Adjustments in bank leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. In the international context, we find evidence of monetary ...policy spillovers on cross-border bank capital flows and the US dollar exchange rate through the banking sector. A contractionary shock to US monetary policy leads to a decrease in cross-border banking capital flows and a decline in the leverage of international banks. Such a decrease in bank capital flows is associated with an appreciation of the US dollar.
•The operation of the risk-taking channel through the banking sector.•How monetary policy impacts bank leverage, cross border flows and the exchange rate.•The role played by the US dollar for global financial conditions.•The transmission of global liquidity conditions across borders.
Procyclical Leverage and Value-at-Risk Adrian, Tobias; Shin, Hyun Song
Review of financial studies/The Review of financial studies,
02/2014, Volume:
27, Issue:
2
Journal Article
Peer reviewed
Open access
The availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries. Empirically, we find that intermediary leverage is negatively aligned with the ...banks' Value-at-Risk (VaR). Motivated by the evidence, we explore a contracting model that captures the observed features. Under general conditions on the outcome distribution given by extreme value theory (EVT), intermediaries maintain a constant probability of default to shifts in the outcome distribution, implying substantial deleveraging during downturns. For some parameter values, we can solve the model explicitly, thereby endogenizing the VaR threshold probability from the contracting problem.
We investigate global factors associated with bank capital flows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the ...bank leverage cycle as the determinant of the transmission of financial conditions across borders through banking sector capital flows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and financial stability. In a panel study of 46 countries, we find support for the key predictions of our model.
We conduct a firm-level analysis of borrowing in US dollars by nonfinancial corporates from outside the United States. We find that emerging market firms with already high cash holdings are more ...likely to issue US dollar-denominated bonds, especially during periods when the dollar carry trade is more favorable. The proceeds of the dollar bond issuance add to the firm's cash holdings more than other sources of funds. The evidence points to financial decisions that resemble carry trades, rather than to precautionary borrowing in anticipation of future financing needs.
SUMMARY
Pablo Zbinden?>We consider the drivers and implications of the growth of ‘BigTech’ in finance – i.e. the financial services offerings of technology companies with established presence in the ...market for digital services. BigTech firms often start with payments. Thereafter, some expand into the provision of credit, insurance and money management products, either directly or in cooperation with financial institution partners. Focusing on credit, we show that BigTech firms lend more in countries with less competitive banking sectors and less stringent bank regulation. Analysing the case of Argentina, we find support for the hypothesis that BigTech lenders, by acquiring a vast amount of non-traditional information, have an advantage in credit assessment relative to a traditional credit bureau. They also serve unbanked borrowers, and may have an advantage in contract enforcement. It is too early to judge the extent of BigTech’s eventual advance into the provision of financial services. However, the early evidence allows us to pose pertinent questions that bear on their impact on financial stability and overall economic welfare.
The U.K. bank Northern Rock became the first high-profile casualty of the global financial crisis of 2007–2008 when it suffered its depositor run in September 2007. In spite of the television images ...of long lines of depositors outside its branch offices, the run on Northern Rock was unlike the textbook retail depositor run caused by coordination failure. Also, contrary to received wisdom, its reliance on securitization was not an immediate factor in its failure. Rather, its problems stemmed from its high leverage coupled with reliance on institutional investors for short-term funding. When the de-leveraging in the credit markets began in August 2007, Northern Rock was uniquely vulnerable to the shrinking of lender balance sheets arising from the tick-up in measured risks. Financial regulation that relies on risk-weighted capital requirements is powerless against such runs. The Northern Rock case also offers lessons concerning the economics of short-term debt.
European global banks intermediating U.S. dollar funds are important in influencing credit conditions in the United States. U.S. dollar-denominated assets of banks outside the United States are ...comparable in size to the total assets of the U.S. commercial bank sector, but the large gross cross-border positions are masked by the netting out of the gross assets and liabilities. As a consequence, current account imbalances do not reflect the influence of gross capital flows on U.S. financial conditions. This paper pieces together evidence from a global flow of funds analysis, and develops a theoretical model linking global banks and U.S. loan risk premiums. The culprit for the easy credit conditions in the United States up to 2007 may have been the "Global Banking Glut" rather than the "Global Savings Glut."
A widespread opinion before the credit crisis of 2007/8 was that securitisation enhances financial stability by dispersing credit risk. After the credit crisis, securitisation was blamed for allowing ...the 'hot potato' of bad loans to be passed to unsuspecting investors. Both views miss the endogeneity of credit supply. Securitisation enables credit expansion through higher leverage of the financial system as a whole. Securitisation by itself may not enhance financial stability if the imperative to expand assets drives down lending standards. The 'hot potato' of bad loans sits in the financial system on the balance sheets of large banks rather than being sold on to final investors, since the aim of financial intermediaries is to expand lending in order to utilise slack in balance sheet capacity.
In a hypothetical world where deposit-taking banks are the only financial intermediaries, their liabilities as measured by traditional monetary aggregates--such as M2--would be good indicators of the ...aggregate size of the balance sheets of leveraged institutions. Instead, this paper emphasizes market-based liabilities such as repos and commercial paper as better indicators of credit conditions that influence the economy. The paper concludes that there is a case for rehabilitating a role for balance sheet quantities for the conduct of monetary policy. Results highlight the way that monetary policy and policies toward financial stability are linked. When the financial system as a whole holds long-term, illiquid assets financed by short-term liabilities, any tensions resulting from a sharp pullback in leverage will show up somewhere in the system.
Liquidity and leverage Adrian, Tobias; Shin, Hyun Song
Journal of financial intermediation,
07/2010, Volume:
19, Issue:
3
Journal Article
Peer reviewed
In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, and eliciting responses from financial intermediaries ...who adjust the size of their balance sheets. We document evidence that marked-to-market leverage is strongly procyclical. Such behavior has aggregate consequences. Changes in dealer repos – the primary margin of adjustment for the aggregate balance sheets of intermediaries – forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index VIX index. Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.
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