New Economics Papers
on Banking
Issue of 2009‒06‒10
nine papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Assessing the risk-return trade-off in loans portfolios By Javier Mencía
  2. Banks, Financial Markets and International Consumption Risk Sharing By Markus Leibrecht; Johann Scharler
  3. Contestability, Technology and Banking By Corvoisier, Sandrine; Gropp, Reint Eberhard
  4. Who Gets the Credit? And Does it Matter? Household vs Firm Lending Across Countries By Beck, T.H.L.; Büyükkarabacak, B.; Rioja, F.; Valev, N.
  5. Financial institutions and markets across countries and over time - data and analysis By Beck , Thorsten; Demirguc-Kunt, Asli
  6. What explains the low profitability of Chinese banks? By Alicia García-Herrero; Sergio Gavilá; Daniel Santabárbara
  7. Bank Integration and Local Credit Cycle:Evidence from Japan By Masami Imai; Seitaro Takarabe
  8. Transmission of Liquidity Shock to Bank Credit: Evidence from the Deposit Insurance Reform in Japan By Masami Imai; Seitaro Takarabe
  9. The Distributive Impact of Reforms in Credit Enforcement: Evidence from Indian Debt Recovery Tribunals By Ulf von Lilienfeld-Toal; Dilip Mookherjee; Sujata Visaria

  1. By: Javier Mencía (Banco de España)
    Abstract: This paper analyses the risk and return of loans portfolios in a joint setting. I develop a model to obtain the distribution of loans returns. I use this model to describe the investment opportunity set of lenders using mean-variance analysis with a Value at Risk constraint. I also obtain closed form expressions for the interest rates that banks should set in compensation for borrowers' credit risk under absence of arbitrage opportunities and I use these rates as a benchmark to interpret actual loans' prices. Finally, I study the risk-return trade-off in an empirical application to the Spanish banking system.
    Keywords: Credit risk, Probability of default, Asset Pricing, Mean-Variance allocation, Stochastic Discount Factor, Value at Risk
    JEL: G21 G12 G11 C32 D81 G28
    Date: 2009–06
  2. By: Markus Leibrecht (Department of Economics, Vienna University of Economics & B.A.); Johann Scharler (Department of Economics, University of Linz)
    Abstract: In this paper we empirically explore how characteristics of the domestic financial system influence the international allocation of consumption risk using a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Specifically, we find that countries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the international diversification of consumption risk. We also find that countries with market-based financial systems manage to share a significantly larger fraction of their country-specific risk than bank-based economies.
    JEL: F36 F41
    Date: 2009–05
  3. By: Corvoisier, Sandrine; Gropp, Reint Eberhard
    Abstract: We estimate the effect of internet penetration on retail bank margins in the euro area. Based on an adapted Baumol [1982] type contestability model, we argue that the internet has reduced sunk costs and therefore increased contestability in retail banking. We test this conjecture by estimating the model using semi-aggregated data for a panel of euro area countries. We utilise time series and cross-sectional variation in internet penetration. We find support for an increase in contestability in deposit markets, and no effect for loan markets. The paper suggests that for time and savings deposits, the presence of brick and mortar bank branches may no longer be of first order importance for the assessment of the competitive structure of the market.
    Keywords: Banking structure, Contestability, Internet
    JEL: D43 E43 G21
    Date: 2009
  4. By: Beck, T.H.L.; Büyükkarabacak, B.; Rioja, F.; Valev, N. (Tilburg University, Center for Economic Research)
    Abstract: While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity.
    Keywords: Financial Intermediation; Household Credit; Firm Credit
    JEL: D14 G21 G28
    Date: 2009
  5. By: Beck , Thorsten; Demirguc-Kunt, Asli
    Abstract: This paper introduces the updated and expanded version of the Financial Development and Structure Database and presents recent trends in structure and development of financial institutions and markets across countries. The authors add indicators on banking structure and financial globalization. They find a deepening of both financial markets and institutions, a trend concentrated in high-income countries and more pronounced for markets than for banks. Similarly, the recent increase in cross-border lending and debt issues has been concentrated in high-income countries, while low and lower-middle income countries have experienced an increase in remittance flows. Low net interest margins, rising profitability and declining stability in high-income countries’ banking sectors characterize the recent financial sector boom in high income countries leading up to the global financial crisis of 2007.
    Keywords: ,Debt Markets,Emerging Markets,Banks&Banking Reform,Economic Theory&Research
    Date: 2009–05–01
  6. By: Alicia García-Herrero (Banco Bilbao Vizcaya Argentaria); Sergio Gavilá (Banco de España); Daniel Santabárbara (Banco de España)
    Abstract: This paper analyzes empirically what explains the low profitability of Chinese banks for the period 1997-2004. We find that better capitalized banks tend to be more profitable. The same is true for banks with a relatively larger share of deposits and for more X-efficient banks. In addition, a less concentrated banking system increases bank profitability, which basically reflects that the four state-owned commercial banks -China’s largest banks- have been the main drag for system’s profitability. We find the same negative influence for China’s development banks (so called Policy Banks), which are fully state-owned. Instead, more market oriented banks, such as joint-stock commercial banks, tend to be more profitable, which again points to the influence of government intervention in explaining bank performance in China. These findings should not come as a surprise for a banking system which has long been functioning as a mechanism for transferring huge savings to meet public policy goals.
    Keywords: China, Bank profitability, Bank reform
    JEL: G21 G28
    Date: 2009–06
  7. By: Masami Imai (Department of Economics, Wesleyan University); Seitaro Takarabe
    Abstract: This paper investigates how the integration of local banking markets affects the credit and economic cycle of local economies by using both a data set on the branch network of nationwide city banks and a prefecture-level panel data set on the formation and collapse of the real estate bubble in Japan. The empirical results show that the presence of city banks does not seem to have lessened the effects of local financial shocks on local economies. On the contrary, we find evidence that nation-wide city banks aggressively transmitted financial shocks that originated from major cities to local peripheral economies. These results suggest a dark side of large nation-wide banks: they can be a source of financial and economic volatility when they elect to take concentrated risk and spread out the impacts of large financial shocks to peripheral economies.
    Date: 2009–06
  8. By: Masami Imai (Department of Economics, Wesleyan University); Seitaro Takarabe
    Abstract: Finding the causal effects of liquidity shocks on credit supply is complicated by the endogenous relation between loan demand and liquidity position of banks. This paper attempts to overcome this problem by exploiting, as a natural experiment, the exogenous deposit outflow prompted by the removal of a blanket deposit guarantee on time deposits in Japan. We find that just as the government placed a cap on insurance for time deposits in 2002, weak banks suffered from a large outflow of partially insured time deposits. More importantly, we find that those weak banks were not able to raise a sufficient amount of fully insured ordinary deposits to make up for the loss of time deposits, which, consequently, forced them to cut back on loan supply. These results are consistent with the theory that the imperfect substitutability of insured deposits and uninsured deposits affects the tightness of banks’ financing constraints and ultimately the supply of bank loans.
    Keywords: Deposit Insurance, Bank Lending Channel, Japan, Natural Experiment
    JEL: E44 G21
    Date: 2009–05
  9. By: Ulf von Lilienfeld-Toal (Stockholm School of Economics); Dilip Mookherjee (Boston University); Sujata Visaria (Boston University)
    Abstract: It is generally presumed that strengthening legal enforcement of lender rights increases credit access for all borrowers, by expanding the set of incentive compatible loan contracts. This is based on an implicit assumption of infinitely elastic supply of loans. With inelastic supply, strengthening enforcement generates general equilibrium effects which reduce credit access for small borrowers while expanding it for wealthy borrowers. We find evidence from a firm-level panel data set of such adverse distributional impacts of an Indian judicial reform which increased banks’ ability to recover non-performing loans in the 1990s.
    Date: 2009–04

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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