New Economics Papers
on Banking
Issue of 2006‒10‒21
thirteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The transparency of the banking industry and the efficiency of information-based bank runs By Chen, Yehning; Hasan, Iftekhar
  2. Relationship lending and competition: Higher switching cost does not necessarily imply greater relationship benefits By Vesala , Timo
  3. Banking fragility and distress: An econometric study of macroeconomic determinants By Pesola , Jarmo
  4. The cyclical behaviour of European bank capital buffers By Jokipii, Terhi; Milne , Alistair
  5. The Financial Services Authority : A Model of Improved Accountability? By Ojo, Marianne
  6. Bank interest rates in a small European economy: Some exploratory macro level analyses using Finnish data By Kauko , Karlo
  7. Why do bank runs look like panic? A new explanation By Chen, Yehning; Hasan, Iftekhar
  8. Pricing risky bank loans in the new Basel II environment By Hasan, Iftekhar; Zazzara, Cristiano
  9. The Threat of Capital Drain: A Rationale for Public Banks? By Hendrik Hakenes; Isabel Schnabel
  10. What's in it for us? Network effects and bank payment innovation By Milne , Alistair
  11. La complémentarité des banques et des microbanques dans une approche de la comptabilité des flux et des stocks By SODOKIN, Koffi
  12. Contagion and interdependence: measuring CEE banking sector co-movements By Jokipii , Terhi; Lucey, Brian
  13. La fonction monétaire des institutions de microfinance et leurs relations de complémentarité avec les banques officielles dans les pays en développement By SODOKIN, Koffi

  1. By: Chen, Yehning (National Taiwan University); Hasan, Iftekhar (Rensselaer Polytechnic Institute and Bank of Finland)
    Abstract: In this paper, we investigate the relationship between the transparency of banks and the fragility of the banking system. We show that information-based bank runs may be inefficient because the deposit con-tract designed to provide liquidity induces depositors to have excessive incentives to withdraw. An im-provement in transparency of a bank may reduce depositor welfare through increasing the chance of an inefficient contagious bank run on other banks. A deposit insurance system in which some depositors are fully insured and the others are partially insured can ameliorate this inefficiency. Under such a system, bank runs can serve as an efficient mechanism for disciplining banks. We also consider bank managers’ control over the timing of information disclosure, and find that they may lack the incentive to reveal in-formation about their banks.
    Keywords: bank run; contagion; transparency; market discipline; deposit insurance
    JEL: G21 G28
    Date: 2005–10–11
  2. By: Vesala , Timo (RUESG, University of Helsinki)
    Abstract: This paper studies relationship lending in a framework where the cost of switching banks measures the degree of banking competition. The relationship lender’s (insider bank’s) informational advantage creates a lock-in effect, which is at its height when the switching cost is infinitesimal. This is because a low switching cost gives rise to a potential adverse selection problem, and outsider banks are thus reluctant to make overly aggressive bids. This effect gradually fades as the magnitude of the switching cost increases, which de facto reduces the insider bank’s profits. However, after a certain threshold in the switching cost, the insider bank’s ‘mark-up’ begins to increase again. Hence, relationship benefits are a non-monotonous (V-shaped) function of the switching cost. The ‘dynamic implication’ of this pattern is that relationship formation should be more common under extreme market structures ie when the cost of switching banks is either very low or sufficiently high. Recent empirical evidence lends support to this prediction.
    Keywords: relationship lending; switching cost; banking competition
    JEL: D43 D82 G21 G24
    Date: 2005–02–13
  3. By: Pesola , Jarmo (Bank of Finland Research)
    Abstract: The macroeconomic determinants of banking sector distresses in the Nordic countries, Belgium, Ger-many, Greece, Spain and the UK are analysed using an econometric model estimated on panel data from partly the early 1980s to 2002. The dependent variable is the ratio of banks’ loan losses to lending. In ad-dition to the lagged dependent variable, the explanatory variables include a surprise change in incomes and real interest rates, both variables as a separate cross-product term with lagged aggregate indebtedness. The underlying macroeconomic account that this paper puts forward is that loan losses are basically gen-erated by strong adverse aggregate shocks under high exposure of banks to such shocks. The underlying innovations to income and real interest rates are constructed using published macro-economic forecast for these variables. According to the results, high customer indebtedness combined with adverse macroeco-nomic surprise shocks to income and real interest rates contributed to the distress in banking sector. Loan losses also display strong autoregressive behaviour which might indicate a feedback effect from loan losses back to macroeconomic level in deep recessions. The results can be used in macro stress-testing the banking sector.
    Keywords: financial fragility; shock; loan loss; banking crisis
    JEL: E44 G21
    Date: 2005–07–11
  4. By: Jokipii, Terhi (Bank of Finland Research); Milne , Alistair (Bank of Finland and Cass Business School London)
    Abstract: Using an unbalanced panel of commercial, savings and co-operative banks for the years 1997 to 2004 we examine the cyclical behaviour of European bank capital buffers. After controlling for other potential de-terminants of bank capital, we find that capital buffers of the banks in the accession countries (RAM) have a significant positive relationship with the cycle, while for those in the EU15 and the EA and the combined EU25 the relationship is significantly negative. We additionally find fairly slow speeds of ad-justment, with around two-thirds of the correction towards desired capital buffers taking place each year. We further distinguish by type and size of bank, and find that capital buffers of commercial and savings banks, and also of a sub-sample of large banks, exhibit negative co-movement. Co-operative banks and smaller banks on the other hand, tend to exhibit positive cyclical co-movement.
    Keywords: bank capital; bank regulation; business cycle fluctuations
    JEL: G21 G28
    Date: 2006–09–27
  5. By: Ojo, Marianne
    Abstract: Prior to the adoption of the FSA (Financial Services Authority) model, supervision of UK banks was carried out by the Bank of England. Although the Bank of England's informal involvement in bank supervision dates back to the mid nineteenth century, it was only in 1979 that it acquired formal powers to grant or refuse authorization to carry out banking business in the UK. Events such as the Secondary Banking Crisis of 1973-74 and the Banking Coordination Directive of 1977 resulted in legislative changes in the form of the Banking Act 1979. Bank failures through the following years then resulted in changes to the legislative framework. This article looks into the claim that the FSA model has improved in terms of accountability in comparison to its predecessor, the Bank of England. It considers the impact the FSA has made on the financial services sector and on certain legislation since its introduction. Through a comparison with the Bank of England, previous and present legislation, reports and other sources, an assessment can be made as to whether the FSA provides more accountability. Evidence provided here supports the conclusion that the FSA is both equipped with better accountability mechanisms and executes its functions in a more accountable way than its predecessor.
    Keywords: regulators; accountability; supervision; financial; services
    JEL: G28
    Date: 2005–11
  6. By: Kauko , Karlo (Bank of Finland Research)
    Abstract: This paper presents econometric analyses on the determination of bank deposit and lending rates using longitudinal Finnish data. Interest rate pass-through is very strong, possibly complete, in the case of lending rates; in the case of deposit rates the pass-through is far from complete, even in the long term. The monetary union has benefited customers by decreasing the average rate on new loans. Credit and interest rate risk premiums are clearly observable in banks' lending rates. The impact of money market rates on loan stock rates seems to have been non-linear; no obvious explanation for this phenomenon has been found.
    Keywords: banking; interest rates
    JEL: E43 E44 G21
    Date: 2005–05–11
  7. By: Chen, Yehning (National Taiwan University); Hasan, Iftekhar (Rensselaer Polytechnic Institute and Bank of Finland.)
    Abstract: This paper demonstrates that, even if depositors are fully rational and always choose the Pareto dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors’ expectations of the bank’s fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank-specific information is revealed, or when they learn that precise bank-specific information is not revealed. The results in this paper are consistent with empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.
    Keywords: bank run; banking panic; suspension of convertibility
    JEL: G21 G28
    Date: 2006–09–27
  8. By: Hasan, Iftekhar (Rensselaer Polytechnic Institute and Bank of Finland); Zazzara, Cristiano (CAPITALIA Banking Group, University “Luiss-Guido Carli”, École Polytechnique Fédérale de Lausanne)
    Abstract: Recently, banking literature has had a quest for appropriate pricing of bank loans under the new Basel II rules and has been in pursuit of possible outcomes for undertaking such credit risk. In this paper, we propose a simplified formula to price bank’s corporate loans, aiming at making bank managers aware of the creation/destruction of shareholder value. We show that the mathematical treatability of the proposed formula and its easy feeding with internal and market inputs allow simple implementation by the final user.
    Keywords: Basel II; rating; pricing; exposure at default; EVA
    JEL: C63 G12 G21 G28
    Date: 2006–04–18
  9. By: Hendrik Hakenes (Max Planck Institute for Research on Collective Goods, Bonn); Isabel Schnabel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper yields a rationale for why subsidized public banks may be desirable from a regional perspective in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through a public guarantee. Under some conditions, cooperative banks can perform the same function without any subsidization; however, they may be crowded out by public banks. We also discuss the impact of the political structure on the emergence of public banks in a political-economy setting and the role of interregional mobility.
    Keywords: Public banks, cooperative banks, capital drain, credit rationing, financial integration, privatization
    JEL: G21 F36 H11 L33
    Date: 2006–04
  10. By: Milne , Alistair (Faculty of Finance, Cass Business School and Bank of Finland)
    Abstract: The developed world exhibits substantial but poorly understood differences in the efficiency and quality of low-value payment services. This paper compares payments arrangements in the UK, Norway, Swe-den, and Finland, and discusses the impact of network effects on incentives to adopt new payments tech-nology. A model is presented, in which private benefits for investment in shared inter-bank payments in-frastructure are weak. In contrast, due to ‘account externalities’, there are strong incentives for investment in intra-bank payment systems. These two features, distinguishing bank payments from other network in-dustries, can help explain some of the observed cross country differences in payments arrangements.
    Keywords: network effects; incentives; payment technology; externalities
    JEL: G21 L14
    Date: 2005–07–11
  11. By: SODOKIN, Koffi (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: L'objectif de ce papier est de démontrer les relations complémentaires entre les banques officielles (les banques) et les institutions de microfinance (les microbanques) dans un modèle flux-stock initialement proposé par Godley et Lavoie. Nous montrons que les banques officielles accommodent conjointement avec les microbanques les demandes de financement des coûts de production des firmes et des microfirmes jugées solvables dans les pays en développement (P.E.D). En conséquence, dans les économies contemporaines des pays les moins avancés, le système bancaire est à deux paliers avec une structure atypique. Un premier palier constitué par la Banque Centrale qui harmonise l'ensemble du système de paiement, un second palier constitué de deux catégories de banques. La première catégorie est constituée des banques commerciales officielles (les banques) et une deuxième catégorie constituée des banques de facto (les microbanques). Les banques et les microbanques jouent un rôle central dans le processus macroéconomique de production des revenus en coordonnant conjointement les anticipations et les actions des différents secteurs économiques des P.E.D. / This paper aims to show complementary of official banks and microbanks in a stock-flow accounting framework initially proposed by Godley and Lavoie. We show that the official banks and microbanks finance the production costs of credits worthy firms and microfirms in Low Developing Countries (LDCs). Consequently, in the contemporary economies of LDCs, the banking system is at two stages with an atypical structure. At the first stage we have the Central Bank which harmonizes the whole payment system, and at the second stage, we have two categories of banks. The first category are the official commercial banks (banks) and the second category are the banks de facto (the microbanks). Banks and microbanks play a central role in the macroeconomic process of income generation by coordinate together anticipations and actions of the various economic sectors in LDs
    Keywords: Banques ; microbanques ; complémentarité ; flux-stock ; pays en développement ; Banks ; microbanks ; complementarity ; flow-stock ; West Africa ; Low developing countries.
    JEL: E40 E42 E44 E51 O11 O17
    Date: 2006–10
  12. By: Jokipii , Terhi (Bank of Finland and Trinity College Dublin); Lucey, Brian (Institute for International Integration Studies, Trinity College Dublin)
    Abstract: Making use of ten years of daily data, this paper examines whether banking sector co-movements be-tween the three largest Central and Eastern European Countries (CEECs) can be attributed to contagion or to interdependence. Our tests based on simple unadjusted correlation analysis uncover evidence of conta-gion between all pairs of countries. Adjusting for market volatility during turmoil, however, produces dif-ferent results. We then find contagion from the Czech Republic to Hungary during this time, but all other cross-market co-movements are rather attributable rather to strong cross-market linkages. In addition, we construct a set of dummy variables to try to capture the impact of macroeconomic news on these markets. Controlling for own-country fundamentals, we discover that the correlations diminish between the Czech Republic and Poland, but that coefficients for all pairs remain substantial and significant. Finally, we ad-dress the problem of simultaneous equations, omitted variables and heteroskedasticity, and adjust our data accordingly. We confirm our previous findings. Our tests provide evidence in favour of parameter insta-bility, again signifying the existence of contagion arising from problems in the Czech Republic affecting Hungary during much of 1996.
    Keywords: contagion; interdependence; macroeconomic news; banking sector; stock returns
    JEL: F30 F40 G15
    Date: 2006–07–03
  13. By: SODOKIN, Koffi (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: Deux objectifs sont poursuivis dans ce papier. Le premier objectif est lié à l’explication des paiements monétaires (formation des revenus monétaires) comme la base d’une construction analytique de la fonctionnalité complémentaire des microstructures financières populaires et des institutions bancaires officielles dans les pays en développement. L’objectif second est de montrer que dans le processus de production des économies en développement, une partie des revenus monétaires créés et non dépensée dans la consommation des biens produits est conservée après les opérations de paiements, sous forme de dépôts auprès des microstructures financières populaires et des institutions bancaires officielles. La part conservée auprès des microstructures financières populaires, quand elle ne sert pas à financer l’achat des biens de consommation et des activités génératrices de revenu, est souvent déposée auprès des institutions bancaires officielles. Les microstructures financières populaires sont complémentaires sur un point de vue structurel aux institutions bancaires officielles. Elles constituent, à cet effet, des « super comptes » de dépôts de facto pour les agents économiques qui n’ont pas accès au système bancaire officiel. Sur un point de vue fonctionnel et de part leur rôle de financement de la production des microentreprises, les microstructures financières populaires provoquent des créations de revenu de nature nécessairement monétaire. Elles sont des banques de facto et sont fonctionnellement complémentaires aux institutions bancaires officielles.
    Keywords: Microstructures financières populaires ; intermédiaires non monétaires ; banques officielles ; création monétaire ; économies en développement.
    Date: 2006–10

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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