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on Banking |
| By: | Albert Banal-Estañol (Department of Economics, City University, London); Marco Ottaviani |
| Abstract: | This paper analyses competition and mergers among risk averse banks. We show that the correlation between the shocks to the demand for loans and the shocks to the supply of deposits induces a strategic interdependence between the two sides of the market. We characterize the role of diversification as a motive for bank mergers and analyse the consequences of mergers on loan and deposit rates. When the value of diversification is sufficiently strong, bank mergers generate an increase in the welfare of borrowers and depositors. If depositors have more correlated shocks than borrowers, bank mergers are relatively worse for depositors than for borrowers. |
| Keywords: | risk aversion; imperfect competition; bank mergers; welfare of depositors and borrowers |
| JEL: | D43 G21 G32 G34 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:0611&r=ban |
| By: | Antonio Nicolo’ (University of University of Padua, IFS and CEPR); Loriana Pelizzon (pelizzon@unive.it; Department of Economics, University Of Venice Ca’ Foscari) |
| Abstract: | How does bank capital regulation affect the design of credit derivative contracts? How does the opacity of the OTC credit derivative markets affect these contracts? In this paper we address these issues and characterize the optimal security design in several settings. We show that both the level of the banks' cost of capital and the opacity of the credit derivative markets do affect the form of the optimal separating contract and the level of the banks' profits. Moreover, our results suggest that the optimal contracts are largely dependent on bank regulation. More specifically, the introduction of Basel II may prevent the use of the equity tranche in CDO contracts as a signaling device. In addition, the presence of private credit derivative contracts would make the use of signaling contracts able to solve the adverse selection problem quite expensive. |
| Keywords: | Credit derivatives, Signalling contracts, Capital requirements |
| JEL: | G21 D82 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:58_06&r=ban |
| By: | Delfiner, Miguel; Pailhé, Cristina |
| Abstract: | This paper reviews the markets and regulatory framework for hybrid financial instruments, with special focus on the recent regulatory changes allowing banks in Argentina to hold these instruments as regulatory capital. These assets refer to a wide family of instruments which have the structure of bonds, but incorporate equity-like features such as interest deferral, profound subordination, and long dated tenor. In 1998 the Basel Committee on Banking Supervision established minimum requirements and limits for these instruments to be included in Tier 1 capital. As a consequence markets for hybrids expanded considerably, and they were admitted in Canada, the United States and various Asian and European countries. In the Latin-American region they were admitted in Brazil and Mexico, and as from 2006 also in Argentina. In addition, these securities are described from the viewpoint of investors, focusing on risk and related costs, which contributes to the understanding of the regulation that applies to them. |
| Keywords: | Hybrid instruments; regulatory capital; Basel Capital Accord |
| JEL: | G28 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1567&r=ban |
| By: | Örs, Evren; Rice, Tara |
| Abstract: | We examine whether “imputed” interest rates obtained from bank financial statements are unbiased estimates of “offered” interest rates that the same banks report in surveys. We find evidence of a statistically significant amount of bias. However, the statistical bias that we document does not appear to be economically significant. When used as dependent variables in regression analysis, imputed rates and offered rates lead to the same policy conclusions. Our work has important methodological implications for empirical research that examines the product market competition among depository institutions. |
| Keywords: | deposit rates; imputed prices; product market; transaction prices |
| JEL: | G21 L11 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6036&r=ban |
| By: | Claessens, Stijn; Van Horen, Neeltje |
| Abstract: | While institutional differences have been found to affect country growth patterns, much has remained unexplained, including how economic actors " overcome " institutional weaknesses and how internationalization helps or hinders development. Banking is an institutionally-intensive activity and the location decision of foreign banks provides a good test of how institutional differences are dealt with and how they may affect economic choices. Specifically, the authors examine whether banks seek out those markets where institutional familiarity provides them with a competitive advantage over other foreign competitor banks. Using bilateral data on banking sector foreign direct investment in all developing countries and controlling for other factors, they find that competitive advantage is an important factor in driving foreign banks ' location decisions. The findings suggest that high institutional quality is not necessarily a prerequisite to attract foreign direct investment in banking and that there are specific benefits, as well as risks, to international financial integration between developing countries. |
| Keywords: | Banks & Banking Reform,Foreign Direct Investment,Country Strategy & Performance,Corporate Law,Economic Theory & Research |
| Date: | 2007–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4113&r=ban |
| By: | Acharya, Viral V; Imbs, Jean; Sturgess, Jason |
| Abstract: | We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value added output, we calculate for each state the efficient frontier for investments in the real economy, the efficient Sharpe ratio, and the corresponding weights on investments in different industries. We study how rapidly different states converge to an efficient allocation, depending on access to finance. We find that convergence is faster - in terms of distance to the efficient frontier and improving Sharpe ratios - following intra- and (particularly) interstate liberalization of bank branching restrictions. This effect arises primarily from convergence in the volatility of state output growth, rather than in its average. The realized industry shares of output also converge faster to their efficient counterparts following liberalization, particularly for industries that are characterized by young, small and external finance dependent firms. Convergence is also faster for states that have a larger share of constrained industries, greater distance from the efficient frontier before liberalization and larger geographical area. These effects are robust to industries integrating across states and the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for the efficiency and specialization (or diversification) of investments, in a manner that depends crucially on the variance-covariance properties of investment returns, rather than on their average only. |
| Keywords: | Diversification; Financial development; Growth; Sharpe ratio; Volatility |
| JEL: | E44 F02 F36 G11 G21 G28 O16 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6029&r=ban |
| By: | Fiorentino, Elisabetta; Karmann, Alexander; Koetter, Michael |
| Abstract: | We investigate the consistency of efficiency scores derived with two competing frontier methods in the financial economics literature: Stochastic Frontier and Data Envelopment Analysis. We sample 34,192 observations for all German universal banks and analyze whether efficiency measures yield consistent results according to five criteria between 1993 and 2004: levels, rankings, identification of extreme performers, stability over time and correlation to standard accounting-based measures of performance. We find that non-parametric methods are particularly sensitive to measurement error and outliers. Furthermore, our results show that accounting for systematic differences among commercial, cooperative and savings banks is important to avoid misinterpretation about the status of efficiency of the total banking sector. Finally, despite ongoing fundamental changes in Europe’s largest banking system, efficiency rank stability is very high in the short run. However, we also find that annually estimated efficiency scores are markedly less stable over a period of twelve years, in particular for parametric methods. Thus, the implicit assumption of serial independence of bank production in most methods has an important influence on obtained efficiency rankings. |
| Keywords: | Cost Efficiency, Banks, Stochastic Frontier Approach, Data Envelopment Analysis |
| JEL: | D24 G21 L25 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:5157&r=ban |
| By: | Giulia Iori (Department of Economics, City University, London); Giulia de Masi (University of l’Aquila); Ovidiu Precup (King’s College London); Giampaolo Gabbi (SDA Bocconi School of Management); Guido Caldarelli (University of “La Sapienza”) |
| Abstract: | The objective of this paper is to analyze, by employing methods of statistical mechanics of complex networks, the network topology of the Italian segment of the European overnight money market. We investigate differences in the activities of banks of different size and the evolution of their connectivity structure over the maintenance period. The main objectives are to understand potential implications of current institutional arrangements on the stability of the banking system and to assess the efficiency of the interbank market in terms of absence of speculative and preferential trading relationships. |
| Date: | 2005–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:0505&r=ban |
| By: | Khemraj, Tarron |
| Abstract: | Banks demand non-remunerative excess reserves because of (i) minimum markup interest rates in the loan market and the government security market; and (ii) a foreign currency constraint in the foreign exchange market. The minimum markup interest rates are consistent with an oligopolistic banking sector. The non-competitive nature of the government security market implies (i) there is no exogenous domestic interest rate to pin down the domestic term structure; and (ii) the theory of the banking firm when applied to underdeveloped economies has to be implemented in an open economy context. Indirect monetary policy which aims at managing excess bank reserves has very limited influence on the loan market. |
| Keywords: | excess liquidity; oligopoly banking; minimum interest rate; foreign currency constraint |
| JEL: | O16 E52 E5 F30 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1557&r=ban |
| By: | Giulia de Masi; Giulia Iori (Department of Economics, City University, London); Guido Caldarelli |
| Abstract: | We use the theory of complex networks in order to quantitatively characterise the formation of communities in a particular financial market. The system is composed by different banks exchanging on a daily basis loans and debts of liquidity. Through topological analysis and by means of a model of network growth we can determine the formation of different group of banks characterized by different business strategy. The model based on Pareto's Law makes no use of growth or preferential attachment and it reproduces correctly all the various statistical properties of the system. We believe that this network modelling of the market could be an efficient way to evaluate the impact of different policies in the market of liquidity. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:0608&r=ban |
| By: | Giulia Iori (Department of Economics, City University, London); Roberto Renò; Giulia de Masi; Guido Caldarelli |
| Abstract: | Using a data set which includes all transactions among banks in the Italian money market, we study their trading strategies and the dependence among them. We use the Fourier method to compute the variance-covariance matrix of trading strategies. Our results indicate that well defined patterns arise. Two main communities of banks, which can be coarsely identified as small and large banks, emerge. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:0603&r=ban |
| By: | Claessens, Stijn; Feijen, Erik; Laeven, Luc |
| Abstract: | Using novel indicators of political connections constructed from campaign contribution data, we show that Brazilian firms that provided contributions to (elected) federal deputies experienced higher stock returns than firms that don’t around the 1998 and 2002 elections. This suggests contributions help shape policy on a firm-specific basis. Using a firm fixed effects framework to mitigate the risk that unobserved firm characteristics distort the results, we find that contributing firms substantially increased their bank financing relative to a control group after each election, indicating that access to bank finance is an important channel through which political connections operate. We estimate the economic costs of this rent seeking over the two election cycles to be at least 0.2% of GDP per annum. |
| Keywords: | Campaign Contributions; Elections; Preferential Lending; Rent-seeking |
| JEL: | D7 G1 G2 G3 P48 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6045&r=ban |