New Economics Papers
on Banking
Issue of 2009‒05‒23
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Complexity and Financial Panics By Ricardo J. Caballero; Alp Simsek
  2. A Mechanism for Thawing the Credit Markets By Edi Karni
  3. Financial Stress, Downturns, and Recoveries By Selim Elekdag; Roberto Cardarelli; Subir Lall
  4. Regional Financial Development and Bank Competition: Effects on Firms' Growth By Fernandez de Guevara, Juan; Maudos, Joaquin
  5. Evaluation of riskiness of Indian Banks and probability of book value insolvency By Sinha, Pankaj; Taneja, Varundeep Singh; Gothi, Vineet
  6. Concentration in corporate bank loans. What do we learn from European comparisons? By Christophe J. Godlewski; Ydriss Ziane
  7. The determinants of net interest income in the Mexican banking system: an integrated model By Maudos, Joaquin; Solisa , Liliana
  8. Quality of governance and bank valuation in Russia: An empirical study By Bokov, Vassily; Vernikov, Andrei

  1. By: Ricardo J. Caballero; Alp Simsek
    Abstract: During extreme financial crises, all of a sudden, the financial world that was once rife with profit opportunities for financial institutions (banks, for short), becomes exceedingly complex. Confusion and uncertainty follow, ravaging financial markets and triggering massive flight-to-quality episodes. In this paper we propose a model of this phenomenon. In our model, banks normally collect information about their trading partners which assures them of the soundness of these relationships. However, when acute financial distress emerges in parts of the financial network, it is not enough to be informed about these partners, as it also becomes important to learn about the health of their trading partners. As conditions continue to deteriorate, banks must learn about the health of the trading partners of the trading partners of the trading partners, and so on. At some point, the cost of information gathering becomes too unmanageable for banks, uncertainty spikes, and they have no option but to withdraw from loan commitments and illiquid positions. A flight-to-quality ensues, and the financial crisis spreads.
    JEL: D8 E0 E5 G1
    Date: 2009–05
  2. By: Edi Karni
    Abstract: This paper describes a mechanism designed to induce commercial banks to increase their willingness to extend loans in an economic environment characterized by increased uncertainty and diminished expectations. This mechanism is a new tool for the conduct of monetary policy to combat recessions.
    Date: 2009–05
  3. By: Selim Elekdag; Roberto Cardarelli; Subir Lall
    Abstract: This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress-in particular banking distress-on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Economies with more arms-length financial systems appear to be particularly vulnerable to sharp contractions, due to the greater procyclicality of leverage in their banking systems.
    Keywords: Financial crisis , Financial systems , Banking sector , Exchange markets , Securities markets , Banking crisis , Economic recession , Economic recovery , Business cycles , Cross country analysis ,
    Date: 2009–05–13
  4. By: Fernandez de Guevara, Juan; Maudos, Joaquin
    Abstract: This paper analyzes the effect of regional financial development and bank competition on firms’ growth using the Spanish provinces as a testing ground. Our results show that firms in industries with a greater dependence on external finance grow faster in more financially developed provinces. The results also show that bank monopoly power has an inverted-U effect on firms’ growth, suggesting that market power has its highest effect at intermediate values. The effect is heterogeneous among firms according to the financial dependence of the industry they belong to. This result is consistent with the literature on relationship banking which argues that bank competition can have a negative effect on the availability of finance for more informationally opaque firms.
    Keywords: economic growth; regional financial development; bank competition
    JEL: L11 D40 G21
    Date: 2009
  5. By: Sinha, Pankaj; Taneja, Varundeep Singh; Gothi, Vineet
    Abstract: Recently, a lot of questions were raised about the financial health of commercial banks in India. This paper analyzes the Indian banks' riskiness and the probability of book-value insolvency under the framework developed by Hannan and Hanweck (1988). A risk index, known as Z score, for Global Trust Bank that became insolvent in 2004 suggests that the framework developed by Hannan and Hanweck (1988) is also relevant in the Indian context. For a random sample of 15 Indian Banks (public & private sector), we determine the riskiness/probability of book value insolvency over the years and also carry out a relative comparison between public and private sector banks in India. Results obtained in the study show that the probability of book value insolvency of Indian Banks has reduced over years and the probability of book value insolvency is lower in case of public sector banks in comparison to private sector banks.
    Keywords: Riskiness; insolvency; Z-statistic
    JEL: E58 O16
    Date: 2009–05–15
  6. By: Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg); Ydriss Ziane (BETA, Université de Nancy)
    Abstract: The aim of this paper is to empirically investigate the determinants of creditor concentration in the use of bank loans by firms in a European cross-country framework. We analyze the influence of loan and borrower characteristics but also banking market structure and legal enforcement country-specific variables that are expected to influence the financial and strategic decision relative to the number of bank lenders. We find that firms tend to diversify sources of financing by reducing bank concentration when their level of quality is higher and both asymmetric information and the risk of early liquidation are minimal (larger, older, transparent, liquid and profitable firms). Furthermore, lenders’ monitoring appears to be an important feature of lending concentration, particularly in order to prevent private benefits extraction by insiders in legal environment where shareholders benefit from better protections.
    Keywords: Financial intermediation, bank lending, creditor concentration, information asymmetry, Europe.
    JEL: G21 G32 G33
    Date: 2009
  7. By: Maudos, Joaquin; Solisa , Liliana
    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
    Keywords: banking; net interest income; operating cost; non-interest income
    JEL: L10 G21
    Date: 2009
  8. By: Bokov, Vassily; Vernikov, Andrei
    Abstract: This paper aims at explaining the differences in valuation of banking firms in Russia from a quality of governance point of view. A sample of acquisition deals and public offerings over the last 5 years is collected with the view of discovering factors that investors deem significant in making a decision whether to invest in a given banking firm and, if so, at what price. We use price-to-book-value of equity (P/BV) multiple as standard measurement of valuation and the dependent variable. As for explanatory variables, we put together a set of proxies for quality of bank governance and management, such as degree of concentration of control, managerial experience, degree of compliance with corporate governance best practices (e.g. degree of Board independence, qualification of external auditors), stability of bank’s governing bodies (Management Board and Board of Directors), and availability of external credit ratings. We find out which factors are statistically significant and relevant. A least squares multiple linear regression model is devised to check how individual variables explain the differences in valuation. We discover that external investors attach value to high concentration of ownership, sheer size of the bank, stability of the governing bodies, involvement of well-established external auditors and also that strategic investors tend to pay higher acquisition premiums. The features of the Board of Directors such as its independence, maturity and stability appear to create less value if any.
    Keywords: Bank; corporate governance; valuation; Russia
    JEL: G34 G21
    Date: 2008–10

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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