New Economics Papers
on Banking
Issue of 2008‒07‒14
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. How do large banking organizations manage their capital ratio? By Allen Berger; Robert DeYoung; Mark Flannery; David Lee; Ozde Oztekin
  2. "Securitization" By Hyman P. Minsky; L. Randall Wray
  3. Investment-cash flow sensitivities, credit rationing and financing constraints By Becchetti , Leonardo; Castelli , Annalisa; Hasan, Iftekhar
  4. The value of risk: measuring the service output of U. S. commercial banks By Susanto Basu; Robert Inklaar; J. Christina Wang
  5. Bank Disclosure and Market Assessment of Financial Fragility: Evidence from Banks' Equity Prices By Penas, M.F.; Tumer-Alkan, G.
  6. Ownership concentration and market discipline in European banking: Good monitoring but bad influence? By Tristan AUVRAY (LEREPS-GRES); Olivier BROSSARD (LEREPS-GRES)
  7. Stress Testing of Probability of Default of Individuals By Petr Kadeřábek; Aleš Slabý; Josef Vodička
  8. Auswirkungen vertikaler Kollusionsprobleme auf die vertragliche Ausgestaltung von Kreditverkäufen By Scholz, Julia

  1. By: Allen Berger; Robert DeYoung; Mark Flannery; David Lee; Ozde Oztekin
    Abstract: Large banking organizations in the U.S. hold significantly more equity capital than the minimum required by bank regulators. This capital cushion has built up during a period of unusual profitability for the banking system, leading some observers to argue that the capital merely reflects recent profits. Others contend that the banks deliberately choose target capital levels based on their risk exposures and their counterparties’ sensitivities to default risk. In either case, the existence of “excess” capital makes it difficult to observe how banks manage their capital levels, particularly in response to regulatory changes (such as Basel II). We propose several hypotheses to explain this “excess” capital, and test these hypotheses using annual panel data for large, publicly traded U.S. bank holding companies (BHCs) from 1992 through 2006, and an innovative partial adjustment approach that allows both the target capital ratios and the speed of adjustment toward those targets to vary with firm-specific characteristics. We find evidence to suggest that large BHCs actively managed their capital ratios during our sample period. Our tests suggest that large BHCs choose target capital levels substantially above well-capitalized regulatory minima; that these targets increase with BHC risk but decrease with BHC size; that BHCs adjust toward these targets relatively quickly; and that adjustment speeds are faster for poorly capitalized BHCs, but slower (ceteris paribus) for BHCs under severe regulatory pressure.
    Keywords: Banks and banking ; Capital
    Date: 2008
  2. By: Hyman P. Minsky; L. Randall Wray
    Abstract: "At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago in May 1987, the buzzword heard in the corridors and used by many of the speakers was 'that which can be securitized, will be securitized.'" So notes Hyman Minsky in a prescient memo on the nature, and the implications, of securitization, written 20 years before an explosion in the securitization of home mortgages helped create the current financial crisis. This memo, which served as the basis for a lecture in Minsky's monetary theory class at Washington University, has not been widely circulated. It is published here in its entirety, with a preface and an afterword by Senior Scholar L. Randall Wray that places Minsky's work in context.
    Date: 2008–06
  3. By: Becchetti , Leonardo (Faculty of Economics, University of Rome "Tor Vergata"); Castelli , Annalisa (Faculty of Economics, University of Rome "Tor Vergata"); Hasan, Iftekhar (Lally School of Management and Technology, Rensselaer Polytechnic Institute, Troy, NY 12180-3590 and Bank of Finland Research)
    Abstract: The controversy over whether investment-cash flow sensitivity is a good indicator of financing constraints is still unresolved. We tackle it from several different angles and cross-validate our analysis with both balance sheet and qualitative data on self-declared credit rationing and financing constraints. Our qualitative information shows that (self-declared) credit rationing is (weakly) related to both traditional a priori factors – such as firm size, age and location – and lenders’ rational decisions based on their credit risk models. We use our qualitative information on firms that were denied credit to provide evidence relevant to the investment-cash flow sensitivity debate. Our results show that self-declared credit rationing significantly discriminates between firms that do and do not have such sensitivity, whereas a priori criteria do not. The same result does not apply when we consider the wider group of financially constrained firms (which do not seem to have a higher investment-cash flow sensitivity), which supports the more recent empirical evidence in this direction.
    Keywords: financing constraints; credit rationing; investment/cash flow sensitivity
    JEL: D92 G21
    Date: 2008–06–24
  4. By: Susanto Basu; Robert Inklaar; J. Christina Wang
    Abstract: Rather than charging direct fees, banks often charge implicitly for their services via interest spreads. As a result, much of bank output has to be estimated indirectly. In contrast to current statistical practice, dynamic optimizing models of banks argue that compensation for bearing systematic risk is not part of bank output. We apply these models and find that between 1997 and 2007, in the U.S. National Accounts, on average, bank output is overestimated by 21 percent and GDP is overestimated by 0.3 percent. Moreover, compared with current methods, our new estimates imply more plausible estimates of the share of capital in income and the return on fixed capital.
    Keywords: Banks and banking ; Risk management
    Date: 2008
  5. By: Penas, M.F.; Tumer-Alkan, G. (Tilburg University, Tilburg Law and Economics Center)
    Date: 2008
    Abstract: We investigate the impact of banks’ ownership concentration on the effectiveness of shareholders’ market discipline. More precisely, we first assess whether the ability of the distance to default to predict banks’ financial distress is affected by the level of ownership concentration (“monitoring” hypothesis). We also assess whether banks’ future financial situation is directly affected by ownership concentration (“influence” hypothesis). Our econometric estimates are conducted on a panel of 77 European banks observed between the first quarter of 1997 and the last quarter of 2005. We find that ownership dispersion reduces the predictive power of the distance to default. The data collected come from three sources: Bankscope, Datastream and Thomson One Banker Ownership. The econometric methodology is based on simple pooled-logit estimates corrected for the clustering effect. Several tests are then conducted to assess the robustness of the results. We also recall that theoretical results do exist to explain why banks’ ownership structure can alter market discipline and the ability of market-derived indicators to predict future financial distresses. This work finally suggests that the empirical literature dealing with market discipline should not focus only on the moral hazard potentially created by bad insurance deposit design, balance sheet opacity or the safety net: the evolution of banks ownership structure might also be an important prudential issue.
    Keywords: market discipline; ownership concentration; banks’ risk taking
    JEL: G21 G32 G34 E44 E58
    Date: 2008
  7. By: Petr Kadeřábek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Komerční banka, a.s); Aleš Slabý (Komerční banka, a.s); Josef Vodička (Komerční banka, a.s; Société Genérale, Paris)
    Abstract: This paper introduces a model for stress testing of probability of default of individuals. The model rests on assumption that the individual defaults if his savings fall below zero. The probability of default is then described as a function of several macroeconomic indicators such as wages, unemployment and interest rates. Stress testing is carried out by applying exogenous stress scenarios for development of these indicators. The model implies that sensitivity of probability of default to the stress is mainly driven by Installment to Income Ratio and for mortgages also by loan maturity. Hence Installment to Income ratio is suggested as the appropriate tool to manage credit risk of retail portfolios.
    Keywords: banking; credit risk; stress testing; probability of default
    JEL: G21 E32 E21
    Date: 2008–07
  8. By: Scholz, Julia
    Abstract: Die Arbeit untersucht die vertragliche Ausgestaltung von Kreditverkäufen, wenn zwischen dem Kreditverkäufer (Bank) und dem Kreditnehmer die Möglichkeit der Bildung einer zu Lasten des Kreditkäufers gehenden vertikalen Kollusion besteht. Die Bank übernimmt nach der Veräußerung des Kredits aufgrund eines Moral Hazard Problems auf der Seite des Kredit-nehmers das Monitoring und Servicing des Kredits, da der Investor über keine Kontrollmög-lichkeit des Kreditnehmers verfügt. Das Monitoring der Bank ist für den Käufer des Kredits nicht beobachtbar und überprüfbar, so dass sich die Möglichkeit einer vertikalen Absprache zwischen der Bank und dem Kreditnehmer ergibt. Es zeigt sich, dass die Möglichkeit zur Kol-lusion einen maßgeblichen Einfluss auf die optimale vertragliche Ausgestaltung des Kredit-verkaufs hat. Zur Maximierung ihres Verkaufserlöses muss die Bank einen Anteil des Kredits zurückbehalten, der jedoch höher ist als im Vergleich zum Fall, in welchem Kollusionen ex ante ausgeschlossen sind. Dies wird darauf zurückgeführt, dass die Bank nicht nur einen Teil des Kredits zurückbehalten muss, um dem Käufer des Kredits die Durchführung des Monito-ring zu signalisieren, sondern auch um diesem glaubhaft zu vermitteln, dass sie keine ineffi-ziente Absprache mit dem Kreditnehmer treffen wird. Dabei zeigt sich, dass dieser Effekt umso größer ist, je stärker sich die Moral Hazard Problematik auf Seiten des Unternehmers gestaltet.
    Keywords: Kreditverkauf; Kollusion; Security Design
    JEL: G21 D82 D86
    Date: 2008–06

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