Does Competition Reduce the Risk of Bank Failure?

A large theoretical literature shows that competition reduces banks' franchise values and induces them to take more risk. Recent research contradicts this result: When banks charge lower rates, their borrowers have an incentive to choose safer investments, so they will in turn be safer. However, this argument does not take into account the fact that lower rates also reduce the banks´revenues from performing loans. This paper shows that when this effect is taken into account, a U-shaped relationship between competition and the risk of bank failure generally obtains.Financial support from the Spanish Ministry of Education and Science [Grant SEJ2005-08875] is gratefully acknowledged

Search for Yield

We present a model of the relationship between real interest rates, credit spreads, and the structure and risk of the banking system. Banks intermediate between entrepreneurs and investors, and can monitor entrepreneurs projects. We characterize the equilibrium for a xed aggregate supply of savings, showing that safer entrepreneurs will be funded by nonmonitoring banks and riskier entrepreneurs by monitoring banks. We show that an increase in savings reduces interest rates and spreads, increases the relative size of the nonmonitoring banking system and the probability of failure of monitoring banks. We also show that the dynamic version of the model exhibits endogenous boom and bust cycles, and rationalizes the existence of countercyclical risk premia and the connection between low interest rates, credit spreads, and the buildup of risks during booms.Financial support from the Spanish Ministry of Economy and Competitiveness, Grants No. ECO2014-59262-P (Repullo) and ECO2013-42849-P (Martinez-Miera), and from Banco de España (Martinez-Miera) is gratefully acknowledged

Sectorial holdings and stock prices: the household-bank nexus

Este trabajo analiza la evolución y las implicaciones en el precio de las acciones de las tenencias de acciones por parte de distintos sectores. Para ello se utiliza información detallada sobre el universo de acciones cotizadas de la zona del euro. Se encuentra lo siguiente: i) los hogares cuentan con un mayor peso en el accionariado de los bancos que en el de las empresas no financieras; ii) las tenencias de acciones de los hogares aumentan (disminuyen) cuando cae (sube) el precio de las acciones, especialmente cuando se trata de las acciones de bancos nacionales, y iii) un aumento de las tenencias de acciones de los hogares domésticos es seguido por incrementos persistentes del precio de las acciones de las empresas, mientras que esto no ocurre para los bancos. Además, tras una emisión de acciones, un aumento de la participación de los hogares en el accionariado de los bancos es seguido por una caída del precio de estas acciones, mientras que esto no ocurre en las empresas. Nuestros resultados sugieren que los hogares actúan como proveedores de liquidez en los mercados de acciones, si bien al mismo tiempo están sujetos a asimetrías de información. Este último mecanismo puede ser más relevante cuando los hogares compran las acciones de los bancos, dadas las estrechas relaciones entre las entidades y los hogares.We analyze the evolution and price implications of aggregate sectorial holdings of stocks, using detailed information on the universe of publicly traded stocks in the euro area. We document that: i) households’ (HH) direct holdings represent a higher fraction of total ownership in domestic bank stocks than in non-financial corporation (NFC) stocks; ii) HH holdings of stocks increase (decrease) following a decline (increase) in the stock price, especially for domestic bank stocks; and iii) an increase in domestic HH holdings is followed by future (persistent) increases in the price of NFC stocks, but not for bank stocks. Moreover, during equity issuances, an increase in the share of domestic HH holdings is followed by a future (persistent) decrease in the stock price of bank stocks, but not for NFC stocks. Our results are consistent with HH being liquidity providers in the stock market, and at the same time subject to negative information asymmetries. We argue that this latter effect is more prevalent in domestic bank stocks than in NFC given the close relationships between HH and banks

Consumer Bankruptcy, Bank Mergers, and Information

This article analyzes the relationship between consumer bankruptcy patterns and the destruction of soft information caused by mergers. Using a major Canadian bank merger as a source of exogenous variation in local banking conditions, we show that local markets affected by the merger exhibit an increase in consumer bankruptcy rates post-merger. The evidence is consistent with the most plausible mechanism being the disruption of consumer–bank relationships. Markets affected by the merger show a decrease in the merging institutions’ branch presence and market share, including those stemming from higher switching rates. We rule out alternative mechanisms such as changes in quantity of credit, loan rates, or observable borrower characteristics.David Martinez-Miera acknowledges Financial support from Banco de España "II Programa de Excelencia en Educación e Investigación", Fundación Ramon Areces and Ministerio de Ciencia e Innovación "ECO2013-42849-P" and "JCI-2011-08963

Public guarantees and private banks’ incentives: evidence from the COVID-19 crisis

En este documento mostramos que los incentivos privados afectan a la asignación de préstamos con aval público (PGL), lo que da como resultado que los bancos más débiles hayan acabado transfiriendo el riesgo de los préstamos con empresas más arriesgadas a los contribuyentes. En cuanto a la base de datos empleada, explotamos los datos de la Central de Información de Riesgos del Banco de España (CIRBE) durante el shock del COVID-19, junto con un modelo estilizado que guía los resultados empíricos. A diferencia de los préstamos que no son PGL, los bancos proporcionan más PGL a las empresas más arriesgadas en las que los bancos tienen una cuota más alta de su crédito total antes de la crisis. Es importante destacar que los efectos son más fuertes para los bancos más débiles. Los resultados que utilizan efectos fijos de la empresa (banco) y la información sobre el volumen/precio de los préstamos sugieren un mecanismo impulsado por la oferta. Además, explotando la variación exógena entre empresas similares con diferente acceso a PGL, mostramos que las empresas que reciben un PGL de un banco aumentan el volumen total de sus préstamos —y su cuota— con ese banco, y que esto ocurre sobre todo entre las empresas con más riesgo y, especialmente, para los bancos más débiles.This paper shows that private incentives influence the allocation of public guaranteed lending (PGL), resulting in weaker banks shifting riskier corporate loans’ risk to taxpayers. We exploit data from the Banco de España’s Central Credit Register during the COVID-19 shock in Spain, and a stylized model is used to structure the empirical results. Unlike non-PGL, banks provide more PGL to riskier firms accounting for a higher share of their total lending to firms before the crisis. Importantly, the effects are stronger for weaker banks. Results using firm (bank) fixed effects and loan volume/price information suggest a supply-driven mechanism. Exploiting exogenous variations across similar firms with different access to PGL, we show that PGL increases banks’ lending to riskier firms, both overall and as a share of their total lending, especially for weaker banks

Anti-IL-6 Receptor Tocilizumab in Refractory Graves? Orbitopathy: National Multicenter Observational Study of 48 Patients

Graves’ orbitopathy (GO) is the most common extrathyroidal manifestation of Graves’ disease (GD). Our aim was to assess the e cacy and safety of Tocilizumab (TCZ) in GO refractory to conventional therapy. This was an open-label multicenter study of glucocorticoid-resistant GO treated with TCZ. The main outcomes were the best-corrected visual acuity (BVCA), Clinical Activity Score (CAS) and intraocular pressure (IOP). These outcome variables were assessed at baseline, 1st, 3rd, 6th and 12th month after TCZ therapy onset. The severity of GO was assessed according to the European Group on Graves’ Orbitopathy (EUGOGO). We studied 48 (38 women and 10 men) patients (95 eyes); mean age standard deviation 51 11.8 years. Before TCZ and besides oral glucocorticoids, they had received IV methylprednisolone (n = 43), or selenium (n = 11). GO disease was moderate (n =29) or severe (n = 19) and dysthyroid optic neuropathy (DON) (n = 7). TCZ was used in monotherapy (n = 45) or combined (n = 3) at a dose of 8 mg/kg IV every four weeks (n = 43) or 162 mg/s.c. every week (n = 5). TCZ yielded a significant improvement in all of the main outcomes at the 1st month that was maintained at one year. Comparing the baseline with data at 1 year all of the variables improved; BCVA (0.78 0.25 vs. 0.9 0.16; p = 0.0001), CAS (4.64 1.5 vs. 1.05 1.27; p = 0.0001) and intraocular pressure (IOP) (19.05 4.1 vs. 16.73 3.4 mmHg; p = 0.007). After a mean follow-up of 16.1 2.1 months, low disease activity (CAS 3), was achieved in 88 eyes (92.6%) and TCZ was withdrawn in 29 cases due to low disease activity (n = 25) or ine cacy (n = 4). No serious adverse events were observed. In conclusion, TCZ is a useful and safe therapeutic option in refractory GO treatment.This work was also partially supported by RETICS Programs, RD08/0075 (RIER) and RD12/0009/0013 from “Instituto de Salud Carlos III” (ISCIII) (Spain)

Impact of the dividend distribution restriction on the flow of credit to non-financial corporations in Spain

Artículo de revistaThis article analyses the impact of Recommendation ECB/2020/19 (to credit institutions to refrain from making dividend distributions and performing share buy-backs aimed at remunerating shareholders) on lending by Spanish banks between January and September 2020. Specifically, we use a sample of Spanish banks and exploit the fact that only some of them (those that had already approved dividend pay-outs before the recommendation) were able to pay dividends during the first few months of the pandemic. This quasi-natural experiment allowed us to analyse the impact of dividend restrictions on lending. Banks that limited their dividend distributions during the period analysed extended significantly more credit (12% to 23% more than banks that did not limit them) to non-financial corporations after the entry into force of the recommendation. At the same time, firms that received loans with public guarantees, such as, for example, loans that benefit from the ICO’s guarantee facilities established in response to the COVID-19 pandemic, received more credit from banks that did not make dividend distributions than from those that did, which suggests that these two measures may complement one another

Impacto de la restricción en el reparto de dividendos sobre el flujo de crédito a sociedades no financieras en España

Artículo de revistaEn este artículo se analiza el impacto de la Recomendación BCE/2020/19, que instaba a las entidades de crédito a limitar el reparto de dividendos y las primas de recompra de acciones para remunerar a sus accionistas, sobre el crédito concedido entre enero y septiembre de 2020 por los bancos españoles. En concreto, se utiliza una muestra de entidades bancarias españolas y el hecho de que tan solo algunas de ellas pudieron repartir dividendos durante los primeros meses de la pandemia, por haber sido ya aprobados en firme antes de la recomendación. Esta situación se aprovecha como experimento cuasinatural para analizar el impacto de la restricción de dividendos sobre la concesión de crédito. Se observa que durante el período analizado aquellas entidades que limitaron el reparto de dividendos concedieron significativamente más crédito a las sociedades no financieras después de la entrada en vigor de dicha recomendación (entre un 12 % y un 23 % más) que aquellas que no lo hicieron. Por otro lado, las empresas que han recibido préstamos con garantías públicas (como, por ejemplo, los préstamos que participan de las líneas de avales del Instituto de Crédito Oficial establecidas como respuesta a la pandemia de COVID-19) han obtenido más crédito de los bancos que no repartieron dividendos que de los que sí lo hicieron, lo que sugiere una posible complementariedad entre ambas medidas

DOES COMPETITION REDUCE THE RISK OF BANK FAILURE?

A large theoretical literature shows that competition reduces banks’ franchise values and induces them to take more risk. Recent research contradicts this result: When banks charge lower rates, their borrowers have an incentive to choose safer investments, so they will in turn be safer. However, this argument does not take into account the fact that lower rates also reduce the banks’ revenues from non-defaulting loans. This paper shows that when this effect is taken into account, a U-shaped relationship between competition and the risk of bank failure generally obtains.Bank competition, bank failure, credit risk, loan rates, loan defaults, default correlation, net interest income, moral hazard risk-shifting, franchise values.

Who truly bears (bank) taxes? : evidence from only shifting statutory incidence

We show strong overall and heterogeneous economic incidence effects, as well as distortionary effects, of only shifting statutory incidence (i.e., the agent on which taxes are levied), without any tax rate change. For identification, we exploit a tax change and administrative data from the credit market: (i) a policy change in 2018 in Spain shifting an existing mortgage tax from being levied on borrowers to being levied on banks; (ii) some areas, for historical reasons, were exempt from paying this tax (or have different tax rates); and (iii) an exhaustive matched credit register. We find the following robust results: First, after the policy change, the average mortgage rate increases consistently with a strong – but not complete – tax pass-through. Second, there is a large heterogeneity in such pass-through: larger for borrowers with lower income, a smaller number of lending relationships, not working for the lender, or facing less banks in their zip-code, thereby suggesting a bargaining power mechanism at work. Third, despite no variation in the tax rate, and consistent with the non-full tax pass-through, the tax shift increases banks’ risk-taking. More affected banks reduce costly mortgage insurance in case of loan default (especially so if banks have weaker ex-ante balance sheets) and expand into non-affected but (much) ex-ante riskier consumer lending, experiencing even higher ex-post defaults within consumer loans