New Economics Papers
on Banking
Issue of 2008‒08‒31
eleven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Herding and Bank Runs By Gu, Chao
  2. The Effects of Diversification on Banks’ Expected Returns By Dairo Estrada; Angela González Arbeláez; Javier Gutierréz Rueda
  3. How Much Do Banks Use Credit Derivatives to Hedge Loans? By Minton, Bernadette; Stulz, Rene; Williamson, Rohan
  4. Banking in transition countries By Bonin, John; Hasan, Iftekhar; Wachtel, Paul
  6. Geographic Deregulation and Commercial Bank Performance in US State Banking Markets By YongDong Zou; Stephen M. Miller; Bernard Malamud
  7. The Effect of Bank Mergers on Loan Prices: Evidence from the U.S. By Erel, Isil
  8. Organizational distance and use of collateral for business loans By Gabriel Jiménez; Vicente Salas-Fumás; Jesús Saurina
  10. Creditor Protection and Banking System Development in India By Simon Deakin; Panicos Demetriades; Gregory James
  11. Stress Testing Linkages between Banks in the Netherlands By van Lelyveld, Iman; Liedorp, Franka; Pröpper, Marc

  1. By: Gu, Chao (U of Missouri, Columbia)
    Abstract: Traditional models of bank runs do not allow for herding effects, because in these models withdrawal decisions are assumed to be made simultaneously. I extend the banking model to allow a depositor to choose his withdrawal time. When he withdraws depends on his liquidity type (patient or impatient), his private, noisy signal about the quality of the bank's portfolio, and the withdrawal histories of the other depositors. In some cases, the optimal banking contract permits herding runs. Some of these "runs" are efficient in that the bank is liquidated before the portfolio worsens. Others are not efficient; these are cases in which the herd is misled.
    JEL: C73
    Date: 2007–10
  2. By: Dairo Estrada; Angela González Arbeláez; Javier Gutierréz Rueda
    Abstract: In financial theory, the optimal allocation of assets and its relationship with profitability has been one of the main concerns; the question has always been if banks should focus or diversify their assets. In our case, we would like to answer this question focusing in diversification of the loan portfolio, presenting a theoretical model that considers the possible gains from diversification, while taking into account the effects of monitoring. Additionally, we present empirical evidence on this matter for the Colombian banking system. According to the model, we find that once the banks have chosen its optimal level of monitoring, expected return is always higher when the bank decides to focus. Additionally, the empirical results suggest that there are no possible gains form diversification in bank’s cost and that, on average, the effects of focusing the loan portfolio reduces bank’s return while showing positive effects of focusing on an specific sector.
    Date: 2008–08–14
  3. By: Minton, Bernadette (Ohio State U); Stulz, Rene; Williamson, Rohan (Georgetown U)
    Abstract: This paper examines the use of credit derivatives by US bank holding companies with assets in excess of one billion dollars from 1999 to 2005. Using the Federal Reserve Bank of Chicago Bank Holding Company Database, we find that in 2005 the gross notional amount of credit derivatives held by banks exceeds the amount of loans on their books. Only 23 large banks out of 395 use credit derivatives and most of their derivatives positions are held for dealer activities rather than for hedging of loans. The net notional amount of credit derivatives used for hedging of loans in 2005 represents less than 2% of the total notional amount of credit derivatives held by banks and less than 2% of their loans. Banks hedge less risky loans more than riskier ones. The banks are more likely to be net protection buyers if they have lower capital ratios, a lower net interest rate margin, engage in asset securitization, originate foreign loans, have more commercial and industrial loans in their portfolio, and have fewer agricultural loans. We conclude that the use of credit derivatives by banks to hedge loans is limited because of adverse selection and moral hazard problems and because of the inability of banks to use hedge accounting when hedging with credit derivatives. Our evidence raises important questions about the validity of the often-held view that the use of credit derivatives makes banks sounder.
    Date: 2008–01
  4. By: Bonin, John (BOFIT); Hasan, Iftekhar (BOFIT); Wachtel, Paul (BOFIT)
    Abstract: Modern banking institutions were virtually non-existent in the planned economies of central Europe and the former Soviet Union. In the early transition period, banking sectors began to develop during several years of macroeconomic decline and turbulence accompanied by repeated bank crises. However, governments in many transition countries learned from these tumultuous experiences and eventually dealt successfully with the accumulated bad loans and lack of strong bank regulation. In addition, rapid progress in bank privatization and consolidation took place in the late 1990s and early 2000s, usually with the participation of foreign banks. By 2005, the banking sectors in many transition countries had developed sufficiently to provide a wide range of services with solid bank performance. Recently, banks have switched their focus from lending to enterprises in a somewhat underdeveloped institutional environment to new collateralized lending to households, which accounts for much of the recent growth of credit in many transition countries.
    Keywords: transition banking; bank privatization; foreign banks; bank regulation; credit growth
    JEL: G21 P30 P34 P52
    Date: 2008–08–27
  5. By: Sherrill Shaffer
    Abstract: Using nationwide U.S. bank-level data from 2003-2007, this paper explores multiple dimensions of the financial performance of small business loans by means of statistical decompositions. I find systematic contrasts across small commercial loans of different sizes, which suggest dynamic changes for growing business borrowers as well as diverse challenges and opportunities for banks. The findings overall suggest that small business lending is neither riskier nor less profitable than larger commercial loans, with higher yields offsetting higher marginal costs, and better portfolio diversification offsetting higher chargeoff rates on the smallest commercial loans.
    Date: 2008–08
  6. By: YongDong Zou (Sany Group); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Bernard Malamud (University of Nevada, Las Vegas)
    Abstract: This paper examines the effects of geographical deregulation on commercial bank performance across states. We reach some general conclusions. First, the process of deregulation on an intrastate and interstate basis generally improves bank profitability and performance. Second, the macroeconomic variables -- the unemployment rate and real personal income per capita -- and the average interest rate affect bank performance as much, or more, than the process of deregulation. Finally, while deregulation toward full interstate banking and branching may produce more efficient banks and a healthier banking system, we find mixed results on this issue.
    Keywords: commercial banks, geographic deregulation, bank performance
    JEL: E5 G2
    Date: 2008–08
  7. By: Erel, Isil (Ohio State U)
    Abstract: Bank mergers will increase or decrease loan spreads, depending on whether the increased market power outweighs gains in operating efficiency. Using a proprietary loan-level data set for U.S. commercial banks, I find that, on average, mergers reduce loan spreads, and that the reduction is greater for acquirers with larger declines in operating costs post merger. Market overlap between the acquirer and the target leads to more potential for cost savings, which push spreads down. However, if the overlap is significant, the enhanced market power dominates the cost savings and, therefore, spreads increase. The findings are robust to using variation in dates of intrastate banking deregulation as an exogenous instrument for the timing of the in-market mergers. Furthermore, contrary to what might be expected, bigger acquirers do not impose less favorable terms on small businesses. Indeed, the average reduction in spreads is significant for small loans, showing that small borrowers typically pay lower interest rates to banks that have expanded during the previous few years through mergers.
    JEL: G21
    Date: 2007–12
  8. By: Gabriel Jiménez (Banco de España); Vicente Salas-Fumás (Universidad de Zaragoza); Jesús Saurina (Banco de España)
    Abstract: This paper examines the effect of organizational distance (i.e. distance between the headquarters of the bank that grants a loan and the location of the borrower) on the use of collateral for business loans by Spanish banks on the basis of the recent lender based theory of collateral [Inderst and Mueller (2007)]. We find that, for the average borrower, the use of collateral is higher for loans granted by local lenders than by distant ones. We also show that the difference in the likelihood of collateral in loans granted by local lenders, relative to distant lenders, is higher among older and larger firms and among firms with longer duration of the lender-borrower relationship, than, respectively, younger, smaller firms and shorter duration. We also find that banks use lending technologies that are different for near and for distant firms, in response to organizational diseconomies.
    Keywords: bank lending technologies, distance, collateral, organizational diseconomies
    JEL: G21 L22
    Date: 2008–08
  9. By: Arroyo, Martín R.
    Abstract: This paper highlights the importance of the information efficiency in the banking sector as a way to ensure his correct operation as financial intermediary and the correct functioning of the economy in general. The problems of information in the banks distort their relation with the financing demand and especially with the sector of the SMEs, what really means an important obstacle for the smooth operation of any market system. The analysis is centred in the relative size of the financial institutions, the generation of different types of information and the way how it affects the sector of the SMEs. By means of empirical evidence we will show how the greater size of the banks has influence on the creation of information systems that are not well adapted for some segments of the demand or even they do not generate information at all.
    JEL: G14 O16 D82
    Date: 2007–09
  10. By: Simon Deakin; Panicos Demetriades; Gregory James
    Abstract: We use a new legal dataset tracking changes in creditor protection law over several decades to study the impact of legal reforms on banking system development in India. Cointegration analysis is used to show that the strengthening of creditor rights in relation to the enforcement of security interests in the 1990s and 2000s led to an increase in bank credit. We show that the change in the law was not endogenous to trends in stock market development and GDP per capita, and that the direction of causation ran from legal reform to banking development, rather than the reverse.
    Keywords: creditor rights; legal origin; banking development; India
    JEL: G21 G38 K22 O16
    Date: 2008–08
  11. By: van Lelyveld, Iman; Liedorp, Franka; Pröpper, Marc
    Abstract: Assessing the stability of the financial sector is becoming more common in many countries. This paper presents two useful approaches, applied to the Netherlands. First we discuss the results of a contagion analysis of the Dutch interbank market. We use various ways to measure linkages between banks and find that the interbank market is fairly robust. We then turn to a network analysis of payment flows between Dutch banks. This analysis provides us with a better understanding of the network structure in this type of market. We specifically look at the effect of the recent turmoil on the payment network and find no significant changes.
    Keywords: interbank; payment; systemic risk; financial stability; network; topology
    JEL: G1 G2 E5
    Date: 2008–08–04

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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