New Economics Papers
on Banking
Issue of 2008‒10‒21
six papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Macroeconomics without the LM: A Post-Keynesian Perspective By Thomas I. Palley
  2. Optimization Heuristics for Determining Internal Rating Grading Scales By Marianna Lyra; Johannes Paha; Sandra Paterlini; Peter Winker
  4. Households’ Indebtedness and Financial Fragility By Tullio Jappelli; Marco Pagano; Marco di Maggio
  5. Caught in the US Subprime Meltdown 2007/2008 : Germany Loses Its Wallet but Escapes Major Harm By Stefan Kooths; Matthias Rieger
  6. Will the TARP Succeed? Lessons From Japan By Takeo Hoshi; Anil K Kashyap

  1. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)
    Abstract: Romer (2000) provides an alternative model to the AS/AD and IS/LM models that abandons the LM schedule by having the short-term interest rate set by the central bank. His framework acknowledges the critical role of the central bank in determining short-term interest rates, which moves mainstream macroeconomics closer to Post Keynesian monetary theory. The current paper presents a Post Keynesian construction of macroeconomics without an LM schedule. Rather than describing the financial sector in terms of an exogenously determined interest rate set by the central bank, the model unpacks financial markets by fully specifying a banking sector. The key analytic feature of the Post Keynesian approach is to replace the money market with the loan market. That makes transparent the macroeconomic significance of the loan market and bank behavior, and generates an endogenous money supply driven by bank lending. If banks become more optimistic over the
    Keywords: bank lending, credit, endogenous money, loan market.
    JEL: E12 E40
    Date: 2008
  2. By: Marianna Lyra; Johannes Paha; Sandra Paterlini; Peter Winker
    Abstract: Basel II imposes regulatory capital on banks related to the default risk of their credit portfolio. Banks using an internal rating approach compute the regulatory capital from pooled probabilities of default. These pooled probabilities can be calculated by clustering credit borrowers into different buckets and computing the mean PD for each bucket. The clustering problem can become very complex when Basel II regulations and real-world constraints are taken into account. Search heuristics have already proven remarkable performance in tackling this problem as complex as it is. A Threshold Accepting algorithm is proposed, which exploits the inherent discrete nature of the clustering problem. This algorithm is found to outperform alternative methodologies already proposed in the literature, such as standard k-means and Differential Evolution. Besides considering several clustering objectives for a given number of buckets, we extend the analysis further by introducing new methods to determine the optimal number of buckets in which to cluster banks' clients.
    Keywords: credit risk, probability of default, clustering, Threshold Accepting, Differential Evolution
    Date: 2008–09
  3. By: Geraint Johnes; Vivi Maltezou
    Abstract: Using personnel records from two firms in the banking industry, duration models are estimated to examine separations in the context of Great Britain and Greece. We find that it is sustained, rather than instantaneous, performance that is linked to separations. In common with some earlier studies, we find qualified support for a u-shaped relationship between performance and separations, but only in the case of the British data. Both of the banks under investigation experienced substantial reorganisation activity over the time period considered, and we find that the year following this was characterised by increased separation propensities. While most of our findings are consistent across the firms in the two countries studied, we find that single men are more likely than their female counterparts to quit in Britain, but less likely to quit in Greece. We offer some suggestions about why this should be the case.
    Keywords: duration modelling, labour turnover, personnel economics
    Date: 2008
  4. By: Tullio Jappelli (Università di Napoli Federico II, CSEF, and CEPR); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR); Marco di Maggio (MIT)
    Abstract: The paper studies the determinants of international differences in household indebtedness, and inquires whether indebtedness is associated with increased “financial fragility”, as measured by the sensitivity of household arrears and insolvencies to the amount of lending and to macroeconomic shocks. It also investigates whether financial fragility is affected by institutional factors, such as information sharing arrangements, judicial efficiency and individual bankruptcy regulation. We address these issues by tapping three data sets: (i) cross-country data on household indebtedness; (ii) European panel data for households lending and arrears; and (iii) time series data for household lending and insolvencies in the U.K., the U.S.A. and Germany. Overall, the analysis underscores the importance of institutional arrangements in determining the size and fragility of household credit markets.
    Keywords: household debt, financial fragility, arrears, insolvency, information sharing, judicial efficiency, bankruptcy law
    JEL: D14 G21 G28 G33
    Date: 2008–10–15
  5. By: Stefan Kooths; Matthias Rieger
    Abstract: The ongoing financial crisis so far cost the German financial sector 38 billion Euros due to losses on its mortgage-related subprime bank exposures. This paper looks for the impact of these losses on the real sector of the economy. First, the financial sector is looked at as part of the overall macro economy in order to identify the direct impact of the write-offs and devaluations of financial assets on value-added and employment in the financial industry. In the second part of the paper the financial sector's role as enabler of real investment is analyzed. So far, there is no significant evidence that the credit creation capacity of the German banking system as a whole was negatively affected (as indicated by stable money multiplier and base equity ratio values). In particular, the flow of credit to non-financial businesses remains intact despite heavy turmoil within the financial sector. Also, the overall interest rate for corporate lending did hardly in-crease. Econometrically, a switching disequilibrium model and a market-clearing approached were setup to test for excess demand during the crisis and any general impact of the crisis on the credit market respectively. The statistical tests turned out to be little helpful for quantifying any major effect. We conclude that despite the substantial financial losses there is no major negative spill-over from the banking sector to the real economy in Germany.
    Keywords: Subprime crisis, credit market, financial sector, value-added
    Date: 2008
  6. By: Takeo Hoshi; Anil K Kashyap
    Abstract: The U.S. government is hiring asset managers to purchase up to $700 billion of toxic real estate securities that are the center of the current credit crisis. Buying up assets, if done properly, might address the collective under-capitalization that is the fundamental problem plaguing the financial system. But, experience with financial crises in other countries suggests that success is by no means guaranteed. Japan was the largest other country where the banks were seriously undercapitalized and where asset purchases were a critical part of the government's response to the problem. The U.S. bailout plan is similar to the Japanese approach in that it does not clearly identify the capital problem as critical and instead proposes using AMCs to remove distressed assets from bank balance sheets. When Japan used AMCs, their effectiveness was limited in part because they did not purchase enough assets. AMCs did not help recapitalization, either, and Japan had to come up with different mechanisms to use public funds for recapitalization. Both these risks are also present for the U.S. plan.
    JEL: E44 G18 G28 G38
    Date: 2008–10

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