Published
The Interest of Being Eligible (with J-S. Mésonnier and O. Toutain), [Link], Journal of Money, Credit and Banking
Abstract: Major central banks accept non-marketable assets, such as pooled individual corporate loans, as collateral in their refinancing operations with banks. Such “eligible” loans to firms may provide a liquidity service to the banks which originate them. Banks may in turn pass on a part of this benefit to their borrowers in the form of a reduced interest rate: the eligibility discount. We exploit a surprise extension of the Eurosystem’s set of eligible collateral to medium-quality corporate loans, the Additional Credit Claims (ACC) program of February 2012, to assess the eligibility discount to corporate loans spreads in France. We find that becoming eligible to the Eurosystem’s collateral framework translates into a relative reduction in rates by 8 bps for new loans issued to ACC-eligible firms, controlling for loan-, firm- and bank-level characteristics. We find that this collateral channel of monetary policy is only active for the banks which have a lower opportunity cost in pledging credit claims and which are well capitalized.
Measuring the Cost of Equity of Euro Area Banks (with C. Altavilla, P. Bochmann, J. De Ryck, A.M. Dumitru, M. Grodzicki, H. Kick, C. Melo Fernandes, J. Mosthaf, S. Palligkinis), [Link], ECB Occasional Paper No. 254
Abstract: The cost of equity for banks equates to the compensation that market participants demand for investing in and holding banks’ equity, and has important implications for the transmission of monetary policy and for financial stability. Notwithstanding its importance, the cost of equity is unobservable and therefore needs to be estimated. This occasional paper provides estimates of the cost of equity for listed and unlisted euro area banks using a three-step methodology. In the first step, ten different models are estimated. In the second step, the models’ results are combined applying an equal-weighting procedure. In the third step, the combined costs of equity for individual banks are aggregated at the euro area level and according to banks’ business models. The results suggest that, since the Great Financial Crisis of 2007-08, the premia that investors demand to compensate them for the risk they bear when financing banks’ equity has been persistently higher than the return on equity (ROE) generated by banks. We show that our estimates of cost of equity have plausible relationships to banks’ fundamentals. The cost of equity tends to be higher for banks that are riskier (higher non-performing loan ratios), less efficient (higher cost-to-income ratio), and with more unstable funding sources (higher relative reliance on interbank deposits). Finally, we use bank fundamentals to estimate the cost of equity for unlisted banks. In general, unlisted banks are found to have a somewhat lower cost of equity compared to listed banks, with business model characteristics accounting for part of the estimated difference.
Working Papers
Does Banks' Information Monopoly Impact the Transmission of Monetary Policy? (with F. McCann) [Link].
Abstract: We empirically investigate the role of frictions in bank-borrower relationships on the transmission channel of monetary policy. We argue that banks’ incentives to pass on reductions in their funding costs depend on the ease at which their borrowers can solicit outside competition for their financing. We test this hypothesis by comparing the loan spreads of small bank-dependent firms with those of group-affiliated and large firms. Using a large sample of investment-grade French firms, we show that following the ECB’s monetary policy stimulus in the winter of 2008, the loan spreads of stand-alone SME (single-bank) firms increased by 42 (32) basis points more than those of large and group-affiliated (multi-bank) firms. Importantly we show that our results are unlikely to be explained by a risk premium story, since we find no similar effect over this period when comparing the spreads between investment-grade and speculative-grade firms.
Bank Internal Capital Markets: Across And Within Bank Allocative Efficiency [Available upon Request]
Abstract: In this paper, I empirically investigate the extent to which bank internal capital markets play an efficiency enhancing role in the savings-investment process. I exploit data on the internal capital markets (ICMs) of the four largest French regional banking networks. I first show that the allocation of liquidity is tilted towards subsidiary banks which are stronger in terms of asset quality and profitability, consistent with theories of “winner-picking” as in Stein, 1997, but also risk-management incentives in the capital allocation process as in Froot and Stein, 1998. I then examine whether differences in the allocation of liquidity across banks is associated with differences in lending sensitivities to borrower quality (creditworthiness and productivity). I find that a higher take-up internal liquidity is associated with a steeper (more efficient) discrimination of borrower quality in banks’ lending decisions.