New Economics Papers
on Banking
Issue of 2007‒09‒30
ten papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  2. Rules versus Discretion in Loan Rate Setting By Cerqueiro, Geraldo; Degryse, Hans; Ongena, Steven
  3. The Effect of Bank Competition on the Bank’s Incentive to Collateralize By Christa Hainz
  4. An Empirical Analysis of Asset-Backed Securitization By Vink, Dennis
  5. ABS, MBS and CDO compared: an empirical analysis By Vink, Dennis
  6. A Causal Framework for Credit Default Theory By Wilson Sy
  7. Are Public Banks pro-Competitive? Evidence from Concentrated Local Markets in Brazil By Christiano A. Coelho; João Manoel Pinho de Mello; Leonardo Rezende
  8. Consumer credit in Italy. Diffusion and territorial differences. By Daniela Vandone
  9. An Extended Structural Credit Risk Model (forthcoming in the Icfai Journal of Financial Risk Management; all copyrights rest with the Icfai University Press) By Marco Realdon
  10. Households’ Saving and Debt in Italy By Tullio Jappelli; Mario Padula

  1. By: batiz-lazo, bernardo
    Abstract: Through case study research this paper illustrates opportunities presented by IT-based technological change in British retail bank markets (1985-1995). For the managers of the Royal Bank of Scotland IT appeared to lower entry barriers, exit barriers and deliver high sustainability of competitive advantage. The strategic intent behind diversification patterns of the Royal Bank of Scotland suggested competitive considerations were at a premium because unsolicited take-over bids in the early 1980s put pressure on managers to create growth opportunities. Direct Line Insurance was a subsidiary from the Royal Bank of Scotland. Direct Line was also the first retail finance institution to establish a clear competitive advantage based on information technology. The success of Direct Line enabled an increase in the market share of British retail financial services of The Royal Bank of Scotland. Direct Line is a case of planned success that questions the extent to which banks’ competencies must change to master alternative delivery channels. The success of Direct Line also suggested more effective execution than other activities explored by managers of the Royal Bank of Scotland.
    Keywords: Financial institutions; technological change; corporate strategy.
    JEL: N24 L10
    Date: 2007–09
  2. By: Cerqueiro, Geraldo; Degryse, Hans; Ongena, Steven
    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: 2007–09
  3. By: Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Tel.:+49 89 2180 3232, Fax.: +49 89 2180 2767,
    Abstract: It has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project’s risk than entrepreneurs. We study the bank’s choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.
    Keywords: collateralization, screening, incentives, bank competition
    JEL: D82 G21 K00
    Date: 2007–09
  4. By: Vink, Dennis
    Abstract: In this study we provide empirical evidence demonstrating a relationship between the nature of the assets and the primary market spread. The model also provides predictions on how other pricing characteristics affect spread, since little is known about how and why spreads of asset-backed securities are influenced by loan tranche characteristics. We find that default and recovery risk characteristics represent the most important group in explaining loan spread variability. Within this group, the credit rating dummies are the most important variables to determine loan spread at issue. Nonetheless, credit rating is not a sufficient statistic for the determination of spreads. We find that the nature of the assets has a substantial impact on the spread across all samples, indicating that primary market spread with backing assets that cannot easily be replaced is significantly higher relative to issues with assets that can easily be obtained. Of the remaining characteristics, only marketability explains a significant portion of the spreads’ variability. In addition, variations of the specifications were estimated in order to asses the robustness of the conclusions concerning the determinants of loan spreads.
    Keywords: asset securitization; asset-backed securitisation; bank lending; default risk; risk management; leveraged financing.
    JEL: G21 G20
    Date: 2007–08–28
  5. By: Vink, Dennis
    Abstract: The capital market in which the asset-backed securities are issued and traded is composed of three main categories: ABS, MBS and CDOs. We were able to examine a total number of 3,951 loans (worth €730.25 billion) of which 1,129 (worth €208.94 billion) have been classified as ABS. MBS issues represent 2,224 issues (worth €459.32 billion) and 598 are CDO issues (worth €61.99 billion). We have investigated how common pricing factors compare for the main classes of securities. Due to the differences in the assets related to these securities, the relevant pricing factors for these securities should differ, too. Taking these three classes as a whole, we have documented that the assets attached as collateral for the securities differ between security classes, but that there are also important univariate differences to consider. We found that most of the common pricing characteristics between ABS, MBS and CDO differ significantly. Furthermore, applying the same pricing estimation model to each security class revealed that most of the common pricing characteristics associated with these classes have a different impact on the primary market spread exhibited by the value of the coefficients. The regression analyses we performed demonstrated econometrically that ABS, MBS, and CDOs are in fact different financial instruments.
    Keywords: asset securitization; asset-backed securitisation; bank lending; default risk; risk management; spreads; leveraged financing
    JEL: G12 G0 G21
    Date: 2007–08–28
  6. By: Wilson Sy (Australian Prudential Regulation Authority)
    Abstract: Most existing credit default theories do not link causes directly to the effect of default and are unable to evaluate credit risk in a rapidly changing market environment, as experienced in the recent mortgage and credit market crisis. Causal theories of credit default are needed to understand lending risk systematically and ultimately to measure and manage credit risk dynamically for financial system stability. Unlike existing theories, credit default is treated in this paper by a joint model with dual causal processes of delinquency and insolvency. A framework for developing causal credit default theories is introduced through the example of a new residential mortgage default theory. This theory overcomes many limitations of existing theories, solves several outstanding puzzles and integrates both micro and macroeconomic factors in a unified financial economic theory for mortgage default.
    Date: 2007–09–24
  7. By: Christiano A. Coelho (Central Bank of Brasil); João Manoel Pinho de Mello (Department of Economics, PUC-Rio); Leonardo Rezende (Department of Economics, PUC-Rio)
    Abstract: We measure the competitive effect of public ownership of banks in concentrated local banking markets in Brazil by extending Bresnahan and Reiss’s [1991] framework to measure the effects of entry in concentrated markets. We use variation in market size, the number of competitors and their identity to infer how conduct is affected by the entry of a private vis-à-vis a public bank. We find that, while local markets whose structure is private bank duopoly are 100% larger than private monopolies, duopolies with one public and one private bank and private monopolies are no different with respect to market size. These results suggest that, while the presence of private banks toughens competition, public banks do not affect conduct.
    Keywords: banking industry; public versus private ownership; effect of entry.
    JEL: L10 L13 L33
    Date: 2007–08
  8. By: Daniela Vandone (University of Milan)
    Abstract: The analysis sets out to clarify whether households' demand for consumer credit can be adequately explained by models presented in the literature (life-cycle and permanent income) or whether other factors are observable, such as the use of debt to alleviate financial difficulties. With this in mind, the research seeks to establish whether specific determinants characterise the consumer credit market in different areas of the country. The Bank of Italy Survey on Household Income and Wealth for 2004 (SHIW) is used to identify determinants of consumer credit and the possible existence of territorial specificity.
    Keywords: consumer credit, household debt sustainability, Survey on Household Income and Wealth, territorial specificity,
    Date: 2007–09–14
  9. By: Marco Realdon
    Abstract: This paper presents an extended structural credit risk model that pro- vides closed form solutions for fixed and floating coupon bonds and credit default swaps. This structural model is an "extended" one in the following sense. It allows for the default free term structure to be driven by the a multi-factor Gaussian model, rather than by a single factor one. Expected default occurs as a latent diffusion process first hits the default barrier, but the diffusion process is not the value of the firm's assets. Default can be "expected" or "unexpected". Liquidity risk is correlated with credit risk. It is not necessary to disentangle the risk of unexpected default from liquidity risk. A tractable and accurate recovery assumption is proposed.
    Keywords: structural credit risk model, Vasicek model, Gaussian term structure model, bond pricing, credit default swap pricing, unexpected default, liquidity risk.
    JEL: G13
    Date: 2007–09
  10. By: Tullio Jappelli (Università di Napoli Federico II, CSEF and CEPR); Mario Padula (Università di Salerno and CSEf)
    Abstract: We review savings trends in Italy, summarizing available empirical evidence on Italians’ motives to save, relying on macroeconomic indicators as well as on data drawn from the Bank of Italy’s Survey of Household Income and Wealth from 1984 to 2004. The macroeconomic data indicate that households’ saving has dropped significantly, although Italy continues to rank above most other countries in terms of saving. We then examine with microeconomic data four indicators of household financial conditions: the propensity to save, the proportion of households with negative savings, the proportion of households with debt, and the proportion of households that lack access to formal credit markets. By international comparison, the level of debt of Italian households and default risk are relatively low. But in light of the deep changes undergone by the Italian pension system, the fall in saving is a concern, particularly for individuals who entered the labor market after the 1995 reform and who have experienced the largest decline in pension wealth.
    Date: 2007–09–01

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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