« Back to Results

Regulation, Risk, and Lending

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Cortez Hills C
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Michael Koetter, Leibniz Institute for Economic Research and Otto-von-Guericke University

Do Bank Bailouts Affect the Provision of Trade Credit?

Lars Norden
,
Getulio Vargas Foundation
Gregory F. Udell
,
Indiana University
Teng Wang
,
Federal Reserve Board

Abstract

We document that borrowers of banks that received capital support under TARP/CPP significantly increased their quarterly provision of trade credit (accounts receivable) during the crisis by 5.2 percent, while borrowers of other banks did not. The effect is strongest in 2008Q4, and larger for pre-crisis riskier, growth-oriented and bank-dependent firms and for firms that borrow from pre-crisis smaller, less profitable and better capitalized CPP banks. Our difference-in-differences analysis shows that the effect is caused by CPP and not by heterogeneity between firms, banks and time periods. Our study provides novel evidence that suggests a beneficial multiplier effect of bank bailouts.

Bank Runs, Portfolio Choice, and Liquidity Provision

Toni Ahnert
,
Bank of Canada and CEPR
Mahmoud Elamin
,
Consultant

Abstract

We examine the portfolio choice of banks in a micro-founded model of runs. To insure risk-averse investors against liquidity risk, competitive banks offer demand deposits. We use global games to link the probability of a bank run to the portfolio choice. Upon interim information about risky investment, banks liquidate investment to hold a safe asset. This partial hedge against investment risk reduces the withdrawal incentives of investors for a given deposit rate. As a result of the portfolio choice, (i) banks provide more liquidity ex ante (so banks offer a higher deposit rate) and (ii) the welfare of investors increases.

Bank Capital and Loan Liquidity

Yijia (Eddie) Zhao
,
University of Massachusetts Boston
Donghang Zhang
,
University of South Carolina
Allen Berger
,
University of South Carolina

Abstract

We find that higher capital ratios for a lead bank are associated with greater secondary market liquidity of loans the bank syndicates. This effect is stronger when banks are more subject to external financing frictions and during the 2007:Q3 – 2009:Q4 financial crisis. Tests using exogenous shocks to capital generated by banks’ housing market exposure and the 2012 JPMorgan Chase ‘London Whale’ shock are suggestive of causality. Overall, our paper contributes to the research and policy debates on the efficacy of bank capital. We also shed new light on the link between intermediary capital and asset liquidity.

Bank Loan Forbearance: Evidence from a Million Restructured Loans

Frederico Mourad
,
Central Bank of Brazil
Rafael Schiozer
,
Getulio Vargas Foundation
Toni Santos
,
Central Bank of Brazil

Abstract

Forbearance is a concession granted by a lending bank to a borrower for reasons of financial difficulty. This paper examines why and when delinquent bank loans are forborne, using a novel dataset with over 13 million delinquent loans to non-financial firms in Brazil, from which 1.1 million are forborne. Our evidence shows that larger loans are more likely to be forborne, and more than 80% of forbearance events occur in less than four months after a loan becomes more than 60 days past due (after which the bank may no longer accrue interest). We also show that the greater the difficulty to seize collateral, the largest the probability of forbearance. Previous forbearances to a borrower are also positively associated to the probability of forbearance, which may be an indicative of loan evergreening. Finally, we find that a regulatory rule that forces banks to increase provisions of non-delinquent loans when the same borrower also has a delinquent loan creates incentives for banks to forbear delinquent loans. Because loan evergreening may pose macroeconomic resource allocation problems and forbearance may be used to conceal loan losses, decrease provisions and manage earnings and capital, our findings have implications for the design of regulation and supervisory processes.
Discussant(s)
Santiago Carbó Valverde
,
CUNEF and Bangor University
Florian Heider
,
European Central Bank
Galina Hale
,
Federal Reserve Bank of San Francisco
Sascha Steffen
,
Frankfurt School of Finance & Management
JEL Classifications
  • G3 - Corporate Finance and Governance
  • K1 - Basic Areas of Law