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Author:Correa, Ricardo 

Discussion Paper
How Do Liquidity Conditions Affect U.S. Bank Lending?
The recent financial crisis underscored the importance of understanding how liquidity conditions for banks (or other financial institutions) influence the banks? lending to domestic and foreign customers. Our recent research examines the domestic and international lending responses to liquidity risks across different types of large U.S. banks before, during, and after the global financial crisis. The analysis compares large global U.S. banks?that is, those that have offices in foreign countries and are able to move liquidity from affiliates across borders?with large domestic U.S. banks, which have to rely on financing raised in capital markets and from depositors to extend credit and issue loans. One key result of our study, detailed below, is that the internal liquidity management by global banks has, on average, mitigated the effects of aggregate liquidity shocks on domestic lending by these banks.
AUTHORS: Rice, Tara; Correa, Ricardo; Goldberg, Linda S.
DATE: 2014-10-15

Working Paper
Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel during the European Sovereign Crisis
This paper documents a new type of cross-border bank lending channel using a novel dataset on the balance sheets of U.S. branches of foreign banks and their syndicated loans. We show that: (1) The U.S. branches of euro-area banks suffered a liquidity shock in the form of reduced access to large time deposits during the European sovereign debt crisis in 2011. The shock was related to their euro-area affiliation rather than to country- or bank-specific characteristics. (2) The affected branches received additional funding from their parent banks, but not enough to offset the lost deposits. (3) The liquidity shock prompted branches to cut lending to U.S. firms, which occurred mostly along the extensive margin. In turn, the affected U.S. firms suffered reduced access to syndicated loans, which prompted them to cut investment and built up their cash reserves.
AUTHORS: Correa, Ricardo; Zlate, Andrei; Sapriza, Horacio
DATE: 2016-09-30

Conference Paper
Which banks sponsored ABCP vehicles and why?
AUTHORS: Arteta, Carlos O.; Kotter, Jason; Carey, Mark S.; Correa, Ricardo
DATE: 2008

Working Paper
Firm volatility and banks: evidence from U.S. banking deregulation
This paper exploits the staggered timing of state-level banking deregulation in the United States during the 1980s to study the causal effect of banking integration on the volatility of non-financial corporations. We find that firm-level employment, production, sales, and cash flows are less volatile after interstate banking deregulation, particularly for firms that have limited access to external finance. This finding suggests that bank-dependent firms exploit wider access to finance after deregulation to smooth out idiosyncratic shocks. In fact, short-term credit becomes less pro-cyclical after out-of-state bank entry is permitted. Finally, lower volatility in real-side variables after deregulation translates into lower idiosyncratic risk in stock returns.
AUTHORS: Correa, Ricardo; Suarez, Gustavo A.
DATE: 2009

Working Paper
International evidence on government support and risk taking in the banking sector
Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of rated banks and find that government support is associated with more risk taking by banks, especially prior and during the 2008-2009 financial crisis. We also find that restricting banks? range of activities ameliorates the link between government support and bank risk taking. We conclude that strengthening market discipline by reducing bank complexity is needed to address this moral hazard problem.
AUTHORS: Sapriza, Horacio; Correa, Ricardo; Brandao-Marques, Luis
DATE: 2013

Working Paper
Say on pay laws, executive compensation, CEO pay slice, and firm value around the world
This paper examines the effects of say on pay (SoP) laws on CEO compensation, the portion of top management pay captured by CEOs, and firm valuation. Using a large cross-country sample of about 103,000 firm-year observations from 39 countries, we document that compared to our control group of firms, SoP laws are associated with 1) a lower level of CEO compensation, which partly results from lower CEO compensation growth rates and is related to CEO power, 2) a higher pay for performance sensitivity suggesting that SoP laws have the greatest effects on firms with poor performance, 3) a lower portion of total top management pay awarded to CEOs indicating lower pay inequality among top managers and 4) a higher firm value, which is related to whether the CEO?s share of total top management pay was relatively high before the laws are passed. Further, while both mandatory and advisory SoP laws are associated with lower CEO pay levels, only advisory SoP laws tighten the sensitivity of executive pay to firm performance. Collectively, our results document significant changes in executive compensation policies and firm valuation following the passage of SoP laws around the world.
AUTHORS: Correa, Ricardo; Lel, Ugur
DATE: 2013

Working Paper
Changes in Prudential Policy Instruments ---- A New Cross-Country Database
This paper documents the features of a new database that focuses on changes in the intensity in the usage of several widely used prudential tools, taking into account both macro-prudential and microprudential objectives. The database coverage is broad, spanning 64 countries, and with quarterly data for the period 2000Q1 through 2014Q4. The five types of prudential instruments in the database are: capital buffers, interbank exposure limits, concentration limits, loan to value (LTV) ratio limits, and reserve requirements. A total of nine prudential tools are constructed since some useful further decompositions are presented, with capital buffers divided into four sub-indices: general capital requirements, real state credit specific capital buffers, consumer credit specific capital buffers, and other specific capital buffers; and with reserve requirements divided into two sub-indices: domestic currency capital requirements and foreign currency capital requirements. While general capital requirements have the most changes from the cross-country perspective, LTV ratio limits and reserve requirements have the largest number of tightening and loosening episodes. We also analyze the instruments? usage in relation to the evolution of key variables such as credit, policy rates, and house prices, finding substantial differences in the patterns of loosening or tightening of instruments in relation to business and financial cycles.
AUTHORS: Cerutti, Eugenio; Correa, Ricardo; Fiorentino, Elisabetta; Segalla, Esther
DATE: 2016-06

Working Paper
International Banking and Cross-Border Effects of Regulation : Lessons from the United States
Domestic prudential regulation can have unintended effects across borders and may be less effective in an environment where banks operate globally. Using U.S. micro-banking data for the first quarter of 2000 through the third quarter of 2013, this study shows that some regulatory changes indeed spill over. First, a foreign country's tightening of limits on loan-to-value ratios and local currency reserve requirements increase lending growth in the United States through the U.S. branches and subsidiaries of foreign banks. Second, foreign tightening of capital requirements shifts lending by U.S. global banks away from the country where the tightening occurs to the United States and to other countries. Third, tighter U.S. capital regulation reduces lending by large U.S. global banks to foreign residents.
AUTHORS: Berrospide, Jose M.; Correa, Ricardo; Goldberg, Linda S.; Niepmann, Friederike
DATE: 2016-09-06

Working Paper
Prudential Policies and Their Impact on Credit in the United States
We analyze how two types of recently used prudential policies affected the supply of credit in the United States. First, we test whether the U.S. bank stress tests had any impact on the supply of mortgage credit. We find that the first Comprehensive Capital Analysis and Review (CCAR) stress test in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks?banks with worse capital positions were impacted more negatively. Second, we analyze the impact of the 2013 Supervisory Guidance on Leveraged Lending and subsequent 2014 FAQ notice, which clarified expectations on the Guidance. We find that the share of speculative-grade term-loan originations decreased notably at regulated banks after the FAQ notice.
AUTHORS: Calem, Paul S.; Correa, Ricardo; Lee, Seung Jung
DATE: 2016-12-13

Working Paper
Cross-Border Bank Flows and Monetary Policy
We analyze the impact of monetary policy on bilateral cross-border bank flows using the BIS Locational Banking Statistics between 1995 and 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border bank portfolio channel. As relatively tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate their claims toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with weaker financial sectors, which are likely to be more risk averse. Lastly, the reallocation is directed toward borrowers in safer countries, such as advanced economies or economies with an investment grade sovereign rating. By highlighting the effect of domestic monetary policy on foreign credit, this study enhances our understanding of the monetary policy transmission mechanism through global banks.
AUTHORS: Correa, Ricardo; Paligorova, Teodora; Sapriza, Horacio; Zlate, Andrei
DATE: 2018-12-03


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