New Economics Papers
on Banking
Issue of 2009‒08‒16
eleven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. An assessment of financial sector rescue programmes By Fabio Panetta; Thomas Faeh; Giuseppe Grande; Corrinne Ho; Michael King; Aviram Levy; Federico M. Signoretti; Marco Taboga; Andrea Zaghini
  2. Bank Competition and International Financial Integration: Evidence using a new Index By Pasricha, Gurnain
  3. Bank risk and monetary policy By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  4. The Pricing of Bank Debt Guarantees By Stefan Arping
  5. The responsive approach by the Basel Committee (on Banking Supervision) to regulation: Meta risk regulation, the Internal Ratings Based Approaches and the Advanced Measurement Approaches. By Ojo, Marianne
  6. What explains the low profitability of Chinese Banks? By Alicia García-Herrero; Sergio Gavilá; Daniel Santabárbara
  7. Lending Competition and Relationship Banking: Evidence from Japan By Ogura, Yoshiaki; Yamori, Nobuyoshi
  8. The retail activity of foreign banks in Italy: effects on credit supply to households and firms By Luigi Infante; Paola Rossi
  9. Impact of Digital Revolution on the Structure of Nigerian Banks By Agboola, A. A.; Yinusa, D.O.; Ologunde, A.O.
  10. Treatment of Double Default Effects within the Granularity Adjustment for Basel II By Sebastian Ebert; Eva Lütkebohmert
  11. Forecasting credit growth rate in Romania: from credit boom to credit crunch? By Albulescu, Claudiu Tiberiu

  1. By: Fabio Panetta (Banca d'Italia); Thomas Faeh (Bank for International Settlements); Giuseppe Grande (Banca d'Italia); Corrinne Ho (Bank for International Settlements); Michael King (Bank for International Settlements); Aviram Levy (Banca d'Italia); Federico M. Signoretti (Banca d'Italia); Marco Taboga (Banca d'Italia); Andrea Zaghini (Banca d'Italia)
    Abstract: We analyse the wide array of rescue programmes adopted in several countries, following Lehman Brothers’ default in September 2008, in order to support banks and other financial institutions. We first provide an overview of the programmes, comparing their characteristics, magnitudes and participation rates across countries. We then consider the effects of the programmes on banks’ risk and valuation, looking at the behaviour of CDS premia and stock prices. We then proceed to analyse the issuance of government guaranteed bonds by banks, examining their impact on banks’ funding and highlighting undesired effects and distortions. Finally, we briefly review the recent evolution of bank lending to the private sector. We draw policy implications, in particular as regards the way of mitigating the distortions implied by such programmes and the need for an exit strategy.
    Keywords: bank asset guarantees, capital injection, banks, financial sector, financial crisis, bank consolidation, bank mergers and acquisitions, event studies, government guaranteed bonds, credit crunch, exit strategy
    JEL: E58 E65 G14 G18 G21 G28 G32 G34
    Date: 2009–07
  2. By: Pasricha, Gurnain
    Abstract: In the debate on the benefits and costs of international financial integration recent literature has emphasized thresholds in the development of domestic markets as preconditions to benefitting from international integration. This paper offers an alternative view - that of development of competition in domestic markets as an aide to de-facto openness. Lack of competition in domestic financial systems may prevent countries from reaping the benefits of international integration simply because they prevent countries from being integrated in a meaningful way - that of price equalization. Using a new index of de facto financial openness, this paper explores the trends in and determinants of cross border integration of interbank markets. This index was introduced in Pasricha (2008)1 and captures the size of deviations from covered interest parity as well as the speed of reversion to the no-arbitrage band. The index is constructed using a SETAR model on a yearly basis for 54 countries for an average of 13 years per country. The results indeed confirm a strong link between lack of financial sector competitiveness (banking and non-banking) and lack of price convergence, particularly for low and middle income countries. Capital controls explain only a small part of deviations from covered interest parity. Crisis periods and periods of greater volatility see lower de facto integration.
    Keywords: Banking Sector; Imperfect Competition; International Financial Integration; Pasricha Index; de-facto Openness; Integration Index
    JEL: G1 F3 C40 C22 D43
    Date: 2009–07
  3. By: Yener Altunbas (University of Wales, Bangor, Gwynedd LL57 2DG, Wales, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We find evidence of a bank lending channel for the euro area operating via bank risk. Financial innovation and the new ways to transfer credit risk have tended to diminish the informational content of standard bank balance-sheet indicators. We show that bank risk conditions, as perceived by financial market investors, need to be considered, together with the other indicators (i.e. size, liquidity and capitalization), traditionally used in the bank lending channel literature to assess a bank’s ability and willingness to supply new loans. Using a large sample of European banks, we find that banks characterized by lower expected default frequency are able to offer a larger amount of credit and to better insulate their loan supply from monetary policy changes. JEL Classification: E44, E55.
    Keywords: bank, risk, bank lending channel, monetary policy.
    Date: 2009–07
  4. By: Stefan Arping (University of Amsterdam)
    Abstract: We analyze the optimal pricing of government-sponsored bank debt guarantees within the context of an asset substitution framework. We show that the desirability of fair pricing of guarantees depends on the degree of transparency of the banking sector: in relatively opaque banking systems, fair pricing exacerbates banks' incentive to take excessive risks, whereas the opposite is true in relatively transparent banking systems.
    Keywords: Debt Guarantees; Fair Pricing; Financial Stability
    JEL: G21 G38
    Date: 2009–06–30
  5. By: Ojo, Marianne
    Abstract: The use of complex and sophisticated financial instruments, such as derivatives, in the modern financial environment, has triggered the emergence of new forms of risks. As well as the need to manage such types of risks, this paper investigates developments which have instigated the Basel Committee in developing advanced risk management techniques such as the Internal Ratings Based (IRB) approaches and the Advanced Measurement Approaches (AMA). Developments since the inception of the 1988 Basel Capital Accord have not only led to growing realisation that new forms of risks have emerged, but that previously existing and managed forms require further redress. Basel II has evolved to a form of meta regulation – a type of regulation which involves the risk management of internal risk within firms. This paper attempts to illustrate the extent to which the Basel II Capital Accord has responded to global and financial developments and concludes on the basis of available research evidence, that given the difficulties attributed to the constantly evolving nature of risk and the need for regulators to remain one step ahead, that Basel II, to an extent, has been responsive in meeting with regulatory demands. However, the existence of unregulated instruments such as hedge funds still implies that, despite its advancements and achievements, the Basel Committee still faces uphill challenges in its efforts to address and regulate risks.
    Keywords: Basel; Committee; bank; regulation; AMA; IRB; risk
    JEL: K2
    Date: 2009–08
  6. By: Alicia García-Herrero; Sergio Gavilá; Daniel Santabárbara
    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 banks 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: 2009–04
  7. By: Ogura, Yoshiaki; Yamori, Nobuyoshi
    Abstract: The question of whether more competition among banks increases relationship banking, which is predicted to improve credit availability for informationally opaque firms in theory, is a controversial issue in the banking literature. By using firm-level survey data in Japan, this paper provides evidence for the negative correlation between lending competition and the provision of relationship banking . This paper raises the question whether fierce interbank competition is always beneficial for small firms.
    Keywords: relationship banking; lending competition
    JEL: L11 D82 G21
    Date: 2009–06–30
  8. By: Luigi Infante (Bank of Italy); Paola Rossi (Bank of Italy)
    Abstract: This paper investigates the effects of the increasing activity of foreign banks in Italy, distinguishing between credit granted to households and firms. Foreign banks display a differentiated degree of business expansion across the provinces, we exploit this variability to measure how foreign banks affect competition and test it with reference to: i) a market share instability index ; ii) interest rates; iii) the collateral requested. Our results, over the period 1997-2006, show that an increase in foreign intermediaries’ market share leads to a less stable market share index. As for mortgage loans to households, this enhanced competitive pressure implies a reduction in the average interest rate applied and an increase in the loans granted with respect to collateral. We do not find a significant impact on the average interest rate conditions applied to firms, although, in the most recent period, a reduction in the collateral on loans with longer maturity has emerged.
    Keywords: foreign banks, credit market competition
    JEL: G21 E44 L10
    Date: 2009–06
  9. By: Agboola, A. A.; Yinusa, D.O.; Ologunde, A.O.
    Abstract: The study examined the extent to which digital revolution has affected the organizational structure of Nigerian banks. Twenty-five banks were selected for the study in south-western Nigeria. Interview was conducted for middle and top level managers and questionnaire was developed and administered to the other staff using a five-point Likert scale to determine the attitudes and opinions of the staff on the effects of digital revolution on the organizational structure of the banks. The mean was used as an indicator of central tendency for quantitative variables that have frequency distributions in the study. The study found that standard operating procedures, politics, culture, surrounding environment and management decisions were all affected by digital revolution. It affected the organizational balance of rights, privileges, obligations, responsibilities, and feelings that have been established over a long period of time. The revolution brought structural changes in the line and unit of command, the principles of span of control, unity of command, and scalar principle of graded chain of superiors in the studied banks. It encouraged flat organizations as decision making became more decentralized. It also altered the required skill and increased the perceived advantage of workers with computer engineering background. Authority relied on knowledge and competence and not on mere formal position The study concluded that digital revolution has changed the course of history in the banking industry leaving far reaching effects and implications on both the organizational and industrial structure. It is imperative for banks and their staff to effect proper restructuring that will facilitate optimal utilization of the benefits provided by the revolution.
    Keywords: Digital Revolution; ICT; e-Commerce; Organizational Structure; Nigerian Banks
    JEL: L81 L89 L22
    Date: 2009–07–28
  10. By: Sebastian Ebert; Eva Lütkebohmert
    Abstract: Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversi?ed away. The impact of undiversi?ed idiosyncratic risk on portfolio Value-at-Risk can be quanti?ed via a granularity adjustment (GA). We provide an analytic formula for the GA in an extended single- factor CreditRisk+ setting incorporating double default e?ects. It accounts for guarantees and their e?ect of reducing credit risk in the portfolio. Our general GA very well suits for application under Pillar 2 of Basel II as the data inputs are drawn from quantities already required for the calculation of IRB capital charges.
    Keywords: analytic approximation, Basel II, counterparty risk, double default, granularity adjustment, IRB approach, securitization
    JEL: G31 G28
    Date: 2009–07
  11. By: Albulescu, Claudiu Tiberiu
    Abstract: The specialists paid a special attention to credit growth in the transitions countries due to its sharp increase during the last years. However, once the financial crisis started in 2008, the credit activity evolution reversed. Consequently, forecasting the credit trend has become a subject of interest in the context of the present financial and economic conditions, because the credit market blockage has a negative impact on economic activity revival and leads to the amplification of the uncertainty on financial markets. The main objective of this paper is to highlight the recent credit developments in Romania and to predict their future evolution. Based on the credit growth rate endogenous factors and using a stochastic simulation econometric model, we demonstrate that this economy experiences a passage from a credit boom to a severe credit crunch. The forecasting exercise results show a credit activity contraction up to the end of 2009, demolishing the expectations related to a near economic recovery in Romania.
    Keywords: credit growth rate; forecasts; stochastic simulation; credit crunch
    JEL: C53 E51 C15
    Date: 2009–07–26

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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