New Economics Papers
on Banking
Issue of 2006‒12‒04
sixteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Credit Cycles, Credit Risk, and Prudential Regulation By Jesus, Saurina; Gabriel, Jimenez
  2. Other People’s Money: The Evolution of Bank Capital in the Industrialized World By Richard S. Grossman
  3. Financial systems and banking crises: An assessment By Ruiz-Porras, Antonio
  4. Complementarity among International Asset Holdings: Do Banks Have a Special Role? By Hahm, Joon-Ho; Shin, Kwanho
  5. Risk-based decisions on assets structure of a bank — partially observed economic conditions By Hałaj, Grzegorz
  6. Contagion effect in banking system - measures based on randomised loss scenarios By Hałaj, Grzegorz
  7. How Law Affects Lending By Haselmann, Rainer; Pistor, Katharina; Vig, Vikrant
  8. The External Auditor's Role in Bank Regulation and Supervision : Helping the Regulator Avoid Regulatory Capture. By Ojo, Marianne
  9. The Role of External Auditors and International Accounting Bodies in Financial Regulation and Supervision. By Ojo, Marianne
  10. Changes in the financing structure of the real economy in Poland - challenges for the banking sector By Pruski, Jerzy; Żochowski, Dawid
  11. Have banks filled the gap? Credit as a mechanism of corporate governance in a transition country: example of Poland By Slomka, Agnieszka
  12. Soft Related Lending: A Tale of Two Korean Banks By John P. Bonin; Masami Imai
  13. Bankintermediation bei der Kreditvergabe an junge oder kleine Unternehmen By Susanne Prantl; Matthias Almus; Jürgen Egeln; Dirk Engel
  14. Strategic groups in Polish banking sector and financial stability By Hałaj, Grzegorz; Żochowski, Dawid
  16. Liquidity, Risk Taking, and the Lender of Last Resort By Repullo, Rafael

  1. By: Jesus, Saurina; Gabriel, Jimenez
    Abstract: This paper finds strong empirical support of a positive, although quite lagged, relationship between rapid credit growth and loan losses. Moreover, it contains empirical evidence of more lenient credit standards during boom periods, both in terms of screening of borrowers and in collateral requirements. We find robust evidence that during upturns, riskier borrowers get bank loans, while collateralized loans decrease. We develop a regulatory prudential tool, based on a countercyclical, or forward-looking, loan loss provision that takes into account the credit risk profile of banks’ loan portfolios along the business cycle. Such a provision might contribute to reinforce the soundness and the stability of banking systems.
    Keywords: credit risk; lending cycles; loan loss provisions; bank capital; collateral
    JEL: G00 G0
    Date: 2006–03–20
  2. By: Richard S. Grossman (Department of Economics, Wesleyan University)
    Date: 2006–04
  3. By: Ruiz-Porras, Antonio
    Abstract: Traditionally an old concern among economists has referred to the effects that specific financial systems may have on economic performance. Here we investigate the “stylised facts” among financial systems and banking crises by using individual and principal-components indicators and sets of OLS regressions. The study relies on a set of banking fragility, financial structure and development indicators for a sample of 47 economies between 1990 and 1997. The stylised facts suggest that financial development is associated to financial systems leaded by stock and securities markets. Furthermore the evidence suggests that such association is magnified during episodes of borderline or systemic banking crises. Thus what our findings might suggest is that banking crises may encourage financial development and the transformation of financial systems into market-based ones.
    Keywords: Financial systems; banking crises; financial structure; financial development
    JEL: G1 C2 F4
    Date: 2006–01–05
  4. By: Hahm, Joon-Ho; Shin, Kwanho
    Abstract: This paper studies the pattern and structure of cross-border bilateral financial asset holdings. By utilizing an extended dataset and employing a variant of gravity models, we find strong evidence for the presence of complementarities among bank loans, shortand long-term debts, and portfolio equity holdings. The complementarities can be explained by common factors of standard gravity models such as economy size, state of development, and information cost proxies, as well as bilateral trade in goods and services. However, we also find the presence of a direct channel of complementarities among financial asset holdings that cannot be explained by these gravity factors. We proceed to investigate whether the complementarities can be characterized by the models that predict a special role of banks in alleviating information asymmetry. We find supporting evidence for this hypothesis in that international bank lending tends to increase the volume of portfolio asset holdings. This acceleration effect of bank lending is stronger for destination countries with higher degrees of ‘law and order,’ which suggests that cross-border bank lending may not lead to capital market integration, despite reduced information cost, if there is no appropriate infrastructure to facilitate portfolio investment. By investigating the structure of bilateral asset holdings, we also find positive evidence for the information role of banks. The share of bank lending decreases with increasing state of development of destination countries measured by per capita GDP and human capital accumulation, but increases with increasing distance, suggesting that information cost may play an important role in determining the structure of cross-border asset holdings.
    Keywords: Cross-border asset holdings; Financial integration; Bank lending
    JEL: F36 F15
    Date: 2006–10
  5. By: Hałaj, Grzegorz
    Abstract: A model of bank’s dynamic asset management problem in case of partially observed future economic conditions and requirements concerning level of risk taken has been built. It requires solving the resulting optimal control with random terminal condition resulting from partial observation of parameter of maximized functional. Stochastic Maximum Principle reduces the problem to solving FBSDE. As optimization may usually imply dependence of forward equation on solutions of backward equation we allow the drift and diffusion of forward part to be functions of solution of backward equation. The necessary conditions for existence of solutions of FBSDE in such a form have been derived. A numerical scheme is then implemented for a particular choice of parameters of the problem.
    Keywords: Portfolio optimization; bank’s assets; partial observation; stochastic maximum principle; + FBSDEs.
    JEL: C61 G11
    Date: 2006–08–06
  6. By: Hałaj, Grzegorz
    Abstract: Measures of risk of domino effect (contagion) transmitted through interbank market are discussed and results on implementation of measurement procedure in banking sector are presented. It is shown how a very limited set of available data – interbank exposures and information from balance sheets and profit a loss accounts – can help in generating randomised scenarios of possible losses related to market and credit risk.
    Keywords: Contagion; banking system; interbank
    JEL: C62 G21
    Date: 2006–10
  7. By: Haselmann, Rainer; Pistor, Katharina; Vig, Vikrant
    Abstract: A voluminous literature seeks to explore the relation between law and finance, but offers little insights into dynamic relation between legal change and behavioral outcomes or about the distributive effects of law on different market participants. The current paper disentangles the law-finance relation by using disaggregate data on banks’ lending patterns in 12 transition countries over a 8 year period. This allows us to control for country level heterogeneity and differentiate between different types of lenders. Employing a differences-in-differences methodology in an exclusive ”laboratory” setting as well as unique hand collected datasets on legal change as well as changes in bank ownership, we find that lending volume responds positively to legal change. However, not all legal change is equally effective. The introduction of a legal regime that enhances each lender’s individual prospects of enforcing her claims (collateral law) results in greater increases in lending volume than changes in bankruptcy law, the essence of which is to provide an orderly liquidation or reorganization process in the presence of multiple creditors. Finally, we find that banks that newly enter the market respond more strongly to legal change than do incumbents. In particular, foreign-owned banks extend their lending volume substantially more than domestic banks.
    Keywords: creditor rights; credit market development; bankruptcy; collateral law; bank lending
    JEL: G28 G21 F37 F34 G33
    Date: 2006–09
  8. By: Ojo, Marianne
    Abstract: The incoming Labour administration in 1997 caused a stir when it gave the Bank of England additional monetary policy powers but removed the Bank’s powers to regulate banking. Up till 1997, banking regulation had been the function of the Bank of England while other areas of financial services had been regulated by bodies such as: The Securities and Investment Board (for investment business) and the Department of Trade and Industry (for insurance). Section 21 of the Bank of England Act 1998 effectively transferred banking supervision to the Financial Services Authority (then known as the Securities and Investments Board). This paper amongst other objectives, aims to explore how the Financial Services Authority ( the FSA) as a regulator, could benefit from the expertise of the external auditor as a middleman, to avoid regulatory capture. As an efficient system of accountability would also help prevent regulatory capture, the issue of accountability will also be discussed. A consideration of developments leading to the adoption of a single regulator in the UK, will illustrate how the type of regulator can contribute to knowledge of how the external auditor can assist the regulator.  Furthermore, not only does this paper consider how the introduction of the FSA has improved transparency and accountability within the banking regulatory and supervisory system, but also the claim that the external auditor could further employ his expertise to help the regulator avoid regulatory capture.
    Keywords: single; regulator; regulatory; capture; external; auditor; banking; supervision
    JEL: K2
    Date: 2005–05
  9. By: Ojo, Marianne
    Abstract: The emergence of powerful financial conglomerates operating at a global level has led to unified supervision of financial services in the UK and Germany. These changes in regulatory structures have a higher potential of better utilisation through the involvement of external auditors. The crucial role played by external auditors in banking regulation and supervision has been highlighted in bank collapses like BCCI and Barings. According to the Basel Core Principles for effective Banking Supervision 1997, an effective banking supervisory system should consist of both “on-site” and “off-site” supervision. Off-site supervision involves the regulator making use of external auditors. On-site work is usually done by the examination staff of the bank supervisory agency or commissioned by supervisors but may be undertaken by external auditors. Following Enron's collapse, debates focussed around why the UK had avoided its Enron. Many argued that it was because the US approach to accounting regulation was rules-based in comparison to the principles-based system of the UK . In addition to adopting an independent standard setting, the International Accounting Standards Board's second principle is aimed at principles as opposed to rules based standards. All public trading companies in the European Union would have to apply new international standards from 2005 in consolidated financial statements ( EC Regulation 1606/2002) and huge efforts are now being made towards global convergence.
    Keywords: international; accounting; organisations; external; auditor; financial; supervision
    JEL: M4
    Date: 2006–03
  10. By: Pruski, Jerzy; Żochowski, Dawid
    Abstract: Significant changes have occurred in the Polish banking sector over the last ten years. In the mid-1990s, due to low market entry requirements, many small private commercial banks, which were frequently established by foreign banks seeking to enter the Polish market, operated alongside state banks. A wave of privatisation occurred in the banking sector, which was followed by a period of consolidation and restructuring. These processes, coupled with a simultaneous increase in foreign investor participation, enhanced management quality and banks’ efficiency, primarily with regard to risk management. The changes, which took place in the Polish banking sector in the second half of the 1990s, improved access to loans for corporates and households alike. As a result, lending grew rapidly. The increase was, on average, more pronounced in the household sector than in the corporate one, which brought the composition of bank loans to the private sector closer to what exists in the European Union. This convergence has accelerated over the last five years. The purpose of this paper is to present the phenomena which influenced the evolution of debt structure of the real economy sector in Poland as well as to discuss related future challenges.
    Keywords: Banking Sector in Poland; Economic Transformation; Credit growth; Lending policy
    JEL: G2 O16 O52
    Date: 2005–08–20
  11. By: Slomka, Agnieszka
    Abstract: Poland, as any other transition country, suffers from inefficient corporate governance as firms have difficulties with obtaining external financing. This paper aims to examine whether bank’s involvement in corporate control reduces information asymmetries, and hence lessens firm’s financial constraints – phenomenon frequently measured by investment-cash flow sensitivity. In the sample of all non-financial companies listed during 1999-2002 on the Polish stock exchange firms with a close relationship with banks are almost as much financially constrained as firms without such ties. However, the former group relies more heavily on bank loans than on internal capital in their investment activities. In contrast, firms without a close relationship with banks finance to larger extent their investment with internal capital than with credit. It may be interpreted that bank loans are more important source of financing for firms with bank ties than for firms without bank ties.
    Keywords: corporate control and governance; firm financing; relationship banking; emerging markets
    JEL: G32
    Date: 2005–04–04
  12. By: John P. Bonin (Economics Deapartment, Wesleyan University); Masami Imai (Economics and East Asian Studies, Wesleyan University)
    Abstract: In this paper, we present indirect evidence that the IMF’s insistence on foreign control of two large nationwide Korean banks in exchange for short-term support during the 1997 financial crisis helped restrain soft related lending practices. News signaling the likely sale of a bank to a foreign financial institution yields an average daily decrease of about 2% in the stock price of related borrowers. News indicating difficulty in finding an interested foreign investor generates an increase in the stock price of related borrowers of about the same magnitude. These signals have larger impacts on less-profitable, less-liquid, and more bank-dependent firms.
    Keywords: Related Lending, Korean Banks, Privatization, Globalization
    JEL: G21 O53
    Date: 2005–12
  13. By: Susanne Prantl (Humboldt Universität zu Berlin, Wissenschaftszentrum Berlin, Reichpietschufer 50, 10785 Berlin; Matthias Almus (Great Lakes, London, United Kingdom); Jürgen Egeln (Zentrum für Europäische Wirtschaftsforschung, Mannheim); Dirk Engel (Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Essen)
    Abstract: Loan financing, especially long term bank loan financing, is important for young or small firms in Germany. A large share of all small business lending in Germany originates in public financing programs and cooperative banks, (non-cooperative) private sector credit banks as well as savings banks mediate in the assignment of loans from these programs. Our empirical analyses of this loan type provide insights into the small business loan assignment behavior of the three different bank groups in general. Using various econometric techniques, observation periods and data sources – including detailed data on 6.880 firms – we find three robust, originate results: Not only recently, but already at the beginning of the 1990s credit banks played no substantial, statistically significant role in small business lending. Cooperative and savings banks have, in contrast, a strong, significant positive influence on young, small firms’ loan access. In addition, the loan assignment behavior of the two latter groups is found to be very similar. This is an important result given the ongoing controversial discussion on reforming the German savings bank sector.
    Keywords: Kreditvergabeverhalten von Genossenschaftsbanken, Kreditbanken und Sparkassen; Finanzierung junger, kleiner Unternehmen; langfristige Kredite und öffentliche Förderprogramme; Reformierung des deutschen Sparkassensektors;
    Date: 2006–08
  14. By: Hałaj, Grzegorz; Żochowski, Dawid
    Abstract: The paper provides results of research concerning identification of strategic groups in the Polish banking sector and tests of the usefulness of these groups in the assessment of financial stability. The theory of strategic groups predicts the existence of stable groups of companies, stemming from the strategy adopted by them. The theory also predicts that groups differ in performance. Our empirical research, preceded by a review of relevant literature, has been carried out on the basis of a cluster analysis with the use of Ward’s algorithm that optimises allocation of banks into groups. We have identified strategic groups in the Polish banking sector, sustained over time after the year 2000. We have also observed statistically significant differences in performance between banks belonging to different groups, and we have demonstrated further that modelling of profitability within groups with the use of regression yields more precise estimates of parameters than in the case of estimation of a model for the whole sector. Thus, breaking down the whole banking sector into strategic groups creates a possibility to forecast the banking sector earnings in a more precise way, i.e. to provide a more precise ex ante assessment of stability of the financial system.
    Keywords: Strategic groups; financial stability; clustering; Ward algorithm
    JEL: C49 L1 G21
    Date: 2006–03–01
  15. By: Ignacio Briones; André Villela
    Date: 2006
  16. By: Repullo, Rafael
    Abstract: This paper studies the strategic interaction between a bank whose deposits are randomly withdrawn and a lender of last resort (LLR) that bases its decision on supervisory information on the quality of the bank’s assets. The bank is subject to a capital requirement and chooses the liquidity buffer that it wants to hold and the risk of its loan portfolio. The equilibrium choice of risk is shown to be decreasing in the capital requirement and increasing in the interest rate charged by the LLR. Moreover, when the LLR does not charge penalty rates, the bank chooses the same level of risk and a smaller liquidity buffer than in the absence of an LLR. Thus, in contrast with the general view, the existence of an LLR does not increase the incentives to take risk, while penalty rates do.
    JEL: G00 G0
    Date: 2005–02–28

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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