New Economics Papers
on Banking
Issue of 2007‒07‒07
nine papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Role of Non-Performing Loads (NPLs) and Capital Adequacy in Banking Structure and Competition By Yoonhee Tina Chang
  2. The Formation of Financial Networks By Ana Babus
  3. Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration By Marvin Goodfriend; Bennett T. McCallum
  4. Governance, Issuance Restrictions, And Competition In Payment Card Networks By Robert S. Pindyck
  5. How depositors discipline banks: the case of Russia By Semenova Maria
  6. A new approach to measuring competition in the loan markets of the euro area By Michiel van Leuvensteijn; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel; Christoffer Kok Sørensen
  7. Does the Underground Economy Hold Back Financial Deepening? Evidence from the Italian Credit Market By Giorgio Gobbi; Roberta Zizza
  8. Banking sector reforms and the Nigerian economy: performance, pitfalls and future policy options By Balogun, Emmanuel Dele
  9. A review of Soludo's perspective of banking sector reforms in Nigeria By Balogun, Emmanuel Dele

  1. By: Yoonhee Tina Chang (School of Management, University of Bath)
    Abstract: This paper analyses the impact of the transition from price-cap regulation (deposit/loan rate control) to rate-of-return regulation (ROA, NP:s and/or BIS ratio) on banking industry structure. A simple theoretical model of banking competition suggests that the relative dominance of the two objective functions under different regulatory regimes affects the market structure. Imposing more stringent rate-of-return regulation, whilst relaxing price-cap regulation, reduces the equilibrium number of banks. The result from the theoretical model is also supported by empirical evidence from Korea, which has undergone substantial consolidation in recent years. The empirical analysis uses a unique data set of the entire commercial banking sector in Korea between 1976 and 2003, which covers both pre- and post-banking crisis periods.
    Keywords: Non-performing loans, capital adequacy, banking structure, regulation, competition
    JEL: G21 G28 L13 L59
    Date: 2006–09
  2. By: Ana Babus (Erasmus University Rotterdam)
    Abstract: Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. Banks form links order to reduce the risk of contagion. The network is formed endogenously and serves as an insurance mechanism. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0.
    Keywords: Financial Stability, Network Formation, Contagion Risk
    JEL: C70 G21
    Date: 2007–06
  3. By: Marvin Goodfriend; Bennett T. McCallum
    Abstract: The paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type. The model is implemented quantitatively, with a calibration based on U.S. data. It is reasonably successful in providing an endogenous explanation for substantial steady-state differentials between the interbank policy rate and (i) the collateralized loan rate, (ii) the uncollateralized loan rate, (iii) the T-bill rate, (iv) the net marginal product of capital, and (v) a pure intertemporal rate. We find a differential of over 3 % pa between (iii) and (iv), thereby contributing to resolution of the equity premium puzzle. Dynamic impulse response functions imply pro-or-counter-cyclical movements in an external finance premium that can be of quantitative significance. In addition, they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4% pa. Also, shocks to banking productivity or collateral effectiveness call for large responses in the policy rate.
    JEL: E44 E52 G21
    Date: 2007–06
  4. By: Robert S. Pindyck
    Abstract: I discuss the antitrust suit brought by the U.S. Department of Justice against Visa and MasterCard in 1998. Banks that issue Visa cards are free to also issue MasterCard cards, and vice versa, and many banks issue the cards of both networks. However, both Visa and MasterCard had rules prohibiting member banks from also issuing the cards of other networks, in particular American Express and Discover. In addition, most banks are members of both the Visa and MasterCard networks, so governance is to some extent shared. The DOJ claimed that restrictions on issuance and shared governance were anticompetitive and should be prohibited. Visa and MasterCard argued that these practices were procompetitive. The case raised important questions: Given that many banks issue both Visa and MasterCard, and that most merchants that accept one also accept the other, do the two networks really compete, and if so, how? And do Visa and/or MasterCard have market power, if so, in what market, and how is it exercised?
    JEL: G20 L40 L44
    Date: 2007–07
  5. By: Semenova Maria
    Abstract: This paper investigates if there is market discipline in the Russian deposit market, i.e. do depositors react to changes in fundamentals, characterizing banks’ riskiness. Another aim is to test whether depositor discipline disappeared with banks’ admission to deposit insurance system. I use panel bank-specific data over the period June 2004 – September 2005
    JEL: G21
    Date: 2007–05–10
  6. By: Michiel van Leuvensteijn (Netherlands Bureau for Economic Policy Analysis (CPB), P.O. Box 80510, 2508 GM, The Hague, The Netherlands.); Jacob A. Bikker (De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, NL-1000 AB Amsterdam, The Netherlands.); Adrian A.R.J.M. van Rixtel (International Economics and International Relations Department, Banco de España (BdE), Alcalá 48, 28014 Madrid, Spain.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative banks. JEL Classification: D4, G21, L1.
    Keywords: Banking industry, competition, loan markets, marginal costs, market shares.
    Date: 2007–06
  7. By: Giorgio Gobbi; Roberta Zizza
    Abstract: The paper investigates the relationship between underground activities and financial deepening. Theaccess to external finance requires entrepreneurs to disclose credible information through formaldocumentation. This requirement may be impossible to oblige to for many informal producers wholack a proper book-keeping of their operations. For the same reason irregular workers may finddifficult to borrow for financing both consumption and housing purchase. Using panel data on Italianregional credit markets we find a strong negative impact of the share of irregular employment onoutstanding credit to the private sector. According to our estimates a shift of 1 per cent of theemployees from regular activities to irregular ones corresponds to a decline of about 2 percentagepoints in the volume of business lending and of 0.3 percentage points in outstanding credit tohouseholds, both expressed as ratios to GDP. Conversely, the feedback effects from financialdeepening to the size of the informal sector are weak and statistically not significant. Through adifference-in-difference approach exploiting the regularisation program for immigrant workerslaunched in 2002 we also identify a negative effect of the irregular labour on banks' entry decisions inthe local credit markets, now defined in terms of provinces.
    Keywords: irregular employment, bank lending, school drop-out, entry, branching, regularisationprogramme
    JEL: G21 O17 R23
    Date: 2007–04
  8. By: Balogun, Emmanuel Dele
    Abstract: This paper reviews the perspective of banking sector reforms since 1970 to date. It notes four eras of banking sector reforms in Nigeria, viz.: Pre-SAP (1970-85), the Post-SAP (1986-93), the Reforms Lethargy (1993-1998), Pre-Soludo (1999-2004) and Post-Soludo (2005-2006). Using both descriptive statistics and econometric methods, three sets of hypothesis were tested: firstly that each phase of reforms culminated in improved incentives; secondly that policy reforms which results in increased capitalization, exchange rate devaluation; interest rate restructuring and abolition of credit rationing may have had positive effects on real sector credit and thirdly that implicit incentives which accompany the reforms had salutary macroeconomic effects. The empirical results confirm that eras of pursuits of market reforms were characterized by improved incentives. However, these did not translate to increased credit purvey to the real sector. Also while growth was stifled in eras of control, the reforms era was associated with rise in inflationary pressures. Among the pitfalls of reforms identified by the study are faulty premise and wrong sequencing of reforms and a host of conflicts emanating from adopted theoretical models for reforms and above all, frequent reversals and/or non-sustainability of reforms. In concluding, the study notes the need to bolster reforms through the deliberate adoption of policies that would ensure convergence of domestic and international rates of return on financial markets investments.
    Keywords: Banking sector reforms; monetary policy; macroeconomic performance
    JEL: E58 E52
    Date: 2007–07–03
  9. By: Balogun, Emmanuel Dele
    Abstract: This paper focuses specifically on the recent Soludo’s banking sector reforms. The study noted that the Soludo’s reforms focused on strengthening the financial systems through banking sector consolidation, foreign exchange market stabilization, interest rates restructuring and the pursuit of stabilization as against structural adjustment policies for monetary and inflationary controls. A review of theoretical qualifications to the Soludo’s reform show that in thoughts, it is rooted in the Classical traditions of Say’s Law, acts monetarist, but expects a Keynesian outcome that money can stimulate expansion in aggregate domestic output. In concluding, the study noted the need to adopt an interest rate operating procedures for monetary policy in addition to moving the economy consciously towards the ‘law of one market and one price’ for the domestic and foreign money markets.
    Keywords: Monetary Policy; Reforms;
    JEL: E58 E52 E5
    Date: 2007–07–02

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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