New Economics Papers
on Banking
Issue of 2009‒02‒14
nineteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Global Banking and Local Markets By Pietro Alessandrini; Andrea Filippo Presbitero; Alberto Zazzaro
  2. Do Islamic Banks Have Greater Market Power ? By Laurent Weill
  3. Geographical Organization of Banking Systems and Innovation Diffusion By Pietro Alessandrini; Andrea Filippo Presbitero; Alberto Zazzaro
  4. Economies of scale in banking, confidence shocks, and business cycles By Dressler, Scott J.
  5. Parliamentary Election Cycles and the Turkish Banking Sector By Christopher F. Baum; Mustafa Caglayan; Oleksandr Talavera
  6. Financial interlinkages and risk of contagion in the Finnish interbank market By Toivanen, Mervi
  7. Bank Financing for SMEs around the World: Drivers, Obstacles, Business Models, and Lending Practices By Beck, Thorsten; Demirguc-Kunt, Asli; Soledad Martinez Peria, Maria
  8. A New Metric for Banking Integration in Europe By Gropp, Reint Eberhard; Kashyap, Anil K.
  9. Bank Size or Distance: What Hampers Innovation Adoption by SMEs? By Pietro Alessandrini; Andrea Filippo Presbitero; Alberto Zazzaro
  10. Drivers and Obstacles to Banking SMEs: The Role of Competition and the Institutional Framework By de la Torre, Augusto; Soledad Martinez Peria, Maria; Schmukler, Sergio L.
  11. Italian investment and merchant banking up to 1914: Hybridising international models and practices By Carlo Brambilla; Giandomenico Piluso
  12. Lending organizational structure and the use of credit scoring: evidence from a survey on Italian banks By Giorgio Albareto; Michele Benvenuti; Sauro Mocetti; Marcello Pagnini; Paola Rossi
  13. RELATIONSHIP LENDING - EMPIRICAL EVIDENCE FOR GERMANY By Memmel, Christoph; Schmieder, Christian; Stein, Ingrid
  14. The Italian mortgage market: characteristics, evolution and regional differences. Evidence from a bank survey By Paola Rossi
  16. Banking in Brazil: Structure, Performance, Drivers, and Policy Implications By Urdapilleta, Eduardo; Stephanou, Constantinos
  17. Bank cross-border mergers and acquisitions (Causes, consequences and recent trends) By Alberto Franco Pozzolo
  18. Competition and Relationship Lending: Friends or Foes? By Andrea Filippo Presbitero; Alberto Zazzaro
  19. Ag Bankers -- Today and Tomorrow By Jolly, Robert W.; Gaul, Michael

  1. By: Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: In the early 1990s, a widely-shared opinion among scholars and practitioners was that the importance of physical proximity between banks and borrowers would be doomed to drastically decrease over time and, put in extreme terms, the end of banking geography would become a real possibility. However, the empirical evidence show an unrelenting importance of local credit markets for small borrowers and local economic development. In the paper, we selectively review the literature on the real effects of bank consolidation and produce new evidence on the role of headquarter-to-branch functional distance on relationship lending.
    Keywords: Functinal distance, Global banking development, Local banking
    JEL: G21 G34 R12 R51
    Date: 2008–10
  2. By: Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg)
    Abstract: The aim of this paper is to investigate whether Islamic banks have greater market power than conventional banks. Indeed Islamic banks may benefit from a captive clientele, owing to religious principles, which would be charged greater prices. To measure market power, we compute Lerner indices on a sample of banks from 17 countries in which Islamic and conventional banks coexist over the period 2000-2007. Comparison of Lerner indices shows no significant difference between Islamic banks and conventional banks. When including control variables, regression of Lerner indices even suggests that Islamic banks have a lower market power than conventional banks. A robustness check with the Rosse-Panzar model confirms that Islamic banks are not less competitive than conventional banks. The lower market power of Islamic banks can be explained by their different norms and their different incentives.
    Keywords: Islamic banks, Lerner index, Bank Competition.
    JEL: G21 D43 D82
    Date: 2009
  3. By: Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Date: 2008–09
  4. By: Dressler, Scott J.
    Abstract: This paper quantitatively investigates equilibrium indeterminacy due to economies of scale (ES) in financial intermediation. Financial intermediation provides deposits (inside money) which can substitute with currency to purchase consumption, and depositing decisions are susceptible to non-fundamental confidence (sunspot) shocks. With the intermediation sector calibrated to match US data: (i) indeterminacy arises for small degrees of ES; (ii) sunspot shocks qualitatively resemble monetary shocks; and (iii) monetary policies can stabilize the real impact of sunspot shocks, but only under complete information. The analysis also assesses the removal of these shocks on the volatility decline observed during the US Great Moderation.
    Keywords: Financial Intermediation; Inside Money; Indeterminacy; Business Cycles
    JEL: E32 C68 E44
    Date: 2009–01
  5. By: Christopher F. Baum (Boston College; DIW Berlin); Mustafa Caglayan (University of Sheffield); Oleksandr Talavera (Aberdeen Business School, Robert Gordon University)
    Abstract: This paper analyzes the effects of parliamentary election cycles on the Turkish banking system. Using annual bank-level data representing all banks in Turkey during 1963-2005, we find that there are meaningful differences in the structure of assets, liabilities and financial performance across different stages of the parliamentary election cycle. However, we find that government-owned banks operate similarly to both domestic and foreign-owned private sector banks before, during and after elections. Our estimates also show that government-owned banks underperform their domestic and foreign-owned private sector counterparts.
    Keywords: elections, state banks, domestic banks, foreign-owned banks, loans, interest rate margin
    JEL: G21 G28
    Date: 2009–02–12
  6. By: Toivanen, Mervi (Bank of Finland Research)
    Abstract: Using the maximum entropy method, this paper estimates the danger of contagion in the Finnish interbank market in 2005–2007 as well as the existence of contagion during a Finnish banking crisis. The contagion analysis of the early 1990s is able to predict the most troublesome and defaulting banks in the banking sector. The simulation results for 2005–2007 suggest that five of ten deposit banks are possible starting points for contagious effects. The magnitude of contagion is conditional on the first failing bank. In addition to large commercial banks, middle-sized banks also cause damaging domino effects. Over the last few years, the negative effects of contagion on the Finnish banking sector have been, on average, more limited than those of the early 1990s. The contagion is currently a low probability event in the Finnish interbank market.
    Keywords: contagion; interbank markets; Finland; maximum entropy
    JEL: G21
    Date: 2009–01–28
  7. By: Beck, Thorsten (Tilburg University); Demirguc-Kunt, Asli (The World Bank); Soledad Martinez Peria, Maria (The World Bank)
    Abstract: Using data from a survey of 91 banks in 45 countries, the authors characterize bank financing to small and medium enterprises (SMEs) around the world. They find that banks perceive the SME segment to be highly profitable, but perceive macroeconomic instability in developing countries and competition in developed countries as the main obstacles. To serve SMEs banks have set up dedicated departments and decentralized the sale of products to the branches. However, loan approval, risk management, and loan recovery functions remain centralized. Compared with large firms, banks are less exposed to small enterprises, charge them higher interest rates and fees, and experience more non-performing loans from lending to them. Although there are some differences in SMEs financing across government, private, and foreign-owned banks -- with the latter being more likely to engage in arms-length lending -- the most significant differences are found between banks in developed and developing countries. Banks in developing countries tend to be less exposed to SMEs, provide a lower share of investment loans, and charge higher fees and interest rates. Overall, the evidence suggests that the lending environment is more important than firm size or bank ownership type in shaping bank financing to SMEs.
    Keywords: Access to credit; access to finance; Access to information; Bank Consolidation; Bank Financing; bank involvement; bank lending; bank loans; Bank Policy; Banking Industry; Banking Practices;
    Date: 2008–11–01
  8. By: Gropp, Reint Eberhard; Kashyap, Anil K.
    Abstract: Most observers have concluded that while money markets and government bond markets are rapidly integrating following the introduction of the common currency in the euro area, there is little evidence that a similar integration process is taking place for retail banking. Data on cross-border retail bank flows, cross-border bank mergers and the law of one price reveal no evidence of integration in retail banking. This paper shows that the previous tests of bank integration are weak in that they are not based on an equilibrium concept and are neither necessary nor sufficient statistics for bank integration. The paper proposes a new test of integration based on convergence in banks’ profitability. The new test emphasises the role of an active market for corporate control and of competition in banking integration. European listed banks profitability appears to converge to a common level. There is weak evidence that competition eliminates high profits for these banks, and underperforming banks tend to show improved profitability. Unlisted European banks differ markedly. Their profits show no tendency to revert to a common target rate of profitability. Overall, the banking market in Europe appears far from being integrated. In contrast, in the U.S. both listed and unlisted commercial banks profits converge to the same target, and high profit banks see their profits driven down quickly.
    Date: 2008
  9. By: Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: A growing body of research is focusing on banking organizational issues, emphasizing the difficulties encountered by hierarchically organized banks in lending to informationally opaque borrowers. While the two extreme cases of hierarchical and non{hierarchical organizations are typically contrasted, what shapes the degree of hierarchy and how to measure it remain fairly vague. In this paper we compare bank size and distance between a bank's branches and headquarter as possible sources of organizational frictions, by studying their impact on small rms' likelihood of introducing innovations. Results show that SMEs located in provinces where the local banking system is functionally distant are less inclined to introduce innovations, while the market share of large banks is only slightly correlated with rms' propensity to innovate.
    Keywords: Bank size, Functional distance, Innovation, SMEs
    JEL: G21 G34 O31 R51
    Date: 2008–09
  10. By: de la Torre, Augusto (The World Bank); Soledad Martinez Peria, Maria (The World Bank); Schmukler, Sergio L. (The World Bank)
    Abstract: This paper studies the factors banks perceive as drivers and obstacles to financing small and medium enterprises (SMEs), focusing on the role of competition and the institutional framework. Using a survey of banks in Argentina and Chile, the paper shows that, despite alleged differences in the countries' environments regarding rules, regulations, and ease of doing business, SMEs have become a strategic segment for most banks in both countries. In particular, banks have begun to target SMEs due to the significant competition in the corporate and retail sectors. They perceive the SMEs market as highly profitable, large, and with good prospects. Moreover, banks are developing coping mechanisms to overcome the particular institutional obstacles present in each country and to compete for SMEs. Banks' interest in SMEs is not based on government programs, yet policy action might help reduce the cost of providing financing, especially long-term lending.
    Keywords: small and medium enterprises; bank finance; financial constraints; banking market structure; institutional factors; regulation; competition
    JEL: G21 G28 L25 O12 O16
    Date: 2008–12–01
  11. By: Carlo Brambilla; Giandomenico Piluso
    Abstract: This paper focuses on the specific legacy of the 19th century private banking on Italian major mixed banks' practices. We consider their international connections (Paris, Berlin, etc.) and their operating patterns as compared to European ones. Besides, we provide a comparative quantitative analysis of their portfolios in order to evaluate how much they differed from the other major European universal banks, and to which extent investment banking activities were relevant in their portfolios.
    Keywords: investment banking, hybridisation, banking patterns
    JEL: G24 N23 N30 N83
    Date: 2008–01–01
  12. By: Giorgio Albareto (Banca d'Italia); Michele Benvenuti (Banca d'Italia); Sauro Mocetti (Banca d'Italia); Marcello Pagnini (Banca d'Italia); Paola Rossi (Banca d'Italia)
    Abstract: This paper examines the results of a survey carried out in 2007 by the Bank of Italy concerning different characteristics of the organization of lending activities. Between 2003 and 2006 the physical distance between the headquarters and the branches increased, the limits to the decision-making process of loan officers were eased, their mobility raised and the use of economic incentives to reward their activity expanded. The huge heterogeneity in organizational structures persists even within relatively homogenous size classes. The diffusion of statistical models to assess credit risk (scoring), accelerated recently particularly among large banks, boosted by the new Basel Capital Accord. Scoring is either very important or determinant in decisions on credit extension while it is rarely influential in setting interest rates, the duration of the credit and the amount and type of collateral required. The survey shows that banks have been progressively adapting their organizational structure in order to incorporate the credit scoring tools into their lending processes.
    Keywords: banking organization, distance, power delegation, credit scoring, relationship lending, technology diffusion
    JEL: G2 O3 L2 D8
    Date: 2008–04
  13. By: Memmel, Christoph (Deutsche Bundesbank); Schmieder, Christian (European Investment Bank); Stein, Ingrid (Deutsche Bundesbank)
    Abstract: Relationship lending is a common practice in credit financing all over the world, notably also in the European Union, which has been assumed to be particularly beneficial for Small and Medium-Sized Enterprises (SMEs). During recent years, there has been the impression that relationship lending loses ground due to a change of the banks' business models, which could ultimately yield to a worsening of the business environment for corporates and SMEs. In this study, we investigate the determinants of relationship lending for Germany, where relationship lending traditionally plays an important role. Compared to previous studies, we refer to much more comprehensive data with information on more than 16,000 firm-bank relationships. Our findings confirm the assumption that relationship lending seems to be an important pillar for economic growth and employment: We find that the firms that are most likely to contribute to (future) economic growth, namely small and R&D-intensive firms, tend to choose a relationship lender. The same is observed for firms of high credit quality, independent of their size or R&D intensity. Furthermore, we also observe that the importance of relationship lending did not decrease since the mid 1990s.
    Keywords: Relationship banking; German banking system; SME
    JEL: G21 G32
    Date: 2008–05–20
  14. By: Paola Rossi (Banca d'Italia)
    Abstract: The paper reviews the supply of different mortgage instruments to Italian households by means of data obtained from a survey conducted in 2007 by the Bank of Italy over more than 300 banks. The results document significant innovations in housing finance in the last five years: a greater variety of mortgage products is supplied, along with a widespread easing of borrowing constraints facing households. The supply of new products is already routinely provided by large and medium banks, while it is spreading among local cooperative banks. It is significantly higher among banks which have adopted credit scoring techniques to select clients.
    Keywords: mortgages, financial innovation, credit scoring
    JEL: G21 D14 R21
    Date: 2008–06
  15. By: Cull, Robert (The World Bank); P. Spreng, Connor (The World Bank)
    Abstract: Profitability improvements after the privatization of a large state-owned bank might come at the expense of reduced access to financial services for some groups, especially the rural poor. The privatization of Tanzania's National Bank of Commerce provides a unique episode for studying this issue. The bank was split into the "new" National Bank of Commerce, a commercial bank that assumed most of the original bank's assets and liabilities, and the National Microfinance Bank, which assumed most of the branch network and the mandate to foster access to financial services. The new National Bank of Commerce's profitability and portfolio quality improved although credit growth was slow, in line with privatization experiences in other developing countries. Finding a buyer for the National Microfinance Bank proved very difficult, although after years under contract management by private banking consultants, Rabobank of the Netherlands emerged as a purchaser. Profitability has since improved and lending has slowly grown, while the share of non-performing loans remains low.
    Keywords: access to banking; access to banking services; access to financial services; access to services; Accounting; Agricultural Bank; asset allocation; asset portfolio; ATMs
    Date: 2008–12–01
  16. By: Urdapilleta, Eduardo (The World Bank); Stephanou, Constantinos (The World Bank)
    Abstract: he objective of this paper is to analyze the industry structure of banking services in Brazil in order to shed light on financial performance and its drivers at a disaggregated level. The study illustrates how differences across market segments -- which tend to be averaged out in aggregate analysis -- need to be taken into account when analyzing performance and designing public policy for the banking sector. In particular, retail banking is found to be less sensitive to price competition and to exhibit considerably higher returns than corporate banking. The authors identify and discuss the factors underlying revenues, costs, and risks in each market segment, and conclude with policy implications.
    Keywords: Brazil; banking; competition; industry structure; performance
    Date: 2009–01–01
  17. By: Alberto Franco Pozzolo (Universit… degli Studi del Moliste)
    Abstract: In the past fifteen years, cross-border mergers and acquisitions have had an ever increasing role in the process of bank internationalization. Although a consensus view has developed on the determinants of a bank’s decision to expand abroad and on the determinants of the patterns of expansion, the debate on the consequences of foreign bank presence is still open. The aim of this chapter is twofold. Firstly, it discusses the major results of the empirical literature studying the determinants, the patterns, and the consequences of bank foreign expansion. Secondly, it studies whether the determinants of bank foreign expansions have changed through time, estimating an econometric model of the patterns of cross-border bank M&As between 1990 and 2006.
    Keywords: Foreign direct investment, International banking
    JEL: E30 F21 F23 G21
    Date: 2008–11
  18. By: Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: Recent empirical findings by Elsas (2005) and Degryse and Ongena (2007) document a U-shaped effect of market concentration on relationship lending whichvcannot be easily accommodated to the investment and strategic theory of relationship lending. In this paper, we show that this non-monotonicity can be explained by looking at the organisational structure of local credit markets. We provide evidence that marginal increases in interbank competition are detrimental (favourable) to relationship lending in markets where transaction-based loans are a primary (limited) product offered by a vast (tiny) group of large, outside headquartered banks. On the contrary, where relational-based lending technologies are already widely in;use in the market, an increase in competition may drive banks to further cultivate their extensive ties with customers. Finally, we show that when competition comes from functionally distant banks, local intermediaries increase their engagement in relationship lending with local firms, consistent with the flight-to-captivity mechanism introduced by Boot and Thakor (2000) and further discussed by Dell'Ariccia and Marquez (2004) and Hauswald and Marquez (2006).
    Keywords: interbank competition, market organisational structure, relationship lending
    JEL: G21 L11
    Date: 2009–01
  19. By: Jolly, Robert W.; Gaul, Michael
    Abstract: A survey of 401 Iowa bank executives was conducted in October 2008. We received 106 valid responses. The survey requested information on expected loan growth and staffing levels for agricultural credit professionals over the next decade. In addition respondents reported the desired training and experience and expected compensation of new hires. Bank executives expect agricultural loans to grow over the next decade but at a slower rate than total loans. A gain in agricultural loan officer employment is expected net of retirements. Bank executives reported that soft skills such as problem solving ability and communication were more important for new agricultural loan officers than formal training in agriculture or business. Expected compensation levels and growth for new hires tend to lag those in competing industries.
    Keywords: agricultural loan officer, employment, compensation, training, survey
    Date: 2009–02–06

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