New Economics Papers
on Banking
Issue of 2008‒12‒14
five papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks By Kimie Harada; Takatoshi Ito
  2. Bank competition and collateral: theory and evidence By Hainz , Christa; Weill , Laurent; Godlewski, Christophe
  3. Northern Rock: The anatomy of a crisis – the prudential lessons By Sonia Ondo-Ndong; Laurence Scialom
  4. Shattered on the Rock? British financial stability from 1866 to 2007 By Milne , Alistair; Wood, Geoffrey
  5. Cost and profit efficiency of banks in Haiti: do domestic banks perform better than foreign banks? By Cadet, Raulin L.

  1. By: Kimie Harada; Takatoshi Ito
    Abstract: In the late 1990s, several large Japanese banks failed for the first time in its postwar history. As the financial environment was deteriorating further, several remaining banks decided to merge among themselves, presumably, to make their operations more efficient to avoid failures. This paper defines, calculates and analyzes the distance to default (DD), a concept of credit risk in corporate finance, of Japanese large banks. The DD helps us to answer a question whether mergers in the late 1990s and 2000s made the merged banks financially more robust as intended. The novelty of the paper is to develop a method of analyzing the DD for banks that experience a merger, and to apply the method to the Japanese banking data. Our findings include: (1) A merged bank fundamentally inherits financial soundness of pre-merged banks, without adding special value from the merger. A merger of sound (unsound) banks produced a sound (unsound, respectively) merged financial institution; and (2) In some cases, a merged bank experienced a negative DD right after the merger. The findings are consistent with a view that a primary objective of a merger was to take advantage of the perceived too-big-to-fail policy, rather than to pursue a radical reform. Another interpretation is that mergers with intention of enhancing efficiency resulted in failed implementation of true operational efficiency, such as quick integration of computer operation systems and elimination of duplicating branches.
    JEL: G19 G21
    Date: 2008–12
  2. By: Hainz , Christa (University of Munich); Weill , Laurent (Université Robert Schuman, Strasbourg); Godlewski, Christophe (University of Strasbourg)
    Abstract: We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We estimate logit models where the presence of collateral is regressed on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the use of collateral. These findings survive several robustness checks.
    Keywords: collateral; bank competition; asymmetric information
    JEL: D43 D82 G21
    Date: 2008–12–02
  3. By: Sonia Ondo-Ndong; Laurence Scialom
    Abstract: This paper attempts to analyse the main characteristics of the Northern Rock crisis and the responses of the Bank of England as lender of last resort. On the basis of the diagnosis about the causes and the handling of this banking crisis we detect the shortcomings prevailing in the UK prudential device. We therefore try to draw the prudential lessons of this experience. As we cannot claim to present an exhaustive picture of the crisis’s implications from a prudential point of view, we chose to focus instead on the points with practical significance far beyond the UK’s case.
    Keywords: bank bankruptcy, deposit insurance, liquidity regulation
    JEL: G38 G33 G32 G28
    Date: 2008
  4. By: Milne , Alistair (Cass Business School); Wood, Geoffrey (Cass Business School)
    Abstract: In autumn of 2007 Britain experienced its first bank run of any significance since the reign of Queen Victoria. The run was on a bank called Northern Rock. This was extraordinary, for Britain had been free of such episodes because by early in the third quarter of the 19th century the Bank of England had developed techniques to prevent them. A second extraordinary aspect of the affair was that it was the decision to provide support for the troubled institution that triggered the run. And thirdly, unlike most runs in banking history, it was a run only on that one institution. This paper considers why the traditional techniques for the maintenance of banking stability failed – if they did fail – and then considers how these techniques may need to be changed or supplemented to prevent such problems in the future. The paper starts with a narrative of the events, then turns to banking policy before the event and to the policy responses after it. We suggest both why the decision to provide support triggered the run and why the run was confined to a single institution. That prepares the way for our consideration of what should be done to help prevent the recurrence of such episodes in the future.
    Keywords: bank failure; lender of last resort; money markets; bank regulation
    JEL: E42 E58 N24
    Date: 2008–12–10
  5. By: Cadet, Raulin L.
    Abstract: I use the stochastic frontier methodology to estimate a cost and a profit frontier functions. The Fourier-flexible form is used in this paper because of its flexibility. Results show that, although foreign banks are more cost efficient than domestic banks, domestic banks are more profit efficient than foreign banks, in Haiti. The paper reveals also that, although treasury bills constitute an alternative source of profit for banks in Haiti, a growth of interest rate on treasury bills increases profit efficiency in current period whereas it decreases profit efficiency one period after this growth. The main implication of this paper is that foreign banks are not always more efficient than domestic banks in developing countries, and even in a country with low income level.
    Keywords: Cost Efficiency; Profit Efficiency; Foreign Banks; Domestic Banks
    JEL: G28 G21 N26
    Date: 2008–01

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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