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on Banking |
| By: | Galina Hale; Joao A. C. Santos |
| Abstract: | Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks to use the private information they gain through monitoring to "hold-up" borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's credit-worthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, particularly for firms that are revealed to be safe. Our findings show that firms are able to borrow from banks at lower interest rates after they issue for the first time in the public bond market and that the magnitude of these savings is larger for safer firms. We further find that among safe firms, those that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating when they entered the bond market. Since more information is revealed at the time of the bond IPO on the former firms and since this information will increase competition from uninformed banks, these findings provide support for the hypothesis that banks price their informational monopoly. Finally, we find that while entering the public bond market may reduce these informational rents, it is costly to firms because they have to pay higher underwriting costs on their IPO bonds. Moreover, IPO bonds are subject to more underpricing than subsequent bonds when they first trade in the secondary bond market. |
| Keywords: | Corporate bonds ; Credit ratings |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-14&r=ban |
| By: | Rajkamal Iyer; Manju Puri |
| Abstract: | We use a unique, new, database to examine micro depositor level data for a bank that faced a run. We use minute-by-minute depositor withdrawal data to understand the effectiveness of deposit insurance, the role of social networks, and the importance of bank-depositor relationships in influencing depositor propensity to run. We employ methods from the epidemiology literature which examine how diseases spread to estimate transmission probabilities of depositors running, and the significant underlying factors. We find that deposit insurance is only partially effective in preventing bank runs. Further, our results suggest that social network effects are important but are mitigated by other factors, in particular the length and depth of the bank-depositor relationship. Depositors with longer relationships and those who have availed of loans from a bank are less likely to run during a crisis, suggesting that cross-selling acts not just as a revenue generator but also as a complementary insurance mechanism for the bank. Finally, we find there are long term effects of a solvent bank run in that depositors who run do not return back to the bank. Our results help understand the underlying dynamics of bank runs and hold important policy implications. |
| JEL: | E58 G21 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14280&r=ban |
| By: | Enrique G. Mendoza; Marco E. Terrones |
| Abstract: | This paper proposes a methodology for measuring credit booms and uses it to identify credit booms in emerging and industrial economies over the past four decades. In addition, we use event study methods to identify the key empirical regularities of credit booms in macroeconomic aggregates and micro-level data. Macro data show a systematic relationship between credit booms and economic expansions, rising asset prices, real appreciations, widening external deficits and managed exchange rates. Micro data show a strong association between credit booms and firm-level measures of leverage, firm values, and external financing, and bank-level indicators of banking fragility. Credit booms in industrial and emerging economies show three major differences: (1) credit booms and the macro and micro fluctuations associated with them are larger in emerging economies, particularly in the nontradables sector; (2) not all credit booms end in financial crises, but most emerging markets crises were associated with credit booms; and (3) credit booms in emerging economies are often preceded by large capital inflows but not by financial reforms or productivity gains. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:936&r=ban |
| By: | Lamont K. Black |
| Abstract: | The presence of private information about a firm can affect the competition among potential lenders. In the Sharpe (1990) model of information asymmetry among lenders (with the von Thadden (2004) correction), an uninformed outside bank faces a winner’s curse when competing with an informed inside bank. This paper examines the model’s prediction for observed interest rates at an inside vs. outside bank. Although the outside bank wins more bad firms than the inside bank, the winner’s curse also causes the outside rate conditional on firm type to be lower in expectation than the inside rate conditional on firm type. I show analytically that the expected interest rate at the outsider can be either higher or lower than the expected interest rate at the insider, depending on the net of these two effects. Under the assumption that the banks split the firms in a tie bid, a numerical solution shows that the outside expected interest rate is higher than the inside expected interest rate for high quality borrower pools, but the outside expected interest rate is lower for low quality borrower pools. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-36&r=ban |
| By: | Antoine Martin; James McAndrews |
| Abstract: | In this paper, we consider the case for an intraday market for reserves. We discuss the separate roles of intraday and overnight reserves and argue that an intraday market could be organized in the same way as the overnight market. We present arguments for and against a market for intraday reserves when the marginal cost of overnight reserves is positive. We also consider how reserves should be supplied when the cost of overnight reserves is zero. In that case, the distinction between overnight and intraday reserves becomes blurred, raising an important question: What is the role of the overnight market? |
| Keywords: | Bank reserves ; Money market ; Banks and banking, Central |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:337&r=ban |
| By: | Tobias Adrian; Hyun Song Shin |
| Abstract: | We study a contracting model for the determination of leverage and balance sheet size for financial intermediaries that fund their activities through collateralized borrowing. The model gives rise to two features: First, leverage is procyclical in the sense that leverage is high when the balance sheet is large. Second, leverage and balance sheet size are both determined by the riskiness of assets. For U.S. investment banks, we find empirical support for both features of our model, that is, leverage is procyclical, and both leverage and balance sheet size are determined by measured risks. In a system context, increased risk reduces the debt capacity of the financial system as a whole, giving rise to amplified de-leveraging by institutions by way of the chain of repo transactions in the financial system. |
| Keywords: | Financial leverage ; Financial risk management ; Assets (Accounting) ; Repurchase agreements ; Bank liquidity |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:338&r=ban |
| By: | Kenneth P. Brevoort; John D. Wolken |
| Abstract: | Deregulation and technological change have reduced the transactions costs that led to the dominance of local financial service suppliers, leading some to question if distance still matters in banking. This debate has been particularly acute in small business banking, where transactions costs are believed to be particularly high. This paper provides a detailed review of the literature on distance in banking markets, highlighting the reasons why geographic proximity is believed to be important and examining the changes that may have affected its importance. Relying on new data from the 2003 Survey of Small Business Finances, we examine how distances between small firms and their financial service suppliers changed over the 1993-2003 decade. Our analysis reveals that distances increased, though the extent varied substantially across financial services and supplier types. Generally, increases were observed in the early half of the decade, while distances declined in the following five years. There was also a trend towards less in person interaction between small firms and their suppliers of financial services. Nevertheless, most relationships remained local, with a median distance of 5 miles in 2003. The results suggest that distance, while perhaps not as tyrannical as in the past, remains an important factor in banking. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-34&r=ban |
| By: | Hirofumi Uchida; Gregory F. Udell; Nobuyoshi Yamori |
| Abstract: | Previous research suggests that loan officers play a critical role in relationship lending by producing soft information about SMEs. For the first time, we empirically confirm this hypothesis We also examine whether the role of loan officers differs from small to large banks as predicted by Stein (2002). While we find that small banks produce more soft information, the capacity and manner in which loan officers produce soft information does not seem to differ between large and small banks. This suggests that, although large banks may produce more soft information, they likely tend to concentrate their resources on transactions lending. |
| Keywords: | Banks and banking ; Bank loans ; Commercial credit |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-17&r=ban |
| By: | Ojo, Marianne |
| Abstract: | This paper traces developments from the inception of the 1988 Basel Capital Accord to its present form (Basel II). In highlighting the flaws of the 1988 Accord, an evaluation is made of the Basel Committee’s efforts to address such weaknesses through Basel II. Whilst considerable progress has been achieved, the paper concludes, based on one of the principal aims of these Accords, namely the management of risk, that more work is still required particularly in relation to hedge funds and those risks attributed to non bank financial institutions. |
| Keywords: | risk;management;regulation;banks;Basel;Committee |
| JEL: | K2 G21 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10051&r=ban |
| By: | Antoine Martin; James McAndrews |
| Abstract: | We study two designs for a liquidity-saving mechanism (LSM), a queuing arrangement used with an interbank settlement system. We consider an environment where banks are subjected to liquidity shocks. Banks must make the decision to send, queue, or delay their payments after observing a noisy signal of the shock. With a balance-reactive LSM, banks can set a balance threshold below which payments are not released from the queue. Banks can choose their threshold such that the release of a payment from the queue is conditional on the liquidity shock. With a receipt-reactive LSM, a payment is released from the queue if an offsetting payment is received, regardless of the liquidity shock. We find that these two designs have opposite effects on different types of payments. Payments that are costly to delay will be settled at least as early, or earlier, with a receipt-reactive LSM. Payments that are not costly to delay will always be delayed with a receipt-reactive LSM, while some of them will be queued and settled early with a balance-reactive LSM. We also show that parameter values will determine which system provides higher welfare. |
| Keywords: | Bank liquidity ; Interbank market ; Payment systems ; Bank liquidity |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:336&r=ban |
| By: | Sandra Rozo; Diego Vásquez; Dairo Estrada |
| Abstract: | This paper presents two versions of a spatial competition model for the banking sector. The first version, describes a framework that fol- lows closely Salop’s spatial competition model. This version is modi- fied in the second part by introducing the loan market and default risk probabilities for credit. Both theoretical approaches are analyzed em- pirically for the Colombian data,covering the period 1996-2005. Our results allow us to construct a deviation of the observed number of branches from an optimal number of branches for the banking system throughout the period of study. The deviation indicates that in the last years the number of branches is below the optimum which sug- gest that political measures should focus in increasing the number of branches in the country. Additionally, we found empirical evidence of market separability between the loan and deposit markets, and fi- nally, we were able to determine the signs of the relations between credit collateral, payment probability and interest rates. |
| Date: | 2008–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005001&r=ban |
| By: | Dean F. Amel; Arthur B. Kennickell; Kevin B. Moore |
| Abstract: | This paper uses data from the triennial waves of the Survey of Consumer Finances from 1992 to 2004 to examine changes in the use of financial services with implications for the definition of banking markets. Despite powerful technological and regulatory shifts over this period, households' banking markets overall remained largely local--the median distance to a provider of financial services remained under four miles. However, there has been rapid growth in the use of non-depository financial institutions over the period, particularly non-local ones. This increase occurred across a wide variety of demographic and other household classifications. The evidence on the clustering of financial services is mixed. Households showed a slightly greater tendency to buy multiple banking services from their primary provider of such services in 2004 than in 1992, while they also became much more likely to procure services from firms that were not their primary provider. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-35&r=ban |