New Economics Papers
on Banking
Issue of 2008‒01‒26
sixteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Moral hazard, bank runs and contagion By Ghosal, Sayantan; Chatterji, Shurojit
  2. Does Interbank Borrowing Reduce Bank Risk? By Valeriya Dinger; Jürgen von Hagen
  3. International Diversification Gains and Home Bias in Banking By Francisco F. Vázquez; Alicia García-Herrero
  4. The output and profit contribution of information technology and advertising investments in banks By Alfredo Martín-Oliver; Vicente Salas-Fumas
  5. Do Public Banks have a Competitive Advantage? By Astrid Matthey
  6. Size, growth and bank dynamics By Enrique Benito
  7. The Default Risk of Firms Examined with Smooth Support Vector Machines By Wolfgang Härdle; Yuh-Jye Lee; Dorothea Schäfer; Yi-Ren Yeh
  8. Performance measures of retail banking networks: a decision support tool By Aude Hubrecht-Deville; Hervé Leleu
  9. Comparative Analysis Between the External Auditor's Role in Bank Regulation and Supervision By Ojo, Marianne
  10. Target's corporate governance and bank merger payoffs By Elijah Brewer, III; William E. Jackson, III; Julapa A. Jagtiani
  11. Bank capital: a myth resolved By Van Laere, Elisabeth; Baesens, Bart; Thibeault, André
  12. Bank Closure Policies and Capital Requirements: a Note By E. Agliardi
  13. Profitability Analysis in the Egyptian Banking Sector By Christian Kalhoefer; Rania Salem
  16. Stochastic Volatilities and Correlations, Extreme Values and Modeling the Macroeconomic Environment, Under Which Brazilian Banks Operate By Marcos Souto; Theodore M. Barnhill

  1. By: Ghosal, Sayantan (Department of Economics, University of Warwick); Chatterji, Shurojit (Department of Economics, University of Warwick)
    Abstract: We study banking with ex ante moral hazard. Resolving the misalignment of the incentives between banks and depositors requires early liquidation with positive probability : efficient risk-sharing between depositors is no longer implementable. In a closed region with a single bank, we show that (i) with costless and perfect monitoring, contracts with bank runs of the equilibrium path of play improve on contracts with transfers, (ii) when the bank’s actions are non-contractible, equilibrium bank runs driven by incentives are linked to liquidity provision by banks. With multiple regions linked via an interbank market, with local moral hazard, we show that implementing second-best allocations requires both ex-ante trade in inter-bank markets and contagion after realization of liquidity shocks.
    Keywords: bank runs ; moral hazard ; risk-sharing ; liquidity ; random contracts
    Date: 2008
  2. By: Valeriya Dinger (University of Bonn; Jürgen von Hagen (Zentrum für Europäische Integrationsforschung Rheinische Friedrich-Wilhelms-Universität Bonn Walter Flex Strasse 3 53113 Bonn Tel. (0228) 73-9199 Fax (0228) 73-1809 Email
    Abstract: In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks which allows us to explore the impact of interbank lending when exposures are long-term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks.
    Keywords: interbank market, bank risk, market discipline, transition countries
    JEL: G21 E53
    Date: 2007–11
  3. By: Francisco F. Vázquez; Alicia García-Herrero
    Abstract: This paper assembles a bank-level dataset covering the operations of 38 international banks from eight industrial countries and their subsidiaries overseas during 1995-2004, and studies the extent of diversification gains from their local operations abroad. The paper finds that international banks with a larger share of assets allocated to foreign subsidiaries, particularly to those located in emerging market countries, are able to attain higher risk-adjusted returns. These gains are somewhat reduced- but by no means depleted-when international banks concentrate their subsidiaries in specific geographical regions. The paper also finds a substantial home bias in the international allocation of bank assets, relative to the results of a mean-variance portfolio optimization model. Overall, international diversification gains in banking appear to be substantial, albeit largely unexploited by current bank expansion strategies. These results suggest that international diversification gains could usefully be considered in the second pillar of Basel II as the first pillar is based only on the idiosyncratic risk of recipient countries.
    Keywords: International banking , Bonds , Bank regulations , Emerging markets ,
    Date: 2007–12–18
  4. By: Alfredo Martín-Oliver (Universidad de Zaragoza); Vicente Salas-Fumas (Banco de España)
    Abstract: This paper examines the contribution of investments in Information Technology (IT) and in advertising to the output and profits of Spanish banks, in the period 1983-2003. We find that the growth in the stock of IT capital explains one third of output growth of banks, and that an additional investment in IT of one million euros may be substituted for twenty-five workers. The paper also finds that advertising investments increase the demand for bank services with an elasticity of 0.22 for deposits and 0.11 for loans. For all the assets considered, the null hypothesis that banks use the profit-maximizing amount of services per period cannot be rejected with the data.
    Keywords: IT capital, advertising, output growth, rate of return, banks
    JEL: G21 D24
    Date: 2007–12
  5. By: Astrid Matthey
    Abstract: Private banks often blame state guarantees to distort competition by giv- ing public banks the advantage of lower funding costs. In this paper I show that if borrowers perceive the public bank as supporting economic develop- ment, private banks may be able to separate firms by self selection, enter the market, and obtain profits 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 profits.
    Keywords: public banks, state guarantee, self-selection
    JEL: G21
    Date: 2008–01
  6. By: Enrique Benito (Banco de España)
    Abstract: This paper investigates the size distribution of the whole population of Spanish commercial, savings and cooperative banks from a dynamic perspective over the 1970 2006 period. To investigate the evolution of the size distribution, we determine whether the data satisfies the Law of Proportionate Effect (LPE) using panel unit root tests. We find that the size-growth relationship is not stable over time but changes depending on the competitive environment of banks (liberalization, deregulation and integration). When Spanish banking was highly regulated, we find that smaller banks grew faster than their larger counterparts. In recent years, however, we find that larger banks grow at the same rate or faster than smaller banks, a result that lends towards LPE acceptance. Thus, our study corroborates the conditioned nature of the size-growth relationship and the size distribution of banks, as emphasized by recent studies for the US banking system. Results imply that the size distribution of Spanish banks will become more skewed in next years, and concentration will tend to increase.
    Keywords: Size distribution, Law of proportionate effect, Panel unit root tests
    JEL: G21 L11 C23
    Date: 2008–01
  7. By: Wolfgang Härdle; Yuh-Jye Lee; Dorothea Schäfer; Yi-Ren Yeh
    Abstract: In the era of Basel II a powerful tool for bankruptcy prognosis is vital for banks. The tool must be precise but also easily adaptable to the bank's objections regarding the relation of false acceptances (Type I error) and false rejections (Type II error). We explore the suitability of Smooth Support Vector Machines (SSVM), and investigate how important factors such as selection of appropriate accounting ratios (predictors), length of training period and structure of the training sample influence the precision of prediction. Furthermore we showthat oversampling can be employed to gear the tradeoff between error types. Finally, we illustrate graphically how different variants of SSVM can be used jointly to support the decision task of loan officers.
    Keywords: Insolvency Prognosis, SVMs, Statistical Learning Theory, Non-parametric Classification
    JEL: G30 C14 G33 C45
    Date: 2007
  8. By: Aude Hubrecht-Deville (Université de Bourgogne); Hervé Leleu (CNRS-LEM, Université Catholique de Lille)
    Abstract: In this paper, we apply a standard model of performance evaluation to the retail banking industry. In this framework, the global economic performance is broken down into technical efficiency related to the optimal use of resources and price efficiency related to the optimal choice of a product-mix. Our main contribution is twofold. First we adapt this traditional framework to the retail banking network by giving a relevant interpretation of the efficiency measures at the branch manager and at the regional top management levels. Second, we relate explicitly the product-mix efficiency to the market environment and to the size of branches. We postulate that branches in different environments could face different production technologies and that optimal product-mixes could vary with the size of the branches. We take a sample size of 1585 branches from a single bank brand breaking down in 17 French regions. We use a nonparametric approach to model the production technologies and to identify optimal benchmarks. Our main objective is to end up with a decision support tool for the top bank management in order to plan product-mix strategies and to give the right incentives to branches’ managers. This tool should prove useful since, in retail banking networks, such tools have to be simple, robust, easy to control, and adapted to the vertical organization of the banking network.
    Date: 2007–12
  9. By: Ojo, Marianne
    Abstract: This comparative analysis discusses the differences between the structure and systems of bank regulation operating in the UK, Germany, Italy and the US. The importance of harmonisation in achieving stated supervisory objectives is also emphasised. The main objective of this chapter is to illustrate how the external auditor's role could be harnessed more efficiently in the UK banking regulatory and supervisory process. This is of particular importance given the reduced supervisory role which the Bank of England has assumed since banking regulatory and supervisory powers and functions were transferred to the Financial Services Authority. External audits and in particular external auditors, have a greater role to play in bank regulation and supervision than was the case over 20 years ago. This is so mainly as a result of globalisation. The need for a single regulator which regulates not just the banking sector, but also the insurance and securities sectors, has arisen principally because of the rise of conglomerate firms. Single regulators are able to manage more effectively cross sector services' risks. Correspondingly, the functional overlaps between banking, insurance and securities business and their universal scope make it more difficult for a regulator to observe and comprehend such businesses. The difficulty of measuring and assessing risk within such institutions along with the speed with which assets can be adjusted in derivatives markets has led to more emphasis being placed on internal managerial control. Consideration is also being given to the structures that can be put in place to re inforce the incentives of all parties involved – not just to management but all parties including auditors and regulators. Because banking has evolved to a stage where conglomerates now have a significant presence and provide a range of services (and not just banking services), and because of the growing presence of international firms, the role of the external auditor has become so important.
    JEL: K29
    Date: 2007–08
  10. By: Elijah Brewer, III; William E. Jackson, III; Julapa A. Jagtiani
    Abstract: Commercial bank merger and acquisition (M&A) transactions are especially informative for analyzing the impact of differing corporate governance structures on the balance of corporate control between managers and shareholders. We exploit these special characteristics to investigate the balance of control between top-tier managers and shareholders using data from bank M&A transactions over the period 1990-2004. Unlike research on non-financial firms, the impacts of independent directors, managerial share ownership, and independent blockholders on bank merger purchase premiums in this environment are likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. Our model controls for risk characteristics of the target and the acquiring banks, the deal characteristics, and the economic environment. The results are robust. Our results are consistent with those found for non-financial firms, and are consistent with the hypothesis that independent directors could provide an important internal governance mechanism for protecting shareholders’ interests especially in large scale transactions such as mergers and takeovers. We also find results consistent with the conflict of interest argument, where top-tier managers tend to trade potential takeover gains in return for their own personal benefits, such as job security and other employment related perquisites. Our overall findings would support policies that promote independent outside directors on the board of commercial banking firms in order to provide protection for shareholders and investors at large.
    Date: 2007
  11. By: Van Laere, Elisabeth; Baesens, Bart; Thibeault, André (Vlerick Leuven Gent Management School)
    Abstract: In order to promote financial stability, regulatory authorities pay a lot of attention in setting minimum capital levels. In addition to these requirements, financial institutions calculate their own economic capital reflecting the unexpected losses and true risk according to the specific characteristics of their portfolio. The current Basel I framework pays little or no attention to the creditworthiness of a borrower in deciding on the regulatory capital requirements. As a result, a lot of banks remove low-risk assets from their balance sheets and only retain relatively high risk assets on balance. The recently introduced Basel II framework should result in a further convergence between regulatory and economic capital. However, recent papers (Elizalde et al., 2006; Jackson et al., 2002 and Jacobson et al. 2006) argue that also under Basel II, regulatory and economic capital will have different determinants. This paper first gives an overview of capital adequacy and then further describes the differences and similarities between economic and regulatory capital based on a literature review.
    Date: 2008–01–08
  12. By: E. Agliardi
    Date: 2007–09
  13. By: Christian Kalhoefer (Faculty of Management Technology, The German University in Cairo); Rania Salem (Faculty of Management Technology, The German University in Cairo)
    Abstract: The paper is analyzing current problems of the Egyptian banking sector, which is dominated by public banks. The reported problems include a massive proportion of non-performing loans in the banks’ credit portfolios as well as significant profitability problems, especially in the public banks. Some empirical data is gathered using a bank-specific Return on Equity-Analysis. Results support the reported problems and also show some structural weaknesses of both public and private banks.
    Keywords: Privatization, non-performing loans, return on equity analysis, banks, Egypt
    JEL: G21 G32 O16
    Date: 2008–01
  14. By: Eric Severin (SAMOS - Statistique Appliquée et MOdélisation Stochastique - Université Panthéon-Sorbonne - Paris I, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Marie Christine Deghaye-Filareto (Centre Universitaire de la citadelle - Université du Littoral Côte d'Opale)
    Abstract: The question of leasing credit as a substitute or complement of a banking loan has still not been resolved in the financial literature. As a continuation of these arguments, the objective of this article is, on the one hand, to determine the characteristics of firms using leasing credit and on the other hand, to better understand the relationship between leasing and credit rationing. Firstly, our results suggest that SME use leasing all the more the leasing so when they are young, leveraged, less solvent and that they present an small size and an important failure probability. Thus, leasing pushes back the limits of banking debt for firms that have no access to it. Secondly, our results suggest a strong and significant relationship between credit rationing and the use of leasing. In this framework the latter appears to be a last resort financing.
    Keywords: Leasing, credit rationing, SME, Self organising maps (SOM)
    Date: 2007–02
  15. By: Liliana Solís (Universitat de València); Joaquín Maudos Villarroya (Instituto Valenciano de Investigaciones Económicas)
    Abstract: This paper analyses the evolution of competition in the Mexican banking system in the period 1993-2005, a period of deregulation, liberalization and consolidation of the sector. For this purpose we use two indicators of competition from the theory of industrial organization (the Lerner index and the Panzar and Rosse´s H-statistic). The empirical evidence does not permit us to reject the existence of monopolistic competition. The Lerner index shows a decrease in competitive rivalry in the deposit market and an increase in the loan market, a cross subsidization strategy being observed. The results obtained call into question the effectiveness of the measures implemented hitherto, aimed at increasing the competitiveness of the Mexican banking system. Este artículo analiza la evolución de la competencia en el sistema bancario Mexicano en el periodo 1993-2005, periodo de desregulación, liberalización y consolidación del sector. Para ello se utilizan dos medidas de competencia derivadas de la teoría de la Organización Industrial: el índice de Lerner y el estadístico H de Panzar y Rosse. La evidencia empírica no permite rechazar la existencia de competencia monopolística. El índice de Lerner muestra una disminución en la rivalidad competitiva en el mercado de los depósitos y un incremento en el mercado de los préstamos, observándose una estrategia de subsidiación cruzada entre ambos mercados. Los resultados obtenidos cuestionan la efectividad de las medidas hasta ahora implementadas dirigidas a incrementar la competencia en la banca Mexicana.
    Keywords: banca, competencia, desregulación banking, competition, deregulation
    JEL: G21 L10
    Date: 2007–12
  16. By: Marcos Souto; Theodore M. Barnhill
    Abstract: Using monthly data for a set of variables, we examine the out-of-sample performance of various variance/covariance models and find that no model has consistently outperformed the others. We also show that it is possible to increase the probability mass toward the tails and to match reasonably well the historical evolution of volatilities by changing a decay factor appropriately. Finally, we implement a simple stochastic volatility model and simulate the credit transition matrix for two large Brazilian banks and show that this methodology has the potential to improve simulated transition probabilities as compared to the constant volatility case. In particular, it can shift CTM probabilities towards lower credit risk categories.
    Keywords: Emerging markets , Brazil , Banks , Interest rates , Credit risk ,
    Date: 2007–12–21

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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