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Banking and the Real Economy

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Washington A
Hosted By: American Finance Association
  • Chair: Juliane Begenau, Harvard Business School

Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk

Daniel Friedmann
,
Goethe University Frankfurt
Bjorn Imbierowicz
,
Copenhagen Business School
Anthony Saunders
,
New York University
Sascha Steffen
,
Frankfurt School of Finance & Management

Abstract

We analyze more than 75,000 auctions in which banks bid for firm deposits. In each of these auctions, only the firm observes the banks and their bids and decides where to deposit its funds. Our results show that a bank’s risk is irrelevant to firms in their decision, irrespective of its measurement and the economic period. In many cases, firms simply select the highest bidding bank. Our data show that this implies on average the risk of losing €74 million for a maximum higher interest income of only €1,300, that is, 0.18 basis points, compared with the worst bid in the auction. Firms only diversify extraordinarily large deposit amounts but also in this case do not account for the individual banks’ risk. Our findings argue for moral hazard of firms, which seem to rely on government bailouts of banks and/or central bank interventions. We further observe that also in rather impersonal electronic markets, relationships are an important decision criterion for firms. A stronger deposit relationship with a firm increases a bank’s probability to be selected in an auction. Furthermore, it also increases a bank’s access to more unsecured deposits from the firm in future periods, including severe crises. Our results reveal that also in markets with high transparency and no switching costs firms base the decision of where to deposit their money on bank relationships as well as the interest rate, but largely disregard bank risk. This has important implications for banks’ access to unsecured corporate funding.

A Positive Analysis of Bank Behaviour Under Capital Requirements

Saleem Bahaj
,
Bank of England
Frederic Malherbe
,
London Business School

Abstract

We propose a theory of bank behaviour under capital requirements that accounts for both risk shifting incentives and debt overhang considerations. A key result is that the bank’s lending response to an increase in the requirement need not be negative. The sign and the magnitude of the response depend on the bank’s balance sheet and economic prospects, and lending is typically U-shaped in the requirement. Using UK regulatory data, we find empirical support for the hypothesis that a bank mainly adjusts to a higher requirement by cutting lending when expected returns are low, but by raising capital when they are high.

U.S. Monetary Policy and Emerging Market Credit Cycles

Falk Brauning
,
Federal Reserve Bank of Boston
Victoria Ivashina
,
Harvard Business School

Abstract

Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers face a 32-percentage-point greater increase in the volume of loans issued by foreign banks than borrowers from developed markets face, with a similarly large effect upon reversal of the U.S. monetary policy stance. This result is robust across different geographical regions and industries, and holds for non-U.S. lenders, including those with little direct exposure to the U.S. economy. Local EME lenders do not offset the foreign bank capital flows; thus, U.S. monetary policy affects credit conditions for EME firms. We show that the spillover is stronger in higher-yielding and more financially open markets, and for firms with a higher reliance on foreign bank credit.
Discussant(s)
Sergey Chernenko
,
Ohio State University
Emily Williams
,
London Business School
Olivier Darmouni
,
Columbia University
JEL Classifications
  • G2 - Financial Institutions and Services