This is my (extensive) summary of the course Credit and Banking. Everything that was covered in class is in here with all my notes and drawings from the lecture itself.
Part 1 THEORY: WHy do banks exist? Are banks special? ...................................................4
1. WHat do banks do? What is special about banks?.................................................................. 4
1.1 definition ...................................................................................................................................................4
1.2 The functions/role of banks ......................................................................................................................4
1.3 link between Banks and economic growth ...............................................................................................5
2. Who wants to borrow from banks? ....................................................................................... 5
2.1 Basics of credit rationaing: fixed investment model .................................................................................5
2.2 Debt Overhang ..........................................................................................................................................8
3. Investor activism: active role of banks/other financial intermediaries .................................... 9
3.1 Introduciton .............................................................................................................................................10
3.2 Basics of investor activism.......................................................................................................................10
Part 1 empirics: WHy do banks exist? Are banks special? .................................................14
1. Some descriptives of Euro and belgian financial institutions ................................................ 14
2. Shadow banking ................................................................................................................. 16
2.1 definition .................................................................................................................................................16
2.2 Some descriptives....................................................................................................................................17
3. are bank loans special ? ...................................................................................................... 17
3.1 James: SOME EVIDENCE ON THE UNIQUENESS OF BANK LOANS (1987) ...............................................18
3.2 Refinements of james’ paper ..................................................................................................................20
3.3 Overview loan announcements studies ..................................................................................................20
3.4 other aspect: bank distress/merger ........................................................................................................20
3.5 other aspect: impact of bank distress on lt firm performance ...............................................................21
Part 2 theory : assymetric information ............................................................................21
1. Equilibrium credit rationing ................................................................................................ 21
1.1 definition .................................................................................................................................................21
1.2 Credit rationing due to adverse selection ...............................................................................................22
part 2 Empirics: assymetric information ..........................................................................27
1. Luck and Santos “The valuation of collateral in bank lending” ............................................. 27
2. Berger, Frame and Ioannidou « offer an interesting setting to identify the importance of both
theories »............................................................................................................................... 31
part 3 theory: Information sharing in banking markets....................................................34
1
, 1. introduction ....................................................................................................................... 34
2. Modeling information SHARING: Padilla and pagano RFS 1997 ............................................ 35
2.1 The model ................................................................................................................................................35
2.2 Solve the game for given degree of moral hazard: p is fixed ..................................................................37
2.3 Issues with this model: ............................................................................................................................38
3. EXTENSIONS: padilla and pagano (eer 2000) ........................................................................ 38
3.1 the model ................................................................................................................................................39
3.2 Solve the game for given degree of moral hazard: p is given .................................................................39
3.3 effort choice ............................................................................................................................................45
4. Extenstions : Bouckaer and degryse (economic journal 2006)and castiglionesi et al (2020) ... 47
Part 3 Emirical work on information sharing in banking markets .....................................47
1. More generally ................................................................................................................... 47
2. Paper 1 by djankov, mcliesh and shleifer ............................................................................. 47
3. Paper 2 :data vs collateral ................................................................................................... 49
part 4 theory: Lender-Borrower Relationships .................................................................54
Goals ..............................................................................................................................................................54
1. Bank versus Arm’s Length Financing .................................................................................... 54
1.1 Outline .....................................................................................................................................................54
1.2 The project...............................................................................................................................................54
1.3 Financiers.................................................................................................................................................56
1.4 Different scenario’s (First-Best, Arm’s length, bank long term, bank short term)..................................57
1.5 Results .....................................................................................................................................................61
1.6 Comparison .............................................................................................................................................61
1.7 Further summary – effect bargaining power ..........................................................................................62
2. Creditor Concentration: Number of Relationships ................................................................ 63
2.1 DGG-Theoretical model ...........................................................................................................................64
part 4 Empirics: bank-firm relations ................................................................................65
1. Indicators of bank-firm relationship strength ....................................................................... 65
2. Impact of bank-firm relationships on firms .......................................................................... 68
3. Relationship banking and firms’ credit constraints ............................................................... 69
3.1 When Arm’s Length is Too Far. Relationship Banking over the Credit Cycle ..........................................69
Part 5 theory: individual bank runs and systemic risk.......................................................80
1. Individual bank runs ........................................................................................................... 81
1.1 Diamond-dybvig (1983) - model and variants .........................................................................................81
1.2 Runs .........................................................................................................................................................86
1.3 Anti-run policies ......................................................................................................................................87
2. Systemic Risk ...................................................................................................................... 87
3. Banking competition and stability ....................................................................................... 88
3.1 “Charter value hypothesis” (Traditional competition-fragility view)......................................................88
2
, 3.2 The optimal contracting hypothesis (competition stability view) ..........................................................88
Part 5 Empricis: individual bank runs and systematic risk.................................................89
Goals ..............................................................................................................................................................89
1. Introduction of topic ........................................................................................................... 89
1.1 Individual bank runs versus systemic risk................................................................................................90
1.2 Recent crisis: Laeven and Valencia (2018) IMF wp..................................................................................90
2. Evidence............................................................................................................................. 93
2.1 Determinants of banking crisis: banking competition and stability ........................................................93
2.2 Implications of banking crises .................................................................................................................95
2.3 Regulation and banking crisis ..................................................................................................................98
3. Liquidity risks ..................................................................................................................... 99
3.1 Kashyap, Rajan and Stein: Banks as liquidity providers: an explanation for the coexistence of lending
and deposit-taking .........................................................................................................................................99
3.2 Gatev, Schuermann and Strahan: Managing bank liquidity risk: How deposit-loan synergies vary with
market conditions .......................................................................................................................................101
3.3 Ippolito et al.: Double bank runs and liquidity risk management .........................................................102
Part 6 theory Banking Regulation: Micro-prudential and macro-prudential ................... 106
Objectives ....................................................................................................................................................106
1. Regulation of banks .......................................................................................................... 106
1.1 general setting..............................................................................................................................107
1.2 bank fragility ..........................................................................................................................................107
1.3 depositor protection and customer confidence ...................................................................................107
1.4 cost of bank failures ..............................................................................................................................108
2. Macro-prudential regulation ............................................................................................. 108
2.1 definition ...............................................................................................................................................108
2.2 Why macro-prudential regulation? .......................................................................................................109
2.3 Interaction with other policies and international dimensions .............................................................111
2.4 Macroprudential toolkit ........................................................................................................................112
Part 6 emperics: macro-prudential regulation ............................................................... 115
Lim et al. (2011) “Macroprudential Policy: What Instruments and How Are They Used? Lessons
from Country Experiences” ................................................................................................... 115
3
, CREDIT AND BANKING
PART 1 THEORY: WHY DO BANKS EXIST? ARE BANKS SPECIAL?
Goal:
- Aim to understand who benefits from borrowing from a bank
o Bank as a monitor – Bank as an advisor
- Aim to understand why impacts of banking crises may persist for a long time =debt overhang
1. WHAT DO BANKS DO? WHAT IS SPECIAL ABOUT BANKS ?
1.1 DEFINITION
Definition of a bank: an institution whose current operations consists in granting loans and receiving
deposits from the public
- Current <-> trade credit (delay of payment) granted by other firms
- Loans and deposits: fragility of banks
o All depositors may need liquidity at same time
E.g., the Belgian Government Savings Certificates led to a decrease in savings
account
o Lines of credit may be drawn at same time due to e.g., shock in economy
o If both sides withdraw at the same time: double bank run
- Public: justification for regulation
o Because banks provide unique services: liquidity and means of payment
o And small depositors are not armed to assess safety and soundness of banks =
consumers cannot protect themselves and do not know better
1.2 THE FUNCTIONS/ROLE OF BANKS
Liquidity and payment services
- “Money” exists as it reduces transaction costs
- People accept money as they expect to be able to use it again at a later stage
Role of banks in payment systems
- Often a loss-leader
= Component of a bank's operations that may not be highly profitable on its own, but is
there to attract clients
- New threats: Facebook, Apple (digital wallets), Fintech, cryptocurrencies,…
➔ These new players often leverage innovative technologies to provide payment services
more efficiently or at lower costs and they are able to gather a lot of information about their
users
- Info obtained through checking account helps in monitoring firms (e.g., Renault and Mester)
or Norden and Weber
Transforming assets
- Size transformation: deposits are typically small amounts whereas loans are large amounts
4
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