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on Banking |
| By: | Jacob A. Bikker; Laura Spierdijk; Paul Finnie |
| Abstract: | Over the past few decades, the worldwide banking industry has undergone strong consolidation. As a result, the number of banks has fallen sharply. At the same time, the size of the largest banks has increased substantially, both in absolute figures and relative to the size of smaller banks. This paper analyzes the impact of this development on competition by assessing the relation between bank size and market power. We use an extended version of the Panzar-Rosse (P-R) model that allows bank size to affect market power. Based on a large sample of more than 18,000 banks in 101 countries comprising more than 112,000 bank-year observations, we show that market power varies with bank size. Large banks have substantially more market power than small banks in many of the countries under consideration, including the world's major economies and covering more than 85% of all banks in our sample. Our results contradict the common finding in the empirical P-R literature that competition increases with bank size. We show that misspecification of the P-R model in the existing literature leads to wrong assessment of the relation between market power and bank size. |
| Keywords: | banking; bank size; competition; consolidation; market power; market structure; Panzar-Rosse model. |
| JEL: | D4 G21 L11 L13 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:120&r=ban |
| By: | Federico S. Mandelman |
| Abstract: | This paper studies the cyclical pattern of ex post markups in the banking system using balance-sheet data for a large set of countries. Markups are strongly countercyclical even after controlling for financial development, banking concentration, operational costs, inflation, and simultaneity or reverse causation. The countercyclical pattern is explained by the procyclical entry of foreign banks, which occurs mostly at the wholesale level and signals the intention to spread to the retail level. My hypothesis is that wholesale entry triggers incumbents' limit-pricing strategies, which are aimed at deterring entry into retail niches and which, in turn, dampen bank markups. In the second part of the paper, I develop a general equilibrium model that accounts for these features of the data. I find that this monopolistic behavior in the intermediary financial sector increases the volatility of real variables and amplifies the business cycle. I interpret this bank-supply channel as an extension of the credit channel pioneered by Bernanke and Blinder (1988). |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-21&r=ban |
| By: | Timothy H. Hannan; Ron Borzekowski |
| Abstract: | The literature on network industries and network effects notes that incompatibility across rival systems can influence firms' incentives to invest in product changes that are beneficial to the consumer. We investigate this phenomenon in the case of bank ATM networks, where the number of ATM locations serves as the measure of product quality and surcharge fees serve as an index of incompatibility. Using as a natural experiment the lifting of a surcharge ban in Iowa (and not in neighboring states), we find that the associated increase in incompatibility for Iowa banks caused a substantial increase in the number of ATM locations offered to customers. This effect is found to be larger (in percentage terms) for larger banks than for smaller ones. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-36&r=ban |
| By: | Timothy H. Hannan; Robin A. Prager |
| Abstract: | This paper examines the relationship between multimarket bank presence and the profitability (and therefore viability) of small, single-market banks. We find that increased presence of multimarket banks is associated with a significant reduction in the profitability of small, single-market banks operating in rural banking markets, but not of those operating in urban markets. We explore this relationship by breaking single-market bank profits down into several components in order to shed light on the mechanisms through which multimarket bank presence might influence the profitability of single-market banks. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-41&r=ban |
| By: | Gary Richardson |
| Abstract: | Hooks and Robinson argue that moral hazard induced by deposit insurance induced banks to invest in riskier assets in Texas during the 1920s. Their regressions suggest this manifestation of moral hazard may explain a portion of the events that occurred during the 1920s, but some other phenomena, hitherto overlooked, must also be at work. Economic logic and evidence form the archives of the Board of Governors suggest that phenomenon is mismanagement and defalcation by corporate officers, which increases when insurance reduces depositors' incentives to monitor and react to the safety and soundness of banks. |
| JEL: | E42 E44 E65 N1 N13 N2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12719&r=ban |
| By: | Timothy H. Hannan; Steven J. Pilloff |
| Abstract: | This paper uses a large sample of individual banking organizations, observed from 1996 to 2003, to investigate the characteristics that made them more likely to be acquired. We use a definition of acquisition that we consider preferable to that used in much of the previous literature, and we employ a competing-risk hazard model that reveals important differences that depend on the type of acquirer. Since interstate acquisitions became more numerous during this period, we also investigate differences in the determinants of acquisition between in-state and out-of-state acquirers. The hypothesis that acquisitions serve to transfer resources from less efficient to more efficient uses receives substantial support from our results, as do a number of other relevant hypotheses. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-40&r=ban |
| By: | Roberto Fuentes; Rubén Hernández-Murillo; Gerard Llobet |
| Abstract: | In this paper we study the determinants of the decision of U.S. banks to create a transactional website for their customers. We show that although bank-specific characteristics (such as the volume of deposits) are important, competition plays a prominent role. In more competitive markets banks are more likely to adopt earlier. Even more important, banks adopt earlier in markets where their competitors have already adopted. A contribution of this paper is to study the adoption decision over time using a panel of commercial banks. We also contribute to the literature by adapting a measure of competition related to the choices of competitors that a bank faces in each market. |
| Keywords: | Internet banking |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-058&r=ban |
| By: | Gary Richardson |
| Abstract: | During the contraction from 1929 through 1933, the Federal Reserve System tracked changes in the status of all banks operating in the United States and determined the cause of each bank suspension. This essay analyzes chronological patterns in aggregate series constructed from that data. The analysis demonstrates both illiquidity and insolvency were substantial sources of bank distress. Periods of heightened distress were correlated with periods of increased illiquidity. Contagion via correspondent networks and bank runs propagated the initial banking panics. As the depression deepened and asset values declined, insolvency loomed as the principal threat to depository institutions. |
| JEL: | E0 E42 E44 E65 N01 N12 N2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12717&r=ban |
| By: | Kaoru Hosono; Koji Sakai; Kotaro Tsuru |
| Abstract: | We investigate the motives and consequences of the consolidation of cooperative banks (Shinkin) in Japan during the period 1984-2002. Our major findings are as follows. First, less profitable and less cost efficient banks are more likely to be an acquirer and a target, though even less profitable and less cost efficient banks are more likely to be a target rather than an acquirer. In addition, a larger bank is more likely to be an acquirer and smaller one a target. These results are consistent with the regulators' motive for stabilizing the local banking system.¡¡Second, acquiring banks improved cost efficiency after the consolidation. M&As also raised the loan interest rate and improved profitability and X-efficiency particularly since the latter half of the 1990s. Nonetheless, the improvement of ROA after the merger was not sufficient to fill in the initial gap of the capital ratio between merging banks and peers, resulting in the deterioration of the capital ratio of consolidated banks relative to peers. M&As did not contribute to sufficiently stabilize the local banking system despite the regulators' motive. Third, the consolidation tended to improve the profitability of merging banks when the difference in profitability and healthiness between acquiring banks and target banks were large, which is consistent with the relative efficiency hypothesis (e.g., Akhavein, Berger, and Humphrey, 1997).Length: 48 pages |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06034&r=ban |
| By: | Mälkönen , Ville (VATT (Government Institute for Economic Research)); Vesala , Timo (Bank of Finland Research) |
| Abstract: | We study the adverse selection problem in imperfectly competitive credit markets and illustrate the circumstances where a separating equilibrium emerges, even without collateral. The borrowers are heterogeneous in their preferences concerning the banks. Separation obtains in market segments where the ‘high risk’ borrowers receive credit from their preferred bank. The ‘low risk’ borrowers choose the ex-ante less-preferred bank that offers loan contracts with lower interest rates. The availability of credit will be maximized under an intermediate level of competition, a prediction that is supported by recent empirical evidence. |
| Keywords: | asymmetric information; credit rationing; bank differentiation |
| JEL: | D43 D82 G21 L13 |
| Date: | 2006–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2006_026&r=ban |
| By: | Jose A. Lopez; Mark M. Spiegel |
| Abstract: | We examine foreign intermediation activity in Japan during the so-called "lost decade" of the 1990s, contrasting the behavior of lending by foreign commercial banks and underwriting activity by foreign investment banks over that period. Foreign bank lending is shown to be sensitive to domestic Japanese conditions, particularly Japanese interest rates, more so than their domestic Japanese bank counterparts. During the 1990s, foreign bank lending in Japan fell, both in overall numbers and as a share of total lending. However, there was marked growth in foreign underwriting activity in the international yen-denominated bond sector. A key factor in the disparity between these activities is their different clienteles: While foreign banks in Japan lent primarily to domestic borrowers, international yen-denominated bond issuers were primarily foreign entities with yen funding needs or opportunities for profitable swaps. Indeed, low interest rates that discouraged lending activity in Japan by foreign banks directly encouraged foreign underwriting activity tied to the so-called "carry trades." Regulatory reforms, particularly the "Big Bang" reforms of the 1990s, also play a large role in the growth of foreign underwriting activity over our sample period. |
| Keywords: | Banks and banking, Foreign - Japan ; Bank underwriting |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-45&r=ban |
| By: | Anandarajan , Asokan (School of Management, New Jersey Institute of Technology); Hasan , Iftekhar (Rensselaer Polytechnic Institute, Bank of Finland Research); McCarthy , Cornelia (School of International and Public Affairs, Columbia University) |
| Abstract: | The objective of this study is to examine whether and to what extent Australian banks use loan loss provisions (LLPs) for capital management, earnings management and signalling. We examine if there were changes in the use of LLPs due to the implementation of banking regulations consistent with the Basel Accord of 1988 which made loan loss reserves no longer part of Tier I capital in the numerator of the capital adequacy ratio. We find some evidence to indicate that Australian banks use LLPs for capital management, but no evidence of a change in this behaviour after the implementation of the Basel Accord. Our results indicate that banks in Australia use LLPs to manage earnings. Further, listed commercial banks engage more aggressively in earnings management using LLPs than unlisted commercial banks. We also find that earnings management behaviour is more pronounced in the post-Basel period. Overall, we find a significant understating of LLPs in the post-Basel period relative to the pre-Basel period. This indicates that reported earnings may not reflect the true economic reality underlying those numbers. Finally, Australian banks do not appear to use LLPs for signalling future intentions of higher earnings to investors. |
| Keywords: | capital management; earnings management; signalling; Australian banks |
| JEL: | C23 G14 M41 |
| Date: | 2006–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2006_023&r=ban |
| By: | Gary Richardson |
| Abstract: | During the contraction from 1929 through 1933, the Federal Reserve System tracked changes in the status of all banks operating in the United States and determined the cause of each bank suspension. This essay introduces quarterly series derived from that hitherto dormant data and presents aggregate series constructed from it. The new data series will supplement, and in some cases, supplant the data currently used to study banking panics of the Great Depression, which was published by the Federal Reserve Board of Governors in 1937. |
| JEL: | E0 E4 E44 N1 N12 N2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12715&r=ban |
| By: | Jan Willem van den End; Marco Hoeberichts en Mostafa Tabbae |
| Abstract: | Macro stress-testing has become an important tool to assess financial stability. This paper describes a tool kit for scenario analysis and macro stress-testing. It is based on a model which maps multivariate scenarios to banks' credit and interest rate risks by deterministic and stochastic simulations. Our approach is an extension of existing macro stress-testing models as it distinguishes between probability of default on the one hand and loss given default on the other and allows for separate models for domestic and foreign portfolios. Another contribution of the paper is that the stochastic simulations generate loss distributions which provide insight in the extreme losses and allow for changing correlations between risk factors in stress situations. The methodology is applied to the Dutch banking sector. |
| Keywords: | banking; financial stability; stress-tests; credit risk; interest rate risk |
| JEL: | C33 E44 G21 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:119&r=ban |
| By: | Kjell Bjørn Nordal (Norges Bank (Central Bank of Norway)) |
| Abstract: | I evaluate a bank's incentives to implement a risk sensitive regulatory capital rule and to invest in improved risk measurement. The decision making is analyzed within a real options framework where optimal policies are derived in terms of threshold levels of risk. I also evaluate the situation where exercise or non-exercise of the options to implement or invest are signals about the underlying quality of the loan portfolio. The framework is used for a numerical evaluation of banks' decision of whether to use internal rating based models for credit risk (the IRB-approach) under the new Basel accord (Basel II), where the dynamic behavior of risk is described by an Ohrnstein-Uhlenbeck process. I discuss empirical implications of the evaluation framework. |
| Keywords: | Risk measurement, capital structure, real options, Basel II |
| JEL: | G13 G21 G28 G32 |
| Date: | 2006–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_12&r=ban |
| By: | Jean-Bernard Chatelain (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], EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Andrea Generale (Banca d´Italia - [Banca d´Italia]); Philip Vermeulen (ECB - European Central Bank - [European Central Bank]); Michael Ehrmann (ECB - European Central Bank - [European Central Bank]); Jorge Martínez-Pagés (Bank of Spain - [Bank of Spain]); Andreas Worms (Bundesbank - [Bundesbank]) |
| Abstract: | This paper presents an overview of the results of a research project on monetary transmission pursued by the Eurosystem, which has analysed micro data on firms and banks in several countries of the euro area in great detail. There is strong empirical support for an interest rate channel working through firm investment. Furthermore, a credit channel can be identified with firm micro data. On the bank side, there is evidence that lending reacts differently to monetary policy according to bank balance sheet characteristics. In particular, banks that have a less liquid asset composition show a stronger loan supply response. This finding may be due to banks drawing on their liquid assets to cushion the effects of monetary policy on their loan portfolio, which is in line with the existence of close relationships between banks and their loan customers. |
| Keywords: | monetary policy transmission, interest rate channel, credit channel, euro area |
| Date: | 2006–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00119489_v2&r=ban |
| By: | Thomas J. Cunningham |
| Abstract: | The answer to this question is yes, but not that much about banks. Every quarter the Federal Reserve System surveys a panel of senior loan officers at major banks across the nation. The results of this survey have been found in previous studies to provide useful information in predicting gross domestic product. This paper extends that work, finding that sector-specific survey results are relevant for predicting real activity in those sectors but, strangely, that the informative power of the survey results only marginally extend to various measures of performance in the banking sector. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-24&r=ban |
| By: | Gary Richardson |
| Abstract: | Between the founding of the Federal Reserve System in 1913 and the depression of the 1930s, three check-clearing systems operated in the United States. The Federal Reserve cleared checks for members of the system. Clearing houses cleared checks for members of their organizations. Correspondents cleared checks for all other institutions. The correspondent-clearing system was vulnerable to counter-party cascades, particularly because accounting conventions overstated reserves available to individual institutions and the system as a whole. In November 1930, a correspondent system in the center of the United States collapsed, causing the closure of more than one hundred institutions. Bank runs radiated from the locus of events, and additional correspondent networks succumbed to the situation. For the remainder of the contraction, banks that relied upon correspondents to clear checks failed at higher rates than other banks. In sum, weaknesses within a check-clearing system played a hitherto unrecognized role in the banking crises of the Great Depression. |
| JEL: | E42 E44 E65 N1 N12 N2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12716&r=ban |
| By: | Ellis W. Tallman; Jon R. Moen |
| Abstract: | Existing research on liquidity provision during National Banking Era (1863–1913) financial crises examines aggregate issuance of clearinghouse loan certificates by the New York Clearinghouse. We employ previously unexploited disaggregate data on clearinghouse loan certificate issues in New York City to document how the dominant national banks provided liquidity during the Panic of 1907. The large New York City national banks acted as private liquidity providers by requesting (and the New York Clearinghouse issuing) a volume of clearinghouse loan certificates far beyond their own immediate liquidity needs, in accord with their role as central reserve city banks in the national banking system. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-23&r=ban |
| By: | Gerald P. Dwyer, Jr.; Margarita Samartín |
| Abstract: | We survey the theories of why banks promise to pay par on demand and examine evidence about the conditions under which banks have promised to pay the par value of deposits and banknotes on demand when holding only fractional reserves. The theoretical literature can be broadly divided into four strands: liquidity provision, asymmetric information, legal restrictions, and a medium of exchange. We assume that it is not zero cost to make a promise to redeem a liability at par value on demand. If so, then the conditions in the theories that result in par redemption are possible explanations of why banks promise to pay par on demand. If the explanation based on customers’ demand for liquidity is correct, payment of deposits at par will be promised when banks hold assets that are illiquid in the short run. If the asymmetric-information explanation based on the difficulty of valuing assets is correct, the marketability of banks’ assets determines whether banks promise to pay par. If the legal restrictions explanation of par redemption is correct, banks will not promise to pay par if they are not required to do so. If the transaction explanation is correct, banks will promise to pay par value only if the deposits are used in transactions. After the survey of the theoretical literature, we examine the history of banking in several countries in different eras: fourth-century Athens, medieval Italy, Japan, and free banking and money market mutual funds in the United States. We find that all of the theories can explain some of the observed banking arrangements, and none explain all of them. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-26&r=ban |
| By: | Jean-Bernard Chatelain (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], EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Bruno Amable (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]) |
| Abstract: | Les performances économiques de l'Allemagne et du Japon laissent supposer qu'une faible concurrence entre les intermédiaires financiers n'est pas nécessairement un obstacle à la croissance. Cet article présente un modèle de croissance endogène ne comportant un secteur d'intermédiation financière en concurrence imparfaite. Une forte concentration du secteur bancaire implique un marge d'intermédiation financière importante. Elle exerce un effet négatif sur la croissance par une baisse de la rémunération de l'épargne et une hausse du coût du capital. Mais les désavantages de la concurrence imparfaite peuvent être plus que compensés par l'accroissement de la productivité des investissements des entreprises provenant de l'expertise et du contrôle exercés par des banques universelles. |
| Keywords: | Concurrence imparfaite, Banques, Croissance |
| Date: | 2006–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009024_v2&r=ban |
| By: | Bruno Amable (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]); Jean-Bernard Chatelain (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], EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Olivier De Bandt (Banque de France - [Banque de France]) |
| Abstract: | Cet article propose un modèle de croissance endogène dans lequel on introduit des intermédiaires financiers en concurrence imparfaite et une rémunération du capital soumise à un choc macroéconomique. Les anticipations rationnelles des ménages sur le risque de faillites bancaires (dont ils supportent en partie les coûts influencent leur décisions de dépôts, contribuent à déterminer le taux de croissance, et peuvent être á l'origine d'un piége á pauvreté. La règlementation de l'entrée dans le secteur bancaire peut, dans certains cas, permettre un meilleur arbitrage entre l'efficacité et la stabilité du secteur bancaire, et, en conséquence, augmenter le nombre de dépôts, la croissance et le bien-être. |
| Keywords: | Croissance, banques, depots, confiance, concurrence imparfaite |
| Date: | 2006–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00118635_v1&r=ban |
| By: | Bruno Amable (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]); Jean-Bernard Chatelain (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], EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]) |
| Abstract: | Dans le cadre d´un modèle de croissance endogène fondé sur l´innovation, cet article compare deux modes de financement de l´économie. Dans un cas, le financement est assuré par une multitude de petits prêteurs, dans l´autre, une seule grande banque fournit l´ensemble des prêts. Il existe deux types de projets d´innovation, un de court terme et un de long terme, et deux types d´innovateurs, certains étant efficaces et d´autres non. Le mode de financement par petits prêteurs conduit à écarter les projets d´innovation de long terme, même lorsqu´ils sont profitables, pour privilégier les projets de court terme. A l´inverse, un financement centralisé favorise la réalisation des projets de long terme. Sous certaines conditions, les économies à systèmes financier centralisé croissent plus vite que les autres. |
| Keywords: | Contrainte budgétaire dure, court termisme, banques, innovation, croissance |
| Date: | 2006–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00118638_v1&r=ban |