New Economics Papers
on Banking
Issue of 2007‒12‒08
seven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bank Consolidation and Loan Pricing. By Lili Xie
  2. Banking, Inside Money and Outside Money By Hongfei Sun
  3. An empirical analysis of asset-backed securitization By Vink, Dennis; Thibeault, André E.
  4. Private Money and Bank Runs By Hongfei Sun; Xiuhua Huangfu
  5. Stock market performance and pension fund investment policy: rebalancing, free float, or market timing? By Jacob A. Bikker; Laura Spierdijk; Paul Finniez
  6. How Do Individuals Choose Banks? An Application to Household Level Data from Turkey By Ardic, Oya Pinar; Yuzereroglu, Uygar
  7. Ratings Versus Market-Based Measures of Default Risk of East Asian Banks By Eric Wong; Cho-Hoi Hui; Chi-fai Lo

  1. By: Lili Xie (Department of Economics, Ball State University)
    Abstract: This paper examines the e®ects of bank mergers on loan pricing. Using a sample of U.S. commercial and industrial loans, I ¯nd that banks reduce loan interest rates after they acquire target banks with small market shares, suggesting that the e±ciency gains e®ect dominates the market power e®ect in such mergers. This merger e®ect is largest in the ¯rst year and almost disappears by the third year after the merger. Ex-ante conditions such as the concentration of the banking market and the market overlap of merging banks signi¯cantly a®ect merger e®ects in ways consistent with theory predictions. Merger e®ects are also found to vary across ¯rms: mergers lead to larger rate reductions for informationally opaque ¯rms than for informationally transparent ¯rms. This provides counter evidence for the concern that bank mergers will particularly hurt ¯rms lacking high-quality quantitative information. Although merging banks reduce their loan interest rates, rival banks, i.e., banks located in the same markets as the merging banks, leave their loan interest rates unchanged after mergers occur. This can be attributed to the fact that rival banks do not get e±ciency gains as merging banks do and thus do not ¯nd it pro¯table to follow the pricing change of merging banks.
    Keywords: Bank Merger, Economies of Scale, Economies of Scope, and Market Power.
    JEL: G21 L40
    Date: 2007–11
  2. By: Hongfei Sun (Queen's University)
    Abstract: This paper presents an integrated theory of money and banking. I address the following question: when both individuals and banks have private information, what is the optimal way to settle debts? I develop a dynamic model with micro-founded roles for banks and a medium of exchange. I establish two main results: first, markets can improve upon the optimal dynamic contract at the presence of private information. Market prices fully reveal the aggregate states and help solve the incentive problem of the bank. Secondly, it is optimal for the bank to require loans be settled with short-term inside money, i.e., bank money that expires immediately after the settlement of debts. Short-term inside money makes it less costly to induce truthful revelation and achieve more efficient risk sharing.
    Keywords: banking, inside money, outside money
    JEL: E4 G2
    Date: 2007–12
  3. By: Vink, Dennis; Thibeault, André E. (Nyenrode Business Universiteit)
    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, everaged financing
    Date: 2007
  4. By: Hongfei Sun (Queen's University); Xiuhua Huangfu (University of Sydney)
    Abstract: This paper studies bank runs in a model with coexistence of fiat money and private money. When fiat money is the only medium of exchange, there exist a bank run equilibrium and an equilibrium that achieves the optimal risk sharing. In contrast, when private money is also a medium of exchange, there exists a unique equilibrium where no one demands early withdrawals of fiat money and agents in need of liquidity only use private money to finance consumption. The unique equilibrium achieves the first-best outcome and eliminates bank runs without having resort to any government intervention.
    Keywords: private money, fiat money, bank runs
    JEL: E4 G2
    Date: 2007–12
  5. By: Jacob A. Bikker; Laura Spierdijk; Paul Finniez
    Abstract: Using a measure of competition based on the Panzar-Rosse model, this paper explains bank competition across 76 countries on the basis of various determinants. Studies explaining banking competition are rare and typically insuffciently robust as they are based on a limited number of countries only. Traditionally, market structure indicators, such as the number of banks and banking concentration, have been considered the major determinants of competition in the banking sector. However, we find that these variables have no signiffcant impact on market power. Instead, we show that a country's institutional framework is a key factor in explaining banking competition. Extensive regulation, particularly antitrust policies, improves the competitive environment. The foreign investment climate, a proxy of contestability, also plays an important role. The fewer restrictions on foreign investments exist, the more competitive the banking sector becomes. In addition, activity restrictions make large banks less competitive and collusion markups are procyclical. Finally, competition is substantially weaker in countries with a socialist past, such as Central- and Eastern Europe.
    Keywords: banking competition; market structure; concentration; contestability; interindustry competition.
    Date: 2007–11
  6. By: Ardic, Oya Pinar; Yuzereroglu, Uygar
    Abstract: This paper uses a multinomial probit model to analyze individuals' choice of banks based on the types of banking services they use, their own characteristics, and their own perceptions about important factors in banking. Previous studies on this topic, which are limited in number, concentrate on the U.S. where financial markets are deep. This analysis uses a unique individual level data set from a nation-wide survey implemented after the 2001 crisis in Turkey, of which one major component was bank failures. Hence, it provides the first set of evidence on the topic in an emerging market context. The study groups banks into three categories: public banks, large private banks and small private banks, among which the latter is perceived to be the potentially risky group. Investigating individuals' choice among these three types, the paper uncovers that while individuals tend to prefer small private banks on the basis of high interest rates, they tend to avoid them on the basis of trust. However, higher branch density and closeness negatively affect the choice of small private banks. Additionally, individual's choice of public banks as opposed to large private banks seems to have been positively influenced mostly by being older, being retired, receiving salary/pension, and valuing special services for farmers and craftsmen while it seems to have been negatively influenced by the use of certain services, valuing friendliness of the staff, and living in more developed regions where there is variety in terms of the financial institutions.
    Keywords: Multinomial probit; banking sector; bank choice; household survey; Turkey
    JEL: D12 C25 G21
    Date: 2007–11–08
  7. By: Eric Wong (Research Department, Hong Kong Monetary Authority); Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority); Chi-fai Lo (Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong)
    Abstract: This paper assesses whether agency ratings and market-based default risk measures are consistent for East Asian banks during the period 1996 to 2006. While the market-based measures are broadly consistent with the credit rating assessments for banks in developed economies, the discrepancy between ratings and the market-based measures for East Asian banks is significant. Credit ratings for East Asian banks were adjusted slowly during the onset of the Asian financial crisis. The relatively higher default risk implied by ratings during the post-crisis period is partly due to the conservatism of rating agencies and the unsolicited ratings. Discrepancies still exist after taking these two factors into account. From perspective of banking policies, the use of agency-based and market-based measures for calculating capital requirements for exposures to banks and deposit insurance premiums in East Asian economies could result in systematic differences.
    Keywords: Asian financial crisis, credit rating agencies, credit risk models
    JEL: G14 G13 G21 G32
    Date: 2007–08

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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