Featured Product

    ECB Paper on Impact of Bank Funding Shocks on Credit Reallocation

    January 30, 2019

    ECB published a paper that presents a comprehensive analysis of the sector- and firm-specific strategies that banks follow when their funding is affected by a negative shock. The authors focus on assessing the impact of bank funding shocks on credit allocation by banks, also providing evidence on the strategic lending decisions made by banks facing a negative funding shock and describing the implications of the findings for bank regulators.

    The paper provides the results on the average impact of the interbank funding shock as well as the reallocation effects.Using bank-firm level credit data, the authors 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 toward low-risk firms. 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. Overall, banks reallocate credit toward firms with low debt levels, low default risk, high available collateral, and a high interest coverage ratios. The paper also provides insights on the timing of funding shock impact and the timing of the reallocation channels. It investigates whether the funding shock has real effects on firm investment and growth, before presenting its conclusions.

    The findings also contain interesting information for bank regulators. The results reveal a bright sight of lending concentration during the times of crisis and are thus informative when making the trade-off between portfolio concentration risk and having sufficient information about borrowers. Finally, the results suggest that not only systemic risk and financial stability issues should be taken into account when studying the welfare implications of portfolio diversification, but that it could also be relevant to consider the potentially beneficial impact of lending concentration on firm credit supply.

     

    Related Link: Working Paper (PDF)

    Keywords: Europe, EU, Banking, Concentration Risk, Systemic Risk, Credit Risk, Credit Allocation, Research, ECB

    Featured Experts
    Related Articles
    News

    FSB Report Examines Implementation and Impact of G20 Financial Reforms

    FSB published fifth annual report on the implementation and effects of the G20 financial regulatory reforms.

    October 16, 2019 WebPage Regulatory News
    News

    FSB Report Examines Implementation of OTC Derivative Reforms

    FSB published annual progress report on implementation of the agreed G20 reforms for over-the-counter (OTC) derivatives markets.

    October 15, 2019 WebPage Regulatory News
    News

    APRA Proposes Measures to Strengthen Capital for Bank Depositors

    APRA proposed changes to APS 111, which is the prudential standard on measuring capital adequacy and establishes the criteria for regulatory capital requirements of authorized deposit-taking institutions.

    October 15, 2019 WebPage Regulatory News
    News

    HKMA Reduces Countercyclical Capital Buffer in Hong Kong to 2.0%

    HKMA announced that the countercyclical capital buffer (CCyB) for banks in Hong Kong has been reduced from 2.5% to 2.0%, with immediate effect, in accordance with the Banking (Capital) Rules.

    October 14, 2019 WebPage Regulatory News
    News

    FCA Releases Feedback to Online Survey on New Data Collection Platform

    FCA published results of the survey requesting feedback for the new data collection platform that will replace GABRIEL.

    October 14, 2019 WebPage Regulatory News
    News

    FSB Publishes Update on Its Market Fragmentation Work

    FSB published an update on its work to address the issue of market fragmentation.

    October 14, 2019 WebPage Regulatory News
    News

    EC Consults on Implementation of Final Basel III Reforms in EU

    EC launched a public consultation on the implementation of Basel III standards in EU.

    October 11, 2019 WebPage Regulatory News
    News

    MAS Amends Regulation on Clearing of Derivatives Contracts

    MAS amended regulation for the mandatory centralized clearing of certain derivative contracts.

    October 11, 2019 WebPage Regulatory News
    News

    EBA Single Rulebook Q&A: Second Update for October 2019

    EBA updated the Single Rulebook question and answer (Q&A) tool with answers to ten questions.

    October 11, 2019 WebPage Regulatory News
    News

    OCC Revises Minimum Threshold for Banks to Conduct Stress Tests

    OCC issued the final rule that amends its company-run stress testing requirements under the 12 CFR 46 in Code of Federal Regulations.

    October 10, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 3969