New Economics Papers
on Banking
Issue of 2007‒02‒24
twelve papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Assessing banking competition: an application to the Spanish market for (quality-changing) deposits By Juan Ayuso; Jorge Martínez
  2. Sound practices for the management of operational risk in financial institutions (in Spanish) By Pailhé, Cristina; Delfiner, Miguel; Mangialavori, Ana
  3. Is the internet delivery channel changing banks' performance? The case of Spanish banks By Ignacio Hernando; María J. Nieto
  4. Activity-Based Valuation of Bank Holding Companies By Charles W. Calomiris; Doron Nissim
  5. Political patronage in Ukranian banking By Christopher F. Baum; Mustafa Caglayan; Dorothea Schaefer; Oleksandr Talavera
  6. Russian banks´ private deposit interest rates and market discipline By Peresetsky, A.A.; Karminsky, A.M.; Golovan, S.V.
  7. Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord By Chakraborty, Suparna; Allen, Linda
  8. Dilatoriness of the banking enterprise debt in Spain, 1992-2003 By Sonia Ruano-Pardo; Vicente Salas-Fumás
  9. The efficiency in Thai financial sector after the financial crisis By Chansarn, Supachet
  10. Monetary policy through the “credit-cost channel”. Italy and Germany By Giuliana Passamani; Roberto Tamborini
  11. Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market By Alena Bi\v{c}áková
  12. Financing Development: The Role of Information Costs By Jeremy Greenwood; Juan M. Sanchez; Cheng Wang

  1. By: Juan Ayuso (Banco de España); Jorge Martínez (Banco de España)
    Abstract: Taking the Spanish market for deposits as a case study we show the importance of properly controlling for the quality of the services provided when assessing the degree of banking competition. While a simple approach based on estimating the price elasticity of the residual supply of deposit funds faced by banks does not reveal any increase in competition, such an increase is clear when the interest rate on deposits is "corrected" according to the behaviour of variables that proxy the quality of the different services embedded in a bank deposit.
    Keywords: banking competition, panel data, service quality
    JEL: G21 D40
    Date: 2006–09
  2. By: Pailhé, Cristina; Delfiner, Miguel; Mangialavori, Ana
    Abstract: The Basel Committee on Banking Supervision (BCBS) has defined operational risk (OR) as the risk of loss resulting from inadequate or failed internal processes, people and systems from external events. This definition includes legal risk, but excludes strategic and reputational risk. Traditionally, individual OR management has been an important part of financial institutions’ efforts to avoid frauds and to keep the integrity of internal controls, among other aspects. Nevertheless, what is quite new is the fact of considering OR management as a comprehensive practice similar to the management of other risks (such as credit or market risk), and the measurement of losses due to OR events and the requirement of regulatory capital. Considering OR as an inclusive risk category, the BCBS has outlined a set of sound practices for the management and supervision of this risk. This document analyses those sound practices and their application in internationally active banks. A sample of Latin American countries which have published regulations on sound practices about this matter, is analyzed. It has to be emphasized that many countries in the region have established regulations in order to promote the adoption of OR management structures based on BCBS principles.
    Keywords: Operational risk; Basel Committee; sound practices
    JEL: G21 G28
    Date: 2007–01
  3. By: Ignacio Hernando (Banco de España); María J. Nieto (Banco de España)
    Abstract: In spite of the conspicuous use of the Internet as a delivery channel, there is a relative dearth of empirical studies that provide a quantitative analysis of the impact of the Internet on banks´ financial performance. This paper attempts to fill this gap by identifying and estimating the impact of the adoption of a transactional web site on financial performance using a sample of 72 commercial banks operating in Spain over the period 1994-2002. The impact on banks´ performance of transactional web adoption takes time to appear. The adoption of the Internet as a delivery channel involves a gradual reduction in overhead expenses (particularly, staff, marketing and IT). This effect is statistically significant after one and a half years after adoption. The cost reduction translates into an improvement in banks´ profitability, which becomes significant after one and a half years in terms of ROA and after three years in terms of ROE. The paper also concludes that the Internet is being used as a complement to, rather than a substitute for, physical branches.
    Keywords: commercial banks, internet banking, profitability, cost and income structure
    JEL: G21 O32 O33
    Date: 2006–09
  4. By: Charles W. Calomiris; Doron Nissim
    Abstract: Standard valuation methods do not lend themselves to bank holding companies. Banks create value through the types of assets and liabilities they create (e.g., lending and deposit taking relationships). Bank income streams reflect heterogeneous sources of income which differ in their margins of profitability and persistence. Our approach to valuation permits potential differences in the composition of assets, liabilities, income and expenses, and in the profitability and persistence of different sources of income, to reflect themselves in estimated relationships that relate the composition of the balance sheet and income statement to bank value. Our approach explains substantial cross-sectional variation in observed market-to-book values, and residuals from cross-sectional regressions of market-to-book values are useful for predicting future stock returns. Predictable future variation in returns does not reflect priced risk factors, but is related to trading costs.
    JEL: G12 G21 G3
    Date: 2007–02
  5. By: Christopher F. Baum (Boston College); Mustafa Caglayan (University of Sheffield); Dorothea Schaefer (DIW Berlin); Oleksandr Talavera (DIW Berlin)
    Abstract: This paper empirically investigates the link between political patronage and bank performance for Ukraine during 2003Q3-2005Q2. We find significant differences between politically affiliated and non-affiliated banks. We present evidence that affiliated banks have significantly lower interest margins. Politically affiliated banks also seem to increase their capital ratio. We conjecture that the reason behind these behavioral differences is to attract foreign investors; we report several mergers that recently took place between affiliated and foreign banks.
    Keywords: Political patronage, Ukraine, banking
    JEL: G32 G38
    Date: 2007–02–14
  6. By: Peresetsky, A.A. (BOFIT); Karminsky, A.M. (BOFIT); Golovan, S.V. (BOFIT)
    Abstract: This paper examines the extent to which the observed diversity of private deposit interest rates in Russia is explained by bank financial indicators. We also test for whether the introduction of the bank deposit insurance scheme in 2005 affected deposit interest rates. Our results suggest market discipline in the Russian banking system involves Russian depositors demanding higher deposit interest rates from banks with risky financial policies. This discipline seems stronger than in developed countries. Our study suggests also that the risks taken by banks increased after introducing the deposit insurance.
    Keywords: banking; deposit interest rates; moral hazard; deposit insurance; Russia
    JEL: D43 E53 G21 P34
    Date: 2007–02–20
  7. By: Chakraborty, Suparna; Allen, Linda
    Abstract: The 1998 passage of the Land Revaluation Law in Japan provided regulatory forbearance to Japanese banks in the form of a regulatory capital infusion. We test whether this divergence from international bank capital requirements had an impact on Japanese bank lending behavior. Because this natural experiment created an exogenous supply shock, we can utilize it to disentangle demand and supply effects in order to determine the impact on Japanese bank lending in both the U.S. and Japan. We find that the infusion of regulatory capital had no aggregate impact on Japanese bank lending in Japan, but it did change the allocation of loans. Well-capitalized Japanese banks shifted their lending from low margin, less capital intensive mortgage lending toward higher yielding, more capital intensive commercial loans. Moreover, we find evidence consistent with a shifting of Japanese bank lending activity away from U.S. lending(which is predominately real estate based) to domestic lending to fund manufacturing. Thus, we find that divergences from international capital standards have significant allocative effects on lending, as well as on bank profitability.
    Keywords: Basel; international lending; capital adequacy; allocative effects; aggregate effects
    JEL: G21 F34
    Date: 2007–02–13
  8. By: Sonia Ruano-Pardo (Banco de España); Vicente Salas-Fumás (Banco de España; Universidad de Zaragoza)
    Abstract: This paper analyses the determinants of the default ratio associated to banking debt in Spanish non financial firms over the period 1992-2003. It studies the factors influencing firms' entering and exit processes in and out from the default status. Additionally, it explores the factors explaining the relative amount of non performing banking debt in defaulted firms. The database combines firm-level data for non-financial companies drawn from two sources: SABI-INFORMA and Credit Register of Banco de Espana. The methodological approach is an application of Heckman's selection model. Results indicate that the decreasing trend in the evolution of the aggregate default ratio over the studied period is mainly attributable to the moderation in the level of the default ratios in those firms in which the default status is persistent over time. The contribution to the evolution of the aggregate default ratio of firms' turnover in a out from the default status has been fairly stable over time.
    Keywords: default of bank debt, non financial firms, heckman’s selection model, financial stability, financial distress
    JEL: C24 G21 G28 G32
    Date: 2006–09
  9. By: Chansarn, Supachet
    Abstract: This study aims to investigate the efficiency in Thai financial sector after the financial crisis (1998 – 2004) by looking at the total factor productivity (TFP) growth. Furthermore, the study also investigate the efficiency in commercial bank sector, finance and securities company sector and insurance company sector, and the efficiency in domestic and foreign financial companies. Based on the sample of 12 commercial banks, 13 finance and securities companies and 20 insurance companies listed on the Stock Exchange of Thailand (SET) over the period of 1998 – 2204, our finding reveals that the efficiency in Thai financial sector, commercial bank sector and finance and securities company sector was diminishing over the period of 1998 – 2004, while the efficiency in insurance company sector remained unchanged over the same period. However, the sharp decrease in efficiency in these three sectors occurred only over the period of 1998 – 1999, while the efficiency was decreasing very slightly over the period of 1999 – 2004. The study also suggests that, in overall, domestic financial companies are more efficient than foreign ones. Domestic finance and securities companies are also more efficient than foreign ones, whereas domestic and foreign commercial banks are not different in efficiency. Moreover, domestic and foreign insurance companies are not different in efficiency as well.
    Keywords: efficiency; productivity; financial sector; total factor productivity
    JEL: E0
    Date: 2005–12
  10. By: Giuliana Passamani; Roberto Tamborini
    Abstract: In this paper we wish to extend the empirical content of the "credit-cost channel" of monetary policy that we proposed in Passamani and Tamborini (2005). In the first place, we replicate the econometric estimation of the model for Italy, to which we add Germany. We find confirmation that, in both countries, firms' reliance on bank loans (“credit channel”) makes aggregate supply sensitive to bank interest rates (“cost channel”), which are in turn driven by the inter-bank rate controlled by the central bank plus a credit risk premium charged by banks on firms. The second extension consists of a formal econometric analysis of the idea that the interest rate is an instrument of control for the central bank. The empirical results of the CCC model that, according to Johansen and Juselius (2003), innovations in the inter-bank rate qualify this variables as a "control variable" in the system. Hence we replicate the Johansen and Juselius technique of simulation of rule-based stabilization policy. This is done for both Italy and Germany, on the basis of the respective estimated CCC models, taking the inter-bak rate as the instrument and the inflation of 2% as the target. As a result, we find confirmation that inflation-targeting by way of inter-bank rate control, grafted onto the estimated CCC model, would stabilize inflation through structural shifts of the "AS curve", that is, the path of realizations in the output-inflation space.
    Keywords: Macroeconomics and monetary economics, Monetary transmission mechanisms, Structural cointegration models, Italian economy, German economy
    JEL: E51 C32
    Date: 2006
  11. By: Alena Bi\v{c}áková
    Abstract: Default rates on instalment loans vary with type of the good purchased. Using an Italian dataset of instalment loans between 1995-1999, we first show that the variation persists even after controlling for contract and individual-specific characteristics, and for the potential selection bias due to credit rationing. We explore whether the residual variation in the default rates across the different types of goods is due to unobserved individual heterogeneity (selection effect) or due to the effect of the specific characteristics of the good (good effect). We claim that the two effects may be interpreted as adverse selection and moral hazard. We exploit the data on multiple contracts per individual to disentangle the two effects, and find that most of the variation is explained by the selection effect. Individuals who buy motorcycles on credit are more likely to default on any loan, while those buying kitchen appliances, furniture and computers are more likely to repay, compared to average. We conclude that there is asymmetric information in the consumer credit market, mostly in the form of adverse selection.
    Keywords: consumer credit, default, adverse selection, moral hazard
    JEL: D12 D14 D82
    Date: 2007
  12. By: Jeremy Greenwood (University of Pennsylvania); Juan M. Sanchez (University of Rochester); Cheng Wang (Iowa State University)
    Abstract: How does technological progress in financial intermediation affect the economy? To address this question a costly-state verification framework is embedded into a standard growth model. In particular, financial intermediaries can invest resources to monitor the returns earned by firms. The inability to monitor perfectly leads to firms earning rents. Undeserving firms are financed, while deserving ones are under funded. A more efficient monitoring technology squeezes the rents earned by firms. With technological advance in the financial sector, the economy moves continuously from a credit-rationing equilibrium to a perfectly efficient competitive equilibrium. A numerical example suggests that finance is important for growth.
    Keywords: financial intermediation, economic development, costly state verification
    JEL: E13 O11 O16
    Date: 2007–03

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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