New Economics Papers
on Banking
Issue of 2008‒01‒05
ten papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bank Ownership, Market Structure and Risk By Gianni De Nicoló; Elena Loukoianova
  2. Corporate Misreporting and Bank Loan Contracting By John R. Graham; Si Li; Jiaping Qiu
  3. Do Public Banks have a Competitive Advantage? By Astrid Matthey
  4. How Well Do Aggregate Bank Ratios Identify Banking Problems? By Martin Cihák; Klaus Schaeck
  5. The Bank Lending Channel of Monetary Transmission: Does It Work in Turkey? By Petya Koeva Brooks
  6. Securitisation and the bank lending channel By Yener Altunbas; Leonardo Gambacorta; David Marqués
  7. Risk, Concentration and Market Power in the Banking Industry: Evidence from the Colombian System (1997-2006) By Jorge Tovar; Christian Jaramillo; Carlos Hernández
  8. Run-prone banking and asset markets By Marie Hoerova
  9. The National Banking System: empirical observations By Bruce Champ
  10. Estimating Spillover Risk Among Large EU Banks By Li L. Ong; Martin Cihák

  1. By: Gianni De Nicoló; Elena Loukoianova
    Abstract: This paper presents a model of a banking industry with heterogeneous banks that delivers predictions on the relationship between banks' risk of failure, market structure, bank ownership, and banks' screening and bankruptcy costs. These predictions are explored empirically using a panel of individual banks data and ownership information including more than 10,000 bank-year observations for 133 non-industrialized countries during the 1993-2004 period. Four main results obtain. First, the positive and significant relationship between bank concentration and bank risk of failure found in Boyd, De Nicolò and Al Jalal (2006) is stronger when bank ownership is taken into account, and it is strongest when state-owned banks have sizeable market shares. Second, conditional on country and firm specific characteristics, the risk profiles of foreign (state-owned) banks are significantly higher than (not significantly different from) those of private domestic banks. Third, private domestic banks do take on more risk as a result of larger market shares of both state-owned and foreign banks. Fourth, the model rationalizes this evidence if both state-owned and foreign banks have either larger screening and/or lower bankruptcy costs than private domestic banks, banks' differences in market shares, screening or bankruptcy costs are not too large, and loan markets are sufficiently segmented across banks of different ownership.
    Keywords: Working Paper , Banks , Corporate sector , Financial risk , Bankruptcy , Industrial structure ,
    Date: 2007–09–12
  2. By: John R. Graham; Si Li; Jiaping Qiu
    Abstract: This paper is the first to study the effect of financial restatement on bank loan contracting. Compared with loans initiated before restatement, loans initiated after restatement have significantly higher spreads, shorter maturities, higher likelihood of being secured, and more covenant restrictions. The increase in loan spread is significantly larger for fraudulent restating firms than other restating firms. We also find that after restatement, the number of lenders per loan declines and firms pay higher upfront and annual fees. These results are consistent with the view that banks use tighter loan contract terms to overcome risk and information problems arising from financial restatements.
    JEL: G21 G32 K22 K42
    Date: 2007–12
  3. By: Astrid Matthey (Max-Planck-Institute of Economics)
    Abstract: Private banks often blame state guarantees to distort competition by giving public banks the advantage of lower funding costs. In this paper I show that if borrowers perceive the public bank as supporting economic development, private banks may be able to separate ï¬rms by self selection, enter the market, and obtain proï¬ts in equilibrium despite their cost disadvantage. The public bank's competitive advantage may be offset, independently of what its true objective function is. Even perfect competition between private banks does not lead to zero proï¬ts.
    Keywords: public banks, state guarantee, self-selection
    JEL: G21
    Date: 2007–12–07
  4. By: Martin Cihák; Klaus Schaeck
    Abstract: The paper provides an empirical analysis of aggregate banking system ratios during systemic banking crises. Drawing upon a wide cross-country dataset, we utilize parametric and nonparametric tests to assess the power of these ratios to discriminate between sound and unsound banking systems. We also estimate a duration model to investigate whether the ratios help determine the timing of a banking crisis. Despite some weaknesses in the available data, our findings offer initial evidence that some indicators are precursors for the likelihood and timing of systemic banking problems. Nevertheless, we caution against sole reliance on these indicators and advocate supplementing them with other tools and techniques.
    Keywords: Banks , Financial crisis , Financial soundness indicators , Economic models ,
    Date: 2007–12–10
  5. By: Petya Koeva Brooks
    Abstract: Does the bank lending channel of monetary transmission work in Turkey? Using the May- June 2006 financial turbulence as an exogenous shock that prompted a significant tightening of monetary policy, this paper examines the loan supply response of Turkey's banks, depending on their balance sheet characteristics. The empirical results indicate that banks can play a role in Turkey's monetary transmission mechanism. Specifically, bank liquidity is found to have a significant effect on loan supply in Turkey. This suggests that the effect of monetary policy in Turkey can be propagated by the banking sector, depending on its liquidity position.
    Keywords: Liquidity , Turkey , Interest rates on loans ,
    Date: 2007–12–10
  6. By: Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd LL57 2DG, United Kingdom.); Leonardo Gambacorta (Banca d’Italia, Economic Outlook and Monetary Policy Department, Via Nazionale 91, I-00184 Rome, Italy.); David Marqués (Correspondence author: European Central Bank, Monetary Policy Directorate, Capital Markets and Financial Structure Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The dramatic increase in securitisation activity has modified the functioning of credit markets by reducing the fundamental role of liquidity transformation performed by financial intermediaries. We claim that the changing role of banks from “originate and hold” to “originate, repackage and sell” has also modified banks’ abilities to grant credit and the effectiveness of the bank lending channel of monetary policy. Using a large sample of European banks, we find that the use of securitisation appears to shelter banks’ loan supply from the effects of monetary policy. Securitisation activity has also strengthened the capacity of banks to supply new loans but this capacity depends upon business cycle conditions and, notably, upon banks’ risk positions. In this respect, the recent experience of the sub-prime mortgage loans crisis is very instructive. JEL Classification: E44, E55.
    Keywords: Asset securitisation, bank lending channel, monetary policy.
    Date: 2007–12
  7. By: Jorge Tovar; Christian Jaramillo; Carlos Hernández
    Abstract: This paper examines the relationship between risk, concentration and the exercise of market power by banking institutions. We use monthly balance-sheet and interest rate data for the Colombian banking system from 1997 to 2006. The evidence shows that, in the face of high risk, banks transfer a larger share of risk to customers through higher intermediation margins. The result suggests that systemic risk acts as a “collusion” device for banks: while high concentration is not enough to have collusion, the true effects of high market concentration on interest rates’ mark-ups emerge when the system is under stress.
    Date: 2007–11–14
  8. By: Marie Hoerova (DG-Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: I analyze the role that asset markets play in the performance and stability of the run-prone banking sector. Banks insure consumers against privately observed liquidity shocks. Asset market investments insure consumers against losses from bank runs. If the probability of a run is small, then banks specialize fully into the provision of liquidity insurance: They provide a higher degree of liquidity insurance when compared to the economy with banks alone. If the probability of a run is high, consumers prefer to invest solely through the asset market. Insurance against runs provided by the market investment reduces consumers' incentives to run. Increased provision of liquidity insurance by banks has the opposite effect. I derive conditions under which the latter effect dominates and the probability of a run is higher than with banks alone. JEL Classification: E44, G21.
    Keywords: Bank runs, asset markets, liquidity, financial stability, mechanism design.
    Date: 2007–12
  9. By: Bruce Champ
    Abstract: This paper provides a summary of the main features of U.S. financial and banking data during the period of the National Banking System (1863–1914). The purpose of the paper is to provide an overview of the stylized facts associated with the era, with an emphasis on those impinging on national bank behavior. The paper takes a detailed look at key elements of national bank balance sheets over time, over the seasons, and during panic periods. The interesting and puzzling patterns of interest rate movements during the era also are examined. The paper introduces a new set of disaggregated data on the national bank era that has not been examined by prior research. As data are presented in the paper, some of the key puzzles associated with the era are introduced.
    Keywords: National banks (United States) ; Banks and banking - History
    Date: 2007
  10. By: Li L. Ong; Martin Cihák
    Abstract: The paper examines the scope for cross-border spillovers among major EU banks using information contained in the stock prices and financial statements of these banks. The results suggest that spillovers within domestic banking systems generally remain more likely, but the number of significant cross-border links is already larger than the number of significant links among domestic banks, adding a piece of empirical evidence supporting the need for strong cross-border supervisory cooperation within the EU.
    Keywords: Financial stability , European Union , Banking systems ,
    Date: 2007–11–29

This issue is ©2008 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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