Finance: Research, Policy and Anecdotes

Differentiating between different types of banks (domestic vs. foreign, government vs. private, retail vs. wholesale, commercial vs. investment) has a long-standing tradition in banking research, but what are the implications for performance over the business and financial cycles and banks’ reaction to monetary policy and other shocks? A new special issue of the JBF includes six papers on the Americas, with some of the papers part of the BIS Consultative Council for the Americas (CCA) research project on “Changes in banks’ business models and their impact on bank lending: an empirical analysis using credit registry data” implemented by a Working Group of the CCA Consultative Group of Directors of Financial Stability (CGDFS).  Herewith a quick run-down of the six papers, with more details in this editorial.

Using loan-level data from five credit registries in a meta-study, Carlos Cantú, Stijn Claessens, and Leonardo Gambacorta find that large and well-capitalized banks with low risk indicators, stable sources of funding and a commercial business model generally supply more credit. Focusing on one of these five countries, Mexico, Carlos Cantu, Roberto Lobato, Calixto Lopez and Fabrizio Lopez-Gallo find that higher capital, liquidity, profitability, long-term funding and deposit fund- ing mitigate the impact of shocks, while credit risk and foreign funding amplifies the impact.  Using bank-firm loan level data for Colombia between 2006 and 2017, Paola Morales, Daniel Osorio, Juan Lemus, and Miguel Sarmiento find that loan growth and loan rates from banks with international presence respond less to monetary policy changes than those of domestic banks and that internationalisation partially mitigates the risk-taking channel of monetary policy.

The other three papers looks at regulatory changes and tools, including capital requirements, stress tests and internal vs. standardised models. Using quarterly bank-level data over 2009 to 2016 for Peru and exploiting the adoption of bank-specific capital buffers Xiang Fang, David Jutsra, Soledad Martinez Peria, Andrea Presbitero and Lev Ratnovski they find that higher capital requirements are associated with lower credit growth, but only in the short-run, while the effect becomes insignificant in about half a year.  Exploiting the cut-off of $50 billion in assets for stress test requirements under the Comprehensive Capital Analysis and Review in the US, and using data between 2011 and 2016, Raffi Garcia and Suzanne Steele find that stress tested banks shift out of high-risk asset classes and into traditional lending, resulting in lower aggregate risk weights.  Using data for Mexico, Mariela Dal Borgo finds that the probability of adopting an internal model for demand deposits rather than the standard approach is higher for banks with longer term deposits and for banks with higher capital requirements for credit and operational risks, while there is no evidence of capital constraints affecting the probability of adoption. Using an internal rather than standard approach also has implications for repricing of mortgages.

Together, these six papers show the wealth of questions that one can address with granular data available in most central banks and supervisory authorities, but also the multi-dimensionality of business models and the heterogeneous effect of changes in regulatory frameworks.

11. Feb, 2022