New Economics Papers
on Banking
Issue of 2006‒11‒04
seventeen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bank behavior with access to credit risk transfer markets By Goderis,Benedikt; Marsh,Ian W.; Vall Castello,Judith; Wagner,Wolf
  2. The Cost of Banking Regulation By Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
  3. Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market By Atif Mian; Asim Ijaz Khwaja
  4. Relationship Banking and the Pricing of Financial Services By Charles Calomiris; Thanavut Pornrojnangkool
  5. US Banking Deregulation, Small Businesses and Interstate Insurance of Personal Income By Demyanyk, Yuliya; Ostergaard, Charlotte; Sorensen, Bent E
  6. Risk Preference and Investments Quality as Determinants of Eciency in the Italian Banking System By Antonio Lopes; Luca Giordano
  7. What drives EU banks’ stock returns? Bank-level evidence using the dynamic dividend-discount model By Olli Castrén; Trevor Fitzpatrick; Matthias Sydow
  8. INTEREST RATE PASS-THROUGH IN COLOMBIA: A MICRO-BANKING PERSPECTIVE By Rocio Betancourt; Hernando Vargas; Norberto Rodríguez
  9. Bank Distress During the Great Contraction, 1929 to 1933, New Data from the Archives of the Board of Governors By Gary Richardson
  10. Sophisticated discipline in a nascent deposit market: Evidence from post-communist Russia By Karas, Alexei; Pyle, William; Schoors, Koen
  11. Monetary Intervention Mitigated Banking Panics During the Great Depression: Quasi-Experimental Evidence from the Federal Reserve District Border in Mississippi, 1929 to 1933 By Gary Richardson; William Troost
  12. Corporate governance and stakeholders ' financial interests in institutions offering Islamic financial services By Grais, Wafik; Pellegrini, Matteo
  13. Corporate governance in institutions offering Islamic financial services : issues and options By Grais, Wafik; Pellegrini, Matteo
  14. Corporate governance and Shariah compliance in institutions offering Islamic financial services By Grais, Wafik; Pellegrini, Matteo
  15. Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections By Glenn D. Rudebusch; John C. Williams
  16. Strategic Incompatibility in ATM Markets By Christopher R. Knittel; Victor Stango
  17. Deposit Insurance and the Composition of Bank Suspensions in Developing Economies: Lessons from the State Deposit Insurance Experiments of the 1920S By Ching-Yi Chung; Gary Richardson

  1. By: Goderis,Benedikt; Marsh,Ian W.; Vall Castello,Judith; Wagner,Wolf (Tilburg University, Center for Economic Research)
    Abstract: One of the most important recent innovations in financial markets has been the development of credit derivative products that allow banks to more actively manage their credit portfolios than ever before. We analyze the effect that access to these markets has had on the lending behavior of a sample of banks, using a sample of banks that have not accessed these markets as a control group. We find that banks that adopt advanced credit risk management techniques (proxied by the issuance of at least one collateralized loan obligation) experience a permanent increase in their target loan levels of around 50%. Partial adjustment to this target, however, means that the impact on actual loan levels is spread over several years. Our findings confirm the general efficiency enhancing implications of new risk management techniques in a world with frictions suggested in the theoretical literature.
    Keywords: credit risk transfer;risk management;bank lending
    JEL: G21 G31
    Date: 2006
  2. By: Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
    Abstract: We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations- access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rates spreads and an increased access to credit at a cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalizations.
    Keywords: macroeconomics; monetary economics
    JEL: E0 G10
    Date: 2006–10
  3. By: Atif Mian; Asim Ijaz Khwaja
    Abstract: Do liquidity shocks matter? While even a simple `yes' or `no' presents identification challenges, going beyond this entails tracing how such shocks to lenders are passed on to borrowers, and whether borrowers can in turn cushion these shocks through the credit market. This paper does so by using data that follows all loans made by lenders to borrowing firms in Pakistan, and exploiting cross-bank variation in liquidity shocks induced by the unanticipated nuclear tests in 1998. We isolate the causal impact of the bank lending channel by showing that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1% larger decline in liquidity drops by an additional 0.6%. The liquidity shock also lowers the probability of continued lending to old clients and extending credit to new ones. Although this lending channel affects all firms significantly, large firms and those with strong business and political ties completely compensate the effect by borrowing more from more liquid banks - both through existing and new banking relationships. In contrast, small unconnected firms are entirely unable to hedge and face large drops in overall borrowing and increased financial distress. The liquidity shocks thus have large distributional consequences.
    JEL: E44 E5 E51 G21 G3
    Date: 2006–10
  4. By: Charles Calomiris; Thanavut Pornrojnangkool
    Abstract: We investigate how banking relationships that combine lending and underwriting services affect the terms of lending, through both loan supply- and loan demand-side effects, and the underwriting costs of debt and equity issues. We capture and control for firm characteristics, including differences in the sequences of firm financing decisions (which we argue are likely to capture important cross-sectional heterogeneity, and which previously have been ignored in the literature). We construct a structural model of lending, which separately identifies loan supply and loan demand. Our approach results in significant improvement in the explanatory power of our regressions when compared to prior studies. We find no evidence that universal banks under-price loans to win underwriting business. Instead, we find that universal banks charge premiums for loans and underwriting services to extract value from combined lending and underwriting relationships. We also find that universal banks (as opposed to stand alone investment banks) enjoy cost advantages in both lending and underwriting, irrespective of relationship benefits. Part of the advantage borrowers may enjoy from bundling products may be a form of liquidity risk insurance, which is manifested in a reduced demand for lines of credit. We also find evidence of a “road show” effect; firms that engage in debt underwritings enjoy loan pricing discounts on the loans that are negotiated at times close to the debt underwritings.
    JEL: G18 G21 G24
    Date: 2006–10
  5. By: Demyanyk, Yuliya; Ostergaard, Charlotte; Sorensen, Bent E
    Abstract: We estimate the effects of deregulation of U.S. banking restrictions on the amount of interstate personal income insurance during the period 1970--2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific shocks to output. We find that income insurance improved after banking deregulation, and that this effect is larger in states where small businesses are more important. We further show that the impact of deregulation is stronger for proprietors' income than other components of personal income. Our explanation of this result centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. Our analysis casts light on the real effects of bank deregulation, on the risk sharing function of banks, and on the integration of bank markets.
    Keywords: financial deregulation; integration of bank markets; interstate risk sharing; small business finance
    JEL: G21 G28
    Date: 2006–10
  6. By: Antonio Lopes; Luca Giordano
    Abstract: The Italian banking system is characterized by deep eciency inequality between banks operating in dierent regions, with northern banks that largely outperform the southern ones. Moreover the ratio of non-performing loans to total loans is signicantly higher in the South than elsewhere. In view of these evidences we asked: is the e- ciency gap of the southern banks (and therefore their lower screening and monitoring ability) the primary source of their higher level of bad loans? Or is the poorer quality of the southern bank loans (due to the adverse macroeconomic environment) that causes lower eciency? The results oer rather concrete evidence in favour of the hypothesis that is a lower managerial eciency which causes an increase in non-performing loans, whereas the eects of exogenous environmental shocks are negligible. As a second point to investigate, we recognize that banks have different risk aversion which dierently aects the choice of input vector and we expressly take into account the capitalization degree (as a buer against the risk) in estimating the bank cost stochastic frontier.
    Date: 2006–09
  7. By: Olli Castrén (Corresponding address: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Trevor Fitzpatrick; Matthias Sydow
    Abstract: We combine the dynamic dividend-discount model with an accounting-based vector autoregression framework that allows for a decomposition of EU banks'stock returns to cash-flow and expected return news components. The main findings are that while the bulk of the variability of EU banks'stock returns is due to cash-flow shocks, the expected return shocks are relatively more important for larger than for smaller banks. Moroever, variables used in the literature as cash-flow proxies explain a higher share of the cash-flow component of the total excess returns for smaller than for larger EU banks. This suggests that large banks could be more prone to market wide news and events - that in the literature are associated with the expected return news component - as opposed to the bank-specific news, typically assumed to be incorporated in the cash-flow component. JEL Classification: C33, G12, G21.
    Keywords: Bank stock return predictability, return decomposition, panel VAR estimation, cash-flow news.
    Date: 2006–09
  8. By: Rocio Betancourt; Hernando Vargas; Norberto Rodríguez
    Abstract: Banks and other credit institutions are key players in the transmission of monetary policy, especially in emerging market economies, where the responses of deposit and loan interest rates to shifts in policy rates are among the most important channels. This pass-through depends on the conditions prevailing in the loan and deposit markets, which are, in turn, affected by macroeconomic factors. Hence, when setting their policy, monetary authorities must take into account those conditions and the behavior of banks. This paper illustrates this point by means of a theoretical micro-banking model and shows empirical evidence for Colombia suggesting that some aspects of the model might be relevant features of the transmission mechanism.
    Keywords: Monetary Transmission Mechanisms, Interest Rate Pass-Through, Banking Classification JEL: G21; E43; E44; E52.
  9. By: Gary Richardson
    Abstract: During the contraction from 1929 through 1933, the Federal Reserve System tracked changes in the status of all banks operating in the United States and determined the cause of each bank suspension. This essay introduces that hitherto dormant data and analyzes chronological patterns in aggregate series constructed from it. The analysis demonstrates both illiquidity and insolvency were substantial sources of bank distress. Contagion (via correspondent networks and bank runs) propagated the initial banking panics. As the depression deepened and asset values declined, insolvency loomed as the principal threat to depository institutions. These patterns corroborate some and question other conjectures concerning the causes and consequences of the financial crisis during the Great Contraction.
    JEL: E42 E5 E65 N1 N12
    Date: 2006–10
  10. By: Karas, Alexei (BOFIT); Pyle, William (BOFIT); Schoors, Koen (BOFIT)
    Abstract: Using a database from post-communist, pre-deposit-insurance Russia, we demonstrate the presence of quantity-based sanctioning of weaker banks by both firms and households, particularly after the financial crisis of 1998. Evidence for the standard form of price discipline, however, is notably weak. We estimate the deposit supply function and show that, particularly for poorly capitalized banks, interest rate increases exhibit diminishing, and eventually negative, returns in terms of deposit attraction. These findings are consistent with depositors interpreting the deposit rate itself as a complementary proxy of otherwise unobserved bank-level risk.
    Keywords: market discipline; deposit market; transition; Russia
    JEL: G21 O16 P20
    Date: 2006–10–26
  11. By: Gary Richardson; William Troost
    Abstract: The Federal Reserve Act of 1913 divided Mississippi between the 6th (Atlanta) and 8th (St. Louis) Federal Reserve Districts. Before and during the Great Depression, these districts' policies differed. The Atlanta Fed championed monetary activism and the extension of credit to troubled banks. The St. Louis Fed adhered to the doctrine of real bills and eschewed expansionary initiatives. Outcomes differed across districts. In the 6th District, banks failed at lower rates than in the 8th District, particularly during the banking panic in the fall of 1930. The pattern suggests that discount lending reduced failure rates during periods of panic. Historical evidence and statistical analysis corroborates this conclusion.
    JEL: E5 E6 E65 N1 N2
    Date: 2006–10
  12. By: Grais, Wafik; Pellegrini, Matteo
    Abstract: This paper focuses on the corporate governance arrangements of institutions offering Islamic financial services (IIFS) aimed at protecting stakeholders ' financial interests. Many IIFS corporate governance issues are common with those of their conventional counterparts. Others are distinctive. In particular they offer unrestricted investment accounts that share risks with shareholders but without a voting right. This paper first reviews internal and external arrangements put in place by IIFS to protect stakeholders ' financial interests. It discusses shortcomings notably in terms of potential conflict of interest between shareholders and holders of unrestricted investment accounts. It then suggests a corporate governance framework that combines internal and external arrangements to provide safeguards to unrestricted investment account holders without overburdening IIFS ' financial performance. The paper uses a review of 13 IIFS and regulatory information from countries where IIFS have developed the most.
    Keywords: Banks & Banking Reform,Financial Intermediation,Corporate Law,Non Bank Financial Institutions,Investment and Investment Climate
    Date: 2006–11–01
  13. By: Grais, Wafik; Pellegrini, Matteo
    Abstract: This paper reviews institutions offering Islamic financial services (IIFS) corporate governance challenges and suggests options to address them. It first points out the importance of corporate governance for IIFS, where it would require a distinct treatment from conventional corporate governance and highlights three cases of distress of IIFS. It then dwells on prevailing corporate governance arrangements addressing IIFS ' needs to ensure the consistency of their operations with Islamic finance principles and the protection of the financial interests of a stakeholders ' category, namely depositors holding unrestricted investment accounts. It raises the issues of independence, confidentiality, competence, consistency, and disclosure that may bear on pronouncements of consistency with Islamic finance principles. It also discusses the agency problem of depositors holding unrestricted investment accounts. The paper argues for a governance framework that combines internal and external arrangements and relies significantly on transparency and disclosure of market relevant information.
    Keywords: Banks & Banking Reform,Corporate Law,Non Bank Financial Institutions,Investment and Investment Climate,Privatization
    Date: 2006–11–01
  14. By: Grais, Wafik; Pellegrini, Matteo
    Abstract: The structures and processes established within an institution offering Islamic financial Services (IIFS) for monitoring and evaluating Shariah compliance rely essentially on arrangements internal to the firm. By being incorporated in the institutional structure, a Shariah supervisory board (SSB) has the advantage of being close to the market. Competent, independent, and empowered to approve new Shariah-conforming instruments, an SSB can enable innovation likely to emerge within the institution. The paper reviews the issues and options facing current arrangements for ensuring Shariah compliance by IIFS. It suggests a framework that draws on internal and external arrangements to the firm and emphasizes market discipline. In issuing its fatwas, an SSB could be guided by standardized contracts and practices that could be harmonized by a self-regulatory professionals ' association. A framework with the suggested internal and external features could ensure adequate consistency of interpretation and enhance the enforceability of contracts before civil courts. The review of transactions would mainly be entrusted to internal review units, which would collaborate with external auditors responsible for issuing an annual opinion on whether the institution ' s activities has met its Shariah requirements. This process would be sustained by reputable entities such as rating agencies, stock markets, financial media, and researchers who would channel signals to market players. This framework would enhance public understanding of the requirements of Shariah and lead to more effective options available to stakeholders to achieve improvements in Islamic financial services.
    Keywords: Banks & Banking Reform,Corporate Law,National Governance,Non Bank Financial Institutions,Governance Indicators
    Date: 2006–11–01
  15. By: Glenn D. Rudebusch; John C. Williams
    Abstract: The modern view of monetary policy stresses its role in shaping the entire yield curve of interest rates in order to achieve various macroeconomic objectives. A crucial element of this process involves guiding financial market expectations of future central bank actions. Recently, a few central banks have started to explicitly signal their future policy intentions to the public, and two of these banks have even begun publishing their internal interest rate projections. We examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate. We show that, in an economy where private agents have imperfect information about the determination of monetary policy, central bank communication of interest rate projections can help shape financial market expectations and may improve macroeconomic performance.
    JEL: E43 E52
    Date: 2006–10
  16. By: Christopher R. Knittel; Victor Stango
    Abstract: We test whether firms use incompatibility strategically, using data from ATM markets. High ATM fees degrade the value of competitors' deposit accounts, and can in principle serve as a mechanism for siphoning depositors away from competitors or for creating deposit account differentiation. Our empirical framework can empirically distinguish surcharging motivated by this strategic concern from surcharging that simply maximizes ATM profit considered as a stand-alone operation. The results are consistent with such behavior by large banks, but not by small banks. For large banks, the effect of incompatibility seems to operate through higher deposit account fees rather than increased deposit account base.
    JEL: K21 L1 L12 L4 L41 L44 L84
    Date: 2006–10
  17. By: Ching-Yi Chung; Gary Richardson
    Abstract: Eight states established deposit insurance systems between 1908 and 1917. All abandoned the systems between 1921 and 1930. Scholars debate the costs and benefits of these policy experiments. New data drawn from the archives of the Federal Reserve Board of Governors demonstrate that deposit insurance influenced the composition of bank suspensions in these states. In typical years, suspensions due to runs fell. Suspensions due to mismanagement rose. During the penultimate year of each system, the bank failure rate rose to an unsustainable height and the system ceased operations.
    JEL: E42 E65 L1 N1 N14 O16
    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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