New Economics Papers
on Banking
Issue of 2008‒09‒20
seven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Macro-model-based stress testing of Basel II capital requirements By Jokivuolle, Esa; Virolainen, Kimmo; Vähämaa, Oskari
  2. Are private banks more efficient than public banks ? Evidence from Russia By Alexei Karas; Koen Schoors; Laurent Weill
  3. Network models and financial stability By Nier, Erlend; Yang, Jing; Yorulmazer, Tanju; Alentorn, Amadeo
  4. An agent-based model of payment systems By Galbiati, Marco; Soramaki, Kimmo
  5. Exploring agent-based methods for the analysis of payment systems: a crisis model for StarLogo TNG By Luca Arciero; Claudia Biancotti; Leandro DÂ’Aurizio; Claudio Impenna
  6. Emerging East Asian Banking Systems Ten Years after the 1997/98 Crisis By Adams, Charles
  7. Global Financial Turmoil: Impact and Challenges for Asia's Financial Systems By Lee, Jong-Wha; Park, Cyn-Young

  1. By: Jokivuolle, Esa (Bank of Finland Research); Virolainen, Kimmo (Financial Markets and Statistics Department); Vähämaa, Oskari (Bank of Finland Research)
    Abstract: Basel II framework requires banks to conduct stress tests on their potential future minimum capital requirements and consider ‘at least the effect of mild recession scenarios’. We propose a stress testing framework for minimum capital requirements in which banks’ corporate credit risks are modeled with macroeconomic variables. We can thus define scenarios such as a mild recession and consider the resulting credit risk developments and consequent changes in minimum capital requirements. We also emphasize the importance of stress testing future minimum capital requirements jointly with credit losses. Our illustrative results based on Finnish data underline the importance of such joint modeling. We also find that stress tests based on scenarios envisaged by regulators are not likely to imply binding capital constraints on banks.
    Keywords: Basel II; capital requirements; credit risk; loan losses; stress tests
    JEL: C15 G21 G28 G33
    Date: 2008–09–02
  2. By: Alexei Karas; Koen Schoors; Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)
    Abstract: We study whether bank ownership is related to bank efficiency 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 the production process, the bank’s environment, the management’s risk preferences, the bank’s activity mix, size or the econometric approach. The evidence in fact suggests that domestic public banks are more efficient than domestic private banks and that the efficiency gap between these two types of banks is not lower after the introduction of deposit insurance in 2004. This may be due to increased switching costs or to the moral hazard effects of deposit insurance. The policy conclusion is that the efficiency of the Russian banking system may benefit more from increased levels of competition and higher access of foreign banks than from bank privatization.
    Keywords: Bank Efficiency; State Ownership; Foreign ownership; Russia.
    JEL: G21 P30 P34 P52
    Date: 2008
  3. By: Nier, Erlend (Bank of England); Yang, Jing (Bank of England); Yorulmazer, Tanju (Bank of England); Alentorn, Amadeo (University of Essex)
    Abstract: Systemic risk is a key concern for central banks charged with safeguarding overall financial stability. In this paper we investigate how systemic risk is affected by the structure of the financial system. We construct banking systems that are composed of a number of banks that are connected by interbank linkages. We then vary the key parameters that define the structure of the financial system - including its level of capitalisation, the degree to which banks are connected, the size of interbank exposures and the degree of concentration of the system - and analyse the influence of these parameters on the likelihood of contagious (knock-on) defaults. First, we find that the better capitalised banks are, the more resilient is the banking system against contagious defaults and this effect is non-linear. Second, the effect of the degree of connectivity is non-monotonic, that is, initially a small increase in connectivity increases the contagion effect; but after a certain threshold value, connectivity improves the ability of a banking system to absorb shocks. Third, the size of interbank liabilities tends to increase the risk of knock-on default, even if banks hold capital against such exposures. Fourth, more concentrated banking systems are shown to be prone to larger systemic risk, all else equal. In an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown. We finally consider how the risk of contagion might depend on the degree of asymmetry (tiering) inherent in the structure of the banking system. A number of our results have important implications for public policy, which this paper also draws out.
    Keywords: Networks; financial stability; contagion; liquidity risk.
    JEL: C63 C90 G28
    Date: 2008–04
  4. By: Galbiati, Marco (Bank of England); Soramaki, Kimmo (Helsinki University of Technology)
    Abstract: This paper lays out and simulates a multi-agent, multi-period model of an RTGS payment system. At the beginning of the day, banks choose how much costly liquidity to allocate to the settlement process. Then, they use it to execute an exogenous, random stream of payment orders. If a bank's liquidity stock is depleted, payments are queued until new liquidity arrives from other banks, imposing costs on the delaying bank. The paper studies the equilibrium level of liquidity posted in the system, performing some comparative statics and obtaining: i) a liquidity demand curve which links liquidity to delay costs and ii) insights on the efficiency of alternative system configurations.
    Keywords: Payment systems; liquidity; RTGS; agent-based modelling; learning; fictitious play.
    JEL: C79
    Date: 2008–08
  5. By: Luca Arciero (Bank of Italy); Claudia Biancotti (Bank of Italy); Leandro DÂ’Aurizio (Bank of Italy); Claudio Impenna (Bank of Italy)
    Keywords: agent-based modeling, payment systems, RTGS, liquidity, crisis simulation Abstract: This paper presents an exploratory agent-based model of a real time gross settlement (RTGS) payment system. Banks are represented as agents who exchange payment requests, which are settled according to a set of simple rules. The model features the main elements of a real-life system, including a central bank acting as liquidity provider, and a simplified money market. A simulation exercise using synthetic data of BI-REL (the Italian RTGS) predicts the macroscopic impact of a disruptive event on the flow of interbank payments. The main advantage of agent - based modeling is that we can dynamically see what happens to the major variables involved. In our reduced-scale system, three hypothetical distinct phases emerge after the disruptive event: 1) a liquidity sink effect is generated and the participants’ liquidity expectations turn out to be excessive; 2) an illusory thickening of the money market follows, along with increased payment delays; and, finally 3) defaulted obligations dramatically rise. The banks cannot staunch the losses accruing on defaults, even after they become fully aware of the critical event, and a scenario emerges in which it might be necessary for the central bank to step in as liquidity provider. The methodology presented differs from traditional payment systems simulations featuring deterministic streams of payments dealt with in a centralized manner with static behavior on the part of banks. The paper is within a recent stream of empirical research that attempts to model RTGS with agent – based techniques.
    JEL: C63 E47 G21
    Date: 2008–08
  6. By: Adams, Charles (National University of Singapore)
    Abstract: This paper looks at the development of the banking sector in emerging East Asia in the 10 years since the financial crisis of 1997/98. It suggests that the health of banking sectors in the region has improved substantially, with key changes including increased foreign ownership, movement into new business lines, greater transparency, and shifts toward household and real estate lending. In addition, supervisory and regulatory systems have been upgraded and have become more forward looking and risk based. However, it notes that major credit rating agencies continue to maintain relatively low ratings for many banks in the region, bank share prices have generally underperformed the market, and significant differences persist in the health of the region's banking systems. In addition, bank lending to private business has been weak across much of the region. Restructuring and reform are ongoing processes and will need to continue not only where further rehabilitation from the effects of the 1997/98 crisis is still required, but in other economies as well.
    Keywords: Financial crisis; restructuring and reform; credit rating; Basel core principles.
    JEL: G21 G24 G28 G32
    Date: 2008–05–01
  7. By: Lee, Jong-Wha (Asian Development Bank); Park, Cyn-Young (Asian Development Bank)
    Abstract: This paper examines the unfolding of the US subprime-generated turmoil and its potential spillover on emerging Asia's financial systems. The subprime mortgage mess has revealed key structural weaknesses in the evolution of modern credit markets. While emerging Asian financial markets have thus far suffered only limited impact, they remain open to further contagion given underlying weaknesses in the region's financial systems. Rapid financial globalization also poses new challenges as the region's largely unsophisticated banking and financial systems strive to keep up with the evolving financial environment and innovation. Policy priorities to foster regional financial stability include enhancing transparency and governance, improving risk management, strengthening regulation and supervision, and deepening and broadening financial systems, especially by developing local currency bond markets.
    Keywords: Trade and financial integration; global and regional integration; risk sharing; East Asia
    JEL: G15 G21 G28
    Date: 2008–06–01

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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