New Economics Papers
on Banking
Issue of 2008‒04‒15
seven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Banking crises and nonlinear linkages between credit and output By Dobromil Serwa
  2. Credit Rationing with Symmetric Information By Fioretti, Guido
  3. Bank Incentives, Contract Design, and Bank Runs By Andolfatto, David
  4. Larger crises cost more: impact of banking sector instability on output growth By Dobromil Serwa
  5. Bank Accounting Standards in Mexico. A layman’s guide to changes 10 years after the 1995 bank crisis By Gustavo A. Del Angel; Stephen Haber; Aldo Musacchio
  6. Credit creation and control: an unresolved issue in Islamic banking By Hasan, Zubair
  7. O Spread de Incumprimento dos Empréstimos Bancários By Paulo Horta

  1. By: Dobromil Serwa (Warsaw School of Economics, National Bank of Poland)
    Abstract: The paper employs a recently developed procedure, based on a bivariate Markov switching model, to analyze the asymmetric causality linkages between credit growth and output growth during banking crises. Using a sample of 103 banking crises, we find that neither credit nor output leads the other variable in calm and crisis periods, although there is evidence of instantaneous regime-interdependence between the banking and real sector during crises. The linear link between credit growth and output growth is also regime-dependent.
    Keywords: banking crises, credit growth, output growth, Markov switching model, causality
    JEL: E32 E51 G21 C12
    Date: 2008–03–25
  2. By: Fioretti, Guido
    Abstract: Without denying the importance of asymmetric information, this article purports the view that credit rationing may also originate from a lender's inability to classify loan applicants in proper risk categories. This effect is particularly strong when novel technologies are involved. Furthermore, its relevance may increase with the importance assigned to internal rating systems by the Basel accord. This article presents a measure of the inadequacy of a lender's classification criteria to the qualitative features of prospective borrowers. Even without information asymmetries, credit rationing may occur if this quantity reaches too high a value. Furthermore, some general principles are outlined, that may be used by lenders in order to change their classification criteria.
    Keywords: Credit Rationing; Risk Categories; Internal Rating Systems; Deciding not to Decide; Problem Decomposition
    JEL: D89 E41
    Date: 2008–04–09
  3. By: Andolfatto, David
    Abstract: We study a version of the Diamond-Dybvig Green-Lin model with a strategic banker.
    JEL: E5
    Date: 2007–06
  4. By: Dobromil Serwa (Warsaw School of Economics, National Bank of Poland)
    Abstract: We propose a method for calculating the macroeconomic costs of banking crises that controls for the downward impact of recessions on banking activity. In contrast to earlier research, we estimate the cost of crises based on the size of banking crises. The extent of a crisis is measured using banking sector aggregates. The results, based on our method and data from over 100 banking crises, suggest that the size of a crisis matters for economic growth. Lower credit, deposit and money growth during crises cause GDP growth to decline.
    Keywords: banking crises, costs, output growth, event-study
    JEL: C32 E51 G21 G15
    Date: 2008–03–25
  5. By: Gustavo A. Del Angel (Centro de Investigación y Docencia Económica, Carr. Mexico); Stephen Haber (Stanford University - Department of Political Science); Aldo Musacchio (Harvard Business School, Business, Government and the International Economy Unit)
    Abstract: After the 1995 crisis, the Mexican banking system experienced significant changes in bank accounting standards. Most of these changes took place between 1996 and 2001, and had a significant impact in the structure and interpretation of financial information of banks. This document explains the major changes on bank accounting, their purpose and structure, and discusses their impact on financial information reported by Mexican banks. It also provides the English equivalent of the major accounting terms used by Mexican banks. The main purpose of this document is to provide a standardized guide to better understand financial information produced before and after the crisis, within the current context of internationalization of Mexican banks' ownership.
    Date: 2008–04
  6. By: Hasan, Zubair
    Abstract: Abstract. This paper deals with a still unresolved issue - credit creation and control- in an interest free banking system. The available literature on the subject is scanty, controversial and inconclusive. The paper holds that credit creation per se is not un-Islamic; the essential point is how credit is generated and used. It argues that credit creation cannot be banished; it is an imperative for frictionless adjustment of money supply to unavoidable fluctuations in its demand in modern economies. It seeks to correct the misunderstanding in the literature that banks create credit ex nihilo.Demand for money apart, fiscal policies and foreign exchange transaction erode the credit controlling power of the central banks. The paper blames major difficulties including those of credit creation and control on the evolution of Islamic banking on the same pattern as its mainstream counterpart and suggests some structural modifications. Finally, it finds the conventional weapons of credit control inefficacious for use in an interest free banking system and suggests the inclusion of a ratio of cash to bank advances among them. The paper has some important technical and policy implications.
    Keywords: Credit creation;demand for money;Base money; Credit control; Central bank
    JEL: E0 E51
    Date: 2008
  7. By: Paulo Horta
    Abstract: In this paper we propose a discrete time model to measure the default spread for Bank loans. The model provides a closed-form solution for the short and medium term default spread, which we assume to be dependent on the default probabilities, the losses given default, the risk grades transition probabilities, seen in a Markov chain, the prime rate and the economic cycle phases. The model is tested with real data provided by a Bank, and allows one to conclude that the actual spread is, on the one hand, insufficient to cover the whole credit risk for low-risk clients and, on the other hand, excessive for high-risk clients. We believe that this study may contribute to improve the pricing for Bank loans.
    Keywords: Bank loans, default spread, credit risk, probability of default, loss given default, prime rate, risk grade transition, Markov chain, economic cycle
    JEL: G12 G21
    Date: 2008

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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