New Economics Papers
on Banking
Issue of 2006‒11‒18
twenty papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bank-Specific, Industry-Specific and Macroeconomic Determinants of Bank Profitability By Panayiotis P. Athanasoglou; Sophocles N. Brissimis; Matthaios D. Delis
  2. The Formation of Financial Networks By Ana Babus
  3. Corporate governance in banking: The role of Board of Directors By Pablo de Andres Alonso; Eleuterio Vallelado Gonzalez
  4. A credit contagion model for loan portfolios in a network of firms with spatial interaction By Diana Barro; Antonella Basso
  5. The Efect of Relationship Lending on Firm Performance By Judit Montoriol
  6. Stale information, shocks and volatility By Reint Gropp; Arjan Kadareja
  7. Asymmetric Information and the Mode of Entry In Foreign Credit Markets By Eric Van Tassel; Sharmila Vishwasrao
  8. The Degree of Competition in the Thai Banking Industry before and after the East Asian Crisis By Kubo, Koji
  9. Macroeconomic fluctuations and bank lending: evidence for Germany and the euro area By Eickmeier, Sandra; Hofmann, Boris; Worms, Andreas
  10. Access to financial services in Zambia By de Luna Martinez, Jose
  11. Multimarket spatial competition in the Colombian deposit market By Dairo Estrada; Sandra Rozo
  12. Determinants of Bank Profitability in the South Eastern European Region By Panayiotis P. Athanasoglou; Matthaios D. Delis; Christos K. Staikouras
  13. A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II By Roman Kraeussl
  14. Deposit insurance and banking reform in Russia By Camara, Modibo K.; Montes-Negret, Fernando
  15. Technical and Allocative Efficiency in European Banking By Sophocles N. Brissimis; Matthaios D. Delis; Efthymios G. Tsionas
  16. Regional Integration Challenges in South East Europe: Banking Sector Trends By George Stubos; Ioannis Tsikripis
  17. The stability of efficiency rankings when risk-preferences and objectives are different By Koetter, Michael
  18. Interbank Markets under Currency Boards By Marius Jurgilas
  19. Taxation and Capital Structure Choice – Evidence from a Panel of German Multinationals By Thiess Buettner; Michael Overesch; Ulrich Schreiber; Georg Wamser
  20. Financial integration of new EU Member States By Lorenzo Cappiello; Bruno Gérard; Arjan Kadareja; Simone Manganelli

  1. By: Panayiotis P. Athanasoglou (Bank of Greece); Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Matthaios D. Delis (Athens University of Economics and Business)
    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.
    Keywords: Bank profitability; business cycles and profitability; dynamic panel data model
    JEL: G21 C23 L2
    Date: 2005–06
  2. By: Ana Babus (Erasmus Universiteit Rotterdam)
    Abstract: Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. The trade-off between the gains and the risks of being connected shapes banks ’incentives to form links. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0.
    Keywords: financial stability; network formation; contagion risk
    JEL: G21 D82
    Date: 2006–10–23
  3. By: Pablo de Andres Alonso (Department of Financial Economics and Accounting, University of Valladolid); Eleuterio Vallelado Gonzalez (Department of Financial Economics and Accounting, University of Valladolid)
    Abstract: We test hypotheses on the dual role of boards of directors for a sample of large international commercial banks. We find an inverted U shaped relation between bank performance and board size that justifies a large board and imposes an efficient limit to the board’s size; a positive relation between the proportion of non-executive directors and performance; and a proactive role in board meetings. Our results show that bank boards’ composition and functioning are related to directors’ incentives to monitor and advise management. All these relations hold after we control for bank business, institutional differences, size, market power in the banking industry, bank ownership and investors’ legal protection.
    Keywords: Corporate Governance, Board of Directors, Commercial Banks
    JEL: G32
    Date: 2006–06
  4. By: Diana Barro (Department of Applied Mathematics, University of Venice); Antonella Basso (Department of Applied Mathematics, University of Venice)
    Abstract: This contribution studies the effects of credit contagion on the credit risk of a portfolio of bank loans. To this aim we introduce a model that takes into account the counterparty risk in a network of interdependent firms that describes the presence of business relations among different firms. The location of the firms is simulated with probabilities computed using an entropy spatial interaction model. By means of a wide simulation analysis we use the model proposed to study the effects of default contagion on the loss distribution of a portfolio.
    Keywords: credit risk, bank loan portfolios, contagion models, entropy spatial models
    JEL: G33 G21 C15
    Date: 2006
  5. By: Judit Montoriol (Department of Business Economics, Universitat Autonoma de Barcelona)
    Abstract: We examine how relationship lending affects firm performance using a panel dataset of about 70,000 small and medium Spanish firms in the period 1993-2004. We model firm performance jointly with the firm's choice of the number of bank relationships. Controlling for firm fixed effects and using instrumental variables for the decision on the number of bank relationships, we found that firms maintaining exclusive bank relationships have lower profitability. The result is consistent with the view that banks appropriate most of the value generated through close relationships with its borrowers as long as they do not face competition from other lenders
    Date: 2006–06
  6. By: Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Arjan Kadareja
    Abstract: We propose a new approach to measuring the effect of unobservable private information or beliefs on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistence should increase, as the private information (beliefs) of investors becomes more important. We find strong support for this idea in the data. We argue that the results have implications for debate surrounding the opacity of banks and the transparency requirements that may be imposed on banks under Pillar III of the New Basel Accord. JEL Classification: G21, G14.
    Keywords: Realised volatility, public information, transparency.
    Date: 2006–10
  7. By: Eric Van Tassel (Department of Economics, College of Business, Florida Atlantic University); Sharmila Vishwasrao (Department of Economics, College of Business, Florida Atlantic University)
    Abstract: In a newly liberalized credit market, foreign banks with cost advantages are likely to be less informed than domestic banks that hold information on credit risks. These relative advantages may generate incentives for a foreign bank to negotiate acquisition of a domestic bank in order to capture information endowments. However, if it is difficult to assess the value of information held by banks, the foreign bank will face important choices about the optimal mode of entry and what acquisition price to pay. These choices have implications for the survival of domestic banks and how capital is allocated after liberalization.
    Keywords: Foreign entry, bank competition, information
    JEL: G21 D82
    Date: 2006–08
  8. By: Kubo, Koji
    Abstract: This paper analyzes the influence of the East Asian crisis and the subsequent reforms on the oligopolistic nature of the Thai banking industry. Since the crisis, there have been substantial changes in competitive environment, including a decline in the family ownership of banks as well as the arrival of new entrants. How did these changes affect a banking industry in which the six largest local banks accounted for over 70 percent of market share? The estimated Lerner index from Bresnahan's [1989] conjectural variation model indicates the possibility of a decline in the degree of competition.
    Keywords: Thai banking industry, Degree of competition, Lerner index, Banks, Financial crises, Thailand
    JEL: L13 G21
    Date: 2006–03
  9. By: Eickmeier, Sandra; Hofmann, Boris; Worms, Andreas
    Abstract: This paper analyzes how bank lending to the private nonbank sector responds dynamically to aggregate supply, demand and monetary policy shocks in Germany and the euro area. The results suggest that the dynamic responses in the two areas are broadly similar, although there are some differences in the relative contribution of the three shocks to the development of output, prices, interest rates and bank loans over time. In order to assess the role of bank lending in the transmission of macroeconomic shocks, we perform counterfactual simulations and analyze the dynamic responses of German loan sub-aggregates in order to test the distributional implications of potential credit market frictions. The results suggest that there is no evidence that loans amplify the transmission of macroeconomic fluctuations or that a “financial accelerator” via bank lending exists.
    Keywords: Business cycle fluctuations, bank lending, SVAR model, sign restrictions
    JEL: E32 E44 G21
    Date: 2006
  10. By: de Luna Martinez, Jose
    Abstract: Despite the deep financial sector reforms undertaken in Zambia in the early 1990s, the expected benefits of establishing a market-based banking system has not materialized. In 2005 the banking system continued to be small and underdeveloped. Credit to the private sector by banks represented only 8 percent of GDP in 2005, which is slightly lower than the level registered in 1990. As in the early 1990s, only large corporations and a few small- and medium-size enterprises have access to credit in 2006. Moreover, less than 8 percent of Zambia ' s adult population had a bank account in 2005. And despite the open door policy to foreign financial institutions, which has been in place since Zambia ' s independence, only a few new banking products have been introduced by foreign banks to serve the needs of households and firms. This paper analyzes the factors that have prevented the development of a large and inclusive banking system in Zambia and highlights possible actions that may help improve access to finance in Zambia in both the short and long terms.
    Keywords: Banks & Banking Reform,Financial Intermediation,Financial Crisis Management & Restructuring,Corporate Law,Banking Law
    Date: 2006–11–01
  11. By: Dairo Estrada; Sandra Rozo
    Abstract: This paper presents a multimarket spatial competition oligopoly model for the Colombian deposit market, in line with the New Empirical Industrial Organization (NEIO) approach. In this framework, banks use price and non-price strategies to compete in the market, which allows us to analyze the country and the regional competitiveness level. The theoretical model is applied to quarterly Colombian data that covers the period between 1996 and 2005. Our results suggest that, although the country deposit market appears to be more competitive than the Nash equilibrium, there are some local areas within the country that present evidence of market power.
    Keywords: Banking; Location; Competition; Colombia. Classification JEL: D4; G21; L13; R12.
  12. By: Panayiotis P. Athanasoglou (Bank of Greece); Matthaios D. Delis (Athens University of Economics and Business); Christos K. Staikouras (Athens University of Economics and Business)
    Abstract: The aim of this study is to examine the profitability behaviour of bank-specific, industryrelated and macroeconomic determinants, using an unbalanced panel dataset of South Eastern European (SEE) credit institutions over the period 1998-2002. The estimation results indicate that, with the exception of liquidity, all bank-specific determinants significantly affect bank profitability in the anticipated way. A key result is that the effect of concentration is positive, which provides evidence in support of the structure-conduct-performance hypothesis, while at the same time some relevance of the efficient-structure hypothesis cannot be rejected. In contrast, a positive relationship between banking reform and profitability was not identified, whilst the picture regarding the macroeconomic determinants is mixed. The paper concludes with some remarks on the practicality and implementability of the findings.
    Keywords: Bank profitability; South Eastern European banking sector; Random effects
    JEL: G21 C23 L2
    Date: 2006–09
  13. By: Roman Kraeussl (Center for Financial Studies, Frankfurt am Main, Germany)
    Abstract: This paper deals with the proposed use of sovereign credit ratings in the “Basel Accord on Capital Adequacy” (Basel II) and considers its potential effect on emerging markets financing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks’ capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies’ sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.
    Keywords: Sovereign Risk, Credit Ratings, Basel II
    JEL: E44 E47 G15
  14. By: Camara, Modibo K.; Montes-Negret, Fernando
    Abstract: The objective of this paper is not to review the pros and cons of deposit insurance systems, but to focus, rather narrowly, on the recent adoption of a deposit insurance system (DIS) in Russia, the rationale offered, and the potential impact it might have on the stability and development of the Russian banking system. An attempt is made to draw some lessons from the implementation experience in Russia. The paper starts with a brief description of the Russian DIS, followed by an overview of the banking system ' s structure and some observations on the sequencing followed for adopting the DIS and the political economy of its adoption. It concludes with a discussion of areas requiring attention.
    Keywords: Banks & Banking Reform,Financial Intermediation,Financial Crisis Management & Restructuring,Corporate Law,Insurance & Risk Mitigation
    Date: 2006–11–01
  15. By: Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Matthaios D. Delis (Athens University of Economics and Business); Efthymios G. Tsionas (Athens University of Economics and Business)
    Abstract: This paper specifies an empirical framework for estimating both technical and allocative efficiency, which is applied to a large panel of European banks over the years 1996 to 2003. Our methodology allows for self-consistent measurement of technical and allocative inefficiency, in an effort to address the issue known in the literature as the Greene problem. The results suggest that, on average, European banks exhibit constant returns to scale, that technical and allocative efficiency are close to 80% and 75% respectively, and that overall economic efficiency shows a clearly improving trend. We also show through the comparison of various estimators that models incorporating only technical efficiency tend to overestimate it.
    Keywords: Technical and allocative efficiency; Translog cost function; Maximum likelihood; European banking
    JEL: C13 G21 L2
    Date: 2006–09
  16. By: George Stubos (Bank of Greece); Ioannis Tsikripis (Bank of Greece)
    Abstract: This study reviews and evaluates a particular aspect of the institution building process in the transition countries of Southeast Europe. The focus is the development of the banking sector. It is argued that banking sector development plays an integral and pivotal role in the successful completion of the transition process. It functions as a very strong integrating force contributing to the broader institution building process and as a pillar of future growth and development in the new market environment of the Balkan economies. This study concentrates on three main issues. First, it undertakes a brief literature review of regional integration approaches in the Balkans. Second, it provides an overview of the most significant changes that have taken place in the banking sector. Third, it reviews some structural characteristics and performance indicators, all of which point to considerable advancements made in this sector in recent years. Empirical evidence is provided showing that a substantial harmonisation of ownership structures and performance indicators has been achieved in the banking sectors of these countries initiating a convergence process toward EU banking structures and functions. In this regard, this study complements the findings of other studies focusing on various sectors of economic activity, which clearly show that a de facto regional and, even more so, continental integration of the Southeast European countries is under way.
    Keywords: Balkan banking; foreign banks; regional integration; transition policies
    JEL: R10 P30 G21
    Date: 2005–06
  17. By: Koetter, Michael
    Abstract: We analyze the stability of efficiency rankings of German universal banks between 1993 and 2004. First, we estimate traditional efficiency scores with stochastic cost and alternative profit frontier analysis. Then, we explicitly allow for different risk preferences and measure efficiency with a structural model based on utility maximization. Using the almost ideal demand system, we estimate input and profit demand functions to obtain proxies for expected return and risk. Efficiency is then measured in this risk-return space. Mean risk-return efficiency is somewhat higher than cost and considerably higher than profit efficiency. More importantly, rankorder correlation between these measures are low or even negative. This suggests that best-practice institutes should not be identified on the basis of traditional efficiency measures alone. Apparently, low cost and/or profit efficiency may merely result from alternative yet efficiently chosen risk-return trade-offs.
    Keywords: Risk, efficiency, banks, Germany
    JEL: D21 G21 G33 L21
    Date: 2006
  18. By: Marius Jurgilas (University of Connecticut)
    Abstract: This paper analyzes interbank markets under currency boards. Under such an environment, problematic endogeneity issues common to other monetary regimes do not arise. Using daily data from the interbank markets in Bulgaria and Lithuania we show, that contrary to the existing literature, overnight interest rates tend to decrease towards the end of the reserve holding period. Empirical results are supported by a finite horizon heterogeneous agents model showing that interest rates tend to decrease in the case of excess aggregate reserves in the banking system. Results contrast with Quir'os and Mendiz'abal (2006) who find that interest rates should be increasing regardless of the outstanding aggregate liquidity in the market. We also show that responsiveness of banks to interest rate changes diminishes as the end of reserve holding period approaches. Under certain circumstances this could lead to multiple equilibria with increasing or decreasing interest rates.
    Keywords: Interbank market, Currency board
    JEL: E52 E58
    Date: 2006–10
  19. By: Thiess Buettner; Michael Overesch; Ulrich Schreiber; Georg Wamser
    Abstract: This paper analyzes the impact of taxes and lending conditions on the financial structure of multinationals' foreign affiliates. The empirical analysis employs a large panel of affiliates of German multinationals in 26 countries in the period from 1996 until 2003. In accordance with the theoretical predictions, the effect of local taxes on leverage is positive for both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes.
    Keywords: corporate income tax, multinationals, capital structure, firm-level data
    JEL: G32 H25 H26
    Date: 2006
  20. By: Lorenzo Cappiello (DG Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Bruno Gérard (Mellon Capital Management, 595 Market Street Suite 3000, San Francisco, CA 94105.); Arjan Kadareja; Simone Manganelli (DG Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This study assesses the degree of financial integration for a selected number of new EU member states between themselves and with the euro zone. Within the framework of a factor model for market returns, we measure integration as the amount of variance explained by the common factor relative to the local components. We show that this measure of integration coincides with return correlation. Correlations are proxied by comovements, estimated via a regression quantile-based methodology. We find that the largest new member states, the Czech Republic, Hungary and Poland, exhibit strong comovements both between themselves and with the euro area. As for smaller countries, only Estonia and to a less extent Cyprus show increased integration both with the euro zone and the block of large economies. In the bond markets, we document an increase in integration only for the Czech Republic versus Germany and Poland. JEL Classification: C32, F30, G12.
    Keywords: Integration, new EU member states, regression quantile.
    Date: 2006–10

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