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Liquidity Shocks to Markets 

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Adams
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Jose A. Lopez, Federal Reserve Bank of San Francisco

The Dollar, Bank Leverage and the Deviation From Covered Interest Parity

Catherine Koch
,
Bank for International Settlements
Hyun Song Shin
,
Bank for International Settlements
Stefan Avdjiev
,
Bank for International Settlements
Wenxin Du
,
Federal Reserve Board

Abstract

We document the triangular relationship formed by the strength of the US dollar, cross-border bank lending in dollars and deviations from covered interest parity (CIP). A stronger dollar goes hand-in-hand with bigger deviations from CIP and contractions of cross-border bank lending in dollars. Differential sensitivity of CIP deviations to the strength of the dollar can explain cross-sectional variations in CIP arbitrage profits. Underpinning the triangle is the role of the dollar as proxy for the shadow price of bank leverage.

Sharing the Pain? Credit Supply and Real Effects of Bank Bail-ins

Thorsten Beck
,
City University of London and CEPR
Samuel Da-Rocha-Lopes
,
European Banking Authority and Nova SBE
Andre Silva
,
City University of London and International Monetary Fund

Abstract

We analyze the credit supply and real sector effects of bank bail-ins by exploiting the unexpected failure of a major bank in Portugal and its subsequent resolution. Using a unique dataset of matched firm-bank data on credit exposures and interest rates from the Portuguese credit register, we show that while banks more exposed to the bail-in significantly reduced credit supply after the shock, affected firms were able to compensate this credit contraction with other sources of funding, including new lending relationships. Although there was no loss of external funding, we observe a moderate tightening of credit conditions as well as lower investment and employment at firms more exposed to the intervention, particularly SMEs. We explain the latter real effects by higher precautionary cash holdings due to increased uncertainty.

The Importance of Deposit Insurance Credibility

Diana Bonfim
,
Bank of Portugal
Joao Santos
,
Federal Reserve Bank of New York

Abstract

Deposit insurance is the most widely used instrument to mitigate the risk of
bank runs. As deposit insurance schemes are not fully funded, they need to
be credible ex-ante to serve their purpose. In this paper we look at
specific episodes during the global financial crisis that have threatened
the credibility of deposit insurance. Using monthly bank level data on
deposits from households and firms, we find that depositors actively react
to events that raise doubts about the credibility of deposit insurance. For
some depositors this may entail moving their savings to financial
institutions whose deposits are guaranteed in other countries, while for
others this may be reflected in a preference for intrinsically sounder
banks.

The Real Effects of Bank Distress: Evidence From Bank Bailouts in Germany

Johannes Bersch
,
Centre for European Economic Research
Hans Degryse
,
KU Leuven and CEPR
Thomas Kick
,
Deutsche Bundesbank
Ingrid Stein
,
Deutsche Bundesbank

Abstract

How does bank distress impact their customers’ probability of default? We address this question by looking at a unique sample of German firms from 2000 to 2012. We follow their firm-bank relationships through times of crises and distress. We find that a bank bailout leads to a bank-induced increase in the firms’ probability of default. This effect mainly stems from bailouts during the 2008-09 recession. We further find that the direction and magnitude of the effect depends on firm quality and the relationship orientation of banks.
Discussant(s)
Camelia Minoiu
,
International Monetary Fund and University of Pennsylvania
Fergal McCann
,
Central Bank of Ireland
Raluca Roman
,
Federal Reserve Bank of Kansas City
Kasper Roszbach
,
Norges Bank and University of Groningen
JEL Classifications
  • G2 - Financial Institutions and Services