Regulation, Risk, and Lending
Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Michael Koetter, Leibniz Institute for Economic Research and Otto-von-Guericke University
Bank Runs, Portfolio Choice, and Liquidity Provision
AbstractWe 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
AbstractWe 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
AbstractForbearance 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.
Santiago Carbó Valverde,
CUNEF and Bangor University
European Central Bank
Federal Reserve Bank of San Francisco
Frankfurt School of Finance & Management
- G3 - Corporate Finance and Governance
- K1 - Basic Areas of Law