New Economics Papers
on Banking
Issue of 2006‒12‒01
eighteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Banks' procyclicality behavior : does provisioning matter ? By Vincent Bouvatier; Laetitia Lepetit
  2. Equilibrium of incomplete markets with money and intermediate banking system By Monique Florenzano; Stella Kanellopoulou; Yannis Vailakis
  3. Banks, Liquidity Crises and Economic Growth By Alejandro Gaytan; Romain Ranciere
  5. Lender and Borrower as Principal and Agent By Karel Janda
  6. Recovery Rates, Default Probabilities and the Credit Cycle By Carlos González-Aguado; Max Bruche
  7. FIRM INVESTMENT AND MONETARY POLICY<br />TRANSMISSION IN THE EURO AREA By Jean-Bernard Chatelain; Andrea Generale; Ignacio Hernando; Ulf Von Kalckreuth; Philip Vermeulen
  8. Networks, Information and Prevention of Indiosyncratic Risks in Mexican Banks 1945-1980 By Gustavo A. Del Ángel Mobarak
  9. Current State of Cross-Border Banking By Christiaan van Laecke; Dirk Schoenmaker
  10. Multimarket spatial competition in the Colombian deposit market By Dairo Estrada; Sandra Rozo
  11. Does Credit Risk Vary with Economic Cycles? The Case of Finland By Petr Jakubík
  12. Marché du crédit et travail décent au Burkina Faso By Adama Zerbo
  13. The Social Impact of the Banking Sector in Colombia, 1995 – 2002 By Juan Carlos Echeverry Garzón; Ángela María Fonseca Galvis
  14. Investment-Cash Flow Sensitivities, credit rationing and financing constraints By BECCHETTI LEONARDO; CASTELLI ANNALISA; HASAN IFTEKHAR
  15. Price transmission dynamics between ADRs and their underlying foreign security: The case of Banco de Colombia S.A.- Bancolombia. By Luis Berggrun
  16. ¿Cuál es la reforma financiera que necesita Colombia? By FEDESARROLLO
  17. Determinação de Rating de Crédito de Unidades de Negócios Visando Estimar o Custo de Capital de Terceiros By Minardi, Andrea Maria Accioly Fonseca; SANVICENTE, Antônio Zoratto; ARTES, R.
  18. Financial intermediation as a source of aggregate instability By FABRIZIO MATTESINI

  1. By: Vincent Bouvatier (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - [Université de Limoges])
    Abstract: A panel of 186 European banks is used for the period 1992-2004 to determine if banking behaviors induced by the capital adequacy constraint and the provisioning system, amplify credit fluctuations. Our finding is consistent with the bank capital channel hypothesis, which means that poorly capitalized banks are constrained to expand credit. We also find that loan loss provisions (LLP) made in order to cover identified credit losses (non discretionary LLP) amplify credit fluctuations. Indeed, non discretionary LLP evolve cyclically. This leads to a misevaluation of expected credit risk which affect banks' incentives to grant new loans since lending costs are misstated. By contrast, LLP use for management objectives (discretionary LLP) do not affect credit fluctuations. The findings of our research are consistent with the call for the implementation of dynamic provisioning in Europe.
    Keywords: Bank lending, loan loss provisions, capital requirement.
    Date: 2006–11–22
  2. By: Monique Florenzano (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Stella Kanellopoulou (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Yannis Vailakis (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: This paper studies a simple stochastic two-period general equilibrium exchange 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 non zero 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.
    Date: 2006–11–07
  3. By: Alejandro Gaytan; Romain Ranciere
    Abstract: How do the liquidity functions of banks affect investment and growth at different stages of economic development? How do financial fragility and the costs of banking crises evolve with the level of wealth of countries? We analyze these issues using an overlapping generations growth model where agents can invest in a liquid storage technology or in a partially illiquid Cobb Douglas technology. By pooling liquidity risk, banks play a growth enhancing role in reducing inefficient liquidation of long term projects, but they may face liquidity crises associated with severe output losses. Middle income economies may find optimal to be exposed to liquidity crises, while poor and rich economies have more incentives to develop a fully covered banking system. Therefore, middle income economies could experience banking crises in the process of their development and, as they get richer, eventually converge to a financially safe long run steady state. The model also replicates the empirical fact of higher costs of banking crises for middle income economies. Finally, using GMM dynamic panel data techniques for a sample of 83 countries we show that growth implications of the model are consistent with the empirical facts.
    Keywords: OLG growth models, liquidity, financial intermediation, financial fragility, banking crises
    JEL: E44 G21 O11
    Date: 2005–06
  4. By: Govori, Fadil
    Abstract: Economic system relies heavily on financial resources and transactions, and economic efficiency rests in part on efficient financial markets. Financial markets consist of agents, brokers, institutions, and intermediaries transacting purchases and sales of securities. The many persons and institutions operating in the financial markets are linked by contracts, communications networks which form an externally visible financial structure, laws, and friendships. The financial market is divided between investors and financial institutions.
    Keywords: Markets and Institutions
    JEL: G23 G21 G20 G22
    Date: 2006–11–26
  5. By: Karel Janda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; University of Economics, Department of Banking and Insurance, Prague, Czech Republic)
    Abstract: This paper provides a critical survey of some recent developments in the principal-agent approach to the relationship between lenders and borrowers. The costly state verification model of optimal debt contract is introduced and new results with respect to optimality of standard debt contracts in this model are discussed. Adverse selection in credit markets and its solution with a menu of screening contracts is described and the problems with collateral as a screening instrument are outlined. The dynamic relationship between the lender and borrower is introduced in a soft budget constraint model of default and bankruptcy decisions. Alternative assumptions about informational asymmetries in credit markets are presented as well. For all these topics a number of references from Czech and international economic literature is provided.
    Keywords: principal; agent; contracts; credit; adverse selection; moral hazard
    JEL: C72 D82 G21
    Date: 2006–07
  6. By: Carlos González-Aguado; Max Bruche
    Abstract: Recovery rates are negatively related to default probabilities (Altman et al.,2005). This paper proposes and estimates a model in which this dependence is the result of an unobserved credit cycle: When times are bad, the default probability is high and recovery rates are low; when times are good, the default probability is low and recovery rates are high. The proposed dynamic model is shown to produce a better fit to the data than a standard static approach. It indicates that ignoring the dynamic nature of credit risk could lead to a severe underestimation of credit risk (e.g. by a factor of up to 1.7 in terms of the 95% VaR). Also, the model indicates that the credit cycle is related to but distinct from the business cycle as e.g. determined by the NBER, which might explain why previous studies have found the power of macroeconomic variables in explaining default probabilities and recoveries to be low.
    Date: 2006–11
  7. By: Jean-Bernard Chatelain (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre], PSE - Paris-Jourdan Sciences Economiques - [CNRS : UMR8545] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Normale Supérieure de Paris]); Andrea Generale (Banca d´Italia - [Banca d´Italia]); Ignacio Hernando (Bank of Spain - [Bank of Spain]); Ulf Von Kalckreuth (Bundesbank - [Bundesbank]); Philip Vermeulen (ECB - European Central Bank - [European Central Bank])
    Abstract: This paper presents a comparable set of results on the monetary transmission channels on firm<br />investment (the interest rate channel and the broad credit channel) for the four largest euro-area<br />countries (Germany, France, Italy and Spain), using particularly rich micro datasets for each<br />country containing over 215,000 observations from 1985 to 1999. For each of those countries,<br />investment relationships are estimated explaining investment by its user cost, sales and cash flow.<br />A first result is that investment is sensitive to user cost changes in all those four countries. This<br />implies an operative interest channel in these euro-area countries. A second result is that investment<br />in all countries is quite sensitive to cash flow movements. However, only in Italy do smaller firms<br />react more to cash flow movements than large firms, implying that a broad credit channel might not<br />be equally pervasive in all countries.
    Keywords: Investment, Monetary Transmission Channels, User Cost of Capital
    Date: 2006–11–08
  8. By: Gustavo A. Del Ángel Mobarak
    Abstract: Between 1945 and 1982 a network of interlocking directorates formed at the interior of the Mexican banking system. However, little work has been done to explore its implications. This paper proves that the network among bankers served to transfer information within the financial system and hence to reduce idiosyncratic risks. Using social network analysis with a database of the banks' boards, this paper presents computations of the centrality of the network. Degree and Eigenvalue centrality, used as measures for interconnection among banks, are then contrasted with indicators of financial performance for individual banks using a panel regression technique.
    Date: 2005–06
  9. By: Christiaan van Laecke; Dirk Schoenmaker
    Date: 2006–11
  10. 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 Em- pirical 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 competitive- ness level. The theoretical model is applied to quarterly Colombian data that covers the period between 1996 and 2005. Our results sug- gest 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.
    Date: 2006–10–01
  11. By: Petr Jakubík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank, Prague, Czech Republic)
    Abstract: The significance of credit risk models has increased with the introduction of new Basel accord known as Basel II. The aim of this study is default rate modeling. This paper follows the two possible approaches of a macro credit risk modeling. First, empirical models are investigated. Second, a latent factor model based on Merton's idea is introduced. Both of these models are derived from individual default probability models. We employed data over the time period from 1988 to 2003 of the Finnish economy. First, linear vector autoregressive models were used in the case of dynamic empirical model. We examined how significant macroeconomic indicators determined the default rate in the economy. However these models cannot provide microeconomic foundation as latent factor models. A one-factor model was estimated using disaggregated industrial data. This estimation can help understand relation between credit risk and macroeconomic indicators. Models can be used for default rate prediction or stress testing by central authorities.
    Keywords: banking; credit risk; latent factor model; default rate
    JEL: G21 G28 G33
    Date: 2006–04
  12. By: Adama Zerbo (CED / IFReDE-GRES, Université Montesquieu Bordeaux IV)
    Abstract: Cette étude visait à dégager des pistes de réflexions pour une meilleure coordination des politiques visant à faciliter l’accès au crédit et à optimiser son allocation dans l’économie pour plus de travail décent au Burkina Faso. Elle montre que le marché du crédit burkinabé est compartimenté en quatre segments qui se distinguent par les mécanismes d’offre de crédit, de gestion de l’information et du risque de crédit. Par ailleurs, l’appel public à l’épargne de l’Etat s’apparente au financement des dépenses publiques par le circuit bancaire au regard de ses effets directs significatifs sur le marché crédit. Le cloisonnement du marché du crédit réduirait significativement l’efficacité des instruments traditionnels de politique monétaire, ainsi que l’impact du marché du crédit sur le travail décent. Pour y remédier, les pistes de réflexions suivantes méritent d’être approfondies : (i) la mise en place d’un système de garanties accessible aux petites et moyennes entreprises, (ii) le renforcement de l’efficacité du système judiciaire pour améliorer le taux de recouvrement des crédits en souffrance afin de réduire l’aversion des banquiers pour le risque, (iii) l’accroissement de la disponibilité et la fiabilité de l’information comptable au niveau des PME afin de permettre aux créanciers d’apprécier le risque à prendre et (iv) le développement à l’horizontale et à la verticale du micro-crédit pour une complémentarité efficace entre crédit bancaire et micro-crédit. This paper aimed to underline reflections tracks for better coordination of credit market policies in Burkina Faso so as to boost decent work. It shows that Burkina Faso credit market has four compartments which are characterized by their credit supply, information and risk management mechanisms. In addition, Treasury bond emission remains equal to the financing of public expenditure by banking system in regard to his effects on credit market. The segmentation of credit market would significantly reduce effective of monetary policy and impact of credit market on decent work. To cure it, following reflections tracks have to be thorough: (i) creating guarantees device accessible to SME; (ii) reinforcing legal system effectiveness to improve the recovery rate of overdue credits in order to reduce bankers’ aversion for risk; (iii) improving of availability and reliability of hard information in SME in turn to allow creditors to assess the risk; (iv) horizontal and vertical development of micro-credit for effective complementary between banking system and microfinance. (Full text in french)
    JEL: E3 J5
    Date: 2006–11
  13. By: Juan Carlos Echeverry Garzón; Ángela María Fonseca Galvis
    Abstract: This document studies the impact of the banking sector on social variables in Colombia, and tries to identify how the difference in banking institutions’ development at the municipal levels influences economic and social prosperity of low income households and firms. One part of the literature emphasizes the role of the financial system in promoting this type of agents’ economic performance as long as it attracts them to the use of financial intermediation, making available to them the use of financial services and technologies, both in deposits and credit. Another trend in the literature studies specific characteristics of liquidity constrained agents. This study empirically identifies how bancarization influences poverty and investment on education, in the case of families; and economic performance and the number of firms, in the municipal level in Colombia for the period 1995-2002. When studying these effects we control for local variables such as public spending in investment, homicide rate and guerrilla conflict. The period of study was characterized by the end of an economic boom and recession, which influences our econometric results. This study shows that banking developments affect households’ education decisions and firms’ performance at the municipal level; it was also found that non performing loans are associated with the decrease in the number of firms, but a relationship between loans and the creation of firms was not present.
    Date: 2005–06
    Abstract: The controversy on whether the investment-cash flow sensitivity is a good indicator of financing constraints is still unsolved. We tackle it from many different angles cross-validating our analysis with both balance sheet and qualitative data on self declared credit rationing and financing constraints. Our qualitative information shows that (self declared) credit rationing is (weakly) related to both traditional a priori factors - such as firm size, age and location - and lenders’ rational decisions taken on the basis of their credit risk models. We use our qualitative information on firms which were denied (additional) credit to provide evidence relevant to the investment-cash flow sensitivity debate. Our results show that self declared credit rationing significantly discriminates between firms which possess or not such sensitivity, while a priori criteria do not. The same result does not apply when we consider the wider group of financially constrained firms (which do not seem to have a higher investment-cash flow sensitivity) supporting the more recent empirical evidence in this direction.
    Keywords: financing constraints, credit rationing, investment/cash flow sensitivity JEL classification: D92, G21
    Date: 2005–11
  15. By: Luis Berggrun
    Abstract: This paper analyzes the dynamics ofthe American Depositary Receipt (ADR) of a Colombian bank (Bancolombia) in relation to its pricing factors (underlying (preferred) shares price, exchange rate and the US market index). The aim is to test if there is a long-term relation among these variables that would imply predictability. One cointegrating relation is found allowing the use of a vector error correction model to examine the transmission of shocks to the underlying prices, the exchange rate, and the US market index. The main finding of this paper is that in the short run, the underlying share price seems to adjust after changes in the ADR price, pointing to the fact that the NYSE (trading market for the ADR) leads the Colombian market. However, in the long run, both, the underlying share price and the ADR price, adjust to changes in one another.
    Date: 2006–01–01
    Abstract: • A pesar de la recuperación de la crisis de 1998-1999, Colombia presenta aún bajos niveles de profundización financiera y bancarización. La evidencia también indica que aún hay espacio para hacer ganancias en eficiencia. • Más que una gran reforma financiera, Fedesarrollo opina que lo que se necesita son ajustes graduales que permitan superar estos problemas estructurales. • Dentro de los primeros aspectos que se deben atacar están los relacionados con la represión financiera. En particular, Fedesarrollo señala la importancia de eliminar el GMF. Así mismo, resulta imperativo hacer los cambios necesarios para asegurar una mayor protección de los derechos de los acreedores y una mejor calidad de las centrales de información crediticia. • En cuanto a la estructura, Fedesarrollo opina que es pertinente permitir a los bancos involucrarse de manera directa (y voluntaria) en los negocios de leasing, fiducia y banca de inversión. La evolución de la economía en 2006 y expectativas para el corto y mediano plazo. • El crecimiento económico del último semestre ratifica el buen momento por el que está atravesando la economía colombiana. • Entre los factores externos e internos que explican el buen momento de la economía se destacan el ambiente de seguridad que ha mejorado la confianza de los consumidores e inversionistas, las bajas tasas de interés internas y la alta disponibilidad de crédito, el dinamismo de la inversión pública y las condiciones favorables que vive la economía mundial. • Sin embargo, se identifican algunos riesgos que pueden afectar la economía en el corto y mediano plazo, los cuales tienen que ver con posibles presiones inflacionarias, choques negativos a la demanda por exportaciones colombianas y dificultades de financiamiento interno y externo. • Fedesarrollo ha calculado sus proyecciones de crecimiento para el período 2006-2011. Se espera que el crecimiento económico se sitúe alrededor de 5,6% en 2006, 5,2% en 2007 y 4,7%, en promedio, entre 2008 y 2011. Algunos de los principales factores que sustentan esta senda de crecimiento se encuentran en un gran dinamismo de la actividad minera, una alta tasa de inversión total y un buen desempeño de la demanda externa. Encuesta de Opinión Financiera • Los administradores esperan incrementos en las tasas de interés • Los títulos atados al IPC continúan siendo el activo más preferido. • En septiembre el porcentaje neto de administradores que espera que las tasas de interés del Banco de la República aumenten creció a un 100%. Encuesta de Confianza del Consumidor • A pesar de una leve reducción, la confianza se mantiene en niveles elevados. • El comportamiento del Índice de Confianza del Consumidor mantiene una tendencia creciente. • Los estratos bajos registran los mayores niveles de confianza. Encuesta de Opinión Empresarial • La confianza industrial registra un máximo histórico. • La utilización de capacidad instalada se encuentra en niveles elevados. • Los industriales consideran que las condiciones económicas para la inversión son bastante favorables.
    Date: 2006–10–17
  17. By: Minardi, Andrea Maria Accioly Fonseca; SANVICENTE, Antônio Zoratto; ARTES, R.
    Date: 2006–10
    Abstract: We consider a simple overlapping generations economy where the behavior of intermediaries, in a market characterized by asymmetric information and moral hazard, may give rise to cyclical equilibria. When capital increases output and savings also increase, and therefore more capital will be available in the following period. At the same time, however, interest rates also decrease and this induces intermediaries to reduce the amount of resources devoted to monitoring. A larger number of firms will select low quality projects and, because of this, less capital will be produced in the following period. For some parameter values this second effect may prevail over the first one and the stock of capital in period t+1 may actually be lower than the stock of capital in period t. The model provides a rigorous interpretation of the view associated with Hyman Minsky [14], Charles Kindleberger[12], and Henry Kaufman[11], according to which expansions come to an inevitable end because of excessive or ill-considered lending that took place during the boom.
    Date: 2005–09

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