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on Banking |
| By: | Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes. |
| JEL: | E32 E44 F3 N20 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14656&r=ban |
| By: | Orlowski, Lucjan T |
| Abstract: | This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble”. Unstable allocations elevate market, credit and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed. |
| Keywords: | subprime mortgage crisis; credit crisis; liquidity crisis; market risk; credit risk; default risk; counterparty risk; collateralized debt obligations; Level 3 Assets; Basel II |
| JEL: | G12 G15 E44 G21 |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12696&r=ban |
| By: | Gary B. Gorton |
| Abstract: | The credit crisis was sparked by a shock to fundamentals, housing prices failed to rise, which led to a collapse of trust in credit markets. In particular, the repurchase agreement market in the U.S., estimated to be about $12 trillion, larger than the total assets in the U.S. banking system ($10 trillion), became very illiquid during the crisis due to the fear of counterparty default, leaving lenders with illiquid bonds that they did not want, believing that they could not be sold. As a result, there was an increase in repo haircuts (the initial margin), causing massive deleveraging. I investigate this indirectly, by looking at the breakdown in the arbitrage foundation of the ABX.HE indices during the panic. The ABX.HE indices of subprime mortgage-backed securities are derivatives linked to the underlying subprime bonds. Introduced in 2006, the indices aggregated and revealed information about the value of the subprime mortgage-backed securities and allowed parties to buy protection against declines in subprime value via credit derivatives written on the index or tranches of the index. When the ABX prices plummeted, the arbitrage relationships linking the credit derivatives linked to the index and the underlying bonds broke down because liquidity evaporated in the repo market. This breakdown allows a glimpse of the information problems that led to illiquidity in the repo markets, and the extent of the demand for protection against subprime risk. |
| JEL: | G1 G13 G21 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14649&r=ban |
| By: | Luísa Farinha (Banco de Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal.); Vítor Gaspar (Bureau of European Policy Advisers, European Commission, Rue de la Loi 100, B-1049 Brussels, Belgium.) |
| Abstract: | In this paper, we use the Furfine (1999) statistical procedure to identify Money market operations from Payments Systems data. Given the availability of an alternative data set, recording money market operations we could confirm the accuracy of the method. We examine evidence on integration of the Money market in the euro area. We ask, “how do Portuguese banks participate in the market for daily funds?” and look for a possible hierarchical structure in the market. We find strong evidence of integration and mixed evidence on hierarchical structure. JEL Classification: E52, E58. |
| Keywords: | Money market, Furfine procedure, financial integration, hierarchical structure, Portuguese banks. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080985&r=ban |
| By: | Miru, Oana Maria; Hetes-Gavra , Roxana; Nicolescu, Ana Cristina |
| Abstract: | The Basel II Agreement is a new stage in the development of prudential regulations. Compared to the initial agreement, Basel I, this one allows a more large and precise analysis of banking risks. The European approach of Basel II requirements aims to offer some common conditions for all the credit institutions. Secondly, in order to achieve the objectives of Basel II, an active implication of the supervisory authorities is needed, as well as a tighter cooperation between them in order to increase the financial integration at the European Union level. In what concerns Romania, that has recently joined the European Union, the implementation of Basel II requirements imply a new series of challenges both for credit institutions and for the Central Bank. These challenges, for the commercial banks, reside in adjusting the risk management techniques and the informational system, training the staff, obtaining the databases, etc. and for the Central Bank in both adapting the surveillance process and elaborating new regulations. This paper tries to analyze the main implications of implementing these requirements, both for the Romanian commercial banks and for the National Bank. |
| Keywords: | banking; prudential regulations; supervision; capital requirements |
| JEL: | E5 E50 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12613&r=ban |
| By: | Bacha, Obiyathulla/I |
| Abstract: | This paper examines the operation of an Islamic Interbank Money market (IIMM), within a dual banking system. The paper argues that even though an Islamic Money market operates in an interest free environment and trades shariah compliant instruments, many of the risks associated with conventional money markets, including interest rate risk is relevant to an Islamic Money Market operating within a dual banking system. The empirical evidence based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in sync with conventional money market rates. Given the dynamics of fund flows and cross linkages, an IIMM operating within a dual banking system cannot sterilize itself from interest rate risk. In fact, the paper argues that such an IIMM may actually enhance interest rate risk transmission to the Islamic banking sector, by providing additional channels of transmission. Ironical as it may be, the operations of an IIMM in a dual banking system may serve to bring the Islamic banking sector into closer orbit with the conventional sector. |
| Keywords: | Islamic Interbank Money Market; Dual Banking; Malaysia |
| JEL: | D53 D02 E44 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12699&r=ban |
| By: | Javier Andrés (Universidad de Valencia); Óscar J. Arce (Banco de España) |
| Abstract: | We develop a dynamic general equilibrium model with an imperfectly competitive bank-loans market and collateral constraints that tie investors credit capacity to the value of their real estate holdings. Banks set optimal lending rates taking into account the effects of their price policies on their market share and on the volume of funds demanded by each customer. Lending margins have a significant effect on aggregate variables. Over the long run, fostering banking competition increases total consumption and output by triggering a reallocation of available collateral towards investors. However, as regards the short-run dynamics, we find that most macroeconomic variables are more responsive to exogenous shocks in an environment of highly competitive banks. Key to this last result is the reaction of housing prices and their effect on borrowers' net worth. The response of housing prices is more pronounced when competition among banks is stronger, thus making borrowers' net worth more vulnerable to adverse shocks and, specially, to monetary contractions. Thus, regarding changes in the degree of banking competition, the model generates a trade-off between the long run level of economic activity and its stability at the business cycle frequency. |
| Keywords: | banking competition, collateral constraints, housing prices |
| JEL: | E32 E43 E44 G21 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0830&r=ban |
| By: | Ines Drumond (CEMPRE and Faculdade de Economia, Universidade do Porto); José Jorge (CEMPRE and Faculdade de Economia, Universidade do Porto) |
| Abstract: | This paper assesses the potential procyclical effects of Basel II capital requirements by evaluating to what extent those effects depend on the composition of banks' asset portfolios and on how borrowers' credit risk evolves over the business cycle. By developing a heterogeneous-agent general equilibrium model, in which firms' access to credit depends on their financial position, we find that regulatory capital requirements, by forcing banks to finance a fraction of loans with costly bank capital, have a negative effect on firms' capital accumulation and output in steady state. This effect is amplified with the changeover from Basel I to Basel II, in a stationary equilibrium characterized by a significant fraction of small and highly leveraged firms. In addition, to the extent that it is more costly to raise bank capital in bad times, the introduction of an aggregate technology shock into a partial equilibrium version of the model supports the Basel II procyclicality hypothesis: Basel II capital requirements accentuate the bank loan supply effect underlying the bank capital channel of propagation of exogenous shocks. |
| Keywords: | Business Cycles, Procyclicality, Financial Constraints, Bank Capital Channel, Basel II, Heterogeneity |
| JEL: | E44 E32 G28 E10 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:307&r=ban |
| By: | Radam, Alias; Baharom, A.H.; Dayang-Afizzah, A.M.; Ismail, Farhana |
| Abstract: | This study is undertaken to investigate the extent to which mergers lead to efficiency by which services are provided to the public and the productivity of Malaysia’s banking institutions sector. The data cover the period 1993 to 2004, which includes the pre-merger years and the post-merger years. This study attempts to evaluate technical efficiency, efficiency change, technical change and productivity of commercial banks, finance companies and merchant banks using a non-parametric Data Envelopment Analysis (DEA) and Malmquist Index approach as the framework for the analyses. It is found that: (1) that on average, productivity across banking institutions increased at annual rate of 5.8% over the study period 1993 to 2004; (2) the results also indicated that almost all of the productivity growth comes from technical change (or innovations in banking technology) rather than improvement in efficiency change, which contributes for 6.1% of productivity growth, while the latter accounted for 0.2% decline; (3) the merger process led to productivity improvements whereby, it is observed that the productivity of Malaysia’s banking sector has been improved (in terms of efficiency) after the implementation of merger program for domestic banking institutions in 1999. This might be due to the utilization of their scale economies to improve their efficiencies. However, the productivity of banking institutions has been affected by certain economic conditions in year 2001 and 2004 (such as the September 11 tragedy and the process of capital rationalization that merged entities have undergone). |
| Keywords: | Banking sector; Mergers; DEA and Malmquist index;Malaysia |
| JEL: | G14 G34 E44 G21 |
| Date: | 2008–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12726&r=ban |
| By: | Geir H. Bjønnes (Norwegian School of Management (BI),); Carol L. Osler (Brandeis International Business School); Dagfinn Rime (Norges Bank (Central Bank of Norway)and Norwegian University of Science and Technology (NTNU)) |
| Abstract: | This paper provides evidence of private information in the interdealer foreign exchange market. In so doing it provides support for the hypothesis that information is an important reason for the strong positive correlation between order flow and returns. It also provides evidence that information influences order-book structure. Our data comprise the complete record of interdealer trades at a good-sized Scandinavian bank during four weeks in 1998 and 1999, including bank identities. Our results indicate that larger banks have more information than smaller banks, that the relation between order flow and returns is stronger for larger banks than smaller banks, and that larger banks exploit their information advantage in limit-order placement. |
| Keywords: | Foreign exchange, microstructure, asymmetric information, liquidity premium |
| JEL: | G15 F31 F33 |
| Date: | 2009–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_25&r=ban |