New Economics Papers
on Banking
Issue of 2007‒03‒31
ten papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bank Lending, Bank Capital Regulation and Efficiency of Corporate Foreign Investment By Diemo Dietrich; Achim Hauck
  2. Relationship loans and regulatory capital: why fair-value accounting is inappropriate for bank loans By William R. Emmons; Gregory E. Sierra
  3. Finance and Efficiency: Do Bank Branching Regulations Matter? By Acharya, Viral V; Imbs, Jean; Sturgess, Jason
  4. Economic capital allocation under liquidity constraints By Mierzejewski, Fernando
  5. The future of small banks By Alton Gilbert
  6. Fetters of Debt, Deposit, or Gold during the Great Depression? The International Propagation of the Banking Crisis of 1931 By Gary Richardson; Patrick Van Horn
  7. Bank Distress and Productivity of Borrowing Firms: Evidence from Japan By AKIYOSHI Fumio; KOBAYASHI Keiichiro
  8. Banking on Democracy: The Political Economy of International Private Bank Lending in Emerging Markets By Javier Rodríguez; Javier Santiso
  9. Mortage interest rate dispersion in the euro area. By Christoffer Kok Sørensen; Jung-Duk Lichtenberger
  10. L’East African Currency Board e la genesi dell’attività bancaria nell’Africa Orientale Britannica By Arnaldo MAURI

  1. By: Diemo Dietrich; Achim Hauck
    Abstract: In this paper we study interdependencies between corporate foreign investment and the capital structure of banks. By committing to invest predominantly at home, firms can reduce the credit default risk of their lending banks. Therefore, banks can refinance loans to a larger extent through deposits thereby reducing firms’ effective financing costs. Firms thus have an incentive to allocate resources inefficiently as they then save on financing costs. We argue that imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs. However, the Basel II framework is shown to miss this potential.
    Keywords: financial contracting; multinational corporations; internal capital markets
    JEL: G21 F23 G28
    Date: 2007–03
  2. By: William R. Emmons; Gregory E. Sierra
    Keywords: Bank loans ; Bank capital ; Bank supervision
    Date: 2006
  3. 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. We study how rapidly different states converge to this benchmark 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 and greater distance from the efficient frontier before liberalization. These effects are robust to industries integrating across states and to the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for 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: 2007–03
  4. By: Mierzejewski, Fernando
    Abstract: Since the capital structure affects the performance of financial institutions confronted to liquidity constraints, the Economic Capital is determined by the maximisation of value. Allowing economic decisions to be characterised by a distorted probability distribution, so assessing the attitude towards risk as well as information and knowledge, the optimal surplus is expressed as a Value-at-Risk, as recommended by the Basel Committee. Thus, demanding more capital than regulatory requirements accounts for different expectations about risks. The optimal surplus is allocated to the lines of business of a conglomerate according to the borne risk and the type of divisional managers. Full-allocation is assured and no covariances are required. Further, a mechanism is provided, which allows for the distribution of equity in a decentralised organisation.
    Keywords: economic capital; capital allocation; distorted probability principle; Value-at-Risk
    JEL: G38 G33 G32
    Date: 2006–04–01
  5. By: Alton Gilbert
    Keywords: Banks and banking ; Bank size
    Date: 2007
  6. By: Gary Richardson; Patrick Van Horn
    Abstract: A banking crisis began in Austria in May 1931 and intensified in July, when runs struck banks throughout Germany. In September, the crisis compelled Britain to quit the gold standard. Newly discovered data shows that failure rates rose for banks in New York City, at the center of the United States money market, in July and August 1931, before Britain abandoned the gold standard and before financial outflows compelled the Federal Reserve to raise interest rates. Banks in New York City had large exposures to foreign deposits and German debt. This paper tests to see whether the foreign exposure of money center banks linked the financial crises on the two sides of the Atlantic.
    JEL: F02 F33 F34 N1 N12 N14 N2
    Date: 2007–03
  7. By: AKIYOSHI Fumio; KOBAYASHI Keiichiro
    Abstract: We investigate the effects of bank distress on productivity of borrowing firms using micro data on listed companies in Japanese manufacturing industry during the 1990s. We find some evidence suggesting that deterioration in financial health of banks, like a decline in capital-asset-ratio, decreased productivity of their borrowers during the period of FY1994-1996. Although huge nonperforming loans had been a serious problem in Japanese economy since the collapse of asset prices bubble in 1991, resolution of the problem was postponed during the early 1990s. The Japanese economy plunged into serious banking crisis from 1997 to 1999. Our finding is consistent with the hypothesis that forbearance lending by banks that was prevalent during the early 1990s lowered the aggregate productivity of the economy.
    Date: 2007–03
  8. By: Javier Rodríguez; Javier Santiso
    Abstract: Private capital movements have risen in recent decades, and bank flows have been part of this story. Some empirical studies have analysed the political drivers of private international liquidity, but paradoxically very few have looked at the political economy of bank flows. Even less research exists on the role of politics in explaining cross-border banking movements towards emerging democracies. The present study links compiled indicators on democracy, policy uncertainty and political stability to international bank lending flows from data developed by the BIS. It provides an empirical investigation of the political economy of cross-border bank flows to emerging markets and tries to answer two questions. Do bankers tend to prefer emerging democracies? Do they reward democratic transitions as well as policy and political stability? One of the major findings is that politics do matter, and international banks tend to have political preferences; annual growth in bank flows usually booms in the three years following a democratic transition, especially in Latin America. <BR>Les flux de capitaux privés ont connu un essor sans précédents au cours des dernières années. Les flux bancaires ont pris part à cette dynamique. Néanmoins, excepté quelques rare travaux empiriques, peu de travaux ont été consacrés aux facteurs politiques expliquant cet essor, et encore moins de recherche a été dédiée à l’économie politique des flux bancaires privés. Le travail présenté aborde cette question en croisant une série d’indicateurs sur la démocratie, l’incertitude et la stabilité politique, avec les séries de flux bancaires développés par la Banque des Règlements Internationaux (BRI). Il propose une économie politique des flux privés bancaires internationaux en abordant deux questions : les banques préfèrent-elles la démocratie ? Tendent-elles à primer les transitions démocratiques, la stabilité des politiques publiques et la stabilité politique ? Un des résultats les plus intéressants du travail présenté est de corroborer que les facteurs politiques importent pour les banques internationales. Celles-ci tendent en particulier à augmenter leurs prêts internationaux dans les trois années qui suivent une transition démocratique. Cette tendance est particulièrement prégnante en Amérique latine où, pays vers lesquels les opérations de crédit bancaire internationale ont augmenté avec l’essor de la démocratie.
    Keywords: capital flows, bank, democracy & emerging markets
    JEL: F21 F34 G21 K00
    Date: 2007–03
  9. By: Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jung-Duk Lichtenberger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Despite the remarkable economic and financial convergence over the last ten years in the euro area, mortgage interest rates still differ across countries. This note presents some stylised facts on the heterogeneity of mortgage interest rates across euro area countries on the basis of the Eurosystem’s harmonised MFI interest rate statistics. We also attempt to provide some insights into the reasons behind these cross-country differences using the methodology recently proposed by Affinito and Farabullini (2006). We differ from Affinito and Farabullini (2006) in that we focus on one particular banking market: the market for mortgage loans. This allows us to identify more clearly the role of specific structural features characterising that market in explaining mortgage rate dispersion. More specifically, we investigate the extent to which various mortgage loan demand and supply determinants help explaining the observed dispersion. It turns out that some of the heterogeneity can be explained by these factors, in particular those that relate to the supply side. However, a substantial part of the dispersion remains unexplained suggesting that much of the heterogeneity also reflects country-specific institutional differences that are likely to be caused by differences in the regulatory and fiscal framework of the mortgage markets. In order to test this, we extend our analysis to also include institutional factors and indeed find that crosscountry differences in enforcement procedures, tax subsidies and loan-to-value ratios influence the level of mortgage rates. JEL Classification: C23; E4; F36; G21; N24.
    Keywords: Mortgage markets; bank interest rates; euro area countries; financial integration; panel econometrics.
    Date: 2007–02
  10. By: Arnaldo MAURI
    Abstract: THE CURRENCY BOARD AND THE RISE OF BANKING IN EAST AFRICA. The East Africa region consists today of three independent countries, Kenya, Tanzania (formerly Tanganyika) and Uganda, which, from the early 1920’s to the achievement of independence, formed an administrative unit under British rule: the British East Africa. The paper presents an historical synthesis of the basic problems and developments of the monetary and banking system in British East Africa. The research covers the period included between the beginning of European colonisation and the attainment of independence by the three above mentioned countries and focuses on the experience with a currency board arrangement in this context. A survey on commercial banking in the region, reveals that this industry, since its rise, carried the imprinting of the British banking tradition. In the first stage of monetary evolution, owing to the influence of Indian trade and settlement in East Africa, the currency most in use was undoubtedly the Indian rupee. In that period banking industry landed in East Africa, brought in by European colonial powers. The second stage in monetary evolution began when a currency board was established, in 1919, in the British colonial possessions of East Africa, just after the acquisition, as loot, of Tanganyika, a colony previously under German rule. Originally the area of Board’s operations, i.e. the East African shilling monetary area, consisted of the three mentioned territories. Zanzibar was added in 1936. During World War II were included, temporarily, in the area also Aden and British Somaliland and eventually the former Italian colonies of Eritrea, Ethiopia and Somalia. The start of activity by the E.A. Currency Board was not easy. In 1925, when the conversion of circulating rupees was completed, because of overvaluation of silver coins in the exchange rate adopted, the EA Currency Board suffered substantial losses and the reserve ratio was 43.6 per cent. Yet the situation worsened with the crisis of the colonial economy during the depression of the 30’s, which caused a sharp decline in money supply in East Africa because of heavy redemption of local currency. In 1932 the lowest point was reached with the reserve ratio at only 9.9 per cent. Circulation of EA shillings increased rapidly after 1940 because of war economy and of a favourable balance of payments of the colonies. In addition, a great enlargement of the original currency area was achieved following British military conquests in the Horn of Africa. In 1950 the circulation was fully covered by reserves, but during the previous decades the colonial currency was mainly based on government credit. However, it was not until 1956, that the fiduciary issue was officially introduced and, by this event, reasonable opportunities for monetary policy were offered. This innovation was introduced to free part of the external reserves held in London. Prior to that act the role of the Currency Board was just passive because the automatic exchange of currency did not allow any kind of money management. It represented a simple and inexpensive mechanism directed to issue currency. A long period of British rule came to an end when the colonial territories of East Africa obtained political independence and this dramatic change marked the epilogue of the story of the colonial monetary institution. The new emerging states would not accept to renounce monetary sovereignty. Therefore the liquidation of East African Currency Board was decided and the establishment of three national central banks was officially announced simultaneously in June 1965 by the governments of Kenya, Tanzania and Uganda. The East African Currency Board ceased operations one year later.
    Keywords: Currency Board, East Africa, Colonial Monetary System, African Banking History
    JEL: G21 N27
    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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