New Economics Papers
on Banking
Issue of 2007‒04‒09
twelve papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The impact of Basel I capital regulation on bank deposits and loans: Empirical evidence for Europe By Birgit Schmitz
  2. Integrating credit and interest rate risk: A theoretical framework and an application to banks' balance sheets By Mathias Drehmann; Steffen Sorensen; Marco Stringa
  3. Bank Size and Lending Relationships in Japan By Hirofumi Uchida; Gregory F.Udell; Wako Watanabe
  4. Financial Stability in European Banking: The Role of Common Factors By Clemens J.M. Kool
  5. Bank Behaviour and the Cost Channel of Monetary Transmission By Eric Mayer; Oliver Hülsewig; Timo Wollmershäuser
  6. Bank Lending and Asset Prices in the Euro Area By Michael Frömmel; Torsten Schmidt
  7. The Labour Market Implications of Large-Scale Restructuring in the Banking Sector in Turkey By Kibritçioğlu, Aykut
  8. Monetary Policy Amplification Effects through a Bank Capital Channel By Alvaro Aguiar; Inês Drumond
  9. Cross-Border Bank Contagion in Europe By Reint Gropp; Marco Lo Duca; Jukka Vesala
  10. The Effect of Scale on Productivity of Turkish Banks in the Post-Crises Period: An Application of Data Envelopment Analysis By Chambers, Nurgul; Cifter, Atilla
  11. Does Collateral Help Mitigate Adverse Selection ? A Cross-Country Analysis By Weill, Laurent; Godlewski, Christophe
  12. An Early Warning Model for EU banks with Detection of the Adverse Selection Effect By Olivier BROSSARD (LEREPS-GRES ); Frédéric DUCROZET (PSE - Crédit Agricole); Adrian ROCHE (EconomiX - Crédit Agricole)

  1. By: Birgit Schmitz (IIW Institute for International Economics University of Bonn)
    Abstract: The Basel Committee on Banking and Supervision established minimum capital requirements for banks in their 1988 Capital Accord. This capital regulation was adopted for European Union banks at the beginning of 1993. After the implementation, a widespread concern emerged about the possible negative impact that higher capital requirements could exert on the level of economic activity, especially on bank lending. This paper investigates the impact of the Basel Accord on bank deposits and loans for eight European countries. We follow the approach taken by Peek and Rosengren (1995a) and test for the regulatory effect in a panel structure with about 2500 individual bank balance sheets for the years 1993-1995. We find that changes in deposits are positively correlated with changes in capital. Lower-capitalized banks show a stronger response to a change in capital than their higher-capitalized competitors. This evidence is consistent with the hypothesis that the implementation of minimum capital requirements had a negative effect on the supply of bank loans
    Keywords: Bank capital regulation, Basel Accord of 1988, EU Banking
    JEL: G21 G28
    Date: 2007–02–02
  2. By: Mathias Drehmann (Systemic Risk Assessment Division, Bank of England); Steffen Sorensen (Systemic Risk Assessment Division, Bank of England); Marco Stringa (Systemic Risk Assessment Division, Bank of England)
    Abstract: Credit and interest rate risk in the banking book are the two most important risks faced by commercial banks. In this paper we derive a consistent and general framework to measure the riskiness of a bank which is subject to correlated interest rate and credit risk. The framework accounts for all sources of credit risk, interest rate risk and their combined impact As we model the whole balance sheet of a bank the framework not only enables us to assess the impact of credit and interest rate risk on the bank's economic value but also on its future earnings and capital adequacy. We apply our framework to a hypothetical bank in normal and stressed conditions. The simulation highlights that it is fundamental to measure the impact of correlated interest rate and credit risk jointly on the whole portfolio of banks, including assets, liabilities and off-balance sheet items
    Keywords: Integration of credit risk & interest rate risk, asset & liability management of banks, economic value, stress testing
    JEL: G21 E47 C13
    Date: 2007–02–02
  3. By: Hirofumi Uchida; Gregory F.Udell; Wako Watanabe
    Abstract: Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using U.S. data that smaller SMEs borrow from smaller banks and smaller banks have stronger relationships with their borrowers (Berger, Miller, Petersen, Rajan, and Stein 2005) (BMPRS). We employ essentially the same methodology as BMPRS on a unique Japanese data set and obtained findings that are quite interesting from an international comparison point of view. We found like BMPRS that larger firms tend to borrow from larger banks. However, unlike BMPRS we did not find that this was because larger firms are more transparent. Together these results imply that large banks do not necessarily have a comparative advantage in extending transactions-based lending. We also found like BMPRS that smaller banks have strong relationships with their borrowers. However, we find that banking relationships in the U.S. and Japan are strong in somewhat different dimensions. Our paper clarifies these and other interesting similarities and differences between the U.S. and Japan.
    JEL: D82 D83 G21 G32 L22
    Date: 2007–04
  4. By: Clemens J.M. Kool (Utrecht University)
    Abstract: In this paper, I investigate the development and determinants of CDS spreads for 18 major European banks between December 2001 and January 2004 using daily data. I demonstrate that two nonstationary common factors can be extracted from the data that together explain most CDS spread variation across time and across banks. The group of German banks plus a few Southern-European banks appear to systematically have high CDS spreads and to be relatively sensitive to changes in the underlying factors. The dominating first common factor impacts on all banks in a similar direction, suggesting strong market integration. However, the quantitatively less important second factor has opposite effects on credit spreads of Southern European versus Northern European banks, suggesting some remaining country-specific or region-specific credit risk. Finally, I show that the first common factor may indeed be interpreted as a measure of market conditions as it is cointegrated with the European P/E ratio and the 2-year nominal interest rate
    Keywords: credit default swap spreads, contagion, cointegration, factor analysis
    JEL: G15 G21 G28
    Date: 2007–02–02
  5. By: Eric Mayer (University of Wuerzburg); Oliver Hülsewig (Ifo Institute, Munich); Timo Wollmershäuser (Ifo Institute, Munich)
    Abstract: This paper provides a micro-foundation of the behavior of the banking industry in a Stochastic Dynamic General Equilibrium model of the New Keynesian style. The role of banks is reduced to the supply of loans to ¯rms that must pay the wage bill before they receive revenues from sell- ing their products. This leads to the so-called cost channel of monetary policy transmission. Our model is based on the existence of a bank{client relationship which provides a rationale for monopolistic competition in the loan market. Using a Calvo-type staggered price setting approach, banks decide on their loan supply in the light of expectations about the future course of monetary policy, implying that the adjustment of loan rates to a monetary policy shock is sticky. This is in contrast to Ravenna and Walsh (2006) who focus primarily on banks operating under perfect competition, which means that the loan rate always equals the money market rate. The structural parameters of our model are determined using a minimum distance estimation, which matches the theoretical impulse responses to the empirical responses of an estimated VAR for the euro zone to a monetary policy shock
    Keywords: New Keynesian Model, monetary policy transmission, bank behavior, cost channel, minimum distance estimation
    JEL: E44 E52 E58
    Date: 2007–02–02
  6. By: Michael Frömmel; Torsten Schmidt
    Abstract: We examine the dynamics of bank lending to the private sector for countries of the Euro area by applying a Markov switching error correction model.We identify for Belgium, Germany, Ireland and Portugal stable, mean reverting regimes and unstable regimes with no tendency to return to the long term credit demand equation, whereas for some other countries there is only weak evidence. Furthermore, for these as well as for other countries we detect in the less stable regimes a strong co-movement with the development of the stock market. We interpret this as evidence for constraints in bank lending. In contrast, the banks’ capital seems to have only marginal impact on the lending behaviour.
    Keywords: Credit demand, credit rationing, asset prices, credit channel
    JEL: C32 G21
    Date: 2006–05
  7. By: Kibritçioğlu, Aykut
    Abstract: This paper is concerned with the causes, timing and effects of banking sector restructuring and financial crisis in Turkey. The main focus of the study, however, is on labour market implications of the banking crisis and banking reform in recent years. The paper is organised as follows. Section 2 presents a brief summary of the macroeconomic background to the latest banking sector crisis in Turkey. In section 3, the efforts of recent Turkish Governments towards restructuring and rehabilitation of the banking sector are considered. Then, following a statistical review of the main features of the Turkish banking sector, section 4 focuses on the labour market problems that can be linked to the Government's restructuring and rehabilitation programme in banking. Section 5 draws some lessons from this restructuring programme. Finally, section 6 concludes with some remarks on future prospects in the banking sector.
    Keywords: restructuring; labour market; unemployment; banking sector; banking crisis; Turkey
    JEL: G34 G21 J21 E44
    Date: 2006–05–10
  8. By: Alvaro Aguiar (Faculdade de Economia, Universidade do Porto); Inês Drumond (Faculdade de Economia, Universidade do Porto)
    Abstract: This paper improves the analysis of the role of financial frictions in the transmission of monetary policy, by bringing together the borrowers' balance sheet channel with an additional channel working through bank capital, considering capital adequacy regulations and households' preferences for liquidity. Detailing a dynamic new Keynesian general equilibrium model, in which households require a (countercyclical) liquidity premium to hold bank capital, we find that the introduction of bank capital amplifies monetary shocks to the macroeconomy through a liquidity premium effect on the external finance premium. This effect, together with the financial accelerator, generates quantitatively large amplification effects
    Keywords: Bank capital channel; Bank capital requirements; Financial accelerator; Liquidity premium; Monetary transmission mechanism
    JEL: E44 E32 E52 G28
    Date: 2007–02–02
  9. By: Reint Gropp; Marco Lo Duca; Jukka Vesala
    Abstract: This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (“coexceedances”) as a function of variables measuring common shocks and coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the first difference in the daily distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification.
    JEL: G21 F36 G15
    Date: 2007–02
  10. By: Chambers, Nurgul; Cifter, Atilla
    Abstract: The purpose of this paper is to investigate the productivity of Turkish Banks according to the effect of scale in the Post-Crises Period. The data used in this study covers the period from 2002:1 to 2004:3. We applied Data Envelopment Analysis (DEA), which is a non-parametric linear programming-based technique for measuring relative performance of decision-making units (DMUs). We calculated DEA as constant & variable return-to-scale based on output oriented Malmquist Index. Although the scale effect can be measured with DEA scale efficiency measurement, we used scale indicators as input variables in order to find out not only scale efficiency but also scale affect directly. We applied DEA by using financial ratios (Athanassopoulos and Ballantine, 1995; Yeh, 1996) and branch & personel number indicators. This study uses five input variables as i) branch numbers, ii) personnel number per branch, iii) share in total assets, iv) share in total loans, v) share in total deposits; and five output variables as i) net profit-losses/total assets (ROA), ii) net profit-losses/total shareholders equity (ROE), iii) net interest income/total assets, iv) net interest income/ total operating income, and v) noninterest income/total assets. We find that difference in efficiency is mainly from technical efficiency rather than scale efficiency in the post-crises period. The other finding reveals that efficiency approximate between selected banks and supporting that advantage of scale economies can be lost in Turkish banking. Overall, the results confirm that Turkish banking has U shaped Scale Efficiency on selected profitability ratios. The application of this paper based on other financial ratios with decreasing and increasing return-to-scale DEA is left to future research.
    Keywords: Turkish Banks; Return to Scale; Scale Efficiency; Profit Efficiency; Data Envelopment Analysis
    JEL: G21 C23 G2
    Date: 2006–05–01
  11. By: Weill, Laurent; Godlewski, Christophe
    Abstract: We investigate whether collateral helps to solve adverse selection problems. Theory predicts a negative relationship between presence of collateral and risk premium, as collateral constitutes a signalling instrument for the borrower to be charged with a lower risk premium. However, bankers’ view and most empirical evidence contradict this prediction in accordance with the observed-risk hypothesis. We provide new evidence with loan-level data and country-level data for a sample of 5843 bank loans from 43 countries. We test whether the degree information asymmetries affects the link between the presence of collateral and risk premium. We include five proxies for the degree of information asymmetries, measuring opacity of financial information, trust, and development. We find that a greater degree of information asymmetries reduces the positive relationship between the presence of collateral and the risk premium. This finding provides support for the adverse selection and observed-risk hypotheses, as both hypotheses may be empirically validated depending of the degree of information asymmetries in the country.
    Keywords: Collateral; Bank; Asymmetric information; Institutions.
    JEL: O50 G20
    Date: 2006–11
  12. By: Olivier BROSSARD (LEREPS-GRES ); Frédéric DUCROZET (PSE - Crédit Agricole); Adrian ROCHE (EconomiX - Crédit Agricole)
    Abstract: We estimate an early warning model of banks’ failure using a panel of 82 EU banks observed between 1991 and 2005. We make two contributions to the literature. Firstly, we construct a distance-to-default indicator and test its predictive power. The tests implemented here are very similar to those realized by Gropp, Vesala and Vulpes (2005), but our time dimension is four years longer and we use a more restrictive definition of banks’ “failure”. This first part of the paper establishes the accuracy of our data and confirms the robustness of distance-to-default as an early indicator of EU banks’ fragility. Our second advance consists in introducing a variable detecting the adverse selection problem that can be caused by rapid growth strategies. A measure of past average growth of assets is shown to be a very significant and powerful predictor of future banks’ difficulties. We discuss the origins and implications of such an effect.
    Keywords: failures; early warning systems; CAMEL ratings; distance to default
    JEL: G21 G33 G14 E58
    Date: 2007

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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