New Economics Papers
on Banking
Issue of 2007‒09‒24
nine papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Sophistication in Risk Management, Bank Equity, and Stability By Jan Wenzelburger; Hans Gersbach
  2. State-dependency and firm-level optimization - a contribution to Calvo price staggering. By Alexis Derviz; Jirí Podpiera
  3. The potential role of subordinated debt programs in enhancing market discipline in banking By Douglas Evanoff; Julapa Jagtiani; Taisuke Nakata
  4. Managers and efficiency in banking By Kauko, Karlo
  5. Do Banks Respond to Capital Requirement? Evidence from Indonesia By Rasyad A Parinduri; Yohanes E. Riyanto
  6. What does excess bank liquidity say about the loan market in Less Developed Countries? By Khemraj, Tarron
  7. What about Underevaluating Operational Value at Risk in the Banking Sector? By Georges Dionne; Hela Dahen
  8. Evidence of non-Markovian behavior in the process of bank rating migrations By José E. Gómez González; Nicholas M. Kiefer
  9. An Analysis of the Effects of the Severance Pay Reform on Credit to Italian SMEs By Riccardo Calcagno; Roman Kraeussl; Chiara Monticone

  1. By: Jan Wenzelburger (Keele University, Centre for Economic Research and School of Economic and Management Studies); Hans Gersbach (Center of Economic Research at ETH Zurich and CEPR)
    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 with 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: Financial intermediation, macroeconomic risks, risk management, risk premia, banking regulation, rating.
    JEL: D40 E44 G21
    Date: 2007–08
  2. By: Alexis Derviz (Czech National Bank, Na Príkope 28, CZ-115 03 Praha 1, Czech Republic.); Jirí Podpiera (Czech National Bank, Na Príkope 28, CZ-115 03 Praha 1, Czech Republic.)
    Abstract: We study both theoretically and empirically the interdependence of lending decisions in different country branches of a multinational bank. First, we model a bank that delegates the management of its foreign unit to a local manager with non-transferable skills. The bank differs from other international investors due to a liquidity threshold which induces a depositor run and a regulatory action if attained. A separate channel of shock propagation exists since lending decisions are influenced by delegation and precautionary motives. This can entail “contagion”, i.e. parallel reactions of the loan volumes in both countries to the parent bank home country disturbance. Second, we look for the presence of lending contagion by panel regression methods in a large sample of multinational banks and their affiliates. We find that the majority of multinational banks behave in line with contagion effect. In addition, the presence of contagion seems to be related to the geographical location of subsidiaries. JEL Classification: F37, G21, G28, G31.
    Keywords: multinational bank, diversification, delegation, lending contagion, panel regression.
    Date: 2007–09
  3. By: Douglas Evanoff; Julapa Jagtiani; Taisuke Nakata
    Abstract: Previous studies have found that subordinated debt (sub-debt) markets do differentiate between banks with different risk profiles. This finding satisfies a necessary condition for regulatory proposals which would mandate increased reliance on sub-debt in the bank capital structure to discipline banks’ risk taking. Such proposals, however, have not been implemented, partially because there are still concerns about the quality of the signal generated in current debt markets. We argue that previous studies evaluating the potential usefulness of sub-debt proposals have evaluated spreads in an environment that is very different from the one that will characterize a fully implemented sub-debt program. With a fully implemented program, the market will become deeper, issuance will be more frequent, debt will be viewed as a more viable means to raise capital, bond dealers will be less reluctant to publicly disclose more details on debt transactions, and generally, the market will be more closely followed. As a test to see how the quality of the signal may change, we evaluate the risk-spread relationship, accounting for the enhanced market transparency surrounding new debt issues. Our empirical results indicate a superior risk-spread relationship surrounding the period of new debt issuance due, we posit, to greater liquidity and transparency. Our results overall suggest that the degree of market discipline would likely be enhanced by a mandatory sub-debt program requiring banks to regularly approach the market to issue sub-debt.
    Date: 2007
  4. By: Kauko, Karlo (Bank of Finland Research)
    Abstract: This paper presents evidence on the impact of managers on cost efficiency in banking. Stochastic frontier analysis is applied to a unique Finnish data set. The paper finds that manager age and education have strong yet complicated effects. University education enhances efficiency if the manager is running a large bank. Managing director changes are systematically followed by efficiency changes. Manager retirement typically causes an efficiency improvement, whereas other manager changes can either improve or weaken efficiency.
    Keywords: efficiency; banking; managers
    JEL: G21 L25 M19
    Date: 2007–09–18
  5. By: Rasyad A Parinduri (Singapore Centre for Applied and Policy Economics (SCAPE) Department of Economics, National University of Singapore); Yohanes E. Riyanto (Department of Economics, National University of Singapore)
    Abstract: Using dynamic panel data models, we examine the effect of capital requirement on banks’ behavior in Indonesia. We find inconclusive results. Some banks tend to comply with capital requirement: They increase their capital ratio when their CAR is lower than, or falling towards, the eight percent regulatory minimum. However, most of our results are statistically significant at 20-30% level of significance only. Moreover, our results are mostly driven by private domestic banks and heavily-undercapitalized banks that were closely monitored by regulator in the aftermath of the 1998 crisis. Whether, in normal circumstances, banks in developing countries like Indonesia comply with capital requirement, therefore, remains questionable. This implies that, if regulators in developing countries continue relying on capital regulation, they would also need to improve their supervision capacity, increase the transparency of financial reporting, and strengthen market monitoring of banks.
    Keywords: banking crisis, capital requirement, bank regulation, dynamic panel data
    JEL: C23 G21 G28
  6. By: Khemraj, Tarron
    Abstract: Evidence about developing countries’ commercial banks’ liquidity preference suggests the following about their loan markets: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over a foreign interest rate, marginal transaction costs and a risk premium. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is consistent with the observed stylized facts.
    Keywords: bank liquidity; oligopoly banking; loan market; monetary policy
    JEL: O10 L13 O16 G10 O12
    Date: 2007–06
  7. By: Georges Dionne; Hela Dahen
    Abstract: The objective of this article is to develop a precise and rigorous measurement of a bank's operational VaR. We compare our model to the standard model frequently used in practice. This standard model is constructed based on lognormal and Poisson distributions which do not take into account any data which fall below the truncature threshold and undervalue banks' exposure to risk. Our risk measurement also brings into account external operational losses that have been scaled to the studied bank. This, in effect, allows us to account for certain possible extreme losses which have not yet occurred. The GB2 proves to be a good candidate for consideration when determining the severity distribution of operational losses. As the GB2 has already been applied recently in several financial domains, this article argues in favor of the relevance of its application in modeling operational risk. For the tails of the distributions, we have chosen the Pareto distribution. We have also shown that the Poisson model, unlike the negative-binomial model, is retained in none of the cases for frequencies. Finally, we show that the operational VaR is largely underestimated when the calculations are based solely on internal data.
    Keywords: Operational risk in banks, severity distribution, frequency distribution, operational VaR, operational risk management
    JEL: G21 G28 C30 C35
    Date: 2007
  8. 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.
    Date: 2007–07–26
  9. By: Riccardo Calcagno (Free University and Tinbergen Institute, Amsterdam; CeRP, Turin); Roman Kraeussl (Free University of Amsterdam and Center for Financial Studies, Frankfurt am Main); Chiara Monticone (CeRP, Collegio Carlo Alberto, Turin)
    Abstract: In this paper we study the effects of the reform of the system of severance indemnities (TFR) currently in use for Italian employees on the cost and the access to credit for Italian small and medium-size enterprises (SMEs). The most direct consequence of the reform will be to reduce the amount of liquid assets available to Italian firms. We argue that this reform, which will produce its first effects in July 2007, will reduce the aggregate investment by SMEs in a more than proportional way in a long run, since it will restrict the access to credit for some of them (Holmstrom and Tirole, 1997). However, we also predict that the reform will not increase the cost of intermediated finance in the long run, coeteris paribus. Nonetheless, in the short-term, if the level of investment by firms can be considered as exogenous, the reform is likely to increase the cost of bank credit for SMEs. In order to perform quantitative estimates of the effect of the reform, we also estimate the future outflows of TFR from the balance sheet of the firms from data covering the whole population of Italian firms.
    Keywords: severance indemnities, moral hazard, credit constraints
    Date: 2007–04

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