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Uncertainty and International Banking

Discussion by Emmanuel De Veirman

De Nederlandsche Bank

June 13, 2014

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Overview

This paper: Estimates micro volatility for banks Finds that micro bank volatility is negatively associated with lending growth, but not with GDP growth. The negative association with lending:

is less pronounced for more liquid and better capitalized banks. is similar for domestic and foreign-owned banks.

Interpretation: higher bank-level uncertainty causes banks to ”wait and see” and lend less today.

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Measurement

The paper measures micro bank volatility in two stages:

Filter bank-level trends and country-wide factors from bank-level growth in profit, productivity, short-term funding, assets: ∆Xijt = αi + αjt + εijt Compute cross-sectional standard deviation in the cleaned growth rates: σjt =

• 1

Njt − 1

Njt

• i=1

(εijt − εjt)2

Similar to firm-specific volatility measures of De Veirman and Levin (2012, 2014); Decker, D’Erasmo, and Moscoso Boedo (2013).

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Results

Micro bank volatility is weakly correlated with dispersion in firm equity returns and with macro (bank) equity return volatility How does it compare to micro firm volatility in balance sheet variables? Micro bank volatility is weakly correlated with GDP growth. This is:

Different from Campbell, Lettau, Malkiel, and Xu (2001): firm-specific volatility in stock returns doubles in recessions. Different from Bloom e.a. (2012): dispersion in firm-level sales and productivity growth is strongly counter-cyclical. Similar to De Veirman and Levin (2014): firm-specific volatility in sales and earnings growth is no major driver of macro fluctuations.

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Interpretation

Irreversibility models: firms invest less when they are more uncertain about demand for their products because resale value of capital is low.

Pindyck (1988), Bloom (2009), Bloom e.a. (2012), Bachmann and Bayer (2013).

Adapting story to bank lending: focus on liquidity risk and maturity mismatch between bank funding and illiquid assets.

Diamond and Dybvig (1983), Diamond and Rajan (2005), Gertler and Karadi (2011)

Testing effect of uncertainty about liquidity:

Is measure of volatility in short-term funding reflected in higher rates

• n short-term funding? In a shift to liquid assets?

Is effect of funding uncertainty on lending stronger for long-term loans? Does it depend on the ease of securitization?

Make distinction with effect of borrower default risk on bank lending.

Valencia (2013), Christiano, Motto, and Rostagno (2014)

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