New Economics Papers
on Banking
Issue of 2007‒02‒10
sixteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Foreign bank participation and crises in developing countries By Cull, Robert; Martinez Peria, Maria Soledad
  2. Moral hazard in the Diamond-Dybvig model of banking By David Andolfatto; Ed Nosal
  3. The Pros and Cons of Banking Socialism By Martin Gregor
  4. Determinants of Deposit-Insurance Adoption and Design By Asli Demirguc-Kunt; Edward J. Kane; Luc Laeven
  5. The Role of Loan Guarantee Schemes in Alleviating Credit Rationing in the UK By Cowling, Marc
  6. Industries and the bank lending effects of bank credit demand and monetary policy in Germany By Arnold, Ivo J.M.; Kool, Clemens J.M.; Raabe, Katharina
  7. Personal bankruptcy and credit market competition By Astrid Dick; Andreas Lehnert
  8. The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns By Marsh , Ian W
  9. "The Impacts of "Shock Therapy" on Large and Small Clients:Experiences from Two Large Bank Failures in Japan" By Shin-ichi Fukuda; Satoshi Koibuchi
  10. Market-based regulation and the informational content of prices By Philip Bond; Itay Goldstein; Edward S. Prescott
  11. National bank notes and silver certificates By Bruce Champ; James B. Thomson
  12. Asset-Backed Securities: Are There Securities Backed by More Then Homes, Cars, and Credit Cards? By Govori, Fadil
  13. 10 Years after the Crisis: Thailand's Financial System Reform By Menkhoff, Lukas; Suwanaporn, Chodechai
  14. Financial Integration, Productivity and Capital Accumulation By Alessandra Bonfiglioli
  15. Banking behaviour after the lifecycle event of “moving in together”: An exploratory study of the role of marketing investments By B. LARIVIÈRE; D. VAN DEN POEL
  16. Financial Revolution and Economic Modernization in Sweden By Ögren, Anders

  1. By: Cull, Robert; Martinez Peria, Maria Soledad
    Abstract: This paper describes the recent trends in foreign bank ownership in developing countries, summarizes the existing evidence on the causes and implications of foreign bank presence, and reexamines the link between banking crises and foreign bank participation. Using data on the share of banking sector assets held by foreign banks in over 100 developing countries during 1995-2002, the results show that countries that experienced a banking crisis tended to have higher levels of foreign bank participation than those that did not. Furthermore, panel regressions indicate that foreign participation increased as a result of crises rather than prior to them. However, post-crisis increases in foreign participation did not coincide with increased credit to the private sector, perhaps because in many cases foreign banks acquired distressed banks.
    Keywords: Banks & Banking Reform,Foreign Direct Investment,Corporate Law,Privatization,Financial Crisis Management & Restructuring
    Date: 2007–02–01
  2. By: David Andolfatto; Ed Nosal
    Abstract: We modify the Diamond-Dybvig model studied in Green and Lin to incorporate a self-interested banker who has a private record-keeping technology. A public record-keeping device does not exist. We find that there is a trade-off between sophisticated contracts that possess relatively good risk-sharing properties but allocate resources inefficiently for incentive reasons, and simple contracts that possess relatively poor risk-sharing properties but economize on the inefficient use of resources. While this trade-off depends on model parameters, we find that simple contracts prevail under a wide range of empirically plausible parameter values. Although moral hazard in banking may simplify the optimal structure of deposit liabilities, this simple structure does not enhance the prospect of bank runs.
    Keywords: Contracts ; Financial crises ; Banks and banking
    Date: 2006
  3. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: When nominal wage rigidity is large, and banking sector oligopolistic, the benevolent government may prefer to regulate interest rates to boost labor demand. A government of a transition economy may postpone bank privatization to keep credit provision under control, as long as inefficiencies of state ownership are not prohibitive. We model a transition economy where the government initially owns enterprises as well as banks. The economy features constant wage, and strong market power of banks. Under these conditions, we identify when the government has incentive to privatize enterprises and/or banks. We derive conditions under which the banking socialism (the government owns banks, but privatizes enterprises) dominates other institutional modes: socialism, industrial socialism, and capitalism.
    Keywords: privatization; banking; transition
    JEL: D72 D78 E62 H20
    Date: 2007–01
  4. By: Asli Demirguc-Kunt; Edward J. Kane; Luc Laeven
    Abstract: This paper identifies factors that influence decisions about a country's financial safety net, using a comprehensive dataset covering 180 countries during the 1960-2003 period. Our analysis focuses on how private interest-group pressures, outside influences, and political-institutional factors affect deposit-insurance adoption and design. Controlling for macroeconomic shocks, quality of bank regulations, and institutional development, we find that both private and public interests, as well as outside influences to emulate developed-country regulatory schemes, can explain the timing of adoption decisions and the rigor of loss-control arrangements. Controlling for other factors, political systems that facilitate intersectoral power sharing dispose a country toward design features that accommodate risk-shifting by banks.
    JEL: G21 G28 P51
    Date: 2007–01
  5. By: Cowling, Marc
    Abstract: It is a widely held perception, although empirically contentious, that credit rationing is an important phenomenon in the UK small business sector. In response to this perception the UK government initiated a loan guarantee scheme (SFLGS) in 1981. In this paper we use a unique dataset comprised of small firms facing a very real, and binding, credit constraint, to question whether a corrective scheme such as the SFLGS has, in practice, alleviated such constraints by promoting access to debt finance for small credit constrained firms. The results broadly support the view that the SFLGS has fulfilled its primary objective.
    Keywords: credit rationing; small firms; entrepreneurship; debt finance
    JEL: G18 G14
    Date: 2007–01–30
  6. By: Arnold, Ivo J.M.; Kool, Clemens J.M.; Raabe, Katharina
    Abstract: This paper presents evidence on the industry effects of bank lending in Germany and identifies the industry effects of bank lending associated with changes in monetary policy and industryspecific bank credit demand. To this end, we estimate individual bank lending functions for 13 manufacturing and non-manufacturing industries and five banking groups using quarterly bank balance sheet and bank lending data for the period 1992:1-2002:4. The evidence from dynamic panel data models shows that industry-specific bank lending growth predominantly responds to changes in industry-specific bank credit demand rather than to changes in monetary policy. In fact, conclusions regarding the bank lending effects of monetary policy are very sensitive to the choice of industry. The empirical results lend strong support to the existence of industry effects of bank lending. Because industries are a prominent source of variation in the bank lending effects of bank credit demand and monetary policy, the paper concludes that the industry composition of bank credit portfolios is an important determinant of bank lending growth and monetary policy effectiveness.
    Keywords: Monetary policy transmission, credit channel, industry structure, dynamic panel data
    JEL: C23 E52 G21 L16
    Date: 2006
  7. By: Astrid Dick; Andreas Lehnert
    Abstract: The effect of credit market competition on borrower default is theoretically ambiguous, because the quantity of credit supplied may rise or fall following an increase in competition. We investigate empirically the relationship between credit market competition, lending to households, and personal bankruptcy rates in the United States. We exploit the exogenous variation in market contestability brought on by banking deregulation at the state level: after deregulation, banks faced the threat of entry into their state markets. We find that deregulation increased competition for borrowers, prompting banks to adopt more sophisticated credit rating technology. In turn, these developments led previously excluded households to enter the credit market. We document that, following deregulation, (1) overall lending increased, (2) loss rates on loans decreased, and (3) bankruptcy rates rose. Further, we find that lending and bankruptcy rates increased more in states with greater actual (rather than potential) entry, and that credit card productivity increased after the removal of entry restrictions. These findings suggest that entrants brought with them enhanced underwriting technology that allowed for credit extension to new borrowers.
    Keywords: Bankruptcy ; Consumer credit ; Loans, Personal ; Bank competition
    Date: 2007
  8. By: Marsh , Ian W (Cass Business School, London, and Bank of Finland)
    Abstract: Although innovative credit risk transfer techniques help to allocate risk more optimally, policymakers worry that they may detrimentally affect the effort spent by financial intermediaries in screening and mo-nitoring credit exposures. This paper examines the equity market’s response to loan announcements. In common with the literature it reports a significantly positive average excess return – the well known ‘bank certification’ effect. However, if the lending bank is known to actively manage its credit risk ex-posure through large-scale securitization programmes, the magnitude of the effect falls by two thirds. The equity market does not appear to place any value on news of loans extended by banks that are known to transfer credit risk off their books.
    Keywords: bank loans; credit derivatives; bank certification
    JEL: G12 G21
    Date: 2006–12–12
  9. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo); Satoshi Koibuchi (Graduate School of Public Policy, University of Tokyo)
    Abstract: A "shock therapy" might have different impacts between large and small firms. In this paper, we focus on the clients of two large failed Japanese banks - the Long-term Credit Bank of Japan (LTCB) and the Nippon Credit Bank (NCB). We first show that subsequent events after the bank failures allowed the new LTCB to adopt a "shock therapy" but kept the new NCB to face "soft budget constraints". We then show that the different therapies made performances of these two banks' customers very different. Under the shock therapy, large firms showed significant recovery of their profits but small firms did not. In contrast, under the soft budget constraints, large firms did not show recovery and small firms experienced significant decline in their profits when the new bank terminated the banking relationship.
    Date: 2006–10
  10. By: Philip Bond; Itay Goldstein; Edward S. Prescott
    Abstract: Various laws and policy proposals call for regulators to make use of the information reflected in market prices. We focus on a leading example of such a proposal, namely that bank supervision should make use of the market prices of traded bank securities. We study the theoretical underpinnings of this proposal in light of a key problem: if the regulator uses market prices, prices adjust to reflect this use and potentially become less revealing. We show that the feasibility of this proposal depends critically on the information gap between the market and the regulator. Thus, there is a strong complementarity between market information and the regulator's information, which suggests that regulators should not abandon other sources of information when learning from market prices. We demonstrate that the type of security being traded matters for the observed equilibrium outcome and discuss other policy measures that can increase the ability of regulators to make use of market information.
    Keywords: Markets ; Prices ; Banks and banking
    Date: 2006
  11. By: Bruce Champ; James B. Thomson
    Abstract: From 1883 to 1892, the circulation of national bank notes in the United States fell nearly 50 percent. Previous studies have attributed this to supply-side factors that led to a decline in the profitability of note issue during this period. This paper provides an alternative explanation. The decline in note issue was, in large part, demand-driven. The presence of a competing currency with superior features caused the public to substitute away from national bank notes.
    Keywords: Paper money ; National bank notes ; Silver
    Date: 2006
  12. By: Govori, Fadil
    Abstract: Asset-backed securities are securities which are based on pools of underlying assets. These assets are usually illiquid and private in nature. Usually, asset-backed securities (ABS) are bonds that represent pools of loans of similar types, duration and interest rates. By selling their loans to ABS packagers, the original lenders recover cash quickly, enabling them to make more loans. Asset securitization is the structured process whereby interests in loans and other receivables are packaged, underwritten, and sold in the form of “asset-backed” securities. In effect, securitization is the open market selling of financial instruments backed by asset cash flow or asset value. When the Securitization is "closed," funds flow from the purchasers of the securities to the Issuer and from the Issuer to the originator. All of these transactions occur virtually simultaneously. Residential mortgage loans were the first type of loan to be securitized. They still account for the bulk of asset-backed securities. A mortgage is a pledge of property to secure payment of a debt. For residential mortgages, the property is usually a house and the land on which it is built, and the debt is a loan to purchase the house and land. Also commercial mortgage loans have been securitized along the lines of residential mortgage loans. The second half of the 1980s has witnessed several new structures for mortgage loans. The impetuses for new structures are twofold. First, lower interest rates called attention to the prepayment option embodied in mortgage loans. Second, investors in mortgage securities became more sophisticated and better able to understand new structures that would better manage prepayment risk. Next to residential mortgage loans, automobile loans are the most securitized. Automobile loans are made to individuals to finance the purchase of a car or light duty truck. They are generally level-pay, fixed-rate, self-amortizing loans that require monthly payments over a two-to five-year period. The actual life of an auto loan depends, however, on involuntary prepayment upon default and voluntary prepayments in the event of accelerated payment by the borrower or the sale or trade-in of the collateral. The first securities backed by credit card receivables were sold in March 1986. The first securities backed by credit card debt were issued by commercial banks and savings and loan associations and were collateralized by bank card (Visa and MasterCard) receivables. Securities backed by credit card accounts are not risk-free. Investors face credit risk, interest-rate risk, and repayment risk. Assets that have reasonably predictable cash flows and are easily understood are ripe for securitization. Residential mortgage loans, automobile loans, and credit card receivables fit this description. But the list does not end there. There are also securities backed by installment-type loans, including leases, loans for manufactured housing, and other consumer debt.
    Keywords: Asset-Backed Securities; Securities Backed by Homes; Cars; and Credit Cards; Securitization
    JEL: G24 G23 G21 G11 G22 G12
    Date: 2006–08
  13. By: Menkhoff, Lukas; Suwanaporn, Chodechai
    Abstract: This paper uses the framework of long-term financial system development to describe and assess the reform process in Thailand after 1997. The present financial reforms are well in line with the pattern of financial development found in the academic literature. A detailed analysis of capital markets, specialized financial institutions and supervisory regulation shows recent advancements and open issues. The rapid rise of non-banks financial institutions can serve as a paradigmatic example of market driven dynamism requiring appropriate policy action. Overall, the building of modern and sophisticated financial institutions is an ongoing process which should consider human resource constraints.
    Keywords: Financial institutions, financial development, Thailand
    JEL: O1 G2
    Date: 2007–01
  14. By: Alessandra Bonfiglioli
    Abstract: Understanding the mechanism through which financial globalization affects economic performance is crucial for evaluating the costs and benefits of opening financial markets. This paper is a first attempt at disentangling the effects of financial integration on the two main determinants of economic performance: productivity (TFP) and investments. I provide empirical evidence from a sample of 93 countries observed between 1975 and 1999. The results suggest that financial integration has a positive direct effect on productivity, while it spurs capital accumulation only with some delay and indirectly, since capital follows the rise in productivity. I control for indirect effects of financial globalization through banking crises. Such episodes depress both investments and TFP, though they are triggered by financial integration only to a minor extent.
    Keywords: Capital account liberalization, financial development, banking crises, growth, productivity, investments
    JEL: G15 F43 O40 C23
    Date: 2007–02–02
    Abstract: This study addresses an important issue for both managers and researchers: whether it is advantageous for financial services providers to invest in youth marketing. More specifically, the effectiveness of these investments is evaluated in terms of retention proneness once youngsters enter the lifecycle event of “moving in together”. The study identifies eight constructs of youth marketing and contrasts their impact against the best deal when youngsters decide to move in together and consequently experience the need to buy their first collectivized financial products, such as a joint account or a mortgage for their new home. Furthermore, the influence of the partner, prior patronage behaviour, customer demographics and psychographic variables are tested for. The findings of the study reveal that (i) individuals are likely to change their banking behaviour during crucial lifetime events such as moving in together, (ii) not all youth marketing investments are equally effective, while (iii) the best deal components (e.g. convenience, price conditions, etc.) have a major impact.
    Keywords: Marketing; Banking; Strategic planning; Ordered logit analysis.
    Date: 2007–01
  16. By: Ögren, Anders (EHF/SSE & EconomiX - UPX)
    Abstract: The development of a well adapted financial system was a main part of the successful Swedish economic modernization in the latter half of the nineteenth century. In this paper it is shown that this development followed the pattern of a financial revolution. Major institutional and organizational changes that took place roughly between the late 1850s and early 1870s led to a rapid increase in liquidity and financial services. This financial revolution preceded the acceleration in economic growth in general and in the modern, industrial sector in particular. Especially the monetization encouraged growth, both in the industrial sector and in GDP as a whole. The basis of the financial system, measured as commercial bank assets and equity capital, was on the other hand also a result of GDP growth.
    Keywords: Financial Development; Growth; Institutions; Liquidity; Monetization; Nineteenth Century; Silver and Gold Standards; Structural Change
    JEL: E44 N13 N23 O16
    Date: 2006–12–21

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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