New Economics Papers
on Banking
Issue of 2007‒05‒12
thirteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The choice of banking firm: Are the interest rate a significant criteria? By Antoni Garrido Torres; Pere Arqué Castells
  2. Financial Liberalisation in Emerging Markets: How Does Bank Lending Change? By Hübler, Olaf Hübler; Menkhoff, Lukas; Suwanaporn, Chodechai
  3. Loan Maturity and renegotiation evidence from the lending practices of large and small banks By Ugo Albertazzi
  4. Cross-Border M&As in the Financial Sector. Is Banking Different from Insurance? By Pozzolo, Alberto Franco; Focarelli, Dario
  5. Why does overnight liquidity cost more than intraday liquidity? By Joydeep Bhattacharya; Joseph H. Haslag; Antoine Martin
  6. Measuring efficiency of Islamic banks: criteria, methods, and social priorities By Hasan, Zubair
  7. Simulation based approach for measuring concentration risk By Kim, Joocheol; Lee, Duyeol
  8. Liquidity Constraints and Imperfect Information in Subprime Lending By William Adams; Liran Einav; Jonathan Levin
  9. Liquidity-saving mechanisms By Antoine Martin; James McAndrews
  10. Household loan loss risk in Finland – estimations and simulations with micro data By Herrala, Risto; Kauko, Karlo
  11. Information Sharing and Credit: Firm-Level Evidence from Transition Countries By Martin Brown; Tullio Jappelli; Marco Pagano
  12. Mudaraba as a mode of finance in Islamic banking: theory, practice and problems By Hasan, Zubair
  13. Choosing Between Fixed and Adjustable Rate Mortgages By Paiella, Monica; Pozzolo, Alberto Franco

  1. By: Antoni Garrido Torres (Grup de Recerca en Federalisme Fiscal i Economia Regional (Institut d'Economia de Barcelona-IEB), Departament d'Econometria, Estadística i Economia Espanyola, Universitat de Barcelona); Pere Arqué Castells (Grup de Recerca en Federalisme Fiscal i Economia Regional (Institut d'Economia de Barcelona-IEB), Universitat de Barcelona.)
    Abstract: The objective of the research is to know the factors that in Spain determine the choice of banking organization. The obtained results indicate that the dimension of the network of branches is the reason more valued. In spite of the increasing symmetry of the Spanish banking market, the preferences of the clients of the savings banks and those of the banks are not absolutely coincident, being the proximity - the main reason for election- much more valued by the former than by the latter. The existence of divergences in the preferences has also been detected according to the region and the typology of city of residence.
    Keywords: Choice criteria, retail banking, logit multinomial.
    JEL: G20 G21
    Date: 2006–12
  2. By: Hübler, Olaf Hübler; Menkhoff, Lukas; Suwanaporn, Chodechai
    Abstract: Financial liberalisation has often failed in the past due to underestimated problems of structural change. We analyse such changes in lending behaviour of Thai commercial banks during a liberalisation phase by way of unique micro data. Liberalisation has expected positive effects, such as lowering the interest rate spread and collateral requirements. Liberalisation causes structural change, such as a decline in collateral-based and relationship banking. However, the liberalisation evidence is consistent with more risk taking, such as lending to more risky projects and less protection against default. The Thai experience suggests obvious policy lessons.
    Keywords: financial liberalisation, lending decisions, emerging economies, Thailand
    JEL: O16 F30 G21
    Date: 2007–05
  3. By: Ugo Albertazzi
    Abstract: Corporate finance theories suggest that problems of asymmetric information and moral hazard in credit markets can be addressed by choosing short-term maturities. Theories of debt renegotiation suggest that the credibility of the implicit commitment to not make concessions to insolvent borrowers, which would undermine the effectiveness of short-term maturities, is related to the characteristics of the lender and in particular to its size. the joint implication of these theories is that, for given borrower's characteristics, small banks should be less willing to issue long term, loans. Using information on Italian banks, this study presents a cross-sectional analysis of the maturity of loans to firms and shows a first evidence consistent with this prediction. With more opaque borrowers, like small and innovative firms, other supply-side features (special regulatory regimes favouring lending relationships and economies of scale in the screening technology) are also shown to be relevant in the determination of loan maturity.JEL Codes: G21, G32Keywords: maturity; renegotiation; adverse selection; moral hazard; short-termism
    Date: 2007–02
  4. By: Pozzolo, Alberto Franco; Focarelli, Dario
    Abstract: This paper investigates what factors might help explain the internationalization strategy of banks and insurance companies, by comparing the determinants of cross-border M&As in the two sectors in a unified framework. The empirical analysis shows that between 1990 and 2003 the internationalization of banks and insurance companies followed similar patterns. Distance and economic and cultural integration are important determinants for both the banks’ and the insurance companies’ expansion abroad. Comparative advantage also has a prominent role, the more so for banks. The evidence is less supportive of the view that cross-border M&As are more frequent between similar countries, as predicted by the new trade theory. Finally, and most interestingly, we find indirect evidence consistent with the hypothesis that implicit barriers to foreign entry are more important in explaining the behavior of banks than that of insurance companies.
    Keywords: international banking and insurance, foreign direct investment
    JEL: E30 G21 G22 F21 F23
    Date: 2007–04–10
  5. By: Joydeep Bhattacharya; Joseph H. Haslag; Antoine Martin
    Abstract: In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, the interest charged on overnight liquidity affects output, while the cost of intraday liquidity only affects the distribution of resources between money holders and non?money holders. The low cost of intraday liquidity follows from the Friedman rule, but with respect to overnight liquidity, it is optimal to deviate from the Friedman rule. The cost differential simultaneously reduces the incentive to overuse money and encourages risk sharing.>
    Keywords: Bank liquidity ; Payment systems ; Friedman, Milton ; Banks and banking, Central
    Date: 2007
  6. By: Hasan, Zubair
    Abstract: This paper provides an appraisal of some of the researches conducted in recent years for evaluating the efficiency of Islamic banks. It is restricted to studies using parametric (SFA) and non-parametric (DEA) models. It finds that they leave much to be desired and the conclusions they arrive at are of suspect validity for a variety of reasons. On a more important side, the criteria – cost or profit – they invariably use for measuring efficiency albeit valid miss the essence of what Islamic banking aims to achieve. These banks must of course pay their way but more than that they have to meet certain social objectives and priorities. The fulfillment of social responsibilities even at the expense of reduced profits has to be the main justification for their existence.
    Keywords: Key words: Islamic banking; Efficiency criteria; SFA; DEA; Scial priorities. Key words: Islamic banking; Efficiency criteria; SFA; DEA; Scial priorities. Key words: Islamic banking; Efficiency criteria; SFA; DEA; Scial priorities. Islamic banking; Efficiency criteria; SFA; DEA; Scial priorities. Islamic banking; Efficiency criteria; SFA; DEA; Scial priorities.
    JEL: G21
    Date: 2007
  7. By: Kim, Joocheol; Lee, Duyeol
    Abstract: Asymptotic Single Risk Factor (ASRF) model is used to derive the regulatory capital formula of Internal Ratings-Based approach in the new Basel accord (Basel II). One of the important assumptions in ASRF model for credit risk is that the given portfolio is well diversified so that one can easily calculate the required capital level by focusing only on systematic risk. In real world, however, idiosyncratic risk of a portfolio cannot be fully diversified away, causing the so called concentration risk problem. In this paper we suggest simulation based approach for measuring concentration risk using bank capital dynamic model. This approach is especially suitable for a portfolio with relatively small to medium number of obligors and relatively large sized loans
    Keywords: Basel II; ASRF model; credit risk; concentration risk
    JEL: G33 G32 G38
    Date: 2007–02–01
  8. By: William Adams; Liran Einav; Jonathan Levin
    Abstract: We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. Our analysis is based on unique data from a large auto sales company that serves the subprime market. We first document the role of short-term liquidity in driving purchasing behavior, including sharp increases in demand during tax rebate season and a high sensitivity to minimum down payment requirements. We then explore the informational problems facing subprime lenders. We find that default rates rise significantly with loan size, providing a rationale for lenders to impose loan caps because of moral hazard. We also find that borrowers at the highest risk of default demand the largest loans, but the degree of adverse selection is mitigated substantially by effective risk-based pricing.
    JEL: D14 G14
    Date: 2007–04
  9. By: Antoine Martin; James McAndrews
    Abstract: We study the incentives of participants in a real-time gross settlement system with and without the addition of a liquidity-saving mechanism (queue). Participants in our model face a liquidity shock and different costs for delaying payments. They trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank. The heterogeneity of participants in our model gives rise to a rich set of strategic interactions. The main contribution of our paper is to show that the design of a liquidity-saving mechanism has important implications for welfare, even in the absence of netting. In particular, we find that parameters will determine whether the addition of a liquidity-saving mechanism increases or decreases welfare.
    Keywords: Bank liquidity ; Payment systems ; Banks and banking ; Banks and banking, Central ; Monetary theory
    Date: 2007
  10. By: Herrala, Risto (Bank of Finland Monetary Policy and Research/Monitoring); Kauko, Karlo (Bank of Finland Research)
    Abstract: This discussion paper presents a microsimulation model of household distress. We use logit analysis to estimate the extent to which a household’s risk of being financially distressed depends on net income after tax and loan servicing costs. The impact of assumed macroeconomic shocks on this net income concept is calculated at the household level. The microsimulation model is used to simulate both the number of distressed households and their aggregate debt in various macroeconomic scenarios. The simulations indicate that household credit risks to banks are relatively well contained.
    Keywords: financial stability; indebtedness; micro simulations; households
    JEL: D14 E47 G21 R29
    Date: 2007–05–08
  11. By: Martin Brown (Swiss National Bank); Tullio Jappelli (Università di Napoli "Federico II", CSEF and CEPR); Marco Pagano (Università di Napoli "Federico II", CSEF and CEPR)
    Abstract: We investigate whether information sharing among banks has affected credit market performance in the transition countries of Eastern Europe and the former Soviet Union, using a large sample of firm-level data. Our estimates show that information sharing is associated with improved availability and lower cost of credit to firms, and that this correlation is stronger for opaque firms than transparent firms. In cross-sectional estimates, we control for variation in country-level aggregate variables that may affect credit, by examining the differential impact of information sharing across firm types. In panel estimates, we also control for the presence of unobserved heterogeneity at the firm level and for changes in selected macroeconomic variables.
    Keywords: information sharing, credit access, transition countries
    JEL: D82 G21 G28 O16 P34
    Date: 2007–05–01
  12. By: Hasan, Zubair
    Abstract: This paper seeks to analyze some of the aspects of mudarabah as a mode of financing business both from the theoretical and operational angles. At the theoretical plane the paper tackles the issue of the determination of the sharing of profit ratio for the outside financier in a competitive setting i.e. where the interest-free and interest-based systems operate side by side. It would show in a micro framework that the determination of this ratio would be a function of profit expectations, leverage ratio, rate of interest, and the risk factor. On the operational side, the paper analyzes the reasons of the unpopularity of the instrument not only with the financiers but also with the borrowers, and suggests some organizational arrangements to overcome the difficulties. The argument has a historical perspective.
    Keywords: Islamic banking Mudarabah Agency problem
    JEL: G21 G24 G2
    Date: 2007
  13. By: Paiella, Monica; Pozzolo, Alberto Franco
    Abstract: This paper estimates the determinants of households’ choice between fixed rate (FRM) and adjustable rate mortgage (ARM) contracts, using the Bank of Italy’s Survey of Household Income and Wealth. Contrary to the predictions of the theoretical literature, the analysis shows that most household characteristics proxying for exposure to other (non-mortgagerelated) risks and for individual risk aversion are irrelevant for the choice. This, in turn, crucially depends on the relative price of the mortgages and on whether the household is liquidity constrained. Liquidity constrained households find ARMs particularly attractive because their initial payments are generally lowest, ceteris paribus. This is so despite some evidence that the premium that lenders charge over their cost of funds is substantially higher on ARMs than on FRMs. Taken together, the evidence suggests that ARM holders do not fully take into account the risk of a rise of the reference interest rates. On the other hand, lenders price quite expensively this risk and borrowers end up paying a high price for the benefit of low initial payments.
    Keywords: home purchase finance, adjustable rate mortgages, fixed rate mortgages.
    JEL: D10 G1 G21 E4
    Date: 2007–04–10

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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