New Economics Papers
on Banking
Issue of 2009‒09‒11
ten papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Bank Competition and International Financial Integration:Evidence Using a New Index By Gurnain Kaur Pasricha
  2. Screening in the credit market when the collateral value is stochastic By Niinimäki, Juha-Pekka
  3. Does IT standardization help to boost cost and profit efficiency? Empirical evidence from German savings banks By Felix Noth; Constantin F. Slotty; Andreas Hackethal
  4. Bank Productivity in China 1997-2007: An Exercise in Measurement By Kent Matthews; Nina Zhang
  5. Bank Ownership, Firm Value and Firm Capital Structure in Europe By Lieven Baert; Rudi Vander Vennet
  6. What Is the Impact of the Global Financial Crisis on the Banking System in East Asia? By Michael Pomerleano
  7. Macro-Prudential Monitoring Indicators for CEMAC Banking System By Kamgna, Severin Yves; Tinang, Nzesseu Jules; Tsombou, Kinfak Christian
  8. The Empirical Relation between Credit Quality, Recovery, and Correlation By Daniel Rosch; Harald Scheule
  9. Default Risk and Equity Returns: A Comparison of the Bank-Based German and the U.S. Financial System By Breig, Christoph; Elsas, Ralf
  10. Stress Testing Credit Risk: Is the Czech Republic Different from Germany? By Petr Jakubik; Christian Schmieder

  1. By: Gurnain Kaur Pasricha (Hong Kong Institute for Monetary Research, University of California, Santa Cruz)
    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. It finds a strong link between greater competitiveness in domestic banking and international integration. The level of de jure controls, volatility and institutions matter for price integration but their importance differs between developed and developing countries.
    Date: 2009–07
  2. By: Niinimäki, Juha-Pekka (Bank of Finland Research)
    Abstract: This theoretical paper explores screening with loan collateral when both the collateral value and the probability of project success fluctuate. Some model versions challenge the classic findings of Bester (1985) by showing that high-risk borrowers may in such case be more willing to pledge collateral than low-risk borrowers. Abundant collateral then would not signal low risk. The results may help explain the mixed empirical findings on the role of collateral. The paper also extends the analysis of the topical subprime crises and risky real estate collateral.
    Keywords: banking; collateral; screening; signalling; subprime lending
    JEL: G21 G22 G28
    Date: 2009–09–02
  3. By: Felix Noth; Constantin F. Slotty; Andreas Hackethal
    Abstract: This paper investigates the impact of IT standardization on bank performance based on a panel of 457 German savings banks over the period from 1996 to 2006. We measure IT standardization as the fraction of IT expenses for centralized services over banks' total IT expenses. Bank efficiency, in turn, is measured by traditional accounting performance indicators as well as by cost and profit efficiencies that are estimated by a stochastic frontier approach. Our results suggest that IT standardization is conducive to cost efficiency. The relation is positive and robust for small and medium-sized banks but vanishes for very large banks. Furthermore, our study confirms the often cited computer paradox by showing that total IT expenditures negatively impact cost efficiency and have no influence on bank profits. To the best of our knowledge, this paper is first to empirically explore whether IT standardization enhances efficiency by employing genuine data of banks' IT expenditures.
    JEL: C23 G21
    Date: 2009–07
  4. By: Kent Matthews (Hong Kong Institute for Monetary Research, Cardiff University, Wales); Nina Zhang (Citibank (China), Cardiff University, Wales)
    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 weak average growth of TFP of the SOCBs disguises strong technical innovation. As a result, the inefficient banks have a greater efficiency gap to make up. This picture is similar but to a lesser extent for the JSCBs. In contrast the CCBs show strong TFP growth driven by efficiency gains and less so by technical innovation.
    Keywords: Bank Efficiency, Productivity, Malmquist Index, Bootstrap
    JEL: D24 G21
    Date: 2009–07
  5. By: Lieven Baert; Rudi Vander Vennet
    Abstract: We investigate whether or not banks play a positive role in the ownership structure of European listed firms. We distinguish between banks and other institutional investors as shareholders and examine empirically the relationship between financial institution ownership and the performance of the firms in which they hold equity. Our main finding is that after controlling for the capital structure decision of the firms and the ownership decision of financial institutions in a simultaneous equations model, we find that there is a negative relationship between financial institution ownership and the market value of firms, measured as the Tobin's Q. This is in contradiction with the monitoring hypothesis.
    Keywords: Financial institution ownership, Firm value, Capital structure
    JEL: G32 G20
    Date: 2009
  6. By: Michael Pomerleano
    Abstract: This paper assesses the condition and outlook of the financial sectors—in particular, the banking sector—in the East Asia region in the aftermath of the current global financial crisis. The risks in the banking systems in East Asia are analyzed using the standard supervisory framework, which assesses capital adequacy, asset quality, management, earnings, and liquidity (CAMEL). [WP 146].
    Keywords: financial sectors, banking sector, banking, financial, East Asia, Asia, banking system, capital, capital adequacy, asset, management, earnings, liquidity, CAMEL, global financial crisis, Thailand, exchange rate, lonas, Japan,
    Date: 2009
  7. By: Kamgna, Severin Yves; Tinang, Nzesseu Jules; Tsombou, Kinfak Christian
    Abstract: The main purpose of this paper is to determine the macro-prudential indicators of financial stability that can be used for supervising the banking system in the CEMAC zone. Going by a set of indicators drawn from similar works on macro-prudential supervision, and, more specifically, aggregate microeconomic variables of the banking sector, macroeconomic variables and combinations of the two, we were able to identify those that are relevant in analysing an imminent deterioration of the banking system in the subregion. At the end of this study, it was realised that claims on the private sector, foreign direct investments and the combination of exports and credits to the private sector, increase the risk of degradation of the banking system, while this risk is reduced by an increase in the exchange rate, increase in the internal resources of the banking system and inflation rate. The regulator should therefore bear this set of indicators in mind in order to facilitate a quick response to offset any potential banking crisis in the CEMAC region.
    Keywords: Banking System; Macro-Prudential Indicators; Weakness; Degradation; Monetary Policy; CEMAC; BEAC; Africa;
    JEL: C13 E58 C12 G28 G21
    Date: 2009–08
  8. By: Daniel Rosch (Leibniz Universitat Hannover); Harald Scheule (Hong Kong Institute for Monetary Research, The University of Melbourne)
    Abstract: The majority of industry credit portfolio risk models, as well as recent scientific results, are based on isolated modules for default probabilities and recoveries in the event of default. This paper shows that these common methods lead to various econometric drawbacks when the parameters are interpreted and aggregated for risk capital allocation and pricing purposes. This paper provides a top down approach in which individual credit risk parameters are derived analytically from a single model. This model allows for a i) dynamic, ii) consistent, and iii) unbiased modeling of credit portfolio risks. An empirical analysis provides evidence for the inferred relationship between credit quality, recovery and correlation.
    Keywords: Asset Value, Correlation, Credit Portfolio, Loss Given Default, Merton Model, Probability of Default, Recovery, Volatility
    JEL: G20 G28 C51
    Date: 2009–07
  9. By: Breig, Christoph; Elsas, Ralf
    Abstract: In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over firms with high default risk. We then compare results from asset pricing tests for the German and the U.S. stock markets. Since Germany is the prime example of a bank-based financial system, where debt is supposedly a major instrument of corporate governance, we expect that a systematic default risk effect on equity returns should be more pronounced for German rather than U.S. firms. Our evidence suggests that a higher firm default risk systematically leads to lower returns in both capital markets. This contradicts some previous results for the U.S. by Vassalou/Xing (2004), but we show that their default risk factor looses its explanatory power if one includes a default risk factor measured as a factor mimicking portfolio. It further turns out that the composition of corporate debt affects equity returns in Germany. Firms' default risk sensitivities are attenuated the more a firm depends on bank debt financing.
    Keywords: Asset pricing; Stochastic Discount Factor; Default Risk
    JEL: G12
    Date: 2009–03–27
  10. By: Petr Jakubik; Christian Schmieder
    Abstract: This study deals with credit risk modelling and stress testing within the context of a Merton-type one-factor model. We analyse the corporate and household sectors of the Czech Republic and Germany to find determining variables of credit risk in both countries. We find that a set of similar variables explains corporate credit risk in both countries despite substantial differences in the default rate pattern. This does not apply to households, where further research seems to be necessary. Next, we establish a framework for the stress testing of credit risk. We use a country specific stress scenario that shocks macroeconomic variables with medium severity. The test results in credit risk increasing by more than 100% in the Czech Republic and by roughly 40% in Germany. The two outcomes are not fully comparable since the shocks are calibrated according to the historical development of the time series considered and the size of the shocks for the Czech Republic was driven by the transformation period.
    Keywords: Credit risk, credit risk modelling, stress testing.
    JEL: G21 G28 G33
    Date: 2008–12

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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