New Economics Papers
on Banking
Issue of 2008‒03‒15
four papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The Welfare Cost of Banking Regulation By TCHANA TCHANA , Fulbert
  2. Endogenous Money in the Age of Financial Liberalization By Gökçer Özgür; Korkut A. Ertürk
  3. The Politician and his Banker By Hendrik Hakanes; Christa Hainz
  4. Modelling bank lending in the euro area: A non-linear approach By Leonardo Gambacorta; Carlotta Rossi

  1. By: TCHANA TCHANA , Fulbert
    Abstract: The Basel Accords promote the adoption of capital adequacy requirements to increase the banking sector's stability. Unfortunately, this type of regulation can hamper economic growth by shifting banks' portfolios from more productive risky investment projects toward less productive but safer projects. This paper introduces banking regulation in an overlapping-generations model and studies how it affects economic growth, banking sector stability, and welfare. In this model, a banking crisis is the outcome of a productivity shock, and banking regulation is modeled as a constraint on the maximal share of banks' portfolios that can be allocated to risky assets. This model allows us to evaluate quantitatively the key trade-off, inherent in this type of regulation, between ensuring banking stability and fostering economic growth. The model implies an optimal level of regulation that prevents crises but at the same time is detrimental to growth. We find that the overall effect of optimal regulation on social welfare is positive when productivity shocks are sufficiently high and economic agents are sufficiently risk-averse.
    Keywords: Overlapping Generations; Competitive Equilibrium; Economic Growth; Banking Regulation
    JEL: G28 E44 D92
    Date: 2007–10–15
  2. By: Gökçer Özgür; Korkut A. Ertürk
    Abstract: The paper reports results that show a much weakened statistical relationship between total bank credit, total deposits and the broad money supply for the period after 1995 for the US, where no statistical causation can be discerned in either direction. This has been the result of the changing nature of the credit creation process where banks have acquired almost total independence from required reserves and core deposits in extending credit, and even an ability to circumvent the constraint posed by capital requirements through asset securitization, giving rise to an explosive increase in nonbank intermediation. As a result, the expansion of bank credit did not result in a commensurate increase of bank deposits because financial intermediation spilled over to nondepository institutions, and with the growing importance of nonbank deposits in M3, broad money supply became broader than banks’ total deposits.
    Keywords: Endogenous Supply of Money, Broad Money, Financial Intermediation, Asset Securitization
    JEL: B22 E12 E51
    Date: 2008–06
  3. By: Hendrik Hakanes (Max Planck Institute for Research on Collective Goods, Bonn); Christa Hainz (University of Munich, CESifo, and WDI)
    Abstract: Should the European Union grant state aid through an institution like the European Investment bank? This paper evaluates the efficiency of different measures for grant-ing state aid. We use a theoretical model with firms that differ in their creditworthiness and compare different types of subsidies with indirect subsidization through public banks. We find that, in a large parameter range, the politician prefers public banks to direct subsidies because they avoid windfall gains to entrepreneurs and they econo-mize on screening costs. For similar reasons, they may increase social welfare rela-tive to subsidies. One important prerequisite for this result is that public banks must not be allowed to fully compete with private banks. However, from a welfare perspec-tive, a politician uses public banks inefficiently often.
    Keywords: property right, non-linear pricing, pure bundling, club good, cross-subsidisation, packet switched telephony
    JEL: G21 G38 H25
    Date: 2008–01
  4. By: Leonardo Gambacorta (Banca d'Italia); Carlotta Rossi (Banca d'Italia)
    Abstract: This paper investigates possible non-linearities in the response of bank lending to monetary policy shocks in the euro area. The credit market is modelled over the period 1985-2005 by means of an Asymmetric Vector Error Correction Model (AVECM) involving four endogenous variables (loans to the private sector, real GDP, lending rate, and consumer price index) and one exogenous variable (money market rate). The main features of the model are the existence of two co-integrating equations representing the long-run credit demand and supply and the possibility for loading and lagged-term coefficients to assume different values depending on the monetary policy regime (easing or tightening). The paper finds that the effect on credit, GDP, and prices of a monetary policy tightening is larger than the effect of a monetary policy easing. This result supports the existence of an asymmetric broad credit channel in the euro area.
    Keywords: monetary policy transmission, credit market, credit view, asymmetries
    JEL: C32 C51 E44 E52
    Date: 2007–11

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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