New Economics Papers
on Banking
Issue of 2007‒12‒01
twelve papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Regulation, subordinated debt, and incentive features of CEO compensation in the banking industry By Kose John; Hamid Mehran; Yiming Qian
  2. Optimal Credit Risk Transfer, Monitored Finance and Real Investment Activity By Bhattacharya, Sudipto; Chiesa, Gabriella
  3. The role of screening and cross-selling in bank-firm relationships By Cosci Stefania; Meliciani Valentina
  4. Professor Becker on Free Banking: A Comment By van den Hauwe, Ludwig
  5. Explaining Bank Failures in Brazil: Micro, Macro and Contagion Effects (1994-1998) By Adriana Soares Sales; Maria Eduarda Tannuri-Pianto
  6. Jacques Laffitte, an investment banker who did not create a model for investment banking (In French) By Hubert BONIN (GREThA)
  7. Bank Size or Distance: What Hampers Innovation Adoption by SMEs ? By Pietro ALESSANDRINI; Alberto ZAZZARO; Andrea PRESBITERO
  8. The Stability-Concentration Relationship in the Brazilian Banking System By Benjamin Miranda Tabak; Solange Maria Guerra; Eduardo José Araújo Lima; Eui Jung Chang
  9. Joint Validation of Credit Rating PDs under Default Correlation By Ricardo Schechtman
  10. Payday holiday: how households fare after payday credit bans By Donald P. Morgan; Michael R. Strain
  12. A Probabilistic Approach for Assessing the Significance of Contextual Variables in Nonparametric Frontier Models: an Application for Brazilian Banks By Roberta Blass Staub; Geraldo da Silva e Souza

  1. By: Kose John; Hamid Mehran; Yiming Qian
    Abstract: We study CEO compensation in the banking industry by considering banks’ unique claim structure in the presence of two types of agency problems: the standard managerial agency problem and the risk-shifting problem between shareholders and debtholders. We empirically test two hypotheses derived from this framework: that the pay-for-performance sensitivity of bank CEO compensation (1) decreases with the total leverage ratio and (2) increases with the intensity of monitoring provided by regulators and nondepository (subordinated) debtholders. We construct an index of the intensity of outsider monitoring based on four variables: the subordinated debt ratio, subordinated debt rating, nonperforming loan ratio, and BOPEC rating (regulators’ assessment of a bank’s overall health and financial condition). We find supporting evidence for both hypotheses. Our results hold after controlling for the endogeneity among compensation, leverage, and monitoring; they are robust to various regression specifications and sample criteria.
    Keywords: Bank directors ; Chief executive officers ; Banks and banking - Ratio analysis ; Bank supervision ; Wages
    Date: 2007
  2. By: Bhattacharya, Sudipto; Chiesa, Gabriella
    Abstract: We examine the implications of optimal credit risk transfer (CRT) for bank-loan monitoring. In the model, monitoring improves expected returns on bank loans, but the loan-portfolio return distribution fails to satisfy the Monotone-Likelihood-Ratio Property (MLRP) because monitoring is most valuable in downturns. We find that CRT enhances loan monitoring and expands financial intermediation, in contrast to the findings of the previous literature, and the reference asset for optimal CRT is the loan portfolio, in line with the preponderance of portfolio products. An important implication of optimal CRT is that it allows maximum capital leverage. The intuition is that the lack of MLRP makes debt financing suboptimal, so the bank is rewarded for good luck rather than for monitoring, and it faces a tighter constraint on outside finance: incentive-based lending capacity, given bank capital, is smaller. Optimal CRT exploits the information conveyed by loan portfolio outcomes to shift income from lucky states to those that are more informative about the monitoring effort. Thus, monitoring incentives are optimized and incentive-based lending capacity is maximized. The role for prudential regulation of banks is examined.
    Keywords: Credit Risk Transfer; Monitoring Incentives; Prudential Regulation
    JEL: D61 D82 G21 G28
    Date: 2007–11
  3. By: Cosci Stefania; Meliciani Valentina
    Abstract: This paper presents a monopolistic competition model of a bank choosing the optimal level of the screening effort in the presence of cross-selling activities. We demonstrate that, in absence of informational synergies, the larger is the range of services that the bank produces, the lower is the optimal screening effort. The paper also analyses the impact of competition in the lending market on cross-selling activities and finds that, for sufficiently low levels of transportation costs, an increase in competition in the lending market increases the expected profitability of services, thus increasing banks’ incentives to engage in cross-selling activities.
    Date: 2007–11
  4. By: van den Hauwe, Ludwig
    Abstract: Professor Becker´s 1956 paper about free banking was originally intended as a reaction to the 100-percent reserve proposals that were then popular at the University of Chicago. Today the original paper clearly illustrates how considerably our views and theories about free banking have evolved in the past 50 years. This development is to a considerable extent the result of the work and the writings of economists of the Austrian School. Pascal Salin is one of the most prominent members of the Austrian free banking school. In a new introduction to the 1956 paper written especially for the Festschrift in honor of Pascal Salin, Professor Gary Becker partially repudiates and mitigates some of his previous conclusions. This event offers a fitting opportunity to review some developments in the theory of free banking and related issues and to add a few clarifications concerning the present “state of the art” as regards an acceptable and adequate notion of free banking.
    Keywords: Free Banking; Monetary Regimes; Monetary Standards; Business Cycles
    JEL: E42 E32 E58
    Date: 2007–10–04
  5. By: Adriana Soares Sales; Maria Eduarda Tannuri-Pianto
    Abstract: We apply duration (survival) models with exponential hazard and exponential piecewise-constant hazard functions to study the determinants of bank failure over the period 1994 to 1998 in Brazil. The models deal empirically with left censoring in the data. We control for macroeconomic conditions and contagion effects, besides bank-specific factors. Our results indicate that foreign banks have distinct empirical survival functions relatively to other banks. For Brazil, macroeconomic and bank-level covariates explain the likelihood and timing of bank failure. Our indicator of system-wide financial fragility (IFF) suggests that the banking industry faced increased fragility after November 1995. We find evidence that the Program of Incentives to the Restructuring and Strengthening of the National Financial System (Proer) was able to distinguish solvent from insolvent banks.
    Date: 2007–10
  6. By: Hubert BONIN (GREThA)
    Abstract: The research program about the history of investment banking gauged in this text the legacy of Jacques Laffitte, one of the initiators of modern investment banking in the years 1800-1840. It assesses the reality of his contributions and argues about their role within the process of modernisation of the Paris banking market at the heart of the first stage of the first industrial revolution. It tried to precise the limits of the breakthroughs achieved by Laffitte within the banking economy of the merchant banks of this time and to explain the flaws of its competitiveness.
    Keywords: Bank, investment banking, banking history, first industrial revolution, Paris market place, merchant banking
    JEL: N23 N24 G21
    Date: 2007
  7. By: Pietro ALESSANDRINI (Universita' Politecnica delle Marche, Dipartimento di Economia); Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); Andrea PRESBITERO ([n.a.])
    Abstract: A growing body of research focuses on banking organizational issues, emphasizing the culties encountered by hierarchically organized banks in lending to borrowers/projects with high intensity of soft information. However, as the two extreme cases of hierarchical and non-hierarchical organizations are typically contrasted, what actually shapes the degree of hierarchy and how to measure it remain fairly vague. In this paper we compare bank size and distance between bank's branches and headquarter as possible sources of organizational frictions. In particular, we study the impact of distance and bank size on the firms' likelihood of introducing innovations and financing constraints on a sample of Italian SMEs. Our results show that firms located in provinces where the local banking system is functionally distant are less inclined to introduce innovations and are more likely to be credit rationed. Conversely, we find that the market share of large banks is only rarely statistically significant and when it is, the economic impact on the probability of introducing innovation and credit rationing is appreciably smaller than that of functional distance.
    Keywords: Bank Size, Functional Distance, Innovation, SMEs
    JEL: G21 G34 O31 R51
    Date: 2007–11
  8. By: Benjamin Miranda Tabak; Solange Maria Guerra; Eduardo José Araújo Lima; Eui Jung Chang
    Abstract: In this article the relation between non-performing loans (NPL) of the Brazilian banking system and macroeconomic factors, systemic risk and banking concentration is empirically tested. While evaluating this relation, we use a dynamic specification with fixed effects, using a panel data approach. The empirical results indicate that the banking concentration has a statistically significant impact on NPL, suggesting that more concentrated banking systems may improve financial stability. These results are important for the design of banking regulation policies.
    Date: 2007–10
  9. By: Ricardo Schechtman
    Abstract: The Basel Committee on Banking Supervision recognizes that one of the greatest technical challenges to the implementation of the new Basel II Accord lies on the validation of the banks’ internal credit rating models (CRMs). This study investigates new proposals of statistical tests for validating the PDs (probabilities of default) of CRMs. It distinguishes between proposals aimed at checking calibration and those focused at discriminatory power. The proposed tests recognize the existence of default correlation, deal jointly with the default behaviour of all the ratings and, differently to previous literature, control the error of validating incorrect CRMs. Power sensitivity analysis and strategies for power improvement are discussed, providing insights on the trade-offs and limitations pertained to the calibration tests. An alternative goal is proposed for the tests of discriminatory power and results of power dominance are shown for them with direct practical consequences. Finally, as the proposed tests are asymptotic, Monte-Carlo simulations investigate the small sample bias for varying scenarios of parameters.
    Date: 2007–10
  10. By: Donald P. Morgan; Michael R. Strain
    Abstract: Payday loans are widely condemned as a “predatory debt trap.” We test that claim by researching how households in Georgia and North Carolina have fared since those states banned payday loans in May 2004 and December 2005. Compared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check “protection” sold by credit unions and banks or loans from pawnshops.>
    Keywords: Loans, Personal ; Debt ; Finance, Personal ; Households - Economic aspects ; Banking law ; Public welfare
    Date: 2007
  11. By: Santiago Carbó-Valverde (Department of Economic Theory and Economic History, University of Granada); José Manuel Liñares-Zegarra (Department of Economic Theory and Economic History, University of Granada); Francisco Rodríguez-Fernández (Department of Economic Theory and Economic History, University of Granada)
    Abstract: Theoretical contributions on network industries have been numerous. However, there is a lack of sufficient empirical evidence which would assist related policymaking. This is the case of payment cards markets. This paper employs a unique database to analyze changes in market power and consumers' willingness to pay resulting from the introduction of payment cards in a multiproduct banking technology. Our findings indicate that any rise in bank market power from payment cards is associated to a greater increase in consumers' willingness to pay. Any antitrust intervention which does not take into account such welfare effects could be misguided.
    Keywords: Card payments, bank market power, willingness to pay, multiproduct technology, network industries.
    JEL: D12 D21 G21
    Date: 2007–11–03
  12. By: Roberta Blass Staub; Geraldo da Silva e Souza
    Abstract: This article presents an empirical application illustrating the use of a nonparametric frontier model relying on a probabilistic definition of the production frontier. The significance of the variable nonperforming loans in productive efficiency is assessed, for a sample of Brazilian banks, using the concepts of condicional and unconditional efficiency measures, in a context where it is not necessary to impose any particular distribution for the production data. The analysis is robust relative to the assumptions of separability.
    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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