New Economics Papers
on Banking
Issue of 2009‒07‒11
fourteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bad Bank(s) and Recapitalization of the Banking Sector By Schäfer, Dorothea; Zimmermann, Klaus F.
  2. Back to the basics in banking ? A micro-analysis of banking system stability By Olivier De Jonghe
  3. Credit quantity and credit quality: bank competition and capital accumulation By Nicola Cetorelli; Pietro F. Peretto
  4. Private Insurance Against Systemic Crises? By Gersbach, Hans
  5. Sharing credit information under endogenous costs By Eric Van Tassel
  6. Precautionary reserves and the interbank market By Adam Ashcraft; James McAndrews; David Skeie
  7. The impact of tax law changes on bank dividend policy, sell-offs, organizational form, and industry structure By Hamid Mehran; Michael Suher
  8. Asymmetric Information and Loan Spreads in Russia: Evidence from Syndicated Loans By Fungáová, Zuzana; Godlewski , Christophe J.; Weill, Laurent
  9. Regional growth and finance in Europe: Is there a quality effect of bank efficiency? By Hasan, Iftekhar; Koetter , Michael; Wedow, Michael
  10. Splendid Associations of Favored Individuals: Federal and State Commercial Banking Policy in the Federalist Era By Howard Bodenhorn
  11. Efficacité et productivité des banques de la zone UEMOA dans un contexte de réformes financières. Une application de la méthode DEA (Banks efficiency and productivity in the WAEMU in a context of financial reforms : an application of the DEA method) By Hodonou DANNON
  12. Financial Networks, Cross Holdings, and Limited Liability By Helmut Elsinger
  13. Remittances and banking sector breadth and depth : evidence from Mexico By Demirguc-Kunt, Asli; Lopez Cordova, Ernesto; Martinez Peria, Maria Soledad; Woodruff, Christopher
  14. Credit crunch? An empirical test of cyclical credit policy By Herrala, Risto

  1. By: Schäfer, Dorothea; Zimmermann, Klaus F.
    Abstract: With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value - assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets’ current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank’s losses, while profits would be distributed to the distressed bank’s current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.
    Keywords: Bad Bank; Financial crisis; Financial Regulation; Toxic Assets
    JEL: G20 G24 G28
    Date: 2009–06
  2. By: Olivier De Jonghe (Ghent University; National Bank of Belgium, Research Department)
    Abstract: This paper analyzes the relationship between banks’ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks’ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank’s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks’ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discount
    Keywords: diversification, non-interest income, financial conglomerates, banking stability, extreme value analysis, tail risk
    JEL: G12 G21 G28
    Date: 2009–06
  3. By: Nicola Cetorelli; Pietro F. Peretto
    Abstract: This paper shows that bank competition has an intrinsically ambiguous effect on capital accumulation and economic growth. We further demonstrate that banking market structure can be responsible for the emergence of development traps in economies that would otherwise be characterized by unique steady-state equilibria. These predictions explain the conflicting evidence gathered from recent empirical studies of how bank competition affects the real economy. Our results were obtained by developing a dynamic general-equilibrium model of capital accumulation in which banks operate in a Cournot oligopoly. The presence of more banks leads to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to screen loan applicants and thus to poorer capital allocation. We also show that conditioning on economic parameters describing the quality of the entrepreneurial population resolves the theoretical ambiguity. In economies where the average prospective entrepreneur is of low credit quality and where screening would therefore be especially beneficial, less competition leads to higher capital accumulation. The opposite is true when entrepreneurs are innately of higher credit quality.
    Keywords: Bank competition ; Banking structure
    Date: 2009
  4. By: Gersbach, Hans
    Abstract: Insurance contracts contingent on macroeconomic shocks or on average bank capital could be a way of insuring against systemic crises. With insurance, banks are recapitalized when negative events would otherwise cause a write down of capital or even bank insolvency. In a simple model we illustrate the working of these contracts and how insurance could be achieved. We identify the main pitfalls of this approach: the insurance capacity of an economy may be too limited, insurance must be mandatory, insurance does not curb excessive risk taking (unobservable or observable), the insurers may go bankrupt in crises, and managerial restrictions on a rising bank equity capital limit insurance. Finally we discuss some complementary regulatory measures to foster the effectiveness of crisis insurance. In particular, we suggest mandatory purchase of insurance contracts against systemic crises by managers of large banks.
    Keywords: automatic recapitalization; banking crises; banking regulation; financial intermediation; insurance contracts
    JEL: D41 E4 G2
    Date: 2009–06
  5. By: Eric Van Tassel
    Abstract: In this paper we study a model in which asymmetrically informed banks compete with one another to offer loans to entrepreneurs with risky projects. Banks are given an opportunity to share private credit information about their borrowers. The revealed information impacts both the bank’s repayment revenue as well as its costs, in terms of either the rate paid on debt and insurance, or the risk adjusted capital requirement. In this framework, we study how the interaction of repayment revenue and cost shape individual banks’ incentives to share information and in turn, how this explains the overall degree of information sharing in the economy.
    Keywords: Information sharing; Bank competition; Market discipline
    JEL: D82 G21 O16
    Date: 2009–06
  6. By: Adam Ashcraft; James McAndrews; David Skeie
    Abstract: Liquidity hoarding by banks and extreme volatility of the fed funds rate have been widely seen as severely disrupting the interbank market and the broader financial system during the 2007-08 financial crisis. Using data on intraday account balances held by banks at the Federal Reserve and Fedwire interbank transactions to estimate all overnight fed funds trades, we present empirical evidence on banks' precautionary hoarding of reserves, their reluctance to lend, and extreme fed funds rate volatility. We develop a model with credit and liquidity frictions in the interbank market consistent with the empirical results. Our theoretical results show that banks rationally hold excess reserves intraday and overnight as a precautionary measure against liquidity shocks. Moreover, the intraday fed funds rate can spike above the discount rate and crash to near zero. Apparent anomalies during the financial crisis may be seen as stark but natural outcomes of our model of the interbank market. The model also provides a unified explanation for several stylized facts and makes new predictions for the interbank market.
    Keywords: Bank reserves ; Federal funds rate ; Interbank market ; Liquidity (Economics)
    Date: 2009
  7. By: Hamid Mehran; Michael Suher
    Abstract: This paper investigates the effect at the bank and industry level of a 1996 tax law change allowing commercial banks to elect S-corporation status. By the end of 2007, roughly one in three commercial banks had either opted for or converted to the S-corporation form of organization. Our study analyzes the effect of this conversion on bank dividend payouts. It also examines the effect S-corporation status has on a community bank's likelihood of sell-off and measures a firm's sensitivity to tax rates based on its choice of organizational form. We document that dividend payouts increase substantially after a bank's conversion to S status. Moreover, community banks that convert are significantly less likely to be sold than their C-corporation peers. We estimate a tax rate elasticity of conversion in the range of 2 to 3 percent for every 1-percentage-point change in relative tax rates. Overall, our results provide evidence that Subchapter S status has significant effects on bank conduct and industry structure.
    Keywords: Banks and banking - Taxation ; Dividends
    Date: 2009
  8. By: Fungáová, Zuzana (BOFIT); Godlewski , Christophe J. (BOFIT); Weill, Laurent (BOFIT)
    Abstract: This paper considers whether local bank participation exerts an impact on the spreads for syndicated loans in Russia. Following Berger, Klapper and Udell (2001), we test whether local banks possess a superior ability to deal with information asymmetries. Using a sample of 528 syndicated loans to Russian borrowers, we perform regressions of the spread on a set of variables including information on local bank participation and the characteristics of loans and borrowers. Unlike earlier studies, we distinguish foreign banks with a local presence from those without such presence. The intuition here is that a local presence may influence a foreign bank’s monitoring ability and access to information about borrowers. We observe no significant impact on the spread when there is local bank participation in a syndicated loan, nor do we find any significant influence of the presence of domestic-owned banks or foreign-owned banks on the spread. Additional estimations considering subsamples with exacerbated information asymmetries provide similar results. Therefore our conclusion is that local banks do not benefit from an advantage in monitoring ability and in information in Russia.
    Keywords: bank; information asymmetry; loan; syndication; Russia
    JEL: G21 P34
    Date: 2009–07–01
  9. By: Hasan, Iftekhar (Lally School of Management and Technology, USA, and Bank of Finland Research); Koetter , Michael (University of Groningen and Deutsche Bundesbank); Wedow, Michael (Deutsche Bundesbank)
    Abstract: In this study, we test whether regional growth in 11 European countries depends on financial development and suggest the use of cost- and profit-efficiency estimates as quality measures for financial institutions. Contrary to the usual quantitative proxies for financial development, the quality of financial institutions is measured in this study as the relative ability of banks to intermediate funds. An improvement in bank efficiency spurs five times more regional growth than does an identical increase in credit. More credit provided by efficient banks exerts an independent growth effect in addition to the direct quantity and quality channel effects.
    Keywords: bank performance; regional growth; bank efficiency; Europe
    JEL: G21 O16 O47 O52
    Date: 2009–05–18
  10. By: Howard Bodenhorn
    Abstract: Early American firms were shaped by contemporary social conceptions of appropriate horizontal power relations inside the firm and the Federalist era bank was shaped by these conceptions. The Federalist era debate on the corporation was much broader than how shareholders would treat with one another. Contemporary Americans who had no direct stake in the business corporation took great interest in its internal governance because rules for how the elite shared power within the corporation spoke to their attitudes toward sharing power in the wider civic polity. Was governance to be plutocratic or democratic? It was within this debate that the first banks were established. This debate influenced how banks were governed, which ultimately influenced how banks did their business. The political debates surrounding the establishment of the Bank of North America (1782) and the Bank of the United States (1791) defined these banks and nearly every bank chartered thereafter up to the mid-1830s and beyond. Specifically, the liberal Bank of North American charter that imposed few meaningful restrictions on the bank’s operation, accountability or governance gave way to the Bank of the United States’s more restrictive charter that sharply limited its operations, made it accountable to government, and defined many of its internal governance procedures. Subsequent state charters were more closely modeled on the Bank of the United States model than the Bank of North America charter.
    JEL: N2 N21
    Date: 2009–07
  11. By: Hodonou DANNON (labrii, ULCO)
    Abstract: L’objectif de cette étude est d’une part de mesurer les effets des réformes financières sur l’efficacité et la productivité des banques de la zone UEMOA sur la période de 1996 à 2006 et, d’autre part, de faire ressortir les principaux déterminants managériaux de l’efficacité de ces banques. L’estimation des scores de productivité et d’efficacité est effectuée au moyen de l’analyse de l’enveloppement des données (DEA). Les résultats montrent premièrement que les inefficiences techniques pures dominent les inefficiences d’échelle au niveau de tous les pays la zone excepté le Sénégal. Ainsi, l’inefficience relève plus d’une sous-utilisation des inputs que de rendements d’échelle inappropriés. Deuxièmement, la productivité globale des facteurs a connu une amélioration due essentiellement à la variation positive des progrès technologiques au détriment de l’efficacité technique sur toute la période de l’étude. Ceci laisse penser que les réformes financières n’ont pas permis aux banques de la zone d’améliorer leur efficacité technique. L’évolution de leur productivité est avant tout expliquée par les progrès technologiques existants dans le secteur bancaire de l’espace UEMOA. Troisièmement, les banques de petite taille de la zone UEMOA font plus d’efforts pour réduire la consommation des inputs que celles de grande taille. Par ailleurs, l’efficience d’échelle augmente pour ensuite descendre plus bas qu’à son niveau initial. Cette observation révèle l’existence d’une taille optimale au-delà de laquelle les banques subiraient des déséconomies d’échelle. Quatrièmement, les banques domestiques privées ont un léger avantage en termes d’efficience technique globale et d’efficacité d’échelle sur les banques étrangères tandis que les banques d’Etat ont enregistré les plus faibles scores en termes d’efficacité et de productivité. L’analyse des déterminants des scores d’efficacité montre que l’origine de la propriété, la taille des banques et l’étendue du réseau bancaire ne constituent guère des facteurs déterminants de l’efficacité des banques, du moins pour ce qui concerne les pays de l’UEMOA. En revanche, l’efficacité est influencée par le ratio de capitalisation des banques de l’Union. Enfin, la structure du portefeuille d’actifs des banques et la part des dépôts dans le total bilan sont des variables qui se sont avérées déterminantes aussi bien de l’efficacité technique globale que de l’efficacité technique pure. The purpose of this study is firstly to measure the effects of financial reforms in banks productivity and efficiency in the WAEMU area during the 1996-2006 period, and secondly, to draw the mains managerial determinants of banks efficiency. The productivity and efficiency scores are estimated through the Data Envelopment Analysis (DEA). Our empirical results show firstly that pure technical inefficiencies are higher than scale inefficiencies in all the countries of the area except for Senegal. Thus, the inefficiency stems rather from an under-use of inputs than from an inappropriate return to scale. Secondly, we notice a growth of the global productivity factors which is essentially due to the positive variation of technological progress. Consequently, financial reforms did not permit to banks to increase their technical efficiency. Thirdly, small banks make more efforts to reduce their inputs consumption than great banks. One the other hand, scale efficiency at first increases to decrease then below its initial level. This observation means that there is an optimal size beyond which banks would undergo diseconomies of scale. Fourthly, private domestic-owned banks have a slight advantage on foreign banks in terms of global technical efficiency and scale efficiency while State-owned banks recorded the weakest efficiency and productivity scores. We furthermore conclude that the ownership’s origin, the size of banks and the breadth of the financial network are not much determinant factors of banks efficiency, at least in the WAEMU countries. However, the efficiency is influenced by the capitalization’s ratio of the banks of the Union. Finally, the structure of the banks' portfolio of assets and the proportion of their deposits in the total balance are revealed to be determinants of global as well as pure technical efficiency.
    Keywords: banks, efficiency, productivity, data envelopment analysis, financial reforms
    JEL: G21 O23 O43 O00
    Date: 2009–05
  12. By: Helmut Elsinger (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna,)
    Abstract: I discuss a network of banks which are linked with each other by financial obligations and cross holdings. Given an initial endowment the value of the obligations and the equity values of the banks are determined endogenously in a way consistent with the priority of debt and the limited liability of equity. Even though neither equity values nor debt values are necessarily unique the value of debt and equity holdings of outside investors is uniquely determined. An algorithm to calculate debt and equity values is developed.
    Keywords: Financial Network; Credit Risk; Systemic Risk.
    JEL: G21 G33
    Date: 2009–05–29
  13. By: Demirguc-Kunt, Asli; Lopez Cordova, Ernesto; Martinez Peria, Maria Soledad; Woodruff, Christopher
    Abstract: Despite the rising volume of remittances flowing to developing countries, their impact on banking sector breadth and depth in recipient countries has been largely unexplored. The authors examine this topic using municipio-level data on the fraction of households that receive remittances and on measures of banking breadth and depth for Mexico. They find that remittances are strongly associated with greater banking breadth and depth, increasing the number of branches and accounts per capita and the ratio of deposits to gross domestic product. These effects are significant both statistically and economically, even after conducting robustness tests and addressing the potential endogeneity of remittances.
    Keywords: Access to Finance,Banks&Banking Reform,Population Policies,Debt Markets,
    Date: 2009–06–01
  14. By: Herrala, Risto (Bank of Finland Research)
    Abstract: In this paper we test the hypothesis that credit policies are pro-cyclical. Our approach is based on a stochastic frontier analysis of borrower data, as in Chen and Wang (2008). We extend the applicability of the approach, and propose a novel test specification which is informative of many types of pro-cyclicality. The analysis of representative samples of household borrowers during a huge cycle and its aftermath yields evidence of time-varying credit policy. We find that the focus of credit policy changed from collateral to current income during the cycle. Instead of a credit crunch, ie, an overall tightening of credit during the economic and financial contraction, we find a tightening of credit limits with respect to a minority of borrowers and an easing for the majority. In the course of the post-crisis period, credit policy became more lenient. Both the level of credit limits and the ‘tailoring’ of limits to group-specific characteristics of households increased. A reduction in the idiosyncratic variance of limits suggest that banks have become more consistent in their credit policies.
    Keywords: credit policy; credit constraints; household borrowing; frontier analysis
    JEL: D14 E32 E51 G21
    Date: 2009–03–24

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