (ii) the investment business, financing its operations on the “wholesale” market and making markets or investing in higher return riskier projects. Our discussion is centered around the analysis of market structure and competition in each of these markets, focusing in turn on (i) primary and secondary markets for government and corporate debt, (ii) interbank loans, (iii) markets for retail funding, and (iv) credit markets, including mortgages.

A numerical simulation approach to study systemic risk in banking systems

Banking systems are at the center of the financial infrastructure of any country. It has become apparent after the subprime crisis that such systems cannot be studied by looking at their components individually (that is, in isolation). Thus, an integrated approach is needed.In this paper we introduce a numerically friendly, yet general, algorithm that allows us to represent a banking system in a realistic way. We start with a detailed description of the banks' balance sheets and we incorporate two different features to account for connectivity effects: interbank loans and correlated-exposures to a common universe of credit-risk loans. The driving force behind the model is the progressive deterioration of the loan portfolios to which the banks are exposed. This method is useful to identify the weaknesses of a given banking system, and it is also helpful to assess the merits of different potential responses from the regulator's viewpoint. An example based on the banking system of a Latin American country is used to demonstrate the merits of this approach.Some of our findings are in agreement with those of previous authors, namely, that the probability of developing cascades is proportional to the degree of connectivity of the banking networks, and that the maximum resilience for a given set on banks is achieved for some "intermediate" (optimal?) level of connectivity. However, we also find -- in contrast with a few earlier researchers -- that investigating the features of a banking system by collapsing banks individually (and keeping other features unaltered) can give a misleading view of the system resilience.

Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873

We study financial stability with constraints on central bank intervention. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium. Importantly, this reallocation can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. With a new dataset constructed from archival records, we demonstrate that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic.

Counterparty Default Risk and Monetary Policy in Unsecured Interbank Lending Markets

Banks bargain over the cost of unsecured loans in a model of interbank lending markets characterized by counterparty default risk. The risk an individual bank defaults depends on both idiosyncratic and aggregate factors and impacts loan rates and participation in the interbank loan market. After a deterioration of the aggregate factor affecting default risk, participation in interbank lending markets declines, and both individual and the average interbank loan rates rise. The model suggests that some policy actions enacted during the late-2000s financial crisis may have reduced participation and increased spreads in unsecured interbank loan markets.

The evolution of European economic institutions during the COVID-19 crisis.

This article argues that the incomplete economic and institutional integration of the euro area has exposed the monetary union to increasing economic divergence, which could be deepened by the COVID‐19 crisis. We discuss how monetary and fiscal measures implemented at the onset of the pandemic have contributed to mitigate the economic consequences of lockdowns, but provided limited insurance to narrow economic gaps across member countries. However, EU countries agreed on July 21, 2020 to develop, for the first time, countercyclical fiscal transfers financed by common debt issuance. We discuss the potential of this instrument to contribute to improve the resilience of the eurozone.

Liquidity, Interbank Network Topology and Bank Capital

By applying the interbank network simulation, this paper examines whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. While existing literature highlights the causal relationship that moves from liquidity to capital, the question of how interbank network characteristics affect this relationship remains unclear. Using a sample of commercial banks from 28 European countries, this paper suggests that banks' interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital rations when facing higher illiquidity. This study provides support for the need to implement minimum liquidity ratios to complement capital ratios, as stressed by the Basel Committee on Banking Regulation and Supervision. This paper also highlights the need for regulatory authorities to consider the network characteristics of banks.

Effects of the bank levy introduction on the interbank market

AbstractOne of the proposals that have been brought forward regarding ways of discouraging banks from taking unnecessary risk, widely debated these days, is the introduction of taxes in the financial sector. Although recent empirical investigations document a positive effect of the bank levies (BL), it may also reduce banks' activity. In this paper, we aim to analyse the Polish BL on assets. Poland's interbank market might be affected by a new BL introduced in 2016, as interbank positions of the balance sheet have been also taxed. The analysis covers the panel structure of data of Polish banks with unconsolidated financial statements. To evaluate the impact of the BL on the above interbank market features, we use the OLS regression with fixed effects in relation to the bank. Data has been sourced from OrbisFocus and Central Banks' websites and covers the period 2011–2017. The result demonstrates that the BL on assets applied in Poland has a negative impact on the interbank market. Estimation results shows that the BL on assets significantly decrease the value of 1y and increases the value of 3 months interbank loans. In addition, the BL on assets in the banking sector positively affects the value of government securities and negatively affects the interest income on interbank loans. Moreover, the dispersion of 1 and 3 months quotations was reduced as a result of the BL introduction. In case of short‐term transactions, dispersion amplifies. Additionally, the volatility of quotation decreases due to reduced trading after the BL implementation.

Bargaining power and outside options in the interbank lending market

AbstractWe study the role of bargaining power and outside options with respect to the pricing of over‐the‐counter interbank loans using a bilateral Nash bargaining model, and we test the model predictions with detailed transaction‐level data from the euro‐area interbank market. We find that lender banks with greater bargaining power over their borrowers charge higher interest rates, whereas the lack of alternative investment opportunities for lenders lowers bilateral interest rates. Moreover, we find that when lenders that are not eligible to earn interest on excess reserves (IOER) lend funds to borrowers with access to the IOER facility, they do so at rates that are below the IOER rate; in turn, these borrowers put the funds in their reserve accounts to earn the spread. Our findings highlight that this persistent arbitrage crucially depends on lenders’ limited bilateral bargaining power. We examine implications of these findings for the transmission of euro‐area monetary policy.

Источники формирования и оценка ресурсной базы кредитных организаций

The article describes the key factors in the development of the state economic system. One of the key factors is the stability of the banking system. Currently, the banking sector in Russia is characterized by increasing instability and a decrease in the reduction of opportunities to replenish the resource base. It is noted that the sources of developing the resource base of credit or-ganizations include own and attracted resources. Own resources include retained earnings, trust funds, formation of a statutory fund, additional contributions of shareholders to the statutory fund, mergers and acquisitions, etc. Borrowed funds comprise interbank loans, issuance of debt securities, term deposits, etc. The main part of the resource base of banking sector belongs to the large credit organizations. The structure and mechanism of creating own and attracted resources by organizations of the banking sector are examined in detail. A review and analysis of existing methods of raising funds by credit organizations is presented. The main trends in changing the resource base have been studied; the assessment of the indicators characterizing the volume and dynamics 
 of bank liabilities at the present stage has been presented. It has been found that the mechanism 
 of forming the resource base of the banking sector has the certain difficulties. A key problem in or-ganizing fundraising mechanisms is the imbalance in long-term assets and liabilities. Today, credit organizations form a significant part of their resources from short-term sources. There has been in-ferred the existence of a priority task for the credit organizations in order to increase competition and liquidity: credit organizations have to choose a method to form a resource base that, at minimal cost, will ensure the payment of dividends, replenish reserves and funds, and provide necessary conditions for the effective development of the organization activities.

How Liquidity Regulations Affect Bank Complexity: GFC vs COVID-19 Crisis

We introduce a general equilibrium model to analyze the interactions between liquidity regulations and banks’ investment in complex assets. Complexity improves bank liquidity in good times but heightens vulnerability to runs during crises. Banks underinvest in complex assets when liquidity regulations are loose and overinvest when liquidity regulations are tight. Liquidity regulations qualitatively affect the structure of complementary ex-ante policies, such as asset-specific taxes, but they can also undermine the benefit of ex-post interventions that support interbank loan prices, such as quantitative easing. The implications of the model are examined empirically in the context of the Liquidity Coverage Ratio.

Transparency and market discipline: evidence from the Russian interbank market

This article investigates the role of bank voluntary disclosure, as a source of information about risk, in the interbank market. Using data on the 179 largest Russian banks over the period of 2004–2013 we test whether the ability to attract interbank loans is sensitive to various transparency indices such as those disclosing bank risks, board composition, or even corporate event details. We show that larger but riskier banks—at least in terms of credit risk—behave more transparently and disclose more. The article is the first to provide evidence that the ability to attract funds in the interbank market is positively correlated with the degree of transparency. This result is stable for various aspects of disclosure.

Do banks change their liquidity ratios based on network characteristics?

By applying interbank network simulation, this paper investigates the impact of interbank network topology on bank liquidity ratios. Whereas regulators have put more emphasis on liquidity requirements since the global financial crisis of 2007–2008, how differently shaped interbank networks affect individual bank liquidity behavior remains an open issue. We look at how banks' interconnectedness within interbank loan and deposit networks affects their decisions to hold more or less liquidity during normal times and distress times. Our sample consists of commercial, investment, and real estate and mortgage banks in 28 European countries and allows us to differentiate large and small networks. Our results show that accounting for bank connections within a network is important to understand how banks set their liquidity ratios. Our findings have critical implications for the implementation of Basel III liquidity requirements and bank supervision more generally.

Effects of the Bank Levy Introduction on the Interbank Market

[enter Abstract Body]One of the proposals that have been brought forward regarding ways of discouraging banks from taking unnecessary risk, widely debated these days, is the introduction of taxes in the financial sector. Although recent empirical investigations document a positive effect of the bank levies (BL), it may also reduce banks’ activity. In this paper, we aim to analyse the Polish BL on assets. Poland’s interbank market might be affected by a new BL introduced in 2016, as interbank positions of the balance sheet have been also taxed. The analysis covers the panel structure of data of 209 Polish banks with unconsolidated financial statements. To evaluate the impact of the BL on the above interbank market features, we use the OLS regression with fixed effects in relation to the bank. Data has been sourced from OrbisFocus and Central Banks’ websites and covers the period 2011-2017. The result demonstrates that the BL on assets applied in Poland has a negative impact on the interbank market. Estimation results shows that the BL on assets significantly decrease the value of 1y and increases the value of 3m interbank loans. In addition, the BL on assets in the banking sector positively affects the value of government securities and negatively affects the interest income on interbank loans. Moreover, the dispersion of 1m and 3m quotations was reduced as a result of the BL introduction. In case of short-term transactions, dispersion amplifies. Additionally, the volatility of quotation decreases due to reduced trading after the BL implementation.

Liquidity Requirements and the Interbank Loan Market: An Experimental Investigation (Presentation Slides)

This conference presentation reports on results of an experiment that illustrates costs and benefits of liquidity regulation. These costs and benefits may come out of interbank market equilibrium behavior.