Risk Management in Financial Institutions

Rampini, Adriano A.; Viswanathan, S.; Vuillemey, Guillaume

doi:10.3386/w25698

Cited by 47 publications

(44 citation statements)

References 38 publications

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“…One explanation for the insignificant result is that uncertainty in monetary policy might have a limited impact on loan loss provisions because monetary policy uncertainty, particularly uncertainty in interest rates, might have a limited effect on existing borrowers' willingness and ability to repay their existing loans. In addition, borrowers and banks might be able to hedge against interest rate uncertainty via interest rate swaps or credit default swaps (Guay, 1999;Campello et al, 2011;Rampini et al, 2017), which, in turn, mitigates the likelihood and/or extent to which monetary policy uncertainty per se impacts future loan losses and thus current loan loss provisions. In contrast, it is likely to be more difficult to hedge against the potential depressive effects that arise in response to fiscal and regulatory policy uncertainty.…”

Section: The Effect Of Pu Due To Regulatory Fiscal and Monetary Policymentioning

confidence: 99%

Policy uncertainty and loan loss provisions in the banking industry

Saffar

Zhang

2020

Rev Account Stud

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Policy uncertainty is an increasingly important issue facing many economies. In this paper, we examine how banks accrue for loan losses in response to policy uncertainty (PU) and the implications of these accruals in terms of actual loan losses and future liquidity creation. Consistent with banks recognizing more loan losses in anticipation of PU's depressive effects, we document a contemporaneous positive association between PU and loan loss accruals. This positive association is more pronounced for banks with a riskier loan portfolio and that have a history of lower loan loss reserves. We also find that banks making more loan loss provisions in times of higher PU have significantly higher future loan charge-offs and lower future liquidity creation. Overall, our paper highlights that PU affects the loan loss accruals of banks and that these accruals reflect rational expectations about PU's depressive effects on the economy.

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Section: The Effect Of Pu Due To Regulatory Fiscal and Monetary Policymentioning

confidence: 99%

Policy uncertainty and loan loss provisions in the banking industry

Saffar

Zhang

2020

Rev Account Stud

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“…Other studies have looked at different aspects of banks' interest rate risk exposure. Rampini et al (2015) provide an alternative explanation for why banks fail to hedge the exposure to interest rate risk that arises from their traditional business. They argue that collateral-constrained banks are willing to give up hedging to increase investment, and provide empirical evidence showing that banks who suffer financial losses consequently reduce their hedging.…”

Section: Introductionmentioning

confidence: 99%

Why are Banks Exposed to Monetary Policy?

Tella

Kurlat²

2017

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We propose a model of banks' exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks' maturity mismatch.

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“…The relation between borrowing constraints, leverage and risk aversion is examined inFroot et al (1993),Froot and Stein (1998) and more recentlyRampini and Viswanathan (2010) Rampini et al (2016). demontrate that equity also a¤ects banks' risk management strategies and that well-capitalized banks are relatively more likely to hedge interest rate risk.…”

mentioning

confidence: 99%

Bank Lending in Uncertain Times

Alessandri

Bottero

2017

SSRN Journal

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We study the impact of economic uncertainty on the supply of bank credit using a monthly dataset that includes all loan applications submitted by a sample of 650,000 Italian firms between 2003 and 2012. We find that an increase in aggregate uncertainty has three effects. First, it reduces the likelihood of banks accepting new applications. Second, it prolongs the time firms have to wait for their loans to be disbursed. Third, it makes banks less responsive to fluctuations in short-term interest rates, thereby weakening the bank lending channel of monetary policy. The influence of uncertainty is relatively stronger for poorly capitalized lenders and geographically distant borrowers.

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Risk Management in Financial Institutions

Cited by 47 publications

References 38 publications

Policy uncertainty and loan loss provisions in the banking industry

Policy uncertainty and loan loss provisions in the banking industry

Why are Banks Exposed to Monetary Policy?

Bank Lending in Uncertain Times

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