Papers free open access: Bank Risk


1. Cortés, Kristle, Yuliya Demyanyk, Lei Li, Elena Loutskina, and Philip E. Strahan, 2018. “Stress Tests and Small Business Lending.” Federal Reserve Bank of Cleveland, Working Paper no. 18-02. https://doi.org/10.26509/frbc-wp-201802.
Abstract
Post-crisis stress tests have altered banks’ credit supply to small business. Banks affected by stress tests reduce credit supply and raise interest rates on small business loans. Banks price the implied increase in capital requirements from stress tests where they have local knowledge, and exit markets where they do not, as quantities fall most in markets where stress-tested banks do not own branches near borrowers, and prices rise mainly where they do. These reductions in supply are concentrated among risky borrowers. Stress tests do not, however, reduce aggregate credit. Small banks increase their share in geographies formerly reliant on stress-tested lenders.
Keywords: small business lending, stress test, credit supply, large banks.

2. Monetary policy and the asset risk-taking channel
Angela Abbate y Dominik Thaler.
Banco de España, Documentos de Trabajo. N.º 1805, 2018.
Abstract
How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking.
Keywords: bank risk, monetary policy, DSGE models.

3. Banks’ maturity transformation: risk, reward, and policy
By Pierluigi Bologna.
Abstract
The aim of this paper is twofold: first, to study the determinants of banks’ net interest margin with a particular focus on the role of maturity transformation, using a new measure of maturity mismatch; second, to analyse the implications for banks of the relaxation of a binding prudential limit on maturity mismatch, in place in Italy until the mid-2000s. The results show that maturity transformation is an important driver of the net interest margin, as higher maturity transformation is typically associated with higher net interest margin. However, there is a limit to this positive relationship as ‘excessive’ maturity transformation — even without leading to systemic vulnerabilities — has some undesirable implications in terms of higher exposure to interest rate risk and lower net interest margin.
Keywords: banks, profitability, maturity transformation, interest rates, macroprudential, microprudential.

4. Afanasyeva, Elena, and Jochen Guntner (2018). “Bank Market Power and the Risk Channel of Monetary Policy,” Finance and Economics Discussion Series 2018-006. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2018.006.
Abstract
This paper investigates the risk channel of monetary policy through banks’ lending standards. We modify the classic costly state verification (CSV) problem by introducing a risk-neutral monopolistic bank, which maximizes profits subject to borrower participation. While the bank can diversify idiosyncratic default risk, it bears the aggregate risk. We show that, in partial equilibrium, the bank prefers a higher leverage ratio of borrowers, when the profitability of lending increases, e.g. after a monetary expansion. This risk channel persists when we embed our contract in a standard New Keynesian DSGE model. Using a factor augmented vector autoregression (FAVAR) approach, we find that the model-implied impulse responses to a monetary policy shock replicate their empirical counterparts.
Keywords: Costly state verification, Credit supply, Lending standards, Monetary policy, Risk channel.

5. Systematic risk, bank moral hazard, and bailouts
Marcella Lucchetta – Michele Moretto – Bruno M. Parigi.
Bank of Finland Research Discussion Papers 2, 2018.
Abstract
We show that the impact of government bailouts (liquidity injections) on a representative bank’s risk taking depends on the level of systematic risk of its loans portfolio. In a model where bank’s output follows a geometric Brownian motion and the government guarantees bank’s liabilities, we show first that more generous bailouts may or may not induce banks to take on more risk depending on the level of systematic risk; if systematic risk is high (low), a more generous bailout decreases (increases) bank’s risk taking. Second, the optimal liquidity policy itself depends on systematic risk. Third, the relationship between bailouts and bank’s risk taking is not monotonic. When systematic risk is low, the optimal liquidity policy is loose and more generous bailouts induce banks to take on more risk. If systematic risk is high and the optimal liquidity policy is tight, less generous bailouts induce banks to take on less risk. However, when high systematic risk makes a very tight liquidity policy optimal, a less generous bailout could increase bank’s risk taking. While in this model there is only one representative bank, in an economy with many banks, a higher level of systematic risk could also be a source of systemic risk if a tighter liquidity policy induces correlated risk taking choices by banks.
Keywords: bailout, bank closure, real option, systematic risk.

6. Frequently asked questions on the Basel III standardised approach for measuring counterparty credit risk exposures, March 2018.
In March 2014, the Basel Committee on Banking Supervision published the standard The standardised approach for measuring counterparty credit risk exposures. To promote consistent global implementation of those requirements, the Committee has agreed to periodically review frequently asked questions (FAQs) and publish answers along with any technical elaboration of the standards text and interpretative guidance that may be necessary.
The document published today sets out the second set of FAQs on the standard, combined with those published in an earlier set of FAQs.

7. Frequently asked questions on market risk capital requirements, March 2018.
In January 2016, the Basel Committee on Banking Supervision published the standard Minimum capital requirements for market risk. To promote consistent global implementation of those requirements, the Committee has agreed to periodically review frequently asked questions (FAQs) and publish answers along with any technical elaboration of the standards text and interpretative guidance that may be necessary.
The document published today sets out the second set of FAQs on the revised market risk standard, combined with those published in an earlier set of FAQs. The questions and answers address clarifications of the standardised approach, the internal models approach and the scope of application of the standard.

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