Lending, Wholesale Banking and Financial Stability
Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM
Sheraton Grand Chicago, Missouri
- Chair: Jose A. Lopez, Federal Reserve Bank of San Francisco
How Large Banks Use CDS to Manage Risks: Bank-Firm-Level Evidence
AbstractWe test five hypotheses on whether banks use CDS to hedge corporate loans, provide credit enhancements, obtain regulatory capital relief, and exploit banking relationship and private information. Linking large banks’ CDS positions and syndicated lending on individual firms, we observe strong evidence for the credit enhancement and regulatory capital relief hypotheses, but mixed evidence for the hedging, banking relationship, and private information hypotheses. Banks buy and sell more CDS on their borrowers, but their net CDS positions and lending status are largely unrelated. We find no evidence of bank using CDS to exploit private information.
Learning from History: Volatility and Financial Crises
AbstractWe study the effects of volatility on financial crises by constructing a cross-country database spanning over 200 years. Volatility itself is not a significant predictor of banking crises, but unusually high and low volatilities are. Low volatility is followed by credit build-ups, indicating that agents take more risk in periods of low risk consistent with Minsky instability hypothesis, and increasing the likelihood of a crisis. The effect is stronger when financial markets are more prominent and less regulated. Finally, both high and low volatilities make stock market crises more likely, while volatility in any form has no impact on currency crises.
The Changing Role of Small Banks in Small Business Lending
This paper studies how competition from large banks affects small banks’ lending to small businesses. We model small banks as having a greater ability to monitor their borrowers while large banks have a lower cost of lending. In equilibrium, an increase in large bank competition makes small banks especially valuable to borrowers of intermediate quality. We then analyze bank data by loan size and find results consistent with this prediction. Small, single-market banks increase the share of their small business loans in the intermediate size category ($250,000 to $1 million) following large bank market entry. Results are stronger at smaller distances and robust to instrumenting for large bank entry. These findings suggest that small banks will continue to serve the intermediate segment of the small business loan market even as large bank competition increases.
Stockholm School of Economics
John O.S. Wilson,
University of St. Andrews
University of Mannheim
Charles M. Kahn,
University of Illinois-Urbana-Champaign
- E4 - Money and Interest Rates
- G2 - Financial Institutions and Services