New Economics Papers
on Banking
Issue of 2007‒01‒23
thirteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The dynamics of bank spreads and financial structure By Reint Gropp; Christoffer Kok Sørensen; Jung-Duk Lichtenberger
  2. Rating targeting and the confidence levels implicit in bank capital By Jokivuolle , Esa; Peura , Samu
  3. Eligibility of External Credit Assessment Institutions By Helena Suvova; Eva Kozelkova; David Zeman; Jaroslava Bauerova
  4. Are banks special? A note on Tobin’s theory of financial intermediaries. By Bertocco Giancarlo
  5. Some critical comments on credit risk modeling. By ilya, gikhman
  6. Pillar I treatment of concentrations in the banking book – a multifactor approach By Zoltán Varsányi
  7. A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II By Roman Kraeussl
  8. Stress Testing the Czech Banking System: Where Are We? Where Are We Going? By Martin Cihak; Jaroslav Hermanek
  9. Stagnation after Financial Liberalization: The Case of Guyana By Khemraj, Tarron
  10. Excess Liquidity and the Foreign Currency Constraint: The Case of Monetary Management in Guyana By Khemraj, Tarron
  11. Can investors profit from banks’ stock recommendations? Evidence for the German DAX index By Pierdzioch, Christian; Kempa, Bernd; Hendricks, Torben
  12. Lending Booms, Underwriting and Competition: The Baring Crisis Revisited By Juan-Huitzi Flores
  13. Der Aktienrückkauf und die Bankenkrise von 1931 By Eva Terberger; Stefanie Wettberg

  1. By: Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany; Corresponding author.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jung-Duk Lichtenberger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the dynamics of the pass-through between market interest rates and bank interest rates in the euro area as a function of cyclical and structural differences in the financial system. We find that overall the speed of adjustment for loans is significantly faster than for deposits, and that the pass-through is especially sluggish for demand deposits and savings deposits. Bank soundness, credit risk and interest rate risk are found to exert a significant influence on the speed of pass through. We also find evidence of faster (slower) pass-through for loans (deposits) if the change in monetary policy was up (down). Overall, we find that competition among banks and competition from financial markets result in a faster bank interest rate pass-through. Finally, we find some evidence that financial innovation speeds up the pass-through for those market segments that are most directly affected by these innovations. JEL Classification: E43, G21.
    Keywords: Monetary transmission, banks, retail rates, financial structure.
    Date: 2007–01
  2. By: Jokivuolle , Esa (Bank of Finland Research); Peura , Samu (Sampo Bank)
    Abstract: The solvency standards implicit in bank capital levels, as reported eg in Jackson et al (2002), are much higher than those required for top ratings, if standard single period economic capital models are taken se-riously. We explain this excess capital puzzle by forward looking rating targeting behaviour by banks, which aims at maintaining rating above a minimum target in future periods. We calibrate to data on actual bank capital the confidence level used by the median US AA rated bank to maintain at least a single A rating. The calibrated confidence level is in line with the historical probability of an AA rated bank to be downgraded below A.
    Keywords: bank capital; credit rating; value-at-risk; economic capital; capital structure
    JEL: G21 G32
    Date: 2006–12–10
  3. By: Helena Suvova; Eva Kozelkova; David Zeman; Jaroslava Bauerova
    Abstract: The Basel Committee on Banking Supervision in 1999 issued a draft New Basel Capital Accord (Basel 2). Its principles are to be incorporated into the European legislation and into the Czech banking regulations. The Standardised Approach to calculating the capital requirement for credit risk is newly based on external credit assessments (ratings). Banking regulators and supervisors have to be prepared for the process of determining eligible credit assessment institutions (ECAIs) and will have to elaborate a formal recognition procedure. This paper investigates the approaches a supervisor may apply to ECAI recognition and elaborates on the criteria of recognition. First, the paper reviews the available rating agencies on the market (including their rating penetration on the Czech market), their best practices and the experience with the use of their ratings for regulatory purposes. Second, drawing on international experience and the proposed Basel 2 rules, we outline the fundamental supervisory approaches to recognition, including the legal aspects thereof, and analyse their pros and cons and the frontiers of supervisory decision making. Third, we outline the rules for recognition, including requirements or expectations (e.g. soft limits), documentation and typical interview questions with the potential candidates. We find the CNB's approach to be in compliance with CEBS Consultative Paper CP07 (issued for public consultation in June 2005).
    Keywords: Basel capital accord, Basel II, Credit rating, default, eligibility criteria, eligibility evaluation, external credit assessment institution (ECAI), export credit agency (ECA), mapping rating grades, market acceptance of ECAIs, rating agency, recognition process
    JEL: E65 G21 G18
    Date: 2005–12
  4. By: Bertocco Giancarlo (Department of Economics, University of Insubria, Italy)
    Abstract: Since the 1960s Tobin has set himself the objective of developing a macroeconomic model more general than that specified by Keynes in The General Theory. Keynes had assumed that all the assets different from money were perfect substitutes; this hypothesis allowed him to explain only one interest rate. On the contrary, Tobin abandons the perfect substitutability hypothesis and elaborates a theoretical model which envisages more than two assets and explicitly deals with financial intermediaries. Moreover Tobin asks himself whether banks play a special role compared with the other intermediaries and elaborates a ‘new view’ which, in contrast with the ‘old view’, maintains that there are no reasons to attribute a special role to the banks. This paper critically analyses Tobin’s theory and presents two results. First, it shows that Tobin’s theory overlooks an important function of banks; a function highlighted by Keynes in some writings which preceded and followed the publications of The General Theory. Second, this work shows that Tobin’s thesis that the specificity of banks does not exist can be confirmed, albeit on different grounds, also taking into account the function of banks that he overlooks. The paper is divided into four parts: in the first one, the most important aspects of the Tobin’s ‘new view’ are described. The limitations of these theoretical approaches are then showed in the second section; in the last two sections the elements of an alternative theory are outlined.y.
    Date: 2006–07
  5. By: ilya, gikhman
    Abstract: In this notice we are comment popular approaches to the credit risk modeling.
    Keywords: Credit risk; credit derivatives; risk neutral world; risk neutral probability; structural model; reduced form.
    JEL: G12 G13 C63 C6
    Date: 2006–07
  6. By: Zoltán Varsányi (Magyar Nemzeti Bank)
    Abstract: The present regulation of concentration risk does not take into consideration recent, sophisticated methods in credit risk quantification; the new Basle Capital Accord has left the regulatory treatment unchanged. Recently, substantial work has begun within the EU on this issue with the formation of the Working Group on Large Exposures within CEBS. The present paper is concerned with the models available under Basle 2 for credit risk quantification: it is searching for tools that can be applied in a new regime in general and that are capable of replicating the riskiness of credit portfolios with risk concentrations - an area that the original Basel model does not cover. The main idea of the paper is to disassemble nongranular portfolios into homogenous parts whose loss can then be directly simulated - taking into consideration the correlation between the parts - without the need to simulate single exposures. This makes the calculation of portfoliowide loss very fast.
    Keywords: Basel regulation, multifactor model, NORTA, numerical integration.
    JEL: C15 G28
    Date: 2006
  7. By: Roman Kraeussl (Center for Financial Studies, Frankfurt am Main, Germany)
    Abstract: This paper deals with the proposed use of sovereign credit ratings in the “Basel Accord on Capital Adequacy” (Basel II) and considers its potential effect on emerging markets financing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks’ capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies’ sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.
    Keywords: Sovereign Risk, Credit Ratings, Basel II
    JEL: E44 E47 G15
  8. By: Martin Cihak; Jaroslav Hermanek
    Abstract: This note summarizes the various outputs from the CNB research project Stress Testing for Banking Supervision. Previous research notes in this project presented the key stress testing concepts and discussed the design of stress tests in general terms. Since then, the project has generated outputs that were presented, for example, in the CNB's first Financial Stability Report. The note describes the current status of the project by presenting the latest stress test results and by comparing the methodology of these tests with those presented by other central banks. Finally, the note suggests further steps to improve the stress testing program at the CNB, such as strengthening credit risk modeling, including by engaging commercial banks in the exercise. The note is accompanied by an appendix presenting one of the project's outputs, namely a survey of stress testing practices in commercial banks.
    Keywords: Banking system, stress tests
    JEL: G21 G28 E44
    Date: 2005–02
  9. By: Khemraj, Tarron
    Abstract: Despite deep financial reforms, sustained economic growth in Guyana is not forthcoming. The non-competitive nature of the commercial banking sector is proposed as the primary explanation. Non-regulated oligopoly banks will demand mainly excess liquidity, foreign assets, and a diminishing percentage of growth-augmenting investment loans. A monetary growth model is developed to formalize the analysis. The model predicts that a typical financial liberalization program will not engender positive growth if the rates of growth of excess liquidity and foreign assets in bank portfolios exceed the rate of growth of broad money supply. The model also predicts that indirect monetary policy will find it difficult to stimulate growth when the banking system is non-competitive. Therefore, the effect of money on real output can be neutral because of the investment choices of non-competitive banks.
    Keywords: financial liberalization; economic growth; oligopoly banking; indirect monetary policy
    JEL: O11 E5
    Date: 2006–11
  10. By: Khemraj, Tarron
    Abstract: The paper examines why commercial banks in Guyana demand non-remunerated excess reserves, a phenomenon that became prevalent after financial sector reforms. Banks do not invest all excess reserves in a safe foreign asset because the central bank maintains an unofficial foreign currency constraint by accumulating international reserves. This is done within an indirect monetary policy framework. Banks in Guyana do not demand excess reserves for precautionary purposes – which is the conclusion of several other studies – but rather because of the maintained constraint. The estimated sterilisation coefficient is consistent with the hypothesis of an enforced constraint. Hence, the results provide another way of looking at the monetary transmission mechanism.
    Keywords: Excess bank liquidity; monetary policy; Guyana
    JEL: F30 F31 E5
    Date: 2006–12
  11. By: Pierdzioch, Christian; Kempa, Bernd; Hendricks, Torben
    Abstract: We find that banks’ buy and sell recommendations only have a minor effect on the out-of-sample predictability of daily stock returns and the market-timing ability of an investor trading in real time in the German DAX30 stock index. Banks’ stock recommendations may improve the performance of simple trading rules in real time. These improvements, however, are in general small and sensitive to the model-selection criterion being used by an investor to set up a forecasting model for stock returns. Moreover, banks’ stock recommendations are more useful for forecasting one-day-ahead stock returns than one-week-ahead stock returns.
    Keywords: Forecasting stock returns; trading rules; buy and sell recommendations by banks
    JEL: C53
    Date: 2007–01–09
  12. By: Juan-Huitzi Flores
    Abstract: This paper aims to provide new light on a famous episode in financial history, the so called Baring crisis. Taking a microeconomic approach, this paper addresses issues that were not emphasized in traditional explanations of the crisis. We analyze borrowing costs in the 1880s using new data from debt contracts. We argue that, despite a worsening macroeconomic situation in Argentina, its Government continued to have capital market access besides decreasing borrowing costs. This paper suggests that competition between financial intermediaries was a main cause behind the crisis.
    Date: 2007–01
  13. By: Eva Terberger (Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften); Stefanie Wettberg (BASF Aktiengesellschaft)
    Abstract: Im Zuge der Analyse jüngerer Finanzkrisen wird auch den Krisen der Vergangenheit vermehrte Aufmerksamkeit zuteil, so auch der deutschen Bankenkrise von 1931. Ein Phänomen, das dabei bisher wenig Beachtung fand, ist der massive Rückkauf eigener Aktien, der im Vorfeld der Krise insbesondere auch bei Banken stattfand. Dieser Erwerb eigener Anteile wirft insofern Fragen auf, als er dem Ziel der Insolvenzvermeidung, welchem bei Managern und Gläubigern höchste Priorität zugeschrieben wird, besonders in Krisenzeiten zuwiderläuft. Auf der Suche nach Motiven, die den Rückkauf erklären könnten, stößt der vorliegende Beitrag auf Indizien, die den Erwerb eigener Aktien zum Zweck des Transfers von Unternehmensvermögen in die Hände einiger Eigner kurz vor der Insolvenz vermuten lassen.
    Keywords: Aktienrückkauf, Deutsche Bankenkrise 1931
    JEL: G21 G32 N24
    Date: 2005–03

This issue is ©2007 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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