Topics in Credit and Banking

Paper Session

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

Hyatt Regency Chicago, Grand Suite 3
Hosted By: American Economic Association
  • Chair: Christopher Cotter, Oberlin College

How Do Banks Adjust to Stricter Supervision?

Maximilian Eber
,
Harvard University
Camelia Minoiu
,
International Monetary Fund

Abstract

We exploit a discontinuity in the assignment mechanism of the European Central Bank's Comprehensive Assessment in order to identify the effects of increased regulatory scrutiny on bank balance sheets. We find that banks adjust to stricter supervision by reducing leverage, and most of the adjustment stems from shrinking assets rather than from raising equity. We estimate a 7 percent reduction in leverage, two thirds of which are due to asset shrinkage. Securities are adjusted much more strongly than the loan book. On the liability side, banks mostly reduce their reliance on wholesale funding. Using data on syndicated
loan issuance, we find that very weak banks also reduce the supply of credit. The evidence highlights banks' reluctance to adjust capital when target leverage changes and suggests that macroprudential considerations matter for stress-testing in practice.

Banks, Firms, and Jobs

Andrea Presbitero
,
International Monetary Fund
Fabio Berton
,
University of Turin
Matteo Richiardi
,
University of Oxford
Sauro Mocetti
,
Bank of Italy

Abstract

Unemployment is one of the most visible effects of financial crises. We contribute to the empirical literature on the employment effects of a decline in bank credit, investigating individual heterogeneity across firms, workers and jobs in the response to a financial shock. We use a rich data set of over 1.5 million individual job contracts in an Italian region, that is matched with the universe of firms and their lending banks. To isolate the effect of the financial shock we construct a firm-specific time-varying measure of credit supply. Our findings indicate that a 10 percent supply-driven credit contraction reduces employment by 2.5 percent. The credit shock has distributional implications, as its effect is mostly concentrated among the relatively less educated and less skilled workers with temporary contracts, and is consistent with the presence of a ``dual'' labor market and a skill upgrade strategy adopted by firms in response to the financial shock.

Bank Information Sharing and Liquidity Risk

Kebin Ma
,
University of Warwick
Zhao Li
,
Pompeu Fabra University
Fabio Castiglionesi
,
Tilburg University

Abstract

This paper proposes a novel rationale for the existence of bank information sharing schemes. We suggest that banks can voluntarily disclose borrowers' credit history in order to maintain asset market liquidity. By entering an information sharing scheme, banks will face less adverse selection when selling their loans in secondary markets. This reduces the cost of asset liquidation in case of liquidity shocks. The benefit, however, has to be weighed against higher competition and lower profitability in prime loan markets. Information sharing can arise endogenously as banks trade-off between asset liquidity and rent extraction. Different from the previous literature, we allow for borrower's non-verifiable credit history, and show that banks still have incentives to truthfully disclose such information in competitive credit markets.

Bank Networks and Systemic Risk: Evidence from the National Banking Acts

Haelim Park
,
U.S. Office of Financial Research
Jessie Wang
,
Arizona State University
Mark Paddrik
,
U.S. Office of Financial Research

Abstract

The National Banking Acts (NBAs) of 1863-1864 established rules governing the amounts and locations of interbank deposits, thereby reshaping the bank networks. Using unique data on bank balance sheets and detailed interbank deposits in 1862 and 1867 in Pennsylvania, we study how the NBAs changed the bank network structure and quantify the effect on financial stability in an interbank network model. We find that the NBAs induced a concentration of interbank deposits at both the city and the bank level, creating systemically important banks. Although the concentration facilitated diversification, contagion became more likely when financial center banks faced large shocks.

Bank Lending in the Knowledge Economy

Lev Ratnovski
,
International Monetary Fund
Camelia Minoiu
,
International Monetary Fund
Giovanni Dell'Ariccia
,
International Monetary Fund
Dalida Kadyrzhanova
,
Georgia State University

Abstract

We study bank portfolio allocations during the transition of the real sector to a knowledge economy in which firms use less tangible capital and invest more in intangible assets. We show that, as firms shift toward intangible assets that have lower collateral values, banks reallocate their portfolios away from commercial and industrial (C&I) loans toward other assets, primarily residential real estate loans. This effect is more pronounced for large and less well capitalized banks and is robust to controlling for non-C&I loan demand. Our results suggest that increased firm investment in intangible assets can explain up to 20% of bank portfolio reallocation from commercial to residential lending over the last four decades.

Credit Elasticity of Job Creation: Does Small Business Credit Spur Local Employment?

Karen Y. Jang
,
Florida International University

Abstract

This study investigates whether an increase in the supply of credit for small firms in a local economy impacts job growth. Using county-level data on small business loan originations between 1996 and 2004 and employing three instrumental variables for the new loans (foreclosure laws, housing supply elasticity, and regulatory barriers to interstate branching) to ensure that this is a loan supply effect, I estimate credit elasticity of job creation of 0.16, and interpret this as evidence that small firms’ access to bank finance generates a positive externality of local job creation. This job-creating impact of increased bank lending to small businesses is 1.8-5.8 times greater than the job-creating impact of increased business formation. Further, my results suggest that small-firm financial constraints can stifle economic growth: (1) the estimated elasticity is larger in the presence of exogenous local growth opportunities and (2) the economic magnitude of credit elasticity decreases with respect to firm size.
JEL Classifications
  • G2 - Financial Institutions and Services