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on Banking |
| By: | Gianni De Nicoló; John H. Boyd; Abu M. Jalal |
| Abstract: | This paper studies two new models in which banks face a non-trivial asset allocation decision. The first model (CVH) predicts a negative relationship between banks' risk of failure and concentration, indicating a trade-off between competition and stability. The second model (BDN) predicts a positive relationship, suggesting no such trade-off exists. Both models can predict a negative relationship between concentration and bank loan-to-asset ratios, and a nonmonotonic relationship between bank concentration and profitability. We explore these predictions empirically using a cross-sectional sample of about 2,500 U.S. banks in 2003 and a panel data set of about 2,600 banks in 134 nonindustrialized countries for 1993-2004. In both these samples, we find that banks' probability of failure is positively and significantly related to concentration, loan-to-asset ratios are negatively and significantly related to concentration, and bank profits are positively and significantly related to concentration. Thus, the risk predictions of the CVH model are rejected, those of the BDN model are not, there is no trade-off between bank competition and stability, and bank competition fosters the willingness of banks to lend. |
| Keywords: | Bank competition , concentration , risk , asset allocations , Bank soundness , Competition , Profits , Asset management , Resource allocation , Risk management , Economic models , |
| Date: | 2007–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/297&r=ban |
| By: | Martin Cihák; Heiko Hesse |
| Abstract: | Cooperative banks are an important, and growing, part of many financial systems. This paper empirically analyzes the role of cooperative banks in financial stability. Contrary to some suggestions in the literature, we find that cooperative banks are more stable than commercial banks. This finding is due to the lower volatility of the cooperative banks' returns, which more than offsets their lower profitability and capitalization. This is most likely due to cooperative banks' ability to use customer surplus as a cushion in weaker periods. We also find that in systems with a high presence of cooperative banks, weak commercial banks are less stable than they would be otherwise. The overall impact of a higher cooperative presence on bank stability is positive on average but insignificant in some specifications. |
| Keywords: | Financial sector stability , cooperative banks , commercial banks , savings banks , |
| Date: | 2007–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/2&r=ban |
| By: | Alessandro Gambini; Marco Arnone; Salim M. Darbar |
| Abstract: | This paper examines the relationship between the quality of banking supervision and governance of the supervisory agency, based on assessments of the Basel Core Principles and the IMF Code on Transparency in Financial Policies, covering 116 and 53 countries, respectively, with 51 common to both. We find a positive correlation between the transparency of the supervisor and the effectiveness of banking supervision; moreover, better accountability and integrity practices of the banking supervisors are associated with higher independence, which in turn is associated with better compliance with the Basel Core Principles. These results are largely robust to different stages of financial development. |
| Keywords: | Bank supervision , governance , Basel Core Principles , transparency , accountability , |
| Date: | 2007–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/82&r=ban |
| By: | Huberto M. Ennis; Todd Keister |
| Abstract: | Governments typically respond to a run on the banking system by temporarily freezing deposits and by rescheduling payments to depositors. Depositors may even be required to demonstrate an urgent need for funds before being allowed to withdraw. We study ex post efficient policy responses to a bank run and the ex ante incentives these responses create. Given that a run is underway, the efficient response is typically not to freeze all remaining deposits, since this would impose heavy costs on individuals with urgent withdrawal needs. Instead, (benevolent) government institutions would allow additional withdrawals, creating further strain on the banking system. We show that when depositors anticipate these extra withdrawals, their incentives to participate in the run actually increase. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur. |
| Keywords: | Banks and banking |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:07-02&r=ban |
| By: | Elod Takats |
| Abstract: | The paper shows how excessive reporting, called "crying wolf", can dilute the information value of reports. Excessive reporting is investigated by undertaking the first formal analysis of money laundering enforcement. Banks monitor transactions and report suspicious activity to government agencies, which use these reports to identify investigation targets. Banks face fines should they fail to report money laundering. However, excessive fines force banks to report transactions which are less suspicious. The empirical evidence is shown to be consistent with the model's predictions. The model is used to suggest implementable corrective policy measures, such as decreasing fines and introducing reporting fees. |
| Keywords: | Money laundering , USA Patriot Act , disclosure , auditing , |
| Date: | 2007–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/81&r=ban |
| By: | Li L. Ong; Srobona Mitra; Jorge A. Chan-Lau |
| Abstract: | In this paper, we use the extreme value theory (EVT) framework to analyze contagion risk across the international banking system. We test for the likelihood that an extreme shock affecting a major, systemic U.K. bank would also affect another large local or foreign counterpart, and vice-versa. Our results reveal several key trends among major global banks: contagion risk among banks exhibits "home bias"; individual banks are affected differently by idiosyncratic shocks to their major counterparts; and banks are affected differently by common shocks to the real economy or financial markets. In general, bank soundness appears more susceptible to common (macro and market) shocks when the global environment is turbulent; this may have important implications for London as a major financial services and capital markets hub. |
| Keywords: | Bank soundness , co-exceedance , contagion risk , distance-to-default , extreme value theory , LOGIT , |
| Date: | 2007–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/74&r=ban |
| By: | Richard Podpiera; Lamin Leigh |
| Abstract: | The recent wave of foreign investment in China's banks and the prospects of further opening of the banking sector under the WTO agreement suggest that foreign banks are likely to play an increasingly important role in China. This paper takes stock of the involvement of foreign banks in the Chinese banking sector in the perspective of international experience. While in most other countries foreign bank entry took the form of direct takeover or majority shareholding, foreign investments in China's banks have been minority shareholdings with very limited management involvement. The paper concludes that China appears to be well positioned to benefit from further opening of the banking sector to foreign investors. International experience suggests that greater competition from and participation of foreign banks can in general bring important benefits if appropriate incentives and sufficient opportunities are created. |
| Keywords: | Foreign investment , China , banks , WTO , banking reforms , Foreign investment , China , Banks , Bank reforms , World Trade Organization , |
| Date: | 2007–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/292&r=ban |
| By: | OGAWA Kazuo; Elmer STERKEN; TOKUTSU Ichiro |
| Abstract: | Based on a matched sample of Japanese small firms and main banks, we investigate bank-firm relationships in the early 2000s. We obtain some remarkable new findings. First, small firms have multiple bank relationships even though they have their main bank relations. Second, firms tied with financially weak main banks increase their number of bank relations to diversify liquidity risk. Third, the duration of a main bank relation has a positive effect on the number of bank relations. This is interpreted as either a reputation effect or firms' counterbalance actions against the monopoly power of main banks. To go further into this issue, we examine the effects of a main bank relation on the design of loan contracts. We find that firms with fewer bank relations tend to pledge personal guarantees to their main banks and are charged a higher interest rate. Our evidence lends support for the hypothesis of monopoly exploitation by main banks. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:07027&r=ban |
| By: | Francisco Ramon-Ballester (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Torsten Wezel (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt am Main, Germany.) |
| Abstract: | This paper empirically investigates the extent to which the financial linkages of Latin American banks with the exterior are influenced by political risk and deposit dollarisation. We find that the sum of banks’ foreign assets and liabilities is a function of risk-return considerations and excess domestic credit demand. An increase in political risk is shown to be associated with a build-up of foreign positions by the banking sector, but this adverse effect on the banking system is mitigated in economies with a high share of dollarised deposits. These relationships largely hold when the determinants of foreign assets and liabilities are estimated separately, with risk-induced capital flight being moderated by a high degree of deposit dollarisation. While changes in overall country risk including the risk of macro collapse drive official capital outflows, for a wider measure of capital flight including informal flows only changes in political risk matter. In each case, deposit dollarisation is shown to possess a risk-mitigating property. The results suggest caution with active dedollarisation strategies in highly dollarised economies where political instability remains an issue. JEL Classification: E42, F36, G21. |
| Keywords: | Dollarisation, political risk, banking systems, financial integration, Latin America. |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070744&r=ban |
| By: | Samer Y. Saab; Jerome Vacher |
| Abstract: | This paper considers the extent of retail banking integration in the Communauté Economique et Monétaire d'Afrique Centrale (CEMAC) and the level of bank competition at the regional level. Using a mix of quantitative and qualitative indicators, the paper finds some evidence of price convergence in average interest rate spreads. However, this observed fact is not supported by an increase in cross-border flows in retail loans and deposits, and price convergence may merely reflect excess liquidity in the region. Other data also indicate that bank competition within the CEMAC as a region is limited, complementing the findings on integration. Addressing shortfalls in legal and regulatory frameworks, infrastructure, and markets would facilitate integration. |
| Keywords: | CEMAC , monetary union , banking sector integration , bank ccompetition , |
| Date: | 2007–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/3&r=ban |
| By: | Luisa Anderloni (Department of Economics, Business and Statistics - University of Milan); Daniela Vandone (Department of Economics, Business and Statistics - University of Milan) |
| Abstract: | This paper analyses migrants' financial behaviour and financial services demand and investigates supply policies that banks can adopt in order to satisfy their specific financial needs. On the demand side we draw a theoretical framework about migrants' life cycle and financial needs to identify the sequence of temporal phases that usually characterize migrants' demand for financial products and services. Adopting this perspective, we consider the relationship among phases and goals of migratory project, priority of basic needs and resulting prioritisation of intervention by social and governmental institutions, structure of banking markets and "bancarisation" of the native population. On the supply side, we identify which features the supply of financial services and products should have in order to satisfy migrants' financial needs during their life cycle; banks should consider the "life value" of these new citizens and start up relationships in the expectation that they will become profitable customers in the medium-long run. In particular, we focus on three main groups of financial services, remittances, mortgages and pension schemes, because at present they are the most significant drivers for financial innovation. We also focus on banking experiences from different countries to identify the best practices to address migrants' financial needs. |
| Keywords: | Financial innovation, banking markets segmentation, financial inclusion, remittances, |
| Date: | 2006–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:bep:unimip:1043&r=ban |