New Economics Papers
on Banking
Issue of 2007‒10‒13
nine papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. How do intangible assets create economic value? an application to banks By Alfredo Martín-Oliver; Vicente Salas-Fumas
  2. Should Bank Supervisors in Developing Countries Exercise More or Less Forbearance? By Patrick Honohan
  3. On Debt Service and Renegotiation when Debt-holders Are More Strategic By Jean-Marc Bourgeon; Georges Dionne
  4. Acquisition versus greenfield: The impact of the mode of foreign bank entry on information and bank lending rates By Claeys, Sophie; Hainz, Christa
  5. "Bank Distress and the Borrowers' Productivity" By Keiichiro Kobayashi; Noriyuki Yanagawa
  6. Portfolio effects and efficiency of lending under Basel II By Jokivuolle , Esa; Vesala, Timo
  7. Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution? By Mayes, David G; Nieto, Maria J; Wall , Larry
  8. Cooperative Banks in Europe--Policy Issues By Wim Fonteyne
  9. How Do Relationship Lenders Price Loans to Small Firms?: "Hold-Up" Costs, Transparency, and Private and Public Security By WATANABE Wako

  1. By: Alfredo Martín-Oliver (Universidad de Zaragoza); Vicente Salas-Fumas (Banco de España)
    Abstract: This paper examines the determinants of economic value and investment behavior of Spanish banks under the theory of investment for a multi-asset firm, focusing on three key issues: i) the distinction between immaterial and intangible assets and how each of them is related to the economic value of the firm; ii) the test of whether the accumulation of intangibles is a consequence of incurring adjustment costs or, on the contrary, intangibles are accumulated at no cost; iii) how to account for market power in the valuation of the multi-assets firm. The empirical results quantify the contribution of material, immaterial (information technology and advertising) and intangible (organization capital) assets to economic value of Spanish banks, separated from the contribution of market power. We find that intangible assets build up from adjustment costs of investments in IT and rents from market power split evenly the economic value of the bank above the replacement cost of material and immaterial assets.
    Keywords: Intangibles, IT capital, adjustment costs, valuation of banks, investment of banks
    JEL: G21 D21
    Date: 2007–10
  2. By: Patrick Honohan
    Abstract: Although forbearance has been associated with more costly financial crises, a triggerhappy approach to closing weak banks could also precipitate an avoidable systemic collapse. In sophisticated regulatory environments, there can be net benefits from at least occasional acts of forbearance. But we argue that three key structural weaknesses in developing countries suggest that their regulators should have less forbearance discretion. This is because financial systems in developing countries tend to have worse information, less interdependence and greater agency problems.
    Date: 2007–10–02
  3. By: Jean-Marc Bourgeon; Georges Dionne
    Abstract: The contingent claims analysis of the firm financing often presents a debt renegotiation game with a passive bank which does not use strategically its capability to force liquidation, contrary towhat is observed in practice. The first purpose of this paper is to introduce more strategic bank behaviour into the continuous-time model developed by Mella-Barral and Perraudin (1997) and Hackbarth, Hennessy, and Leland (2007). Its second purpose is to account for variations in the information obtained by the parties during the contract period. We show that with public information and private debt only, the optimal probability of debt renegotiation is fixed by the firm's anticipated liquidation value. When we add public debt and asymmetric information, the good-type firm may be tempted to mimic the bad-type to reduce its debt service. We show that to deter such mimicking, banks may sometimes refuse to renegotiate with strong firms having a low liquidation value. Our results are in line with the empirical observation that recovery rate at emergence of bankruptcy is function of the share of private debt in all the firm's debt and is relatively low.
    Keywords: Debt service, debt renegotiation, recovery rate, strategic bank, bankruptcy, contingent claim
    JEL: G13 G32 G33 D81
    Date: 2007
  4. By: Claeys, Sophie (Research Department, Central Bank of Sweden); Hainz, Christa (Department of Economics, University of Munich)
    Abstract: Policy makers often decide to liberalize foreign bank entry but put limitations on the mode of entry. We study how different entry modes affect the lending rate set by foreign and domestic banks. Our model captures two essential features of banking competition in emerging markets: Domestic banks possess private information about their incumbent clients and foreign banks have better screening skills. Our model predicts that competition is stronger if foreign entry occurs through a greenfield investment and domestic banks' interest rates are thus lower. We find empirical support for this differential competition effect for a sample of banks from ten Eastern European countries for the period 1995-2003.
    Keywords: Banking; Foreign Entry; Mode of Entry; Interest Rate; Asymmetric Information
    JEL: D40 G21 L31
    Date: 2007–06–01
  5. By: Keiichiro Kobayashi (Research Institute of Economy, Trade, and Industry); Noriyuki Yanagawa (Faculty of Economics, University of Toyama)
    Abstract: In this paper, we propose a theoretical model in which a banking crisis (or bank distress) causes declines in the aggregate productivity. When borrowing firms need additional bank loans to continue their businesses, a high probability of bank failure discourages ex ante investments (i.e., "specialization") by the firms that enhance their productivity. In a general equilibrium setting, we also show that there may be multiple equilibria, in one of which bank distress continues and the borrowers' productivity is low, and in the other equilibrium, banks are healthy and the borrowers' productivity is high. We show that the bank capital requirement may be effective to eliminate the bad equilibrium and may lead the economy to the good equilibrium in which the productivity of borrowing firms and the aggregate output are both high and the probability of bank failure is low.
    Date: 2007–10
  6. By: Jokivuolle , Esa (Bank of Finland Research); Vesala, Timo (Tapiola Group)
    Abstract: Although beneficial allocational effects have been a central motivation for the Basel II capital adequacy reform, the interaction of these effects with Basel II’s procyclical impact has been less discussed. In this paper, we investigate the effect of Basel II on the efficiency of bank lending. We consider competitive credit markets where entrepreneurs may apply for loans for investments of different risk profiles. In this setting, excessive risk taking typically arises because low risk borrowers cross-subsidize high risk borrowers through the price system that is based on average success rates. We find that while flat-rate capital requirements (such as Basel I) amplify overinvestment in risky projects, risk-based capital requirements alleviate the cross-subsidization effect, improving allocational efficiency. This also suggests that Basel II does not necessarily lead to exacerbation of macroeconomic cycles because the reduction in the proportion of high-risk investments softens the cyclicality of bank lending over the business cycle.
    Keywords: Basel II; bank regulation; capital requirements; credit risk; procyclicality
    JEL: D41 D82 G14 G21 G28
    Date: 2007–10–03
  7. By: Mayes, David G (University of Auckland and Bank of Finland); Nieto, Maria J (Banco de España); Wall , Larry (Federal Reserve Bank of Atlanta)
    Abstract: Prompt Corrective Action (PCA) provides a more efficient mechanism for dealing with problem banks operating in more than one European country. In a PCA framework, a bank’s losses are likely to be substantially reduced. This reduction in the losses to deposit insurance and governments will improve the problem of allocating those losses across the various insurance schemes and make it less likely that any deposit insurer will renege on its obligations in a cross-border banking crisis. This paper explores the institutional changes needed in Europe if PCA is to be effective in resolving the cross-border agency problems that arise in supervising and resolving cross-border banking groups. The paper identifies these changes starting with enhancements in the availability to prudential supervisors of information on banking groups’ financial condition. Next, the paper considers collective decision-making by prudential supervisors with authority to make discretionary decisions within the PCA framework as soon as a bank of a cross-border banking group falls below the minimum capital standard. Finally, the paper analyses the coordination measures that should be implemented if PCA requires the bank to be resolved.
    Keywords: banking supervision; European Union; Prompt Corrective Action
    JEL: F20 G28 K23
    Date: 2007–06–12
  8. By: Wim Fonteyne
    Abstract: This paper explains the continuing success of European cooperative banks through evolving comparative advantages. It points out that a cooperative is built around an intergenerational endowment without final owners, which creates particular governance challenges. Risks include the use of the endowment for purposes other than members' best interest, such as empire-building, and attempts at appropriation. The risk of empire-building is reinforced by mechanisms that foster capital accumulation and asymmetric opportunities for consolidation. The paper concludes that some form of independent external oversight of corporate governance is warranted and that cooperatives need mechanisms enabling them to better manage their capital.
    Keywords: Working Paper , Banks , Europe , European Union , Bank supervision , Profits , Financial stability , Financial systems , Governance ,
    Date: 2007–07–13
  9. By: WATANABE Wako
    Abstract: We conduct a comprehensive examination on how relationship lenders price loans to small opaque firms using the rich matched data set of Japanese firms and their main banks. Our major findings are: 1. Neither measures for a borrower firm's transparency to the public (outsiders) nor measures for the firm's transparency to its main bank affect the lending rate. 2. A bank suffering from a greater ratio of non-performing loans to total asset charges a higher lending rate. 3. Treating the non-price terms of a loan contract as endogenous variables is crucial in consistently estimating the lending rate.
    Date: 2007–10

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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