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Esa Jokivuolle

20 May 2014
WORKING PAPER SERIES - No. 1676
Details
Abstract
Basel III has introduced a non-risk-weighted leverage ratio requirement (LRR) which complements the internal ratings based (IRB) capital requirements. It provides a backstop against model risk which arises if some loans get incorrectly rated and become toxic. We study the effects of the LRR on lending strategies and its implications for banks
JEL Code
D41 : Microeconomics→Market Structure and Pricing→Perfect Competition
D82 : Microeconomics→Information, Knowledge, and Uncertainty→Asymmetric and Private Information, Mechanism Design
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
Network
Macroprudential Research Network
16 June 2015
WORKING PAPER SERIES - No. 1809
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Abstract
We construct a measure of a banks relative creditworthiness from Eurosystem’s proprietary overnight loan data: the bank’s “average overnight borrowing rate spread, relative to overnight rate index” (AOR). We investigate the dynamic relationship between the AOR and the credit default swap spread (CDS) of 60 banks in years 2008 - 2013. We find that in daily differences the AOR leads the CDS at least by one day. The lead is concentrated on days of market stress for banks which mainly borrow from “relationship” lender banks. Such borrower banks are typically smaller, have weak ratings, and likely reside in crisis countries. In longer differences, up to several weeks, both the AOR and the CDS have some predictive power over one another. In sum, overnight borrowing rates may provide additional early-warning indications on certain banks’ deteriorating financial health over and above bank CDS spreads.
JEL Code
G01 : Financial Economics→General→Financial Crises
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages