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on Banking |
| By: | Ursel Baumann; Glenn Hoggarth; Darren Pain |
| Abstract: | This paper investigates the extent to which changes in the quantity and cost of non-bank finance impact on the quantity and interest cost of UK-owned banks' corporate lending. The results give some support to the view that there is substitution between market finance and bank loans - loan growth rises (falls) during periods when corporate bond spreads widen (decline). In particular, bank loans seem to substitute for other forms of finance in some periods of market stress such as in 1998 Q3. Moreover, this increase in credit seems to be supplied on unchanged terms, perhaps suggesting that banks passively accommodate changes in corporate loan demand. During other episodes of disturbances in non-bank finance, such as when bond or commercial paper issuance falls sharply, banks appear to increase their loan rates, perhaps reflecting greater perceived borrower risk or some reduction in banks' own risk appetite. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:274&r=ban |
| By: | Lea Zicchino |
| Abstract: | The revised framework for capital regulation of internationally active banks (known as Basel II) introduces risk-based capital requirements. This paper analyses the relationship between bank capital, lending and macroeconomic activity under the new capital adequacy regime. It extends a model of the bank-capital channel of monetary policy - developed by Chami and Cosimano - by introducing capital constraints . la Basel II. The results suggest that bank capital is likely to be less variable under the new capital adequacy regime than under the current one, which is characterised by invariant asset risk-weights. However, bank lending is likely to be more responsive to macroeconomic shocks. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:270&r=ban |
| By: | Mark J Manning; Matthew Willison |
| Abstract: | Banks often rely on collateralised intraday liquidity from the central bank in order to be able to effect payments in a real-time gross settlement (RTGS) payment system. If a bank is holding insufficient eligible collateral in a particular country, and therefore cannot obtain credit from the local central bank, it may have to delay payments. This constitutes a liquidity risk to the system. Furthermore, a bank operating in multiple systems may face a mismatch between the location of its collateral holdings and liquidity needs. In this paper, we examine the extent to which the liquidity risk arising from such a mismatch may be mitigated by allowing cross-border use of collateral. We develop a two-country, two-bank model in which risk-neutral banks minimise expected costs with respect to their collateral choice in each country. In our baseline model, in which each bank faces a liquidity need in only one country, we find that liquidity risk is indeed reduced by cross-border use of collateral. This result holds despite the fact that banks may find it optimal to economise on their total holdings of collateral. However, when we extend the model to allow for the possibility that a bank faces liquidity needs in both countries simultaneously, the total quantum of collateral held is important. Indeed, when a bank finds it optimal to reduce its total holdings, there may be an increase in liquidity risk in at least one country when simultaneous liquidity demands are realised. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:286&r=ban |
| By: | Jason Allen; Walter Engert; Ying Liu |
| Abstract: | The authors compare the efficiency of Canada's largest banks with U.S. commercial banks over the past 20 years. Efficiency is measured in three ways. First, the authors study key performance ratios, and find that Canadian banks are as productive as U.S. banks. Second, they investigate whether there are economies of scale in the production functions of Canadian banks and broadly comparable U.S. bank-holding companies (BHCs). They find larger economies of scale for Canadian banks than for the U.S. BHCs, which suggests that Canadian banks are less efficient in terms of scale, and have more to gain in terms of efficiency benefits from becoming larger. Third, the authors measure cost-inefficiency in Canadian banks and in U.S. BHCs relative to the domestic efficient frontier in each country (the domestic best-practice institution). They find that Canadian banks are closer to the domestic efficient frontier than are the U.S. BHCs. Canadian banks have also moved closer to the domestic efficient frontier than have the U.S. BHCs over time. Finally, the authors examine the dispersion in cost-inefficiency found in Canadian banks and attribute some of the dispersion to differences in information and communication technology investment. Comparisons are made with the U.S. BHC experience. |
| Keywords: | Financial institutions |
| JEL: | G21 D24 C33 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-33&r=ban |
| By: | Bjørn-Andersen, Niels (Department of Informatics, Copenhagen Business School) |
| Abstract: | Danish banks have traditionally been in the absolute forefront globally as regards the automation and introduction of IT since the mid 60’ies. But when the e-commerce opportunities emerged in the late 90’ies, the majority of the Danish banks resisted the development. They saw no reason to be the prime movers in cannibalising their own key competitive advantage, the 2.500+ retail-outlets (branches) placed on all the best locations on corners of the shopping streets1. However, once pure Internet banks were introduced in 1998 - 2000, all major banks (and the computing centres servicing the smaller banks) launched massive initiatives to bring the brick-and-mortar banks back into the driver seat using Internet banking. At the end of 2003 more than 30% of all Danish bank customers are using Internet. This development in the banking industry is illustrated using two cases. The first is one of the most ambitious attempts at creating a Nordic based large international financial service company, capable of spearheading the transition to the digital economy - the case of Nordea. This bank is in the midst of various transformation processes across the organisation due to several years of multiple cross boarder mergers and acquisitions, new composition of the group executive management, increasing thrives towards automation of business processes to reduce costs, and different innovations involving a change of the roles of value network partners. The other case is Lån & Spar Bank, which is one of the smaller Danish banks, who have its basic IT services done at a joint computing centre owned with many other smaller banks, but have its own IT development for strategic purposed done in-house in close collaboration with the business units. This bank has been in the forefornt in adopting new IT-solutions. This report consists of an analysis of the background for the development of the Danish banking sectors, the key processes in the Danish banking industry, the environmental and policy actors influencing the development, the e-commerce readiness in the Danish banking sector, the diffusion of e-commerce, and finally the impact on efficiency, industry structure and competition. The main results are that there are more Danish financial institutions having Internet technologies and Internet applications than in the other nine countries in the GEC survey. Furthermore, we suspect that they have had it for a longer period on average than found elsewhere in the sample. However, when we compare the figures in the GEC-survey on the ‘ Use of Internet for the different business processes’, and ‘On-line support’, the number of Danish financial institutions having Internet applications is not higher than in the other countries. |
| Keywords: | None |
| JEL: | O30 |
| Date: | 2006–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cbsinf:2004_004&r=ban |
| By: | Misa Tanaka |
| Abstract: | This paper develops a model to analyse the optimal choice between bank loans and bond finance for a sovereign debtor. We show that if banks have better information about their borrowers compared to bondholders, only the least risky sovereigns issue bonds. But if borrowers can be 'publicly monitored' by an outside agency that disseminates the information about their creditworthiness, their choice between bank loans and bond finance is determined endogenously by the trade-off between two deadweight costs: the crisis cost of a sovereign default and the cost of debtor moral hazard. In equilibrium, sovereigns use bank loans for financing short-term projects and bond issuance for projects with uncertain timing of cash flows if crisis costs are large. We also demonstrate that state-contingent debt and IMF intervention can improve welfare. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:267&r=ban |
| By: | Misa Tanaka; Glenn Hoggarth |
| Abstract: | This paper develops a dynamic model to examine the ex-ante and ex-post implications of five policy options for resolving bank failures when the authorities cannot observe the level of non-performing loans (NPLs) held by individual banks. Under asymmetric information, we show that the first-best outcome is achievable when the authorities can close all banks that fail to raise a minimum level of new capital. But when the authorities cannot close banks and must rely on financial incentives to induce banks to liquidate their NPLs, recapitalisation using equity (Tier 1 capital) would be the second-best policy, whereas recapitalisation using subordinated debt (Tier 2 capital) is suboptimal. If the authorities do not wish to hold an equity stake in a bank, they should subsidise the liquidation of non-performing loans rather than inject subordinated debt. We also show that the cost of this subsidy can be reduced if it is offered in a menu that includes equity injection. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:293&r=ban |
| By: | Glenn Hoggarth; Steffen Sorensen; Lea Zicchino |
| Abstract: | This paper adopts a new approach to stress testing the UK banking system. We attempt to account for the dynamics between banks' write-offs and key macroeconomic variables, through conditioning our stress test on the historical correlation between the variables and allowing for feedback effects from credit risk to the macroeconomy. In contrast to most existing empirical stress testing work, this paper uses a direct measure of banks' fragility - the write-off to loan ratio. We find that both UK banks' total and corporate write-offs are significantly related to deviations of output from potential. Following an adverse output shock, total and corporate write-off ratios increase. Mortgage arrears, on the other hand, appear to be mainly dependent on household income gearing. The results suggest that, even if the most extreme economic stress conditions witnessed over the past two decades were repeated, the UK banking sector should remain robust. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:282&r=ban |
| By: | Fulgencio López Martínez (Caja de Ahorros del Mediterráneo); José Yagüe (Universidad de Murcia); Pedro Martínez Solano (Universidad de Murcia) |
| Abstract: | This paper examines the reaction of the Spanish continuous market to the announcement of securitisation operations by listed banks in the period 1993-2003. Results indicate the existence of positive and significant abnormal returns on the day immediately following the announcement date. The average cumulative abnormal returns over windows of varying lengths around the announcement date are also positive and significant. The market’s reaction is stronger when the bank has a higher proportion of equity in its capital structure and is less profitable. Este trabajo examina la reacción del mercado continuo español ante el anuncio de emisiones de titulización realizadas por bancos cotizados en el período 1993-2003. Los resultados obtenidos indican la existencia de rentabilidades anormales positivas y significativas en el día inmediatamente posterior al de la Comunicación Previa a la CNMV. También resultan ser positivos y significativos los promedios de las rentabilidades anormales acumuladas en varios intervalos de días en torno a la fecha de anuncio. La reacción del mercado es mayor ante anuncios realizados por bancos con un mayor peso de los recursos propios en su pasivo y menos rentables. |
| Keywords: | Titulización, banca, rentabilidad, eficiencia, estudio de eventos Securitisation, banking, profitability, efficiency, event study |
| JEL: | G14 G21 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasec:2006-10&r=ban |
| By: | David Aikman; Matthias Paustian |
| Abstract: | We study a general equilibrium model in which informational frictions impede entrepreneurs' ability to borrow and banks' ability to intermediate funds. These financial market frictions are embedded in an otherwise-standard dynamic New Keynesian model. We find that exogenous shocks have an amplified and more persistent effect on output and investment, relative to the case of perfect capital markets. The chief contribution of the paper is to analyse how these financial sector imperfections - in particular, those relating to the banking sector - modify our understanding of optimal monetary policy. Our main finding is that optimal monetary policy tolerates only a very small amount of inflation volatility. Given that similar results have been reported for models that abstract from banks, we conclude that assigning a non-trivial role for banks need not materially affect the properties of optimal monetary policy. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:305&r=ban |
| By: | Stephen Millard; Matthew Willison |
| Abstract: | The Bank of England's second core purpose is to maintain the stability of the financial system. Payment systems, by supporting transactions, are a key aspect of this. In this paper, we examine the importance of smoothly functioning payment systems to the economy by extending a recently developed theoretical model of banks. In the model the risk of theft implies a cost to using cash. This risk can be avoided by depositing cash in banks and transferring money through an interbank payment system. However, agents are then exposed to the risk that the payment system is unreliable. Agents will use a payment system (rather than cash) to make transactions if the system is sufficiently cheap to use and/or it is sufficiently reliable. We show that the introduction of a payment system that buyers and producers choose to use unambiguously increases social welfare if it expands the number of trades occurring in the economy. This is more likely the more reliable is the payment system. When the introduction of a payment system does not increase the number of trades, social welfare may increase or decrease depending on the trade-off between the risk of using cash and the risk that the payment system is unreliable. We again show that the more reliable is the payment system, the more likely welfare is increased by its introduction and we illustrate how this benefit might be quantified. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:301&r=ban |
| By: | Rivaud-Danset, Dorothée; Oheix, Valérie |
| Abstract: | This paper provides a quantitative comparison of the financial patterns of non-financial European firms for seven Continental European countries and the period 1991-2001. Our analytical framework departs from the common one as we consider that long-term and short-term sources of funds have to be analysed separately. Using the BACH database, principal component analysis, cluster analysis and econometrical tests are carried out in order to test for two hypotheses : i) there is a tendency toward grouping around a common corporate financial pattern; ii) there is a general tendency across countries toward less bank financing. We find that differences between European countries remain highly significant so that the first hypothesis is not validated. The second hypothesis is rejected with the long-term intermediation ratio but validated with the short-term one. Indeed, econometrical tests lead to a strong conclusion : the existence of a common trend toward disintermediation of short-term financing. The banking function of allocating liquidity for day-to-day business and providing a certain liquidity insurance to firms is declining whatever the size of firms. |
| Keywords: | corporate financial structure; BACH database; European convergence; financial intermediation; liquidity insurance. |
| JEL: | G32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40&r=ban |
| By: | Schwarzbauer, Wolfgang (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria) |
| Abstract: | So far studies concerned with the interest pass-through of monetary policy have not taken into account one central issue that arose in Europe in the late 1990s: the importance of financial structure for the convergence of monetary transmission. This study addresses this shortcoming. We estimate a time varying interest pass-through allowing us to test for the importance of financial structure and its impact on the convergence of the effects of monetary policy. We find convergence in banks' reaction to money market movements, which is additionally reduced in groups of countries with similar financial structure. Furthermore, there is a significant impact of financial structure on the extent of transmission of monetary policy impulses within the same month. Thus, differences in financial structure between countries must not be ignored when considering convergence of monetary transmission in Europe. |
| Keywords: | Convergence, Interest rate pass-through, EMU, Financial structure, Money and bank interest rates, Transmission mechanism |
| JEL: | E43 G21 E52 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:191&r=ban |
| By: | Carol C. Bertaut (Board of Governors of the Federal Reserve System); Michael Haliassos (University of Frankfurt and CFS) |
| Abstract: | We use data from several waves of the Survey of Consumer Finances to document credit and debit card ownership and use across US demographic groups. We then present recent theoretical and empirical contributions to the study of credit and debit card behavior. Utilization rates of credit lines and portfolios of card holders present several puzzles. Credit line increases initiated by banks lead households to restore previous utilization rates. High-interest credit card debt co-exists with substantial holdings of low-interest liquid assets and with accumulation of retirement assets. Although available evidence disputes ignorance of credit card terms by card holders, credit card rates do not respond to competition. There is a rising trend in bankruptcy and delinquency, partly attributable to an increased tendency of households to declare bankruptcy associated with reduced social stigma, ease of procedures, and financial incentives. Co-existence of credit card debt with retirement assets can be explained through self-control hyperbolic discounting. Strategic default motives contribute partly to observed co-existence of credit card debt with low-interest liquid assets. A framework of “accountant-shopper” households, in which a rational accountant tries to control an impulsive shopper, seems consistent with both types of co-existence and with observed utilization of credit lines. |
| Keywords: | Credit Cards, Debit Cards, Revolving Debt, Consumer Credit, Portfolios |
| JEL: | G11 E21 |
| Date: | 2006–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp2000619&r=ban |