New Economics Papers
on Banking
Issue of 2006‒10‒14
sixteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Banks, Relative Performance, and Sequential Contagion By Sudipto Bhattacharya; Charles A. E. Goodhart; Pojanart Sunirand; Dimitrios P. Tsomocos
  2. Bank-specific, industry-specific and macroeconomic determinants of bank profitability By Athanasoglou, P.; Brissimis, S.; Delis, M.
  3. Technology and Customer Value Dynamics in Banking Industry: Measuring Symbiotic Influence in Growth and Performance By Rajagopal
  4. Misspecifiation of the Panzar-Rosse Model: Assessing Competition in the Banking Industry By Jacob Bikker; Laura Spierdijk; Paul Finnie
  5. Review of Huerta de Soto´s `Money, Bank Credit, and Economic Cycles´ By van den Hauwe, Ludwig
  6. On the market discipline of informationally opaque firms: evidence from bank borrowers in the federal funds market By Adam Ashcraft; Hoyt Bleakley
  7. Bank efficiency, ownership, and market structure : why are interest spreads so high in Uganda ? By Beck, Thorsten; Hesse, Heiko
  8. The impact of bank and non-bank financial institutions on local economic growth in China By Cheng,Xiaoqiang; Degryse,Hans
  9. Congestion and cascades in payment systems By Walter E. Beyeler; Robert J. Glass; Morten L. Bech; Kimmo Soramaki
  10. Banking sector openness and economic growth By Bayraktar, Nihal; Wang, Yan
  11. Bank Behavior and the Cost Channel of Monetary Transmission By Oliver Hülsewig; Eric Mayer; Timo Wollmershäuser
  12. The Uneasy Case for Fractional-Reserve Free Banking By van den Hauwe, Ludwig
  13. Monetary Transmission and Bank Lending in Portugal: A Sectoral Approach By José Alberto Fuinhas
  14. La cohérence dans la mobilisation du capital humain:une illustration de la théorie de l’architecture organisationnelle dans les banques de réseau By Christine Marsal
  15. Mesure de la performance des agences bancaires par une approche DEA By Aude Hubrecht; Michel Dietsch; Fabienne Guerra
  16. Financial Services In The Colombia-U.S. Free Trade Agreement By María Angélica Arbeláez Restrepo; Andrés Flórez; Natalia Salazar Ferro

  1. By: Sudipto Bhattacharya; Charles A. E. Goodhart; Pojanart Sunirand; Dimitrios P. Tsomocos
    Abstract: We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to under-diversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of the other in a sequential manner. Lack of (full) diversification among credit risks arises in our model owing to a relative profit argument in each banker's utility function, which is otherwise risk- and default-averse. We examine its implications for the welfare of depositors and debtors.
    Date: 2006
  2. By: Athanasoglou, P.; Brissimis, S.; Delis, M.
    Abstract: The aim of this study is to examine the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis. To account for profit persistence, we apply a GMM technique to a panel of Greek banks that covers the period 1985-2001. The estimation results show that profitability persists to a moderate extent, indicating that departures from perfectly competitive market structures may not be that large. All bank-specific determinants, with the exception of size, affect bank profitability significantly in the anticipated way. However, no evidence is found in support of the SCP hypothesis. Finally, the business cycle has a positive, albeit asymmetric effect on bank profitability, being significant only in the upper phase of the cycle.
    JEL: G21 C23 L20
    Date: 2005
  3. By: Rajagopal (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: This paper attempts to critically examine the available literature on the subject, discuss a model that provides a framework for analyzing the variables associated with customer value, and to identify potential research areas. The paper argues through a set of linear equations that maximizing customer value which is interdependent factor for technology adoption and profit optimization in the banks need to be backed with appropriate economic parameters for attaining competitive efficiency and optimizing profit. The framework of the construct is laid on the theory of competitive advantage and customer lifetime value, so as to maximize the potential of the organization and all its subsystems to create and sustain satisfied customers. The paper draws theoretical impetus from new technologies in banking services such as mobile banking in the North American region and discusses the technology led marketing process towards optimizing profit. The discussion in the paper also analyzes the main criteria for successful internet-banking strategy and brings out benefits of e-banking from the point of view of banks, their technology and customer values and tentatively concludes that there is increasing returns to scale in the bank services in relation to the banking products, new technology and customer value.
    Keywords: Banking technology, customer value, profit optimization, diffusion and adoption process
    JEL: C21 C51 D21 D91 G21 O14 O33
    Date: 2006–08
  4. By: Jacob Bikker; Laura Spierdijk; Paul Finnie
    Abstract: This paper demonstrates that the level of competition in the existing Panzar Rosse (P-R) literature is systematically overestimated and that the tests on both monopoly and perfect competition are distorted. This is due to the use of bank revenues divided by total assets as dependent variable in the P-R model instead of unscaled bank revenues. We provide both theoretical and empirical evidence to illustrate the impact of the misspecification on the estimation of competition and the statistical tests on the market structure. Inclusion of scale variables as explanatory variables, which is commonpractice in the current literature, has a similar distorting effect. Our overview of the extensive P-R literature reveals that all 28 studies considered suffer from these types of misspecification. The empirical evidence provided in this paper is based on a large sample of more than 18,000 banks in 101 countries over 16 years. We find that monopoly cannot be rejected in 28% of the countries (against 0% under misspecification) and that perfect competition cannot be rejected in 38% of the cases (against 20-30% under misspecification).
    Keywords: competition; banking industry; Panzar-Rosse model; misspecification; market structure
    JEL: C52 G21 L11 L13
    Date: 2006–09
  5. By: van den Hauwe, Ludwig
    Abstract: This article reviews the first English edition of Prof. Jesús Huerta de Soto´s book `Dinero, Crédito Bancario y Ciclos Económicos´ which first appeared in Spain in 1998.
    Keywords: Business Cycle Theory; Law and Economics of Money and Banking; Austrian school; new institutional economics; financial markets; history of money; credit and banking; deregulation of financial institutions; economics of transition
    JEL: E32 B53 P34 N23 G18 N24 E5 K39 E00 E42 G0 K0 P3 N2 H11
    Date: 2006–10–02
  6. By: Adam Ashcraft; Hoyt Bleakley
    Abstract: Using plausibly exogenous variation in demand for federal funds created by daily shocks to reserve balances, we identify the supply curve facing a bank borrower in the interbank market and study how access to overnight credit is affected by changes in public and private measures of borrower creditworthiness. Although there is evidence that lenders respond to adverse changes in public information about credit quality by restricting access to the market in a fashion consistent with market discipline, there is also evidence that borrowers respond to adverse changes in private information about credit quality by increasing leverage so as to offset the future impact on earnings. While the responsiveness of investors to public information is comforting, we document evidence that suggests that banks are able to manage the real information content of these disclosures. In particular, public measures of loan portfolio performance have information about future loan charge-offs, but only in quarters when the bank is examined by supervisors. However, the loan supply curve is not any more sensitive to public disclosures about nonperforming loans in an exam quarter, suggesting that investors are unaware of this information management.
    Keywords: Federal funds market (United States) ; Bank loans ; Credit
    Date: 2006
  7. By: Beck, Thorsten; Hesse, Heiko
    Abstract: Using a unique bank-level data set on the Ugandan banking system during 1999-2005, the authors explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, they do not find a robust and economically significant relationship between privatization, foreign bank entry, market structure, and banking efficiency. Similarly, macroeconomic variables can explain little of the over-time variation in bank spreads. Bank-level characteristics, on the other hand, such as bank size, operating costs, and composition of loan portfolio explain a large proportion of cross-bank, cross-time variation in spreads and margins. However, time-invariant bank-level fixed effects explain the largest part of bank variation in spreads and margins. Further, the authors find tentative evidence that banks targeting the low end of the market incur higher costs and therefore higher margins.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Investment and Investment Climate,Financial Crisis Management & Restructuring,Financial Intermediation
    Date: 2006–10–01
  8. By: Cheng,Xiaoqiang; Degryse,Hans (Tilburg University, Center for Economic Research)
    Abstract: This paper provides evidence on the relationship between finance and growth in a fast growing country, such as China. Employing data of 27 Chinese provinces over the period 1995-2003, we study whether the financial development of two different types of institutions - banks and non-bank financial institutions - have a (significantly different) impact on local economic growth. Our findings indicate that only banking development shows a statistically significant and economically relevant impact on local economic growth.
    Keywords: growth;financial development;Chinese provinces;banks
    JEL: E44 G21
    Date: 2006
  9. By: Walter E. Beyeler; Robert J. Glass; Morten L. Bech; Kimmo Soramaki
    Abstract: We develop a parsimonious model of the interbank payment system to study congestion and the role of liquidity markets in alleviating congestion. The model incorporates an endogenous instruction arrival process, scale-free topology of payments between banks, fixed total liquidity that limits banks' capacity to process arriving instructions, and a global market that distributes liquidity. We find that at low liquidity, the system becomes congested and payment settlement loses correlation with payment instruction arrival, becoming coupled across the network. The onset of congestion is evidently related to the relative values of three characteristic times: the time for banks' net position to return to zero, the time for banks to exhaust their liquidity endowments, and the liquidity market relaxation time. In the congested regime, settlement takes place in cascades having a characteristic size. A global liquidity market substantially diminishes congestion, requiring only a small fraction of the payment-induced liquidity flow to achieve strong beneficial effects.
    Keywords: Payment systems ; Bank liquidity ; International liquidity
    Date: 2006
  10. By: Bayraktar, Nihal; Wang, Yan
    Abstract: Banking sector openness may directly affect growth by improving the access to financial services and indirectly by improving the efficiency of financial intermediaries, both of which reduce the cost of financing, and in turn, stimulate capital accumulation and economic growth. The objective of the paper is to empirically reinvestigate these direct and indirect links using a more advanced econometric technique (GMM dynamic panel estimators). An illustrative model is presented to link financial market development with investment. The empirical results confirm the presence of direct and indirect links, and thus provide support for countries planning to open their banking sector for international competition.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Financial Intermediation,Pro-Poor Growth and Inequality,Financial Crisis Management & Restructuring
    Date: 2006–10–01
  11. By: Oliver Hülsewig; Eric Mayer; Timo Wollmershäuser
    Abstract: This paper presents a New Keynesian model that dwells on the role of banks in the cost channel of monetary policy. Banks extend loans to firms in an environment of monopolistic competition by setting the loan rate according to a Calvo-type staggered price setting approach, which means that the adjustment of the aggregate loan rate to a monetary policy shock is sticky. We estimate the model for the Euro area by adopting a minimum distance approach. Our findings exhibit that, first, frictions on the loan market influence the propagation of monetary policy shocks as the pass-through of a change in the money market rate to the loan rate is incomplete, and, second, the cost channel is operating, but the effect is weak since inflation is driven by real unit labor costs rather than the loan rate. Our main conclusion is that the strength of the cost channel is mitigated as banks shelter firms from monetary policy shocks by smoothing lending rates.
    Keywords: bank behavior, cost channel, minimum distance estimation
    JEL: E44 E52 E58
    Date: 2006
  12. By: van den Hauwe, Ludwig
    Abstract: Since a few decades several sub-disciplines within economics have witnessed a reorientation towards institutional analysis. This development has in particular also affected the fields of macroeconomics and monetary theory where it has led to several proposals for far-reaching financial and monetary reform. One of the more successful of these proposals advocates a fractional-reserve free banking system, that is, a system with no central bank, but with permission for the banks to operate with a fractional reserve. This article exposes several conceptual flaws in this proposal. In particular several claims of the fractional-reserve free bankers with respect to the purported working characteristics of this system are criticized from the perspective of economic theory. In particular, the claim that a fractional-reserve free banking system would lead to the disappearance of the business cycle is recognized as false. Furthermore an invisible-hand analysis is performed, reinforcing the conclusion that fractional-reserve free banking is incompatible with the ethical and juridical principles underlying a free society.
    Keywords: monetary and banking regimes; comparative institutional analysis; central banking versus free banking controversy; fractional-reserve free banking; Law and Economics of money and banking;
    JEL: E50 E32 E42 B53 K39 G18 P34 H11
    Date: 2006–10–05
  13. By: José Alberto Fuinhas (Departamento de Gestão e Economia, Universidade da Beira Interior)
    Abstract: This paper investigates the role of bank lending in the monetary transmission process in Portugal. We estimate a small sectoral VAR model of the Portuguese macroeconomy. This model is then used to simulate the effects of an exogenous monetary policy shock upon asset prices, bank balance sheet variables and final target variables (activity and prices), for the personal and corporate sectors. Significant sectoral differences are found among the channels of monetary transmission. In addition, the use of sectoral data facilitates the identification of distinct money and credit channels in the transmission of monetary policy. These results contrast with the ambiguous findings on the roles of money and credit in the literature to date. Our study suggests that there is a bank-lending channel in Portugal.
    Keywords: Credit channel; bank lending; and monetary transmission
    JEL: C32 E44 E51 E52
    Date: 2006
  14. By: Christine Marsal (Université de Bourgogne)
    Abstract: (VF)S’il est courant d’opposer capital financier et capital humain les organisations mettent en place des mécanismes de coordination afin de faire converger les intérêts des deux catégories de partenaires que sont les salariés et les actionnaires. La théorie de l’architecture organisationnelle permet de fournir un cadre d’analyse pertinent pour rendre compte de ces mécanismes. Dans ce cadre nous pouvons constater la pluralité des mécanismes d’incitation. Parmi eux, les incitations financières et le pouvoir de délégation accordé au niveau local figurent en bonne place. Ce qui garantit l’efficacité de ces mécanismes est la complémentarité et la cohérence des différentes composantes de l’architecture organisationnelle. Nous illustrons notre propos par une étude conduite dans le secteur bancaire français.(VA)If financial and human capital are commonly opposed, organization internal coordination used to align both employee and stockholder interest. Organizational architecure theory provides a conceptual framework to study thoses mecanisms. In this framework, we can notice incitative plurality mecanisms. We particularly study financial compensation and decision right allocation. Value creation comes from complemenarity between thoses mecanisms, an illustration is given in french retail banking sector.
    Keywords: incitations financières;marge de manœuvre;pouvoir de délégation;capital humain;capital financier;banques de réseau;architecture organisationnelle.
    JEL: D20 M10
    Date: 2006–05
  15. By: Aude Hubrecht (Université de Bourgogne); Michel Dietsch (Université de Strasbourg 3); Fabienne Guerra (FUCAM - Mons)
    Abstract: (VF)Dans le cadre de l’approche DEA («Data Envelopment Analysis») nous développons de nouveaux indicateurs de la performance pour les réseaux de distribution intégrés. Nous détaillons les développements méthodologiques utiles à la construction d’un indicateur de productivité des points de vente qui respecte les critères de contrôlabilité, de cohérence transversale. Ensuite, nous modélisons le lien entre un indicateur de performance de la tête de réseau et l’indicateur de productivité des points de vente pour garantir la cohérence hiérarchique. Et enfin, nous insérons ces indicateurs dans un outil d’aide à la décision conforme à l’organisation verticale des réseaux de distribution : un système de tableau de bord prospectif.(VA)In a DEA framework («Data Envelopment Analysis»), we develop new performance indicators for the integer retail network. We detail the methodological improvement to propose a productivity indicator which respects the criteria of controllability and transversal coherence. Next, we formalise the relation between a performance indicator of the headquarter and the productivity of the retailers. Finally, we insert these new indicators into a making help decision tool modified to be in accordance with the vertical organisation of the retail network: a system of balanced scorecard.
    Keywords: Data Envelopment Analysis;agences bancaires;système de tableaux de bord prospectifs;contrôlabilité; cohérence transversale;cohérence hiérarchique;bank branches;balanced scorecards system;controllability;transversal coherence;hierarchical coherence.
    JEL: G21 L11 D21 D24 M42
    Date: 2005–06
  16. By: María Angélica Arbeláez Restrepo; Andrés Flórez; Natalia Salazar Ferro
    Abstract: This study presents an analysis of the financial services chapter of the Free Trade Agreement (FTA) between Colombia and the United States. It evaluates the negotiation process, its results, and its expected impacts on Colombia’s financial sector during the next few years. After Colombia’s unilateral financial liberalization in he early 90’s, the FTA is the more recent step towards greater openness of the domestic financial system. Even though the financial system is not expected to face any great changes, the agreement will have mplications in specific areas such as insurance and changes in the current operation of collective investment chemes, as well as broader indirect effects on foreign investment. The study concludes that with the FTA, the ountry took advantage of the opportunity to start an internal reform process aimed at financial sector modernization and its greater efficiency, in order to deepen financial consolidation in favor of a productive ector more open to foreign competition.
    Date: 2006–08–01

This issue is ©2006 by Roberto J. Santillán–Salgado. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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