New Economics Papers
on Banking
Issue of 2008‒12‒01
fourteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The Use of Blanket Guarantees in Banking Crises By Luc Laeven; Fabian Valencia
  2. Banks' Precautionary Capital and Credit Crunches By Fabian Valencia
  3. The Effects of Size on Local Banks' Funding Costs By Oliver Vins; Thomas Bloch
  4. Models for Moody’s bank ratings By Peresetsky , Anatoly; Karminsky, Alexander
  5. An MCDA-based Approach for Creditworthiness Assessment By Marco Corazza; Stefania Funari; Federico Siviero
  6. The Effects of Bank Mergers on Small Business Lending in Germany By Thomas Bloch
  7. The Quiet Life Hypothesis in Banking - Evidence from German Savings Banks By Oliver Vins; Michael Koetter
  8. How Politics Influence State-owned Banks - the Case of German Savings Banks By Oliver Vins
  9. Islamic Banks: Profit sharing, equity, leverage lure and credit control By Hasan, Zubair
  10. Dissynergies of Mergers among Local Banks By Thomas Bloch
  11. Liquidity matters: Evidence from the Russian interbank market By Kares, Alexei; Schoors , Koen; Lanine, Gleb
  12. How corruption affects bank lending in Russia By Weill, Laurent
  13. Technical efficiency in Botswana’s financial institutions: a DEA approach By Moffat, Boitnmelo; Valadkhani, Abbas
  14. Commodity murabaha: does it violate Islamic norms? Note By Hasan, Zubair

  1. By: Luc Laeven; Fabian Valencia
    Abstract: In episodes of significant banking distress or perceived systemic risk to the financial system, policymakers have often opted for issuing blanket guarantees on bank liabilities to stop or avoid widespread bank runs. In theory, blanket guarantees can prevent bank runs if they are credible. However, guarantee could add substantial fiscal costs to bank restructuring programs and may increase moral hazard going forward. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees are successful in reducing liquidity pressures on banks arising from deposit withdrawals. However, banks' foreign liabilities appear virtually irresponsive to blanket guarantees. Furthermore, guarantees tend to be fiscally costly, though this positive association arises in large part because guarantees tend to be employed in conjunction with extensive liquidity support and when crises are severe.
    Keywords: Banking crisis , Loan guarantees , Risk management , Liquidity , Bank credit , Financial systems , Moral hazard ,
    Date: 2008–10–28
  2. By: Fabian Valencia
    Abstract: Periods of banking distress are often followed by sizable and long-lasting contractions in bank credit. They may be explained by a declined demand by financially impaired borrowers (the conventional financial accelerator) or by lower supply by capital-constrained banks, a "credit crunch". This paper develops a bank model to study credit crunches and their real effects. In this model, banks maintain a precautionary level of capital that serves as a smoothing mechanism to avert disruptions in the supply of credit when hit by small shocks. However, for larger shocks, highly persistent credit crunches may arise even when the impulse is a one time, non-serially correlated event. From a policy perspective, the model justifies the use of public funds to recapitalize banks following a significant deterioration in their capital position.
    Keywords: Banking crisis , Bank credit , External shocks , Liquidity management , Financial risk , Economic models ,
    Date: 2008–10–28
  3. By: Oliver Vins; Thomas Bloch
    Abstract: Motivated by the recent discussion of the declining importance of deposits as banks' major source of funding we investigate which factors determine funding costs at local banks. Using a panel data set of more than 800 German local savings and cooperative banks for the period from 1998 to 2004 we show that funding costs are not only driven by the relative share of comparatively cheap deposits of bank's liabilities but among other factors especially by the size of the bank. In our empirical analysis we find strong and robust evidence that, ceteris paribus, smaller banks exhibit lower funding costs than larger banks suggesting that small banks are able to attract deposits more cheaply than their larger counterparts. We argue that this is the case because smaller banks interact more personally with customers, operate in customers' geographic proximity and have longer and stronger relationships than larger banks and, hence, are able to charge higher prices for their services. Our finding of a strong influence of bank size on funding costs is also in an international context of great interest as mergers among small local banks - the key driver of bank growth - are a recent phenomenon not only in European banking that is expected to continue in the future. At the same time, net interest income remains by far the most important source of revenue for most local banks, accounting for approximately 70% of total operating revenues in the case of German local banks. The influence of size on funding costs is of strong economic relevance: our results suggest that an increase in size by 50%, for example, from EUR 500 million in total assets to EUR 750 million (exemplary for M&A transactions among local banks) increases funding costs, ceteris paribus, by approximately 18 basis points which relates to approx. 7% of banks' average net interest margin.
    JEL: G21 G34 L25 C23
    Date: 2008–11
  4. By: Peresetsky , Anatoly (BOFIT); Karminsky, Alexander (BOFIT)
    Abstract: The paper presents an econometric study of the two bank ratings assigned by Moody's Investors Service. According to Moody’s methodology, foreign-currency long-term deposit ratings are assigned on the basis of Bank Financial Strength Ratings (BFSR), taking into account “external bank support factors” (joint-default analysis, JDA). Models for the (unobserved) external support are presented, and we find that models based solely on public information can reasonably well approximate the ratings. It appears that the observed rating degradation can be explained by growth of the banking system as a whole. Moody’s has a special approach for banks in developing countries and Russia in particular. The models help reveal the factors that are important for external bank support.
    Keywords: banks; ratings; rating model; risk evaluation; early warning system
    JEL: G21 G32
    Date: 2008–11–21
  5. By: Marco Corazza (Department of Applied Mathematics, University of Venice); Stefania Funari (Department of Applied Mathematics, University of Venice); Federico Siviero (Cohen & Company, Subsidiary of London)
    Abstract: In this paper we propose a deterministic methodology for creditworthiness evaluation based on the Multi-Criteria Decision Analysis (MCDA) method known as MUlticriteria RAnking MEthod (MURAME). This approach allows to rank the firms according to their credit risk characteristics and to sort them into a prefixed number of homogeneous creditworthiness groups. Moreover, the methodology allows to estimate ex-post proxies of the probabilities of default and of the probabilities of transition. Then, we apply the proposed approach to check its capability to evaluate the creditworthiness in real cases; in particular, we consider the case of an important north eastern Italian bank.
    Keywords: Multi-Criteria Decision Analysis (or MCDA), MUlti-criteria RAnking MEthod (or MURAME), credit risk assessment
    JEL: C02 G20 G32
    Date: 2008–11
  6. By: Thomas Bloch
    Abstract: In this paper, we examine the impact of mergers among German savings banks on the extent to which these savings banks engage in small business lending. The ongoing consolidation in the banking industry has sparked concerns about the continuous availability of credit to small businesses which has been further fueled by empirical studies that partly confirm a reduction in small business lending in the aftermath of mergers. However, using a proprietary data set of German savings banks we find strong evidence that in Germany merging savings banks do not significantly change the extent to which they lend to small businesses compared to prior to the merger or compared to the contemporaneous lending by non-merging banks. We investigate the merger related effects on small business lending in Germany from a bank-level perspective. Furthermore, we estimate small business lending and its continuous adjustment process simultaneously using recent General Method of Moments (GMM) techniques for panel data as proposed by Arellano and Bond (1991).
    JEL: G21 G28 G34 C23
    Date: 2008–11
  7. By: Oliver Vins; Michael Koetter
    Abstract: The "quiet life hypothesis (QLH)" posits that banks enjoy the advantages of market power in terms of foregone revenues or cost savings. We suggest a unied approach to measure competition and efficiency simultaneously to test this hypothesis. We estimate bank-specific Lerner indices as measures of competition and test if cost and profitt efficiency are negatively related to market power in the case of German savings banks. We find that both market power and average revenues declined among these banks between 1996 and 2006. While we find clear evidence supporting the QLH, estimated effects of the QLH are small from an economical perspective.
    JEL: E42 E52 E58 G21 G28
    Date: 2008–11
  8. By: Oliver Vins
    Abstract: This paper is one of the first to analyse political influence on state-owned savings banks in a developed country with an established financial market: Germany. Combining a large dataset with financial and operating figures of all 457 German savings banks from 1994 to 2006 and information on over 1,250 local elections during this period we investigate the change in business behavior around elections. We find strong indications for political influence: the probability that savings banks close branches, lay-off employees or engage in merger activities is significantly reduced around elections. At the same time they tend to increase their extraordinary spendings, which include support for social and cultural events in the area, on average by over 15%. Finally, we find that savings banks extend significantly more loans to their corporate and private customers in the run-up to an election. In further analyses, we show that the magnitude of political influence depends on bank specific, economical and political circumstances in the city or county: political influence seems to be facilitated by weak political majorities and profitable banks. Banks in economically weak areas seem to be less prone to political influence.
    JEL: D72 D78 G21 G28 H70
    Date: 2008–11
  9. By: Hasan, Zubair
    Abstract: This paper deals with three basic issues in Islamic banking: First, how the profit sharing ratios in mudaraba contracts are in principle determined? Second, do the actual sharing ratios result in an equitable division of profit between the banks on the one hand and the depositors on the other? Finally, can the central bank use the profit sharing ratio along with the rate of interest for credit control so as to mitigate leverage lure in a dual banking system? The paper provides an explanation as answer to the first question. The response to the second is negative but positive to the third. It suggests a policy tool the central banks can possibly use to prevent the sort of credit turmoil as the world is facing today in 2008 because of leverage lure. The tool may also help improve return to investors and thus establish some equity in the distribution of profits.
    Keywords: Key words: Islamic banking; Two-tier mudaraba; Profit sharing ratio; Division of profit; Leverage lure
    JEL: G38 G24 G21
    Date: 2008–09–14
  10. By: Thomas Bloch
    Abstract: In this paper, we investigate how bank mergers affect bank revenues and present empirical evidence that mergers among banks have a substantial and persistent negative impact on merging banks’ revenues. We refer to merger related negative effects on banks’ revenues as dissynergies and suggest that they are a result of organizational diseconomies, the loss of customers and the temporary distraction of management from day-to-day operations by effecting the merger. For our analyses we draw on a proprietary data set with detailed financials of all 457 regional savings banks in Germany, which have been involved in 212 mergers between 1994 and 2006. We find that the negative impact of a merger on net operating revenues amounts to 3% of pro-forma consolidated banks’ operating profits and persists not only for the year of the merger but for up to four years post-merger. Only thereafter mergers exhibit a significantly superior performance compared to their respective pre-merger performance or the performance of their non-merging peers. The magnitude and persistence of merger related revenue dissynergies highlight their economic relevance. Previous research on post-merger performance mainly focuses on the effects from mergers on banks’ (cost) efficiency and profitability but fails to provide clear and consistent results. We are the first, to our knowledge, to examine the post-merger performance of banks’ net operating revenues and to empirically verify significant negative implications of mergers for banks’ net operating revenues. We propose that our finding of negative merger related effects on banks’ operating revenues is the reason why previous research fails to show merger related gains.
    JEL: G21 G34 L25 C23
    Date: 2008–11
  11. By: Kares, Alexei (BOFIT); Schoors , Koen (BOFIT); Lanine, Gleb (BOFIT)
    Abstract: We suggest an additional transmission channel of contagion on the interbank market - the liquidity channel. Examining the Russian banking sector, we and that the liquidity channel contributes significantly to understanding and predicting interbank market crises. Interbank market stability Granger causes the interbank market structure, while the opposite causality is rejected. This bolsters the view that the interbank market structure is endogenous. The results corroborate the thesis that prudential regulation at the individual bank level is insufficient to prevent systemic crises. We demonstrate that liquidity injections of a classical lender of last resort can effectively mitigate coordination failures on the interbank market both in theory and practice. Apparently, liquidity does matter.
    Keywords: interbank market stability; contagion; liquidity channel; lender of last resort; Russia
    JEL: C80 G21
    Date: 2008–11–21
  12. By: Weill, Laurent (BOFIT)
    Abstract: The aim of this study is to investigate the impact of corruption on bank lending in Russia. This issue is of major interest in order to understand the causes of financial underdevelopment and the effects of corruption in Russia. We use regional measures of corruption and bank-level data to perform this investigation. Our main estimations show that corruption hampers bank lending in Russia. We investigate whether this negative role of corruption is influenced by the degree of bank risk aversion, but find no effect. The detrimental effect of corruption is only observed for loans to households and firms, in opposition to loans to government. Additional controls confirm the detrimental impact of corruption on bank lending. Therefore, our results provide motivations to fight corruption to favor bank lending in Russia.
    Keywords: corruption; bank; Russia; financial development; economic transition
    JEL: G20 K40 P20
    Date: 2008–11–21
  13. By: Moffat, Boitnmelo (University of Wollongong); Valadkhani, Abbas (University of Wollongong)
    Abstract: This paper examines technical and pure technical efficiencies of ten major financial institutions in Botswana for each year during the period 2001-2006 using data envelopment analysis. In order to obtain more robust and reliable results, the sensitivity of our efficiency indices were put into test by choosing three alternative approaches in specifying the mix of inputs and outputs. The empirical results indicate that: (a) no matter which approach and year are taken into consideration, Baroda and FNB (which are both foreign banks) and BSB (which is a publicly owned institution) are consistently among the most efficient institutions and BDC, ABC and NDB are the least efficient ones; (b) the most efficient banks are either small or large institutions in terms of their asset sizes; (c) due to the small sample size, the evidence of a relationship between the age of institutions and their technical efficiencies remains inconclusive. One can conclude that financial institutions can further enhance efficiency by adopting self-service technologies such as telephone and internet banking which can substantially reduce their service delivery costs.
    Keywords: Botswana, Technical efficiency, Data envelopment analysis, financial institutions.
    JEL: C14 C61 G21 G2
    Date: 2008
  14. By: Hasan, Zubair
    Abstract: Recently commodity murabaha has run into disrepute due to court decisions going against the use of this instrument in Islamic banks. This brief note argues that at fault has been the structure of contracts and the excessive use of the instrument. In principle, commodity murabaha is doubtless rooted deep in the Islamic Shari’ah.
    Keywords: Key words: Islamic finance; commodity murabaha; Time value in price; Shari’ah intention and spirit
    JEL: G21
    Date: 2008–11–10

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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