Global Banking: Endogenous Competition and Risk Taking

Transcription

1 Global Banking: Endogenous Competition and Risk Taking Ester Faia and Gianmarco Ottaviano Goethe University Frankfurt, CEPR and CFS, London School of Economics, Bocconi University and CEPR 11 December, Banque de France 11 December, Banque de France 1 /

2 Motivation Banks decision to globalize: bene ts of competition versus costs of risk taking Rajan 5: risks of nance globalization IMF report 15 and other empirical evidence: 1. Cross-border lending (prior to 7) increased risk taking. After 8: new business model "bricks and mortar" 3. Discipline role of local competition (long run)! reduces risk taking Faia, Ottaviano, Sanchez-Arjona (17): collected dataset on GSIBs 11 December, Banque de France /

3 Main Channels in Our Model 1 Oligopsony (Cournot) in deposit market: Allen and Gale (4) - Banks entrance: higher deposit competition (with deposit insurance)!search for yield Oligopoly (Cournot) in loan markets: Boyd and De Nicolo (5) - Banks entrance: lowers loan rates!reduces rms risk-shifting/risk-taking incentives (Stiglitz and Weiss 1981) 3 Predatory lending: entry and monitoring costs! banks reduces rates more aggressively to gain market shares (scale e ect) 4 Industry Dynamic: endogenous entry/exogenous exit (Hopenhayn 199, Ericson and Pakes 1995)! charter values increase with market shares! enhance and 3 11 December, Banque de France 3 /

4 Main Results Globalization (lower monitoring costs or positive productivity shock):!reduce banks margins (higher deposit rates, lower loan rates)!increase scale of credit, which reduces loan rates (strategic complementarities.)!reduce rms risk-shifting and risk-taking 11 December, Banque de France 4 /

5 Extensions Asymmetric productivity shocks: scope for diversi cation!risk declines Cross-border lending: risk-taking is higher! Vertical integration as opposed to horizontal structure (scale is smaller than margin) Correlated risk (Vasicek factor; Martinez-Miera and Repullo 14): con rm model results Endogenous exit: heterogenous deposit withdrawals and exit cost!higher exit: less active banks, lower credit scale, higher risk-taking 11 December, Banque de France 5 /

6 Banks Dynamics and Entry Decision Banks enter two markets, entry barrier κ = κ b + κ d, ξ deposit insurance costs, foreign market monitoring costs µ > Endogenous entry and exogenous exit: N a t,h = N t 1,H + N e t,h = N t,h 1 ϱ. Banks compare entry costs with discounted pro ts: Π t = E t ϱ)) z=t(β(1 z t (Π t,hh + Π t,hf ). Entry implies: V t = Π t,hh + Π t,hf + β(1 ϱ)e t fv t+1 g = κ, 11 December, Banque de France 6 /

7 Depositors, Risk-Return Pro les and Loan Demand Depositors:!insured; inverse supply of deposits, increasing and concave: rt D!Total deposits in each market: DH T = D HH + D FH. Firms projects: - yielding a t rh,t I with probability p(r H,t I, a t) and otherwise - Success probability falls with project returns and raises with aggregate productivity Total loans L T H = L HH + L FH,, demand for loans rh L = r L L T H increasing and convex!important: rates depend on aggregate loans (strategic complementarities) D T t 11 December, Banque de France 7 /

8 Firms (in each destination market) Moral hazard: banks do not observe rms choice of projects Risk neutral rms choose r I t (the risk-return pro le) to max pro t: p(r I H, a)(ar I H r L H ), FOC: p(rh I, a)a p 1 (rh I, a) + ar H I = r L L T H, Higher loan rates (risk-shifting)! more aggressive returns pro les p = 1 αr L 11 December, Banque de France 8 /

9 Banks Bank H chooses L r,hh to max: Π r,hh = p(rh r I, a) L L T H L r,hh r D (DH T )D r,hh ξd r,hh, Foreign banks have additional monitoring costs FOC: p(rh r I, a) L L T H r D (L T H ) ξ + +p(rh r I, a) L L T H r D (L T H ) L r,hh + +p 1 (rh I, a)r I r L L T H r L L T H r L L T H r D (L T H ) ξ L r,hh = - rst term is scale e ect : marginal gain from increasing bank scale - second term is competition e ect : more competition! lower margins - third is risk-taking e ect : more loan competition, decreases loan rates, improves risk-return 11 December, Banque de France 9 /

10 Equilibrium and Parametrization Functional forms: r L t Dt T = a t α β 1 Dt T with β 1 >, rt D (Dt T ) = γdt T with γ >. We also assume that investment projects succeed with probability p(rt I at 1 αrt, a t ) = I for rt I [, 1/α] otherwise Parameters calibrated on micro data or estimated to match second moments on entry and exit (Claessens and Van Horen 15) 11 December, Banque de France 1 /

11 Steady State: symmetric markets - Exogenously increase N T : L T ss (N T ss ) = N T ss d ss (N T ss ) = 1 α ξ β 1 + γ N T ss 1 ϱ + 1 N T ss 1 ϱ + lowers r I ss (N T ss ) = 1/α β 1 L T ss (N T ss )/ and increases p ss = αβ 1 L T ss (N T ss )/ - Endogenous entry: π ss (Nss T ) = αβ 1 1 α ξ 3 (β 1 + γ) N T ss Implicit derivations: dn T ss /dα < N T ss 1 ϱ + 1 N T 3 = [1 β(1 ϱ)] κ. ss 1 ϱ + 11 December, Banque de France 11 /

12 Success probability T otal number of banks Return on investment x 1 3 Return on depos its Spread return investment deposits T otal deposits Foreign and domestic deposits p Return on loans Spread return loan deposits Spread loan deposits net of moni x December, Banque de France 1 /

13 4 Probability of success Project return Deposits domestic (per bank) Deposits abroad (per bank) Active banks Total loans κ =.1 κ =. 11 December, Banque de France 13 /

14 6 Probability of success Project return Deposits domestic (per bank) Deposits abroad (per bank) Active banks Total loans ξ =.11 ξ = December, Banque de France 14 /

15 4 Probability of success Project return Deposits domestic (per bank) Active banks Deposits abroad (per bank) Total loans α = 31.8 α = 5 11 December, Banque de France 15 /

16 4 Probability of success Project return Deposits domestic (per bank) Active banks Deposits abroad (per bank) Total loans µ =.4 µ =.8 11 December, Banque de France 16 /

17 Cross-Border Lending Lighter foreign presence. Lender then chooses L r,hh and L r,hf so as to maximize expected pro t: p(rh I, a H ) rh L L T H L r,hh rh D (DH T )L r,hh ξl r,hh + +p(rf I, a F ) rf L L T F L r,hf rh D (DH T )L r,hf ξl r,hf µl r,hf κ κ d. Results:!For given N a cross-border banking generates less loans!higher risk-taking!when N a is determined endogenously MNB pro ts are higher than CBB: hence N a and L T is higher 11 December, Banque de France 17 /

18 Endogenous Entry Distribution of Deposits withdrawals. Endogenous exit rate: 1 eϱ t = 1 Φ(eλ t ) The exit region is then given by: where eπ t = p(l T t, a t ) eπ t = p(l T t, a t ) rt L ev t = eπ t + eπ t + (1 eϱ t )E t n e V t+1 o = κ exit t r D t r L t r D t eλ t eλ t ξ µ ξ d t and d t Results: exit is more likely, less active banks, less credit!more risk 11 December, Banque de France 18 /

19 Correlated Risk Project outcome determined by the realization of a random variable y i de ned as: y i = Φ 1 (1 p i ) + p ρz + p 1 ρε i, Probability of portfolio failure rises (despite lower probability of individual loans default) when: d ln L T d ln N a + d ln m(lt ) d ln N a < 1. The fall in the margin shall be strong enough to o set the increase in the scale 11 December, Banque de France 19 /

20 Conclusions Model of banks industry dynamic with endogenous entry decisions and endogenous risk-taking Future research:!impact of expansionary monetary policy on banks risk-taking on asset side!interaction of risk-taking on liability and asset side!optimal competition and prudential policy 11 December, Banque de France /