New Economics Papers
on Banking
Issue of 2006‒08‒05
twenty-two papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Are More Competitive Banking Systems More Stable? By Martin Cihák; Klaus Schaeck; Simon Wolfe
  2. Banks, markets, and efficiency By Fecht, Falko; Martin, Antoine
  3. Finance and growth in a bank-based economy: is it quantity or quality that matters? By Koetter, Michael; Wedow, Michael
  4. Foreign entry and bank competition By Rajdeep Sengupta
  5. Progress in China's Banking Sector Reform: Has Bank Behavior Changed? By Richard Podpiera
  6. Quantitative easing and Japanese bank equity values By Takeshi Kobayashi; Mark Spiegel; Nobuyoshi Yamori
  7. Cost Efficiency of Domestic and Foreign Banks in Thailand: Evidence from Panel Data By Chantapong, Saovanee; Menkhoff, Lukas
  8. Banks’ regulatory capital buffer and the business cycle: evidence for German savings and cooperative banks By Stolz, Stephanie; Wedow, Michael
  9. Do banks diversify loan portfolios? A tentative answer based on individual bank loan portfolios By Kamp, Andreas; Pfingsten, Andreas; Porath, Daniel
  10. Cyclical implications of minimum capital requirements By Heid, Frank
  11. Quality of Institutions, Credit Markets and Bankruptcy By Hainz, Christa
  12. Accounting for distress in bank mergers By Koetter, Michael; Bos, Jaap W. B.; Heid, Frank; Kool, Clemens J. M.; Kolari, James W.; Porath, Daniel
  13. Is One Watchdog Better Than Three? International Experience with Integrated Financial Sector Supervision By Richard Podpiera; Martin Cihák
  14. German bank lending to industrial and non-industrial countries: driven by fundamentals or different treatment? By Nestmann, Thorsten
  15. Robust non-parametric quantile estimation of efficiency and productivity change in U.S. commercial banking, 1985-2004 By David C. Wheelock; Paul Wilson
  16. Measuring business sector concentration by an infection model By Düllmann, Klaus
  17. Evaluating the German bank merger wave By Koetter, Michael
  18. The eurosystem money market auctions: a banking perspective By Bartzsch, Nikolaus; Craig, Ben; Fecht, Falko
  19. Financial integration and systemic risk By Fecht, Falko; Grüner, Hans Peter
  20. The Credit Risk Transfer Market and Stability Implications for U.K. Financial Institutions By Li L. Ong; Jorge A. Chan-Lau
  21. The supervisor’s portfolio: the market price risk of German banks from 2001 to 2003 – Analysis and models for risk aggregation By Memmel, Christoph; Wehn, Carsten
  22. Branching and Competitiveness across Regions in the Italian Banking Industry By V. CERASI - B. CHIZZOLINI - M. IVALDI

  1. By: Martin Cihák; Klaus Schaeck; Simon Wolfe
    Abstract: This paper provides the first empirical analysis of the cross-country relationship between a direct measure of competitive conduct of financial institutions and banking system fragility. Using the Panzar and Rosse H-Statistic as a measure for competition in 38 countries during 1980-2003, we present evidence that more competitive banking systems are less prone to systemic crises and that time to crisis is longer in a competitive environment. Our results hold when concentration and the regulatory environment are controlled for and are robust to different methodologies, different sampling periods, and alternative samples.
    Keywords: Banking systems , Bank regulations , Bank supervision , Financial crisis ,
    Date: 2006–06–14
  2. By: Fecht, Falko; Martin, Antoine
    Abstract: Following Diamond (1997) and Fecht (2004) we use a model in which financial market access of households restrains the efficiency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks. Since monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect. But this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. Thus our results suggest that in the bank-dominated financial system of Germany, in which banks intensely compete for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' financial market participation might be beneficial.
    Keywords: Financial Intermediaries, Risk Sharing, Banking Competition, Comparing Financial Systems
    JEL: E44 G10 G21
    Date: 2005
  3. By: Koetter, Michael; Wedow, Michael
    Abstract: With this paper we seek to contribute to the literature on the relation between finance and growth. We argue that most studies in the field fail to measure the quality of financial intermediation but rather resort to using proxies on the size of nancial systems. Moreover, cross-country comparisons suffer from the disadvantage that systematic differences between markedly different economies may drive the result that finance matters. To circumvent these two problems we examine the importance of the quality of banks' financial intermediation in the regions of one economy only: Germany. To approximate the quality of financial intermediation we use cost effciency estimates derived with stochastic frontier analysis. We find that the quantity of supplied credit is indeed insignificant when a measure of intermediation quality is included. In turn, the efficiency of intermediation is robust, also after excluding banks likely to operate in multiple regions and distinguishing between dierent banking pillars active in Germany.
    Keywords: Finance-growth nexus, financial intermediation, regional growth
    JEL: G21 G28 O4 R11
    Date: 2005
  4. By: Rajdeep Sengupta
    Abstract: Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large firms thereby neglecting small and medium enterprises. The results also explain why this observed "bias" is stronger in emerging markets.
    Keywords: Bank competition ; Credit control
    Date: 2006
  5. By: Richard Podpiera
    Abstract: Substantial effort has been devoted to reforming China's banking system in recent years. The authorities recapitalized three large state-owned banks, introduced new governance structures, and brought in foreign strategic investors. However, it remains unclear the extent to which currently reported data reflect the true credit risk in loan portfolios and whether lending decisions have started to be taken on a commercial basis. We examine lending growth, credit pricing, and regional patterns in lending from 1997 through 2004 to look for evidence of changing behavior of the large state-owned commercial banks (SCBs). We find that the SCBs have slowed down credit expansion, but that the pricing of credit risk remains undifferentiated and banks do not appear to take enterprise profitability into account when making lending decisions. Controlling for several factors, we find that large SCBs have continued to lose market share to other financial institutions in provinces with more profitable enterprises. The full impact of the most recent reforms will become clear only in several years, however, and these issues should be revisited in future research.
    Keywords: Banking systems , China , Credit risk , Bank supervision , Bank regulations ,
    Date: 2006–03–29
  6. By: Takeshi Kobayashi; Mark Spiegel; Nobuyoshi Yamori
    Abstract: One of the primary motivations offered by the Bank of Japan (BOJ) for its quantitative easing program -- whereby it maintained a current account balance target in excess of required reserves, effectively pegging short-term interest rates at zero -- was to maintain credit extension by the troubled Japanese financial sector. We conduct an event study concerning the anticipated impact of quantitative easing on the Japanese banking sector by examining the impact of the introduction and expansion of the policy on Japanese bank equity values. We find that excess returns of Japanese banks were greater when increases in the BOJ current account balance target were accompanied by “nonstandard” expansionary policies, such as raising the ceiling on BOJ purchases of longterm Japanese government bonds. We also provide cross-sectional evidence that suggests that the market perceived that the quantitative easing program would disproportionately benefit financially weaker Japanese banks.
    Keywords: Monetary policy - Japan ; Bank of Japan ; Banks and banking - Japan
    Date: 2006
  7. By: Chantapong, Saovanee; Menkhoff, Lukas
    Abstract: The paper estimates and compares cost efficiency of domestic and foreign banks in Thailand by using bank-panel data between 1995 and 2003. It also examines the effect of foreign bank entry on banking efficiency in Thailand since the significant acquisitions by foreign banks after the 1997 financial crisis. The widely used translog functional form specification is statistically tested by pooled regressions. The estimated results suggest that the unit costs of production of domestic and foreign banks are indistinguishable, although the two types of banks focus on different areas of the banking business. The findings suggest that based on bank operating efficiency, if foreign banks represent the best-practice banks in the industry, to a large extent, domestic banks in Thailand have caught up to the best-practice standards throughout 1995-2003, significantly after the 1997 financial crisis . This may be due to greater foreign participation through acquisitions, which increases the competitive pressure in the banking industry, and also to financial restructuring of domestic banks, which increases the cost efficiency of domestic banks, thereby benefiting banking customers.
    Keywords: Banks, Financial Policy, Capital and Ownership Structure, Cost Efficiency
    JEL: D24 G21 G32
    Date: 2005
  8. By: Stolz, Stephanie; Wedow, Michael
    Abstract: This paper analyzes the effect of the business cycle on the regulatory capital buffer of German savings and cooperative banks in the period 1993–2003. The capital buffer is found to fluctuate anticyclically over the business cycle. The fluctuation is stronger for savings banks than for cooperative banks, as, for savings banks, risk-weighted assets fluctuate more strongly with the business cycle. Further, low-capitalized banks do not catch up with their wellcapitalized peers. The gap between low-capitalized and well capitalized banks even widened over the observation period. Finally, low-capitalized banks do not decrease risk-weighted assets in a business cycle downturn by more than well-capitalized banks. This finding seems to imply that their low capitalization does not force them to retreat from lending.
    Keywords: Capital Regulation, Bank Capital, Business Cycle Fluctuations
    JEL: G21 G28
    Date: 2005
  9. By: Kamp, Andreas; Pfingsten, Andreas; Porath, Daniel
    Abstract: Theory of financial intermediation gives contradicting answers to the question whether banks should diversify or focus their loan portfolios. Our aim is to find out which of the two strategies is predominant in the German banking market. To this end we measure diversification for all German banks in the period from 1993 to 2002. As measures we use a broad set of heuristic approaches which capture the deviation of a bank's portfolio from a specified benchmark. Conceivable benchmarks are naive diversification across all industries or, alternatively, the economy's industry structure. With this framework our analysis comprises the widespread measures of concentration, like the Hirschman-Herfindahl index, but also the less known and in this context innovative group of distance measures. We find that different statistical measures of diversification may indicate contradicting results on the individual bank level. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only in the debate about diversification and focus, may be misleading. We further find that, despite these differences on the individual bank level, both approaches reveal that the majority of banks significantly increased loan portfolio diversification over the last decade. This tendency is especially driven by the large number of credit cooperatives and savings banks. However, some banks (especially regional banks and subsidiaries of foreign banks) reveal a strategy that seems to be more focused on certain industries.
    Keywords: bank lending, loan portfolio, portfolio theory, diversification, concentration measures, distance measures, focus
    JEL: C43 G11 G21
    Date: 2005
  10. By: Heid, Frank
    Abstract: Capital requirements play a key role in the supervision and regulation of banks. The Basel Committee on Banking Supervision is now changing the current framework by introducing risk-sensitive capital charges. There have been concerns that this will unduly increase volatility in the banks’ capital. Furthermore, when the credit supply is rationed, capital requirements may exacerbate an economic downturn. We examine the problem of cyclicality in a macroeconomic model which explicitly takes regulatory constraints into account. We find that the capital buffer which banks hold on top of the required minimum plays a crucial role in mitigating the volatility in capital requirements. Therefore, despite the fact that capital charges may vary significantly over time, the effects on the macroeconomy will be moderate.
    Keywords: minimum capital requirements, regulatory capital, economic capital, capital buffer, pro-cyclicality, business cycle, bank lending channel
    JEL: E32 E44 G21
    Date: 2005
  11. By: Hainz, Christa
    Abstract: The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank’s decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated.
    Keywords: Credit markets, institutions, bank competition, information sharing, bankruptcy, relationship banking
    JEL: D82 G21 G33 K10
    Date: 2005
  12. By: Koetter, Michael; Bos, Jaap W. B.; Heid, Frank; Kool, Clemens J. M.; Kolari, James W.; Porath, Daniel
    Abstract: The inability of most bank merger studies to control for hidden bailouts may lead to biased results. In this study, we employ a unique data set of approximately 1,000 mergers to analyze the determinants of bank mergers. We use data on the regulatory intervention history to distinguish between distressed and non-distressed mergers. We find that, among merging banks, distressed banks had the worst profiles and acquirers perform somewhat better than targets. However, both distressed and non-distressed mergers have worse CAMEL profiles than our control group. In fact, non-distressed mergers may be motivated by the desire to forestall serious future financial distress and prevent regulatory intervention.
    Keywords: Mergers, bailout, X-efficiency, multinomial logit
    JEL: G14 G21 G34
    Date: 2005
  13. By: Richard Podpiera; Martin Cihák
    Abstract: Over the past two decades, there has been a clear trend toward integrating the regulation and supervision of banks, nonbank financial institutions, and securities markets. This paper reviews the international experience with integrated supervision. We survey the theoretical arguments for and against the integrated supervisory model, and use data on compliance with international standards to assess the validity of some of these arguments. We find that (i) full integration is associated with higher quality of supervision in insurance and securities and greater consistency of supervision across sectors, after controlling for the level of development; and (ii) fully integrated supervision is not associated with a significant reduction in supervisory staff.
    Keywords: Financial sector , Bank regulations , Bank supervision , Insurance regulations , Insurance supervision , Securities regulations ,
    Date: 2006–03–15
  14. By: Nestmann, Thorsten
    Abstract: This paper shows that the substantial disparity in German bank lending towards industrial (IC) and non-industrial (Non-IC) countries is largely explained by differences in countries’ endowments and only to a minor extent by German banks’ different treatment of these country groups. This is demonstrated by applying a decomposition technique to an augmented gravity model that is estimated for German foreign lending using a new micro panel data-set on individual claims from the Deutsche Bundesbank covering the period from 1996 to 2002.
    Keywords: German bank lending, gravity models, Oaxaca decompositio alysis
    JEL: F30 F34 G21
    Date: 2005
  15. By: David C. Wheelock; Paul Wilson
    Abstract: This paper describes a non-parametric, unconditional quantile estimator that unlike traditional non-parametric frontier estimators is both robust to data outliers and has a root-n convergence rate. We use this estimator to examine changes in the efficiency and productivity of U.S. banks between 1985 and 2004. We find that larger banks experienced larger efficiency and productivity gains than small banks, consistent with the presumption that recent changes in regulation and information technology have favored larger banks.
    Keywords: Production (Economic theory) ; Banks and banking
    Date: 2006
  16. By: Düllmann, Klaus
    Abstract: Results from portfolio models for credit risk tell us that loan concentration in certain industry sectors can substantially increase the value-at-risk (VaR). The purpose of this paper is to analyze whether a tractable “infection model” can provide a meaningful estimate of the impact of concentration risk on the VaR. I apply rather parsimonious data requirements, which are comparable to those for Moody’s Binomial Expansion Technique (BET) and considerably lower than for a multi-factor model. The infection model extends the BET model by introducing default infection into the hypothetical portfolio on which the real portfolio is mapped in order to obtain a simple solution for the VaR. The infection probability is calibrated for a range of typical values of input parameters, which capture the concentration of a portfolio in industry sectors, default dependencies between exposures and their credit quality. The accuracy of the new model is measured for test portfolios with a realistic industry-sector composition, obtained from the German central credit register. I find that a carefully calibrated infection model provides a reasonably close approximation to the VaR obtained from a multi-factor model and outperforms by far the BET model. The simulation results suggest that the calibrated infection model promises to provide a fit-for-purpose tool to measure concentration risk in business sectors that could be useful for risk managers and banking supervisors alike.
    Keywords: asset correlation, concentration risk, credit risk, multi-factor model, value-at-risk
    JEL: C15 C20 G21
    Date: 2005
  17. By: Koetter, Michael
    Abstract: German banks experienced a merger wave throughout the 1990s. However, the success of bank mergers remains a continuous matter of debate. In this paper we suggest a taxonomy as how to evaluate post-merger performance on the basis of cost efficiency (CE). We categorise mergers a success that fulfill simultaneously two criteria. First, merged institutes must exhibit CE levels above the average of non-merging banks. Second, banks must exhibit CE changes between merger and evaluation year above efficiency changes of non-merging banks. We employ this taxonomy to characterise (successful) mergers in terms of various key-performance and structural indicators and investigate the implications for three important policy issues. Our main conclusions are twofold. First, approximately every second merger is a success. Second, the margin of success is narrow, as the CE differential between merging and non-merging banks is one percentage point.
    Keywords: Banks mergers, regulation, distress, cost efficiency, Germany
    JEL: G21 G28 G33 G34 L44
    Date: 2005
  18. By: Bartzsch, Nikolaus; Craig, Ben; Fecht, Falko
    Abstract: This paper analyzes the individual bidding behaviour of German banks in the money market auctions conducted by the ECB from the beginning of the third quarter of 2000 to the end of the first quarter of 2001. Our approach takes a variety of characteristics of the individual banks into account. In particular, we consider variable that capture the different use of liquidity and the different attitude towards liquidity risk of the individual banks. It turns out that these characteristics are reflected in the banks' respective bidding behaviour to a large extent. Thus our study contributes to a deeper understanding of the way liquidity risk is managed in the banking sctor.
    Keywords: Money Market Auctions, Liquidity Management, Interbank Market
    JEL: E51 G21
    Date: 2005
  19. By: Fecht, Falko; Grüner, Hans Peter
    Abstract: Recent empirical studies criticize the sluggish financial integration in the euro area and find that only interbank money markets are fully integrated so far. This paper studies the optimal regional and/or sectoral integration of financial systems given that integration is restricted to the interbank market. Based on Allen and Gale (2000)’s seminal analysis of financial contagion we derive the interbank market structure that maximizes consumers’ ex-ante expected utility, i.e. that optimizes the trade-off between the contagion and the diversification effect. We analyze the impact of various structural parameters including the underlying stochastic structure on this trade-off. In addition we derive the efficient design of the interbank market that allows for a cross-regional risk sharing between banks. We also provide a measure for the efficiency losses that result if financial integration is limited to an integration of the interbank market.
    Keywords: Interbank Market, Risk Sharing, Financial Co ion, Financial Integration
    JEL: D61 E44 G10 G21
    Date: 2005
  20. By: Li L. Ong; Jorge A. Chan-Lau
    Abstract: The increasing ability to trade credit risk in financial markets has facilitated its dispersion across the financial and other sectors. However, specific risks attached to credit risk transfer (CRT) instruments in a market with still-limited liquidity means that its rapid expansion may actually pose problems for financial sector stability in the event of a major negative shock to credit markets. This paper attempts to quantify the exposure of major U.K. financial groups to credit derivatives, by applying a vector autoregression (VAR) model to publicly available market prices. Our results indicate that use of credit derivatives does not pose a substantial threat to financial sector stability in the United Kingdom. Exposures across major financial institutions appear sufficiently diversified to limit the impact of any shock to the market, while major insurance companies are largely exposed to the "safer" senior tranches.
    Keywords: Credit risk , United Kingdom , Capital markets , Financial stability ,
    Date: 2006–06–12
  21. By: Memmel, Christoph; Wehn, Carsten
    Abstract: The Value at Risk of a portfolio differs from the sum of the Values at Risk of the portfolio’s components. In this paper, we analyze the problem of how a single economic risk figure for the Value at Risk of a hypothetical portfolio composed of different commercial banks might be obtained for a supervisor. Using the daily profits and losses and the daily Value at Risk figures of twelve German banks for the period from 2001 to 2003, we estimate the Value at Risk of the entire portfolio. We assume a reduced-form model and neglect the effects of a potential bankruptcy of one of the banks. We analyze different models for the cross-correlation of the banks’ profits and losses. In an empirical study, we apply backtesting methods to determine which aggregation model leads to the best out-of-sample estimates for the portfolio’s economic risk figure. Our main findings can be summarized in three statements. (i) The portfolio’s Value at Risk can be estimated from time series data very well. (ii) During ‘normal’ times, the portfolio’s Value at Risk is much lower than the sum of the single Values at Risk. (iii) The relative marginal risk contribution depends on the bank in question and is between 0.05 and 0.62.
    Keywords: Value at Risk, portfolio, cross-correlation, market risk regulation, risk forecast, model validation
    JEL: C52 G11 G21 G28
    Date: 2005

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