New Economics Papers
on Banking
Issue of 2008‒09‒13
nine papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bank competition and financial stability By Berger, Allen N.; Klapper, Leora F.; Turk-Ariss, Rima
  2. Bank involvement with SMEs : beyond relationship lending By de la Torre, Augusto; Soledad Martinez Peria, Maria; Schmukler , Sergio L.
  3. Bank competition and financial stability : friends or foes ? By Beck, Thorsten
  4. Bank regulations are changing : for better or worse ? By Barth, James R.; Caprio, Gerard, Jr.; Levine, Ross
  5. Who gets the credit ? and does it matter ? household vs. firm lending across countries By Beck, Thorsten; Buyukkarabacak, Berrak; Rioja, Felix; Valev, Neven
  6. Credit risk mitigation and SMEs bank financing in Basel II : the case of the Loan Guarantee Associations By Clara Cardone Riportella; Antonio Trujillo Ponce; Maria Jose Casasola
  7. Bank competition - When is it Goog? By Christa Hainz;
  8. The World Bank's early reflections on development : a development institution or a bank? By Alacevich, Michele
  9. ""Credit Crunch"?: Details from Borrower Quarterly Financial Data about What Actually Happened in Japan during 1997-1999"(in Japanese) By Yoshiro Miwa

  1. By: Berger, Allen N.; Klapper, Leora F.; Turk-Ariss, Rima
    Abstract: Under the traditional"competition-fragility"view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative"competition-stability"view, more market power in the loan market may result in greater bank risk as the higher interest rates charged to loan customers make it more difficult to repay loans and exacerbate moral hazard and adverse selection problems. But even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. The authors test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. The results suggest that - consistent with the traditional"competition-fragility"view - banks with a greater degree of market power also have less overall risk exposure. The data also provide some support for one element of the"competition-stability"view - that market power increases loan portfolio risk. The authors show that this risk may be offset in part by higher equity capital ratios.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,,Markets and Market Access
    Date: 2008–08–01
  2. By: de la Torre, Augusto; Soledad Martinez Peria, Maria; Schmukler , Sergio L.
    Abstract: The"conventional wisdom"in academic and policy circles argues that, while large and foreign banks are generally not interested in serving SMEs, small and niche banks have an advantage in doing so because they can overcome SME opaqueness through relationship lending. This paper shows that there is a gap between this view and what banks actually do. Banks perceive SMEs as a core and strategic business and seem well positioned to expand their links with SMEs. The recent intensification of bank involvement with SMEs in various emerging markets documented in this paper is neither led by small or niche banks nor highly dependent on relationship lending. Rather, all types of banks are catering to SMEs and larger, multiple-service banks have in fact a comparative advantage in offering a wide range of products and services on a large scale, through the use of new technologies, business models, and risk management systems.
    Keywords: Banks&Banking Reform,Access to Finance,,Financial Intermediation,Debt Markets
    Date: 2008–06–01
  3. By: Beck, Thorsten
    Abstract: Theory makes ambiguous predictions about the relationship between market structure and competitiveness of the banking system and banking sector stability. Empirical studies focusing on individual countries provide similarly ambiguous results, while cross-country studies point mostly to a positive relationship between competition and stability in the banking system. Where liberalization and unfettered competition have resulted in fragility, this has been mostly the consequence of regulatory and supervisory failures. The advantages of competition for an efficient and inclusive financial system are strong, and regulatory and supervisory policies should focus on an incentive-compatible environment for banking rather than try to fine-tune market structure or the degree of competition.
    Keywords: Banks&Banking Reform,Access to Finance,Emerging Markets,Debt Markets,Labor Policies
    Date: 2008–06–01
  4. By: Barth, James R.; Caprio, Gerard, Jr.; Levine, Ross
    Abstract: This paper presents new and official survey information on bank regulations in 142 countries and makes comparisons with two earlier surveys. The data do not suggest that countries have primarily reformed their bank regulations for the better over the last decade. Following Basel guidelines many countries strengthened capital regulations and official supervisory agencies, but existing evidence suggests that these reforms will not improve bank stability or efficiency. While some countries have empowered private monitoring of banks, consistent with the third pillar of Basel II, there are many exceptions and reversals along this dimension.
    Keywords: Banks&Banking Reform,Access to Finance,,Debt Markets,Emerging Markets
    Date: 2008–06–01
  5. By: Beck, Thorsten; Buyukkarabacak, Berrak; Rioja, Felix; Valev, Neven
    Abstract: While the theoretical and empirical finance literature has focused almost exclusively on enterprise credit, about half of credit extended by banks to the private sector in a sample of 45 developing and developed countries is to households. The share of household credit in total credit increases as countries grow richer and financial systems develop. Cross-country regressions, however, suggest a positive and significant impact on gross domestic product per capita growth only of enterprise but not household credit. These two findings together partly explain why previous studies have found a small or insignificant effect of finance on growth in high-income countries. In addition, countries with a lower share of manufacturing, a higher degree of urbanization, and more market-oriented financial systems have a higher share of household credit. It is thus mostly socio-economic trends that determine credit composition, while policies influencing banking market structure and regulatory policies are not robustly related to credit composition.
    Keywords: Access to Finance,Banks&Banking Reform,Economic Theory&Research,,Debt Markets
    Date: 2008–07–01
  6. By: Clara Cardone Riportella; Antonio Trujillo Ponce; Maria Jose Casasola
    Abstract: The objective of this paper is to analyse the impact of the techniques foreseen in the Basel Agreement II (BII) for mitigating the risk of default on bank loans to small and medium enterprises (SMEs). In particular, we will conduct an analysis of the effect of the guarantees that the Loan Guarantee Association (LGA) offer to the SMEs on the assignment of capital requirements of the financial entities under BII. At the same time, the study will examine the effect of this guarantee on the credit risk premium that the financial entities should charge their clients, and whether this foreseeable decrease in the interest rates applicable to the SMEs is compensated by the cost of the guarantee. The results show that, considering that the cost of the LGA guarantee in Spain is around 0.68%, it will be advantageous for an SME with the annual sales of less than or equal to €5 million to request this guarantee whenever the probability of default (PD) of the LGA is <1.1%, if the approach utilised by the financial entity is the Internal Ratings-Based (IRB) and the SME is considered as corporate; however, if the SME is included in a regulatory retail portfolio, then the limit for the PD of the LGA decreases to 0.71%. On the other hand, when the approach utilised is the Standardised one, then will be profitable for an SME treated as retail to request this guarantee whenever the PD of the LGA is <3.35% (3.95% for corporate exposures).
    Keywords: Credit risk mitigation, Bank financing of SMEs, Basel II, Loan Guarantee Association
    JEL: G21 G28 G32
    Date: 2008–09
  7. By: Christa Hainz; (University of Munich, Akademiestr. 1/III, 80799 Munich, Germany; )
    Abstract: The effects of bank competition and institutions on credit markets are usually studied separately although both factors are interdependent. We study the effect of bank competition on the choice of contracts (screening versus collateralized credit contract) and explicitly capture the impact of the institutional environment. Most importantly, we show that the effects of bank competition on collateralization, access to finance, and social welfare depend on the institutional environment. We predict that firms’ access to credit increases in bank competition if institutions are weak but bank competition does not matter if they are well-developed.
    Keywords: Strategic Experimentation, Two-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium
    JEL: D82 G21 K00
    Date: 2008–09
  8. By: Alacevich, Michele
    Abstract: Until the late 1960s, the World Bank presented itself as an institution devoted to making sound and directly productive project loans. Yet, during its very early years, some discussions developed inside the Bank regarding the possibility of issuing different types of loans, namely (i) loans aimed at tackling social issues ("social loans"), and (ii) loans aimed at providing foreign currency to address disequilibria in the balance of payments ("impact loans"). This paper brings together historical analysis and theories of organization development to study the housing issue as a case in point. The analysis reveals that the Bank was unwilling to lend for housing programs not because these were not sound - in fact, they were - but because they were geared toward achieving social welfare objectives and were not directly linked to productive investment projects, such as dams, power stations, and railroads. This early decision had a significant impact on the subsequent development of the Bank's view of policy-making: it locked the institution into a particular lending pattern, and deprived it of important intellectual resources. It was not until the late 1960s that the Bank began to take social issues into consideration, rather late compared with other multilateral institutions.
    Keywords: Banks&Banking Reform,,Access to Finance,Corporate Law,Public Sector Corruption&Anticorruption Measures
    Date: 2008–07–01
  9. By: Yoshiro Miwa (Faculty of Economics, University of Tokyo)
    Abstract: After "the Burst of the Bubble," Japan entered a long period of stagnation in 1990s, which observers call "the Lost Decade." This "Lost Decade" ended with "the Financial Crisis," after which the Koizumi Cabinet aggressively pursued a policy designed to reduce the amount of "bad loans" held by banks. Some observers now argue that other governments should learn from Japan's successful experience in their own fight against "the sub-prime loan" problem. What actually occurred in Japan during the Lost Decade and after, however, is neither well-known nor well-understood. This is particularly true of "the Financial Crisis" period. Observers have focused on the bad loans, which could cause some big banks to fail, and assumed that their failure would cause grave turmoil in the financial markets. During "the Financial Crisis" the government did pour large amounts of public funds into bank rescues, arguing that a "credit crunch" would otherwise seriously hurt the economy. And although the government took time to enforce the policy, the Japanese economy soon began to recover. Thus, "the Financial Crisis" period has become a turning point both for Japan's policy toward bank regulation and for related policy debates. Using firm-level quarterly financial data, this paper investigates the details of what actually occurred in firm financing behavior during 1994-2000. We focus particularly on how seriously, when, in what way, and where a "credit crunch" affected firm behavior. What would happen to the conventional wisdom about the Lost Decade if the troubles in the financial institutions and the related policies during the period had no serious effect on the real economy? Yet nowhere do we find a clear indication of any serious "credit crunch." In particular, we find no indication of such a phenomena from the 4th quarter of 1997 to the 1st quarter of 1999. We use quarterly financial data on about 6,000 non-financial firms with over \600 million in paid-in capital from Hojin Kigyo Tokei Kiho (Corporate Enterprise Quarterly Statistics) of the Ministry of Finance. We conclude with questions to various sides of the conventional view, including the purported success of Japanese policy toward the Financial Crisis and bank bad-loan reduction, the debate on the causes and consequences of the Lost Decade, and the postwar policy discipline consistently applied to financial regulation.
    Date: 2008–08

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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