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on Banking |
| By: | Acharya, Viral V; Gromb, Denis; Yorulmazer, Tanju |
| Abstract: | We study liquidity transfers between banks through the interbank borrowing and asset sale markets when (i) surplus banks providing liquidity have market power, (ii) there are frictions in the lending market due to moral hazard, and (iii) assets are bank-specific. We show that when the outside options of needy banks are weak, surplus banks may strategically under-provide lending, thereby inducing inefficient sales of bank-specific assets. A central bank can ameliorate this inefficiency by standing ready to lend to needy banks, provided it has greater information about banks (e.g., through supervision) compared to outside markets, or is prepared to extend loss- making loans. The public provision of liquidity to banks, in fact its mere credibility, can thus improve the private allocation of liquidity among banks. This rationale for central banking finds support in historical episodes preceding the modern era of central banking and has implications for recent debates on the supervisory and lender-of-last-resort roles of central banks. |
| Keywords: | Asset specificity; Central bank; Competition; Interbank lending; Lender of last resort; Market power |
| JEL: | D62 E58 G21 G28 G38 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6984&r=ban |
| By: | Franklin Allen; Elena Carletti; Robert Marquez |
| Abstract: | It is commonly believed that equity finance for banks is more costly than deposits. This suggests that banks should economize on the use of equity and regulatory constraints on capital should be binding. Empirical evidence suggests that in fact this is not the case. Banks in many countries hold capital well in excess of regulatory minimums and do not change their holdings in response to regulatory changes. We present a simple model of bank moral hazard that is consistent with this observation. In perfectly competitive markets, banks can find it optimal to use costly capital rather than the interest rate on the loan to guarantee monitoring because it allows higher borrower surplus. |
| Keywords: | credit market competition, monitoring, loan rates, capital, bank monitoring |
| JEL: | G21 G31 D4 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/08&r=ban |
| By: | Bennardo, Alberto; Pagano, Marco; Piccolo, Salvatore |
| Abstract: | When a customer can borrow from several competing banks, multiple lending raises default risk. If creditor rights are poorly protected, this contractual externality can generate novel equilibria with strategic default and rationing, in addition to equilibria with excessive lending or non-competitive rates. Information sharing among banks about clients' past indebtedness lowers interest and default rates, improves access to credit (unless the value of collateral is very uncertain) and may act as a substitute for creditor rights protection. If information sharing also allows banks to monitor their clients' subsequent indebtedness, the credit market may achieve full efficiency. |
| Keywords: | creditor rights; information sharing; multiple-bank lending; non-exclusivity; seniority |
| JEL: | D73 K21 K42 L51 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7186&r=ban |
| By: | Giannetti, Mariassunta; Ongena, Steven |
| Abstract: | Using a novel dataset that allows us to trace the primary bank relationships of a sample of mostly unlisted firms, we explore which borrowers are able to benefit from foreign bank presence in emerging markets. Our results suggest that the limits to financial integration are less tight than the static picture of bank-firm relationships implies. Even though foreign banks are more likely to engage large and foreign-owned firms, they do not terminate relationships with the clients of banks they acquire as often as domestic financial acquirers do. Most importantly, firms appear to have the same access to financial loans and ability to invest whether they borrow from a foreign bank or not. Since firms without bank relationships make lower use of financial loans, and invest less, our results suggest that by making relationships more stable and by indirectly enhancing access to the financial system, foreign banks may benefit all firms. |
| Keywords: | competition; emerging markets; foreign bank lending; lending relationships |
| JEL: | G21 L11 L14 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6958&r=ban |
| By: | Kaniska Dam; Marc Escrihuela-Villar; Santiago Sanchez-Pages |
| Abstract: | We analyse risk-taking behaviour of banks in the context of spatial competition. Banks mobilise unsecured deposits by offering deposit rates, which they invest either in a prudent or a gambling asset. Limited liability along with high return of a successful gamble induce moral hazard at the bank level. We show that when the market power is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market power, all banks choose the prudent asset to invest in. We further show that a merger of two neighboring banks increases the likelihood of prudent behaviour. Finally, introduction of a deposit insurance scheme exacerbates banks’ moral hazard problem. |
| JEL: | D43 G28 G34 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:187&r=ban |
| By: | Manuel Illueca (Universitat Jaume I (Spain), Department of Finance and Accounting); Lars Norden (University of Mannheim (Germany), Department of Banking anf Finance); Gregory F. Udell (Kelly School of Business, Indiana University) |
| Abstract: | We study the effects of the interplay between banking deregulation and corporate governance on the lending behavior of savings banks in Spain. The removal of branching barriers that constrained these banks has led to a nationwide expansion, increasing the number of their branches and their commercial lending volume dramatically. Analyzing a unique data set combining information on the geographic distribution of bank branches and matched lenderborrower financial statements during 1996-2004, we provide evidence that suggests that the governance of those banks affects the way in which they expand their lending activities. In particular, political influence affects where they expand and their ex ante risk taking behavior. Because most countries have a portion of their banking system that is not privately owned, the behavior of these Spanish savings banks may have broader implications about the impact of global banking deregulation and industry consolidation and their interaction with bank governance. |
| Keywords: | Banck branching, Bank lending, Deregulation, Distance, Geographic expansion |
| JEL: | G10 G21 G30 H11 L30 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:17&r=ban |
| By: | Acharya, Viral V |
| Abstract: | Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited liability of banks and the presence of a negative externality of one bank’s failure on the health of other banks give rise to a systemic risk-shifting incentive where all banks undertake correlated investments, thereby increasing economy-wide aggregate risk. Regulatory mechanisms such as bank closure policy and capital adequacy requirements that are commonly based only on a bank’s own risk fail to mitigate aggregate risk-shifting incentives, and can, in fact, accentuate systemic risk. Prudential regulation is shown to operate at a collective level, regulating each bank as a function of both its joint (correlated) risk with other banks as well as its individual (bank-specific) risk. |
| Keywords: | Bank regulation; Capital adequacy; Crisis; Risk-shifting; Systemic risk |
| JEL: | D62 E58 G21 G28 G38 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7164&r=ban |
| By: | Lóránth, Gyöngyi; Morrison, Alan |
| Abstract: | We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks. |
| Keywords: | capital regulation; compensation; internal reporting system |
| JEL: | G20 G21 G30 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7179&r=ban |
| By: | Demirguc-Kunt, Asli; Huizinga, Harry |
| Abstract: | This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, consistent with the demise of the U.S. investment banking sector. |
| Keywords: | bank fragility; financial crisis; non-interest income share; universal banking; wholesale funding |
| JEL: | G1 G21 G28 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7170&r=ban |
| By: | Hirofumi Uchida (Wakayama University, Faculty of Economics); Gregory F. Udell (Kelly School of Business, Indiana University); Nobuyoshi Yamori (Nagoya University, Graduate School of Economics) |
| Abstract: | Previous research suggests that loan officers play a critical role in relationship lending by producing soft information about SMEs. For the first time, we empirically confirm this hypothesis. We also examine whether the role of loan officers differs from small to large banks as predicted by Stein (2002). While we find that small banks produce more soft information, the capacity and manner in which loan officers produce soft information does not seem to differ between large and small banks. This suggests that, although large banks may produce more soft information, they likely tend to concentrate their resources on transactions lending. |
| Keywords: | Relationship lending, Small- and medium-sized enterprises, hierarchical organizations, soft information |
| JEL: | D82 G21 L14 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:16&r=ban |
| By: | Loranth, Gyongyi; Morrison, Alan |
| Abstract: | We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7155&r=ban |
| By: | Lóránth, Gyöngyi; Morrison, Alan |
| Abstract: | This paper analyzes the consequences of bank diversification into fee-based businesses. Universal banks raise welfare by expanding the range of services available to entrepreneurs. However, because they may choose to rescue failed entrepreneurs in order to sell them fee-based financial services, universal banks provide weaker incentives. Adopting a holding company structure and devolving liquidation decisions to the lending division partially resolves this problem. We demonstrate a relationship between the welfare effects of diversification and competition for fee-based business, and we analyze the tying of lending and fee-based business. Our analysis yields several testable implications. |
| Keywords: | Bank diversification; soft budget constraint; tying; universal banks |
| JEL: | G20 G21 G34 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7051&r=ban |
| By: | Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR) |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:7&r=ban |
| By: | Franklin Allen; Elena Carletti; Douglas Gale |
| Abstract: | We develop a simple model of the interbank market where banks trade a long term, safe asset. We show that when there is a lack of opportunities for banks to hedge aggregate and idiosyncratic liquidity shocks, the interbank market is characterized by excessive price volatility. In such a situation, a central bank can implement the constrained efficient allocation by using open market operations to fix the short term interest rate. The model shows also that market freezes, where banks stop trading with each other, can be a feature of the constrained efficient allocation if there is sufficient uncertainty about aggregate liquidity demand compared to idiosyncratic liquidity demand. |
| Keywords: | interbank market, liquidity, central bank intervention, open market operations |
| JEL: | G18 G21 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/09&r=ban |