Lending Flows Research Articles

Feeling the Heat: Mortgage Lending and Central Bank Options

Extreme heat periods due to the changing climate are having a negative impact on many areas of the economy. In our study, we look at how much US mortgage lending is originated in the areas that are most vulnerable to future heat waves, and what central bank and supervisory authority actions could mitigate the resulting risk. From our results, we see that proportionally more lending flows into the areas that are likely to be most exposed to heat in the future. Population and economic output are relatively higher in these areas, and thus climate risk is less of a factor in lending decisions. However, lenders reject proportionately slightly more mortgage applications in the counties that are expected to be the hottest. Central bank and supervisory authority measures to support climate objectives are therefore of key importance. These could include, for example, central bank asset purchase programmes to support sustainable construction, especially in areas vulnerable to climate change, or the development of collateral management along similar lines. Coordination between the different authorities is also important because of the limitations of central bank actions.

How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

We combine a rarely accessed BIS database on cross-border lending flows with cross-country data on macroprudential regulations. We find significant interactions between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies in source (home) lending banking systems. Consistent with the bank lending channel, macroprudential easing in a home country amplifies the effect of currency issuers' monetary policy on lending. For instance, UK macroprudential easing amplifies the negative impact of US monetary policy tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice versa, tighter macroprudential policy mitigates these effects.

A Prudential trade-off? Leakages and Interactions with Monetary Policy*

While monetary and prudential policies are generally analysed separately, this paper focuses on how the two interact. Taking an international perspective, we show that monetary policy in a centre economy (Euro Area) spill over its borders through bank lending – therefore inducing volatility in cross-border lending flows. Investigating a sample of 30 advanced and emerging economies, we find evidence that prudential policy in the receiving-country interact with monetary policy so that a tighter prudential stance in the recipient-country mitigates the volatility of banking flows induced by monetary policy abroad. But we also show that a tighter prudential stance – interactions apart – implies a higher growth of cross-border lending. Taken together, these results might suggest a trade-off: while a tighter prudential stance reduces the volatility of cross-border lending flows, it also implies that local borrowers resort more to lending from abroad. Taking advantage of the granularity of our confidential dataset, we finally explore heterogeneities and show that such leakages arise only for financially more open economies and only through the financial sector, with evidence that such leakages are driven by intra-group lending.

The real impact of ratings-based capital rules on the finance-growth nexus

We investigate whether ratings-based capital regulation has affected the finance-growth nexus via a foreign credit channel. Using quarterly data on short to medium term real GDP growth and cross-border bank lending flows from G-10 countries to 67 recipient countries, we find that since the implementation of Basel 2 capital rules, risk weight reductions mapped to sovereign credit rating upgrades have stimulated short-term economic growth in investment grade recipients but hampered growth in non-investment grade recipients. The impact of these rating upgrades is strongest in the first year and then reverses from the third year and onwards. On the other hand, there is a consistent and lasting negative impact of risk weight increases due to rating downgrades across all recipient countries. The adverse effects of ratings-based capital regulation on foreign bank credit supply and economic growth are compounded in countries with more corruption and less competitive banking sectors and are attenuated with greater political stability.

The currency dimension of the bank lending channel in international monetary transmission

We investigate how the use of a currency transmits monetary policy changes in the global banking system. We use a newly available rarely accessed dataset on the bilateral cross-border lending flows of 27 BIS-reporting lending banking systems to borrowers in 51 countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, we identify a currency dimension of the international bank lending channel: monetary changes in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the target country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, the currency dimension of the bank lending channel works similarly across the three currencies, suggesting that the USD may not be unique in this respect.

Does mortgage lending impact business credit? Evidence from a new disaggregated bank credit data set

Abstract We present a new data set for 74 economies over 1990–2016 on domestic bank credit distinguishing between four categories: household mortgages, household consumption credit, loans to non-bank financial institutions, and loans to non-financial business. We offer a description of sources and data collection methods and a comparison with similar data sets. We document the key data trends including a shift in bank credit allocation away from business lending. The literature suggests that this ‘debt shift’ has substantial consequences for growth, income distribution and macroeconomic resilience, which motivates the construction of a new data set. We apply the data to analyze the effect of an increase in mortgage lending flows on business credit flows. We identify several theoretical transmission channels which involve collateral and bank balance sheet effects and wealth effects on consumption. The impact of mortgage credit expansion on business credit growth is found to be positive in advanced economies and negative in emerging and developing economies.

How Repayments Manipulate Our Perceptions about Loan Dynamics after a Boom

AbstractWe propose a method to decompose net lending flows into loan origination and repayments. We show that a boom in loan origination is transmitted to repayments with a very long lag, depressing the growth rate of the stock for many periods. In the euro area, repayments of the mortgage loans granted in the boom preceding the financial crisis have been dragging down net loan growth in recent years. This concealed an increasing dynamism in loan origination, especially during the last wave of ECB’s non-standard measures. Using loan origination instead of net loans has important implications for understanding macroeconomic developments. For instance, the robust developments in loan origination in recent times explain the strengthening in housing markets better than net loans. Moreover, credit supply restrictions during the crisis are estimated to be smaller. Overall, we show that analyses of credit dynamics benefit from putting the focus on loan origination instead of net loans, especially after large booms.

How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.

Determinants of the Current Account Balances among Central and Eastern European Countries in the European Union

This study examines whether the financial market development and integration have affected the current account balances in the European Union (EU) countries in Central and Eastern Europe (CEE) during 1996–2015. First, the results suggest that the higher bank credit flows have resulted in the current account deficits especially after EU accession. The larger pool of bank lending flows due to the foreign mergers and acquisitions has helped finance domestic investment. This has led to the larger current account deficits. Second, the results indicate that the larger stock market size due to EU accession has caused current account surpluses rather than deficits. This contradicts the findings of previous studies, which find that higher financial market development leads to current account deficit. Finally, the result confirms that financial integration has facilitated higher current account deficits. The European Monetary Union has eliminated the regulatory restrictions on cross-border capital flows. The increase in foreign capital inflows has helped finance the growing local consumption and investment needs, which has made the CEE countries run the larger current account deficits.

Has European monetary union influenced the European Union bank lending flows to the EU countries from Central and Eastern Europe?

PurposeThe purpose of this study is to modify the gravity model to identify the main determinants of the European Union (EU) bank lending to the Central and Eastern Europe (CEE) countries during 1994-2012.Design/methodology/approachThis study uses both two-stage least squares and dynamic generalized method of moments to estimate the modified gravity model.FindingsThis study finds that the CEE countries with more developed stock markets have received the higher EU bank lending inflows. The EU banks have greater access to additional financing in the stock markets. Second, the higher stock market difference between the CEE and EU countries has boosted the EU bank lending. Compared to the developed EU stock markets, the less developed CEE stock markets have become more favorable to the EU banks seeking to earn higher profits.Research limitations/implicationsThe CEE countries can further boost the EU bank lending inflows through deepening capital liberalization. They should facilitate easy foreign bank entry by reducing excessive bank legislations and regulations. Moreover, they can promote the EU bank lending through substantial EU bank integration. This can accelerate the major bank reform which would facilitate better bank supervision and regulations.Originality/valueMost previous studies have primarily used the macroeconomic and institutional factors to explain the EU bank lending. In contrast, this study explores the growing importance of the CEE financial development and bilateral trade in explaining the EU bank lending.

How Repayments Manipulate Our Perceptions About Loan Dynamics After a Boom

We propose a method to decompose net lending flows into loan origination and repayments. We show that a boom in loan origination is transmitted to repayments with a very long lag, depressing the growth rate of the stock for many periods. In the euro area, repayments of the mortgage loans granted in the boom preceding the financial crisis have been dragging down net loan growth in recent years. This concealed an increasing dynamism in loan origination, especially during the last wave of ECB’s non-standard measures. Using loan origination instead of net loans has important implications for understanding macroeconomic developments. For instance, the robust developments in loan origination in recent times explain the strengthening in housing markets better than net loans. Moreover, credit supply restrictions during the crisis are estimated to be smaller. Overall, there is a premium on using loan origination and repayments in economic models, especially after large booms.

THE ROLE OF REGULATORY ARBITRAGE IN U.S. BANKS' INTERNATIONAL FLOWS: BANK‐LEVEL EVIDENCE

I study the prevalence and profitability of regulatory arbitrage in U.S. banks' foreign activities. I analyze a publicly available bank‐level data set on bilateral lending flows to 75 countries over 2003–2013. U.S. banks' affiliates lend less to borrowers in host countries with stricter bank capital regulations, and are less likely to maintain affiliates in such countries. Banks substitute from (host‐regulated) affiliate toward (U.S.‐regulated) cross‐border lending in hosts with strict bank capital rules. This is particularly so for low‐capitalized banks with lower foreign ownership shares. Banks that reduce their exposure to stricter host capital rules are more profitable in foreign activities. (JEL F3, F4, G2)

How Repayments Manipulate Our Perceptions about Loan Dynamics after a Boom

We propose a method to decompose net lending flows into loan origination and repayments. We show that a boom in loan origination is transmitted to repayments with a very long lag, depressing the growth rate of the stock for many periods. In the euro area, repayments of the mortgage loans granted in the boom preceding the financial crisis have been dragging down net loan growth in recent years. This concealed an increasing dynamism in loan origination, especially during the last wave of ECB’s non-standard measures. Using loan origination instead of net loans has important implications for understanding macroeconomic developments. For instance, the robust developments in loan origination in recent times explain the strengthening in housing markets better than net loans. Moreover, credit supply restrictions during the crisis are estimated to be smaller. Overall, there is a premium on using loan origination and repayments in economic models, especially after large booms. JEL Classification: E17, E44, G01, D14

The Currency Dimension of the Bank Lending Channel in International Monetary Transmission

We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral crossborder lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.

Can Macroprudential Measures Make Cross-Border Lending More Resilient? Lessons from the Taper Tantrum

We study the effect of macroprudential measures on cross-border lending during the taper tantrum, which saw a strong slowdown of cross-border bank lending to some jurisdictions. We use a novel dataset combining the BIS Stage 1 enhanced banking statistics on bilateral cross-border lending flows with the IBRN’s macroprudential database. Our results suggest that macroprudential measures implemented in borrowers’ host countries prior to the taper tantrum significantly reduced the negative effect of the tantrum on cross-border lending growth. The shock-mitigating effect of host country macroprudential rules are present both in lending to banks and non-banks, and are strongest for lending flows to borrowers in advanced economies and to the non-bank sector in general. Source (lending) banking system measures do not affect bilateral lending flows, nor do they enhance the effect of host country macroprudential measures. Our results imply that policymakers may consider applying macroprudential tools to mitigate international shock transmission through cross-border bank lending.

The Currency Dimension of the Bank Lending Channel in International Monetary Transmission

We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral cross-border lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.

Supply driven mortgage choice

Variable mortgage contracts dominate the UK mortgage market. The dominance of the variable rate mortgage contracts has important consequences for the transmission mechanism of monetary policy decisions and systemic risks. This raises an obvious concern that a mortgage market such as that in the UK, where the major proportion of mortgage debt is either at a variable or fixed for less than two years rate, is vulnerable to alterations in the interest rate regime. Theoretically, mortgage choice is determined by demand and supply factors. So far, most of the existing literature has focused on the demand side perspective, and what is limited is consideration of supply side factors in empirical investigation on mortgage choice decisions. This paper uniquely explores whether supply side factors may partially explain observed/ex-post mortgage type decisions. Empirical results detect that lenders’ profit motives and mortgage funding/pricing issues may have assisted in preferences toward variable rate contracts. Securitisation is found to positively impact upon gross mortgage lending volumes while negatively impacting upon the share of variable lending flows. This shows that an increase in securitisation not only improves liquidity in the supply of mortgage funds, but also has the potential to shift mortgage choices toward fixed mortgage debt. The policy implications may involve a number of measures, including reconsideration of the capital requirements for the fixed, as opposed to the variable rate mortgage debt, growing securitisation and optimisation of the mortgage pricing policies.

The Role of Regulatory Arbitrage in U.S. Banks' International Lending Flows: Bank-Level Evidence

This paper studies the prevalence, drivers and profitability of regulatory arbitrage in U.S. banks’ foreign activities. The analysis uses a bank-level dataset on bilateral capital flows to 75 countries from 2003 to 2013. Results show that U.S. banks lend less to host countries with stricter bank regulations, and are also less likely to maintain affiliate presence in such countries. The deterrent effects of host country bank capital regulations are particularly strong for smaller global banks, and for geographically focused lenders with high shares of foreign ownership. Banks that engage in capital regulatory arbitrage are more profitable in their foreign activities.

Capital Flow Waves to and from Switzerland before and after the Financial Crisis

Summary This paper first shows that capital inflows to and outflows from financial centers were disproportionately affected by the global financial crisis. Switzerland was no exception. The paper then identifies waves of capital flows to and from Switzerland from 2000:Q1 to 2014:Q2 by using a simple statistical method. The analysis shows that private capital inflows to and outflows from Switzerland have become exceptionally muted and less volatile since the crisis. Further, strong and long-lasting ‘home bias’ behavior can be observed for both Swiss and foreign investors. By contrast, net private capital flows have shown significantly higher volatility since the financial crisis, frequently registering extreme movements driven by extreme movements in bank lending flows. These findings suggest that the financial crisis generated a breaking point for capital flows to and from Switzerland.

The Role of Regulatory Arbitrage in U.S. Bankss International Lending Flows: Bank-Level Evidence

The Role of Regulatory Arbitrage in U.S. Bankss International Lending Flows: Bank-Level Evidence