New Economics Papers
on Banking
Issue of 2008‒03‒08
seven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Theoretical Framework Of Competition As Applied To Banking Industry By KV, Bhanu Murthy; Deb, Ashis Taru
  2. Banking Permits: Economic Efficiency and Distributional Effects By Valentina Bosetti; Carlo Carraro; Emanuele Massetti
  3. Credit Expansion, the Prisoner´s Dilemma and Free Banking as Mechanism Design By van den Hauwe, Ludwig
  4. Merger Control as Barrier to EU Banking Market Integration By Koehler, Matthias
  5. Mortgage Interest Rates, Country Risk and Maturity Matching in Colombia By Arturo José Galindo; Marc Hofstetter
  6. Diversity of human capital attributes and diversity of remunerating systems By Fatima Suleman; Jean-Jacques Paul
  7. Operationalizing and Measuring Competition: Determinants of Competition in Private Banking Industry in India By KV, BHANU MURTHY; Deb, Ashis Taru

  1. By: KV, Bhanu Murthy; Deb, Ashis Taru
    Abstract: Concepts evolve through time and over time they assume different meanings. The concept of competition is no exception. This paper discusses the evolution of the concept of competition in general with a view to derive a theoretical framework for analyzing competition in banking industry. Starting from the classical notions of competition it proceeds to some of the latest approaches (Northcott (2004), Neuberger (1998), Toolsema (2003), Bolt and Tieman (2001)). The ordinary Structure-Conduct-Performance approach does not involve any analysis of market dynamics. Our approach introduces various aspects of industry dynamics and growth. It provides a methodology to arrive at the market form in banking industry through an analysis of all the aspects of basic conditions, structure, conduct and performance. It is argued that sustained growth and dynamics of the industry is not price led. Growth arises out of changing basic conditions and dynamics arises out of sharing the new market created by basic conditions. Hence the prime mover of competition is rivalry among firms to control market share and to internalize externalities rather than adjustments brought about by the price mechanism.
    Keywords: Structure-Conduct-Performance;Competition theory;Banking competition;Basic Conditions;Entry facilitator.
    JEL: D21 B19 E58 D41 D40 B29 D49
    Date: 2008–01
  2. By: Valentina Bosetti (Fondazione Eni Enrico Mattei); Carlo Carraro (Fondazione Eni Enrico Mattei, University of Venice, CEPR, CESifo and CEPS); Emanuele Massetti (Fondazione Eni Enrico Mattei and Catholic University)
    Abstract: Most analyses of the Kyoto flexibility mechanisms focus on the cost effectiveness of “where” flexibility (e.g. by showing that mitigation costs are lower in a global permit market than in regional markets or in permit markets confined to Annex 1 countries). Less attention has been devoted to “when” flexibility, i.e. to the benefits of allowing emission permit traders to bank their permits for future use. In the model presented in this paper, banking of carbon allowances in a global permit market is fully endogenised, i.e. agents may decide to bank permits by taking into account their present and future needs and the present and future decisions of all the other agents. It is therefore possible to identify under what conditions traders find it optimal to bank permits, when banking is socially optimal, and what are the implications for present and future permit prices. We can also explain why the equilibrium rate of growth of permit prices is likely to be larger than the equilibrium interest rate. Most importantly, this paper analyses the efficiency and distributional consequences of allowing markets to optimally allocate emission permits across regions and over time. The welfare and distributional effects of an optimal intertemporal emission trading scheme are assessed for different initial allocation rules. Finally, the impact of banking on carbon emissions, technological progress, and optimal investment decisions is quantified and the incentives that banking provides to accelerate technological innovation and diffusion are also discussed. Among the many results, we show that not only does banking reduce abatement costs, but it also increases the amount of GHG emissions abated in the short-term. It should therefore belong to all emission trading schemes under construction.
    Keywords: Emission Trading, Banking
    JEL: C72 H23 Q25 Q28
    Date: 2008–01
  3. By: van den Hauwe, Ludwig
    Abstract: Despite the distinctive character of the Austrian approach to “microfoundations for macroeconomics”, the literature on free banking contains a number of arguments which make use of game-theoretic concepts and models such as the well-known Prisoner´s Dilemma model. While there can be no general a priori presumption against the possible usefulness of game-theoretic concepts for Austrian theorizing, in the context of the debate on free banking such concepts and models have been used with varying degrees of perspicacity. One example which is elaborated in the paper is concerned with the interaction configuration between independent banks in a fractional-reserve free banking system, which has sometimes been modeled as a One-Shot Prisoner´s Dilemma. This conceptualization does not provide a sufficient argument for the in-concert overexpansion thesis, nor for the thesis that fractional-reserve free banking will tend to lead to the establishment of a central bank. The author drops the implicit assumption that there exists a one-to-one correspondence between the outcome matrix and the utility matrix. When it is acknowledged that banks in a fractional-reserve free banking system need not necessarily adopt a “myopic”, self-regarding perspective but may recognize the long-run harmony of interests between the banking sector and society at large, a different conceptualization and a different matrix representation emerge.
    Keywords: Free Banking; Business Cycle Theory; Prisoner´s Dilemma; Mechanism Design;
    JEL: E32 E66 E58 E42 E31 G18 E52 D01 K39
    Date: 2008–02–21
  4. By: Koehler, Matthias
    Abstract: In 2005, the President of the Bank of Italy blocked the cross-border acquisition of two Italian banks for ‘prudential reasons and formal errors’. Following these events, the EU Commission brought actions against Italy for infringement of the principle of the free movement of capital. Although there is anecdotal evidence that prudential control may constitute a barrier to cross-border M&A in the banking sector, empirical evidence is missing until now. The main problem is the lack of data on the scope for politicians and supervisors to block M&A in the banking sector. The main contribution of this paper is to measure this scope for interference by constructing indices on the political independence and the transparency and strength of the supervisory review process of bank M&A. The main source of information to construct these indices is a questionnaire on banking regulation that was sent to the supervisory authorities in the 25 EU member countries between October 2006 and March 2007.
    Date: 2007
  5. By: Arturo José Galindo; Marc Hofstetter
    Abstract: In this paper, we examine the determinants of mortgage loans interest rates in Colombia during the period January 2002 - June 2006. We find that the main macroeconomic determinant is public debt interest rates. At the micro level, we find that credit risk is the main determinant. We demonstrate and analyze the tight relationship between country risk and mortgage debt interest rates. This relationship has been growing over time, as banks have increased their share of long-term liabilities in an effort to reduce the maturity mismatch that characterized their balance sheets prior to the 1998-99 financial crisis. Nevertheless, the reduction in the maturity mismatch has left mortgage rates more exposed to country risk variations.
    Date: 2008–01–14
  6. By: Fatima Suleman (DINAMIA - Centro de Estudos sobre a Mudança Socioeconómica - Université de Lisbonne); Jean-Jacques Paul (IREDU - Institut de recherche sur l'éducation : Sociologie et Economie de l'Education - CNRS : UMR5225 - Université de Bourgogne)
    Abstract: This paper aims at comparing the respective impact of the traditional Human Capital Variables (HCV) and of competences explicitly assessed on employees’ remuneration. The data are derived from an original survey conducted in five large banking companies in Portugal. Six hundred clerks were interviewed regarding their individual characteristics (age, gender, education, experience in the labour market, experience in the company). Their respective supervisors were asked to assess their competences using a list of thirty skills. Complementary models are used in this research, relating to earnings and the distribution of profit shares to employees. Analyses take the specific structure of the multilevel data into account. These different dimensions show that traditional human capital variables are important determinants for earnings, whereas competences explain the profit shares distributed to employees.
    Keywords: Earnings ; Human capital ; Competences ; Profit sharing ; Banking sector ; Portugal
    Date: 2008–03
  7. By: KV, BHANU MURTHY; Deb, Ashis Taru
    Abstract: Using an appropriate theoretical framework and econometric methodology, the study has sought to measure and model competition in private banking industry in India in an attempt to analyse the process of market dynamics in the industry. The changing scenario of private banking consequent to deregulation provided the motivation behind the study. It used the concept of competition proposed by Stigler (1961) and measured it by Bodenhorn’s (1990) measure of mobility. The study provides a critique of the mechanism of inducing competition, which is implicit in the Narasimham Committee (1991). It then provides the theoretical background of an alternative mechanism based on Structure-Conduct-Performance paradigm, which incorporates basic conditions and strategic groups, apart from including entry, economies of scale, product differentiation and price cost margin, One basic contention of the study is that competition goes beyond “conduct” and encompasses all the four components of S-C-P paradigm: basic conditions, structure, conduct and performance. Accordingly, a three equation simultaneous equation model is used to ultimately estimate the equation of competition through Tobit technique. The result demonstrates that variables related to basic conditions, structure, and conduct and performance influence competition. The study has found evidence against the simplistic relationship between concentration and competition, which remained implicit in the literature. The study also developed a methodology to arrive at market form from an analysis of three aspects of a market and concludes that private banking industry in India is characterized by monopolistic competition.
    Keywords: Competition;Structure-Conduct-Performance;Banking reform;Tobit model.
    JEL: D21 E58 D41 D40 C25 D49
    Date: 2008–01

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