New Economics Papers
on Banking
Issue of 2009‒07‒28
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Back to the Basics in Banking? A Micro-Analysis of Banking System Stability By O. DE JONGHE
  2. The optimal level of deposit insurance coverage By Michael Manz
  3. Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation By Andrea Beltratti; René M. Stulz
  4. A question of liquidity: the great banking run of 2008? By Judit Montoriol-Garriga; Evan Sekeris
  5. Hong Kong's Banks During the Financial Crisis By Robert Mülhaupt
  6. Regulators and Innovators Play Tag: The Italian Historical Experience By Alfredo Gigliobianco; Claire Giordano; Gianni Toniolo
  8. Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization By Manuel Adelino; Kristopher Gerardi; Paul S. Willen

  1. By: O. DE JONGHE
    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: 2009–04
  2. By: Michael Manz
    Abstract: This paper develops a global game model that allows for a rigorous analysis of partial deposit insurance and provides the first comparative statics of the optimal level of deposit coverage. The optimal amount of coverage increases with lower bank liquidity requirements, with a higher precision of depositors' information, and with a lower relevance of large, uninsured creditors, and it should not be increased in anticipation of an economic downturn. Optimal insurance is higher if there is contagion and lower if banks can assume excessive risk, but interestingly, a high level of coverage may not be optimal even in the absence of moral hazard on the part of banks. The model supports the inauguration of coinsurance provisions and is applied to compare various policies addressing financial fragility. While an optimal lending of last resort policy can outperform deposit insurance, anticipated bailouts are inferior in terms of welfare. Capital requirements are not a substitute for insurance, but mitigate excessive risk taking.
    Keywords: Deposit insurance
    Date: 2009
  3. By: Andrea Beltratti; René M. Stulz
    Abstract: Though overall bank performance from July 2007 to December 2008 was the worst since at least the Great Depression, there is significant variation in the cross-section of stock returns of large banks across the world during that period. We use this variation to evaluate the importance of factors that have been discussed as having contributed to the poor performance of banks during the credit crisis. More specifically, we investigate whether bank performance is related to bank-level governance, country-level governance, country-level regulation, and bank balance sheet and profitability characteristics before the crisis. Banks that the market favored in 2006 had especially poor returns during the crisis. Using conventional indicators of good governance, banks with more shareholder-friendly boards performed worse during the crisis. Banks in countries with stricter capital requirement regulations and with more independent supervisors performed better. Though banks in countries with more powerful supervisors had worse stock returns, we provide some evidence that this may be because these supervisors required banks to raise more capital during the crisis and that doing so was costly for shareholders. Large banks with more Tier 1 capital and more deposit financing at the end of 2006 had significantly higher returns during the crisis. After accounting for country fixed effects, banks with more loans and more liquid assets performed better during the month following the Lehman bankruptcy, and so did banks from countries with stronger capital supervision and more restrictions on bank activities.
    JEL: G15 G18 G21 G32 G34
    Date: 2009–07
  4. By: Judit Montoriol-Garriga; Evan Sekeris
    Abstract: The current financial crisis has given rise to a new type of bank run, one that affects both the banks' assets and liabilities. In this paper we combine information from the commercial paper market with loan level data from the Survey of Terms of Business Loans to show that during the 2007-2008 financial crises banks suffered a run on credit lines. First, as in previous crises, we find an increase in the usage of credit lines as commercial spreads widen, especially among the lowest quality firms. Second, as the crises deepened, firms drew down their credit lines out of fear that the weakened health of their financial institution might affect the availability of the funds going forward. In particular, we show that these precautionary draw-downs are strongly correlated with the perceived default risk of their bank. Finally, we conclude that these runs on credit lines have weakened banks further, curtailing their ability to effectively fulfill their role as financial intermediaries.
    Keywords: Bank assets ; Bank liabilities ; Financial crises ; Commercial credit
    Date: 2009
  5. By: Robert Mülhaupt
    Abstract: Despite the negative impact of the current crisis and many remaining uncertainties about the actual economic recovery path, the medium-term outlook for Hong Kong’s banks remains favourable.
    Keywords: banking sector, foreign subsidiaries, GDP, financial services, global recession, China, economic, Hong Knog, banks, income, wealth management, loans,
    Date: 2009
  6. By: Alfredo Gigliobianco (Bank of Italy, Structural Studies Department); Claire Giordano (Bank of Italy, Structural Studies Department); Gianni Toniolo (Duke University)
    Abstract: Between the 1880s and the 1930s, three "regulatory cycles" can be identified in Italy. In the underlying model, each financial crisis gives rise to a regulatory change, which is circumvented in due time by financial innovation, that can then contribute to the outbreak of a new financial crisis. In Italy, overtrading of the banks of issue in the 1880s contributed to the 1888-1894 financial crisis, which yielded regulation concerning only these banks and restricting their activity. The German-type universal banks, created at the turn of the century and unconstrained in their undertakings, were at the core of the 1907 and the 1921-1923 crises. These led to a banking law in 1926 which, however, was born obsolete, in that it was not aimed at regulating universal banking as it had developed until then, but it contained general provisions regarding the whole range of deposit-taking institutions. Finally, the evolutionary adaptation of the universal banks into holding companies, not taken into account by the preceding law, contributed to the 1931-1934 banking crisis, followed by the 1936 bank legislation.
    JEL: G28 N20 N40
    Date: 2009–04
  7. By: Alain BERAUD (THEMA, Université de Cergy Pontoise)
    Abstract: Cet article étudie la crise qui, en 1825, tacha l’économie anglaise et les travaux que John Stuart Mill, Thomas Tooke et John Ramsay McCulloch consacrèrent à son analyse. Alors que McCulloch s’appuyait, pour comprendre, la crise sur la tradition ricardienne, Mill et Tooke s’en écartent et sans doute celui-là plus que celui-ci. McCulloch et Tooke soutiennent que l’organisation du système bancaire anglais a joué, sinon dans l’origine du moins dans le développement de la crise, un rôle remarquable. Mill, au contraire, pense que la crise est l’effet de spéculations hasardeuses et qu’elle se serait tout aussi bien développée dans un système où la monnaie aurait consisté en espèces. Il avance des idées qui seront reprises et développées par la Banking School.
    Keywords: Mill, Tooke, McCulloch, crise, spéculation, overtrading, Banking School.
    JEL: B12 B31 E42 N13
    Date: 2009
  8. By: Manuel Adelino; Kristopher Gerardi; Paul S. Willen
    Abstract: We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.
    JEL: D11 D12 G21
    Date: 2009–07

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