New Economics Papers
on Banking
Issue of 2007‒03‒24
ten papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Identification of a Loan Supply Function: A Cross-Country Test for the Existence of a Bank Lending Channel By Sophocles N. Brissimis; Matthaios D. Delis
  2. The Lending Channel in Emerging Economies: Are Foreign Banks Different? By Francisco F. Vázquez; Marco Arena; Carmen Reinhart
  3. Financial Globalization and the Governance of Domestic Financial Intermediaries By Thierry Tressel; Thierry Verdier
  4. Determinants of Subordinated Debt Issuance by Japanese Regional Banks By Naohiko Baba; Masakazu Inada; Yasuo Maeda
  5. External Linkages and Contagion Risk in Irish Banks By Srobona Mitra; Elena Duggar
  6. The entry of multinational banks into Latin America: a source of stability or financial fragility ? By Alexandre MINDA (LEREPS-GRES)
  7. Corporate governance of banks: the current state of the debate. By Polo, Andrea
  8. The optimal rating philosophy for the rating of SMEs By Rikkers, F.; Thibeault, A.
  9. Estimation Risk Effects on Backtesting For Parametric Value-at-Risk Models By Juan Carlos Escanciano; Jose Olmo
  10. Introduction to Applied Stress Testing By Martin Cihák

  1. By: Sophocles N. Brissimis (Bank of Greece and University of Piraeus); Matthaios D. Delis (Athens University of Economics and Business)
    Abstract: Using the theoretical predictions of the Bernanke-Blinder (1988) model, we seek to examine the existence of a bank lending channel through the empirical identification of a loan supply function and to assess the impact of differential bank characteristics on banks’ ability to supply loans. To this end, we estimate a loan supply model and test for the restrictions implied by perfect substitutability between loans and bonds in bank portfolios. Estimations are carried out on bank panel data for 16 OECD countries, the results showing that a bank lending channel is at work in only two of them. Moreover, and contrary to standard accounts, we find that the relevance of bank characteristics is hardly a decisive factor in the identification of a loan supply function.
    Keywords: Bank lending channel; financial structure; dynamic panels
    JEL: C23 C52 E44 E52
    Date: 2007–01
  2. By: Francisco F. Vázquez; Marco Arena; Carmen Reinhart
    Abstract: This paper exploits a panel dataset comprising 1,565 banks in 20 emerging countries during 1989- 2001 and compares the response of the volume of loans and the rates on loans and deposits to various measures of monetary conditions across domestic and foreign banks. It also looks for systematic differences in the behavior of domestic and foreign banks during periods of financial distress and tranquil times. Using differences in bank ownership as a proxy for financial constraints, the paper finds weak evidence that foreign banks have a lower sensitivity of credit to monetary conditions relative to their domestic competitors, with the differences driven by banks with lower asset liquidity and/or capitalization. The lending and deposit rates of foreign banks tend to be smoother during periods of financial distress. However, the differences across domestic and foreign banks do not appear to be strong. These results provide weak support to the existence of supply-side effects in credit markets and suggest that foreign bank entry in emerging countries may have contributed somewhat to stability in credit markets.
    Keywords: Lending channel , monetary transmission , credit markets , foreign banks , Banking , Emerging markets , Credit ,
    Date: 2007–03–06
  3. By: Thierry Tressel; Thierry Verdier
    Abstract: We model an economy in which domestic banks and firms face incentive constraints, as in Holmstrom and Tirole (1997). Firms borrow from banks and uninformed investors, and can collude with banks to reduce the intensity of monitoring. We study the general equilibrium effects of capital flows (portfolio investments and loans, FDI) on the governance of domestic banks. We find that liberalization of capital flows may deteriorate the governance of the domestic financial system by increasing firms' incentives to collude with banks, with negative effects on productivity. We also show that systemic bailout guarantees increase the risks of collusion.
    Keywords: Financial globalization , domestic banks , collusion , bailout guarantees , Globalization , Governance , Banking ,
    Date: 2007–03–06
  4. By: Naohiko Baba (Senior Economist and Director, Financial Markets Department, Bank of Japan. (E-mail:; Masakazu Inada (Institute for Monetary and Economic Studies, Bank of Japan. (E-mail:; Yasuo Maeda (Professor, Faculty of Economics, Keio University . (E-mail:
    Abstract: This paper empirically investigates the determinants of subordinated debt issuance by Japanese regional banks during the period 2000-2005 using a probit model. The empirical results suggest the following: (i) Throughout the period, Japanese regional banks with a lower capital/asset ratio have a higher incentive to issue subordinated debts because they are counted as Tier 2 capital under the Basel Accord. (ii) During the period of instability in the Japanese banking system ( 2000-2003), investors tended to intensively use financial variables such as the non-performing loan ratio, ROA, and total deposits outstanding to screen good banks for their investments in the subordinated debts. (iii) During the period after the banking system regained stability (2004-2005), investors tended to pay less attention to the above variables due mainly to the mitigated default risk of these banks.
    JEL: G21 G28
    Date: 2007–03
  5. By: Srobona Mitra; Elena Duggar
    Abstract: The large and growing international linkages of big Irish banks expose them to idiosyncratic shocks arising in other countries. We analyze international interdependencies of Irish banks-during both normal times and in periods of large shocks or extreme events-using an existing methodology with distance to default (DD) data constructed from the banks' equity prices. The data covers daily observations from January 1994 to November 2005. We first construct rolling correlations between DDs of Irish banks and those of banks from other European countries and the U.S. to analyze trends in cross-country interdependencies. We then use a multinomial logit model to estimate the number of banks in Ireland that experience a large shock on the same day as banks in other countries ("coexceedances"), controlling for Ireland-specific and global factors. We find evidence of increasing cross-border interdependencies over time; differing interlinkage patterns in the pre-Euro, post-Euro, and the post-September 11th periods; and significant cross-border contagion risk from the United Kingdom, the United States, and the Netherlands. This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
    Keywords: Contagion risk , distance to default , Ireland , Banking , Ireland , Risk management , International financial system , Economic models ,
    Date: 2007–02–28
  6. By: Alexandre MINDA (LEREPS-GRES)
    Abstract: This paper aims to contribute to the debate regarding the presence of foreign banks in Latin America. To clarify the discussion, we shall conduct a survey of the theoretical and empirical literature devoted to internationalisation in the banking sector so as to provide a better analysis of the determinants that currently underpin foreign banking investments. The international banks concerned come mainly from the European Union, particularly Spain, and primarily focus their investments in the region’s large emerging economies. They display profitability indicators that are on a par with those of domestic banks, generate a significantly lower level of operational efficiency, but are more efficient in their management of risk. Multinational banks can help reinforce banking stability by spreading new risk management methods, by introducing new control procedures and strengthening asset solidity. However, they are partly responsible for the credit squeeze from which Latin America is suffering. Foreign banks can be the cause of new sources of banking fragility such as the exposure to foreign exchange risks, the increase in market influence, persistently high intermediation spreads and the moral hazard.
    Keywords: Foreign banks, multinational banks, Latin America, financial stability, credit squeeze, banking fragility
    JEL: G21
    Date: 2007
  7. By: Polo, Andrea
    Abstract: Since banks are among the most important sources not only of finance but also of external governance for firms, the corporate governance of banks is a crucial factor for growth and development. Despite its importance, this topic has been explored only by a few studies. While some authors support, with different arguments in the course of time, the specificity of banks, other authors, among whom Ross Levine and his co-authors from the World Bank, question heavily the present banking regulatory framework. The debate on the corporate governance of banks has a direct bearing on the current discussions on the future of banking regulatory design: should the regulatory intervention be the most important corporate control mechanism in banking or should regulators focus on introducing incentives for appropriate market behaviour?
    Keywords: Financial economics; Corporate Governance; Banking; Regulation and Supervision; Market Discipline; Securities Law
    JEL: K22 G28 G21 G34 G18
    Date: 2007–03–19
  8. By: Rikkers, F.; Thibeault, A.
    Abstract: The objective of this research is to determine the optimal rating philosophy for the rating of SMEs, and to describe the consequences of the chosen philosophy on several related aspects. As to our knowledge, this is the first paper that studies the considerations of financial institutions on what rating philosophy to adopt for specific portfolios. The importance for banks to have a solid risk framework to predict credit risk of their counterparties is well reflected by the quality and the quantity of research on this subject. Moreover, a good risk framework is vital to become compliant with the new Basel II framework. Problem is that financial institutions nearly always neglect the first step in the rating model development process: the determination of the rating philosophy. It is very important for financial institutions to decide whether they want their internal rating systems to grade borrowers according to their current condition (point-in-time), or their expected condition over a cycle and in stress (through-the-cycle), because the rating philosophy influences many aspects such as: credit approval, pricing, credit and portfolio monitoring, the regulatory and internal capital requirements and the competitive position of a bank. This makes the question which rating philosophy to use very important. Moreover, many different modelling techniques exist to determine credit risk, but few attempts have been devoted to credit risk assessment of small commercial loans, although SME exposures are relatively important for European banks. SMEs have specific characteristics that influence the rating philosophy and therefore the development and use of credit risk models. These SME characteristics are taken into account in the analysis to determine the optimal rating philosophy.
    Keywords: rating philosophy, small business, Basel II, credit rating, banks
    JEL: D82 E32 G20 G28 G33
    Date: 2007–02–27
  9. By: Juan Carlos Escanciano; Jose Olmo (City University, London)
    Abstract: One of the implications of the creation of Basel Committee on Banking Supervision was the implementation of Value-at-Risk (VaR) as the standard tool for measuring market risk. Thereby the correct specification of parametric VaR models became of crucial importance in order to provide accurate and reliable risk measures. If the underlying risk model is not correctly specified, VaR estimates understate/overstate risk exposure. This can have dramatic consequences on stability and reputation of financial institutions or lead to sub-optimal capital allocation. We show that the use of the standard unconditional backtesting procedures to assess VaR models is completely misleading. These tests do not consider the impact of estimation risk and therefore use wrong critical values to assess market risk. The purpose of this paper is to quantify such estimation risk in a very general class of dynamic parametric VaR models and to correct standard backtesting procedures to provide valid inference in specification analyses. A Monte Carlo study illustrates our theoretical findings in finite-samples. Finally, an application to S&P500 Index shows the importance of this correction and its impact on capital requirements as imposed by Basel Accord, and on the choice of dynamic parametric models for risk management.
    Keywords: Backtesting; Basel Accord; Model Risk; Risk Management; Value at Risk; Conditional Quantile
    JEL: C52 C22 G21 G32
    Date: 2007–03
  10. By: Martin Cihák
    Abstract: Stress testing is a useful and increasingly popular, yet sometimes misunderstood, method of analyzing the resilience of financial systems to adverse events. This paper aims to help demystify stress tests, and illustrate their strengths and weaknesses. Using an Excel-based exercise with institution-by-institution data, readers are walked through stress testing for credit risk, interest rate and exchange rate risks, liquidity risk and contagion risk, and are guided in the design of stress testing scenarios. The paper also describes the links between stress testing and other analytical tools, such as financial soundness indicators and supervisory early warning systems. Furthermore, it includes surveys of stress testing practices in central banks and the IMF.
    Keywords: Stress testing , financial soundness indicators , early warning systems ,
    Date: 2007–03–15

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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