Resumen de Essays on the bank lending channel
Banks provide a range of services to the real economy. Commercial banks focus their activities on consumers and private sector firms, offering checking and savings accounts, mortgages, lines of credit and personal loans. Investment banks help firms with corporate financing, such as going public and issuing corporate bonds, and provide investment management services. Yet, the banking sector’s risky behavior can generate lasting effects on the real economy, as seen infamously during the Great Depression and the recent 2007-2008 financial crisis. Recent literature has highlighted differences in banks to non-financial firms, mainly in that their assets are highly complex and opaque, they communicate to both their shareholders and regulators, they are highly leveraged and susceptible to small asset price fluctuations, all the while acting as one of the main providers of lending to the real economy. The goal of this thesis is to shed light on how banks respond, predominantly through lending, when confronted with three different scenarios: uncertainty, regulatory supervision and macroprudential policies.
In the first chapter, I propose a new index to detect the idiosyncratic uncertainty banks face at the bank-quarter level. The index uses a recent natural language processing technique, called Skip-gram Model, to discover a novel list of “uncertainty" words based on semantic and syntactic similarities. I use the frequencies of these words in banks quarterly conference calls as a proxy for bank-level uncertainty. The index spikes at the beginning of the 2007-2009 financial crisis and reveals which banks at a given quarter signal more uncertainty about their balance sheets. Higher uncertainty is associated with lower lending the next quarter and higher liquidity, suggesting active management of uncertainty. The active management of uncertainty is more pronounced during periods of higher aggregate volatility and for banks with more skin-in-the-game.
Government regulation requires effective supervision, but regulated entities may window-dress to supervisors. In the second chapter, joint with Puriya Abbassi, Rajkamal Iyer and José-Luis Peydró, I explore how banks shift their balance sheets when confronted with a comprehensive review by regulators of their assets. For empirical identification, we analyze banks exploiting a quasi-natural experiment —ECB’s 2014 asset quality review (AQR)— in conjunction with the security and credit registers of Germany. After the AQR announcement, reviewed banks decrease the share of riskier securities and loans, and level of overall securities and credit supply. After AQR compliance, reviewed banks reload riskier securities, but not riskier credit. Effects are stronger for banks with higher trading expertise. Finally, this behavior induces spillovers on asset prices and firm level credit availability. Results suggest banks’ window-dressing for supervisory audits, especially on liquid securities that are easier to trade, and hold important implications for supervision.
The effectiveness of capital controls on financial stability relies on understanding the interaction between foreign capital inflows and domestic credit. However, evidence of this interaction remains elusive. In the third chapter of the thesis, joint with Andrea Fabiani, Martha López Piñeros and José-Luis Peydró, I document the efficacy of capital controls and illustrate the impact on domestic credit and non-financial firm activity. For identification, we analyze the introduction of capital controls in Colombia, through the form of a 40% Unremunerated Reserve Requirement (URR), in 2007 using granular data on firm-level debt inflows and the Colombian credit registry. First, we document that the URR successfully reduced foreign debt inflows, with stronger effects for companies relying heavily on this form of external financing. Next, we ask whether these firms were able to switch to domestic lending. We find firms which obtained foreign credit through direct financing abroad were penalized through credit cutbacks and higher interest rates. Firms which sought foreign debt via Colombian financial intermediaries were more able to substitute foreign debt with domestic peso credit. Our results point to complementarities between domestic and foreign credit supply, a channel which has been forgone in both empirical and theoretical applications. Finally, we find that the introduction of capital controls breaks the link between dollarization of domestic credit and loosened global financial conditions as proxied by the VIX.
Given the central role banks play in modern economies, understanding their behavior is imperative for financial stability. This thesis aims to elucidate the banking sector’s activities for policymakers and market participants. The new index I develop in the first chapter can be used to predict which banks face high uncertainty and are most likely to cut credit. The second chapter studying bank reactions to a comprehensive supervisory review can help regulators design Asset Quality Reviews for the banking sector. Lastly, the third chapter studying the introduction of capital controls can help policymakers understand externalities associated with shutting down bank debt from abroad.
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