New Economics Papers
on Banking
Issue of 2007‒06‒30
eleven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Sophistication in Risk Management, Bank Equity, and Stability By Gersbach, Hans; Wenzelburger, Jan
  2. Liquidity and Ambiguity: Banks or Asset Markets? By Jürgen Eichberger; Willy Spanjers
  3. Emergence and Evolution of Proprietary ATM Networks in the UK, 1967-2000 By Batiz-Lazo, Bernardo
  4. Ambiguity, Efficieny and Bank Bailouts By Dmitri V. Vinogradov
  5. Marchés obligataires et crises bancaires dans les pays émergents By Jamel Boukhatem
  6. A quantitative theory of unsecured consumer credit with risk of default By Satyajit Chatterjee; Dean Corbae; Makoto Nakajima; Jose-Victor Rios-Rull
  7. Asset liquidity, debt valuation and credit risk By Ethan Cohen-Cole
  8. Financial intermediation in the pre-consolidated banking sector in Nigeria By Hesse, Heiko
  9. French banks in Hong Kong (1860s-1950s): Challengers to British banks? By Hubert BONIN (GREThA-GRES)
  10. Financing of the private sector in Mexico, 2000-05 : evolution, composition, and determinants By Munoz, Emanuel Salinas; Stephanou, Constantinos
  11. Racial dispersion in consumer credit interest rates By Wendy Edelberg

  1. By: Gersbach, Hans; Wenzelburger, Jan
    Abstract: We investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system in which an average rating is used with a sophisticated banking system in which banks are able to assess the default risk of entrepreneurs individually. Both banking systems compete for deposits, loans, and bank equity. While a sophisticated system rewards entrepreneurs with low default risks by low loan interest rates, a simple system acquires more bank equity and finances more entrepreneurs. Expected repayments in a simple system are always higher and its default risk is lower if productivity is sufficiently high. Expected aggregate consumption of entrepreneurs, however, is higher in a sophisticated banking system.
    Keywords: banking regulation; Financial intermediation; macroeconomic risks; rating; risk management; risk premia
    JEL: D40 E44 G21
    Date: 2007–06
  2. By: Jürgen Eichberger (University of Heidelberg, Department of Economics); Willy Spanjers (Kingston University, School of Economics)
    Abstract: We study the impact of ambiguity on two alternative institutions of financial intermediation in an economy where consumers face uncertain liquidity needs. The ambiguity the consumers experience is modeled by the degree of confidence in their additive beliefs. We analyze the optimal liquidity allocation and two institutional settings for implementing this allocation: a secondary asset market and a bank deposit contract. For full confidence we obtain the well-known result that consumers prefer the bank deposit contract over the asset market, since the former can provide the optimal cross subsidy for consumers with high liquidity needs. With increasing ambiguity this preference will be reversed: the asset market is preferred, since it avoids inefficient liquidation if the bank reserve holdings turn out to be suboptimal.
    Keywords: Financial institutions, Liquidity, Ambiguity, Choquet Expected Utility.
    JEL: D8 G1 G2
    Date: 2007–06
  3. By: Batiz-Lazo, Bernardo
    Abstract: Through archival research we investigate the impact of the introduction of Automated Teller Machines (ATM) in British retail banking. Contrary to the experience in the US, in the UK the ATM has been largely neglected by historians and management scholars. Technologically, cash dispensers preceded ATM and were originally a British innovation but U.S. (e.g. IBM and NCR) and German manufacturers (e.g. Siemens) took the lead as the ATM became a global technology. The evolution of the ATM illustrates how banks adopted on-line, real-time computing for the entire branch network and highlights the role of network externalities in financial markets. From a business history perspective, the ATM epitomises a shift in bank strategy, namely how applications of computer technology moved from being potential sources of competitive advantage to being a minimum requirement for effective competition in retail finance. Research in this article traces the origins of this process of competitive change in British retail financial markets, by looking at the emergence of proprietary networks and their evolution into a single national network at the same time that cash dispensers transformed into ATM.
    Keywords: Automated Teller Machines; UK; clearing banks; network effects
    JEL: O33 N24
    Date: 2007–06
  4. By: Dmitri V. Vinogradov (University of Heidelberg, Department of Economics)
    Abstract: The paper examines the effects of ambiguity in regulation on the equilibrium allocation. Under ambiguous bailout policy, agents’ suffer from a lack of information with regards to the insolvency resolution method, which would be chosen by the regulator if a financial institution fails. In this case, beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors. The beliefs may be asymmetric even if bankers and depositors possess absolutely symmetric information about the policy of the regulator. It is shown that such asymmetry in beliefs can generate an allocative inefficiency of the bank based economy.
    Keywords: bank bailouts; constructive ambiguity; decision-making, uncertainty
    JEL: G28
    Date: 2007–05
  5. By: Jamel Boukhatem
    Abstract: This paper deals with the question of knowing if countries with bank based financial activity face crises more expensive than those where bond markets are broader and more developed. Based on the work of Arteta (2005), the results of the empirical tests on a panel of emerging countries suggest that bank based financial systems are associated with slightly more expensive crises, whereas the relation between bond markets and the costs of crises is fragile. Besides, market based financial systems with a stronger confidence in bond markets are associated with a higher growth of production independently of the presence or not of crises. The originality which we carry to Arteta’s work consists in considering the joint effect of financial liberalization and institutional environment on the development of bond markets. Our results show the importance of the order of financial liberalization. We join in this direction one of the most significant aspects of the “sequencing” theorized by McKinnon (1973). Moreover, effective prudential regulation tends to reduce significantly the probability of occurrence of banking crises. An effective internal and external regulation is necessary to contain the increase in the risk inherent to the expansion of the new activities dictated by the aforementioned liberalization, to which financial managers and analysts of various institutions are often badly prepared.
    Date: 2007
  6. By: Satyajit Chatterjee; Dean Corbae; Makoto Nakajima; Jose-Victor Rios-Rull
    Abstract: The authors study, theoretically and quantitatively, the general equilibrium of an economy in which households smooth consumption by means of both a riskless asset and unsecured loans with the option to default. The default option resembles a bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code. Competitive financial intermediaries offer a menu of loan sizes and interest rates wherein each loan makes zero profits. They prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on its loans. They show that their model accounts for the main statistics regarding bankruptcy and unsecured credit while matching key macroeconomic aggregates and the earnings and wealth distributions. They use this model to address the implications of a recent policy change that introduces a form of “means-testing” for households contemplating a Chapter 7 bankruptcy filing. They find that this policy change yields large welfare gains.
    Date: 2007
  7. By: Ethan Cohen-Cole
    Abstract: This paper presents a structural debt valuation model that links default probabilities and recovery rates of corporate securities to asset market liquidity. This linking is advantageous for risk management and regulation of financial institutions in that it provides a method of calibrating the relationship between probability of default (PD) and loss given default (LGD). Two innovations in the paper are the placing of the default point in a model of debt valuation into general equilibrium and conditioning this point on market factors such as asset liquidity. These allow one to derive implications on the correlation between various components of the model. Specifically, it finds two relationships between the probability of default (PD) and loss given default (LGD) of a debt instrument; temporal correlations are positive and cross-sectional ones negative. Such findings confirm the intuition of existing reduced form approaches and provide the ability to inspect other properties of the relationship that derive from theory. For example, one can use the model to forecast LGD. Some empirical validation of the theoretical results is provided.
    Keywords: Securities ; Default (Finance)
    Date: 2007
  8. By: Hesse, Heiko
    Abstract: This paper uses unique bank-by-bank balance sheet and income statement information to investigate the intermediation efficiency in the Nigerian pre-consolidated banking sector during 2000-05. The author analyzes whether the Central Bank of Nigeria ' s policy of recent banking consolidation can be justified and rationalized by looking at the determinants of spreads. A spread decomposition and panel estimations show that the reform of the banking sector could be the first step to raise the intermediation efficiency of the Nigerian banking sector. The author finds that larger banks have enjoyed lower overhead costs, increased concentration in the banking sector has not been detrimental to the spreads, both increased holdings of liquidity and capital might have led to lower spreads in 2005, and a stable macroeconomic environment is conducive to a more efficient channeling of savings to productive investments.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Financial Intermediation,Financial Crisis Management & Restructuring,Investment and Investment Climate
    Date: 2007–06–01
  9. By: Hubert BONIN (GREThA-GRES)
    Abstract: French banking expansion in China and South-East Asia had to respect the powerful influence of British banks there. From the 1860s French merchant and banking interests had been involved in Hong Kong business because of the colonial developments in Indochina and the links between this area and the Hong Kong centre. The growth of commercial links between the colony and China favoured further integration of banking and currency exchanges with Hong Kong, through the Banque de l’Indochine corporation, competing with Hsbc. It was itself committed to finance Asian-French commercial flows (silk, etc.) directly (Lyon, Bordeaux, Paris) or indirectly (London branch) took part to banking links with France. But Hong Kong also became a bridgehead for Banque de l’Indochine into southern China (Canton, etc.) from the1890s up to the 1930s and, in parallel with the Shanghai branch, its branch there asserted itself as a part of French expansion in the Far-East.
    Keywords: Imperialism, First Globalization, Bank, Overseas, China, Hong-Kong, Guangzhou
    JEL: G20 N25
    Date: 2007
  10. By: Munoz, Emanuel Salinas; Stephanou, Constantinos
    Abstract: The objective of this paper is to describe the evolution, composition, and determinants of financing to the nonfinancial private sector in Mexico between 2000 and 2005. Supported by the macroeconomic environment and financial system reforms, total financing to the private sector (particularly consumer credit) increased relative to GDP, while accessibility and affordability generally improved. Equity issuance did not play an important role during the period under consideration. Although the supply of financing shifted toward domestic nonbank providers, commercial banks remain the primary source of funding. Significant progress was made in cleaning up bank loan portfolios and in strengthening financial system soundness and infrastructure. The prospects for continued private sector financing growth remain very positive, but financing is not spread out evenly across all market segments. The authors conclude with some policy implications to further facilitate deeper and broader financing of the private sector.
    Keywords: Banks & Banking Reform,Financial Intermediation,Economic Theory & Research,Public Sector Economics & Finance,Financial Crisis Management & Restructuring
    Date: 2007–06–01
  11. By: Wendy Edelberg
    Abstract: Most of the literature exploring racial disparities in consumer credit markets focuses on the issue of access to loans. But the disparate terms on which loans are issued are equally revealing. In this paper, I examine disparities in a variety of consumer loan interest rates using a reduced-form framework. I find that interest rates on loans issued before the 1995 show a statistically significant degree of unexplained racial heterogeneity even after controlling for the financial costs of issuing debt. However, racial dispersion in rates falls off for loans originated after 1995. ; The unexplainable racial disparity in consumer loan rates issued before 1995 implies that in this earlier period minorities faced unaccountably higher interest-rate premiums on the order of--in two examples--20 basis points for first mortgages and 80 basis points for automobile loans. Overall, evidence of unexplainable racial dispersion in interest rates is more robust among homeowners than renters.
    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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