New Economics Papers
on Banking
Issue of 2007‒04‒28
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Harming depositors and helping borrowers: the disparate impact of bank consolidation By Kwangwoo Park; George Pennacchi
  2. Modeling the distribution of credit losses with observable and latent factors By Gabriel Jiménez; Javier Mencía
  3. Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market By Alena Bicáková
  4. Foreign Investment in Chinese Joint Stock Banks: 1996-2006 By Abotsi, Kodjo
  5. Assessing a decade of interstate bank branching By Christian A. Johnson; Tara Rice
  6. Foreign banks’ attraction to the financial centre Frankfurt – a ‘u’-shaped relationship By Michael H. Grote
  7. Formal finance and trade credit during China ' s transition By Tian Zhu; Lixin Colin Xu; Cull, Robert
  8. Loan and bond finance in Argentina, 1985-2005 By Roque B. Fernández; Celeste González; Sergio Pernice; Jorge M. Streb

  1. By: Kwangwoo Park; George Pennacchi
    Abstract: A model of multimarket spatial competition is developed where small, single-market banks compete with large, multimarket banks (LMBs) for retail loans and deposits. Consistent with empirical evidence, LMBs are assumed to have different operating costs, set retail interest rates that are uniform across markets, and have access to wholesale funding. If LMBs have significant funding advantages that offset any loan operating cost disadvantages, then market-extension mergers by LMBs promote loan competition, especially in concentrated markets. However, such mergers reduce retail deposit competition, especially in less concentrated markets. Prior empirical research and our own analysis of retail deposit rates support the model’s predictions.
    Keywords: Bank mergers
    Date: 2007
  2. By: Gabriel Jiménez (Banco de España); Javier Mencía (Banco de España)
    Abstract: This paper develops a flexible and computationally efficient model to estimate the credit loss distribution of the loans in a banking system. We consider a sectorial structure, where default frequencies and the total number of loans are allowed to depend on macroeconomic conditions as well as on unobservable credit risk factors, which can capture contagion effects between sectors. In addition, we also model the distributions of the Exposure at Default and the Loss Given Default. We apply our model to the Spanish credit market, where we find that sectorial default frequencies are affected by a persistent latent factor. Finally, we also identify the potentially riskier sectors and perform stress tests.
    Keywords: credit risk, probability of default, loss distribution, stress test, contagion
    JEL: G21 E32 E37
    Date: 2007–04
  3. By: Alena Bicáková
    Abstract: Default rates on instalment loans vary with type of the good purchased. Using an Italian dataset of instalment loans between 1995-1999, we first show that the variation persists even after controlling for contract and individual-specific characteristics, and for the potential selection bias due to credit rationing. We explore whether the residual variation in the default rates across the different types of goods is due to unobserved individual heterogeneity (selection effect) or due to the effect of the specific characteristics of the good (good effect). We claim that the two effects may be interpreted as adverse selection and moral hazard. We exploit the data on multiple contracts per individual to disentangle the two effects, and find that most of the variation is explained by the selection effect. Individuals who buy motorcycles on credit are more likely to default on any loan, while those buying kitchen appliances, furniture and computers are more likely to repay, compared to average. We conclude that there is asymmetric information in the consumer credit market, mostly in the form of adverse selection.
    Keywords: consumer credit, default, adverse selection, moral hazard
    JEL: D12 D14 D82
    Date: 2007
  4. By: Abotsi, Kodjo
    Abstract: This article reviews the foreign investment in China joint stock banks and analyze the motivations behind these investments. We will start by reviewing the comparative advantage of local joint stock banks as foreign investment recipients, as compared to larger state-owned commercial banks or smaller cities banks; we will then study the effects on efficiency and overall performance of minority foreign investment in joint stock banks in China. Finally, we will try to identify the opportunities that will beneficiate joint stock banks in China after liberalization in 2007, and how foreign banks can make the most of it.
    Keywords: china banking; china finance; investment in china; foreign banks in china; joint stock banks in china
    JEL: G0 F3
    Date: 2007–03
  5. By: Christian A. Johnson; Tara Rice
    Abstract: U.S. banking regulation has historically prohibited the ability of a bank to open or own a branch located outside of its home state, commonly referred to as interstate branching. Only since the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) in 1994 have banks have been able to engage in interstate branching, though subject to state restrictions. Despite IBBEA’s removal of branching barriers, it still allowed the states to impose restrictions on the entry of out-of-state branch offices. This article describes the changes in Federal and state interstate branching law since passage of IBBEA and reviews how initial (1994-1997) and evolving (1998-2004) interstate branching laws affect out-of-state branch growth. It concludes that anticompetitive state provisions restricted out-of- state growth when those provisions were more restrictive than the provisions set by IBBEA or by neighboring states.
    Date: 2007
  6. By: Michael H. Grote
    Abstract: This paper traces the location of foreign banks in Germany from 1949 to 2006. As suggested by new economic geography models we find a ‘u’-shaped concentration of foreign banks in Germany. Only after a competition between several cities, Frankfurt has emerged as the pre-eminent financial centre, triggered by the ‘historical event’ of setting up the German central bank in Frankfurt. After a strong increase, Frankfurt’s share in the location of foreign banks in Germany decreases slowly but significantly since the mid 1980’s. We conclude that there will be a lesser role in Europe for secondtier financial centres in the future.
    JEL: R11 N94
    Date: 2007–04
  7. By: Tian Zhu; Lixin Colin Xu; Cull, Robert
    Abstract: Using a large panel dataset of Chinese industrial firms, the authors examine the determinants of access to loans from formal financial intermediaries and extension of trade credit. Poorly performing state-owned enterprises were more likely to redistribute credit to firms with less privileged access to loans through trade credit, a pattern consistent with some of the extension of trade credit being involuntary. By contrast, profitable private domestic firms were more likely to extend trade credit than unprofitable ones. Trade credit likely provided a substitute for loans for these private firms ' customers that were shut out of formal credit markets. As biases in lending became less severe, the amount of trade credit extended by private firms declined.
    Keywords: Investment and Investment Climate,Economic Theory & Research,Banks & Banking Reform,Financial Crisis Management & Restructuring,Financial Intermediation
    Date: 2007–04–01
  8. By: Roque B. Fernández; Celeste González; Sergio Pernice; Jorge M. Streb
    Abstract: Loan and bond finance during 1985-2005 can be divided into three sub-periods. After the 1982 debt crisis, which mainly involved domestic and foreign bank loans to both the corporate and government sectors, there was practically no credit. This situation of lack of credit persisted until the domestic economy was stabilized in 1991 with the Convertibility Plan, and foreign debt renegotiation was completed in 1993 with the Brady Plan. Loan finance recovered to unprecedented levels since the 1950s, and bond finance became for the first time an important financing vehicle for both the national government and large firms in the corporate sector. Credit came to a sudden stop in 2001, with widespread default on both corporate and government bonds. The 2001 debt crisis was not followed by runaway domestic inflation, and by 2005 Argentina was able to return to foreign capital markets.
    Keywords: bank loans, sovereign bonds, provincial bonds, central bank bonds, corporate bonds, pension funds, yields, liquidity
    JEL: G1 H6
    Date: 2007–04

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.