New Economics Papers
on Banking
Issue of 2008‒06‒21
eleven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The Procyclical Effects of Basel II By Repullo, Rafael; Suarez, Javier
  2. What are borders made of? An analysis of barriers to European banking integration By Massimiliano Affinito; Matteo Piazza
  3. Does the Chinese Banking System Promote the Growth of Firms? By Panicaos Demetriades; Jun Du; Sourafel Girma; Chenggang Xu
  4. The Anatomy of Banking Crises By Paul Cashin; Rupa Duttagupta
  5. Banks on Board By Jeffrey Fear; Christopher Kobrak
  6. Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market By Luc Laeven; Deniz Igan; Giovanni Dell'Ariccia
  7. Informality and Bank Credit: Evidence from Firm-Level Data By Junko Koeda; Era Dabla-Norris
  8. Family Finance By Christopher Kobrak
  10. Reserve Requirements, the Maturity Structure of Debt, and Bank Runs By Eza Al-Zein
  11. Assessment of Economic Capital: An Equity Market approach By Bandyopadhyay, Arindam; Saha, Asish

  1. By: Repullo, Rafael; Suarez, Javier
    Abstract: We analyze the cyclical effects of moving from risk-insensitive (Basel I) to risk-sensitive (Basel II) capital requirements in the context of a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period. Banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and, as a precaution, hold capital buffers. We find that the new regulation changes the behavior of these buffers from countercyclical to procyclical. Yet, the higher buffers maintained in expansions are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession. We show that cyclical adjustments in the confidence level behind Basel II can reduce its procyclical effects without compromising banks' long-run solvency.
    Keywords: banking regulation; Basel II; business cycles; capital requirements; credit crunch; loan defaults; relationship banking
    JEL: E43 G21 G28
    Date: 2008–06
  2. By: Massimiliano Affinito (Banca d'Italia); Matteo Piazza (Banca d'Italia)
    Abstract: Linguistic and cultural differences, different legal and supervisory frameworks, relationship lending have been repeatedly mentioned as barriers to European retail banking integration. We investigate whether these barriers have affected integration within national boundaries, using an index of localism of regional banking systems as a measure of market integration. If local banks are established and flourish because asymmetric information makes entry difficult for non-incumbents (DellÂ’Ariccia, 2001) or regulatory and governance rules prevent entry from outside (Berger et al., 1995), we should find a significant relationship between indicators of these barriers and measures of the localism of banking systems. Our results show that this is indeed the case for asymmetric information, while findings are more blurred for supervisory practices.
    Keywords: banking integration, barriers, asymmetric information
    JEL: G21 G28
    Date: 2008–04
  3. By: Panicaos Demetriades (University of Leicester); Jun Du (Aston University); Sourafel Girma (University of Nottingham); Chenggang Xu (London School of Economics)
    Abstract: Using a large panel dataset of Chinese manufacturing enterprises during 1999-2005, which accounts for over 90% of China’s industrial output, and robust econometric procedures we show that the Chinese banking system has helped to support the growth of both firm value added and TFP. We find that access to bank loans is positively correlated with future value added and TFP growth. We also find that firms with access to bank loans tend to grow faster in regions with greater banking sector development. While the effects of bank loans on firm growth are more pronounced in the case of purely private-owned and foreign firms, they are positive and statistically significant even in the case of state-owned and collectively-owned firms. We show that excluding loss-making firms from the sample does not change the qualitative nature of our results.
    Keywords: Chinese banking system development, value added and TFP growth, panel dataset
    JEL: E44 O53
    Date: 2008–02
  4. By: Paul Cashin; Rupa Duttagupta
    Abstract: This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT identifies key indicators and their threshold values at which vulnerability to banking crisis increases. The three conditions identified as crisis-prone-(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity, and (iii) low bank profitability-highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are key vulnerabilities triggering banking crises. The main results survive under alternative robustness checks, confirming the importance of the BCT approach for monitoring banking system vulnerabilities.
    Date: 2008–04–22
  5. By: Jeffrey Fear; Christopher Kobrak (ESCP-EAP - ESCP-EAP - Ecole Supérieure de Commerce de Paris)
    Abstract: As part of a series of related papers, the authors examine the conceptual foundations of German and American corporate governance, specifically highlighting the role of banks’ relationships to corporations and the stock market. This paper focuses on how the regulatory and macroeconomic environments of the two countries helped shape how banks, especially money-centred bankers, actually interacted with their clients. Prior to 1914, despite many regulatory obstacles, American banks wielded more power over U.S. corporations than the legendary German ones because they had more “opportunities” for intervention. The U.S. suffered larger booms and busts (“panics” and bankruptcies), had more foreign investment, as well as saw more corporate consolidation than in Germany. By contrast, German companies seemed to have less need for active bank management and largely maintained their distance from activist banks, although German banks could potentially wield great power through board membership and proxy voting. Additionally, German regulators and investors turned more readily to banks to bolster controls on equity and debt capital markets to dampen dangerous speculation of “productive assets.” They encouraged banks to play a crucial intermediary role in solving the agency problem in firms and correcting the perceived weaknesses of financial markets—unlike U.S. regulators. Germans also expected banks to save companies from financial distress, but these occasions were more rare in Germany than in the United States. Surprisingly, the debates in Germany and the U.S. about the role of banks had many common features, yet the two countries increasingly found alternative solutions to classic corporate governance dilemmas. Whereas American regulators tended to suspect banks’ insider relationship with companies and stock markets, and then endeavored to destroy this “money trust,” German regulators turned to banks as institutional stabilizers to tame market turbulence and speculation. Over time, they bolstered rather than undermined banks’ special relationship to firms and capital markets. Key institutional choices set the stage for a much greater divergence during the interwar period.
    Keywords: banking ; corporate governance
    Date: 2007–08–22
  6. By: Luc Laeven; Deniz Igan; Giovanni Dell'Ariccia
    Abstract: This paper links the current sub-prime mortgage crisis to a decline in lending standards associated with the rapid expansion of this market. We show that lending standards declined more in areas that experienced larger credit booms and house price increases. We also find that the underlying market structure mattered, with entry of new, large lenders triggering declines in lending standards by incumbent banks. Finally, lending standards declined more in areas with higher mortgage securitization rates. The results are consistent with theoretical predictions from recent financial accelerator models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.
    Keywords: Working Paper , Credit expansion , Loans , Housing , Industrial structure , Financial instruments , Moral hazard ,
    Date: 2008–04–29
  7. By: Junko Koeda; Era Dabla-Norris
    Abstract: The paper relies on a firm-level data on transition economies to examine the relationship between informality and bank credit. We find evidence that informality is robustly and significantly associated with lower access to and use of bank credit. We also find that higher tax compliance costs reduce firms' reliance on bank credit, while a stronger quality of the legal environment is associated with higher access to credit even for financially opaque informal firms. An interactive term between a country-wide measure of tax compliance costs and the level of informal activity is negative and significant, suggesting that the negative association between informality and bank credit is stronger in countries with weak tax administration.
    Date: 2008–04–22
  8. By: Christopher Kobrak (ESCP-EAP - ESCP-EAP - Ecole Supérieure de Commerce de Paris)
    Abstract: As Mira Wilkins has argued, there is a curious disconnect between business and financial history. (Wilkins, 2003) Whereas business history literature has rediscovered the importance of family business in many countries and in many sectors of contemporary commercial life, for example, little has been written about family banking as an alternative to joint-stock, management-run financial institutions. This lacuna is odd for many reasons. First, family banking is one of the best-known examples of family business in history. Second, family banks once played a much greater role in international investment banking than it does today. Third, some family financial institutions are still active (dominant) in certain market segments and countries. This paper will focus on how, when and why family banking lost its position in international (multinational) banking during the first few decades of the 20th century. Although political upheaval and a widespread movement to reduce the power of private financial institutions undermined their businesses, family banks suffered, too, from America’s maturing as a financial center. I will argue that this shift is connected with the increased importance of American markets and financial regulations, which, in the 1930s, deliberately steered financial transactions away from private dealings and toward transparent impersonal exchanges and capital markets with new forms of aggregated capital and individual investors, in which private banks were ill-suited to manage or at the least for which they had no special competitive edge. Using concepts drawn from an earlier paper on family businesses and relying mostly on secondary sources, this paper will further argue that in markets or market segments, such as Leveraged Buyouts, where uncertainty forms a greater part of the transactional environment, family banking still plays a significant role.
    Keywords: business history ; family banking
    Date: 2008–04
  9. By: Vink, D.; Thibeault, A. (Vlerick Leuven Gent Management School)
    Abstract: The capital market in which the asset-backed securities are issued and traded is composed of three main categories: ABS, MBS and CDOs. We were able to examine a total number of 3,951 loans (worth €730.25 billion) of which 1,129 (worth €208.94 billion) have been classified as ABS. MBS issues represent 2,224 issues (worth €459.32 billion) and 598 are CDO issues (worth €61.99 billion). We have investigated how common pricing factors compare for the main classes of securities. Due to the differences in the assets related to these securities, the relevant pricing factors for these securities should differ, too. Taking these three classes as a whole, we have documented that the assets attached as collateral for the securities differ between security classes, but that there are also important univariate differences to consider. We found that most of the common pricing characteristics between ABS, MBS and CDO differ significantly. Furthermore, applying the same pricing estimation model to each security class revealed that most of the common pricing characteristics associated with these classes have a different impact on the primary market spread exhibited by the value of the coefficients. The regression analyses we performed demonstrated econometrically that ABS, MBS, and CDOs are in fact different financial instruments.
    Keywords: asset securitization, asset-backed securitisation, bank lending, default risk, risk management, spreads, leveraged financing
    JEL: G21 G24 G32
    Date: 2008–06–02
  10. By: Eza Al-Zein
    Abstract: The paper looks at the relationship between reserve requirements and the choice of the maturity structure of external debt in a general equilibrium setup, by incorporating the role of international lenders. A date- and maturity-specific reserve requirement is a fraction of the debt to be deposited in a non-interest bearing account at the central bank. At maturity, the central bank returns the reserves. There exist some specific combinations of date- and maturity-specific reserve requirements that reduce the vulnerability to bank runs. In such setup, lenders may still want to provide new short-term lending to the bank after a bank run.
    Keywords: Working Paper , Reserve requirements , External debt , Bank regulations , Financial crisis , Loans , Central banks ,
    Date: 2008–04–29
  11. By: Bandyopadhyay, Arindam; Saha, Asish
    Abstract: Assessment of individual bank’s need for economic capital will enable them to understand their actual solvency position for internal management of capital and evaluating the larger strategic issues like expanding or contracting its risk appetite to generate returns. This paper is an attempt to empirically demonstrate the process of estimating bank's mark to market measure of economic capital on an integrated basis. Such measure will help the bank as well as the regulator to understand the bank's solvency position on a regular basis. The top down approach followed in this paper will also assist the bank to measure Risk Adjusted Return on its entire business and examine its economic value addition on an integrated basis.
    Keywords: Bank Solvency; Economic Capital; Integrated Risk Management
    JEL: G15 G32 G21
    Date: 2008–02–07

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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