New Economics Papers
on Banking
Issue of 2009‒08‒02
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The role of the securitization process in the expansion of subprime credit By Taylor D. Nadauld; Shane M. Sherlund
  2. Bank CEO Incentives and the Credit Crisis By Rüdiger Fahlenbrach; René M. Stulz
  3. Regulations, competition and bank risk-taking in transition countries By Agoraki, Maria-Eleni; Delis, Manthos D; Pasiouras, Fotios
  4. Globalized banks: lending to emerging markets in the crisis By Nicola Cetorelli; Linda S. Goldberg
  5. Leverage Bubbles By Fares Triki
  6. Does Trade Credit Provides Favorable Information to Banks? Evidence from Japan By Takanori Tanaka
  7. Bank competition, institutional strength and financial reforms in Central and Eastern Europe and the EU By Delis, Manthos D; Pagoulatos, George
  8. Financial Stability in the United Kingdom: Banking on Prudence By E. Philip Davis

  1. By: Taylor D. Nadauld; Shane M. Sherlund
    Abstract: We analyze the structure and attributes of subprime mortgage-backed securitization deals originated between 1997 and 2007. Our data set allows us to link loan-level data for over 6.7 million subprime loans to the securitization deals into which the loans were sold. We show that the securitization process, including the assignment of credit ratings, provided incentives for securitizing banks to purchase loans of poor credit quality in areas with high rates of house price appreciation. Increased demand from the secondary mortgage market for these types of loans appears to have facilitated easier credit in the primary mortgage market. To test this hypothesis, we identify an event which represents an external shock to the relative demand for subprime mortgages in the secondary market. We show that following the SEC's adoption of rules reducing capital requirements on certain broker dealers in 2004, five large deal underwriters disproportionately increased their purchasing activity relative to competing underwriters in ZIP codes with the highest realized rates of house price appreciation but lower average credit quality. We show that these loans subsequently defaulted at marginally higher rates. Finally, using the event as an instrument, we demonstrate a causal link between the demand for mortgages in the secondary mortgage market and the supply of subprime credit in the primary mortgage market.
    Date: 2009
  2. By: Rüdiger Fahlenbrach; René M. Stulz
    Abstract: We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity. Further, option compensation did not have an adverse impact on bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; further, there is no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.
    JEL: G21 G32
    Date: 2009–07
  3. By: Agoraki, Maria-Eleni; Delis, Manthos D; Pasiouras, Fotios
    Abstract: This study investigates whether regulations have an independent effect on bank risk-taking or whether their effect is channeled through the market power possessed by banks. Given a well-established set of theoretical priors, the regulations considered are capital requirements, restrictions on bank activities and official supervisory power. We use data from the Central and Eastern European banking sectors over the period 1998-2005. The empirical results suggest that banks with market power tend to take on lower credit risk and have a lower probability of default. Capital requirements reduce risk in general, but for banks with market power this effect significantly weakens. Higher activity restrictions in combination with more market power reduce both credit risk and the risk of default, while official supervisory power has only a direct impact on bank risk.
    Keywords: Banking sector reform; regulations; competition; risk-taking; CEE banks
    JEL: G38 G32 G21
    Date: 2009–06–01
  4. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: As banking has become more globalized, so too have the consequences of shocks originating in home and host markets. Global banks can provide liquidity and risk-sharing opportunities to the host market in the event of adverse host-country shocks, but they can also have profound effects across international markets. Indeed, global banks played a significant role in the transmission of the current crisis to emerging-market economies. Flows between global banks and emerging markets include both cross-border lending, which has long been recognized as responding significantly to shocks at home or abroad, and internal capital-market lending, which is the internal flow of funds within a banking organization (such as between a headquarters and its offices in foreign locations). Adverse liquidity shocks to developed-country banking, such as those that occurred in the United States in 2007 and 2008, have reduced lending in local markets through contractions in cross-border lending to banks and private agents and also through contractions in parent banks' support of foreign affiliates. Because all these forms of transmission impinge on the lending channel in recipient markets, the ownership structure of emerging-market banks does not by itself provide sufficient basis for identifying the degree of shock transmission from abroad.
    Keywords: Globalization ; Banks and banking, International ; Emerging markets ; Liquidity (Economics)
    Date: 2009
  5. By: Fares Triki (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This paper investigates the relation between liquidity and asset prices. It shows that, when banks balance sheets are marked to market and banks are targeting a financial leverage level - a situation similar to current environment - formation of Leverage Bubble phenomenon and suggests a new regulation rule based on a Dynamic Leverage Ratio (DLR) rule.
    Keywords: Financial crises, rational bubbles, Dynamic Leverage Ratio, mark to market accounting, asset pricing, macroprudential regulation, market liquidity.
    Date: 2009–05
  6. By: Takanori Tanaka (Institute of Social and Economic Research, Osaka University)
    Abstract: This article examines whether trade credit provides credible information about borrowerfs creditworthiness, thereby facilitating provision of bank credit. Using data on Japanese manufacturing firms over the period 1990-1995, our empirical analyses reveal that trade payables as a credible signal about borrowerfs creditworthiness facilitate the provision of short-term credit by less-informed banks. Consequently, in the firms that have armfs-length relations with banks, trade payables play an important role in mitigating asymmetric information problems between firms and banks, thereby facilitating extension of bank credit.
    Keywords: trade credit; bank credit
    JEL: G32
    Date: 2009–07
  7. By: Delis, Manthos D; Pagoulatos, George
    Abstract: Abstract Following their EU15 counterparts, the banking systems of Central and Eastern European (CEE) countries underwent extensive reform since the 1990s. In this paper we estimate the degree of bank market power during the periods of financial reform in each European country, and subsequently we analyze the political and institutional sources of bank competition distinguishing between the EU15 and CEE subgroups. A linear pattern in the relationship between bank competition and institutional strength is demonstrated for the EU15 group of countries, while for the CEEs this pattern is non-linear. Therefore, we suggest that relatively underdeveloped banking systems, in less advanced politico-institutional milieus, overall fail to benefit from reforms in their early stages. As a policy implication the results imply that a certain level of institutional maturity, combined with openness to foreign investors, is a precondition for reforms aiming at enhancing competition and efficiency of banking markets.
    Keywords: Bank competition; Financial reforms; Institutional development; European Union; Central and Eastern European countries
    JEL: C10 P51 P34 G21
    Date: 2009–07–02
  8. By: E. Philip Davis
    Abstract: The UK financial market has been severely affected by the recent financial crisis. The crisis has exposed weaknesses in the supervisory framework as well as that for crisis management and resolution. This paper reviews the supervisory and regulatory framework and the many reforms that have already been adopted to remedy these weaknesses. It also provides recommendations for further reforms. This Working Paper relates to the 2009 Economic Survey of the United Kingdom (<P>Stabilité financière au Royaume-Uni : miser sur la prudence<BR>Le marché financier britannique a été sévèrement touché par la crise financière. Celle-ci a mis en évidence de nombreuses faiblesses des mécanismes de contrôle et des dispositifs de gestion et de résolution des crises. Le présent chapitre examine le cadre de contrôle et de réglementation, ainsi que les nombreuses réformes qui ont déjà été adoptées pour remédier à ses faiblesses. Il s’achève par des recommandations concernant de nouvelles réformes. Ce document de travail se rapporte à l'Étude économique de l'OCDE sur le Royaume-Uni 2009 (
    Keywords: financial regulation, réglementation financière, UK banking system, système bancaire du Royaume-Uni, macroprudential issues, questions macroprudentielles, financial stability, stabilité financière
    JEL: G18 G21 G29
    Date: 2009–07–22

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