We study how an increase to the deposit insurance limit affects households’ portfolio allocation. Using unique data on individual deposit accounts, a suitable natural experiment, along with detailed information on Canadian households’ portfolio holdings, we show that households respond by drawing down deposits and shifting towards mutual funds and stocks. These outflows amount to 2.8% of outstanding household deposits. The mechanism underlying these portfolio adjustments relies on differences in deposit betas of insured vs. uninsured deposits. More generous deposit insurance coverage, hence, may result in non-trivial adjustments to household portfolios.

We exploit the introduction of interstate banking deregulation across the U.S. to study the relationship between credit constraints and consumption of durables and energy use. Using the American Housing Survey, we link the timing of these reforms with evidence of a credit expansion and household responses on many margins. We find evidence that low-income households are more likely to purchase new appliances after the deregulation; however, this did not increase energy consumption. The results are informative for policymakers who would like households to purchase new durable goods that use less energy.

We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank funding stress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of nonmortgage liabilities. This, however, only translates into lower levels of consumption for low income households. Hence, adverse credit supply shocks are associated with significant heterogeneous effects.

Deposit insurance protects depositors from failing banks, thus making insured deposits risk-free. When a deposit insurance limit is increased, some deposits that previously were uninsured become insured, thereby increasing the share of risk-free assets in households’ portfolios. This increase cannot simply be undone by households, because to invest in uninsured deposits, a household must first invest in insured deposits up to the limit. This basic insight is the starting point of the analysis in this paper.

Using a confidential data set of foreign bank affiliates (FBAs) in Hong Kong, this study finds evidence of an international transmission of prudential policies through banks' balance sheets from a host-country perspective. Specifically, in response to tighter capital requirements in the home country, parent banks with a higher tier 1 capital ratio tend to sustain higher loan growth by their FBAs in Hong Kong than their peers. When tighter liquidity requirements are considered, differences in parent banks' core deposit shares and reliance on net intragroup funding are found to significantly affect the loan responses of FBAs in Hong Kong. One implication is that from a host supervisor's perspective, understanding the balance sheet structure of an FBA's parent bank is important in assessing the international transmission of prudential policies. Regarding the impact on the loan supply of the Hong Kong banking sector, our findings show that the size of the spillover effects for the overall capital requirements and reserve requirements are larger than those for sector-specific prudential measures. The relatively smaller spillover effects for sector-specific prudential measures can be partly explained by a significant portfolio rebalancing effect both across and within affiliates of international banks, making the net impact on the host country less clear.

We study how an increase to the deposit insurance limit affects household portfolio allocation. We argue that an increase in deposit insurance exogenously increases the share of safe assets in the household portfolio. Using detailed information on the portfolio holdings of Canadian households, we document that households respond by drawing down safe deposits and increasing exposure to risky mutual funds and stocks. This is consistent with households attempting to maintain a constant allocation between safe and risky assets, as suggested by standard asset pricing models. Our results point to an overlooked policy implication of deposit insurance, as a more generous coverage may result in outflows of deposits from the banking sector, a re-allocation of deposits within the banking sector, and to non-trivial changes in household portfolios.

This article analyzes the relationship between consumer bankruptcy patterns and the destruction of soft information caused by mergers. Using a major Canadian bank merger as a source of exogenous variation in local banking conditions, we show that local markets affected by the merger exhibit an increase in consumer bankruptcy rates post-merger. The evidence is consistent with the most plausible mechanism being the disruption of consumer-bank relationships. Markets affected by the merger show a decrease in the merging institutions' branch presence and market share, including those stemming from higher switching rates. We rule out alternative mechanisms such as changes in quantity of credit, loan rates, or observable borrower characteristics.

In this paper, we investigate how liquidity conditions in Canada may affect domestic and/or foreign lending of globally active banks and whether this transmission is influenced by individual bank characteristics. We find that Canadian banks expanded their foreign lending during the recent financial crisis, often through acquisitions of foreign banks. We also find evidence that internal capital markets play a role in the lending activities of globally active Canadian banks during times of heightened liquidity risk.

Cette etude examine la maniere dont les banques gerent simultanement l’actif et le passif de leur bilan ainsi que les consequences de ce mode de gestion sur la prise de risque des banques et sur l’activite economique reelle. Notre analyse porte d’abord sur la maniere dont les changements dans le financement influent sur l’offre de prets bancaires.

We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank financial distress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of non-mortgage liabilities. This, however, does not result in lower levels of consumption. Households compensate by drawing down liquid assets to smooth consumption in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms' investment and employment decisions.

En octobre 2006, l’agence DBRS a modifie la notation des banques afin de tenir compte du soutien potentiel de l’Etat. Les modifications apportees ne traduisaient pas des changements de la qualite fondamentale du credit des institutions concernees.

Positive co-movements in bank leverage and assets are associated with leverage procyclicality. As wholesale funding allows banks to quickly adjust leverage, banks with wholesale funding are expected to exhibit higher leverage procyclicality. Using Canadian data, we analyze (i) if leverage procyclicality exists and its dependence on wholesale funding, (ii) market factors associated with this procyclicality, and (iii) if banking-sector leverage procyclicality forecasts market volatility. The findings suggest that procyclicality exists and that its degree positively depends on use of wholesale funding. Furthermore, funding-market liquidity matters for this procyclicality. Finally, banking-sector leverage procyclicality can forecast volatility in the equity market.

Bank of Canada working papers are theoretical or empirical works-in-progress on subjects in economics and finance. The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada. ii Acknowledgements We thank the Office of the Superintendent of Bankruptcy for their support. We thank Abstract We analyze the relationship between the intensity of banks' use of soft-information and household bankruptcy patterns. Using a unique data set on the universe of Canadian household bankruptcies, we document that bankruptcy rates are higher in markets where the collection of soft, or qualitative locally gathered information, is the weakest. Using two Canadian bank mergers as exogenous variation in local market structure, we show that the differences in bankruptcy rates are not due to changes in the supply of credit. Our findings indicate that screening via hard-information is not a perfect substitute for soft-information. Instead, the two appear to be complements. Résumé Les auteurs analysent la relation qu'il y a entre l'intensité avec laquelle les banques exploitent des données subjectives ou « informelles » et les tendances entourant les faillites de ménages. À partir d'un ensemble unique de données sur les faillites de ménages canadiens, ils confirment que les taux de faillite sont plus élevés dans les marchés où il se recueille le moins d'informations subjectives, c.-à-d. de renseignements qualitatifs obtenus par les succursales. En traitant deux fusions de banques canadiennes comme des facteurs de variation exogènes de la structure d'un marché local, les auteurs montrent que les différences entre les taux de faillite ne sont pas causées par des modifications de l'offre de crédit. Leurs résultats indiquent que les données objectives utilisées pour la sélection des emprunteurs ne constituent pas de substituts parfaits des données subjectives : en réalité, les deux types d'informations s'avèrent complémentaires.

With increasing levels of household debt in recent years, the number of households that may be vulnerable to a negative economic shock is rising as well. Decisions made by both the debtor and the creditor can contribute to insolvency. This article presents some stylized facts about insolvency in Canada’s household sector and analyzes the role of creditors in insolvencies. The average debt of an individual filing for bankruptcy is more than 1.5 times that of an average Canadian household; bankruptcy filers tend to be unemployed or in low-wage jobs, and are typically renters. The article reports that banks that approve more loans per branch, which is interpreted as less-intensive use of soft information (such as the loan officer’s assessment of the applicant’s character), experience more client bankruptcies. This finding has important policy implications, because financial institutions that do not use soft information risk further deterioration in their lending portfolios.

What makes households use internet banking? Bank adoption of internet banking technology has been widely considered, but relatively few papers address consumer usage of internet banking. This study looks at the determinants of internet banking usage among credit union members in the Western United States. We use call report data from the National Credit Union Administration to calculate the rate of internet banking usage among a credit union's members, which allows us to examine whether variations in institutional characteristics, local economic conditions and membership criteria have an impact on the internet usage rates among members of different credit unions. We find that members in credit unions that were early internet technology adopters have higher usage rates, and that the contribution to usage rates varies among types of online services offered.

Some evidence points to the procyclicality of leverage among financial institutions leading to aggregate volatility. This procyclicality occurs when financial institutions finance their assets with non-equity funding (i.e., debt financed asset expansions). Wholesale funding is an important source of market-based funding that allows some institutions to quickly adjust their leverage. As such, financial institutions that rely on wholesale funding are expected to have higher degrees of leverage procyclicality. Using high frequency balance sheet data for the universe of banks, this study tries to identify (i) if such a positive link exists between the assets and leverage in Canada, (ii) how wholesale funding plays a role for this link, and (iii) market and macroeconomic factors associated with this link. The findings of the empirical analysis suggest that a strong positive link exists between asset growth and leverage growth, and the use to wholesale funding is an important determinant of this relationship. Furthermore, liquidity of several short-term funding markets matters for procyclicality of leverage.