New Economics Papers
on Banking
Issue of 2008‒07‒20
sixteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Are private banks more efficient than public banks? Evidence from Russia By A. KARAS; K. SCHOORS; L. WEILL
  2. Bank regulation and supervision in Japan and Germany: A comparison By Ralf Bebenroth; Diemo Dietrich; Uwe Vollmer
  3. Environmental Factors Affecting Hong Kong Banking: A Post-Asian Financial Crisis Efficiency Analysis By Maximilian J. B. Hall; Karligash A. Kenjegalieva; Richard Simper
  4. Macro stress testing with sector specific bankruptcy models By Marianna Valentinyi-Endrész; Zoltán Vásáry
  5. Systemic bank risk in Brazil: an assessment of correlated market, credit, sovereign and inter-bank risk in an environment with stochastic volatilities and correlations By Barnhill, Theodore M.; Souto, Marcos Rietti
  6. Banking In China: Are New Tigers Supplanting the Mammoths? By Giovanni Ferri
  7. The success of bank mergers revisited : an assessment based on a matching strategy By Behr, Andreas; Heid, Frank
  8. The implications of latent technology regimes for competition and efficiency in banking By Koetter, Michael; Poghosyan, Tigran
  9. Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks By Memmel, Christoph
  10. Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality? By Shawn A. Cole
  11. Fixing Market Failures or Fixing Elections? Agricultural Credit in India By Shawn A. Cole
  12. Bank shareholding and lending: complementarity or substitution? Some evidence from a panel of large Italian firms! By Emilio Barucci; Fabrizio Mattesini
  13. Liquidity matters: Evidence from the Russian interbank market By A. KARAS; K. SCHOORS; G. LANINE
  14. Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework By Chiara Pederzoli; Costanza Torricelli; Dimitrios P. Tsomocos
  15. Regulatory capital for market and credit risk interaction: is current regulation always conservative? By Breuer, Thomas; Jandacka, Martin; Rheinberger, Klaus; Summer, Martin
  16. The role of the interchange fee on the effect of forbidding price discrimination of ATM services By Ramón Faulí-Oller

    Abstract: We study whether bank efficiency is related to bank ownership in Russia. We find that foreign banks are more efficient than domestic private banks and – surprisingly – that domestic private banks are not more efficient than domestic public banks. These results are not driven by the choice of production process, the bank’s environment, management’s risk preferences, the bank’s activity mix or size, the econometric approach, or the introduction of deposit insurance. The policy conclusion is that the efficiency of the Russian banking system may benefit more from increased levels of competition and greater access of foreign banks than from bank privatization.
    Keywords: Bank Efficiency; State Ownership; Foreign ownership; Russia
    JEL: G21 P30 P34 P52
    Date: 2008–06
  2. By: Ralf Bebenroth (Research Institute for Economics and Business Administration, Kobe University); Diemo Dietrich (Halle Institute for Economic Research); Uwe Vollmer (University of Leipzig)
    Abstract: This paper describes and compares the regulation and supervision of banks in Japan and Germany. We have chosen these countries because they have both bank-dominated financial systems and belong to the same law tradition, yet, bank stability differs significantly. We ask to what extent these countries follow best practice regulations in banking and whether differences in banking stability and efficiency can be explained by regulatory and supervisory differences. We argue that bank regulation and supervision are less efficient in Japan than in Germany and show why Japan and Germany have made different regulatory and supervisory choices.
    Keywords: Bank regulation and supervision, Banking stability and banking efficiency, deposit insurance, Lender of last resort, Forbearance, Japan and Germany
    JEL: G21 G32
    Date: 2007–11
  3. By: Maximilian J. B. Hall (Loughborough University, Hong Kong Institute for Monetary Research); Karligash A. Kenjegalieva (Loughborough University); Richard Simper (Loughborough University, Hong Kong Institute for Monetary Research)
    Abstract: Within the banking efficiency analysis literature there is a dearth of studies which have considered how banks have 'survived' the Asian financial crisis of the late 1990s. Considering the profound changes that have occurred in the region's financial systems since then, such an analysis is both timely and warranted. This paper examines the evolution of Hong Kong's banking industry's efficiency and its macroeconomic determinants through the prism of two alternative approaches to banking production based on the intermediation and services-producing goals of bank management over the post-crisis period. Within this research strategy we employ Tone's (2001) Slacks-Based Model (SBM) combining it with recent bootstrapping techniques, namely the non-parametric truncated regression analysis suggested by Simar and Wilson (2007) and Simar and Zelenyuk's (2007) group-wise heterogeneous sub-sampling approach. We find that there was a significant negative effect on Hong Kong bank efficiency in 2001, which we ascribe to the fallout from the terrorist attacks in America in 9/11 and to the completion of deposit rate deregulation that year. However, post 2001 most banks have reported a steady increase in efficiency leading to a better 'intermediation' and 'production' of activities than in the base year of 2000, with the SARS epidemic having surprisingly little effect in 2003. It was also interesting to find that the smaller banks were more efficient than the larger banks, but the latter were also able to enjoy economies of scale. This size factor was linked to the exportability of financial services. Other environmental factors found to be significantly impacting on bank efficiency were private consumption and housing rent.
    Keywords: Finance and Banking, Productivity, Efficiency
    JEL: C23 C52 G21
    Date: 2008–12
  4. By: Marianna Valentinyi-Endrész (Magyar Nemzeti Bank); Zoltán Vásáry (Magyar Nemzeti Bank)
    Abstract: This paper employs the methodology of Wilson (1997) on Hungarian data to conduct a macro stress test in relation to banks’ corporate loan portfolio. First, sector specific models of bankruptcy are estimated, where the bankruptcy frequency is linked to the general health of the economy. Data on bankruptcy filings in Hungary between 1995 and 2005 are used. Then, after identifying relevant shocks, the estimated models are employed in Monte Carlo simulation to conduct a stress test on the Hungarian banking sector. Various loss measures are defined to quantify the impact of shocks and evaluate the resilience of the Hungarian banking sector. The sensitivity of the stress test results to the endogeneity of LGD and the prevailing macro environment are also examined.
    Keywords: credit risk, bankruptcy, macro stress testing.
    JEL: C32 G21 G33
    Date: 2008
  5. By: Barnhill, Theodore M.; Souto, Marcos Rietti
    Abstract: In this study we develop and demonstrate a powerful and flexible forward-looking portfolio simulation methodology for assessing the correlated impacts of market risk, and private sector, sovereign and inter-bank default risk on both individual banks (i.e. 28 of the largest Brazilian banks) and groups of banks (i.e. the Brazilian banking system). The methodology importantly accounts for bank asset and liability maturity and currency mismatches and loan portfolio credit quality and sector and region concentrations. In a significant innovation, financial and economic environment variables are modeled with stochastic volatilities and correlations. We demonstrate the reliability of the models by comparing simulated and historical credit transition probabilities, simulated and historical bank rates of return, and simulated versus actual bank credit ratings. When omitting sovereign risk our analysis indicates that none of the banks face significant default risk over a 1-year horizon. This low default risk stems primarily from the large amount of government securities held by Brazilian banks, but also reflects the banks’ adequate capitalizations and extraordinarily high interest rate spreads. Once sovereign risk is considered and losses in the market value of government securities reaches 10 percent (or higher), several banks face potential solvency problems. These results demonstrate the well known risk of concentrated lending to a borrower which has a non-zero probability of default (e.g. Government of Brazil). We also demonstrate the potential systemic risk impact of variation in average recovery rates on defaulted private sector loans which reflect, among other factors, bank lending policies, the efficiency of the legal system in resolving defaults, and aggregate levels of defaults. Our analysis also highlights the importance of accounting for the differential risk characteristics of various banks and for the inter-bank risk channel, through which a systemic crisis may propagate. It further indicates that, in the event of a sovereign default, the Government of Brazil would face constrained debt management alternatives. To the best of our knowledge no one else has put forward a systematic methodology for assessing correlated market and credit (sovereign, corporate and inter-bank) default risk for a financial system. In dieser Studie wollen wir eine vorausschauende Methodik zur Einschätzung des systemischen Bankrisikos (der Wahrscheinlichkeit von multiplen Bankausfällen) entwickeln, die das Markt- und das Kreditrisiko anhand eines Portfoliosimulationsverfahrens integriert. Die Methodik soll sodann auf das brasilianische Bankensystem angewendet werden. Wir haben zahlreiche Simulationen durchgeführt, die sich auf umfassende Daten für 28 der größten brasilianischen Banken mit starkem Engagement im Bereich der staatlichen Kredite stützten. Im ersten Teil simulieren wir die Banken einzeln, wobei zwei Szenarien unterstellt werden: 1) die brasilianische Regierung ist immer in der Lage, ihre Inlandsschulden zu bedienen, und 2) die brasilianische Regierung kann zahlungsunfähig werden, wobei die Ausfallrate in etwa der durchschnittlichen Ausfallrate von Staatsschulden mit demselben Fitch-Rating wie Brasilien entspricht. Unsere Ergebnisse zeigen, dass einige Banken zwar tatsächlich Verluste verzeichnen, auch wenn eine Zahlungsunfähigkeit der Regierung nicht berücksichtigt wird, dass aber keine der Banken in dem einjährigen Simulationszeitraum einem nennenswerten Ausfallrisiko unterliegt. Wird allerdings der Ausfall der Regierung miteinbezogen, weisen mehrere simulierte Banken Probleme bezüglich des Ausfallrisikos auf. Zusammen betrachtet offenbaren diese Ergebnisse die negativen Seiten einer zu starken Kreditvergabe an den Staat. Erstens hindert ein zu hoher Bestand an Staatspapieren, selbst wenn die Regierung nicht zahlungsunfähig wird, die Banken daran, höhere (risikoreichere) Zinserträge aus Unternehmens- und Kundenkrediten zu erzielen. Zweitens ist es möglich, den der Regierung gewährten Kreditbetrag zu verringern und das Portfolio derart auszurichten, dass die Banken im Durchschnitt selbst dann noch gewinnbringendes Kapital erwirtschaften, wenn eine Zahlungsunfähigkeit der Regierung einbezogen wird. Wir weisen zudem nach, dass durchschnittliche und standardmäßige Abweichungen von der durchschnittlichen Gesamtkapitalrendite und der durchschnittlichen Eigenkapitalrendite für dieselben Momente unverzerrte Schätzwerte für die entsprechende historische Gesamtkapital- und Eigenkapitalrendite darstellen. Diese Erkenntnis ist aufgrund der Einschränkungen der Analyse zwar mit Vorsicht zu betrachten, doch zeigt sie, dass das Simulationsverfahren imstande ist, Ertragskennziffern der Banken nachzubilden, die hinlänglich mit den historischen Werten vergleichbar sind.
    Keywords: Integrated Market and Credit Risk, Monte Carlo Simulation, Brazilian banks
    JEL: G0
    Date: 2008
  6. By: Giovanni Ferri (University of Bari, Italy, Hong Kong Institute for Monetary Research)
    Abstract: "New Tigers" (including city commercial banks) outperform state-owned commercial banks burdened with non-performing loans from unprofitable state-owned enterprises. We study whether this is due solely to superior corporate governance (multiple shareholders versus total government ownership) or also to the favorable environment (the New Tigers target affluent China, while state-owned commercial banks operate nationwide). Using a field survey on 20 city commercial banks from three provinces at different levels of economic development, we find better performance at those in the East and worse performance at those controlled by state-owned enterprises. Geography and policy do matter, and reform of state-owned commercial banks is necessary to bring better banking to China.
    Keywords: China, State Ownership of Banks, Corporate Governance, Geography and Performance
    JEL: G21 G30 G38
    Date: 2008–05
  7. By: Behr, Andreas; Heid, Frank
    Abstract: The question of whether or not mergers and acquisitions have helped to enhance banks’ efficiency and profitability has not yet been conclusively resolved in the literature. We argue that this is partly due to the severe methodological problems involved. In this study, we analyze the effect of German bank mergers in the period 1995-2000 on banks’ profitability and cost efficiency. We suggest a new matching strategy to control for the selection effects arising from the fact that predominantly under-performing banks engage in mergers. Our results indicate a neutral effect of mergers on profitability and a positive effect on cost efficiency. Comparing our results with those obtained from a naive performance comparison of merging and non-merging banks indicates a severe negative selection bias with regard to the former.
    Keywords: Bank mergers, performance measurement, propensity score matching
    JEL: G21 G34
    Date: 2008
  8. By: Koetter, Michael; Poghosyan, Tigran
    Abstract: Banks continue to differ in many ways, for instance with respect to business models, growth strategies, or nancial health. Neglecting these differences confuses inefficiency with heterogeneity while sub-sample estimation prohibits efficiency comparisons across different samples. We use a latent class stochastic frontier model to estimate simultaneously multiple technology regimes and group membership probabilities. The latter are conditioned on six bank traits of German banks and we identify four signifficantly different technology regimes. Only small, retail focused banks exhibit cost inefficiencies, which are 5.4% on average and thus substantially lower compared to previous studies. We use technology regime specific cost parameters to measure competition with Lerner indices. Large, national universal banks and the smallest, most specialized banks exhibit the lowest level of competition. In turn, medium sized universal banks are both efficient and exhibit the lowest Lerner margins between 1994 and 2004. Das deutsche Bankwesen wird oft als Drei-Säulen-System bezeichnet, welches aus Sparkassen, Geschäfts-, und Genossenschaftsbanken besteht. Diese Systematik wird oft als geradezu natürliche Marktsegmentierung verstanden. Banken können sich jedoch auch zwischen und innerhalb der drei Säulen hinsichtlich anderer Kriterien unterscheiden, zum BeispielWachstumsstrategien, Stabilitätseigenschaften oder Geschäftsmodellen. Viele vergleichenden Studien definieren oftmals vorab Teilstichproben, um diese Unterschiede zu berücksichtigen. Jede Bildung von Bankengruppen beinhaltet jedoch unweigerlich eine zum Teil willkürliche Komponente und verhindert außerdem den Vergleich relativer Effizienzmaße zwischen Teilstichproben. In dieser Studie benutzen wir ein latent class frontier model (LCFM), um unterschiedliche Technologiegruppen empirisch zu schätzen anstatt sie zu definieren. Wir ermitteln die Wahrscheinlichkeit der Gruppenzugehörigkeit (GZW) je Bank in Abhängigkeit von sechs individuellen Charakteristika. Für jede Technologiegruppe leiten wir Wettbewerbsmaÿe ab und untersuchen deren Entwicklung zwischen 1994 und 2004.
    Keywords: Banks, competition, efficiency, latent class frontier, strategy
    JEL: G21 L1
    Date: 2008
  9. By: Memmel, Christoph
    Abstract: Interest income is the most important source of revenue for most of the banks. The aim of this paper is to assess the impact of different interest rate scenarios on the banks' interest income. As we do not know the interest rate sensitivity of real banks, we construct for each bank a portfolio with a similar composition of its assets and liabilities, called 'tracking bank'. We evaluate the effect of 260 historical interest rate shocks on the tracking banks of German savings banks and cooperative banks. It turns out that a sharp decrease in the steepness of the yield curve has the most negative impact on the banks' interest income. Der Zinsüberschuss ist für die meisten Banken die wichtigste Ertragsquelle. Stresstests in Bezug auf den Zinsüberschuss sind daher von wesentlicher Bedeutung. Die einzelnen Banken können solche Stresstests relativ einfach durchführen, weil ihnen die notwendigen Informationen (zukünftige Zahlungsströme und die Laufzeitstruktur der Forderungen und Verbindlichkeiten) vorliegen. Auÿenstehende dagegen müssen die Laufzeitstruktur der Forderungen und Verbindlichkeiten auf Grundlage von Aktienkursänderungen oder Jahresabschlüssen schätzen.
    Keywords: Interest Rate Risk, Stress Testing
    JEL: G12 G21
    Date: 2008
  10. By: Shawn A. Cole (Harvard Business School, Finance Unit)
    Abstract: In 1980, India nationalized its large private banks. This induced different bank ownership patterns across different towns, allowing credible identification of the effects of bank ownership on financial development, lending rates, and the quality of intermediation, as well as employment and investment. Credit markets with nationalized banks experienced faster credit growth during a period of financial repression. Nationalization led to lower interest rates and lower quality intermediation, and may have slowed employment gains in trade and services. Development lending goals were met, but these had no impact on the real economy.
    JEL: G21 O16
    Date: 2007–11
  11. By: Shawn A. Cole (Harvard Business School, Finance Unit)
    Abstract: This paper integrates theories of political budget cycles with theories of tactical electoral redistribution to test for political capture in a novel way. Studying banks in India, I find that government-owned bank lending tracks the electoral cycle, with agricultural credit increasing by 5-10 percentage points in an election year. There is significant cross-sectional targeting, with large increases in districts in which the election is particularly close. This targeting does not occur in non-election years, or in private bank lending. I show capture is costly: elections affect loan repayment, and election year credit booms do not measurably affect agricultural output.
    Date: 2008–07
  12. By: Emilio Barucci (Politecnico di Milano); Fabrizio Mattesini (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: The paper studies the motivations behind banks’ shareholding of non-financial firms using a panel of large Italian companies in the period 1994-2000. Empirical evidence shows that banks are shareholders of companies that are less profitable, have experienced slower growth, are more indebted and are endowed with collateral and have hard time to repay their debt out of current income. Banks are more likely to hold shares in companies they lend to. Overall the evidence suggests that there is complementarity between bank equity holding and lending. A plausible explanation is the shareholder-debtholder conflict, the evidence is weakly compatible with governance and information hypotheses.
    Keywords: Lending, cross shareholding, conflict of interest
    JEL: G21 G24
    Date: 2008–07–14
    Abstract: We suggest a new transmission channel of contagion on the interbank market, namely the liquidity channel. We apply this idea to the Russian banking sector and .nd that the liquidity channel contributes signi.cantly to a better understanding and prediction of actual interbank market crises. Interbank market stability Granger causes the interbank market struc- ture, while the opposite causality is rejected. This emboldens the case for viewing the interbank market structure as endogenous. The results corroborate the thesis that prudential regulation at individual bank level is insu¢ cient to prevent systemic crises. We demonstrate that liquidity injections of a classical LOLR can e¤ectively mitigate coordination fail- ures on the interbank market not only in theory, but also in practice. In short: liquidity matters.
    Keywords: interbank market stability, contagion, liquidity channel, lender of last resort, Russia
    JEL: C8 G21
    Date: 2008–06
  14. By: Chiara Pederzoli; Costanza Torricelli; Dimitrios P. Tsomocos
    Abstract: The introduction of Basel II has raised concerns about the potential impact of risk-sensitive capital requirements on the business cycle. Several approaches have been proposed to assess the procyclicality issue. In this paper, we adopt a general equilibrium model and conduct comprehensive analysis of different proposals. We set out a model that allows to evaluate different rating systems in relation to the procyclicality issue. Our model extends previous models by analysing the effects of different rating systems on banks’ portfolios (as in Catarineu-Rabell et al. 2005) and the contagion effects relevant to financial stability (as in Goodhart et al. 2005). The paper presents comparative statics results comparing a cycle-dependent and a neutral rating system from the point of view of banks profit maximization. Our results suggest that banks’ preferences about point in time or through the cycle rating systems depend on the banks’ characteristics and on the business cycle conditions in terms of expectations and realizations.
    Date: 2008
  15. By: Breuer, Thomas; Jandacka, Martin; Rheinberger, Klaus; Summer, Martin
    Abstract: In the work of the Basel Committee there has been a tradition of distinguishing market from credit risk and to treat both categories independently in the calculation of risk capital. In practice positions in a portfolio depend simultaneously on both market and credit risk factors. In this case, an approximation of the portfolio value function splitting value changes into a pure market risk plus pure credit risk component can lead to underestimation of risk. It can therefore not be argued that the current regulatory approach would always be conservative from a risk assessment perspective. We discuss this fact in the context of foreign currency loans and argue that under the traditional regulatory approach the true risk of a portfolio of foreign currency loans would be significantly underestimated. Unter der ersten Säule von Basel II wird das regulatorische Eigenkapital für Markt- und Kreditrisiko separat berechnet. Wenn wir vom operationalen Risiko absehen, errechnet sich das gesamte regulatorische Eigenkapital aus der Summe des Eigenkapitals, das für Markt- und Kreditrisiko zu hinterlegen ist. Diese Berechnung von Einzelkomponenten des regulatorischen Kapitals folgt in groben Zügen der Aufteilung in Bank- und Handelsbuch. In der traditionellen Denkweise ist Kreditrisiko hauptsächlich relevant in Bezug auf das Bankbuch während Marktrisiko als hauptsächlich relevant für das Handelsbuch angesehen wird. Diese Denkweise steht vermutlich auch hinter der weit verbreiteten Ansicht, dass die Aufsummierung von Kapitalkomponenten für einzelne Risikokategorien konservativ sei. Werden nämlich Bank- und Handelsbuch als Subportfolios des gesamten Bankportfolios gesehen, ergibt die Aufsummierung der einzelnen regulatorischen Kapitalkomponenten aufgrund eines Diversifikationsarguments eine obere Schranke für das regulatorische Eigenkapital. Wir behaupten, dass in vielen praktischen Risikobewertungssituationen eine Trennung von Markt- und Kreditrisiko anhand von Bank- und Handelsbuch nicht möglich ist. Wir zeigen, dass das Diversifizierungsargument aber nur dann gilt, wenn eine solche Aufteilung möglich ist. Nur dann, wenn das Bankportfolio separierbar ist in ein Subportfolio, das nur von Marktrisikofaktoren, nicht aber von Kreditrisikofaktoren abhängt und in ein Subportfolio, das nur von Kreditrisikofaktoren, nicht aber von Marktrisikofaktoren abhängt, ist das tatsächlich benötigte regulatorische Kapital kleiner oder gleich der Summe des Kapitals für Markt und Kreditrisiko. Ist diese Separation nicht möglich, kann unter dem Verfahren von Säule 1 das regulatorische Eigenkapital unterschätzt werden. Wir zeigen, dass in vielen Situationen Portfoliopositionen sowohl von Markt- als auch vom Kreditrisiko abhängen. In einer solchen Situation führt die traditionelle Berechnung des regulatorischen Eigenkapitals zu einer falschen Portfoliobewertung und als Konsequenz zu einer falschen Risikoeinschätzung. Wir zeigen anhand des Beispiels von Fremdwährungskrediten, dass diese Fehleinschätzung quantitativ bedeutend sein kann und zu einer schweren Unterschätzung des wahren Portfoliorisikos führt.
    Keywords: integrated analysis of market and credit risk, risk management, foreign currency loans, banking regulation
    JEL: C15 G20 G28 G32
    Date: 2008
  16. By: Ramón Faulí-Oller (Universidad de Alicante)
    Abstract: We consider whether banks should be allowed to set different ATM prices to their customers depending on whether they hold an account on the bank. In Massoud and Bernhardt (2002), without considering an interchange fee, a ban on price discrimination on ATM services increases total surplus. In the present model that considers an interchange fee, the effect of a ban on price discrimination depends on the way the interchange is fixed. If it is fixed to maximize the profits of banks, forbidding price discrimination reduces total surplus. However, if the interchange is fixed to maximize total surplus, banning price discrimination increases total surplus.
    Keywords: ATM, surcharge, foreign fee, interchange fee, collusion.
    JEL: L13 G21
    Date: 2008–03

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