New Economics Papers
on Banking
Issue of 2007‒06‒18
seven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. An assessment of Basel II procyclicality in mortgage portfolios By Jesús Saurina; Carlos Trucharte
  2. Do accounting changes affect the economic behaviour of financial firms? By Anne Beatty
  3. Economic information and finance : more information means more credit, fewer bad loans, and less corruption By Islam, Roumeen
  4. Fair value accounting for financial instruments: some implications for bank regulation By Wayne Landsman
  5. Households’ Portfolio Diversification By Tullio Jappelli; Christian Julliard; Marco Pagano
  6. Unanticipated Defaults and Losses in Canada's Large-Value Payments System, Revisited By Devin Ball; Walter Engert
  7. Relying on the Information of Others: Debt Rescheduling with Multiple Lenders By Claude Fluet; Paolo G. Garella

  1. By: Jesús Saurina (Banco de España); Carlos Trucharte (Banco de España)
    Abstract: In this paper we develop a probability of default (PD) model for mortgage loans, taking advantage of the Spanish Credit Register, a comprehensive database on loan characteristics and credit quality. From that model, we calculate different types of PDs: point in time, PIT, through the cycle, TTC, average across the cycle and acyclical. Then, we compare capital requirements coming from the different Basel II approaches. We show that minimum regulatory capital under Basel II can be very sensitive to the risk measurement methodology employed. Thus, the procyclicality of regulatory capital requirements under Basel II is an open question, depending on the way internal rating systems are implemented and their output is utilised. We focus on the mortgage portfolio since it is one of the most under researched areas regarding the impact of Basel II and because it is one of the most important banks’ portfolios.
    Keywords: procyclicality, basel ii, rating systems, mortgages
    JEL: E32 G18 G21
    Date: 2007–05
  2. By: Anne Beatty (Ohio State University - Department of Accounting & Management Information Systems)
    Abstract: This study examines whether accounting changes result in changes in the economic behaviour of financial institutions. The results of several papers examining how banks respond to accounting changes that affect their regulatory capital ratios are consistent with Furfine's (2000) summary that "capital regulation, broadly speaking, can significantly influence bank decision-making." These papers do not attempt to disentangle the effects of capital regulation versus market discipline. This paper examines banks' response to recent changes in accounting for Trust Preferred Securities that effect how these securities are reported in the balance sheet but do not change the calculation of Tier 1 capital. This provides a good setting to examine whether accounting changes induce changes in banks' economic behaviour in the absence of an effect on regulatory capital. I test five hypotheses related to banks' decisions to issue Trust Preferred Stock during the period from 1997 through 2004. Specifically, I examine whether there was an overall decrease in banks' propensity to issue these securities after the accounting change, whether publicly traded banks and those that access the external debt markets were more likely to issue these securities before the accounting change but not after, and whether banks with low regulatory capital ratios and with high marginal tax rates were more likely to issue these securities both before and after the accounting change. The results suggest that accounting changes can lead to changes in banks' economic behaviour even when the change in accounting does not affect regulatory capital calculations. This is consistent with bank managers acting as if they are concerned with the markets' response to the numbers reported after the accounting change.
    Keywords: Bank capital, taxation, trust preferred securities, financial reporting
    JEL: G21 G32 M41
    Date: 2006–08
  3. By: Islam, Roumeen
    Abstract: This paper builds on recent work that shows how financial sector outcomes are affected by the provision of information by financial and other entities. In particular, it shows that an indicator of economic transparency is positively related to higher levels of private credit and a lower share of nonperforming loans even after accounting for factors commonly believed to influence financial sector development in cross-country empirical estimation. Timely access to economic data allows investors to make better decisions on investments and to better monitor banks ' financial health. Greater economic transparency raises accountability and lowers corruption in bank lending.
    Keywords: Banks & Banking Reform,Financial Intermediation,Economic Theory & Research,Insurance & Risk Mitigation,Investment and Investment Climate
    Date: 2007–06–01
  4. By: Wayne Landsman (University of North Carolina at Chapel Hill - Accounting Area)
    Abstract: I identify issues that bank regulators need to consider if fair value accounting is used for determining bank regulatory capital and when making regulatory decisions. In financial reporting, US and international accounting standard setters have issued several disclosure and measurement and recognition standards for financial instruments and all indications are that both standard setters will mandate recognition of all financial instruments at fair value. To help identify important issues for bank regulators, I briefly review capital market studies that examine the usefulness of fair value accounting to investors, and discuss marking-to-market implementation issues of determining financial instruments' fair values. In doing so, I identify several key issues. First, regulators need to consider how to let managers reveal private information in their fair value estimates while minimising strategic manipulation of model inputs to manage income and regulatory capital. Second, regulators need to consider how best to minimise measurement error in fair values to maximise their usefulness to investors and creditors when making investment decisions, and to ensure bank managers have incentives to select investments that maximise economic efficiency of the banking system. Third, cross-country institutional differences are likely to play an important role in determining the effectiveness of using mark-to-market accounting for financial reporting and bank regulation.
    Keywords: fair values, financial instruments, information asymmetry
    JEL: E58 G15 M41
    Date: 2006–08
  5. By: Tullio Jappelli (Università di Napoli "Federico II", CSEF and CEPR); Christian Julliard (London Business School); Marco Pagano (Università di Napoli "Federico II", CSEF and CEPR)
    Abstract: This paper performs an efficiency analysis of households portfolios based on the comparison of observed portfolios with the mean-variance frontier of assets returns. Data on household portfolios are drawn from the 2001 Centro Einaudi survey, a representative sample of the Italian population with at least a bank account. We find that most households’ portfolios are extremely close to the efficient frontier once we explicitly take into account no short-selling constraints, while the null hypothesis of efficiency is rejected for all portfolios if we don’t consider these constraints.
    JEL: D
    Date: 2007–06–01
  6. By: Devin Ball; Walter Engert
    Abstract: Recent work at the Bank of Canada studied the impact of default in Canada’s large-value payments system, and concluded that participants could readily manage their potential losses (McVanel 2005). In an extension of that work, the authors use a much larger set of daily payments data - with three times as many observations - to examine the simulated losses of private sector participants and the Bank from defaults in the payments system. They also gauge the upper bound of possible losses in the period April 2004 to April 2006. The authors conclude that losses from a participant failure in the large-value payments system are very likely to be small and readily manageable, as in McVanel (2005). For one or two small participants, under some (probably extreme) conditions, losses could be significant, but not solvency threatening. In sum, the risk controls of the large-value payments system allow and encourage participants to keep potential losses manageable.
    Keywords: Financial institutions; Payment, clearing, and settlement systems
    JEL: E44 E47 G21
    Date: 2007
  7. By: Claude Fluet; Paolo G. Garella
    Abstract: Can inertia in terminating unsuccessful loans be due to the multiplicity of lenders in loan arrangements? Can a lender reschedule, betting against his odds? We show that fear of being last in a liquidation run prevents the aggregation of the lenders' information about the value of continuation. Private information in the form of bad but coarse news, that would prompt foreclosure on its own, will instead lead to rescheduling. The gamble is that other lenders may have sharper information. At equilibrium, rescheduling occurs even if all lenders received bad news. This is inefficient (increasing the cost of capital) compared to perfect information sharing. However, from a social point of view, barren information sharing, the equilibrium does not exhibit excessive reliance on the information of others.
    Keywords: Debt contracts, asymmetric information, rescheduling, bankruptcy, Bayesian games
    JEL: G32 G33
    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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