Lending, Wholesale Banking and Financial Stability

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Missouri
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Jose A. Lopez, Federal Reserve Bank of San Francisco

Underwriting as Certification of Bank Bonds

Santiago Carbo-Valverde
,
Bangor University, Funcas and CUNEF
Francisco Rodriguez-Fernandez
,
University of Granada and Funcas
Anthony Saunders
,
New York University

Abstract

It has been argued that banks distribute corporate debt by selling their reputation as underwriters to investors in debt markets. Nevertheless, little has been explored on the certification role of banks in placing their own bond debt. Bank reputation was badly damaged during the recent crisis and the question of how banks certify their bond debt in bad times is still an unresolved issue. Taking a sample of bank bond deals from 24 European countries and controlling for the non-random matching of underwriters and bank issuers, we show that strong underwriter reputation brings significant differences in yield and fee benefits and that these differences are actually larger in crisis years. Over the 2003-2013 period we find that issuer banks could save Eur 11 million per deal when that deal was placed by a reputable underwriter, while they lost Eur 9 million per deal when the deal was managed by an underwriter in a less reputable group.

How Large Banks Use CDS to Manage Risks: Bank-Firm-Level Evidence

Iftekhar Hasan
,
Fordham University and Bank of Finland
Deming Wu
,
Office of the Comptroller of the Currency

Abstract

We 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

Jon Danielsson
,
London School of Economics and Political Science
Marcela Valenzuela
,
University of Chile
Ilknur Zer
,
Federal Reserve Board

Abstract

We 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

Lamont Black
,
DePaul University
Michal Kowalik
,
Federal Reserve Bank of Boston

Abstract


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.
Discussant(s)
Bo Becker
,
Stockholm School of Economics
John O.S. Wilson
,
University of St. Andrews
Sascha Steffen
,
University of Mannheim
Charles M. Kahn
,
University of Illinois-Urbana-Champaign
JEL Classifications
  • E4 - Money and Interest Rates
  • G2 - Financial Institutions and Services