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on Banking |
| By: | Sumru G. Altug; Murta Usman |
| Abstract: | We examine bank lending decisions in an economy with spillover effects in the creation of new investment opportunities and asymmetric information in credit markets. We examine pricesetting equilibria with horizontally differentiated banks. If bank lending takes place under a weak corporate governance mechanism and is fraught with agency problems and ineffective bank monitoring, then an equilibrium emerges in which loan supply is strategically restricted. In this equilibrium, the loan restriction, the “under-lending” strategy, provides an advantage to one bank by increasing its market share and sustaining monopoly interest rates. The bank’s incentives for doing so increase under conditions of increased volatility of lending capacities of banks, more severe borrower-side moral hazard, and lower returns on the investment projects. Although this equilibrium is not always unique, with poor bank monitoring and corporate governance, a more intense banking competition renders the bad equilibrium the unique outcome. |
| Keywords: | Bank lending, threshold effects, underlending equilibria, interest rate competition. |
| JEL: | E22 E62 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0608&r=ban |
| By: | Sophie Claeys (Department of Financial Economics and CERISE, Ghent University, W. Wilsonplein 5D, B-9000 Ghent, Belgium.); Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany.) |
| Abstract: | Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from 10 transition countries of Eastern Europe for the period 1995-2003. JEL Classification: G21, D4, L31. |
| Keywords: | Banking, Foreign Entry, Mode of Entry, Interest Rate, Asymmetric Information. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060653&r=ban |
| By: | Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jukka Vesala (Financial Supervision Authority of Finland (Fin-FSA), Snellmaninkatu 6, P.O. Box 159, FIN-00101 Helsinki, Finland.) |
| Abstract: | This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (“coexceedances”) as a function of variables measuring common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in the distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification. JEL Classification: G21, F36, G15. |
| Keywords: | Banking, Contagion, Distance to default, Multinomial logit model. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060662&r=ban |
| By: | Catherine Fuss (National Bank of Belgium, 14, bd de Berlaimont, 1000 Brussels, Belgium.); Philip Vermeulen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We test whether firms with a single bank are better shielded from loss of credit and investment cuts in periods of adverse cash flow shocks than firms with multiple bank relationships. Our estimates of the cash flow sensitivity of investment show that both types of firms are equally subject to financing constraints that bind only in the event of adverse cash flow shocks. In these periods, firms incur lower cuts in investment expenditures when they can obtain extra credit. In periods of adverse cash flow shocks, the probability of obtaining extra bank debt becomes more sensitive to the size and leverage of the firm. JEL Classification: D92. |
| Keywords: | Financial constraints, lending relationships, firm investment, firm financing. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060658&r=ban |
| By: | Demirguc-Kunt, Asli; Kane, Edward J.; Laeven, Luc |
| Abstract: | This paper illustrates the trends in deposit insurance adoption. It discusses the cross-country differences in design, and synthesizes the policy messages from cross-country empirical work as well as individual country experiences. The paper develops practical lessons from this work and distills the evidence into a set of principles of good design. Cross-country empirical research and individual-country experience confirm that, for at least the time being, officials in many countries would do well to delay the installation of a deposit insurance system. |
| Keywords: | Banks & Banking Reform,Financial Intermediation,Financial Crisis Management & Restructuring,Insurance & Risk Mitigation,Non Bank Financial Institutions |
| Date: | 2006–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3969&r=ban |