New Economics Papers
on Banking
Issue of 2007‒09‒16
eleven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bank Regulation, Compliance and Enforcement By Singh , Rupinder
  2. Rules versus Discretion in Loan Rate Setting By Cerqueiro, G.M.; Degryse, H.A.; Ongena, S.
  3. Should Wal-Mart, Real Estate Brokers, and Banks Be in Bed Together? A Principles-Based Approach to the Issues of the Separation of Banking and Commerce By Lawrence J. White
  4. Do efficient banking sectors accelerate economic growth in transition countries By Koivu, Tuuli
  5. Bank panics in transition economies By Niinimäki, Juha-Pekka
  6. Development and Efficiency of the Banking Sector in a Transitional Economy: Hungarian Experience By Hasan, Iftekhar; Marton, Katherin
  7. Introducing Islamic Banks into Coventional Banking Systems By Juan Sole
  8. The Case for a European Banking Charter By Martin Cihák; Jörg Decressin
  9. Risk-Based Pricing of High Loan-To-Value Mortgage By Wang, Fan
  10. Consolidation of Banks in Japan: Causes and Consequences By Kaoru Hosono; Koji Sakai; Kotaro Tsuru
  11. Nonbanks in the Payments System: Vertical Integration Issues By Nicholas Economides; ;

  1. By: Singh , Rupinder (BOFIT)
    Abstract: A model is presented where the question of bank regulation is developed under a principal-agent scenario in a regime where the regulator has limited resources and banks may have an incentive to act ultra virus the regulatory standards. If banks are subject to random audit, then compliance is achieved through a system of fines determined according to the extent of non-compliance. The model shows that the choice of internal monitoring of risk is driven by each bank’s choice of the wage contract for its compliance officer who works for the ban for a wage. The officer’s incentive for effective monitoring is heightened by the threat of an internal fine from the bank for any contravention of regulations. Moreover, either a fine on the bank or a fine on the compliance officer alone is sufficient to ensure that efficiency is achieved. The model is useful for the bank regulator in a market economy and in transition economies, where the effective constraint on regulatory capacity is addressed using market-based incentives to ensure prudent regulation and effective supervision, and thereby limit the danger of bank failure and contagion.
    Keywords: banking; regulation; supervision; enforcement; transition economies
    JEL: E50 G00 P20 P30
    Date: 2007–09–13
  2. By: Cerqueiro, G.M.; Degryse, H.A.; Ongena, S. (Tilburg University, Center for Economic Research)
    Abstract: We propose a heteroscedastic regression model to identify the determinants of the dispersion in interest rates on loans granted to small and medium sized enterprises. We interpret unexplained deviations as evidence of the banks? discretionary use of market power in the loan rate setting process. ?Discretion? in the loan-pricing process is most important, we find, if: (i) loans are small and uncollateralized; (ii) firms are small, risky and difficult to monitor; (iii) firms? owners are older, and, (iv) the banking market where the firm operates is large and highly concentrated. We also find that the weight of ?discretion? in loan rates of small credits to opaque firms has decreased somewhat over the last fifteen years, consistent with the proliferation of information-technologies in the banking industry. Overall, our results reflect the relevance in the credit market of the costs firms face in searching information and switching lenders.
    Keywords: financial intermediation;loan rates;price discrimination;variance analysis.
    JEL: G21 L11
    Date: 2007
  3. By: Lawrence J. White
    Date: 2007
  4. By: Koivu, Tuuli (BOFIT)
    Abstract: The relationship between financial sector and economic growth in transition countries has been largely ignored in the earlier empirical literature. In this paper, we analyse the finance-growth nexus using a fixed-effects panel model and unbalanced panel data from 25 transition countries during the period 1993-2000. We measure the qualitative development in the banking sectors using the margin between lending and deposit interest rates. Our second variable for the level of financial sector development is the amount of bank credit allocated to the private sector as a share of GDP. According to our results, the interest rate margin is significantly and negatively related to economic growth. This outcome is in line with theoretical models and has important policy implications. On the other hand, a rise in the amount of credit does not seem to accelerate economic growth. The main reasons behind this result could be the numerous banking crises the transition countries have experienced and the soft budget constraints that are still prevalent in many transition countries. Due to these specific characteristics the growth in credit has not always been sustainable and in some cases it may have led to a decline in growth rates.
    Keywords: financial sector; transition economies; economic growth; panel data
    Date: 2007–09–12
  5. By: Niinimäki, Juha-Pekka (BOFIT)
    Abstract: This paper discusses recent bank runs in seven transition economies (Russia, Bulgaria, Estonia, Hungary, Latvia, Lithuania and Romania), comparing them against the older US experience and theoretical research. Bank runs seem to usually be information based. For example, improvements in bank transparency such as new accounting rules can reveal a bank’s insolvency and trigger a run. However, bank runs, as seen a few years ago in East Asia, Bulgaria and Russia, may also be accompanied by runs on national currencies. We include a bank run model that shows a bank may issue liquid demand deposits and avoid runs without deposit insurance as long as it also issues less liquid time deposits. Self-fulfilling runs are prevented through elimination of the maturity mismatch. The well-known Diamond & Dybvig (1983) model is modified to account for depositors’ risk affinities, whereby high-risk depositors hold their savings as demand deposits and low-risk depositors prefer time deposits. These deposit choices transfer liquidity optimally from low-risk to high-risk depositors who value liquidity. By exploiting these choices, a bank can improve its intertemporal risk-sharing by issuing deposits of varying degrees of liquidity. This maturity transformation does not necessarily raise the economy’s total liquidity.
    Keywords: ansition economies; bank panics; bank regulation; financial crises
    Date: 2007–09–11
  6. By: Hasan, Iftekhar (BOFIT); Marton, Katherin (BOFIT)
    Abstract: The paper analyzes the experiences and developments of Hungarian banking sector during the transitional process from a centralized economy to a market-oriented system. The paper identifies that early reorganization initiatives, flexible approaches to privatization, and liberal policies towards foreign banks’ involvement with the domestic institutions helped to build a relatively strong and increasingly efficient banking system. Banks with higher foreign bank ownership involvement were associated with lower inefficiency.
    Keywords: banking; transition; efficiency; privatisation; Hungary
    Date: 2007–09–13
  7. By: Juan Sole
    Abstract: Over the last decade, Islamic banking has experienced global growth rates of 10-15 percent per annum, and has been moving into an increasing number of conventional financial systems at such a rapid pace that Islamic financial institutions are present today in over 51 countries. Despite this consistent growth, many supervisory authorities and finance practitioners remain unfamiliar with the process by which Islamic banks are introduced into a conventional system. This paper attempts to shed some light in this area by describing the main phases in the process, and by flagging some of the main challenges that countries will face as Islamic banking develops alongside conventional institutions.
    Date: 2007–07–23
  8. By: Martin Cihák; Jörg Decressin
    Abstract: Most financial institutions in the European Union (EU) are still based in one country, but a number of large financial institutions (LCFI) have systemic cross-border exposures. The paper explains how, despite much progress, nationally-segmented supervisory frameworks and national accountability for financial stability hinder optimization across borders of banks' operations and efficient and effective LCFI supervision. A full-fledged EU-level prudential regime that operates along-side national regimes--a European Banking Charter (EBC)--could harness market forces to establish a level playing field for financial sector competition, while plugging some significant gaps in Europe's financial stability framework without concentrating excessive powers.
    Date: 2007–07–18
  9. By: Wang, Fan
    Abstract: High loan-to-value (LTV) mortgage are residential mortgage loans with LTV ratio greater or equal to 90\%. Lenders are increasingly engaged in risk-based pricing. If properly quantified, the additional credit risk taken when originating high LTV mortgage can be compensated by higher interest rate charged to customers. High LTV mortgage is regulated to meet higher capital requirement and thus have higher funding cost. Current regulation raises regulatory capital requirement of banks on all high LTV mortgage holdings. However, it is not efficient to differentiate the risk between a high LTV first mortgage and a second lien mortgage with the same LTV. In the paper, I show how LTV ratio affects credit risk in mortgage. A structured credit modeling approach is taken to quantify the credit risk of first mortgage and second mortgage. The total risk in a combination of first and second mortgage is shown to be equal to that of a first mortgage with the same aggregate LTV. Default risk is derived implicitly. Optionality of defaultable debt results in an upward sloping credit supply curve in terms of a function of interest rate with respect to LTV. Current regulation in high LTV mortgage creates a funding advantage in seperating a high LTV mortgage into a lower funding cost first mortgage and a higher cost second mortgage.
    Keywords: mortgage lending; risk-based pricing; credit risk; regulatory capital
    JEL: G21
    Date: 2007–02–01
  10. By: Kaoru Hosono; Koji Sakai; Kotaro Tsuru
    Abstract: We investigate the motives and consequences of the consolidation of banks in Japan during the period of fiscal year 1990-2004 using a comprehensive dataset. Our analysis suggests that the government's too-big-to-fail policy played an important role in the mergers and acquisitions (M&As), though its attempt does not seem to have been successful. The efficiency-improving motive also seems to have driven the M&As conducted by major banks and regional banks in the post-crisis period, while the market-power motive seems to have driven the M&As conducted by regional banks and corporative (shinkin) banks. We obtain no evidence that supports managerial motives for empire building.
    JEL: G21 G34
    Date: 2007–09
  11. By: Nicholas Economides (Stern School of Business, New York University); ;
    Abstract: We discuss and evaluate the incentives for vertical expansion and vertical mergers in the payments systems industry paying particular attention to the implications of the existence of network effects in this industry. We assess the incentives of large merchants to extend vertically into payments systems, noting that this incentive is maximized when there is significant market power in payments systems and merchants are not sufficiently compensated for the business they bring to the network.
    Keywords: payments system; credit cards; debit cards; non-banks; vertical integration; market power; monopoly
    JEL: L13 L42 L50 L80
    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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