New Economics Papers
on Banking
Issue of 2007‒03‒10
sixteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Banking integration and co-movements in EU banks’ fragility By Vulpes, Giuseppe; Brasili, Andrea
  2. Credit market competition, collateral and firms' finance By Gabriel Jiménez; Vicente Salas-Fumás; Jesús Saurina
  3. The joint size and ownership specialization in banks' lending By Javier Delgado; Vicente Salas-Fumás; Jesús Saurina
  4. Bank behaviour with access to credit risk transfer markets By Goderis, Benedikt; Marsh, Ian; Vall Castello , Judit; Wagner, Wolf
  5. An Analysis of Financial Stability Indicators in European Banking: The Role of Common Factors By Clemens Kool
  6. Bank Efficiency in China, Rent Seeking versus X-inefficiency: A non-parametric Bootstrapping Approach. By Matthews, Kent; Guo, Jianguang; Zhang, Nina; Wang, Lina
  7. Rational Inefficiency and non-performing loans in Chinese Banking: A non-parametric Bootstrapping Approach. By Matthews, Kent; Guo, Jianguang; Zhang, Nina
  8. Macroeconomic uncertainty and banks' lending decisions: The case of Italy By Mario Quagliariello
  9. A Structural Empirical Analysis of Retail Banking Competition: the Case of Hungary By József Molnár; Márton Nagy; Csilla Horváth
  10. Earnings and capital management in alternative loan loss provision regulatory regimes By Daniel Pérez; Vicente Salas-Fumás; Jesús Saurina
  11. A Profit Efficiency Perspective on the Future Strategic Positioning of the Portuguese Banks By Joana Resende; Elvira Silva
  12. Banking Sector Integration and Competition in CEMAC By Saab, Samer; Vacher, Jerome
  13. Financial Stability in European Banking: The Role of Common Factors By Clemens Kool
  14. Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk By Marcel Boyer; Donatella Porrini
  15. Preconditions for a successful implementation of supervisors' Prompt Corrective Action: Is there a case for a banking standard in the EU? By María J. Nieto; Larry D. Wall
  16. A neural network architecture for data editing in the Bank of Italy’s business surveys By Claudia Biancotti; Leandro D'Aurizio; Raffaele Tartaglia-Polcini

  1. By: Vulpes, Giuseppe; Brasili, Andrea
    Abstract: The aim of this paper is to verify whether and to which extent co-movements in EU banks’ risk, i.e. their degree of exposures of European banks to common shocks, have increased in time, following the completion of Monetary Union, the introduction of the euro and the process of European banking integration. To this end, we provide a measure of co-movements in bank risk by means of a dynamic factor model, which allows to decompose an indicator of bank fragility, the Distance-to-Default, into three main components: an EU-wide, a country-specific and a bank-level idiosyncratic component. Our results show the commonality in bank risk appears to have significantly increased since 1999, in particular if one concentrates on large banks. We also show that co-movements in EU banks’ fragility are only in part related to common macro shocks and that a banking system specific component at the EU-wide level appears relevant. This has obvious consequences in terms of systemic stability, but may also have far reaching policy implications with regards to the structuring of banking supervision in Europe
    Keywords: Co-movements; dynamic factor models; distance-to-default; Systemic risk
    JEL: C51 G21 G15
    Date: 2006–06
  2. By: Gabriel Jiménez (Banco de España); Vicente Salas-Fumás (Banco de España; Universidad de Zaragoza); Jesús Saurina (Banco de España)
    Abstract: This paper investigates the relationship between credit market competition and the availability of bank credit for firms of unobserved credit quality when firms pledge collateral to secure the loans. Loan data from the Spanish Credit Register shows that the average credit quality of borrowers that get loans in a provincial market decreases with market concentration (which is shown to be positively correlated with market power) and with the availability of collateral, although the marginal effect of each variable decreases for higher values of the other. We also find that credit lines' interest rates increase with the availability of collateral, but the increase is lower for banks operating in more concentrated credit markets.Therefore market power in credit markets and collateral appear as substitutes to increase the availability of bank finance under asymmetric information.
    Keywords: collateral, competition, asymmetric information, relationship banking
    JEL: G21
    Date: 2006–06
  3. By: Javier Delgado (Banco de España); Vicente Salas-Fumás (Banco de España; Universidad de Zaragoza); Jesús Saurina (Banco de España)
    Abstract: In this paper we study the specialization of Spanish banks along two intertwined dimensions: size and ownership form. We find some interesting results at odds with the existing empirical literature. As commercial banks increase their size, they lend more to large borrowers but that is not the case for the largest banks. For savings banks, the larger the size the more likely is the lending to small borrowers. Moreover, we find evidence that larger commercial banks are more willing to lend to low credit quality borrowers than medium size banks, while the opposite is true among savings banks. Banks' specialization in lending to business firms seems to go across the reputation considerations, risk shifting behavior and lending technologies most often considered in the literature.
    Keywords: bank specialization, transactional lending, relational lending, ownership form
    JEL: D23 G21
    Date: 2006–03
  4. By: Goderis, Benedikt (Oxford University); Marsh, Ian (Cass Business School); Vall Castello , Judit (Universitat Autonoma); Wagner, Wolf (Tilburg University and Cambridge Endowment for Research in Finance (CERF))
    Abstract: One of the most important recent innovations in financial markets has been the development of credit derivative products that allow banks to more actively manage their credit portfolios than ever before. We analyse the effect that access to these markets has had on the lending behaviour of a sample of banks, using a sample of banks that have not accessed these markets as a control group. We find that banks that adopt advanced credit risk management techniques (proxied by the issuance of at least one collateralized loan obligation) experience a permanent increase in their target loan levels of around 50%. Partial adjustment to this target, however, means that the impact on actual loan levels is spread over several years. Our findings confirm the general efficiency-enhancing implications of new risk management techniques in a world with frictions suggested in the theoretical literature.
    Keywords: credit derivatives; bank loans; moral hazard
    JEL: G20 G21 G28
    Date: 2007–02–28
  5. By: Clemens Kool
    Abstract: In this paper, we investigate the information content of three market indicators of financial instability using daily data on subordinated debt spreads (SND), credit default swap spreads (CDS) and implied option volatility (IV) over the period January 2001 Ð January 2004 for a sample of twenty major European banks. Using common factor analysis, we find for each indicator a significant common factor across banks, which we label the ÒmarketÓ factor. This market factor explains between 61 and 92 percent of total variation. Cointegration analysis shows that the market factor in each case is significantly related to macro financial variables such as the short term nominal interest rate, the yield spread and a European Price earning stock ratio. Hence, market risk is primarily affected by aggregate economic and financial developments which are widely seen to impact financial markets. The driving variables of market risk are different for the bond and equity markets with short-term interest rates and yield curve dominating the bond market (SND) and P/E ratio and short-term interest rate significantly influencing the equity market (IV). The CDS market seems to lie somewhat in between these two classical markets, with closer links, however, to the traditional bond market. Little evidence is found that idiosyncratic bank-specific risks are a major component of SND, CDS and IV developments.
    Keywords: Credit Default Swap Spreads, Risk Premium, Financial Integration
    JEL: G12 G15 G21 C30
    Date: 2006–12
  6. By: Matthews, Kent (Cardiff Business School); Guo, Jianguang; Zhang, Nina; Wang, Lina
    Abstract: This study demarcates cost-inefficiency in Chinese banks into X-inefficiency and inefficiency caused by rent seeking behaviour. A protected banking market not only encourages weak management and X-inefficiency but also public ownership and state directed lending encourages moral hazard and bureaucratic rent seeking. This paper uses bootstrap non-parametric techniques to estimate measures of X-inefficiency and rent-seeking inefficiency for the 4 state owned banks and 11 joint-stock banks over the period 1997-2004. In contrast to other studies of the Chinese banking sector, the paper argues that reduced inefficiency is an indicator that the competitive threat of the opening up of the banking market in 2007 has produced tangible benefits in improved performance.
    Keywords: Bank Efficiency; China; X-inefficiency; DEA; Bootstrapping
    JEL: D23 G21 G28
    Date: 2007–02
  7. By: Matthews, Kent (Cardiff Business School); Guo, Jianguang; Zhang, Nina
    Abstract: The existing Chinese banking system was born out of a state-planning framework focussed on the funding of state-owned enterprises. Despite the development of a modern banking system, numerous studies of Chinese banking point to its high level of average inefficiency. Much of this inefficiency relates to the high level of non-performing loans held on the banks books. This study argues that a significant component of inefficiency relates to a defunct bureaucratic incentive structure. Using bootstrap non-parametric techniques the paper decomposes cost-inefficiency into X-inefficiency and rational inefficiency caused by bureaucratic rent seeking. In contrast to other studies of the Chinese banking sector, the paper argues that a change in the incentive structure and the competitive threat of the opening up of the banking market in 2007 has produced reduced inefficiency and improved performance.
    Keywords: Bank Efficiency; China; X-inefficiency; DEA
    JEL: D23 G21 G28
    Date: 2007–02
  8. By: Mario Quagliariello (Banca d’Italia)
    Abstract: This paper discusses the role that macroeconomic uncertainty plays in banks’ decisions on the optimal asset allocation. Using a portfolio model recently proposed in the literature, the paper aims at disentangling how Italian banks choose between loans and risk-free assets when uncertainty on macroeconomic conditions increases. The econometric results confirm that macroeconomic uncertainty is a significant determinant of banks’ investment decisions, also after controlling for other factors. In periods of increasing turmoil, banks’ ability to accurately forecast future returns is hindered and herding behaviour tends to emerge, as witnessed by the reduction of the cross-sectional variance of the share of loans held in portfolio.
    Keywords: bank, business cycle, uncertainty, lending decisions, GARCH
    JEL: E44 G21 G28
  9. By: József Molnár (Bank of Finland); Márton Nagy (Magyar Nemzeti Bank); Csilla Horváth (Radboud University Nijmegen, The Netherlands)
    Abstract: In this paper we analyze the degree of competition in the Hungarian household credit and deposit markets. We estimate discrete-choice, multinomial logit deposit service and loan demand functions for each bank and calculate the corresponding price elasticities. Two models of the banking industry are considered: a static, differentiated product Nash-Bertrand oligopoly (as non-collusive benchmark) and a cartel. With estimated marginal costs and observed interest rates we calculate the price-cost margins and compare these to the theoretically implied ones. We find that in our sample period the competition in the Hungarian banking sector is low, i.e. price-cost margins are high.
    Keywords: Demand, discrete choice, product differentiation, banking, market power.
    JEL: G21 L11 L13
    Date: 2007
  10. By: Daniel Pérez (Banco de España); Vicente Salas-Fumás (Banco de España; Universidad de Zaragoza); Jesús Saurina (Banco de España)
    Abstract: The paper sets an accounting and behavioral framework from which we derive a reduced form equation to test income smoothing and capital management practices through loan loss provisions (PLL) by Spanish banks. Spain offers a unique environment to perform those tests because there are very detailed rules to set aside loan loss provisions and they are not counted as regulatory capital. Using panel data econometric techniques, we find evidence of income smoothing through PLL but not of capital management. The paper draws some lessons for accounting rule setters and banking regulators regarding the current changes in the accounting framework (introduction of IFRS/IAS in Europe) as well as the new capital framework (Basel II). In particular, a very detailed set of rules to set aside loan loss provisions does not prevent managers from decreasing earnings volatility, similarly to what happens in a more principles oriented accounting framework.
    Keywords: income smoothing, capital management, ifrs/ias, basel ii
    JEL: G18 G21
    Date: 2006–06
  11. By: Joana Resende (CETE, Faculdade de Economia, Universidade do Porto); Elvira Silva (CETE, Faculdade de Economia, Universidade do Porto)
    Abstract: The Portuguese banking sector has been recently subjected to important structural changes. The diversification of the supply of financial services, the specialization phenomena and the growing importance of new technologies are changing the sector dramatically. A profit perspective is used to investigate the efficiency performance of the commercial banking sector in Portugal in the period 2000-2004 and infer some implications for the banks´ management strategic orientation. The Nerlovian and an alternative profit efficiency measures are used, illustrating the potentialities of the directional distance functions to the profit efficiency analysis. A decomposition of the alternative profit efficiency measure is also proposed.
    Keywords: Banking; Nerlovian profit efficiency; alternative profit efficiency; directional distance functions
    JEL: C61 G21 L11
    Date: 2007–03
  12. By: Saab, Samer; Vacher, Jerome
    Abstract: This paper considers the extent of retail banking integration in the Communauté Economique et Monétaire d'Afrique Centrale (CEMAC) and the level of bank competition at the regional level. Using a mix of quantitative and qualitative indicators, the paper finds some evidence of price convergence in average interest rate spreads. However, this observed fact is not supported by an increase in cross-border flows in retail loans and deposits, and price convergence may merely reflect excess liquidity in the region. Other data also indicate that bank competition within the CEMAC as a region is limited, complementing the findings on integration. Addressing shortfalls in legal and regulatory frameworks, infrastructure, and markets would facilitate integration.
    Keywords: Central African Economic and Monetary Community; Banks; Competition; Bank soundness; Financial soundness indicators; Monetary unions; Economic cooperation; CEMAC
    JEL: G21 E58
    Date: 2007–01–01
  13. By: Clemens Kool
    Abstract: In this paper, I investigate the development and determinants of CDS spreads for 18 major European banks between December 2001 and January 2004 applying factor analysis to daily data. Two clear-cut conclusions can be drawn. First, the dominating first common factor that explains 88 percent of all variation in the system, impacts on all banks in a similar direction. This suggests a strong market integration. However the size of the response of each bankÕs CDS spread to the first common factor differs substantially, probably reflecting differences in individual bankÕs exposure and riskiness. Second, the first common factor appears significantly related to the European P/E ratio and the European-wide 2-year nominal interest rate. This finding suggests that the common factor may be interpreted as a general indicator of market conditions.
    Keywords: Credit Default Swap Spreads, Risk Premium, Financial Integration
    JEL: G12 G15 G21 C30
    Date: 2006–06
  14. By: Marcel Boyer; Donatella Porrini
    Abstract: We characterize the distortions in environmental liability sharing between firms and banks that the imperfect implementation of government policies implies. These distortions stem from three factors: the presence of moral hazard, the use of objective functions by firms and banks that differs from the social welfare function, and the difficulty for the court to assess the safety care level exerted by the firms. We characterize cases where the liability sharing factor is above or below its full information perfect implementation level. We derive comparative statics results indicating the sensitivity of the liability sharing factor to changes in some parameters relevant for characterizing the optimal policy toward environmental protection or the prevention of industrial accidents. <P>Nous caractérisons les distortions dans le partage de responsabilités entre banques et firmes qu'implique l'implémentation imparfaite des politiques gouvernementales. Ces distortions découlent de la présence de risque moral et de sélection adverse, de l'utilisation de fonctions-objectifs par les firmes et les banques diffèrentes de la fonction de bien-être social, et de la difficulté des cours de justice d'évaluer le niveau de précaution exercé par les firmes. Nous montrons l'existence de divers cas où le partage de responsabilités est supérieur ou inférieur au partage optimal en information et implémentation parfaites. Nous obtenons des résultats de statique comparée illustrant la sensibilité du partage des responsabilités aux paramètres pertinents à la détermination d'une politique optimale de protection environnementale ou de prévention d'accidents industriels.
    Keywords: liability sharing, industrial/environmental liability, safety care, moral hazard, principal-agent, partage de responsabilités, environnement, prévention, risque moral, sélection adverse, principal-agent
    JEL: D82 G32 K13 K32 Q28
    Date: 2007–03–01
  15. By: María J. Nieto (Banco de España); Larry D. Wall (Federal Reserve Bank of Atlanta)
    Abstract: Over the past years, several countries around the world have adopted a system of prudential prompt corrective action (PCA). The European Union countries are being encouraged to adopt PCA by policy analysts who explicitly call for its adoption. To date, most of the discussion on PCA has focused on its overall merits. This paper focuses on the preconditions needed for the adoption of an effective PCA. These preconditions include conceptual elements such as a prudential supervisory focus on minimizing deposit insurance losses and mandating supervisory action as capital declines. These preconditions also include institutional aspects such as greater supervisory independence and authority, more effective resolution mechanisms and better methods of measuring capital.
    Keywords: bank, supervision, european union, pca
    JEL: G28 K23 F20
    Date: 2007–02
  16. By: Claudia Biancotti (Bank of Italy); Leandro D'Aurizio (Bank of Italy); Raffaele Tartaglia-Polcini (Bank of Italy)
    Abstract: This paper presents an application of neural network models to predictive classification for data quality control. Our aim is to identify data affected by measurement error in the Bank of Italy’s business surveys. We build an architecture consisting of three feed-forward networks for variables related to employment, sales and investment respectively: the networks are trained on input matrices extracted from the error-free final survey database for the 2003 wave, and subjected to stochastic transformations reproducing known error patterns. A binary indicator of unit perturbation is used as the output variable. The networks are trained with the Resilient Propagation learning algorithm. On the training and validation sets, correct predictions occur in about 90 per cent of the records for employment, 94 per cent for sales, and 75 per cent for investment. On independent test sets, the respective quotas average 92, 80 and 70 per cent. On our data, neural networks perform much better as classifiers than logistic regression, one of the most popular competing methods, on our data. They appear to provide a valid means of improving the efficiency of the quality control process and, ultimately, the reliability of survey data.
    Keywords: data quality, data editing, binary classification, neural networks, measurement error
    JEL: C42 C45

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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