New Economics Papers
on Banking
Issue of 2009‒03‒14
sixteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Market Structure, Capital Regulation and Bank Risk Taking By Patrick Behr; Reinhard H. Schmidt; Ru Xie
  2. On the Relationship between Market Concentration and Bank Risk Taking By Kaniska Dam; Marc Escrihuela-Villar; Santiago Sánchez-Pagés
  3. Regulations and productivity growth in banking By Delis, Manthos D; Molyneux, Philip; Pasiouras, Fotios
  4. Forecasting the fragility of the banking and insurance sector By Kerstin Bernoth; Andreas Pick
  5. Bank activity and funding strategies : the impact on risk and returns By Demirguc-Kunt, Asli; Huizinga, Harry
  6. The joint estimation of firm-level market power and efficiency By Delis, Manthos D; Tsionas, Efthymios
  7. How to find plausible, severe, and useful stress scenarios By Thomas Breuer; Martin Jandacka; Klaus Rheinberger; Martin Summer
  8. From credit crunch to credit boom: transitional challenges in Bulgarian banking, 1999-2006 By Erdinç, Didar
  9. Bank ties and firm performance in Japan: some evidence since FY2002 By Patrick McGuire
  10. Competitive conditions in the Central and Eastern European banking systems By Delis, Manthos D
  11. Are Banks Different? Evidence from the CDS Market. By Burkhard Raunig; Martin Scheicher
  12. Estructura de Mercado, Condiciones de Entrada y Número Óptimo de Bancos en el Sistema Bancario Boliviano: Una Aproximación de Indicadores de Concentración y Movilidad Intra-industrial By Gonzales-Martínez, Rolando
  13. Structure and Temporal Change of Credit Network between Banks and Large Firms in Japan By Fujiwara, Yoshi; Aoyama, Hideaki; Ikeda, Yuichi; Iyetomi, Hiroshi; Souma, Wataru
  14. Differentiated bank strategies across the territory: an exploratory analysis By Marco Crocco; Ana Tereza Lanna Figueiredo
  15. "The Activities of a Japanese Bank in the Interwar Financial Centers: A Case of the Yokohama Specie Bank" By Makoto Kasuya
  16. The Influence of Culture on Economic Outcomes: An Exploration of Islamic Finance as a New Transmission Channel By Laurent Gheeraert

  1. By: Patrick Behr; Reinhard H. Schmidt; Ru Xie
    Abstract: This paper discusses the effect of capital regulation on the risk taking behaviour of commercial banks. We first theoretically show that capital regulation works differently in different market structures of banking sectors. In lowly concentrated markets, capital regulation is effective in mitigating risk taking behavior because banks' franchise values are low and banks have incentives to pursue risky strategies in order to increase their franchise values. If franchise values are high, on the other hand, the effect of capital regulation on bank risk taking is ambiguous as banks lack those incentives. We then test the model predictions on a cross-country sample including 421 commercial banks from 61 countries. We find that capital regulation is effective in mitigating risk taking only in markets with a low degree of concentration. The results remain robust after accounting for financial sector development, legal system efficiency, and for other country and bank-specific characteristics.
    Keywords: Banks, market structure, risk shifting, franchise value, capital regulation
    JEL: G21 G28
    Date: 2008–06
  2. By: Kaniska Dam (CIDE); Marc Escrihuela-Villar (Universitat de les Illes Balears); Santiago Sánchez-Pagés (Edinburgh School of Economics)
    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 in 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 concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, 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.
    Keywords: Market concentration; Bank mergers; Risk-taking
    JEL: G21 L11 L13
    Date: 2009
  3. By: Delis, Manthos D; Molyneux, Philip; Pasiouras, Fotios
    Abstract: This paper examines the relationship between the regulatory and supervision framework and the productivity of banks in 22 countries over the period 1999-2006. We follow a semi-parametric two-step approach that combines Malmquist index estimates with bootstrap regressions. The results indicate that regulations and incentives that promote private monitoring have a positive impact on productivity. Restrictions on banks’ activities relating to their involvement in securities, insurance, real estate and ownership of non-financial firms also have a positive impact. However, regulations relating to the first and second pillars of Basel II, namely capital requirements and official supervisory power do not appear to have a statistically significant impact on productivity.
    Keywords: Banks; Basel II; Productivity; Regulations
    JEL: C14 G21
    Date: 2009–02–07
  4. By: Kerstin Bernoth; Andreas Pick
    Abstract: This paper considers the issue of forecasting financial fragility of banks and insurances using a panel data set of performance indicators, namely distance-to-default, taking unobserved common factors into account. We show that common factors are important in the performance of banks and insurances, analyze the influences of a number of observable factors on banking and insurance performance, and evaluate the forecasts from our model. We find that taking unobserved common factors into account reduces the root mean square forecasts error of  firm specific forecasts by up to 11% and of system forecasts by up to 29% relative to a model based only on observed variables. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period.
    Keywords: Financial stability; financial linkages; banking; insurances; unobserved common factors; forecasting
    JEL: C53 G21 G22
    Date: 2009–02
  5. By: Demirguc-Kunt, Asli; Huizinga, Harry
    Abstract: This paper examines the implications of bank activity and short-term funding strategies for bank risk and returns using an international sample of 1,334 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, by contrast, lowers the rate of return on assets, although 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, which is consistent with the demise of the U.S. investment banking sector.
    Keywords: Banks&Banking Reform,Debt Markets,Emerging Markets,,Access to Finance
    Date: 2009–02–01
  6. By: Delis, Manthos D; Tsionas, Efthymios
    Abstract: The aim of this study is to provide a methodology for the joint estimation of efficiency and market power of individual banks. The proposed method utilizes the separate implications of the new empirical industrial organization and the stochastic frontier literatures and suggests identification using the local maximum likelihood (LML) technique. Through LML, estimation of market power of individual banks becomes feasible, while a number of restrictive theoretical and empirical assumptions are relaxed. The empirical analysis is carried out on the basis of EMU and US bank data and the results suggest small differences in the market power and efficiency levels of banks between the two samples. Market power estimates indicate fairly competitive conduct in general; however, heterogeneity in market power estimates is substantial across banks within each sample. The latter result suggests that while the banking industries examined are fairly competitive in general, the practice of some banks deviates from the average behavior, and this finding has important policy implications. Finally, efficiency and market power present a negative relationship, which is in line with the so-called “quiet life hypothesis”.
    Keywords: Efficiency; market power; local maximum likelihood
    JEL: L11 C14 G21
    Date: 2009–01–07
  7. By: Thomas Breuer (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.); Martin Jandacka (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.); Klaus Rheinberger (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.); Martin Summer (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna, Austria.)
    Abstract: We give a precise operational definition to three requirements the Basel Committee on Banking Supervision specifies for stress tests: Plausibility and severity of stress scenarios as well as suggestiveness of risk reducing actions. The basic idea of our approach is to define a suitable region of plausibility in terms of the risk factor distribution and search systematically for the worst portfolio loss over this region. One key innovation compared to the existing literature is the solution of two open problems. We suggest a measure of plausibility that is not prone to the problem of dimensional dependence of maximum loss and we derive a way to consistently deal with situations where some but not all risk factors are stressed. Among the various approaches used for partial scenarios, plausibility is maximised by setting the non stressed risk factors to their conditional expected value given the value of the stressed risk factors.
    Keywords: Stress testing, maximum loss, risk management, banking regulation.
    JEL: G28 G32 G20 C15
    Date: 2009–02–05
  8. By: Erdinç, Didar
    Abstract: New econometric evidence is provided to identify the determinants of the rapid credit growth in Bulgaria and evaluate whether the credit boom has increased bank fragility, based on a panel data analysis of 30 Bulgarian banks over the 1999-2006 period. Employing Fixed effects and GMM estimation techniques to explore the link between credit and capital base in a partial adjustment framework, the study provides evidence for the growing risks of credit expansion and assesses the potential for banking distress in Bulgaria. The paper argues that after a period of severe credit crunch during 1997-1999, foreign-owned Bulgarian banks have financed a credit boom, especially since 2003 but this indicated growing risk in lending and increasing vulnerability to a systemic banking crisis as banks reduced their capital base and registered an increase in non-performing loans. Aggressive lending by less-capitalized banks without appropriate loan loss provisioning has also been verified empirically in a number of panel specifications. While well-capitalized banks have tended to expand credit in proportion to their capital base, banks with weak capital base engaged in excessive risk taking, and expanded credit despite growing ratio of non-performing loans. Hence, the credit boom has come at the expense of increased banking fragility in Bulgaria, raising the probability of bank failure in the event of a downturn in global financial flows which became a disturbing reality in 2008.
    Keywords: Bulgarian banking; GMM estimation; credit boom; credit crunch
    JEL: G15 G32 G21
    Date: 2009–04
  9. By: Patrick McGuire
    Abstract: Since the mid-1990s, major Japanese banks have sold off a significant portion of their holdings of corporate equity. Using information on the identity of Japanese firms' top 10 shareholders, this paper explores the process of banks' equity disposal. There is some evidence that, after FY2001, banks' sales of equity accelerated, even holdings in firms for which the bank served as the main bank. However, affiliation with a main bank - proxied by firm-bank loan and shareholding ties - continues to be negatively associated with firm performance through FY2004. Regression estimates suggest that firms with strong bank ties are less profitable, face higher interest payments, and yet do not seem to enjoy lower stock price volatility than other firms. These effects are strongest for firms with a history of outside financing options, consistent with earlier arguments that the benefits of main bank relationships accrue to the banks themselves.
    Keywords: Cross-Shareholding; Main Bank; Japanese Banks; Firm Performance
    Date: 2009–03
  10. By: Delis, Manthos D
    Abstract: The aim of this study is to conduct a large-scale empirical analysis of the competitive conditions in the banking systems of Central and Eastern European countries. The well-known model of Panzar and Rosse (1987) is implemented on bank-level data over the period 1999-2006. The estimates based on the separate country panels suggest a wide variation in the competitive conditions of the banking systems examined, with some being characterized as (monopolistically) competitive and other as non-competitive. Finally, the results from the full sample indicate that bank revenue is substantially influenced by structural and macroeconomic conditions.
    Keywords: Market power; Central and Eastern European banks; Panzar-Rosse model
    JEL: D20 C33 G21
    Date: 2008–12–31
  11. By: Burkhard Raunig (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna,); Martin Scheicher (European Central Bank, Kaiserstrasse 29, D – 60311, Frankfurt am Main, Germany,)
    Abstract: This paper uses regression analysis to compare the market pricing of the default risk of banks to that of other firms. We study how CDS traders discriminate between banks and other type of firms and how their judgement changes over time, in particular, since the start of the recent financial turmoil. We use monthly data on the Credit Default Swaps (CDS) of 41 major banks and 162 non-banks. By means of panel analysis, we decompose the CDS premia into the expected loss and the risk premium. Our primary result is that market participants indeed viewed banks differently and that they drastically changed their mind during the recent turmoil that started in August 2007.
    Keywords: Credit default swap, market discipline, default risk, risk premium
    JEL: E43 G12 G13
    Date: 2009–02–16
  12. By: Gonzales-Martínez, Rolando
    Abstract: This paper calculates indicators of market structure: concentration ratio, Herfindahl index, Herfindahl-Hirschman index, inverse of the Herfindahl index and the stability indicator. These indicators are used: (1) to measure indirectly the competitiveness of the bank market, (2) to define conditions of entrance of new banks to the market, and (3) to establish a criterion to estimate the optimal number of banks in the market.
    Keywords: indicadores de concentración; estructura de mercado; número óptimo de bancos
    JEL: G38 L10 G21
    Date: 2008–11
  13. By: Fujiwara, Yoshi; Aoyama, Hideaki; Ikeda, Yuichi; Iyetomi, Hiroshi; Souma, Wataru
    Abstract: Credit relationships between commercial banks and quoted firms are studied for the structure and its temporal change from the year 1980 to 2005. At each year, the credit network is regarded as a weighted bipartite graph where edges correspond to the relationships and weights refer to the amounts of loans. Reduction in the supply of credit affects firms as debtor, and failure of a firm influences banks as creditor. To quantify the dependency and influence between banks and firms, we propose to define a set of scores of banks and firms, which can be calculated by solving an eigenvalue problem determined the weight of the credit network. We found that a few largest eigenvalues and corresponding eigenvectors are significant by using a null hypothesis of random bipartite graphs, and that the scores can quantitatively describe the stability or fragility of the credit network during the 25 years.
    Keywords: Banks-firms credit, credit topology, Bipartite network
    JEL: E51 E52 G21
    Date: 2009
  14. By: Marco Crocco (Cedeplar-UFMG); Ana Tereza Lanna Figueiredo (Cedeplar-UFMG e PUC-MG)
    Abstract: This paper aims to investigate to what extent there is a differentiated regional bank strategy in the Brazilian economy. Based on the Post Keynesian theory of regional liquidity preference (Dow, 1993), the paper analyses consolidate balance sheets of banks’ branches from several Brazilian regions. Through the analysis of some indicators that were built using the data, the article finds evidence for the thesis that the Brazilian Bank System’s strategy is heterogeneous across space. Furthermore, we conclude that this behaviour reinforces existing uneven regional patterns of development of the economy.
    Keywords: bank strategy, regional liquidity preference, regional economics, development.
    Date: 2009–01
  15. By: Makoto Kasuya (Faculty of Economics, University of Tokyo)
    Abstract: This paper aims to analyze the role of a branch of a Japanese bank in the internationals financial centers and its change during the Interwar period. Branches of international exchange banks generally buy bills for goods exported from where they exist, to collect bills for goods imported to where they exist, and to transfer funds with other branches. In addition to these "ordinary" businesses branches in the international financial centers raise funds by selling bills there or by borrowing money from other banks, to makes investments for securing reserves, and to advise letters of credit issued by large banks there. This paper sheds light on these activities of the Yokohama Specie Bank, which was the largest international exchange bank in Japan before the Second World War and shows that branches in London and New York facilitated the flow of funds within the bank. The Interwar period saw significant change in international money flow as New York grew to an international financial center, which was as important as London and also saw the Great Depression and international conflicts after that. This paper analyzes how businesses of the two branches changed in order to cope with turbulence in the financial markets.
    Date: 2009–01
  16. By: Laurent Gheeraert (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.)
    Abstract: Islamic finance is one of the most prominent phenomena over the last decade in the banking industry in the Middle-East and South-East Asia. It has recently spread in non-Muslim countries, such as the UK or the US. Globally, assets on the books of Shariah-compliant commercial banks have exceeded 350 Billion USD in 2005 and grown by an average of 29% annually from 2000. In spite of the substantial size and growth of this segment, the role of Islamic banking in the economy is still heavily debated and very few empirical work is available. This paper studies the impact of Islamic banking on financial sector development. It circumvents the lack of data through a newly-constructed and comprehensive database, “IFIRST”, covering Islamic commercial banks worldwide over the period 2000-2005. This database is, to our knowledge, unique in the industry. After controlling for standard determinants and potential endogeneity, using religion as an instrument, we find strong and significant empirical evidence of a positive role of Islamic banking on countries’ financial sector development, as measured by private credit over GDP.
    Keywords: culture, religion, Islamic Finance, financial sector development, growth.
    Date: 2008–03

This issue is ©2009 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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