New Economics Papers
on Banking
Issue of 2006‒09‒03
five papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Financial Intermediation, Moral Hazard, And Pareto Inferior Trade By Hansen, Bodil Olai; Keiding, Hans
  2. Heterogeneity in lending and sectoral growth : evidence from German bank-level data By Buch, Claudia M.; Schertler, Andrea; von Westernhagen, Natalja
  3. Two-Sided Matching and Spread Determinants in the Loan Market By Jiawei Chen
  4. Quantifying Equilibrium Network Externalities in the ACH Banking Industry By Daniel A. Ackerberg; Gautam Gowrisankaran
  5. Optimal Debt Contracts when Credit Managers are (Perhaps) Corruptible By Ingela Alger

  1. By: Hansen, Bodil Olai (Department of Economics, Copenhagen Business School); Keiding, Hans (Department of Economics, Copenhagen Business School)
    Abstract: We consider a simple model of international trade under uncertainty, where production takes time and is subject to uncertainty. The riskiness of production depends on the choices of the producers, not observable to the general public, and these choices are influenced by the availability and cost of credit. If investment is financed by a bond market, then a situation may arise where otherwise identical countries end up with different levels of interest and different choices of technique, which again implies differences in achieved level of welfare. Under suitable conditions on the parameters of the model, the market may not be able to supply credits to one of the countries. The introduction of financial intermediaries with the ability to control the debtors may change this situation in a direction which is welfare improving (in a suitable sense) by increasing expected output in the country with high interest rates, while opening up for new problems of asymmetric information with respect to the monitoring activity of the banks.
    Keywords: Capital outflow; financial intermediaries; moral hazard
    JEL: D92 E44 F36
    Date: 2006–08–28
  2. By: Buch, Claudia M.; Schertler, Andrea; von Westernhagen, Natalja
    Abstract: This paper studies the sectoral and geographical dimensions of the response of bank lending to sectoral growth. We use several bank-level datasets provided by the Deutsche Bundesbank for the 1996-2002 period. Our results show that bank heterogeneity affects how lending responds to domestic sectoral growth. We document that banks’ total lending to German firms reacts procyclically to domestic sectoral growth, while lending exceeding a threshold of €1.5 million to German and foreign firms does not. Moreover, we find that the response of lending depends on bank characteristics such as the banking groups, the banks’ asset size, and the degree of sectoral portfolio concentration. We find that total domestic lending by savings banks and credit cooperatives (including their regional institutions), smaller banks, and banks whose portfolios are heavily concentrated in specific sectors responds positively and, in relevant cases, more strongly to domestic sectoral growth.
    Keywords: bank lending, heterogeneity, sectoral growth
    JEL: F3 G21
    Date: 2006
  3. By: Jiawei Chen (Department of Economics, University of California-Irvine)
    Abstract: Empirical work on bank loans typically regresses loan spreads (markups of loan interest rates over a benchmark rate) on observed characteristics of banks, firms, and loans. The estimation is problematic when some of these characteristics are only partially observed and the matching of banks and firms is endogenously determined because they prefer partners that have higher quality. We study the U.S. bank loan market with a two-sided matching model to control for the endogenous matching, and obtain Bayesian inference using a Gibbs sampling algorithm with data augmentation. We find evidence of positive assortative matching of sizes, explained by similar relationships between quality and size on both sides of the market. Banks' risk and firms' risk are important factors in their quality. Controlling for the endogenous matching has a strong impact on estimated coefficients in the loan spread equation.
    Keywords: Two-sided matching, Loan spread, Bayesian inference, Gibbs sampling with data augmentation
    JEL: C11 C78 G21 L11
    Date: 2006–08
  4. By: Daniel A. Ackerberg; Gautam Gowrisankaran
    Abstract: We seek to determine the causes and magnitudes of network externalities for the automated clearinghouse (ACH) electronic payments system. We construct an equilibrium model of customer and bank adoption of ACH. We structurally estimate the parameters of the model using an indirect inference procedure and panel data. The parameters are identified from exogenous variation in the adoption decisions of banks based outside the network and other factors. We find that most of the impediment to ACH adoption is from large customer fixed costs of adoption. Policies to provide moderate subsidies to customers and larger subsidies to banks for ACH adoption could increase welfare significantly.
    JEL: L0 L13 L86 L88
    Date: 2006–08
  5. By: Ingela Alger (Boston College)
    Abstract: The paper derives the optimal organizational response of a bank (the principal) which faces a risk of collusion between the credit manager (the agent) and the credit-seeking firms. The bank can deter collusion either through internal incentives or by distorting the credit contracts. The model thus explicitly takes into account the interaction between internal (collusion) risks and external (default) risks in the optimal design of the internal organization as well as of the credit contracts. We investigate this question in two settings. In the first one, we adopt the standard assumption that the agent is always willing to collude (is corruptible) if that increases his monetary payoff. In the second one, he is corruptible with some probability only, and honest otherwise. A novel feature of our approach is to allow for screening among corruptible and honest agents. We find that if the probability that the agent is honest is sufficiently large, collusion occurs in equilibrium.
    Date: 2006–08–26

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