Credit Markets
Paper Session
Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)
- Chair: Matthew Botsch, Bowdoin College
International Financial Frictions, Bank Lending and Firm Level Activity
Abstract
We investigate the impact of a shock to foreign short-term funding at Norwegian banks due to deviations from covered interest parity, in conjunction with the European sovereign debt crisis. During this period funding of Euro area global banks decreased by US money market funds (Ivashina et al., 2015). By contrast, we show that in the same period highly rated, internationally active Scandinavian banks could borrow more from U.S. money market funds on more favourable terms compared to domestic funding. We then document -- both at the bank and loan level -- that these banks responded to the shock by lending more to firms. Firms received 3.2 percent more loans from internationally active banks (treatment) as compared to other banks in Norway (control). This constitutes a 50 percent increase over the unconditional mean. Despite the fact that the shock affected only short-term funding for banks, the ensuing expansion in domestic credit increased long-term rather than short-term loans, resulting in higher maturity mismatch and higher rollover risk for banks. New lending led to an increase in long-term investment in firms in the form of higher fixed assets, but not to an increase in current assets. In aggregate, the effects were large: capital grew by an extra 2-2.9 percent due to the shock, suggesting that covered interest parity deviations have sizeable macroeconomic implications.Islamic Banking and Firm Performance: Costs, Benefits, and Lessons from the Global Financial Crisis
Abstract
The roles played by Western-oriented banks in creating and exacerbating the Global Financial Crisis invite investigation and comparison of alternative banking arrangements. The dual-banking system in Turkey allows us to obtain a better understanding of Islamic banks in resolving the two fundamental finance problems: transferring funds from savers to borrowers and efficiently allocating those funds among competing borrowers.We are particularly concerned with the effects of that resolution on real activity by nonfinancial firms.Islamic banking relations are analyzed in terms of secular, Western-oriented, finance concepts and the ways in which they reduce financial frictions. Islamic banking relationships attenuate financial frictions and shift risk from firms to banks (where risk can be borne more efficiently).
The extent to which these features of Islamic banking relationships affect firms and impact real economic performance are evaluated empirically. We study Turkey because both Islamic and conventional banking relations are readily available to firms. With a unique dataset of 100,000 firm/year observations for 2006-2013, we document the advantages of an Islamic banking relation in normal times in terms of increasing investment and expanding firm size. During abnormal times (the Global Financial Crisis), we find that firms with an Islamic banking relationship investment much less, suggesting the dark side of an Islamic banking relationship.Propensity score matching estimates confirm these findings.Religiosity is an important factor in the adoption decision by firms for an exclusive Islamic banking relationship. We use this ”instrument” to re-examine the sensitivity of investment, expansion, and cash holdings to an Islamic banking relationship and confirm most of the prior findings.
The primary purpose of this paper is to understand how the Islamic banking relationship impacts affiliated firms. Apart from this goal, obtaining a better understanding of the benefits and costs of Islamic banking is important given its exponential growth.
Aggregate Implications of Credit Relationship Flows: A Tale of Two Margins
Abstract
This paper documents the aggregate properties of credit relationship flows within the commercial loan market in France between 1998 and 2018. Using detailed bank- firm level data from the French Credit Register, we show that banks actively and continuously adjust their credit supply along both intensive and extensive margins. We particularly highlight the importance of gross flows associated with credit relationships and show that they are (i) volatile and pervasive throughout the cycle, and (ii) can account for up to 48 percent of the cyclical and 90 percent of the long-run variations in aggregate bank credit.A Macroeconomic Model with Heterogeneous Banks
Abstract
I develop a non-linear, dynamic general equilibrium macroeconomic model with heterogeneous intermediaries, incomplete markets, monopolistic financial competition, bank default risk, and endogenous entry. The model nests the Gertler and Kiyotaki (2010) framework as a special case, breaks bank scale invariance, and generates a bank net worth fluctuation problem analogous to the canonical Bewley-Huggett-Aiyagari-Imrohoglu environment. Quantitatively, the model produces realistic, right-skewed cross-sectional distributions of bank assets, net worth, leverage, default risk, marginal costs, and interest margins. The impact of bank heterogeneity on the macroeconomy is disciplined with an endogenous distribution of the Marginal Propensity to Lend (MPL) - a sufficient statistic for macro elasticities with respect to a wide range of bank-level or aggregate shocks. In this environment, I study unconventional policy measures such as bank equity injections, direct lending and liquidity facilities, and debt guarantee schemes. These policies are allowed to be targeted at any individual bank in the distribution. Macroeconomic effects depend on the instrument type and the region of the distribution which is being targeted. I find that financial and economic crises are less severe if equity injections are directed towards big banks. Direct lending and liquidity facilities, on the other hand, are more effective if applied to small banks. I conclude by characterizing normative implications with bank size and income-dependent optimal policy.Nonlinear Effects of Financial Development on Consumption
Abstract
In this paper we analyze the effect of financial development on consumption in both a direct and an indirect way. Using a panel of 46 countries with yearly observations from 2000 to 2014 a set of models including a measure of financial development as a regressor is estimated providing evidence of a positive effect of financial development over consumption. In a second stage we apply threshold regression procedures to the previous models, using financial development as the threshold variable finding that financial development generates different reactions of consumption to its regressors according to the level of financial development.JEL Classifications
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit