New Economics Papers
on Banking
Issue of 2007‒08‒18
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Banking, Inside Money and Outside Money By Sun, Hongfei
  2. Rediscounting under aggregate risk with moral hazard By James T. E. Chapman; Antoine Martin
  3. How much would banks be willing to pay to become "too-big-to-fail" and to capture other benefits? By Elijah Brewer, III; Julapa Jagtiani
  4. The Role of Trade Credit for Small Firms: An Implication from Japan's Banking Crisis Failures in Japan By Shin-ichi Fukuda; Munehisa Kasuya; Kentaro Akashi
  5. 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∗
  6. Investment, Internal Funds and Public Banking in Germany By Dirk Engel; Torge Middendorf
  7. Agency Conflicts, Financial Distress, and Syndicate Structure: Evidence from Japanese Borrowers By Sang Whi Lee; Seung-Woog Kwang; Donald J. Mullineaux; Kwangwoo Park
  8. Big Bad Banks? The Impact of U.S. Branch Deregulation on Income Distribution By Thorsten Beck; Ross Levine; Alexey Levkov

  1. By: Sun, Hongfei
    Abstract: This paper presents an integrated theory of money and banking. I address the following question: when both individuals and banks have private information, what is the optimal way to settle debts? I develop a dynamic model with micro-founded roles for banks and a medium of exchange. I establish two main results: first, markets can improve upon the optimal dynamic contract at the presence of private information. Market prices fully reveal the aggregate states and help solve the incentive problem of the bank. Secondly, it is optimal for the bank to require loans be settled with short-term inside money, i.e. bank money that expires immediately after the settlement of debts. Short-term inside money dominates outside money because the former makes it less costly to induce truthful revelation and achieve more efficient risk sharing.
    Keywords: banking; inside money; outside money
    JEL: G2 E4
    Date: 2007–08
  2. By: James T. E. Chapman; Antoine Martin
    Abstract: In a 1999 paper, Freeman proposes a model in which discount window lending and open market operations have different outcomes - an important development because in most of the literature the results of these policy tools are indistinguishable. Freeman's conclusion that the central bank should absorb losses related to default to provide risk-sharing goes against the concern that central banks should limit their exposure to credit risk. We extend Freeman's model by introducing moral hazard. With moral hazard, the central bank should avoid absorbing losses, contrary to Freeman's argument. However, we show that the outcomes of discount window lending and open market operations can still be distinguished in this new framework. The optimal policy would be for the central bank to make a restricted number of creditors compete for funds. By restricting the number of agents, the central bank can limit the moral hazard problem. And by making agents compete with each other, the central bank can exploit market information that reveals the state of the economy.
    Keywords: Discount window ; Open market operations ; Banks and banking, Central ; Credit
    Date: 2007
  3. By: Elijah Brewer, III; Julapa Jagtiani
    Abstract: This paper examines an important aspect of the “too-big-to-fail” (TBTF) policy employed by regulatory agencies in the United States. How much is it worth to become TBTF? How much has the TBTF status added to bank shareholders’ wealth? Using market and accounting data during the merger boom (1991-2004) when larger banks greatly expanded their size through mergers and acquisitions, we find that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the nine merger deals that brought the organizations over $100 billion in total assets. These added premiums may reflect that perceived benefits of being TBTF and/or other potential benefits associated with size.
    Keywords: Bank mergers
    Date: 2007
  4. By: Shin-ichi Fukuda; Munehisa Kasuya; Kentaro Akashi
    Abstract: Trade credit is one of the most important sources of short-term external finance for small firms. Previous literature has focused mainly on the substitution of bank loans for trade credit during monetary tightening among many firms, but in this paper we investigate the role of trade credit during the banking crisis in Japan. The basic motivation is to explore whether the substitution hypothesis still holds even under serious financial turbulence. Our main results suggest that the substitution hypothesis held in Japan when the banking sector was healthy, but broke down during the banking crisis. More precisely, both bank loans and trade credit contracted simultaneously during the crisis. Deteriorated bank health might have been primarily responsible for the widespread declines of credit to small and medium size firms in Japan during the banking crisis.
    Keywords: Trade credit, Bank-firm relationship, Unlisted firms
    JEL: G21 G33 G32
    Date: 2006–10
  5. By: Michiel van Leuvensteijn; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel; Christoffer Kok-Sørensen∗
    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.
    Keywords: Banking industry, competition, loan markets, marginal costs, market shares;
    JEL: D4 G21 L1
    Date: 2007–05
  6. By: Dirk Engel; Torge Middendorf
    Abstract: Previous studies argued that low investment-cash flow sensitivities of German firms may be caused by dominance of public banking.The paper addresses this topic and applies a unique accounting dataset of German firms. Results from a dynamic panel data approach show that the dependence of investment spending on internal funds does not significantly differ between firms attached to savings banks, cooperative banks or commercial banks. Thus, the importance of the public banking sector in Germany may not explain the rather low dependence of firms on internal funds and public ownership of borrowers seems not essential to reduce financing constraints.
    Keywords: Investment, Relationship Banking, Panel Data,GMM
    JEL: G32 D92 L21 C23
    Date: 2007–05
  7. By: Sang Whi Lee; Seung-Woog Kwang; Donald J. Mullineaux; Kwangwoo Park
    Abstract: We examine how borrower firm characteristics affect the size structure in the Japanese syndicated loan market for the 1999-2003 period. Consistent with the view by Lee and Mullineaux (2004), we find that syndicates are smaller when borrowers have higher credit risk, while firms with greater information asymmetry are associated with larger syndicates in Japan. These results are primarily driven by non-keiretsu (non-business group) firms. This suggests that the role of enhanced monitoring and facilitated renegotiation is especially useful for banks participating in Japanese syndicated loan for non-keiretsu firms. On the other hand, information problems seem to be less severe for keiretsu (business group) firms which tend to have easier access to syndicated loan via the intermediation of in-house banks in the relevant syndicate. Finally, we find that keiretsu (non-keiretsu) firms have less (more) fraction of loan by their agent banks as the maturity rises. It appears that main banks of keiretsu firms with informational advantage are likely to retain less of the loan and form a more dispersed syndicate to "signal' that the loan is of high quality with increased maturity. This further confirms the view that information problems are less severe in the keiretsu firms.
    Date: 2006–10
  8. By: Thorsten Beck; Ross Levine; Alexey Levkov
    Abstract: Policymakers and economists disagree about the impact of bank regulations on the distribution of income. Exploiting cross-state and cross-time variation, we test whether liberalizing restrictions on intra-state branching in the United States intensified, ameliorated, or had no effect on income distribution. We find that branch deregulation lowered income inequality. Deregulation lowered income inequality by affecting labor market conditions, not by boosting the business income of the poor, nor by enhancing educational attainment. Reductions in the earnings gap between men and women and between skilled and unskilled workers account for the bulk of the explained drop in income inequality.
    JEL: D31 G28 O16
    Date: 2007–08

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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