New Economics Papers
on Banking
Issue of 2009‒03‒22
nine papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. On the measurement of market power in the banking industry By Delis, Manthos D; Staikouras, Christos; Varlagas, Panagiotis
  2. The dark side of bank wholesale funding By Rocco Huang; Lev Ratnovski
  3. Bank Capital Requirements and Capital Structure By John P. Harding; Xiaozhong Liang; Stephen L. Ross
  4. Evaluating cost and profit efficiency: a comparison of parametric and nonparametric methodologies By Delis, Manthos D; Koutsomanoli-Filippaki, Anastasia; Staikouras, Christos; Gerogiannaki, Katerina
  6. The strategic behavior of banks during a financial crisis; evidence from the syndicated loan market By de Haas, Ralph; van Horen, Neeltje
  7. Bank Activity and Funding Strategies: The Impact on Risk and Return By Demirgüc-Kunt, A.; Huizinga, H.P.
  8. Multinational Banking and the New Spanish Armada: An Inter-Temporal Co-Evolutionary Approach By Sergio Castello; John Olienyk
  9. The Macroeconomic Consequences of Banking Crises in OECD Countries By David Haugh; Patrice Ollivaud; David Turner

  1. By: Delis, Manthos D; Staikouras, Christos; Varlagas, Panagiotis
    Abstract: This paper compares the estimates of the two most widely used non-structural models for market power measurement in banking, namely the conduct parameter method and the revenue test, as applied to a panel of Greek banks over the period 1993-2004. We also propose a dynamic reformulation of these models within a panel data context, in order to address possible statistical problems associated with the dynamic nature of bank-level data. The results suggest that both static methods provide lower estimates of market power relative to their dynamic counterparts. Therefore, the inclusion of some dynamics in the models, even though it increased estimation complexity, helped to reveal some collusive behavior of banks.
    Keywords: Market power estimation; Conduct parameter method; Revenue test; Greek banking sector
    JEL: L10 P20 G21
    Date: 2008–06–12
  2. By: Rocco Huang; Lev Ratnovski
    Abstract: Commercial banks increasingly use short-term wholesale funds to supplement traditional retail deposits. Existing literature mainly points to the "bright side" of wholesale funding: sophisticated financiers can monitor banks, disciplining bad ones but refinancing solvent ones. This paper models a "dark side" of wholesale funding. In an environment with a costless but imperfect signal on bank project quality (e.g., credit ratings, performance of peers), short-term wholesale financiers have lower incentives to conduct costly information acquisition, and instead may withdraw based on negative but noisy public signals, triggering inefficient liquidations. We show that the "dark side" of wholesale funding dominates the "bright side" when bank assets are more arm's length and tradable (leading to more relevant public signals and lower liquidation costs): precisely the attributes of a banking sector with securitizations and risk transfers. The results shed light on the recent financial turmoil, explaining why some wholesale financiers did not provide market discipline ex-ante and exacerbated liquidity risks ex-post.
    Keywords: Wholesale price indexes ; Bank liabilities
    Date: 2009
  3. By: John P. Harding (University of Connecticut); Xiaozhong Liang (State Street Corporation); Stephen L. Ross (University of Connecticut)
    Abstract: This paper studies the impact of capital requirements, deposit insurance and tax benefits on a bank's capital structure. We find that properly regulated banks voluntarily choose to maintain capital in excess of the minimum required. Central to this decision is both tax advantaged debt (a source of firm franchise value) and the ability of regulators to place banks in receivership stripping equity holders of firm value. These features of our model help explain both the capital structure of the large mortgage Government Sponsored Enterprises and the recent increase in risk taking through leverage by financial institutions.
    Keywords: Banks, Capital Structure, Capital Regulation, Financial Intermediation, Leverage, GSE, Investment Banks
    JEL: G21 G28 G32 G38
    Date: 2009–02
  4. By: Delis, Manthos D; Koutsomanoli-Filippaki, Anastasia; Staikouras, Christos; Gerogiannaki, Katerina
    Abstract: The objective of this article is 2-fold. First, it provides an empirical assessment of the cost and profit stochastic frontiers based on a panel dataset of Greek commercial banks over the period 1993 to 2005. Second, on the basis of the same sample, it also compares the most widely used parametric and nonparametric techniques to cost efficiency measurement, namely, the Stochastic Frontier Approach and Data EnvelopmentAnalysis. The results suggest greater similarities between the predictions of cost and profit efficiency methods than between parametric and nonparametric techniques. Such evidence is new in the literature and calls for a more technically level playing field for estimating bank efficiency.
    Keywords: Bank cost and profit efficiency; Parametric and non-parametric methods
    JEL: L25 C14 G21
    Date: 2008–01–08
  5. By: Jonathan Pincus (School of Economics, University of Adelaide); Richard Pomfret
    Abstract: Financial sector innovation and development has been an integral part of the rise of capitalism over the last half millennium. The innovations of the last three decades of the twentieth century were a continuation of the trend; they contributed to an era of global prosperity, but also increased the probability of bank failures as bankers and policymakers inexperienced in the new instruments made mistaken decisions. The likelihood of crises was increased by public policies which increased moral hazard. Governments regulate the financial sector due to asymmetric information between depositors and deposit-taking institutions; restricting entry or the lending activity of financial institutions is inefficient, so the weight is now placed on deposit insurance with moral hazard consequences. The policy challenge is to reduce moral hazard without repressing the financial sector and creating adverse selection in lending practices. Since the mid-1980s cheap money policies have exacerbated moral hazard associated with inadequate financial sector regulation by encouraging highly leveraged investments. The post-2007 financial crisis was one of many crises with idiosyncratic catalysts but with common underlying causes: cheap money available to participants in the integrated but imperfectly regulated global financial market eventually led to loan defaults and bank failures. This is not the end of capitalism, but a reminder of the difficult balancing acts involved in policing the financial sector which is at the heart of capitalist economies.
    Keywords: financial development – moral hazard
    JEL: O16 G28 F43
    Date: 2009–05
  6. By: de Haas, Ralph; van Horen, Neeltje
    Abstract: We examine the strategic reaction of banks to the current global financial crisis. In particular, we test whether banks predominantly react by diversifying their loan portfolio or by stepping up their screening and monitoring. To this end we analyze information on nearly 17,000 syndicated loans that were granted to private borrowers in 60 countries over the period 2005-2008. We exploit the variation in lender and borrower characteristics to examine whether banks’ risk-mitigating strategies differ across borrower types. Our results show that during a financial crisis arranging banks retain larger portions of loans and form more concentrated syndicates, reflecting an increased need to screen and monitor borrowers. During a crisis, agency problems are attenuated in syndicates that lend to repeat borrowers and that are composed by experienced arrangers.
    Keywords: bank lending; financial crisis; asymmetric information; syndication
    JEL: G15 D82 G21
    Date: 2009–05
  7. By: Demirgüc-Kunt, A.; Huizinga, H.P. (Tilburg University, Center for Economic Research)
    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: non-interest income share;wholesale funding;diversification;universal banking;bank fragility;financial crisis
    JEL: G21 G28
    Date: 2009
  8. By: Sergio Castello (Spring Hill College); John Olienyk (Colorado State University)
    Abstract: Spanish banks, Group Santander and Banco Bilbao Vizcaya Argentaria (BBVA) are becoming the new Spanish armada. These two banks are transforming themselves into large, efficient, and very profitable financial institutions across the globe. A host of internal factors in the 1980s, as well as external ones in the 1990s gave Spain a platform to engage in multinational banking activities parallel and supportive of foreign direct investment (FDI). This paper explains the rise of Spanish banks qua multinationals in the global financial scene from its beginning in the early 1990s, accelerating in the latter part of the decade and early 2000s, within an inter-temporal co-evolutionary systems theory approach focusing on the micro-economic level strategic behavior of Spanish banks, while examining the macro-institutional and meso-level of the banking sector in which decisive national structural and industry qualitative changes have taken place and can be observed motivating domestic banks to expand overseas and to engage in asset exploiting while seeking more profitable markets.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidad Nova de Lisboa, Lisbon, Portugal, May 21-23, 2008.
    Date: 2008–08–06
  9. By: David Haugh; Patrice Ollivaud; David Turner
    Abstract: This paper examines the characteristics of downturns and subsequent recoveries following past banking crises in OECD countries as well as evidence of any effects on potential output growth. It is differentiated from previous analyses because it makes use of OECD measures of the output gap and potential output. Downturns following banking crises are found to be more protracted with larger output losses and disproportionate falls in housing and business investment. The recovery is typically more muted with exports providing a disproportionately large positive contribution. Evidence regarding possible effects on potential growth of a banking crisis is mixed. The banking crisis in Japan was followed by a deterioration in potential growth partly due to a worsening in productivity performance which may be related to the protracted nature of the banking problems and the resulting misallocation of capital. Following the Nordic banking crises, which were resolved more quickly, there was no deterioration in productivity performance, although there was a temporary deterioration in potential growth which is mostly explained by an increase in the structural unemployment rate, which in turn may reflect the interaction of an exceptionally severe downturn with structural labour market rigidities.<P>Conséquences macroéconomiques des crises bancaires dans les pays de l’OCDE<BR>Ce papier analyse, dans le contexte des crises bancaires passées des pays de l’OCDE, les caractéristiques des ralentissements économiques et de la reprise qui suit, ainsi que de mettre en évidence de possibles effets sur la croissance du potentiel de production. Cette étude se différencie des précédentes par l’utilisation de l’écart de production et du potentiel de l’économie. Les ralentissements qui font suite à une crise bancaire semblent durer plus longtemps avec des pertes plus importantes et avec une réaction négative de l’investissement privé disproportionnée. Le rythme de la reprise est plus modéré et se caractérise par des contributions fortement positives des exportations. Les résultats de l’analyse des conséquences des crises bancaires sur le potentiel de l’économie sont mitigés. La crise bancaire au Japon a affecté négativement le potentiel de production via une baisse de la productivité du travail. Cela peut être relié à la durée des problèmes bancaires qui ont touché le Japon et de leurs conséquences néfastes sur l’allocation du capital. Dans le cas des crises bancaires des pays nordiques qui ont duré moins longtemps, il n’y a pas eu d’effets sur la productivité, bien que temporairement le potentiel ait baissé ce qui provient principalement d’une augmentation du taux de chômage structurel. Cette dernière relation peut refléter l’interaction entre d’une part un ralentissement exceptionnellement sévère et d’autre part des rigidités structurelles sur le marché du travail.
    Keywords: cycle économique, croissance potentielle, potential output, output gap, écart de production, financial crisis, crise financière, banking crisis, crise bancaire, downturn, ralentissement économique, business cycle
    JEL: E32 E44
    Date: 2009–03–06

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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