The Profit-Credit Cycle

Richter, Björn; Zimmermann, Kaspar

doi:10.2139/ssrn.3292166

Cited by 13 publications

(11 citation statements)

References 48 publications

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“…This realistic mechanism leads to behavior sometimes referred to as "reaching for yield." Furthermore, consistent with empirical evidence, in our model a credit boom emerges when bank profitability is relatively high, so that accounting profitability prior to the crisis is associated with higher systematic tail risk (Meiselman, Nagel, and Purnanandam, 2018;Richter and Zimmermann, 2019).…”

Section: Bank Risk-takingsupporting

confidence: 87%

“…3 Our model requires that risks be foreseen by some but not all investors, bank executives, or bank employees. This is then consistent with evidence of Cheng, Raina, and Xiong (2014), Chernenko, Hanson, and Sunderam (2016) and Richter and Zimmermann (2019) that some within the banking sector might have been overoptimistic. The question to us is not why bank executives acted in a way that failed to avoid risk, but rather why informed equity holders did not curtail, and perhaps even encouraged, risky practices.…”

Section: Introductionsupporting

confidence: 82%

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Foreseen Risks

Gomes¹,

Grotteria²,

Wachter³

2018

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Large crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value fluctuates over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.

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Section: Bank Risk-takingsupporting

confidence: 87%

Section: Introductionsupporting

confidence: 82%

Foreseen Risks

Gomes¹,

Grotteria²,

Wachter³

2018

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“…We will exploit this relationship using data for banking sector profit and loss accounts from Richter and Zimmermann (2018) and instrument changes in capital ratios with changes in return on assets (RoA), the ratio of net income after tax to book assets. We define the 5-year change in this variable as ∆ 5 RoA i,t = RoA i,t − RoA i,t−5 .…”

Section: -Year Average Annual Change In Roamentioning

confidence: 99%

Bank Capital Redux: Solvency, Liquidity, and Crisis

Jordà

Richter

Schularick

et al. 2020

The Review of Economic Studies

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What is the relationship between bank capital, the risk of a financial crisis, and its severity? This paper introduces the first comprehensive analysis of the long-run evolution of the capital structure of modern banking using newly constructed data for banks’ balance sheets in 17 countries since 1870. In addition to establishing stylized facts on the changing funding mix of banks, we study the nexus between capital structure and financial instability. We find no association between higher capital and lower risk of banking crisis. However, economies with better capitalized banking systems recover faster from financial crises as credit begins to flow back more readily.

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“…To do this, we estimate how the link between bank asset returns and future economic performance differs across time periods, macroeconomic risk environments, and banking system structures. To enable our analysis, we combine three long-run datasets on market returns on bank equity (Baron, Verner, and Xiong, 2021), bank balance sheets (Jordà, Richter, Schularick, and Taylor, 2021), and their profits and losses (Richter and Zimmermann, 2020). These data allow us to construct measures of bank risk, and study its realisations across 17 advanced economies for years 1870-2016.…”

Section: Introductionmentioning

confidence: 99%