New Economics Papers
on Banking
Issue of 2008‒12‒07
twelve papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Do Credit Constraints Matter more for College Dropout Entrepreneurs? By Werner, Arndt
  2. Network embeddedness, specialization choices and performance in investment banking industry By Farina, Vincenzo
  3. Are Spectral Estimators Useful for Implementing Long-Run Restrictions in SVARs? By Nils Herger;
  4. Duration of syndication process and syndicate organization By Christophe J. Godlewski
  5. Credit market and prediction of its future development By Vodová, Pavla
  6. More myths about the financial crisis of 2008 By Tatom, John
  7. Which bank is the "central" bank? an application of Markov theory to the Canadian Large Value Transfer System By Morten L. Bech; James T. E. Chapman; Rod Garratt
  8. Establishment and analysis of the credit risk profile in a Romanian retail bank By Popescu, Ramona Florina; Clipici, Emilia
  9. How Corruption Affects Bank Lending in Russia By Laurent Weill
  10. The Federal Home Loan Bank System: the lender of next-to-last resort? By Adam B. Ashcraft; Morten L. Bech; W. Scott Frame
  11. The Institutional Environment and the Banking - Growth Nexus: Theory and Investigation for MENA By Nabi, Mahmoud Sami; Suliman, Mohamed Osman
  12. Banks’ centrality in corporate interlock networks: evidences in Italy By Farina, Vincenzo

  1. By: Werner, Arndt
    Abstract: Start-ups and their respective market partners are faced with severe problems of asymmetric information due to their lack of prior production history and reputation. Given this situation, it is most likely that outside financiers will not be informed about the potential gains, losses, and risks of the new venture. In our paper, we study how banks screen the abilities of the entrepreneurs. We argue that specific characteristics of the educational history of individuals signal their quality as founders. Namely, we expect banks to also use “college dropout” as an indicator when deciding to extend credit to a founder. We empirically test our hypotheses using a dataset of 189 German start-ups collected in 1998/99. Our hypothesis is borne out by the data. Applying ordered probit techniques we find that college dropouts have more difficulties to obtain the credit they need in the beginning of their start-up than those without college dropout experience.
    Keywords: adverse selection; financial constraints; entrepreneurship; education
    JEL: G14 D82 M13 M21
    Date: 2008–11–01
  2. By: Farina, Vincenzo
    Abstract: The idea that network structure and embeddedness affect firms’ competitive behavior and performance is not new both in network literature and in strategic management literature. This study recognizes that the possibility to fully exploit network opportunities is depending on firm specialization choices. By analyzing network embeddedness within the European investment banking industry, I find that banks enhance performance by having a central position in their network and that specialization reduces bank’s benefits of having a central position in the network.
    Keywords: Investment Banking; IPOs; Underwriting syndicates; Social network analysis.
    JEL: G24 M10
    Date: 2008
  3. By: Nils Herger (Study Center Gerzensee);
    Abstract: Using count data on the number of bank failures in US states during the 1960 to 2006 period, this paper endeavors to establish how far sources of economic risk (recessions, high interest rates, in ation) or differences in solvency and branching regulation can explain some of the fragility in banking. Assuming that variables are predetermined, lagged values provide instruments to absorb potential endogeneity between the number of bank failures and economic and regulatory conditions. Results suggest that bank failures are not merely self-fulfilling prophecies but relate systematically to inflation as well as to policy changes in banking regulation. Furthermore, in terms of statistical and economic significance, the distribution and development of bankruptcies across US states depends crucially on past bank failures suggesting that contagion provides an important channel through which banking crises emerge.
    Date: 2008–11
  4. By: Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)
    Abstract: What is the influence of syndicate organization on the duration of a loan syndication process? We answer this question using the survival analysis methodology on a sample of loans to borrowers from 59 countries. We find that syndicate size, concentration, experience, reputation, and national diversity clearly matters for the duration of a syndication process and therefore for borrower satisfaction regarding the speed of obtaining the necessary funding. A syndicate organization adapted to specific agency problems of syndication, with numerous, reputable, and experienced arrangers retaining a larger portion of the loan reduces the duration. The latter is also shorter when more lenders come from the same country as the borrower. These effects are more pronounced when the borrower has a low reputation on the syndicated lending market and when his opacity is stronger.
    Keywords: Syndicated loan, syndication process, syndicate organiza- tion, agency costs, experience, reputation, nationality, survival analysis.
    JEL: F30 G15 G21 G32 C41
    Date: 2008
  5. By: Vodová, Pavla
    Abstract: This study focuses on the credit market in the Czech Republic. The aim of this paper is to carry out an econometric investigation of supply and demand on the credit market and to predict the development in the future. The first part of the paper briefly characterizes the credit market in the Czech Republic. As a result of banking crisis, the growth rate of credits provided to private sector has decreased sharply and is recovering only gradually. It has caused many problems especially to nonfinancial companies. Next chapter discuss the essence of disequilibrium model. Credit markets are very often characterized by the fact that the interest rate does not clean the market and the discrepancy between credit demand and credit supply occurs. The fact that it is impossible to measure credit demand and credit supply quantities can be solved by the use of disequilibrium model. In the framework of disequilibrium model, the credit demand and credit supply functions are estimated under the restriction that the minimum of the two determines credit. The last chapter describes the data used and the empirical findings. The analysis is based on quarterly data covered the period from the first quarter of 1994 to the fourth quarter of 2006. Based on parameter estimates, the volume of credit demand and credit supply is calculated and compared with the actual volume of credit. The future development of the Czech credit market is predicted.
    Keywords: credit market; lending activity; disequilibrium model; credit demand and supply
    JEL: C13 G21
    Date: 2008
  6. By: Tatom, John
    Abstract: There are numerous myths that surround the financial crisis that began in August 2007. Some of these myths are about the role of bank credit in the crisis, while others concern the weakness of the U.S. banking system and supposed excess leverage—the ratio of assets to equity in banks-- in contributing to the crisis. This paper provides evidence that net new commercial and industrial loans at banks did not slow before the financial crisis began in August 2007, nor was there any slowing in the early months. A subsequent slowing did reach its lowest pace in June-August 2008, but even at its worst, it was not particularly severe. The paper also looks at the safety and soundness of banks as indicated by their equity-assets ratio. The concern is that bank assets are troubled and excessively leveraged, with very low equity-asset ratios so that banks could have to “deleverage” or reduce lending as their equity declines. The shrinkage of bank equity and assets due to deleveraging could deepen the recession. But banks have not suffered significant declines in their equity ratios and they have been holding near record equity ratios. Moreover bank assets are growing rapidly, with equity nearly keeping pace. Ironically the Treasury’s Troubled Asset Relief Program will add $270 beginning in the fourth quarter. The TARP’s injections of bank capital have dried up private sector injections that had appeared on the horizon from sovereign wealth funds and private equity. Equity ratios of banks could become strained in future as total loans and assets continue to expand. The financial crisis has not undermined the safety and soundness of the commercial banking system. It is not likely to do so because most of the expected losses from the foreclosure crisis have already been taken into provisions. Nonetheless, many banks heavily exposed to mortgage losses have failed and more will fail.
    Keywords: foreclosure crisis; deleverage; bank credit;
    JEL: G28 G21
    Date: 2008–11–25
  7. By: Morten L. Bech; James T. E. Chapman; Rod Garratt
    Abstract: Recently, economists have argued that a bank's importance within the financial system depends not only on its individual characteristics but also on its position within the banking network. A bank is deemed to be "central" if, based on our network analysis, it is predicted to hold the most liquidity. In this paper, we use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). In doing so, 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: Banks and banking, Central ; Banks and banking ; Liquidity (Economics) ; Electronic funds transfers
    Date: 2008
  8. By: Popescu, Ramona Florina; Clipici, Emilia
    Abstract: In order to protect its stakeholders and clients interests, a bank assumes a cautious credit risk profile, correlated to the objectives established in its business strategy. This article presents the credit risk profile and the analysis of the factors involved in the estimation of the probability and the impact of the credit risk upon the loan portfolio in a Romanian retail bank. In the final part, the authors show how the analysis results affect the bank’s credit policy.
    Keywords: credit risk profile;loan portfolio;credit policy
    JEL: G32 G21
    Date: 2008–11–24
  9. By: Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)
    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 K4 P2
    Date: 2008
  10. By: Adam B. Ashcraft; Morten L. Bech; W. Scott Frame
    Abstract: The Federal Home Loan Bank (FHLB) System is a large, complex, and understudied government-sponsored liquidity facility that currently has more than $1 trillion in secured loans outstanding, mostly to commercial banks and thrifts. In this paper, we document the significant role played by the FHLB System at the onset of the ongoing financial crises and then provide evidence on the uses of these funds by the System's bank and thrift members. Next, we identify the trade-offs faced by member-borrowers when choosing between accessing the FHLB System or the Federal Reserve's Discount Window during the crisis period. We conclude by describing the fragmented U.S. lender-of-last-resort framework and finding that additional clarity about the respective roles of the various liquidity facilities would be helpful.
    Keywords: Federal home loan banks ; Discount window ; Liquidity (Economics) ; Financial crises
    Date: 2008
  11. By: Nabi, Mahmoud Sami; Suliman, Mohamed Osman
    Abstract: This paper seeks to provide some theoretical and empirical answers to the following question: Does the institutional environment affect the causality relationship between banking development and economic growth? In the theoretical part, we develop an endogenous growth model where the institutional environment is captured through two indicators: the judicial system efficiency and the easiness of informal trade. We show that an improvement of the institutional environment has two effects. First, it intensifies the causality direction from banking to economic growth through a reduction of defaulting loans. Second, it reduces the interest rate spread. In the empirical part, considering twenty-two MENA countries over the period 1984-2004, we find a bi-directional causality. The first one, which runs from banking development to economic growth, is more intense in countries with a more developed institutional environment. The second causality runs from economic growth to banking and indicates that a more developed economy has a more developed banking system.
    Keywords: Banking; Growth; Institutions; MENA.
    JEL: O41 O17 O16
    Date: 2008–04
  12. By: Farina, Vincenzo
    Abstract: The idea that the governance mechanisms affect firms’ performance is well acknowledged in management literature. The settings prevailing in governance studies explain board’s roles at the light of the agency theory framework. However, a complementary perspective is focused on the acquisition of critical resources closely related to activation of external relations with the most influential actors of firm’s environment. One such kind of external relationship is called interlocking directorates and occur when an individual simultaneously sits on the board of two companies. Moreover, since banks control financial capital, that is a resource that has a universal value for all firms, they are more likely to be very important actors inside corporate networks. By analyzing interlocking directorates among listed banks and non financial firms in Italy, using the methods and theory of social network analysis (SNA), I find that banks are the most influential actors in the network and that centrality in the network enhances financial performance.
    Keywords: Corporate Governance; Board of Directors; Performance; Social network analysis.
    JEL: L20 G34
    Date: 2008

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.