New Economics Papers
on Banking
Issue of 2007‒11‒17
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The Cost of Banking Regulation By Luigi Guiso; Paola Sapienza; Luigi Zingales
  2. Banking competition and financial fragility: Evidence from panel-data By Ruiz-Porras, Antonio
  3. French investment banking at Belle Époque: the legacy of the 19th century Haute Banque By Hubert BONIN (GREThA)
  4. Bank Failures in Theory and History: The Great Depression and Other "Contagious" Events By Charles W. Calomiris
  5. Linking Global Economic Dynamics to a South African Specific Credit Portfolio By Albert H. De Wet; Reneé Van Eyden
  6. Efficiency and Productivity of the US Banking Industry, 1998-2005: Evidence from the Fourier Cost Function Satisfying Global Reg By Guohua Feng; Apostolos Serletis
  7. The Structure of Multiple Credit Relationships: Evidence from US Firms By Luigi Guiso; Raoul Minetti
  8. Executive Compensation and Competition in the Banking and Financial Sectors By Vicente Cuñat; Maria Guadalupe

  1. By: Luigi Guiso; Paola Sapienza; Luigi Zingales
    Abstract: We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations - access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rate spreads and an increased access to credit at the cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalization
    Keywords: banking regulation, financial development, finance
    JEL: G0 G2 K2
    Date: 2007
  2. By: Ruiz-Porras, Antonio
    Abstract: We study how banking competition may affect the stability of banking systems. We develop our study by expanding the failure-determinant methodology to include panel-data techniques and by controlling the effects of financial structure and development. We use indicators for 47 countries between 1990 and 1997. The main findings show that banking concentration and foreign ownership are associated to bank-based financial systems and financial underdevelopment. They also show that banking credit and bank-based financial systems enhance banking fragility. Banking concentration is not a significant determinant. Furthermore our findings suggest that financial structure and, maybe, the property regime matter to assess fragility.
    Keywords: Banks; competition; fragility; financial systems
    JEL: L16 D40 G10 G21
    Date: 2007–10–29
  3. By: Hubert BONIN (GREThA)
    Abstract: The research program about the history of investment banking assesses through this text the legacy transmitted by the merchant banks (Haute Banque) to the Paris banking market. It first delimited the foibles which hindered them in the last quarter of the 19th century, but précised how they succeeded in renewing themselves and in absorbing fresh forces of initiative and creativeness. It draws the strong lines of the strategic deployment of the private bankers, of their portfolio of banking skills and their aptitude to insert themselves in banking in the wake of “modern” banks or even to create one, the Banque de l’union parisienne (Bup) in 1904.
    Keywords: Bank, merchant banking; Paris banking market; banking strategy; portfolio of strategic activities; firms’ portfolio of skills
    JEL: N23 N24 G21
    Date: 2007
  4. By: Charles W. Calomiris
    Abstract: Bank failures during banking crises, in theory, can result either from unwarranted depositor withdrawals during events characterized by contagion or panic, or as the result of fundamental bank insolvency. Various views of contagion are described and compared to historical evidence from banking crises, with special emphasis on the U.S. experience during and prior to the Great Depression. Panics or "contagion" played a small role in bank failure, during or before the Great Depression-era distress. Ironically, the government safety net, which was designed to forestall the (overestimated) risks of contagion, seems to have become the primary source of systemic instability in banking in the current era.
    JEL: E5 G2 N2
    Date: 2007–11
  5. By: Albert H. De Wet (First Rand Bank); Reneé Van Eyden (Department of Economics, University of Pretoria)
    Abstract: Driven by intense competition for market share banks across the globe have increasingly allowed credit portfolios to become less diversified (across all dimensions - country, industry, sector and size) and were willing to accept lesser quality assets on their books. As a result, even well capitalised banks could come under severe solvency pressure when global economic conditions turn. The banking industry have realised the need for more sophisticated loan origination, credit and capital management practices. To this end, the reforms introduced by the Bank of International Settlement through the New Basel Accord (Basel II) aim to include exposure specific credit risk characteristics within the regulatory capital requirement framework. The new regulatory capital framework still does not allow diversification and concentration risk to be fully recognised within the credit portfolio because it does not account for systematic and idiosyncratic risk in a multifactor framework. The core principle for addressing practical questions in credit portfolio management is enclosed in the ability to link the cyclical or systematic components of firm credit risk with the firm’s own idiosyncratic credit risk as well as the systematic credit risk component of every other exposure in the portfolio. Simple structural credit portfolio management approaches have opted to represent the general economy or systematic risk by a single risk factor. The systematic component of all exposures, the process generating asset values and therefore the default thresholds are homogeneous across all firms. Indeed, this Asymptotic Single Risk Factor (ASRF) model has been the foundation for Basel II. While the ASRF framework is appealing due to its analytical closed-form properties for regulatory and generally universal application in large portfolios, the single risk factor characteristic is also its major drawback. Essentially it does not allow for enough flexibility in answering real life questions. Commercially available credit portfolio models make an effort to address this by introducing more systematic factors in the asset value generating process but from a practitioner’s point of view, these models are often a “black-box” allowing little economic meaning or inference to be attributed to systematic factors. The methodology proposed by Pesaran, Schuermann, and Weiner (2004) and supplemented by Pesaran, Schuermann, Treutler and Weiner (2006) has made a significant advance in credit risk modelling in that it avoids the use of proprietary balance sheet and distance to default data, focussing on credit ratings which are more freely available. Linking an adjusted structural default model to a structural global econometric model (GVAR) credit risk analysis and portfolio management can be done through the use of a conditional loss distribution estimation and simulation process. The GVAR model used in Pesaran et al. (2004) comprises a total of 25 countries which is grouped into 11 regions and accounts for 80 per cent of world production. In the case of South Africa the GVAR model lacks applicability since it does not include an African component. In this paper we construct a country specific macro-econometric risk driver engine which is compatible with and could feed into the GVAR model and framework of PSW (2004) using vector error correcting (VECM) techniques. This will allow conditional loss estimation of a South African specific credit portfolio but also opens the door for credit portfolio modelling on a global scale as such a model can easily be linked into the GVAR model. We extend the set of domestic factors beyond those used in PSW (2004) in such a way that the risk driver model is applicable for both retail and corporate credit risk. As such, the model can be applied to a total bank balance sheet, incorporating the correlation and diversification between both retail and corporate credit exposures. Assuming statistical over-identification restrictions, our results indicate that it is possible to construct a South African component for the GVAR model and that such a component could easily be integrated into a global content. From a practical application perspective the framework and model is particularly appealing since it could be used as a theoretically consistent correlation model within a South African specific credit portfolio management tool.
    Keywords: Credit portfolio management, multifactor model, vector error correction model (VECM), credit correlations
    JEL: C32 C51 E44
    Date: 2007–09
  6. By: Guohua Feng; Apostolos Serletis
    Date: 2007–10–26
  7. By: Luigi Guiso; Raoul Minetti
    Abstract: When firms borrow from multiple concentrated creditors such as banks they appear to differentiate their allocation of borrowing. In this paper, we put forward hypotheses for this borrowing pattern based on incomplete contract theories and test them using a sample of small U.S. firms. We find that firms with more valuable, more redeployable, and more homogeneous assets differentiate borrowing more sharply across their concentrated creditors. We also find that borrowing differentiation is inversely related to restructuring costs and positively related to firms’ informational transparency. This evidence supports the predictions of incomplete contract theories: the structure of credit relationships appears to be used as a device to discipline creditors and entrepreneurs, especially during corporate reorganizations.
    Keywords: Credit Relationships, Multiple Creditors, Borrowing Allocation
    JEL: G21 G33 G34
    Date: 2007
  8. By: Vicente Cuñat; Maria Guadalupe
    Abstract: This paper studies the effect of deregulation and increased product market competition on the compensation packages that firms offer to their executives. We use a panel of US executives in the nineties and exploit the deregulation episodes in the banking and financial sectors as quasi-natural experiments. We provide difference-in-differences estimates of their effect on (1) total pay, (2) estimated fixed pay and performance-pay sensitivities and (3) on the sensitivity of stock option grants. Our results indicate that the deregulations substantially changed the level and structure of compensation: the variable components of pay increased, performance-pay sensitivities grew and, at the same time, the fixed component of pay fell. The overall effect on total pay was small.JEL codes: M52, L1, J31Keywords: Executive compensation; performance related pay; incentives; product market competition; deregulation.
    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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