Bank Characteristics and Procyclicality: A Theoretical Approach
Author(s)
Marie-Sophie Gauvin*
ABSTRACT
The 2007-2008 crisis highlighted liquidity management troubles. We witness a real estate asset price boom during the pre-crisis period and a difficulty for banks to raise funding afterwards. Consequently, bank choices in response to the conduct of the monetary policy along the cycle can be studied. Despite usual financial accelerator, the excessive (lack of) confidence of banks in the upward (down) phase explains procyclical balance sheet movements. Moreover, the monetary policy effects on bank behaviors vary according to their initial specifications. From a theoretical point of view, this paper examines the response of the banking sector to monetary authorities impulses, in function of their initial characteristics. So, the paper highlights a theoretical model, based on accounting identities, in which banks are distinguished in different categories according to their level of capitalization and liquidity. The principal result is that the less capitalized and liquid banks have more procyclical behaviors.
Cite this paper
Gauvin, M. (2014) Bank Characteristics and Procyclicality: A Theoretical Approach. Journal of Financial Risk Management, 3, 57-66. doi: 10.4236/jfrm.2014.33007.
Gauvin, M. (2014) Bank Characteristics and Procyclicality: A Theoretical Approach. Journal of Financial Risk Management, 3, 57-66. doi: 10.4236/jfrm.2014.33007.
References
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http://dx.doi.org/10.1257/jep.25.1.3 [32] Jiménez, G., Ongena, S., Peydro, J. L., & Saurina, J. (2009). Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk-Taking? AFA 2009 San Francisco Meetings Paper. [33] Kashyap, A., & Stein, J. (2000) What Do a Million Observations on Banks Say about the Transmission of Monetary Policy? The American Economic Review, 90, 407-428.
http://dx.doi.org/10.1257/aer.90.3.407 [34] Kiyotaki, N., & Moore, J. (1997). Credit Cycles. Journal of Political Economy, 105, 211-248.
http://dx.doi.org/10.1086/262072 [35] Kling, A. (2009). Not What They Had in Mind: A History of Policies That Produced the Financial Crisis of 2008. Working Paper, Mercatus Center, Fairfax: George Mason University. [36] Maddaloni, A., & Peydro, J. (2010). Bank Risk-Taking, Securitization, Supervision and Low Interest Rates: Evidence from the Euro Area and the US Lending Standards. European Central Bank Working Paper, 1248, October. [37] Mésonnier, J. S. (2005). Capitalisation bancaire et transmission de la politique monétaire: Une revue. Banque de France, Mimeo. [38] Minsky, H. (1982). Can “It” Happen Again? M. E. Sharpe (Ed.), Essays on Instability and Finance, New York. [39] N’Diaye, P. (2009). Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy. IMF Working Paper, November.
http://dx.doi.org/10.5089/9781451874037.001 [40] Nijskens, R., & Wagner, W. (2011). Credit Risk Transfer Activities and Systemic Risk: How Banks Became Less Risky Individually but Posed Greater Risks to Financial System at the Same Time? Journal of Banking and Finance, 35, 1391-1398.
http://dx.doi.org/10.1016/j.jbankfin.2010.10.001 [41] Pepin, D. (2011). Instabilité des comportements et cycles financiers: Une relecture dans un cadre rationnel avec préférences endogènes. Document de Travail, 07, CRIEF, Université de Poitiers. [42] Van den Heuvel, S. (2002). Does Bank Capital Matter for Monetary Transmission? Federal Reserve Bank of New York, Economic Policy Review, 260-266. [43] Van den Heuvel, S. (2006). The Bank Capital Channel of Monetary Policy. The Wharton School University of Pennsylvania Meeting Papers, 512. [44] Verona, F., Martins, M., & Drumond, I. (2013) (Un)anticipated Monetary Policy in a DSGE Model with a Shadow Banking System. Bank of Finland Research Discussion Paper, 4, April.
[1] Adrian, T., Estrella, A., & Shin, H. S. (2010). Monetary Cycles, Financialcycles, and the Business Cycle. Staff Reports, Federal Reserve Bank of New-York, 421. [2] Agénor, P. R., Korey, A., & da Silva, L. (2013). Capital Regulation, Monetary Policy and Financial Stability. International Journal of Central Banking, 9, 193-238. [3] Agur, I., & Demertzis, M. (2012). Excessive Bank Risk Taking and Monetary Policy. ECB Working Paper Series, 1457, August. [4] Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2012). Do Bank Characteristics Influence the Effect of Monetary Policy on Bank Risk? ECB Working Paper Series, 1427, March. [5] Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2007). Securitization and the Bank Lending Channel. ECB Working Paper Series, 838, December. [6] Berger, A., & Bouwman, C. (2013). How Does Capital Affect Bank Performance during Financial Crises? Journal of Financial Economics, 109, 146-176.
http://dx.doi.org/10.1016/j.jfineco.2013.02.008 [7] Bernanke, B., Gertler, M., & Gilchrist, S. (1996). The Financial Accelerator and the Flight to Quality. The Review of Economics and Statistics, 78, 1-15. [8] Bernanke, B. (2013). The Crisis as a Classic Financial Panic. Speech at the Fourteenth Jacques Polak Annual Research Conference, Washington DC, November 8. [9] Betbèze, J. P., Bordes, C., Couppey-Soubeyran, J., & Plihon, D. (2011). Banques centrales et stabilité financière. Rapport du Conseil d’Analyse Economique, La Documentation française, Paris. [10] Borio, C. (2011). La mise en oeuvre d’un cadre macroprudentiel: Un juste équilibre entre audace et réalisme. Revue d’économiefinancière, 101, 157-174. [11] Brissimis, S., & Delis, M. (2010). Bank Heterogeneity and Monetary Policy Transmission. ECB Working Paper Series, 1233, August. [12] Brunnermeier, M., Crockett, A., Goodhart, C., Persaud, A., & Shin, H. S. (2009). The Fundamental Principles of Financial Regulation. Geneva Reports on the World Economy, International Center for Monetary and Banking Studies,. [13] Brunnermeier, M. (2009). Deciphering the Liquidity and Credit Crunch 2007-2008. Journal of Economic Perspectives, 23, 77-100.
http://dx.doi.org/10.1257/jep.23.1.77 [14] Cardone-Riportella, C., Samaniego-Medina, R., & Trujillo-Ponce, A. (2010). What Drives Bank Securitization? The Spanish Experience. Journal of Banking and Finance, 34, 2639-2651.
http://dx.doi.org/10.1016/j.jbankfin.2010.05.003 [15] Choulet, C., & Quignon, L. (2010). Régulation Prudentielle: Les enjeux d’une réforme. Conjoncture, BNP-Paribas, Département des Etudes économiques, Janvier. [16] Ciccarelli, M., Maddaloni, A., & Peydro, J. L. (2010). Trusting the Bankers: A New Look at the Credit Channel of Monetary Policy. Working Paper Series, European Central Bank, 1228. [17] Cornett, M., McNutt, J., Strahan, P., & Hasan, T. (2011). Liquidity Risk Management and Credit Supply in the Financial Crisis. Journal of Financial Economics, 101, 297-312.
http://dx.doi.org/10.1016/j.jfineco.2011.03.001 [18] Delis, M., & Kouretas, G. (2011). Interest Rates and Bank Risk-Taking. Journal of Banking and Finance, 35, 840-855.
http://dx.doi.org/10.1016/j.jbankfin.2010.09.032 [19] Delis, M., Hasan, I., & Mylonidis, N. (2011). The Risk-Taking Channel of Monetary Policy in the USA: Evidence from Micro-Level Data. Munich Personal Repec Archive Paper, 34084, October. [20] Dell’Ariccia, G., Laeven, L., & Marquez, R. (2011). Monetary Policy, Leverage, and Bank Risk-Taking. CEPR Discussion Paper, 8199, January. [21] Duffie, D. (2008). Innovations in Credit Risk Transfer: Implications for Financial Stability. BIS Working Papers, 255, July. [22] Gambacorta, L., & Marques-Ibanez, D. (2011). The Bank Lending Channel. Lessons from the Crisis. BIS Working Papers, 1335, May. [23] Gambacorta, L., & Mistrulli, P. (2004). Does Bank Capital Affect Lending Behavior? Journal of Financial Intermediation, 13, 436-457.
http://dx.doi.org/10.1016/j.jfi.2004.06.001 [24] Geanakoplos, J. (2010). The Leverage Cycle. In D. Acemoglu, K. Rogoff, & M. Woodford (Eds.), NBER Macroeconomic Annual 2009 (pp. 1-65). Chicago: University of Chicago Press. [25] Gilles, P., Gauvin, M. S., & Huchet, N. (2013). Banking Sector and Monetary Policy Transmission: Bank Capital, Credit and Risk Taking Channels. Modern Economy Journal, 4, 77-86.
http://dx.doi.org/10.4236/me.2013.41010 [26] Goodhart, C., Kashyap, A., Tsomocos, D., & Varduolakis, A. (2013). An Integrated Framework for Analysing Multiple Financial Regulations. International Journal of Central Banking, 109-143. [27] Goodhart, C. (2005). Financial Regulation, Credit Risk and Financial Stability. National Institute Economic Review, 192, 118-127.
http://dx.doi.org/10.1177/002795010519200111 [28] Goodhart, C. A. E. (2011). The Macro-Prudential Authority: Powers, Scope and Accountability. OECD Journal: Financial Market Trends, 2011, 97-123.
http://dx.doi.org/10.1787/fmt-2011-5k9cswn0jrr1 [29] Goodhart, C., & Persaud, A. (2008). A Proposal for How to Avoid the Next Crash. The Financial Times, January 31st. [30] Gorton, G., & Ordonez, G. (2013). The Supply and Demand for Safe Assets. NBER Working Papers, 18732, August. [31] Hanson, S., Kashyap, A., & Stein, J. (2011). A Macro-Prudential Approach to Financial Regulation. Journal of Economic Perspectives, 25, 3-28.
http://dx.doi.org/10.1257/jep.25.1.3 [32] Jiménez, G., Ongena, S., Peydro, J. L., & Saurina, J. (2009). Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk-Taking? AFA 2009 San Francisco Meetings Paper. [33] Kashyap, A., & Stein, J. (2000) What Do a Million Observations on Banks Say about the Transmission of Monetary Policy? The American Economic Review, 90, 407-428.
http://dx.doi.org/10.1257/aer.90.3.407 [34] Kiyotaki, N., & Moore, J. (1997). Credit Cycles. Journal of Political Economy, 105, 211-248.
http://dx.doi.org/10.1086/262072 [35] Kling, A. (2009). Not What They Had in Mind: A History of Policies That Produced the Financial Crisis of 2008. Working Paper, Mercatus Center, Fairfax: George Mason University. [36] Maddaloni, A., & Peydro, J. (2010). Bank Risk-Taking, Securitization, Supervision and Low Interest Rates: Evidence from the Euro Area and the US Lending Standards. European Central Bank Working Paper, 1248, October. [37] Mésonnier, J. S. (2005). Capitalisation bancaire et transmission de la politique monétaire: Une revue. Banque de France, Mimeo. [38] Minsky, H. (1982). Can “It” Happen Again? M. E. Sharpe (Ed.), Essays on Instability and Finance, New York. [39] N’Diaye, P. (2009). Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy. IMF Working Paper, November.
http://dx.doi.org/10.5089/9781451874037.001 [40] Nijskens, R., & Wagner, W. (2011). Credit Risk Transfer Activities and Systemic Risk: How Banks Became Less Risky Individually but Posed Greater Risks to Financial System at the Same Time? Journal of Banking and Finance, 35, 1391-1398.
http://dx.doi.org/10.1016/j.jbankfin.2010.10.001 [41] Pepin, D. (2011). Instabilité des comportements et cycles financiers: Une relecture dans un cadre rationnel avec préférences endogènes. Document de Travail, 07, CRIEF, Université de Poitiers. [42] Van den Heuvel, S. (2002). Does Bank Capital Matter for Monetary Transmission? Federal Reserve Bank of New York, Economic Policy Review, 260-266. [43] Van den Heuvel, S. (2006). The Bank Capital Channel of Monetary Policy. The Wharton School University of Pennsylvania Meeting Papers, 512. [44] Verona, F., Martins, M., & Drumond, I. (2013) (Un)anticipated Monetary Policy in a DSGE Model with a Shadow Banking System. Bank of Finland Research Discussion Paper, 4, April.