New Economics Papers
on Banking
Issue of 2007‒11‒24
four papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Lending to uncreditworthy borrowers By Rajdeep Sengupta
  2. Credit risk and Basel II: Are non-profit firms financially different? By B. Luppi; M. Marzo; E. Scorcu
  3. Changing Income Structure, Ownership and Performance: An Empirical Analysis of Indian Banking Sector By Umakrishnan, K U; Bandyopadhyay, Arindam
  4. A new approach to measuring competition in the loan markets of the euro area By Michiel van Leuvensteijn; Jacob A. Bikker; Adrian van Rixtel; Christoffer Kok-Sørensen

  1. By: Rajdeep Sengupta
    Abstract: This paper models entry and competition in "high-risk" credit markets. An incumbent lender's advantage over any outside bank derives from its knowledge of (i) the risk profile of its (creditworthy) clients and (ii) uncreditworthy types in the borrower population. Screening is costly and the uninformed lender's ability to use collateral as a screening mechanism depends on its cost advantage over its informed rival. Nevertheless, the outside bank can pool uncreditworthy borrowers with creditworthy types, but only if it has a low cost of funds. Therefore, while a secular decline in the cost of funds does not help outside banks to screen uncreditworthy borrowers, it allows them to pool these borrowers with creditworthy types. This not only facilitates entry of outside banks into "high-risk" credit markets, but also makes it optimal for them to include non-creditworthy borrowers in their loan portfolio. The framework is relevant for explaining the recent entry of outside banks into the "subprime"-end of the loan market, for example, loans to the lowest end of small businesses in developing countries - also known as microfinance.
    Keywords: Credit control - United States ; Bank loans - United States
    Date: 2007
  2. By: B. Luppi; M. Marzo; E. Scorcu
    Date: 2007–07
  3. By: Umakrishnan, K U; Bandyopadhyay, Arindam
    Abstract: This paper investigates the relationship between the changing patterns of bank’s source of income and risk adjusted performance. A database of 77 banks over the period of 1999 to 2004 is constructed for the 27 public sector banks, 22 private banks, 25 foreign banks and 3 cooperative banks to compare their change in income composition. Bank’s performance is measured by risk adjusted return on BIS risk allocated capital (RARORAC). To examine the relationship between ownership pattern and performance, we compare the difference between new generation private sector banks and foreign banks with their public sector and cooperative banks counterparts. We argue that in a competitive financial market in order to change the profitability drivers in banking, Indian banks need to improve their non-interest income and also augment risk adjusted interest income through better risk based pricing.
    Keywords: Banking; Value creation and performance
    JEL: L11 G32 D60 G21
    Date: 2005–12–31
  4. By: Michiel van Leuvensteijn (Netherlands Bureau for Economic Policy Analysis); Jacob A. Bikker (De Nederlandsche Bank); Adrian van Rixtel (Banco de España); Christoffer Kok-Sørensen (European Central Bank)
    Abstract: This paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major euro countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative banks.
    Keywords: banking industry, competition, loan markets, marginal costs, market shares
    JEL: D4 G21 L1
    Date: 2007–11

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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