New Economics Papers
on Banking
Issue of 2009‒05‒09
five papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The Role of Banks in the Subprime Financial Crisis By Michele Fratianni; Francesco Marchionne
  2. Forecasting the Fragility of the Banking and Insurance Sector By Kerstin Bernoth; Andreas Pick
  3. Moral Hazard and Capital Requirements in a Lending Model of Credit Denial By Eric Van Tassel
  4. The determinants of net interest income in the Mexican banking system: an integrated model By Joaquín Maudos Villarroya; Liliana Solís
  5. Recovery Process Model By Itoh, Yuki

  1. By: Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Francesco Marchionne (Universita Politecnica delle Marche)
    Abstract: The ultimate point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses. Accounting data fail to reveal the full extent of the financial maelstrom. Ironically, according to these data, US banks appear to be still adequately capitalized. Yet, bank undercapitalization is the biggest stumbling block to a resolution of the financial crisis.
    Keywords: accounting, banks, credit, crisis, fair values, risk aversion, undercapitalization
    JEL: G21 N20
    Date: 2009–04
  2. 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 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
  3. By: Eric Van Tassel
    Abstract: In this paper we analyze a repeated game in which an intermediary offers unsecured loans to entrepreneurs using future credit denial to induce repayment. To finance the loans, the intermediary uses a combination of equity capital and external funds. We focus on a moral hazard problem that emerges between the intermediary and the less informed external investors over a costly loan monitoring choice. The presence of informed borrowers in the lender’s portfolio turns out to act as a substitute for capital requirements. The result is that the lending strategy utilized by the intermediary minimizes the moral hazard problem but implies the intermediary’s balance sheet is fragile to exogenous risk.
    Keywords: Moral hazard; Capital requirements; Bank regulation; Repayment incentives
    JEL: G21 G28 O16
    Date: 2009–05
  4. By: Joaquín Maudos Villarroya (Universitat de València); Liliana Solís (Universitat de València)
    Abstract: This paper analyzes net interest income in the Mexican banking system over the period 1993-2005. Taking as reference the seminal work by Ho and Saunders (1981) and subsequent extensions by other authors, our study models the net interest margin simultaneously including operating costs and diversification and specialization as determinants of the margin. The results referring to the Mexican case show that its high margins can be explained mainly by average operating costs and by market power. Although non-interest income has increased in recent years, its economic impact is low. El trabajo analiza el margen de intermediación de la banca Mexicana en el periodo 1996-2005. Tomando como referencia el trabajo seminal de Ho and Saunders (1981) y extensiones posteriores de otros autores, nuestro estudio modeliza el margen de intermediación incluyendo simultáneamente los costes operativos y la diversificación y especialización como determinantes del margen. Los resultados referidos al caso mexicano muestran que los altos márgenes vienen explicados principalmente por los costes medios operativos y por el poder de mercado. Si bien los ingresos no financieros han aumentando en los últimos años, su impacto económico es reducido.
    Keywords: Banca, Margen financiero, Costes operativos, Poder de Mercado, Ingresos no financieros. banking, net interest income, operating cost, non-interest income
    JEL: G21 L10
    Date: 2009–06
  5. By: Itoh, Yuki
    Abstract: Recently because of Basel II and the subprime mortgage crisis, the quantification of recovery size and recovery rate for the debt of a defaulted company is a serious problem for financial institutions and their supervision, but there has been no study of structure of recovery process. Existent recovery models do not regard recovery progress before the time of achievement of recovery. We directly model recovery process for the debt of a single defaulted company. We model the recovery process by a homogeneous compound Poisson process and extend our model to an inhomogeneous compound Poisson process. Interest rate is explicitly used in our model. By our model, the relationship between cumulative recovery, the increment of recovery, the initial debt amount, the last recovery possible time and interest rate can be analyzed. We derive the expectation and the variance of the survival value of the debt and recovery rate, and also derive the probability distribution function and the expectation of the recovery completion time. For this paper we present the numerical methods of calculating the expectation and the variance based on Panjer recursion formula and the fast Fourier transformation, and give numerical result. The methods of calculating the transition density of an inhomogeneous compound Poisson process is necessary for calculating the expectation and the variance of those in the inhomogeneous compound Poisson model, however little attention has been given to such methods. Therefore we propose the new procedure for calculating it by a piecewise homogeneous compound Poisson process.
    Keywords: Recovery rate, Credit risk, Basel, inhomogeneous compound Poisson process, Loan
    JEL: C61 C63 G10 G21
    Date: 2008–11

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