New Economics Papers
on Banking
Issue of 2008‒11‒11
thirteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Credit risk with semimartingales and risk-neutrality By Jesús P. Colino; Winfried Stute
  2. Financial (in)stability, supervision and liquidity injections : a dynamic general equilibrium approach By Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
  3. Systemic risk and liquidity in payment systems By Gara M. Afonso; Hyun Song Shin
  4. Los beneficios del liderazgo en el mercado de depósitos bancarios: Una comparación entre Cournot y Stackelberg By Ruiz-Porras, Antonio
  5. To acquire, or to compete? An entry dilemna By GABSZEWICZ, Jean; LAUSSEL, Didier; TAROLA, Ornella
  6. Bank Lending, Housing and Spreads By Aqib Aslam; Emiliano Santoro
  7. Did the market signal impending problems at Northern Rock? An analysis of four financial instruments By Maximilian J. B. Hall; Paul Hamalainen; Adrian Pop; Barry Howcroft
  8. Banking and Finance in South - Eastern Europe: The Albanian Case By Kliti Ceca; Kelmend Rexha; Elsida Orhan
  9. Which Bank is the "Central" Bank? An Application of Markov Theory to the Canadian Large Value Transfer System By Morten Bech; James T. E. Chapman; Rod Garratt
  10. Modelling Bank Loan LGD of Corporate and SME Segments: A Case Study By Radovan Chalupka; Juraj Kopecsni
  11. Central Bank Involvement in Banking Crises in Latin America By Luis Ignacio Jácome
  12. Banking in Turkey: History and Evolution By Yuksel Gormez
  13. Banking and Central Banking in Pre-WWII Grecce: Money and Currency Developments By Sophia Lazaretou

  1. By: Jesús P. Colino; Winfried Stute
    Abstract: A no-arbitrage framework to model interest rates with credit risk, based on the LIBOR additive process, and an approach to price corporate bonds in incomplete markets, is presented in this paper. We derive the no-arbitrage conditions under different conditions of recovery, and we obtain new expressions in order to estimate the probabilities of default under risk-neutral measure.
    Keywords: Credit-risk, Semimartingales, Interest-rate modelling
    Date: 2008–11
  2. By: Gregory de Walque (National Bank of Belgium, Research Department; University of Namur); Olivier Pierrard (Central Bank of Luxembourg; Catholic University of Louvain); Abdelaziz Rouabah (Central Bank of Luxembourg)
    Abstract: This paper develops a dynamic stochastic general equilibrium model with interactions between an heterogeneous banking sector and other private agents. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbankmarket. Our aim is to understand the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real data and used for simulations. We show that liquidity injections reduce financial instability but have ambiguous effects on output fluctuations. The model also confirms the partial equilibrium literature results on the procyclicality of Basel II.
    Keywords: DSGE, Banking sector, Default risk, Supervision, Money
    JEL: E13 E20 G21 G28
    Date: 2008–10
  3. By: Gara M. Afonso; Hyun Song Shin
    Abstract: We study liquidity and systemic risk in high-value payment systems. Flows in high-value systems are characterized by high velocity, meaning that the total amount paid and received is high relative to the stock of reserves. In such systems, banks rely heavily on incoming funds to finance outgoing payments, necessitating a high degree of coordination and synchronization. We use lattice-theoretic methods to solve for the unique fixed point of an equilibrium mapping and conduct comparative statics analyses on changes to the environment. We find that banks attempting to conserve liquidity cause an increase in the demand for intraday credit and, ultimately, a disruption of payments. Additionally, we find that when a bank is identified as vulnerable to failure and other banks choose to cancel payments to that bank, there are systemic repercussions for the whole financial system.
    Keywords: Velocity of money ; Bank liquidity ; Payment systems
    Date: 2008
  4. By: Ruiz-Porras, Antonio
    Abstract: We analyze the effects of leadership in banking when oligopolistic competition exists in the market of deposits. We assess such effects by comparing the performance of banking systems that only differ on their strategic interactions. Specifically, we compare the outcomes associated to strategies of the Cournot and Stackelberg types (symmetric competition and leader-follower strategies). Our main findings suggest that there are private and social benefits associated to leadership. The results suggest that it induces high levels of deposits, of returns and of consumption for long-term depositors. Moreover, leadership enhances financial stability and efficiency in banking.
    Keywords: banks; leadership; deposits; benefits; stability
    JEL: D43 D92 G21
    Date: 2008–10–06
  5. By: GABSZEWICZ, Jean (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); LAUSSEL, Didier; TAROLA, Ornella
    Abstract: In this paper we address the following question: is it more profitable, for an entrant in a differentiated market, to acquire an existing firm than to compete? We illustrate the answer by considering competition in the banking sector.
    Keywords: Vertical differentiation, entry, banking competition
    JEL: G34 L13 L22
    Date: 2008–05
  6. By: Aqib Aslam (University of Cambridge); Emiliano Santoro (Department of Economics, University of Copenhagen)
    Abstract: The framework presented in this paper takes its cue from recent financial events and attempts to develop a tractable framework for policy analysis of macro-linkages, in particular a first attempt at the integration of an independent profit-maximising banking sector that lends to and borrows from agents in the economy, and through which changes in the monetary policy rate by the central bank are transmitted. The inter-linkages between housing and the role of the banking sector in the transmission of monetary policy is emphasized. Two competing effects are highlighted: (i) a financial accelerator channel, due to the presence of collateralized borrowers, and (ii) a banking attenuator effect, which crucially arises from the spread in interest rates caused by the introduction of monopolistically competitive financial intermediaries. We show how the classical amplification mechanism explored in models of private borrowing between collaterally-constrained 'impatient' households and unconstrained 'patient' households, such as those put forward by Kiyotaki and Moore (1997) and Iacoviello (2005), is counteracted by the banking attenuator effect, given an endogenous steady state spread between loan and savings rates. Attenuation occurs therefore even under the assumption of flexible interest rates. This effect is further magnified when sluggishness in the interest rate-setting mechanism is introduced.
    Keywords: bank lending; housing; liquidity; credit; staggered interest rate-setting; collateral constraints
    JEL: E32 E43 E44 E51 E52 E58
    Date: 2008–05
  7. By: Maximilian J. B. Hall (Dept of Economics, Loughborough University); Paul Hamalainen (University of Essex, Colchester, Essex, England, CO4 3SQ); Adrian Pop (University of Nantes, 44322 Nantes Cedex 3, France); Barry Howcroft (Loughborough University, Loughborough, Leicestershire, England, LE11 3TU)
    Abstract: The academic literature has regularly argued that market discipline can support regulatory authority discipline to monitor banking sector stability. This includes, amongst other things, using forward-looking market prices to identify those credit institutions that are most at risk of failure. The paper’s key aim is to analyse whether market investors signalled potential problems at Northern Rock in advance of the bank announcing that it had negotiated emergency lending facilities at the Bank of England in September 2007. A further aim of the paper is to examine the signalling qualities of four financial market instruments so as to explore both the relative and individual qualities of each. Therefore, the paper’s findings contribute to the market discipline literature on using market data to identify bank risk-taking and enhancing supervisory monitoring. In addition, the paper tests for evidence of an implicit “too-big-to-fail” policy in UK banking. Our analysis suggests that private market participants did signal impending financial problems at Northern Rock in advance of the bank announcing that it had negotiated emergency lending facilities. These findings lend some empirical support to proposals for the supervisory authorities to use market information more extensively to improve the identification of troubled banks.
    Keywords: Banking regulation, bank failures, market discipline, early warning signals.
    JEL: G14 G21 G28
    Date: 2008–10
  8. By: Kliti Ceca (Bank of Albania); Kelmend Rexha (Bank of Albania); Elsida Orhan (Bank of Albania)
    Abstract: This paper aims to present the main developments of banking and finance in Albania in a historical perspective. This historical overview might help to better understand not only the great difficulties and obstacles the country faced in the past but also the successes it achieved. It is widely known that the financial system, especially the banking sector, is considered as very important as it serves as a catalyst for the economic development of the country. And this is because financial depth determines economic growth. The paper also highlights the future challenges that the Albanian financial system will face within the context of the country’s European integration and the EU harmonization of the financial policies.
    Keywords: Historical perspectives; Financial system; Bank-dominated system; Panics; EU integration
    JEL: G21 G22 N24
    Date: 2008–07
  9. By: Morten Bech; James T. E. Chapman; Rod Garratt
    Abstract: We use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). Along the way we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for explaining why observed daily distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks.
    Keywords: Payment, clearing, and settlement systems
    JEL: C11 E50 G20
    Date: 2008
  10. By: Radovan Chalupka (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Juraj Kopecsni (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The aim of this paper is to propose a methodology to estimate loss given default (LGD) and apply it to a set of micro-data of loans to SME and corporations of an anonymous commercial bank from Central Europe. LGD estimates are important inputs in the pricing of credit risk and the measurement of bank profitability and solvency. Basel II Advance IRB Approach requires internally estimates of LGD to calculate risk-weighted assets and to estimate expected loss. We analyse the recovery rate dynamically over time and identify the efficient recovery period of a workout department. Moreover, we focus on the appropriate choice of a discount factor by introducing risk premium based on a risk level of collaterals. We apply statistical methods to estimate LGD and test empirically its determinants. Particularly, we analyse generalised linear models using symmetric logit and asymmetric log-log link functions for ordinal responses as well as for fractional responses. For fractional responses we employ two alternatives, a beta inflated distribution and a quasi-maximum likelihood estimator. We find out that the main drivers of LGD are a relative value of collateral, a loan size as well as a year of the loan origination. Different models provided similar results. As for the different links in more complex models, log-log models in some cases perform better, implying an asymmetric response of the dependent variable.
    Keywords: credit risk, bank loan, loss given default, LGD, recovery rate, fractional responses, ordinal regression, quasi-maximum likelihood estimator
    JEL: G21 G28
    Date: 2008–11
  11. By: Luis Ignacio Jácome
    Abstract: This paper reviews the nature of central bank involvement in 26 episodes of financial disturbance and crises in Latin America from the mid-1990s onwards. It finds that, except in a handful of cases, large amounts of central bank money were used to cope with large and small crises alike. Pouring central bank money into the financial system generally derailed monetary policy, fueled further macroeconomic unrest, and contributed to simultaneous currency crises, thereby aggravating financial instability. In contrast, when central bank money issuance was restricted and bank resolution was timely executed, financial disturbances were handled with less economic cost. However, this strategy worked provided appropriate institutional arrangements were in place, which highlights the importance of building a suitable framework for preventing and managing banking crises.
    Keywords: Working Paper , South America , Latin America , Central America , Central banks , Financial crisis , Banking crisis ,
    Date: 2008–05–29
  12. By: Yuksel Gormez (Central Bank of Turkey)
    Abstract: The early stages of banking and finance in Turkey were one of its brightest periods, even though it was the toughest because of lack of capital and unfavourable initial conditions. The finance and banking conception was quite rational and potential crises were eliminated through careful choices. In the following years, boom and bust conditions dominated financial services provision with a crisis in every decade under different economic policy frameworks. Since 2001, European convergence has been leading the way and one may argue that Turkish banking and finance is ready for the challenges of the 21st century, supported by fast-increasing foreign participation that has increased capital adequacy ratios.
    Keywords: Money; Banking and finance; Turkey.
    JEL: E4 G1
    Date: 2008–07
  13. By: Sophia Lazaretou (Bank of Greece)
    Abstract: This paper aims to trace the history of central banking in pre-WWII Greece. To this end, we first study the country’s financial structure and its process of financial development. Several indices of financial development have been assessed and their evolvement has been studied. The country’s financial development had passed through different stages. Financial depth had increased in the turn of the 19th century and expanded further in the 1920s. However, on the basis of behavioural indices, banks were shown to be poorly asset-liability managed. They were also suffered by capital adequacy and were highly leveraged. The analysis of the composition of money supply and its long run behaviour suggests that monetary base variations were the proximate determinants of money supply movements, whereas money multiplier had a minimum impact. Central banking in pre-WWII Greece is viewed with regard to the monetary policy strategy, the monetary policy implementation framework and state interventions. The balance sheet of the Bank of Greece reveals an excessive focus on the chosen monetary policy strategy of a currency peg. Domestic credit was controlled via liquidity-providing standing facilities, either discounts or advances. Moreover, Bank’s considerable involvement in government re-financing might indicate that state interventions were considerable.
    Keywords: Central banking; Financial intermediation; Money.
    JEL: E50 N23
    Date: 2008–07

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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