New Economics Papers
on Banking
Issue of 2008‒02‒23
eleven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Syndicated Loans in Emerging Markets By Christophe J. Godlewski; Laurent Weill
  2. Credit Risk Assessment Considering Variations in Exposure: Application to Commitment Lines By Shigeaki Fujiwara
  3. Persistent Gaps and Default Traps By Luis A. V. Catao; Ana Fostel; Sandeep Kapur
  4. SME’s main bank choice and organizational structure : Evidence from France By Hiba El Hajj Chehade; Ludovic Vigneron
  5. Stress testing of the Czech banking sector By Petr Jakubík; Jaroslav Heømánek
  6. How Banking Competition Changed over Time By Jacob A. Bikker; Laura Spierdijk
  7. Cotton manufacturers as bankers: the textile trade and credit in spain (1840-1913) By Marc Prat Sabartes
  8. Banking Sector Reforms and Co-operative Credit Institutions in India By Shah, Deepak
  9. Models financing regional development of Eastern Croatia By Matić, Branko; Serdarušić, Hrvoje
  10. Institutional Credit through Cooperatives in Maharashtra: A Region-wise Analysis By Shah, Deepak
  11. US and European Household Debt and Credit Constraints By Jonathan Crook; Stefan Hochguertel

  1. By: Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur); Laurent Weill
    Abstract: There has been a considerable expansion of the volume of syndicated loans in emerging markets in the recent years. We provide the first analysis of the determinants of the decision of banks to syndicate a loan on a sample of loan facilities from 50 emerging countries. We show the significant role of loan characteristics and of financial development, banking regulation, and legal institutions, on the decision to syndicate a loan. We support the efforts of authorities to increase banking competition and efficiency, and to implement binding banking regulation on capital requirement to promote the expansion of syndicated loans.
    Keywords: Bank, Loan, Syndication, Emerging Markets, Logit Regressions.
    JEL: G21 C25
    Date: 2007
  2. By: Shigeaki Fujiwara (Deputy Director and Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shigeaki.fuiiwarafalboj.or.ip'))
    Abstract: With the worldwide financial market confUsion caused by the subprime mortgage problem and the increase in credit line contracts with relaxed covenants, there are cases where financial institutions are facing demands to provide additional credit to securitized vehicles with heightened liquidity and credit risks. These are typical examples demonstrating the importance of risk management considering variations in exposure. There are also calls for incorporation of future variations in exposure into the model for the Basel II advanced internal ratings-based approach. This paper adopts commitment lines as a credit provision with variable exposure and constructs a credit risk model whereby stochastic new borrowing demand is linked to changes in a firm's asset value. Through simulations, the paper then considers the interdependence among exposure at default, probability of default, loss given default, expected loss, and unexpected loss. The paper also prepares a simple model for the covenants, and verifies the influence of the rigidness of covenants on expected loss and other risk factors.
    Keywords: : Commitment lines, Probability of default, Loss given default, Exposure at default, Expected loss, Unexpected loss
    JEL: G21 G32 G33
    Date: 2008–02
  3. By: Luis A. V. Catao; Ana Fostel; Sandeep Kapur (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We show how vicious circles in countries’ credit histories arise in a model where output persistence is coupled with asymmetric information between borrowers and lenders about the nature of output shocks. In such an environment, default creates a pessimistic outlook about the borrower’s output path. This translates into higher debt to- expected-output ratios, pushing up interest rates and hence debt servicing costs. By raising the cost of future repayments, this creates “default traps”. We provide empirical support for the model by building a long and broad cross-country dataset spanning over a century. This data is used to provide evidence on the existence of a history dependent “default premium” and to show that the effect of output persistence on sovereign creditworthiness is significant and consistent with the model’s predictions after controlling for other determinants of sovereign risk.
    Keywords: Sovereign default, spreads, persistence
    JEL: F34 G15 H63 N20
    Date: 2008–02
  4. By: Hiba El Hajj Chehade; Ludovic Vigneron
    Abstract: The theory suggests that decentralized structures are more efficient than hierarchical ones in decisions based on soft information. According to this, small banks that often have a decentralised structure are more attractive when customers are opaque ones. We propose to test this affirmation using a panel of 6.258 couples (main bank/SME) working in the French market. The results of our several regressions show the existence of a strong tie between the firm’s informational opacity and the choice of a decentralised bank. Moreover, opaque firms are more likely to be credit constrained if they choose a hierarchical bank as their main bank.
    Keywords: Main bank, informational opacity, organizational structure, small and medium sized businesses, relationship lending.
    JEL: G21 D82
    Date: 2007
  5. By: Petr Jakubík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Jaroslav Heømánek (Czech National Bank)
    Abstract: This article presents the results of stress tests of the Czech banking sector conducted using models of credit risk and credit growth broken down by sector. The use of these models enables the stress tests to be linked to the CNB’s official quarterly macroeconomic forecast. In addition, the article updates the stress scenarios, including simple sensitivity analyses of credit risk for individual sectors. Based on the analysis, an answer is sought to the question of whether the observed credit growth to corporate sector and households poses any threat to the stability of the banking sector. The analyses conclude that the banking sector as a whole seems to be resilient to the macroeconomic shocks under consideration.
    Keywords: stress testing, financial stability, credit risk, credit growth
    JEL: G21 G28 G33
    Date: 2008–02
  6. By: Jacob A. Bikker; Laura Spierdijk
    Abstract: This paper is the first detailed and world-wide investigation of the developments in banking competition during the past fiffteen years. Using the Panzar-Rosse approach, we establish significant changes over time in the competitiveness of the banking industry. The changes in competition over time are small on average, but substantial for several countries and regions. Various Western economies faced a significant decline in banking competition during recent years. In particular, the competitive climate in the euro area was subject to a major break around 2001 - 2002, initiating a period of less competition. Also for the United States and Japan we establish a break during this period. The part of Eastern Europe that now belongs to the European Union experienced a significant but modest decrease in competition during the past ten years. Furthermore, the banking industry in emerging markets became more competitive during the last decade. We attribute the predominantly downward trend in competition to increased bank size and the shift from traditional intermediation to off-balance sheet activities.
    Keywords: competition, banking industry, Panzar-Rosse model, structural breaks
    JEL: C52 G21 L11 L13
    Date: 2008–02
  7. By: Marc Prat Sabartes (Universitat de Barcelona)
    Abstract: Historians claim that in the nineteenth century Catalan cotton manufacturers were giving informal credit to their clients, and were therefore unable to transfer this credit to the banking system. Such circumstances would have had a detrimental effect on the profitability of the cotton firms. Based on an analysis of the archives of several firms, as well as judicial and notary sources, we can confirm this state of affairs, but present a more optimistic interpretation of the system. Manufacturers were, in fact, acting as their customers bankers because they were in the best position to perform this function. They built up a good information structure, managed the credit risk efficiently and earned money from this activity.
    Keywords: financial system, credit market, cotton industry, commercial network, information costs
    JEL: G21 L14 D83 L22 N23 G12
    Date: 2008
  8. By: Shah, Deepak
    Abstract: The credit cooperatives in Maharashtra have shown slower growth in their membership and institutional financing. On the other hand, a faster growth has been observed in outstanding against loan advances. A lackadaisical approach of Primary Agriculture Cooperative Credit Societies (PACS) has been observed towards SC/ST members, particularly in terms of their coverage, pattern of loan advances to them and recovery pattern. The study has identified several issues that need to be taken cognizance of to revitalize the rural credit delivery system through the cooperatives. One of these is wide variations in total and crop loan advances across various districts and regions of Maharashtra. A decline in the loan advances with rise in GCA in the Konkan region is another issue, but the most important one among all is the mounting overdues and non-performing assets (NPAs) of the cooperatives operating in both forward and backward regions of Maharashtra. The viability of two central level credit institutions, viz. Sangli District Central Cooperative Bank and Buldana District Central Cooperative Bank, has been estimated. In order to rejuvenate the rural credit delivery system through cooperatives, the major problems facing the system, viz. high transaction cost, poor repayment performance, mounting NPAs, distributional aspect of credit, low coverage of SC/ST members, etc. need to be tackled with more fiscal jurisprudence reserving exemplary punishment for willful defaults, particularly by the large farmers.
    Keywords: Banking Sector Reforms Co-operative Credit Institutions
    JEL: G21
    Date: 2008–02
  9. By: Matić, Branko; Serdarušić, Hrvoje
    Abstract: The paper discusses the reasons for the low development level of Eastern Croatia, as well as possible ways of overcoming this situation. The revenues of local and regional self-government are frequently insufficient to finance development projects. Different characteristics of these fiscalities, such as permanent income and changes in managing this income can reduce the costs and result in more prudent and economical stewardship of local and regional authorities. This refers primarily to concentrating public resources in one commercial bank, which would establish a kind of partnership between the bank and the local community. The paper further examines the influence of ownership structure and bank's domicile on business policies of the banks operating in Eastern Croatia. The proposed changes together with new ways of financing, such as issuing securities, could generate new positive effects in financing regional development.
    Keywords: regional development; financing; banks
    JEL: O1 G2 G3
    Date: 2007
  10. By: Shah, Deepak
    Abstract: In the era of financial sector reforms, sustainability, viability and operational efficiency of rural financial institutions (RFIs) are the major issues that need to be taken cognizance of in ensuring effective rural credit delivery system. However, the major problems plaguing the efficiency of rural credit delivery system are the mounting overdue and Non Performing Assets (NPAs) of RFIs. In the state of Maharashtra, the credit cooperatives have not only shown slower growth in their institutional finance coupled with much slower growth in their membership but also faster growth in outstanding loans as against their loan advances during the reform period. The reason for this dismal scenario can be associated with adverse environment created by the financial sector reforms, which have reduced the entire rural credit delivery through cooperatives to a moribund state. The financial sector reforms have accorded greater flexibility to cooperatives to invest in non-target avenues like shares and debentures of corporates, units of mutual funds, bonds of public sector undertakings, etc. This has affected credit flow from these major institutions operating in rural Maharashtra as most of their loans meant for farm finance are diverted to investments. The estimates of this study also show not only wide variation in total and crop loan advances of PACS but also their outstanding loans, overdue and per member borrowing across different regions of Maharashtra. The outstanding loan of PACS based on per hectare GCA is seen to have exceeded loan advances with a comfortable margin in all the regions of the state. Although increase in outstanding loan with rise in loan advances and GCA is another issue, the most important one among all is the mounting overdue and NPAs of cooperatives that sets a path where from there is no return and, which ultimately leads to inefficiency in cooperative credit delivery. In order to rejuvenate rural credit delivery system through cooperatives, the major problems facing the system, viz., high transaction cost, poor repayment performance, mounting NPAs, distributional aspect of credit, coverage of various social groups, etc., need to be tackled with more fiscal jurisprudence reserving exemplary punishment for willful defaults, particularly large farmers. In fact, insofar as the rural credit delivery system is concerned, the focus should be on strategies that are required for tackling issues such as sustainability and viability, operational efficiency, recovery performance, small farmer coverage and balanced sectoral development.
    Keywords: Institutional Credit Cooperatives Region-wise Analysis
    JEL: G21
    Date: 2008–02
  11. By: Jonathan Crook (University of Edinburgh); Stefan Hochguertel (VU University Amsterdam)
    Abstract: This paper uses micro data from four OECD countries (the United States, Spain, Italy, and the Netherlands), to assess the determinants of household debt holding and to investigate whether or not credit constraints are important for household debt holding. We extend the existing literature in important ways. First, we present comparative evidence for four countries at the micro level, where we rely on household panel data for two countries; we are thus able to control for unobserved heterogeneity via individual household effects and to track changes in household behaviour over time. Second, by making data across countries as comparable as possible, we can explore the importance of the differences in institutional settings for debt incidence, debt outstanding and credit constraints. We also explore the implications for debt holding from consumption models, including a numerically solved precautionary savings model. We find that inter-country differences are substantial and remain even after controlling for a host of observable characteristics. This points to institutional differences between the countries being important.
    Keywords: debt and credit; borrowing constraints; permanent income; panel data; international comparison.
    JEL: C33 D12 D14 D91 G21 O57
    Date: 2007–11–13

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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