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Summary Credit and Banking KUL '21-'22
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Summary of the course Credit and Banking
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PART I: WHY DO BANKS EXIST? 5What do banks do? What is special about banks? 5
Who borrows from banks? 5
Basics of credit rationing: fixed investment model 5
Debt overhang 7
Decrease in net worth 7
Lack of renegotiating 7
Bargaining with initial investors, who have cash 8
Initial investors don’t have funds to invest. Bargaining with new investors only 8
Initial investors don’t have funds to invest. Bargaining with new and initial investors 8
Investor Activism 8
Active versus Passive monitors 8
Introduction 8
Basics of investor activism 9
Monitoring 9
Case 1: no monitoring 9
Case 2: monitoring with fixed intensity 9
Advising 9
No advisor 9
Advisor 9
Shadow banking 10
Are bank loans special? 11
PART II: ASYMMETRIC INFORMATION 12
Equilibrium credit rationing 12
Credit rationing due to adverse selection 13
Collateral 14
Ex-ante theories: Screening versus rationing (Bester, 1985) 14
Ex-post theories regarding collateral: solving ex-post frictions 15
Empirics 16
Luck and Santos (2019) ‘’The valuation of collateral in bank lending’’ 16
Berger, Frame and Ioannidou (2011) 17
PART III: INFORMATION SHARING IN BANKING MARKETS 19
Introduction 19
Modelling information sharing: Padilla and Pagano RFS1997 19
1. Solve the game for given degree of moral hazard: p is fixed 21
Without information sharing (ns) 21
With information sharing (is) 21
1
, Comparison 21
2. With endogenous moral hazard 21
Issues with this model 22
Extensions: Padilla and Pagano (EER 2000) 22
1. Solve the game for given degree of moral hazard: p is given (solve by backward induction) 22
Without information sharing 22
Second-period competition 22
First-period competition 23
With information sharing about defaults (partial sharing) 24
Second-period competition 24
First-period competition 24
With information sharing about types, complete information sharing 25
2. Effort choice 25
First-Best 25
No information sharing 25
Information sharing about defaults 26
Information sharing about types 26
Comparison 27
Extensions: Bouckaert and Degryse (Economic Journal 2006) 27
Empirical work on information sharing 27
Data vs Collateral 27
PART IV: LENDER-BORROWER RELATIONSHIPS 29
Bank versus Arm’s Length Financing 29
Outline 29
Financiers 30
Different scenario’s 30
First-Best 30
Market finance (arm’s length) 30
Bank finance LT-contract 31
Bank finance ST-contract 32
Results 32
Creditor concentration: number of relationships 33
DGG-Theoretical model 33
Empirics – Indicators of bank-firm relationship strengths 34
Impact of bank-firm relationships on firms 34
Relationship banking and firms’ credit constraints 35
When arm’s length is too far. Relationship banking over the credit cycle (Back, Degryse, de Haas, van Horen)
35
PART V: INDIVIDUAL BANK RUNS AND SYSTEMIC RISK 39
2
,Individual bank runs 39
Financial institutions as liquidity pools/insurers 39
Implementation 40
Jacklin critique 40
Runs 41
Systemic risk 42
Banking competition and stability 42
Empirics 43
Introduction 43
Evidence 43
Implications of banking crises 43
Regulation and banking crisis 44
Contagion 44
Methods 44
Role of interbank market structure 46
Cross-border contagion 47
Liquidity risks 47
Kashyap, Rajan and Stein (2002): Banks as liquidity providers: an explanation for the coexistence of
lending and deposit-taking 47
Gatev, Schuermann and Strahan (2009): Managing bank liquidity risk: How deposit-loan synergies vary
with market conditions 48
Ippolito et al. : Double bank runs and liquidity risk management 48
Q1 and Q2: Do banks suffer double runs? Do firms run on credit lines granted by banks that are hit by
funding a liquidity shock? 48
Q2: Supply of credit to new applicants 49
Q3: Is there evidence of liquidity risk management? 49
Conclusion 49
PART VI: BANKING REGULATION: MICRO-PRUDENTIAL AND MACRO-PRUDENTIAL 50
Regulation of banks (Freixas and Rochet 2008) 50
General setting 50
Bank Fragility 50
Depositor protection and customer confidence 50
Cost of bank failures 51
Macro-prudential regulation 51
Definition 51
Why macro-prudential regulation? 51
Macro-prudential toolkit 53
GUEST LECTURE KBC: THE IMPACT OF THE LOW YIELD ON A BANK’S BALANCE SHEET
MANAGEMENT 55
What is Treasury? Three FAQs 55
One credit and One deposit (interest rate risk) 55
3
, Issue with second deposit (liquidity risk) 56
One credit and Two deposits (asset mix) 56
Low yield impacting bank’s balance sheet 57
What happened in the financial sector? 57
Impact on banking sector 58
GUEST LECTURE: SUSTAINABLE FINANCE 60
Why does sustainability matter? 60
Climate change: evidence and challenges 60
The role of the financial system 60
Sustainability challenges to corporates 61
Financing sustainability 61
Sustainable equity investing 61
Green bonds 62
Sustainable banking 62
Degruse, Goncharenko, Theunisz & Tamasz (2021): When green meets green 63
The role of central banks 63
A regulatory approach to sustainable financing 64
4
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