Response Of Lending Research Articles

Dollar Funding and the Lending Behavior of Global Banks

A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing their funding to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.

Does Macropru Leak? Evidence from a UK Policy Experiment

The regulation of bank capital to improve the resilience of the financial system and, related to this aim, as a means of smoothing the credit cycle are central elements of forthcoming macroprudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit: (i) changes in capital requirements need to affect loan supply by regulated banks, and (ii) substitute sources of credit should not fully 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 United Kingdom, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. Over the 1998-2007 period, UK-regulated banks reduced lending in response to tighter capital requirements. But non UK-regulated banks (resident foreign branches) increased lending in response to tighter capital requirements on a relevant reference group of regulated banks. This ‘leakage’ was material although only partial: it offset—by about one third—the initial impulse from the regulatory change. These results suggest that, on balance, changes in capital requirements can have a substantial impact on aggregate credit supply by UK-resident banks. But they also affirm the importance of cross-country co-operation on macroprudential policies.

Governance Form and Organizational Adaptation: Lessons from the Savings and Loan Industry in the 1980s

This paper explores how governance form affects the organizational capacity for adaptation. We make a general case about the importance of governance in adaptation, and we identify three mechanisms through which governance form may affect organizations' ability to manage the competency and failure traps that often frustrate the process. We look for evidence of these mechanisms through a study of the U.S. Savings and Loan (S&L) industry in the 1980s. This is an apt context because S&Ls were confronted by severe environmental changes that suggested a need for change of a relatively radical sort during this decade and because the industry contains a mix of governance forms (stock form firms and mutual associations). We examine whether mutuals and stocks differed in their propensity to move away from their traditional business and mission of residential mortgage lending in response to the challenges of the 1980s. We also consider whether stocks and mutuals differed in their performance outcomes during this decade. Results indicate that mutuals were slightly less prone toward change but were in no sense inertial. They also show that mutuals performed better overall and appeared to change more successfully than did stock firms. The overall pattern of results suggests that mutual governance was a resource that allowed S&Ls to better balance exploration and exploitation in the face of a changing and ambiguous environment. We consider the broader implications of these findings for research on organizational adaptation, governance form, and governance more generally.

The Bank Lending Channel of Monetary Policy and its Effect on Mortgage Lending

The bank lending channel of monetary policy suggests that play a special role in the transmission of monetary policy. We look for this special role by examining the business strategies of as it relates to mortgage funding and mortgage lending. Traditional banks have a large supply of excess core deposits and specialize in information-intensive lending to borrowers (which is proxied here using mortgage lending in subprime communities), whereas market-based banks are funded with managed liabilities and mainly lend to relatively easy-to-evaluate borrowers. We predict that only banks operating between these business strategies are likely to increase their loan rate spreads substantially in response to monetary tightening. To fund ongoing mortgage originations, these must substitute from core deposits to managed liabilities, which have a large external finance premium due to these banks' information-intensive lending. Consistent with this prediction, we find evidence of a bank lending channel only among transition - they significantly reduce mortgage lending in response to monetary contractions.

The Cross-Market Spillover of Economic Shocks Through Multi-Market Banks

This paper investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007-2009. Some metro areas in the U.S. suffered much greater mortgage defaults than others. We use this regional variation to identify whether high mortgage delinquencies in some markets affected multi-market banks' mortgage lending in other markets. Our results show that multi-market banks reduced local mortgage lending in response to delinquencies in other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks' internal capital markets. This spillover effect was greatest in peripheral markets where multi-market banks do a small share of their lending. We find that securitized lending may have mitigated the decline in portfolio lending, but the effect on total lending is economically significant. The mechanism of the transmission appears to be through changes in bank capital and new information about the mortgage market.

The Bank Lending Channel of Monetary Policy and its Effect on Mortgage Lending

The bank lending channel of monetary policy suggests that banks play a special role in the transmission of monetary policy. We look for this special role by examining the business strategies of banks as it relates to mortgage funding and mortgage lending. 'Traditional banks' have a large supply of excess core deposits and specialize in information-intensive lending to borrowers (which is proxied here using mortgage lending in subprime communities), whereas 'market-based banks' are funded with managed liabilities and mainly lend to relatively easy-to-evaluate borrowers. We predict that only 'transition banks' operating between these business strategies are likely to increase their loan rate spreads substantially in response to monetary tightening. To fund ongoing mortgage originations, these banks must substitute from core deposits to managed liabilities, which have a large external finance premium due to these banks' information-intensive lending. Consistent with this prediction, we find evidence of a bank lending channel only among transition banks -- they significantly reduce mortgage lending in response to monetary contractions.

An Evaluation of the International Monetary Fund's Claims about Public Health

The International Monetary Fund's recent claims concerning its impact on public health are evaluated against available data. First, the IMF claims that health spending either does not change or increases with IMF-supported programs, but there is substantial evidence to the contrary. Second, the IMF claims to have relaxed strict spending requirements in response to the 2008-9 financial crisis, but there is no evidence supporting this claim, and some limited evidence from the Center for Economic Policy Research contradicting it. Third, the IMF states that wage ceilings on public health are no longer part of its explicit conditionalities to poor countries, as governments can choose how to achieve public spending targets; but in practice, ministers are left with few viable alternatives than to reduce health budgets to achieve specific IMF-mandated targets, so the result effectively preserves former policy. Fourth, the IMF's claim that it has increased aid to poor countries also seems to be contradicted by its policies of diverting aid to reserves, as well as evidence that a very small fraction of the Fund's new lending in response to the financial crisis has reached poor countries. Finally, the IMF's claim that it follows public health standards in tobacco control contrasts with its existing policies, which fail to follow the guidelines recommended by the World Bank and World Health Organization. The authors recommend that the IMF (1) become more transparent in its policies, practices, and data to allow improved independent evaluations of its impact on public health (including Health Impact Assessment) and (2) review considerable public health evidence indicating a negative association between its current policies and public health outcomes.

Will World Bank and IMF Lending Lead to HIPC-IV? Debt Déjà-Vu All Over Again

Four years ago, the G-7 pushed through an unprecedented initiative forcing the international financial institutions to cancel 100 percent of their outstanding debt claims on the world’s poorest countries. Through the Multilateral Debt Relief Initiative (MDRI), these heavily indebted poor countries (HIPCs) stand to receive up to $60 billion in debt relief over time. Moreover, the World Bank, African Development Bank, and IMF shareholders approved a new debt sustainability framework to govern future lending decisions and prevent the need for yet another round of systemic debt relief. All parties emerged from these landmark agreements confident that the dragon of unsustainable debt finally had been slain. However, several unsettling trends raise serious questions about the finality of these actions. First, World Bank and AfDB lending disbursement volumes to these very same HIPC countries remain very high, and nearly the same as compared to pre-MDRI. Emergency IMF lending in response to the global economic crisis has compounded the situation. Second, IMF and World Bank growth projections for HIPCs remain overly rosy compared to actual and historical performance. Our new dataset of IMF growth projections suggests a structural optimism of at least one percentage point per year. Third, HIPCs continue to experience significant volatility in country performance measures that has a direct impact on their ability to carry debt sustainably. Taken together, these findings suggest that donor countries should re-examine the issue of debt sustainability in low-income countries and the system for determining the appropriate grant/loan mix. The upcoming IDA and AfDF replenishment negotiations present a timely opportunity to do so. Absent assertive and corrective action, the international community may be faced with the prospect of a HIPC IV agreement in the not too distant future.

Price Run-up in Housing Markets, Access to Bank Lending and House Prices in Korea

This paper studies the causal relationship between house prices and the access to bank lending in Kangnam, the hottest submarket in Seoul and four ‘cold’ markets which have shown relatively modest price increases. In response to the rapid escalation of house prices in Seoul, primarily in Kangnam in recent years, the Korean government implemented a number of policies to stabilize house prices. In particular, it introduced more strict limits on loan-to-value ratio and debt-to-income ratio as part of the mortgage loan qualification process in order to restrict the availability of bank lending for the housing market. The short-run influence of the bank lending on the apartment prices is clearly present in ‘cold’ markets, while it is not in Kangnam, the ‘hot’ market, even though the long-run influence is stronger in Kangnam than in the other markets. This result holds for the entire sample period (1999–2006) as well as for the subperiods before and after the introduction of lending restrictions in August, 2005. It also holds for Kangnam and Kangbuk for an extended period of 1988 to 2006. Our results suggest that in the short run the lending restriction may cause a disruption in untargeted housing markets while it has little influence on the apartment prices in the targeted market. We also find that banks have adjusted the bank lending in response to changes in the house prices in Kangnam as well as in the other markets.

Bank Core Deposits and the Mitigation of Monetary Policy

We consider the business strategy of some that provide relationship loans (where they have loan origination and monitoring advantages relative to capital markets) with deposit funding (where they can pass along the benefit of a sticky price on deposits). These banks tend to lend out less than the deposits they take in, so they have a of deposits. This buffer stock of deposits can be used to mitigate the full effect of tighter monetary policy on their bank-dependent borrowers. In this manner, the business strategy of banks acts as a core deposit mitigation to provide funds to bank-dependent borrowers when there are monetary shocks. In effect, there is no bank lending channel of monetary policy associated with these traditional banks. ; In contrast, other mainly rely on managed liabilities that are priced at market rates. These do not have to shift from insured deposits to managed liabilities in response to tighter monetary policy. At the margin, their loans are already funded with managed liabilities. For these as well, there is no unique bank lending channel of monetary policy. ; The only that are likely to raise loan rates substantially in response to an increase in the federal funds rate are with a high proportion of relationship loans that are close to a loan-to-core deposit ratio of one. These must substitute higher cost nondeposit liabilities, which have an external finance premium, for deposits, which do not because of deposit insurance. Some of these may also face higher marginal costs as their loan-to-core deposit ratio approaches one because of the costs associated with lending to default-prone relationship borrowers. It is among these (which we refer to as high relationship lenders), and only these banks, that we find evidence of a bank lending channel - they significantly reduce lending in response to a monetary contraction. Importantly, these hold only a small fraction of U.S. banking assets. Thus, in the United States, the bank lending channel seems limited in scope and importance, mainly because so few that specialize in relationship lending switch from deposits to managed liabilities in response to changes in interest rates.

Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?

The accumulation of international reserves by emerging markets raises the question of how to best utilize these funds. This paper explores two routes through which the pooling of reserves could enhance stability and welfare. First, the reserve pool could be used for emergency lending in response to sudden stops. Second, a portion of the reserve pool along with borrowed funds could be used to purchase contingent debt securities issued by governments and corporations, helping to solve the first-mover problem that limits the liquidity of markets in these instruments and hinders their acceptance by private investors. This paper argues that the second option is more likely to be feasible and productive.

Prudential Regulation and the “Credit Crunch”: Evidence from Japan

The underlying causes of sharp declines in bank lending during recessions in large developed economies, as exemplified by the U.S. in the early 1990s and Japan in the late 1990s, are still being debated due to the lack of any convincing identification strategy of the supply side capital–lending relationship from lending demand. Using within bank share of real estate lending in the late 1980s as an instrumental variable for bank capital, we find that Japanese banks cut back on their lending in response to a large loss of bank capital in fiscal year 1997.

Federal Home Loan Bank Advances and Commercial Bank Portfolio Composition

The primary mission of the 12 cooperatively owned Federal Home Loan Banks (FHLBs) is to provide their members financial products and services to assist and enhance member housing finance. In this paper, we consider the role of the FHLBs' traditional product--'advances,' or collateralized loans to members--in stabilizing commercial bank members' residential mortgage lending activities. Our theoretical model shows that using membership criteria (such as a minimum of 10 percent of the portfolio being in mortgage-related assets) or using mortgage-related assets as collateral does not ensure that FHLB advances will be put to use for stabilizing members' financing of housing. Indeed, our model demonstrates that advances--a relatively low cost managed liability--are most likely to influence lending only when such liabilities are used to finance 'relationship' loans (i.e., loans to bank-dependent borrowers) that will be held on a bank's balance sheet and are least likely to influence lending for loans where the loan rate is heavily influenced by securitization activities, like mortgages. Using panel vector autoregression (VAR) techniques, we estimate recent dynamic responses of U.S. bank portfolios to FHLB advance shocks, to bank lending shocks, and to macroeconomic shocks. Our empirical findings are consistent with the predictions of our theoretical model. First, recent bank portfolio responses to FHLB advance shocks are of similar magnitude for mortgages, for commercial and industrial loans, and for other real estate loans. This suggests that advances are just as likely to fund other types of bank credit as to fund single-family mortgages. Second, unexpected changes in all types of bank lending are accommodated using FHLB advances. Third, FHLB advances do not appear to reduce variability in bank residential mortgage lending resulting from macroeconomic shocks. However, some banks appear to have used FHLB advances to reduce variability in commercial and industrial lending in response to such macroeconomic shocks. Thus, relatively low cost managed liabilities may be used to finance 'relationship' borrowers (which are typically business borrowers, rather than residential mortgage borrowers), although this use for advances appears to have diminished over time.

Monetary Policy and Sectoral Bank Lending in Malaysia

Unlike most studies on the effect of monetary policy on bank lending, this article intends to answer the question whether the tightening of monetary policy in Malaysia before and after the financial crisis in 1997 affected differently the commercial bank lending to various sectors of the economy. To achieve the objective, Vector Autoregressive Regression (VAR) method was used to generate impulse response function and variance decomposition to trace the impact of a shock in monetary policy on bank lending in Malaysia. The results show that a monetary policy tightening in Malaysia gives a negative impact on all the sectors. Analyzing sectoral responses to monetary shocks, evidence is found that some sectors are more affected than the others. The manufacturing, agricultural, and mining sector seems to decline more than the aggregate bank lending in response to interest rate shock.

Asset securitisation as a risk management and funding tool

PurposeThe paper surveys the risks and rewards of asset securitisation and illustrates how this structured finance technique can lift credit constraints to small‐ and medium‐sized enterprises (SMEs) as banks to turn more conservative in their lending in response to more risk‐sensitive capital requirements for credit risk.Design/methodology/approachThe mechanics of securitisation provide an analytical framework and perspective for our analysis of conditions for sustainable SME securitisation and its potential contribution to greater risk diversification of both issuers and investors. The paper also elicits lessons to be learned for essential regulatory and policy measures to guide a sound development of securitisation markets from an empirical review of SME securitisation in Germany.FindingsThe paper finds that the structural versatility of securitisation offers economic benefits irrespective of the configuration of the financial system. The development of a viable securitisation market for SME‐related claims in a bank‐based financial system is likely to require financial sector initiatives, whose scope and intensity might be enhanced by development agencies. Orchestrated policy efforts make for a benign strategy to incubate SME securitisation in a timely fashion, while keeping legal uncertainty and economic attrition to a minimum.Originality/valueAs opposed to previous papers, the paper defines and discusses SME securitisation from both the perspective of bank‐ and firm‐sponsored securitisation and issue hands‐on recommendations for its efficient implementation.

The Effects of Monetary Policy in the Euro Area

This paper presents evidence on the monetary transmission process in the euro area, based on macroeconomic data and on micro data on banks. According to the estimations of macro vector autoregression and macroeconometric models, a monetary policy tightening significantly reduces output and--after a time lag--also prices. The effect on output is temporary, while that on prices is permanent. Clear patterns of significant asymmetries in the monetary policy effects across countries do not emerge. The estimations based on micro data on banks show that the main factor that determines the average bank's response to monetary policy is its degree of liquidity: the lower its share of liquid assets in total assets, the more strongly does a bank reduce its lending in response to a monetary tightening. Bank size does not emerge as an important factor for a bank's reaction to monetary policy. These results hold for virtually all member countries of the European Monetary Union, despite the differences in their banking systems. Copyright 2003, Oxford University Press.

Consumption and Aggregate Constraints: Evidence from U.S. States and Canadian Provinces

State‐level consumption exhibits excess sensitivity to lagged income to the same extent as U.S. aggregate data, but state‐specific (idiosyncratic) consumption exhibits substantially less sensitivity to lagged state‐specific income—a result that also holds for Canadian provinces. We propose the following interpretation: borrowing and lending in response to changes in consumer demand are easier for individual U.S. states than for the United States as a whole, and therefore, the measured deviation from the benchmark permanent income hypothesis model is smaller. However, lagged state‐specific variables help predict state‐specific consumption, suggesting that the PIH model still requires qualification.

Consumption and Aggregate Constraints: Evidence From U.S. States and Canadian Provinces

State-level consumption exhibits excess sensitivity to lagged income to the same extent as US aggregate data, but state-specific (idiosyncratic) consumption exhibits substantially less sensitivity to lagged state-specific income - a result that also holds for Canadian Provinces. We propose the following interpretation: borrowing and lending in response to changes in consumer demand is easier for an individual US state than it is for the US as a whole. The PIH may thus be a good model for describing the reaction of consumption to idiosyncratic disposable income shocks even if it fails at the aggregate US level. Further analysis, centred on the persistence of income shocks and on the consumption/income ratio, is consistent with this interpretation but suggests that the PIH still require qualification. We contrast our results with tests of full interstate risk sharing.