New Economics Papers
on Banking
Issue of 2009‒04‒05
eighteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Banking Stability Measures By Charles Goodhart; Miguel Segoviano
  2. Banking-on-the-Average Rules By Hans Gersbach; Volker Hahn
  3. Foreign Bank Entry: The Stability Implications of Greenfield Entry vs. Acquisition By Nikolaj Schmidt
  4. Assessing Output and Productivity Growth in the Banking Industry By Panayiotis P. Athanasoglou; Evangelia A. Georgiou; Christos C. Staikouras
  5. The gestion of semnificative risks in banking societies By Troaca, Victor
  6. Rating Assignments: Lessons from International Banks By Guglielmo Maria Caporale; Roman Matousek; Chris Stewart
  7. U.S. commercial bank lending through 2008:Q4: new evidence from gross credit flows By Silvio Contessi; Johanna Francis
  8. The German banking system and the global financial crisis: causes, developments and policy responses By Bleuel, Hans-H.
  9. Strengthening the annual financial statements of the banks By Troaca, Victor; Troaca, Mihaela-Elvira
  10. The joint estimation of bank-level market power and efficiency By Delis, Manthos D; Tsionas, Efthymios
  11. Bank-Level Estimates of Market Power By Sophocles N. Brissimis; Manthos D. Delis
  12. Transforming Bad Banks into Good Banks: Lessons from the Chilean Financial Crisis By Philip Brock
  13. The credit crisis and the dynamics of asset backed commercial paper programs By Nikolaj Schmidt
  14. Mesure de la performance des banques dans une zone d'ancrage monétaire: cas de la France et des pays de l'UMOA By Sandrine Kablan
  15. Foreign Bank Entry: A Liquidity Based Theory of Entry and Credit Market Segmentation By Nikolaj Schmidt
  16. Bank Ownership, Firm Value and Firm Capital Structure in Europe By Lieven Baert; Rudi Vander Vennet
  17. Yearly balance sheet and the account for profit and loss made by banking societies By Troaca, Victor
  18. Financial Openness and Productivity By Geert Bekaert; Campbell R. Harvey; Christian Lundblad

  1. By: Charles Goodhart; Miguel Segoviano
    Abstract: The recent crisis underlined that proper estimation of distress-dependence amongst banks in a global system is essential for financial stability assessment. We present a set of banking stability measures embedding banks’ linear (correlation) and nonlinear distress-dependence, and their changes through the economic cycle, thereby allowing analysis of stability from three complementary perspectives: common distress in the system, distress between specific banks, and cascade effects associated with a specific bank. Our approach defines the banking system as a portfolio of banks and infers its multivariate density from which the proposed measures are estimated. These can be provided for developed and developing countries.
    Date: 2009–01
  2. By: Hans Gersbach (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Volker Hahn (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: In this paper, we argue for a regulatory framework under which a bank’s required level of equity capital depends on the equity capital of its peers. Such bankingon- the-average rules are transparent and could also be combined with the current regulatory framework. In addition, we argue that banking-on-the-average rules ensure the build-up of bank equity capitals in booms and thus avoid excessive leverage. Prudent banks can impose prudency on other banks. In a simple model of a banking system, we show that a banking-on-the-average framework can deliver the socially optimal solution because it induces banks to abstain from gambling. Moreover, it alleviates socially harmful consequences of conventional equity-capital rules, which may induce banks to excessively cut back on lending or liquidate desirable long-term investment projects in downturns.
    Keywords: banking on the average, equity-capital requirements, banking system, banking crisis
    JEL: G21 G28
    Date: 2009–03
  3. By: Nikolaj Schmidt
    Abstract: Banks can enter new countries either through greenfield entry or by acquiring local banks. I model the effect of a foreign bank's mode of entry on the stability of the local financial sector. Banks exert costly effort when they extend credit. Limited liability creates an agency problem which leads to under provision of effort. I show that the diversification of the foreign bank.s loan portfolio mitigates the agency problem, and permits the foreign bank to extend credit during downturns where the local banks are forced to contract credit. The risk management framework employed by the foreign bank creates a divergence in the behaviour of a greenfield entrant and an acquirer. The greenfield entrant does not own a portfolio of local loans, and therefore, it has a greater risk taking capacity than the acquirer. Thus, competition, and thereby the distortion of the local banks' incentives to exert effort, is greater following greenfield entry than following entry through acquisition.
    Date: 2008–10
  4. By: Panayiotis P. Athanasoglou (Bank of Greece); Evangelia A. Georgiou (Bank of Greece); Christos C. Staikouras (Athens University of Economics and Business)
    Abstract: This paper assesses the evolution of output and productivity in the Greek banking industry for the period 1990-2006. Three main categories of bank output were estimated based on modern theoretical approaches, while for the aggregation and estimation of output and inputs and the estimation of productivity (partial and total factor) we relied on the index number method (Tornqvist index). Additionally, we considered the effect of labor quality on banks’ productivity and using a growth accounting framework we examined the contribution of total factor productivity (TFP) to bank output growth. The results show that bank output and labor productivity increased considerably during the period under examination, outpacing the respective GDP growth and labor productivity of the Greek economy. Capital productivity and TFP of the Greek banking industry have also improved remarkably mainly since 1999, as a result of the structural changes that took place within the industry, capital investments (mainly in IT equipment) as well as improvement in the quality of human capital.
    Keywords: Bank output; user-cost approach; total factor productivity; Tornqvist index; growth accounting; labor quality
    JEL: D24 G21 J24 O47
    Date: 2008–11
  5. By: Troaca, Victor
    Abstract: The activity of bank institutions is subjrcted to a range of risks, and therefore these indtitutions are supossed to deal with their administration to the highest possible. An efficient administration of risks of the credit institutions supposes, among others, identification of considerable risks of the activity developped and the elaboration of some politics and efficient administration procedures of these. The banks must also create functional special structures in order to assure this administration and to establish adequate responsabilities on different hierarchical levels. An extremely important role in the administration of significant risks is given to committes of administration the risks which have to function in every bank institution.
    Keywords: bank institution/ risk/ great risk/ gestion of semnificative risks
    JEL: G38 G32 G30
    Date: 2008–11–21
  6. By: Guglielmo Maria Caporale; Roman Matousek; Chris Stewart
    Abstract: This paper estimates ordered logit and probit regression models for bank ratings which also include a country index to capture country-specific variation. The empirical findings provide support to the hypothesis that the individual international bank ratings assigned by Fitch Ratings are underpinned by fundamental quantitative financial analyses. Also, there is strong evidence of a country effect. Our model is shown to provide accurate predictions of bank ratings for the period prior to the 2007 - 2008 banking crisis based upon publicly available information. However, our results also suggest that quantitative models are not likely to be able to predict ratings with complete accuracy. Furthermore, we find that both quantitative models and rating agencies are likely to produce highly inaccurate predictions of ratings during periods of financial instability.
    Keywords: International banks, ratings, ordered choice models, country index
    JEL: C25 C51 C52 G21
    Date: 2009
  7. By: Silvio Contessi; Johanna Francis
    Abstract: How have U.S. commercial banks responded during the current financial crisis? What was hiding behind the dynamics of aggregate commercial bank loans through the end of 2008? We use balance sheet data for the entire population of commercial banks to construct quarterly gross credit flows (credit expansion and credit contraction series) for the U.S. banking system during the period 1999:Q1-2008:Q4 and provide new evidence on changes in lending. We show that credit expansion, as defined in this paper, began declining during the first half of 2008 while credit contraction began steeply increasing only between the third and fourth quarters of 2008. Until then net credit growth was below trend but positive and not dissimilar to the 1980 and 2001 recessions. However, between the third and fourth quarter credit contraction grew larger than credit expansion across all types of loans (real estate, individual, commercial, and industrial loans) and for the largest banks. On the contrary, smaller banks continued to display positive net credit growth. Once we include 2008:Q4 data, the cyclical properties of our series most resemble the beginning of the 1991 recession and the intensification of the Savings and Loan crisis.
    Keywords: Financial crises ; Business cycles ; Credit; Credit Market, Reallocation, Aggregate Restructuring, Business Cycle, Financial crisis
    Date: 2009
  8. By: Bleuel, Hans-H. (Department of Economics of the Duesseldorf University of Applied Sciences)
    Abstract: Germany’s banking sector has been severely hit by the global financial crisis. In a German context as of February, 2009, this paper reviews briefly the structure of the banking industry, quantifies effects of the crisis on banks and surveys responses of economic policy. It is argued that policy design needs to enhance transparency and enforce the liability principle. In addition, economic policy should not eclipse principles of competition policy.
    Keywords: bank, banking crisis, financial crisis, economic policy, germany
    JEL: E52
    Date: 2009–03
  9. By: Troaca, Victor; Troaca, Mihaela-Elvira
    Abstract: Strengthening of the annual financial statements of companies that are in some cases explicitly regulated is a legal obligation stemming on the part of international practice and on the other side of prudential requirements and supervision. Specificity and impact on the banking, financial and economic environment, coupled with the trend of globalization of banking, requires more than paying special attention to strengthening of the annual financial statements of the banks. On paper, there are presented a series of issues related to the strengthening of the annual financial statements of the banks which are Romanian legal entities.
    Keywords: Bank/ Financial situations consolidation/ Regulation/ Strengthened report/ Audit
    JEL: M41 G28 G21
    Date: 2008–11–29
  10. 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
  11. By: Sophocles N. Brissimis (Bank of Greece); Manthos D. Delis (University of Ioannina)
    Abstract: The aim of this study is to provide an empirical methodology for the estimation of market power of individual banks. The new method employs the well-known model of Panzar and Rosse (1987) and proposes its estimation using the local regression technique. Thus, a number of restrictive assumptions regarding the properties of the production function of banks are relaxed, while the method proves successful in providing reasonable estimates of bank-level market power when applied to a large panel of banks of transition countries. The empirical results suggest that many banks in the sample deviate significantly from competitive practices and that market power varies substantially across banks in each country. Country averages of the bank-level results exhibit a very close relationship with standard, industry-level Panzar-Rosse estimates.
    Keywords: Bank output; Market power; bank-level; local regression
    JEL: G21 L11 C14
    Date: 2009–01
  12. By: Philip Brock
    Abstract: This paper provides a narrative account of the 1980s Chilean banking crisis. The Chilean crisis saw the nationalization of the two largest financial conglomerates and resulted in more than half of the financial system’s assets and liabilities falling under direct control of the government. The paper provides details of the bank rescue measures as well as the resolution of the banks' nonperforming debt problem. By providing a detailed chronology of the financial crisis, the paper highlights the evolutionary process that characterized the interventions taken by the Chilean authorities to restore the financial system to solvency. Despite the pessimism that accompanied the early stages of the banking crisis, the fifteen-year process of intervention, restructuring, and recapitalization left the financial system well-positioned to finance Chile’s economic growth, which averaged six percent per year (in real terms) for the 20 years following 1985.
    Date: 2009–04
  13. By: Nikolaj Schmidt
    Abstract: Motivated by the credit crisis 2007-08, this paper presents a theory of ¶capital market banks¶; banks that use derivative programs to exploit ine¢ ciencies in the capital markets. I model banks. use of asset backed commercial paper (ABCP) programs as a local game, and analyse how these programs affect financial stability. In a financial market where banks are subject to costly capital requirements and investors are heterogeneous, the ABCP program arises endogenously in response to inefficient risk sharing. The sustainability of the ABCP program depends crucially on the sponsoring bank's capital. Small shocks to the bank's capital can lead to a failure of the ABCP program. This amplifies the shock and pushes the the bank into bankruptcy. I link the dynamics of the ABCP market to the interbank market, and argue that an unravelling of the ABCP market can cause a seizure of the interbank market. The model indicates, that traditional monetary policy is unable to alleviate seizures of the interbank market, but that targeted liquidity measures, such as the ¶Term Securities Lending Facility¶, the ¶Term Auction Facility¶, the ¶Troubled Asset Relief Program¶, the ¶Money Market ABCP Program¶ and the launch of a ¶super fund¶, could end the unravelling of the ABCP market and ease the pressures in the interbank market.
    Date: 2009–01
  14. By: Sandrine Kablan
    Abstract: Our study aims at measuring banking system efficiency for France and WAMU, by isolating environmental specificities to each region. Our results show that the two banking systems have quite close efficiency scores about 80%. As their french counterparts, WAMU banks are efficient; however this assertion is true in regarding the environment in which they evolve. Indeed, those banks transform collected deposits in short term loans or loans to big foreign corporations, that they are sure to recover lent amounts. This situation has the following effect: a significant part of entreprises (smal and medium ones) are under funded. The comparison of the two banking systems lead us to suggest that monetary and financial authorities implement reforms. Those reforms inspired by french ones and adapted to the WAMU specificity and environement, would help the banking system of the zone to effectively play its financial intermediary role.
    Keywords: anchorage monetary zone, banking efficiency, stochastic frontier analysis
    JEL: G21 O16 O18 P17 P52
    Date: 2009
  15. By: Nikolaj Schmidt
    Abstract: This paper analyses how entry by an international bank into a developing economy a¤ects the credit market equilibrium. It opers a novel explanation of how a foreign entrant overcomes asymmetric information problems, and complements extant hard vs. soft information based theories of credit market segmentation. In the model, the banks are protected by limited liability. This introduces an agency problem since, in certain states of the world, it is optimal for the banks to lend to negative net present value projects. The agency problem has an asymmetric impact on the local and the foreign bank. The model illustrates how the diversification of the foreign bank's loan portfolio eliminates the agency problem. In contrast, in certain states of the world, the agency problem frustrates the local bank's ability to raise finance. The paper explores the importance of the foreign bank.s ability to provide finance during local liquidity shortages, and illustrates how this can lead to a segmentation of the credit market. In equilibrium, the foreign bank .nances local firms with a low exposure to the local economy, and the local bank finances firms with a high exposure to the local economy. The model predicts, that foreign entry increases the domestic .nancial sector.s vulnerability to liquidity shocks.
    Date: 2008–09
  16. By: Lieven Baert; Rudi Vander Vennet
    Abstract: We investigate whether or not banks play a positive role in the ownership structure of European listed firms. We distinguish between banks and other institutional investors as shareholders and examine empirically the relationship between financial institution ownership and the performance of the firms in which they hold equity. Our main finding is that after controlling for the capital structure decision of the firms and the ownership decision of financial institutions in a simultaneous equations model, we find that there is a negative relationship between financial institution ownership and the market value of firms, measured as the Tobin's Q. This is in contradiction with the monitoring hypothesis.
    Keywords: Financial institution ownership, Firm value, Capital structure
    JEL: G32 G20
    Date: 2009
  17. By: Troaca, Victor
    Abstract: The banking societies, as economical entities with specific activities inside the economy, draw up yearly financial situations, as well as in the situations designedly specified by the lawgiver. The financial yearly situations which the banking companies are compelled to draw up and at the same time to assure their publication, are made up of a unitarian documents system, namely: balance sheet, account of profit and loss, situation of modifications of proper capitals, situation of cash ebbs and flows and explanatory notes. To ensure a whole conformity with the European practice, as well as the assurance of comparability of yearly synthesis information presented by the Romanian banking companies with those of European banking companies, the contents, the structure and the way of drawing up of these documents has been designedly regulated by the Romanian authorities. These situations are presented as a unity whole and in a clearer manner in order to reflect the faithful image of the assets, debts, financial position, profit or loss and also of treasury ebbs and flows of the concerned bank.. The indicators presented inside the yearly financial situations made by the banking companies, have s synthesis character, reflecting different states or components of their acitivity, and the knowledge of content and their significance is being essential both in drawing papers and subsequently in the analysis of grouped or individual indicators or the ensemble activity of one or another of the banking societies. The balance sheet and the account of profit and loss have a central place in the ensemble of these yearly sinthesis documents, for which reason our analysis should focus on their presentation.
    Keywords: Banking societies/ balance sheet/ profit account/ loss account
    JEL: M41 G20
    Date: 2008–10–22
  18. By: Geert Bekaert; Campbell R. Harvey; Christian Lundblad
    Abstract: Financial openness is often associated with higher rates of economic growth. We show that the impact of openness on factor productivity growth is more important than the effect on capital growth. This explains why the growth effects of liberalization appear to be largely permanent, not temporary. We attribute these permanent liberalization effects to the role financial openness plays in stock market and banking sector development, and to changes in the quality of institutions. We find some indirect evidence of higher investment efficiency post-liberalization. We also document threshold effects: countries that are more financially developed or have higher quality of institutions experience larger productivity growth responses. Finally, we show that the growth boost from openness outweighs the detrimental loss in growth from global or regional banking crises.
    JEL: F15 F30 F36 F43 G15 G28
    Date: 2009–04

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