Back to the basics in banking ? A micro-analysis of banking system stability

This paper analyzes the relationship between banks’ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks’ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank’s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks’ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discountdiversification, non-interest income, financial conglomerates, banking stability, extreme value analysis, tail risk

The Determinants of Pass-Through of Market Conditions to Bank Retail Interest Rates in Belgium

We analyse the pass-through of money market rates to retail interest rates at the disaggregate level in the Belgian banking market. First, we measure the extent of pass-through for a total of fourteen products. We find that the response varies over loans and deposits and depends positively on the maturity of the product. Second, the launch of EMU has generally not resulted in more competitive pricing by banks. Third, we assess the importance of several biases and find that heterogeneity in price-setting behaviour should be accounted for in analysing the pass-through. Fourth, we analyse bank-specific determinants of heterogeneous interest rate pass-through. We find a role for capital, liquidity and market share and we relate these results to the various channels in monetary policy transmission and to the structure-conduct-performance hypothesis in banking.pass-through, Heterogeneous panel, aggregation bias, panel cointegration, retailbanking, bank-level interest rates, bank-level determinants

Does banks’ systemic importance affect their capital structure and balance sheet adjustment processes? National Bank of Belgium, Working Paper No. 369

Frictions prevent banks to immediately adjust their capital ratio towards their desired and/or imposed level. This paper analyzes (i) whether or not these frictions are larger for regulatory capital ratios vis-à-vis a plain leverage ratio; (ii) which adjustment channels banks use to adjust their capital ratio; and (iii) how the speed of adjustment and adjustment channels differ between large, systemic and complex banks versus small banks. Our results, obtained using a sample of listed banks across OECD countries for the 2001-2012 period, bear critical policy implications for the implementation of new (systemic risk-based) capital requirements and their impact on banks’ balance sheets, specifically lending, and hence the real economy

Bank capital (requirements) and credit supply: Evidence from pillar 2 decisions. National Bank of Belgium Working Paper No. 303

We analyze how time-varying bank-specific capital requirements a ect banks' balance sheet adjustments as well as bank lending to the non-financial corporate sector. To do so, we relate Pillar 2 capital requirements to bank balance sheet data, a fully documented corporate credit register and firm balance sheet data. Our analysis consists of three components. First, we examine how time-varying bank-specific capital requirements affect banks' balance sheet composition. Subsequently, we investigate how capital requirements affect the supply of bank credit to the corporate sector, both on the intensive and extensive margin, as well as for different types of credit. Finally, we document how bank characteristics, firm characteristics and the stance of monetary policy impact the relationship between bank capital requirements and credit supply

Some borrowers are more equal than others: Bank funding shocks and credit reallocation. National Bank of Belgium, Working Paper No. 361

This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank-firm level credit data, we show that banks reallocate credit within their loan portfolio in at least three different ways. First, banks reallocate to sectors where they have a high market share. Second, they also reallocate to sectors in which they are more specialized. Third, they reallocate credit towards low-risk _rms. These reallocation effects are economically large. A standard deviation increase in sector market share, sector specialization or firm soundness reduces the transmission of the funding shock to credit supply by 22, 8 and 10 %, respectively

Identifying credit supply shocks with bank-firm data: methods and applications. National Bank of Belgium, Working Paper No. 347

Current empirical methods to identify and assess the impact of bank credit supply shocks rely strictly on multi-bank firms and ignore firms borrowing from only one bank. Yet, these single-bank firms are often the majority of firms in an economy and most prone to credit supply shocks. We propose and underpin an alternative demand control (using industry-location-size-time fixed effects) that allows identifying timevarying cross-sectional bank credit supply shocks using both single- and multi-bank firms. Using matched bank-firm credit data from Belgium, we show that firms borrowing from banks with negative credit supply shocks exhibit lower financial debt growth, asset growth, investments, and operating margin growth. Positive credit supply shocks are associated with bank risk-taking behaviour at the extensive margin. Importantly, to capture these effects it is crucial to include the single-bank firms when identifying the bank credit supply shocks

Identifying credit supply shocks with bank-firm data:Methods and applications

Current empirical methods to identify and assess the impact of bank credit supply shocks rely strictly on multi-bank firms and ignore firms borrowing from only one bank. Yet, these single-bank firms are often the majority of firms in an economy and most prone to credit supply shocks. We propose and underpin an alternative demand control (using industry–location–size–time fixed effects) that allows identifying time-varying cross-sectional bank credit supply shocks using both single- and multi-bank firms. Using matched bank-firm credit data from Belgium, we show that firms borrowing from banks with negative credit supply shocks exhibit lower financial debt growth, asset growth, investments, and operating margin growth. Positive credit supply shocks are associated with bank risk-taking behaviour at the extensive margin. Importantly, to capture these effects it is crucial to include the single-bank firms when identifying the bank credit supply shocks

Bank competition and stability: Cross-country heterogeneity

This paper documents large cross-country variation in the relationship between bank competition and bank stability and explores market, regulatory and institutional features that can explain this variation. We show that an increase in competition will have a larger impact on banks’ fragility in countries with stricter activity restrictions, lower systemic fragility, better developed stock exchanges, more generous deposit insurance and more effective systems of credit information sharing. The effects are economically large and thus have important repercussions for the current regulatory reform debate

Impact of early enteral versus parenteral nutrition on mortality in patients requiring mechanical ventilation and catecholamines: study protocol for a randomized controlled trial (NUTRIREA-2)

BACKGROUND: Nutritional support is crucial to the management of patients receiving invasive mechanical ventilation (IMV) and the most commonly prescribed treatment in intensive care units (ICUs). International guidelines consistently indicate that enteral nutrition (EN) should be preferred over parenteral nutrition (PN) whenever possible and started as early as possible. However, no adequately designed study has evaluated whether a specific nutritional modality is associated with decreased mortality. The primary goal of this trial is to assess the hypothesis that early first-line EN, as compared to early first-line PN, decreases day 28 all-cause mortality in patients receiving IMV and vasoactive drugs for shock. METHODS/DESIGN: The NUTRIREA-2 study is a multicenter, open-label, parallel-group, randomized controlled trial comparing early PN versus early EN in critically ill patients requiring IMV for an expected duration of at least 48 hours, combined with vasoactive drugs, for shock. Patients will be allocated at random to first-line PN for at least 72 hours or to first-line EN. In both groups, nutritional support will be started within 24 hours after IMV initiation. Calorie targets will be 20 to 25 kcal/kg/day during the first week, then 25 to 30 kcal/kg/day thereafter. Patients receiving PN may be switched to EN after at least 72 hours in the event of shock resolution (no vasoactive drugs for 24 consecutive hours and arterial lactic acid level below 2 mmol/L). On day 7, all patients receiving PN and having no contraindications to EN will be switched to EN. In both groups, supplemental PN may be added to EN after day 7 in patients with persistent intolerance to EN and inadequate calorie intake. We plan to recruit 2,854 patients at 44 participating ICUs. DISCUSSION: The NUTRIREA-2 study is the first large randomized controlled trial designed to assess the hypothesis that early EN improves survival compared to early PN in ICU patients. Enrollment started on 22 March 2013 and is expected to end in November 2015. TRIAL REGISTRATION: ClinicalTrials.gov Identifier: NCT01802099 (registered 27 February 2013)