New Economics Papers
on Banking
Issue of 2007‒09‒02
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Capital regulation and banks' financial decisions By Haibin Zhu
  2. Herding and Bank Runs By Chao Gu
  3. Finance for Growth: Does a Balanced Financial Structure Matter? By Lucía Cuadro-Sáez; Alicia García-Herrero
  4. Regulatory discretion and banks' pursuit of "safety in similarity" By Ryan Stever; James A Wilcox
  5. The Credit is a Right By Reggiani, Tommaso
  6. The economic impact of the Single Euro Payments Area By Heiko Schmiedel
  7. Evidence of non-Markovian behavior in the process of bank rating migrations By José E.Gómez González; Nicholas M. Kiefer
  8. Using counterfactual simulations to assess the danger of contagion in interbank markets By Christian Upper

  1. By: Haibin Zhu
    Abstract: This paper develops a stochastic dynamic model to examine the impact of capital regulation on banks' financial decisions. In equilibrium, lending decisions, capital buffer and the probability of bank failure are endogenously determined. Compared to a flat-rate capital rule, a risk-sensitive capital standard causes the capital requirement to be much higher for small (and riskier) banks and much lower for large (and less risky) banks. Nevertheless, changes in actual capital holdings are less pronounced due to the offsetting effect of capital buffers. Moreover, the non-binding capital constraint in equilibrium implies that banks adopt an active portfolio strategy and hence the counter-cyclical movement of risk-based capital requirements does not necessarily lead to a reinforcement of the credit cycle. In fact, the results from the calibrated model show that the impact on cyclical lending behavior differs substantially across banks. Lastly, the analysis suggests that the adoption of a more risk-sensitive capital regime can be welfare-improving from a regulator's perspective, in that it causes less distortion in loan decisions and achieves a better balance between safety and efficiency.
    Keywords: Capital requirement, economic capital, regulatory capital, actual capital holding, procyclicality effect, dynamic programming, prudential regulation
    Date: 2007–07
  2. By: Chao Gu (Department of Economics, University of Missouri-Columbia)
    Abstract: Traditional models of bank runs do not allow for herding effects, because in these models withdrawal decisions are assumed to be made simultaneously. I extend the banking model to allow a depositor to choose his withdrawal time. When he withdraws depends on his liquidity type (patient or impatient), his private, noisy signal about the quality of the bank's portfolio, and the withdrawal histories of the other depositors. In some cases, the optimal banking contract permits herding runs. Some of these "runs" are efficient in that the bank is liquidated before the portfolio worsens. Others are not efficient; these are cases in which the herd is misled.
    Keywords: Bank runs, herding, imperfect information, perfect Bayesian equilibrium, optimal bank contract, sequential-move game, fundamental-based bank runs.
    JEL: C73 D82 E59 G21
    Date: 2007–08–27
  3. By: Lucía Cuadro-Sáez; Alicia García-Herrero
    Abstract: In this paper we explore empirically a long-standing question in the literature on finance for growth. namely whether the financial structure -in terms of the size of the banking system relative to the capital markets- matters for economic growth. We build upon the existing literature by constructing a new measure of the "balancedness" of the financial structure which is broader, as it includes the domestic bond market as well as external sources of financing. It is also bounded and more linear than existing ones We find that a more balanced financial structure -in terms of the size of banks relative to the capital markets- is associated with higher economic growth. Such finding points to banks and capital markets being more of a complement than a substitute. This is in with Greenspan's idea of one market serving as "spare wheel" of the other.
    Keywords: financial structure, banking system, capital markets, economic growth
    JEL: O16 G15 G21
    Date: 2007–07
  4. By: Ryan Stever; James A Wilcox
    Abstract: We propose that individual banks' reported loan losses and provisions for future loan losses are lower, all else equal (including their own financial statements), when the banking industry is weaker. We further hypothesize that this option of underreporting charge-offs and provisions provides banks with incentives, when the banking industry is weaker, to cluster more, or to seek "safety in similarity." We provide evidence that large, individual U.S. banks indeed tend to report both lower charge-offs and lower provisions for loan losses, after controlling for their other determinants, when the banking industry is weaker. We also show that banks tend to be more clustered, or similar, when the industry is weaker. In addition, individual banks change their risk-taking to make it more similar to that of banking industry averages, and change it faster, when the industry is weaker. At the same time, in contrast to banks, we show that non-bank financial corporations show virtually no tendency to cluster more as their part of the financial sector weakens.
    Keywords: Procyclicality, reporting discretion, bank capital, clustering, bank risk
    Date: 2007–08
  5. By: Reggiani, Tommaso
    Abstract: This article proposes to analyze Grameen Bank operational system and its own evolution, illustrating the values that support this economics theory and the innovations that microcredit brings to the understanding of economics and banking phenomena.
    Keywords: Microcredit; Grameen Bank; Poverty; Yunus; Ethics in Economics
    JEL: R51 G21
    Date: 2007–06–01
  6. By: Heiko Schmiedel (DG Payment Systems and Market Infrastructure, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: With the realisation of the Single Euro Payments Area (SEPA), there will be no difference in the euro area between national and cross-border retail payments. SEPA is aimed at fostering competition and innovation, and improving conditions for customers. This requires concerted efforts from various stakeholders, in particular the banking industry, to align national practices. The Eurosystem strongly supports the SEPA project. In its catalyst role, the European Central Bank (ECB) closely monitors and assesses the overall development of SEPA. Against this background, the ECB has carried out in cooperation with the banking industry a SEPA impact study with the aim of enriching its understanding of the potential economic consequences of SEPA. Based on the quantitative and qualitative expectations of major pan-European banks, the study finds that the overall financial impact for the banking industry varies according to different scenarios of the SEPA project. The coexistence of national and SEPA retail payment schemes is expected to lead to initial investments borne by the banks. In the longer term, banks expect to benefit from improved cost efficiency and economies of scale and scope. Furthermore, banks are expected to face downward pressure on their revenues as competition will increase across borders and as a result of new market entrants. The findings of the study confirm the view that a dual SEPA implementation phase should be as short as possible. In fact, a longer migration period would give rise to higher costs than a shorter period. It can furthermore be concluded that those institutions that embrace new technological developments, create new businesses and provide innovative services are likely to gain most from SEPA. JEL Classification: G21, L11, L22.
    Keywords: SEPA, European integration, payment systems.
    Date: 2007–08
  7. By: José E.Gómez González; Nicholas M. Kiefer
    Abstract: This paper estimates transition matrices for the ratings on financial insti-tutions, using an unusually informative data set. We show that the process of rating migration exhibits significant non-Markovian behavior, in the sense that the transition intensities are affected by macroeconomic and bank spe- cific variables. We illustrate how the use of a continuous time framework may improve the estimation of the transition probabilities. However, the time homogeneity assumption, frequently done in economic applications, does not hold, even for short time intervals. Thus, the information provided by migrations alone is not enough to forecast the future behavior of ratings. The stage of the business cycle should be taken into account, and individual characteristics of banks must be considered as well.
    Keywords: Financial institutions; macroeconomic variables; capitaliza- tion; supervision; transition intensities. Classification JEL: C4; E44; G21; G23; G38.
  8. By: Christian Upper
    Abstract: Researchers at central banks increasingly turn to counterfactual simulations to estimate the danger of contagion owing to exposures in the interbank loan market. The present paper summarises the findings of such simulations, provides a critical assessment of the modelling assumptions on which they are based, and discusses their use in financial stability analysis. On the whole, such simulations suggest that contagious defaults are unlikely, but cannot be fully ruled out, at least in some countries. If contagion does take place, then it could lead to the breakdown of a substantial fraction of the banking system, thus imposing high costs to society. However, when interpreting these results, one has to bear in mind the potential bias caused by the very strong assumptions underlying the simulations. While robustness tests indicate that the models might be able to correctly predict whether or not contagion could be an issue and, possibly, also identify critical institutions, they are less suited for stress testing or for the analysis of policy options in crises, primarily due to their lack of behavioural foundations. Going forward, more work is needed on how to attach probabilities to the individual scenarios and on the microfoundations of the models.
    Keywords: Contagion, interbank lending, domino effects, systemic risk
    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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