New Economics Papers
on Banking
Issue of 2008‒10‒07
thirteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Empirical analysis of corporate credit lines By Gabriel Jiménez; José A. López; Jesús Saurina
  2. Measuring bank capital requirements through Dynamic Factor analysis By Andrea Cipollini; Giuseppe Missaglia
  3. Credit Crises, Risk Management Systems and Liquidity Modelling By Frank Milne
  4. The Role of Bank Capital in the Propagation of Shocks By Césaire Meh; Kevin Moran
  5. Bank Failures: The Limitations of Risk Modelling By Patrick Honohan
  6. Risk Management and the Costs of the Banking Crisis By Patrick Honohan
  7. Internet Banking in Europe: a comparative analysis. By Francesca Arnaboldi; Peter Claeys
  8. Banking Performance in South-Eastern Europe During the Interwar Period By Zarko Lazarevic
  9. Banking Structure and Credit Growth in Central and Eastern European Countries By Burcu Aydin
  10. Integrating with Their Feet: Cross-Border Lending at the German-Austrian Border By Jarko Fidrmuc; Christa Hainz
  11. The Evolution of Bulgarian Banks' Efficiency During the Twenties: A Dea Approach By Nikolay Nenovsky; Martin Ivanov; Gergana Mihaylova
  12. Market Structure and the Diffusion of E-Commerce: Evidence from the Retail Banking Industry By Jason Allen; Robert Clark; Jean-François Houde
  13. Market Discipline and Deposit Insurance in Russia By Peresetsky , Anatoly

  1. By: Gabriel Jiménez (Banco de España); José A. López (Federal Reseve Bank of San Francisco); Jesús Saurina (Banco de España)
    Abstract: Since bank credit lines are a major source of corporate funding, we examine the determinants of credit line usage with a comprehensive database of Spanish corporate credit lines. A line’s default status is a key factor driving its usage, which increases as a firm’s financial condition worsens. Line usage decreases by roughly 10% for each year of its life. Lender characteristics, such as the number and length of a firm’s banking relationships, are found to affect a firm’s usage decisions, and credit line usage is found to be inversely related to macroeconomic conditions.
    Keywords: credit lines, firm default, bank lending, exposure at default
    JEL: E32 G18 M21
    Date: 2008–10
  2. By: Andrea Cipollini; Giuseppe Missaglia
    Abstract: In this paper, using industry sector stock returns as proxies of firm asset values, we obtain bank capital requirements (through the cycle). This is achieved by Montecarlo simulation of a bank loan portfolio loss density. We depart from the Basel 2 analytical formula developed by Gordy (2003) for the computation of the economic capital by, first, allowing dynamic heterogeneity in the factor loadings, and, also, by accounting for stochastic dependent recoveries. Dynamic heterogeneity in the factor loadings is introduced by using dynamic forecast of a Dynamic Factor model fitted to a large dataset of macroeconomic credit drivers. The empirical findings show that there is a decrease in the degree of Portfolio Credit Risk, once we move from the Basel 2 analytic formula to the Dynamic Factor model specification.
    Keywords: Dynamic Factor Model, Forecasting, Stochastic Simulation, Risk Management, Banking
    JEL: C32 C53 E17 G21 G33
    Date: 2008–02
  3. By: Frank Milne (Queen's Unversity)
    Abstract: This paper explores the theoretical structure and implementation of Risk Management systems in Financial Institutions. It uses the current credit crisis as a test of the model's deficiencies. The paper suggests possible modifications to these systems to allow for "liquidity" in asset trading. Also the paper links these modifications to the theory of banking and financial crises and suggests possible ways in which regulators and central banks may exploit or modify RM systems to test for systemic risks.
    Keywords: Credit Risk, Risk Management, Liquidity
    JEL: G18 G21 L13
    Date: 2008–09
  4. By: Césaire Meh; Kevin Moran
    Abstract: Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking sector, which we interpret as episodes of distress in financial markets. We show that, following adverse shocks, economies whose banking sectors remain well-capitalized experience smaller reductions in bank lending and less pronounced downturns. Bank capital thus increases an economy's ability to absorb shocks and, in doing so, affects the conduct of monetary policy. The model is also used to shed light on the ongoing debate over bank capital regulation.
    Keywords: Transmission of monetary policy; Financial institutions; Financial system regulation and policies; Economic models
    JEL: E44 E52 G21
    Date: 2008
  5. By: Patrick Honohan
    Abstract: Overconfidence on the part of bankers and regulators in mechanical risk management models is an important and distinctive driver of bank failures in the current crisis. This paper illustrates the process by drawing on brief case studies of a handful of the biggest failures and losses. There are significant implications for a more holistic and less mechanical approach to risk management and prudential regulation.
    Date: 2008–10–01
  6. By: Patrick Honohan
    Abstract: The 2007-8 banking crisis in the advanced economies has exposed deficiencies in risk management and prudential regulation approaches that rely too heavily on mechanical, albeit sophisticated, risk management models. These have aggravated private and economic losses, while perhaps protecting the taxpayer from bearing quite as high a share of the direct costs as in typical crises of the past. Policymakers and bankers need to recognize the limitations of rules-based regulation and restore a more discretionary and holistic approach to risk management.
    Date: 2008–09–29
  7. By: Francesca Arnaboldi (Dipartimento di Economia, Università di Milano); Peter Claeys (Faculty of Economics, University of Barcelona)
    Abstract: A key strategic issue for banks is the implementation of internet banking. The ‘click and mortar’ model that complements classical branch banking with online facilities is competing with pure internet banks. The objective of this paper is to compare the performance of these two models across countries, so as to examine the role of differences in the banking system and technological progress. A fuzzy cluster analysis on the performance of banks in Finland, Spain, Italy and the UK shows that internet banks are hard to distinguish from banks that follow a click and mortar strategy; country borders are more important. We therefore explain bank performance by a group of selected bank features, country-specific economic and IT indicators over the period 1995-2004. We find that the strategy of banking groups to incorporate internet banks reflects some competitive edge that these banks have in their business models. Extensive technological innovation boosts internet banking.
    Keywords: Banks, Internet, Innovation.
    Date: 2008–09
  8. By: Zarko Lazarevic (Institute of Contemporary History, Foreign Research Division, Ljubljana, Slovenia)
    Abstract: In the framework of the broader political and economic development of the individual states on Balkan Peninsula the author has made the comparison between the performance of the banking sector in Yugoslavia, Romania, Greece and Bulgaria. The analysis was carried out on the sample of balance sheets for the most important joint stock banking companies in the respective countries in the years 1928 and 1929 which represent the peak of the activity and performance of banks in region. In the following years the whole region sank in the abyss of the Great Depression of the thirties when the issue of banking performance was considered on the different way. One of the common features of the banks in region is certainly the prevailing role of short-term resources and a huge imbalance in interest incomes and incomes from other bank transactions. This fact does not only testify to high margins and effective interest rates, but also to a limited portfolio in bank services and other transactions, which was the consequence of the social and economic environment that banks had to operate in.
    Keywords: South-eastern Europe; Banks; Banking; Balance sheets.
    JEL: G21 N24
    Date: 2008–07
  9. By: Burcu Aydin
    Abstract: Recent developments have increased questions about vulnerabilities in Central and Eastern European Countries (CEE) that are experiencing credit booms. This paper analyzes the role of foreign-owned banks in these credit booms. The results show that the CEE countries depend on foreign banks, and these foreign banks depend on interbank funding. Lending by foreign banks seems driven by economic growth and interest rate margins. This lending appears independent of economic but not financial conditions in the foreign bank's home country.
    Date: 2008–09–15
  10. By: Jarko Fidrmuc; Christa Hainz (University of Munich; University of Munich)
    Abstract: The current economic policy discussion on financial integration in the European Union concentrates on cross-border mergers. We study the impact of cross-border lending in a theoretical model where banks acquire either hard or soft information on borrowing firms and predict that the closer firms are to the border the more likely banks are to offer them cross-border loans. This hypothesis is confirmed in the ifo Business Climate Survey that reports the perceptions of German firms on banks’ lending behavior between 2003 and 2006. In contrast to the policy of harmonization, differences in bank regulations may provide incentives for cross-border lending. Thus, we show that financial integration may take place from the bottom up.
    Keywords: Financial Integration, SMEs, Banking Supervision, Business Surveys, Threshold Analysis
    JEL: G18 G21 C25
    Date: 2008–08
  11. By: Nikolay Nenovsky (Bulgarian National Bank, University of Orleans and ICER); Martin Ivanov (Institute of History, Sofia); Gergana Mihaylova (Agency for Economic Analysis and Forecasting, Sofia)
    Abstract: This paper studies the dynamics of the bank efficiency in Bulgaria in the years 1923 and 1928. In the course of research several interdependencies were detected, related mainly to the reaction of different types of banks to the financial crisis and the financial stabilization. Official bank balance sheets were used as well as the profit and loss statements of 50 Bulgarian credit institutions. After their classification into subgroups different variations of DEA (data envelopment analysis), in particular the intermediation approach, were applied to the banks’ financial positions. The DEA overcomes several deficiencies in the traditional accounting measurement of bank efficiency, which has made it very popular in latest literature. To our knowledge this method has not been applied so far to historical data.
    Keywords: Bulgarian monetary history; Banking system; Âanking efficiency; DEA modelling.
    JEL: N24 G21
    Date: 2008–07
  12. By: Jason Allen; Robert Clark; Jean-François Houde
    Abstract: This paper studies the role that market structure plays in affecting the diffusion of electronic banking. Electronic banking (and electronic commerce more generally) reduces the cost of performing many types of transactions for firms. The full benefits for firms from adoption, however, only accrue once consumers begin to perform a significant share of their transactions online. Since there are learning costs to adopting the new technology firms may try to encourage consumers to go online by affecting the relative quality of the online and offline options. Their ability to do so is a function of market structure. In more competitive markets, reducing the relative attractiveness of the offline option involves the risk of losing customers (or potential customers) to competitors, whereas, this is less of a concern for a more dominant firm. We develop a model of branch-service quality choice with switching costs meant to characterize the trade-off banks face when rationalizing their network between technology penetration and business stealing. The model is solved numerically and we show that the incentive to lower branch-service quality and drive consumers into electronic banking is greater in more concentrated markets and for more dominant banks. We find support for the predictions of the model using a panel of household survey data on electronic payment usage as well as branch location data, which we use to construct measures of branch quality.
    Keywords: Financial institutions; Market structure and pricing
    JEL: D14 D4 G21 L1
    Date: 2008
  13. By: Peresetsky , Anatoly (BOFIT)
    Abstract: The paper presents a study of Russian banks' interest rates on household deposits during the formation period of the deposit insurance system. It is shown that market discipline weakened after deposit insurance was effectively in place.
    Keywords: deposit insurance; market discipline; deposit interest rates
    JEL: G21 G28 P37
    Date: 2008–10–02

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