New Economics Papers
on Banking
Issue of 2007‒04‒21
fourteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts By Dean Karlan; Jonathan Zinman
  2. Simulating retaliation in payment systems: Can banks control their exposure to a failing participant? By Elisabeth Ledrut
  3. Subprime Lending and Alternative Financial Service Providers: A Literature Review and Empirical Analysis By HUD - PD&R
  4. Portfolio Value-at-Risk with Time-Varying Copula: Evidence from the Americas By Ozun, Alper; Cifter, Atilla
  5. Financial markets in Iceland By Peter Tulip
  6. Too Big to Fail: the Panic of 1927 By YOKOYAMA, Kazuki
  7. Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia By Alexei Karas; William Pyle; Koen Schoors
  8. Capital Adequacy Ratios, Efficiency and Governance: a Comparison Between Islamic and Western Banks By Lucia Dalla Pellegrina
  9. Default Rates in the Loan Market for SMEs: Evidence from Slovakia By Jarko Fidrmuc; Christa Hainz; Anton Malesich
  10. Microfinance and Investment: a Comparison with Bank and Informal Lending By Lucia Dalla Pellegrina
  11. "Global Risk Sharing: Toward a stronger Financial System"(in Japanese) By Takao Kobayashi; Jeffrey Bohn; Risa Sai
  12. Financial Deregulation and Financial Development, and Subsequent Impact on Economic Growth in the Czech Republic, Hungary and Poland By Patricia Mc Grath
  13. Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Report By Dean Karlan; Jonathan Zinman
  14. Determinants of Credit Participation and Its Impact on Household Consumption: Evidence From Rural Vietnam By Cuong H. Nguyen

  1. By: Dean Karlan; Jonathan Zinman
    Abstract: Expanding access to credit is a key ingredient of development strategies worldwide, and the microfinance industry is generally credited with success in helping to alleviate poverty and improve the lives of the poor. But there is less consensus on the role of consumer loans in credit expansion initiatives. In fact, many practitioners and policymakers are skeptical about the benefits of consumer lending. This working paper by CGD non-resident fellow Dean Karlan and Jonathan Zinman estimates the impacts of expanding the consumer credit supply using a South African field experiment in which some loan applicants who had been denied credit were randomly selected to be "unrejected" for a loan. They find that compared to those who did not receive credit, borrowers showed increased employment, reduced hunger and reduced poverty. The loans also appear to have been profitable for the lender. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106-111).
    Keywords: access to credit, microfinance, consumer loans
    JEL: G21 M20
  2. By: Elisabeth Ledrut
    Abstract: This paper assesses the impact of an operational failure at one of the biggest participants in the Dutch interbank payment system, varying the time at which the disruption takes place. Liquidity levels equal historical levels. The impact of such a disruption is quantified in terms of the additional liquidity needed in order to settle all payments than can settle given the banks' intraday reserves and collateral facilities. Assuming the disruption lasts for the remainder of the day, banks are faced with costs, as they need to borrow this additional liquidity overnight from the market or from the central bank. As could be expected, the second-round effect (the number of unsettled payments among healthy banks) of an operational disruption is highest when it occurs early during the day and lasts for the remainder of the day. So are the additional overnight liquidity needed and the costs of overnight credit. Furthermore, the paper introduces different possible reaction patterns from the stricken bank's counterparties. These counterparties can react according to two basic rules: they stop sending payments to the stricken bank either after some pre-determined time or after their exposure to the stricken bank reaches a certain level. From a cost perspective, reacting is more effective when determined by the individual exposure of the stricken banks' counterparties. However, even an immediate reaction does not prevent banks from running losses following the failure of a major participant. This leads to a reflection about the bilateral relations between the stricken bank, considered to be a node in a partial star network, and the other banks. How much each payment system participant can control its exposure to the stricken bank depends on the degree of reciprocity in the value of bilateral payments.
    Keywords: payment system; operational disruption; liquidity
    Date: 2007–04
  3. By: HUD - PD&R
    Abstract: The last two decades have been marked by significant changes in consumer financial services. Two significant changes that have been evident are the rapid growth of both subprime mortgage lending and alternative financial service providers (AFSPs), such as check cashers, payday lenders, and pawnshops. A common concern with both of these industries is high fees for their services and disproportionate targeting of low-income and minority households. Another common element regarding these trends is the variety of studies arguing that the growth in use of these higher-cost financial services in low-income and minority communities is due in part to the absence of banks from these areas. But while much has been written in recent years on the growth of these two segments of the financial services market, there is limited research on the extent to which these phenomena are related. The purpose of this study is to examine subprime lending and the prevalence of AFSPs through a common lens to investigate the extent of similarities and differences in the prevalence of these activities in low-income and minority communities.
    JEL: G21
    Date: 2006–03
  4. By: Ozun, Alper; Cifter, Atilla
    Abstract: Model risk in the estimation of value-at-risk is a challenging threat for the success of any financial investments. The degree of the model risk increases when the estimation process is constructed with a portfolio in the emerging markets. The proper model should both provide flexible joint distributions by splitting the marginality from the dependencies among the financial assets within the portfolio and also capture the non-linear behaviours and extremes in the returns arising from the special features of the emerging markets. In this paper, we use time-varying copula to estimate the value-at-risk of the portfolio comprised of the Bovespa and the IPC Mexico in equal and constant weights. The performance comparison of the copula model to the EWMA portfolio model made by the Christoffersen back-test shows that the copula model captures the extremes most successfully. The copula model, by estimating the portfolio value-at-risk with the least violation number in the back-tests, provides the investors to allocate the minimum regulatory capital requirement in accordance with the Basel II Accord.
    Keywords: Time-varying Copula; portfolio value-at-risk; Latin American equity markets; portfolio GARCH
    JEL: C14 G1 C51
    Date: 2007–04–10
  5. By: Peter Tulip
    Abstract: This paper discusses recent developments and policy issues relating to financial markets in Iceland. Overall, the sector is thriving, both relative to history and to conditions in other countries. This bodes well not only for those directly involved in the industry but for the country as a whole, as financial development is an important source of economic growth. Recently concerns have been expressed about the stability of the financial system; however the guarded assessment... <P>La libéralisation financière en Islande <BR>Ce document examine l’évolution récente et les questions de fond concernant les marchés financiers islandais. Globalement, ce secteur est florissant, tant au regard du passé que par rapport à d’autres pays. Cela est de bon augure non seulement pour les acteurs directement impliqués dans le secteur, mais aussi pour le pays dans son ensemble, car le développement financier est une source...
    Keywords: financial markets, marchés financiers, libéralisation, liberalisation, Iceland, Islande
    JEL: G20 G28
    Date: 2007–04–02
  6. By: YOKOYAMA, Kazuki
    Abstract: This paper measures that the Bank of Japan adopted the too-big-to-fail doctrine against the panic of 1927. The results at this paper imply that supported banks had higher closure risk or occupied key positions in the local loan-markets. And this paper finds that the Bank of Japan bailed out solvent banks if they had political importance.
    Keywords: lender of last resort (LLR); too big to fail; the panic of 1927; bank closure.
    JEL: G28 G21 N25
    Date: 2007–04–17
  7. By: Alexei Karas; William Pyle; Koen Schoors
    Abstract: Using a database from post-communist, pre-deposit-insurance Russia, we demonstrate the presence of quantity-based sanctioning of weaker banks by both firms and households, particularly after the financial crisis of 1998. Evidence for the standard form of price discipline, however, is notably weak. Estimating the deposit supply function, we show that, particularly for poorly capitalized banks, interest rate increases exhibit diminishing, and eventually negative, returns in terms of deposit attraction, a finding consistent with depositors interpreting the deposit rate itself as a signal of otherwise unobserved bank-level risk.
    Keywords: banking, market discipline, deposit market, transition, Russia
    JEL: G21 O16 P2
    Date: 2006–06–01
  8. By: Lucia Dalla Pellegrina
    Abstract: The profit and loss sharing principle that is peculiar to Islamic finance reformulates the allocation of risk between stakeholders. Since in Islamic banks depositors are closer to stockholders in terms of residual claiming on profits, the relationship between capitalization and efficiency should in principle be weaker than in their Western counterparts. Results, obtained by means of a stochastic cost frontier analysis on samples of European-15 and Islamic banks during the period 1996-2002, show that the ratio of equity to deposits negatively affects inefficiency in both types of banks, but this effect is considerably undersized in Islamic banks as compared to European ones. This supports the reluctance that has accompained the proposal of capital adequacy ratios for Islamic banks in accordance to Basel Agreements.
    Keywords: Islamic Banks, capital, governance.
    JEL: G21 G32
    Date: 2007–04
  9. By: Jarko Fidrmuc; Christa Hainz; Anton Malesich
    Abstract: Banks entering an emerging market face a lot of uncertainty about the risks involved in lending. We use a unique unbalanced panel of nearly 700 shortterm loans made to SMEs in Slovakia between January 2000 and June 2005. Of the loans granted, on average 6.0 per cent of the firms defaulted. Several probit models and panel probit models show that liquidity and profitability factors are important determinants of SMEs defaults, while debt factors are less robust. However, we find that above average indebtedness significantly increases the probability of default. Moreover, the legal form that determines liability has important incentive effects.
    Keywords: SME, Credit, Loan Default, Mortality Rates, Incentives, Probit, Panel Data
    JEL: G33 G21 C25
    Date: 2006–11–01
  10. By: Lucia Dalla Pellegrina
    Abstract: Using data from a World Bank survey carried out in Bangladesh during the period 1991-1992, we compare the impact of microfinance programs and other types of credit on agricultural investment. After controlling for several measurable determinants of credit agreements, such as interest rates and collateral, estimates still show that microfinance programs are more likely to increase variable input expenditure than informal and bank credit are able to do. This provides evidence that microfinance incentive devices (joint responsibility, peer monitoring, social sanctions, future credit denial in case of default, etc.), perhaps together with other services associated with programs, are effective in order to promote a productive use of funds.
    Keywords: Microfnance, Banks, Informal lending, Investment.
    JEL: O16 O17 G21
    Date: 2007–04
  11. By: Takao Kobayashi (Faculty of Economics, University of Tokyo); Jeffrey Bohn (The Financial Strategies Division, Shinsei Bank); Risa Sai (Graduate School of Economics, University of Tokyo)
    Abstract: Recent surge of large real estate lending in Japan suggests the creation of a new series of lumpy credit risk exposures entering Japanese bank portfolios. It is necessary to transform these types of large, concentrated exposures into more manageable pieces of risk. The development of syndication and securitization markets provide an antidote to this creeping risk of crisis as concentrations deepen. Without the mechanisms for distributing and managing risk, Japan will forever lag the rest of the developed world in terms of financial market development and financial market competitiveness. Even worse, the days of liquidity crunches and a contracting economy may return if the structure of the market is not modified to better manage concentration risk.
    Date: 2007–04
  12. By: Patricia Mc Grath
    Abstract: Results support Arestis’s theory, that low real interest rates do not prevent economic growth (though he related it to the regulation debate). Here in the deregulation environment, it also stands. Results also support Shaw’s assertion that financial liberalisation increases the monetary sector. Stiglitz’s theory, that government intervention leads to improved quality of loans, is contradicted as the reduction of state involvement led to bad loans falling. Support is given to Everett and Kelly’s view that financial liberalisation supports growth. Finally King and Levine studies are supported – banking sector development leads to faster growth, and also Barth’s view that state involvement leads to poorly developed banks.
    Keywords: Transition Economies, Financial Deregulation, Financial Development,Economic Growth, Eastern Europe
    JEL: G G15 G21
    Date: 2006–06–01
  13. By: Dean Karlan; Jonathan Zinman
    Abstract: Information asymmetries--which occur when one party to a transaction has more or better information than the other party--such as moral hazard or adverse selection, can cause inefficiency, overinvestment, or poverty traps. Unfortunately, they are difficult to identify in practice. This working paper by Dean Karlan, CGD non-resident fellow, and his co-author provides a microfoundation for studying the real effects of credit constraints by identifying the presence (or absence) of two specific credit market failures: adverse selection adverse selection (where sellers lack information) and moral hazard (where buyers or borrowers lack information). The experiment identifies information asymmetries by randomizing loan pricing using 58,000 direct mail offers along three dimensions: an initial "offer interest rate" featured on the direct mail solicitation, the actual interest rate on the loan contract revealed only after the borrower agreed to the initial offer rate, and the interest rate on future loans offered only to those who remained in good standing. Findings show evidence of moral hazard with weaker evidence of adverse selection. A rough calibration shows that approximately 7% to 16% of default is due to asymmetric information problems. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
    Keywords: Information asymmetries, adverse selection, moral hazard, microfinance, credit market
    JEL: G21 M20 E51 D82
  14. By: Cuong H. Nguyen
    Abstract: This paper analyses the Vietnam's rural credit market to understand the determinants of credit choices and to measure impacts of borrowing activities on borrower's consumption in the 1992-1998 period. There are three main results. First, there exists uniform access to formal credit among rural households in Vietnam. Households' financial activity is found to be determined by household size and agricultural work rather than education or distance from the commune to the nearest bank branch. Education level seems to have an inverse U-shape effect on credit taking possibility; the least and the most educated households borrow least. Second, there is evidence of money lenders being crowded out by formal institutions via competition. Finally, we apply fix-effected regression and propensity score matching estimation on cross-sectional and panel data to assess impact of credit taking on household consumption. Our study demonstrates that formal credit positively affects borrowers' consumption while informal finance has mixed results.
    Keywords: rural credit, credit participation, Vietnam
    JEL: O12 O16 O17
    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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