New Economics Papers
on Banking
Issue of 2008‒07‒05
ten papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Is the future of the ATM past? By Batiz-Lazo, Bernardo; Reese, Claudia
  2. The Empirics of Banking Regulation By TCHANA TCHANA , Fulbert
  3. Capital Investment as Real Options: A Note on Dixit-Pindyck Model. By Termos, Ali
  4. Finance and Growth: When Does Credit Really Matter? By Coricelli, Fabrizio; Roland, Isabelle
  5. Tax Evasion and Growth: a Banking Approach By Max Gillman; Michal Kejak
  6. Intensified Regulatory Scrutiny and Bank Distress in New York City During the Great Depression By Gary Richardson; Patrick Van Horn
  7. Does the Chinese banking system benefit from foreign investors? By García-Herrero, Alicia; Santabárbara, Daniel
  8. Regulation and Banking Stability: A Survey of Empirical Studies By TCHANA TCHANA , Fulbert
  9. Prompt corrective action provisions: are insurance companies and investment banks next? By Tatom, John / A.
  10. Duration of loan arrangement and syndicate structure By Godlewski, Christophe

  1. By: Batiz-Lazo, Bernardo; Reese, Claudia
    Abstract: Just over 40 years ago the first cash dispensers became operational in the UK. From its modest beginnings this industry specific application evolved into the backbone of self service technology. In this article we consider their past and present to reflect on their future with the assistance of the so called ‘social construction of technology’ theory while supported by archival research and a summary of interviews with ‘actors’ in the UK. We tell how machine, functionality and shared networks will continue to interact in shaping the future of the cash dispensing market.
    Keywords: cash dispenser; ATM; payment systems; UK; networks; self-service market; multilateral interchange fee (MIF); LINK
    JEL: L14 N24 L80 G21
    Date: 2008–06
  2. By: TCHANA TCHANA , Fulbert
    Abstract: This paper assesses empirically whether banking regulation is effective at preventing banking crises. We use a monthly index of banking system fragility, which captures almost every source of risk in the banking system, to estimate the effect of regulatory measures (entry restriction, reserve requirement, deposit insurance, and capital adequacy requirement) on banking stability in the context of a Markov-switching model. We apply this method to the Indonesian banking system, which has been subject to several regulatory changes over the last couple of decades, and at the same time, has experienced a severe systemic crisis. We draw from this research the following findings: (i) entry restriction reduces crisis duration and also the probability of their occurrence; (ii) larger reserve requirements reduce crisis duration, but increase banking instability; (iii) deposit insurance increases banking system stability and reduces crisis duration. (vi) capital adequacy requirement improves stability and reduces the expected duration of banking crises.
    Keywords: Banking Crises; Banking System Fragility Index; Banking Regulation; Markov Switching Regression
    JEL: G28 C25 G21
    Date: 2008–06–15
  3. By: Termos, Ali
    Abstract: Abstract This paper applies Contingent Claims model a la Dixit and Pindyck (1994), on bank investment. Banks are indifferent between investing their assets on their own and extending loans to investors. The critical decision faced by the banker is the timing of the investment decision and its uncertainty. When banks make an irreversible investment decision they exercise the option to invest and give up the opportunity of waiting for new information to arrive. This lost option value is incorporated in the investment cost. Therefore, the value of the project must exceed the investment cost by the value of keeping the investment option alive. Using a third-moment mean-reversion process of the investment’s volatility, the model shows that a higher mean-reversion parameter reduces both the value of the option to invest and the critical value at which the project deems feasible.
    Keywords: Key words: Real options; contingent claims; mean-reversion process; bank investment.
    JEL: G12
    Date: 2008–01–29
  4. By: Coricelli, Fabrizio; Roland, Isabelle
    Abstract: The paper provides a simple theory and empirical evidence on the asymmetric effect of credit markets on output decline and output growth. When credit markets are underdeveloped and enterprise activity is financed outside the banking sector, exogenous shocks may induce a break-up of both credit and production chains, leading to sudden and sharp collapses in output. The development of a banking sector can reduce the probability of such collapses. Using industry-level data across a large cross-section of countries, the empirical analysis suggests that credit markets play a more important role in softening output declines than in fostering growth or recovery. These results suggest that credit markets are one of the main suspects for explaining why the magnitude of output declines tends to be larger in emerging markets than in advanced market economies.
    Keywords: credit and output; Emerging Economies; sharp recessions
    JEL: E44 O43
    Date: 2008–06
  5. By: Max Gillman (Cardiff University); Michal Kejak (The Center for Economic Research and Graduate Education of Charles University (CERGE EI))
    Abstract: The paper formalizes the relation between flat taxes and growth when there is a competitive equilibrium tax evasion. A decentralized tax evasion service is supplied by the banking sector. The bank production function follows the financial intermediation microfoundation approach, with deposits as an input. Across a class of endogenous growth models, tax evasion decreases the effective tax rate, and thereby lessens the negative effect of taxes on growth. And as the tax rate rises, tax evasion causes the growth rate to fall by less. Underlying the results is a fiscal principle whereby tax evasion creates, or magnifies, a rising demand price sensitivity to higher tax rates.
    Keywords: Tax evasion, financial intermediation, endogenous growth, and flat taxes.
    JEL: E13 E62 H26 O41
    Date: 2008–06
  6. By: Gary Richardson; Patrick Van Horn
    Abstract: New data reveals that bank distress peaked in New York City, at the center of the United States money market, in July and August 1931, when the banking crisis peaked in Germany and before Britain abandoned the gold standard. This paper tests competing theories about the causes of New York's banking crisis. The cause appears to have been intensified regulatory scrutiny, which was a delayed reaction to the failure of the Bank of United States, rather than the exposure of money-center banks to events overseas.
    JEL: E42 G21 N1 N12
    Date: 2008–06
  7. By: García-Herrero, Alicia (BOFIT); Santabárbara, Daniel (BOFIT)
    Abstract: We find empirical evidence that the Chinese banking system has benefited from the entry of foreign investors through higher profitability and increased efficiency of the banking system. Foreign participation, which consists of a minority stake in a Chinese bank (in contrast to the typical pattern in emerging countries), appears to be most effective when the foreign bank acts as a strategic investor. Purely financial investors contribute little, if anything, to bank performance.
    Keywords: China; banking system; foreign participation
    JEL: G21 G28
    Date: 2008–06–26
  8. By: TCHANA TCHANA , Fulbert
    Abstract: This paper brings together and adds structure to the empirical literature on the link between banking regulation and banking system stability. In addition to clarifying the theoretical underpinnings for studying banking regulation, it points to several directions for future empirical research, necessary to fill the gaps in our understanding of the link between banking regulation and stability. The paper starts with a review of the literature on the design of banking regulation and its link with stability, followed by an assessment of the most common methodologies used in this literature.The paper then reviews the empirical literature of various banking regulations. This is followed by a proposal on the new directions for research of the link between banking regulation and banking system stability.
    Keywords: Banking Stability; Banking Regulation
    JEL: G28 G21
    Date: 2008–05–30
  9. By: Tatom, John / A.
    Abstract: In 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Act provided for risk-based deposit insurance premiums, put explicit limits on the application of a “too big to fail” principle for banks and required that examiners implement “prompt corrective action” (PCA) standards for banks. Essentially these steps were to improve the functioning of the FDIC, especially removing discretion of the examiners in the process of addressing the risk of failure of banks and providing explicit requirements of managing the deteriorating risk of failure and providing for rising insurance premiums for such banks. In particular, PCA established a set of capital benchmarks and required regulator actions that removed privileges for banks to manage their capital and payments of income to share holders and bank creditors as the capital position of the bank deteriorated and the risk of failure rose. In effect regulators could take preemptive action to keep banks from depleting their capital as their capital positions deteriorate. These provisions have drawn increasing public attention in the past year for very different reasons. First, Senate Bill 40, The National Insurance Act (NIA), which provides new opportunities for insurance companies to obtain their charters and to be regulated by a federal government entity instead of only the state governments, also requires that the new federal regulator develop and apply prompt corrective action provisions to the supervision of federally chartered insurance companies. The second reason that these provisions have drawn attention recently is the near failure and sale of Bear Stearns. The Federal Reserve helped arrange the sale of Bear Stearns in March 2008, with the sale to be completed shortly, to preempt its failure and consequent effects on other financial institutions. At about the same time the U.S. Department of Treasury released it long awaited “Blueprint for a Modernized Federal Financial Regulatory Structure,” that called for the Board of Governors of the Federal Reserve System to have broad regulatory power over all financial institutions on issues related to financial market stability. These actions call attention to the absence of regulatory oversight powers by the Fed, in particular, enabling legislation that would allow the Fed to close investment banks or other failed or failing institutions in the same way that they can or must close such banks. PCA is on the horizon for insurance companies, investment banks and other financial institutions subject to regulation.
    Keywords: Prompt corrective action; capital requirements; financial regulatory reform; Basel II
    JEL: G22 G28 G21
    Date: 2008–05–30
  10. By: Godlewski, Christophe
    Abstract: What is the influence of syndicate structure on the duration of loan arrangement? I answer this question using survival analysis methodology on a sample of loans from 59 countries over the 1992-2006 period. I find that syndicate size, concentration, reputation, and national diversity clearly matters for the duration of loan arrangement. A syndicate structure adapted to specific agency problems of syndication, with numerous, reputable, and experienced arrangers retaining a larger portion of the loan reduces the duration. The latter is also reduced when the syndicate has numerous lenders acting as syndicate ``managers'' from the same country as the borrower. Furthermore, more same-country ``managers'' and participants allow to shorten the duration of loan arrangement.
    Keywords: Syndicated loan; syndication process; duration of loan arrangement; agency costs; reputation; experience; nationality; survival analysis.
    JEL: F30 C41 G15 G32 G21
    Date: 2008–06–28

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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