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on Banking |
| By: | Diemo Dietrich; Uwe Vollmer |
| Abstract: | This paper studies how capital requirements influence a bank’s mode of entry into foreign financial markets. We develop a model of an internationally operating bank that creates and allocates liquidity across countries and argue that the advantage of multinational banking over offering cross-border financial services depends on the benefit and the cost of intimacy with local markets. The benefit is that it allows to create more liquidity. The cost is that it causes inefficiencies in internal capital markets, on which a multinational bank relies to allocate liquidity across countries. Capital requirements affect this trade-off by influencing the degree of inefficiency in internal capital markets. |
| Keywords: | incomplete financial contracting; cross-border financial services; multinational banking; liquidity allocation; capital regulation. |
| JEL: | F21 F23 G21 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:18-06&r=ban |
| By: | Elsinger, Helmut; Lehar, Alfred; Summer, Martin |
| Abstract: | We propose a new method for the analysis of systemic stability of a banking system relying mostly on market data. We model both asset correlations and interlinkages from interbank borrowing so that our analysis gauges two major sources of systemic risk: correlated exposures and mutual credit relations that may cause domino effects of insolvencies. We apply our method to a data set of the ten major UK banks and analyze insolvency risk over a one-year horizon. We also suggest a stress-testing procedure by analyzing the conditional asset return distribution that results from the hypothetical failure of individual institutions in this system. Rather than looking at individual bank defaults ceteris paribus, we take the change in the asset return distribution and the resulting change in the risk of all other banks into account. This takes previous stress tests of interlinkages a substantial step further. |
| Keywords: | Systemic Risk; Financial Stability; Stress Testing; Interbank Market |
| JEL: | G00 G0 |
| Date: | 2005–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:817&r=ban |
| By: | Fred Furlong; Simon Kwan |
| Abstract: | In 1986, a task force of banking academics organized and sponsored by the American Bankers Association convened to examine the banking industry and the efficacy of its regulatory system. The group was charged with reviewing the problems of ensuring the safety and soundness of the banking system and evaluating a number of policy options to improve the efficiency, performance, and safety of the system by changing the structure of the deposit insurance system and the bank regulatory and supervisory process. The results of the work of the task force were published by the MIT Press as the book, Perspectives on Safe and Sound Banking (Benston et al., 1986, the Report), which includes a set of principal options and recommendations. The purpose of this article is to assess the extent to which changes in public policy regarding depository institutions have been aligned with the recommendations of the Report. We find that, over the past 20 years, several legislative initiatives and changes in regulations and the bank supervisory process have been in keeping with the specific recommendations of the Report or with the analytic framework underlying the recommendations. At the same time, other recommendations in the Report have not been taken up and some proposals rejected in the Report have been put in place by legislative and regulatory initiatives. Overall, public policy and private sector initiatives appear to have contributed to safer and sounder banking and thrift sectors over the past 20 years. Consistent with what we see as the main theme of the Report, a likely contributing factor is the more appropriate alignment of incentive for risk-taking among larger depository institutions. Developments affecting risk-taking by depository institutions likely include higher capitalizations, greater risk exposure of private sector stakeholders more generally, improvements in risk management, and supervision and regulation that is focused on overall risk. |
| Keywords: | Banks and banking ; Bank supervision |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-27&r=ban |
| By: | Christian Merkl; Stéphanie Stolz |
| Abstract: | Based on a quarterly regulatory dataset for German banks from 1999 to 2004, this paper analyzes the effects of banks’ regulatory capital on the transmission of monetary policy in a system of liquidity networks. The dynamic panel regression results provide evidence in favor of the bank capital channel theory. Banks holding less regulatory capital and less interbank liquidity react more restrictively to a monetary tightening than their peers. |
| Keywords: | monetary policy transmission, bank lending channel, bank capital channel, liquidity networks |
| JEL: | E52 G21 G28 C23 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1303&r=ban |
| By: | Thierry Tressel; Enrica Detragiache; Asli Demirgüç-Kunt |
| Abstract: | This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) improves bank soundness. The authors find a significant and positive relationship between bank soundness (measured with Moody's financial strength ratings) and compliance with principles related to information provision2. Specifically, countries that require banks to regularly and accurately report their financial data to regulators and market participants have sounder banks. This relationship is robust to controlling for broad indexes of institutional quality, macroeconomic variables, sovereign ratings, and reverse causality. Measuring soundness through Z-scores yields similar results. These findings emphasize the importance of transparency in making supervisory processes effective and strengthening market discipline. Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision over other elements of the core principles. |
| Keywords: | Bank soundness , regulation and supervision , Basel Core Principles , |
| Date: | 2006–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/242&r=ban |
| By: | Monique Florenzano (Centre d'Economie de la Sorbonne); Stella Kanellopoulou (Centre d'Economie de la Sorbonne); Yannis Vailakis (Centre d'Economie de la Sorbonne) |
| Abstract: | This paper studies a simple stochastic two-period general equilibrium model with money, an incomplete market of nominal assets, and a competitive banking system, intermediate between consumers and a Central Bank. There is a finite number of agents, consumers and banks. Default is not permitted. The public policy instruments are, besides real taxes implicit in the model, public debt and creation of money, both implemented at the first period. The equilibrium existence is established under a "Gains to trade" hypothesis and the assumption that banks have a nonzero endowment of money at each date-event of the model. |
| Keywords: | Competitive banking system, incomplete markets, nominal assets, money, monetary equilibrium, cash-in-advance constraints, public debt. |
| JEL: | C61 C62 D20 D46 D51 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:b06068&r=ban |
| By: | Amadou N. R. Sy; Jorge A. Chan-Lau |
| Abstract: | In contrast to corporate defaults, regulators typically take a number of statutory actions to avoid the large fiscal costs associated with bank defaults. The distance-to-default, a widely used market-based measure of corporate default risk, ignores such regulatory actions. To overcome this limitation, this paper introduces the concept of distance-to-capital that accounts for pre-default regulatory actions such as those in a prompt-corrective-actions framework. We show that both risk measures can be analyzed using the same theoretical framework but differ depending on the level of capital adequacy thresholds and asset volatility. We also use the framework to illustrate pre-default regulatory actions in Japan in 2001-03. |
| Keywords: | Banks , insolvency , closure , prompt corrective action , distance-to-default , distance-to-capital , Banks , Financial stability , |
| Date: | 2006–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/215&r=ban |
| By: | Miguel A. Segoviano Basurto; Boris Hofmann; C. A. E. Goodhart |
| Abstract: | This paper uses a Merton-type estimate of the probability of default (PoD) for the main banks in a sample of Organization for Economic Cooperation and Development and middle-income countries as a proxy for the fragility of their banking systems. Based on theory and stylized facts, the paper explores a range of financial and real variables that explain such PoDs across time. We find property price fluctuations and bank credit to be important explanatory factors. There is two-way interaction between these variables and a clearer relationship when the variables are entered as a deviation from trend. The lag structure between such developments and PoDs is long and varies widely across countries. The paper assesses the implications of these findings for economic policy. |
| Keywords: | Probability of default , credit risk , systemic risk , macroeconomic shocks , stress testing , financial surveillance , |
| Date: | 2006–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/223&r=ban |
| By: | Oleksandr Talavera; Andriy Tsapin; Oleksandr Zholud |
| Abstract: | Our study investigates the link between bank lending behavior and macroeconomic uncertainty. We develop a dynamic model of a bank's value maximization that results in a negative relationship between loan to capital ratio and macroeconomic uncertainty. This proposition is tested using a panel of Ukrainian banks collected from NBU and covering the period 2003q1-2005q3. The results indicate that banks increase their lending ratios when macroeconomic uncertainty decreases. We demonstrate that our results are robust with respect to the measurement of macroeconomic uncertainty. The reaction of banks to changes in uncertainty is not uniform and depends on bank-specific characteristics. |
| Keywords: | Banks, macroeconomic uncertainty, Ukraine, banks' balance sheets |
| JEL: | G21 G28 P27 P34 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp637&r=ban |
| By: | H P, Mahesh; Rajeev, Meenakshi |
| Abstract: | Abstract Present study attempts to examine the changes in the productive efficiency of Indian commercial banks after the financial sector reforms initiated in 1992. Using stochastic frontier technique we estimate bank specific deposit, advance and investment efficiencies for the period 1985-2004. Our results show that deregulation has significant impacts on all three types of efficiency measures. While deposit and investment efficiencies have improved, advance efficiency has declined marginally. Public sector banks as a group ranks first in all the three efficiency measures showing that, as opposed to the general perception, these banks are doing better than their private counterparts. Private Banks however have shown marked improvement during the post-liberalisation period in terms of all three types of efficiency measures. |
| Keywords: | Key words: Liberalisation; Banking; Frontier; Efficiency. |
| JEL: | G21 |
| Date: | 2006–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:827&r=ban |
| By: | Kim, Joocheol; Kim, KiHyung |
| Abstract: | The proposals of the Basel Committee on Banking Supervision for the revision of minimum requirements for bank's risk capital leave the quanti¯cation of loss-given-default (LGD) parameter used for capital calculation unspeci¯ed. This paper proposes a new methodology for incorporating LGD parameter explicitly into the Basel risk weight function. Numerical examples based on the new methodology are compared to the current proposals of the Basel committee on Banking Supervision. |
| Keywords: | LGD; Single Risk Factor; Basel |
| JEL: | G21 |
| Date: | 2006–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:860&r=ban |
| By: | Semenova, Maria |
| Abstract: | The introduction of institutions of credit information sharing - private credit bureaus and public credit registries - in the market for bank loans represent one of the possible solutions of information asymmetry problem, - the problem which the creditors tend to face. However the possibility of information sharing influences the bank's incentives in two different ways. While it disciplines the borrowers and, therefore, reduces the share of bad loans, a bank loses the competitive advantage, namely the monopolistic knowledge about the data in its clients' credit histories. Does the bank have an opportunity at its disposal to use the benefits of information sharing without losing its competitive advantage and its clientele? One way to do so is to report false data on borrowers. This paper analyses the bank's incentives for such opportunistic behavior and describes the impact of false information reporting on the characteristics of market equilibrium. The opportunity to get extra profit and to offer less expensive credit to new clients explains why banks prefer the strategy of dishonest behavior. This paper outlines the role of the informational intermediary in quality control for the data, contained in credit reports. Also, it describes the conditions under which verification of a certain share of reports provides that the parameters characterizing the equilibrium are equal to those in no information asymmetry situation. |
| JEL: | G14 G21 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:359&r=ban |
| By: | Lelyveld, Iman van; Liedorp, Franka |
| Abstract: | We investigate interlinkages and contagion risks in the Dutch interbank market. Based on several data sources, including the answers of banks to a questionnaire, we estimate the exposures in the interbank market at bank level. Next, we perform a scenario analysis to measure contagion risks. We find that the bankruptcy of one of the large banks will put a considerable burden on the other banks, but will not lead to a complete collapse of the interbank market. The contagion effects of the failure of a smaller bank are limited. The exposures to foreign counterparties are large and warrant further research. An important contribution of this paper is that we show, using survey data, that the entropy estimation using large exposures data as applied in many previous papers gives an adequate approximation of the actual linkages between banks. Hence, this methodology does not seem to introduce a bias. |
| Keywords: | interbank market; contagion; simulation |
| JEL: | O16 |
| Date: | 2004–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:651&r=ban |
| By: | Robert A. Eisenbeis; George G. Kaufman |
| Abstract: | This paper examines the implications that alternative regulatory structures may have for resolving failed banking institutions. We place our emphasis on the European Union (EU), which is both economically and financially large and has several features relating to cross-border banking in the form of direct investment that may heighten the problems we consider. We propose four principles to ensure the efficient resolution of bank failures, should they occur, with minimum, if any, credit and liquidity losses. These principles include prompt legal closure of institutions before they become economically insolvent, prompt identification of claims and assignment of losses, prompt reopening of failed institutions, and prompt recapitalizing and reprivatization of failed institutions. Finally, we propose a mechanism to put such a scheme into place quickly in the case where a cross-border banking organization seeks to take advantage of the liberal cross-border branching provisions in the single banking license available to banks in the EU. In return for the privilege of such a license, the bank agrees to be subject to a legal closure rule as a positive capital ratio established by the EU or the home country. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-15&r=ban |
| By: | Batiz-Lazo, Bernardo; Maixe-Altes, J. Carles |
| Abstract: | In this article we explore organisational changes associated with the automation of financial intermediaries in Spain and the UK. This international comparison looks at the evolution of the same organisational form in two distinct competitive environments. Changes in regulation and technological developments (particularly applications of information technology) are said to be responsible for enhancing competitiveness of retail finance. Archival research on the evolution of savings banks helps to ascertain how, prior to competitive changes taking place, participants in bank markets had to develop capabilities to compete. |
| Keywords: | comparative financial markets; United Kingdom; Spain; market structure; technological change; regulatory change; savings banks; banks. |
| JEL: | N20 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:804&r=ban |
| By: | Lelyveld, Iman van; Liedorp, Franka |
| Abstract: | We investigate interlinkages and contagion risks in the Dutch interbank market. Based on several data sources, including survey data, we estimate the exposures in the interbank market at bank level. Next, we perform a scenario analysis to measure contagion risks. We find that the bankruptcy of one of the large banks will put a considerable burden on the other banks but will not lead to a complete collapse of the interbank market. The exposures to foreign counterparties are large and warrant further research. An important contribution of this paper is that we show, using survey data, that the entropy estimation using large exposures data as applied in many previous papers gives an adequate approximation of the actual linkages between banks. Hence, this methodology does not seem to introduce a bias. |
| JEL: | G00 G0 |
| Date: | 2006–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:806&r=ban |
| By: | Baba, Naohiko; Nakashima, Motoharu; Shigemi, Yosuke; Ueda, Kazuo |
| Abstract: | Using the interest rates on negotiable certificates of deposit issued by individual banks, we first show that under the Bank of Japan's zero interest rate policy and quantitative monetary easing policy, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. We next show that the fall in the dispersion of the rates is not fully explained by a fall in the dispersion of credit ratings of the banks. We also present some evidence on the role of the Bank of Japan's monetary policy in reducing risk premiums. |
| Keywords: | Monetary policy; Zero Interest Rate Policy; Quantitative Monetary Easing Policy; Negotiable Certificate of Deposit; Credit Risk Premium |
| JEL: | G00 G0 |
| Date: | 2005–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:816&r=ban |
| By: | Rodolphe Blavy |
| Abstract: | This paper combines financial soundness indicators (FSIs) and stress-testing methodologies to provide a broad assessment of the soundness of Venezuela's banking sector, based on a diagnosis of its structural and transient shortcomings. While the Venezuelan banking sector appears sound under current favorable economic conditions, it remains significantly vulnerable to cyclical downturns-which have been severe in the past. Banks are particularly exposed to interest rate and credit risks. This suggests that the strong FSIs may be partly the result of a conjunctural credit boom in the context of capital controls and very low real interest rates. |
| Keywords: | Banking sector , financial soundness , macroprudential analysis , stress tests , Venezuela , |
| Date: | 2006–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/225&r=ban |
| By: | Federico S. Mandelman |
| Abstract: | Starting from a variant of the New Keynesian model for a small open economy, I extend the standard credit channel framework to show that the presence of imperfect competition in the banking system propagates external shocks and amplifies the business cycle. This novel modeling of the banking system captures various well-documented facts in developing economies. I show that strategic limit pricing, aimed at protecting retail niches from potential competitors, generates countercyclical bank markups. Markup increments, as a consequence of sudden capital outflows, end up increasing borrowing costs for firms as well as damaging the financial position of firms’ balance sheets. The recognition of monopoly power in banking allows the model to account for the relatively high investment volatility registered in emerging countries, even in the presence of debt that is fully denominated in local currency and flexible exchange rates. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-17&r=ban |
| By: | Tetsuji Okazaki (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper explores how the Bank of Japan (BOJ) dealt with the trade-off between stability of the financial system and the moral hazard of banks in pre-war Japan. The BOJ concentrated Lender of Last Resort (LLR) loans with those banks that had an established transaction relationship with the BOJ. At the same time, the BOJ carefully selected its transaction counterparts, and did not hesitate to end the relationship if the performance of a counterpart declined. Further, the BOJ was selective in providing LLR loans. Through this policy, the BOJ could avoid the moral hazard that the LLR policy might otherwise have incurred. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2006cf447&r=ban |
| By: | Wendell Samuel; Laura Valderrama |
| Abstract: | The paper analyzes the determinants of banking spreads in Barbados, with a view to identifying the role of the monetary policy regime in explaining high spreads. The paper finds that interest rate spreads for Barbados are higher than would be suggested by its macroeconomic performance. Banking concentration and bank-specific variables, including bank size and provisions for nonperforming loans, do not have an important role in explaining variations in bank spreads. Rather, it appears that monetary policy variables, such as reserve requirements and capital controls, are the most important determinants of spreads. |
| Keywords: | Interest rate spreads , monetary policy regime , |
| Date: | 2006–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/211&r=ban |
| By: | Robert A. Eisenbeis |
| Abstract: | This paper examines the negative externalities that may occur when a large bank fails, describes the nature of those externalities, and explores whether they may be greater in a case involving a large cross-border banking organization. The analysis suggests that the chief negative externalities are associated with credit losses and losses due to liquidity problems, and these losses are critically affected by how promptly an insolvent institution is closed, how quickly depositors gain access to their funds, and how long it takes borrowers to reestablish credit relationships. While regulatory delay and forbearance may affect the size and distribution of losses, the likely incident of systemic risk and the negative externalities are more associated with the structure of the applicable bankruptcy laws and methods available to resolve a failed institution and quickly get it operating again. This circumstance implies that regulatory concerns about systemic risk should be directed first at closing institutions promptly, reforming bankruptcy statutes to admit special procedures for handling bank failures, and providing mechanisms to give creditors and borrowers prompt and immediate access to their funds and lines of credit. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-18&r=ban |
| 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. |
| Keywords: | Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-31&r=ban |