New Economics Papers
on Banking
Issue of 2009‒09‒05
nine papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Shocks at large banks and banking sector distress: the Banking Granular Residual By Blank, Sven; Buch, Claudia M.; Neugebauer, Katja
  2. Bank Crises and Investor Confidence By Una Okonkwo Osili; Anna Paulson
  3. The effects of mutual guarantee consortia on the quality of bank lending By Columba, Francesco; Gambacorta, Leonardo; Mistrulli, Paolo Emilio
  4. The effects of privatization and consolidation on bank productivity: comparative evidence from Italy and Germany By Fiorentino, Elisabetta; Vincenzo, Alessio De; Heid, Frank; Karmann, Alexander; Koetter, Michael
  5. Why do savings banks transform sight deposits into illiquid assets less intensively than the regulation allows? By Holl, Dorothee; Schertler, Andrea
  6. Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks By Marcos Souto; Benjamin M. Tabak; Francisco Vazquez
  7. Bank Productivity in China 1997-2007: An Exercise in Measurement By Matthews, Kent; Zhang, Nina
  8. Stress testing German banks in a downturn in the automobile industry By Düllmann, Klaus; Erdelmeier, Martin
  9. Does banks size distort market prices?: evidence for too-big-to-fail in the CDS market By Völz, Manja; Wedow, Michael

  1. By: Blank, Sven; Buch, Claudia M.; Neugebauer, Katja
    Abstract: Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix (2008a) and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2007). We find that positive shocks at large banks reduce the probability of distress of small banks.
    Keywords: Banking sector distress,size effects,shock propagation,Granular Residual
    JEL: E44 E52 E32 G21
    Date: 2009
  2. By: Una Okonkwo Osili; Anna Paulson
    Abstract: In addition to their direct effects, episodes of financial instability may decrease investor confidence. Measuring the impact of a crisis on investor confidence is complicated by the fact that it is difficult to disentangle the effect of investor confidence from coincident direct effects of the crisis. In order to isolate the effects of financial crises on investor confidence, we study the investment behavior of immigrants in the U.S. Our findings indicate that systemic banking crises have important effects on investor behavior. Immigrants who have experienced a banking crisis in their countries of origin are significantly less likely to have bank accounts in the U.S. This finding is robust to including important individual controls like wealth, education, income, and age. In addition, the effect of crises is robust to controlling for a variety of country of origin characteristics, including measures of financial and economic development and specifications with country of origin fixed effects.
    Keywords: Systemic Bank Crisis, Financial Crisis, Investor Confidence
    JEL: G21
    Date: 2009–01
  3. By: Columba, Francesco; Gambacorta, Leonardo; Mistrulli, Paolo Emilio
    Abstract: In this paper we investigate whether or not mutual guarantee consortia (MGC), a financial institution well developed in Italy, alleviate the difficulties that Small and Medium Enterprises (SMEs) face when they ask for a bank loan. We find that the probability of a small firm affiliated to a MGC of going into default is lower than that of firms not affiliated to such a consortium. These results indicate that MGCs improve the ability of banks to screen and monitor small firms.
    Keywords: bank credit; financial intermediaries; small and medium enterprises; bad debt.
    JEL: O16 D82 G30 G21
    Date: 2009–04
  4. By: Fiorentino, Elisabetta; Vincenzo, Alessio De; Heid, Frank; Karmann, Alexander; Koetter, Michael
    Abstract: The Italian and German banking systems shared similar characteristics early in the 1990s but have evolved in different directions since then: Italy privatized its publicly-owned banks while Germany has maintained a large share of state-owned savings banks. Contemporaneously, banks in both markets engaged heavily in mergers and acquisitions. We analyze how these activities have affected banks' productivity in the period 1994-2004, differentiating between technical change, efficiency change and scale economies. We find that privatized banks experienced a significant increase in productivity, especially if they subsequently merged with other banks. German banks were still able to increase their productivity through consolidation.
    Keywords: Banking market integration,deregulation,total factor productivity,Italy,Germany
    JEL: D24 G21 G28 L33
    Date: 2009
  5. By: Holl, Dorothee; Schertler, Andrea
    Abstract: For their short-term payment obligations, savings banks hold substantially more liquid assets than the liquidity regulation requires. This paper investigates whether sight deposits, an important funding source for savings banks, help in explaining liquid asset holdings in excess of regulatory requirements. We analyze whether savings banks transform sight deposits in illiquid assets less intensively than is permitted because (i) the liquidity regulation underestimates actual withdrawal rates (underestimation effect) and/or (ii) savings banks are subject to limits in their lending to non-banks that they do not offset by, for instance, medium-term interbank lending or fixed asset holdings (lending effect). In our sample, we do not find the underestimation effect to be applicable as actual deposit withdrawal rates are in most cases lower than the regulatorily specified rate. However, we find the lending effect to be at work: Savings banks with low shares of loans to non-banks do not transform sight deposits into illiquid assets as intensively as savings banks with high shares of non-bank loans. Our analysis does not only show that liquid assets positively depend on sight deposits, but also shines a light on how bank size and the individual bank's position in the interbank market affect liquid assets.
    Keywords: Liquid assets,sight deposits,prudential liquidity regulation
    JEL: G21
    Date: 2009
  6. By: Marcos Souto; Benjamin M. Tabak; Francisco Vazquez
    Abstract: This study constructs a set of credit risk indicators for 39 Brazilian banks, using the Merton framework and balance sheet information on the banks’ total assets and liabilities. Despite the simplifying assumptions, the methodology captures well several stylized facts in the recent history of Brazil. In particular, it identifies deterioration in the credit risk indicators of the banking sector, following the crisis in the early 2000s. The risk indicators were regressed against a number of macro-financial variables at both individual and systemic level, showing that an increase in the system EDF, interest rates, and CDS spreads will lead to a deterioration of the individual expected default probability.
    Date: 2009–07
  7. By: Matthews, Kent (Cardiff Business School); Zhang, Nina
    Abstract: This study examines the productivity growth of the nationwide banks of China and a sample of city commercial, banks for the eleven years to 2007. Estimates of total factor productivity growth are constructed with appropriate confidence intervals, using a bootstrap method for the Malmquist index. The study adjusts for the quality of the output by accounting for the non-performing loans on the balance sheets of the banks and tests for the robustness of the results by examining alternative sets of outputs. The productivity growth of the state-owned commercial banks (SOCBs) is compared with the joint-stock banks (JSCBs) and city commercial banks (CCBs). The results show that average total factor productivity for the joint-stock banks was better than that of the state-owned banks for some models of measurement but not others. But the average city commercial banks improved its productivity growth both in terms of frontier shift and efficiency gain throughout the whole period. The study also shows that individual state-owned and joint-stock banks did improve their productivity growth and defined an improving production frontier. Most other banks lagged behind so that the gap between the inefficient banks and the most efficient banks widened. While individual banks improved their productivity growth there is no evidence that the average productivity growth of Chinese banks as a whole improved in the run-up to WTO.
    Keywords: Bank Efficiency; Productivity; Malmquist index; Bootstrap
    JEL: D24 G21
    Date: 2009–09
  8. By: Düllmann, Klaus; Erdelmeier, Martin
    Abstract: In this paper we stress-test credit portfolios of 28 German banks based on a Mertontype multi-factor credit risk model. The ad-hoc stress scenario is an economic downturn in the automobile industry that constitutes an exceptional but plausible event suggested by historical data. Rather than on a particular stress forecast, the focus of the paper is on the main drivers of the stress impact on banks' credit portfolios. Although the percentage of loans in the automobile sector is relatively low for all banks in the sample, the expected loss conditional on the stress event increases substantially by 70%-80% for the total portfolio. This result confirms the need to account for hidden sectoral concentration risk because the increase in expected loss is driven mainly by correlation effects with related industry sectors. Therefore, credit risk dependencies between sectors have to be adequately captured even if the trigger event is confined to a single sector. Finally, we calculate the impact on banks' own funds ratios. The main results are robust against various robustness checks, namely those concerning the granularity of the credit portfolio, the level of inter-sector asset correlations, and a cross-sectional variation of intra-sector asset correlations.
    Keywords: Asset correlation,portfolio credit risk,stress test,sectoral credit concentration
    JEL: G21 G33 C13 C15
    Date: 2009
  9. By: Völz, Manja; Wedow, Michael
    Abstract: This paper examines the potential distortion of prices in the CDS market caused by too-big-to-fail. Overall, we find evidence for market discipline in the CDS market. However, CDS prices are distorted due to a size effect which arises when investors expect a public bail-out as a result of too-big-to-fail. A one percentage point increase in size reduces the CDS spread of a bank by about two basis points. We further find that some banks have already reached a size that makes them too-big-to-be-rescued. While the price distortion for these banks decreases the existence of banks that are considered to be toobig-to-rescue raises important new issues for banking supervisors.
    Keywords: Market Discipline,Too Big To Fail,Too Big to Rescue CDS Spreads
    JEL: G14 G21 G28
    Date: 2009

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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