New Economics Papers
on Banking
Issue of 2009‒09‒26
eight papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Basel II and the Capital Requirements Directive: Responding to the 2008/09 Financial Crisis By Ojo, Marianne
  2. Presentation Du Nouvel Accord De Bale Sur Les Fonds Propres By Hamza Fekir
  3. How market power influences bank failures: Evidence from Russia By Fungacova, Zuzana; Weill, Laurent
  4. The Outbreak of the Russian Banking Crisis By Fidrmuc, Jarko; Süß, Philipp Johann
  5. India By Chairlone, Stefano; Ghosh, Saibal
  6. Structure and temporal change of the credit network between banks and large firms in Japan By Yoshi Fujiwara; Hideaki Aoyama; Yuichi Ikeda; Hiroshi Iyetomi; Wataru Souma
  7. The Effect of Deposit Insurance on Market Discipline:Evidence from a Natural Experiment on Deposit Flows By Alexei Karas; William Pyle; Koen Schoors
  8. The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data By Christian Calmès; Raymond Théoret

  1. By: Ojo, Marianne
    Abstract: This paper addresses factors which have prompted the need for further revision of banking regulation, with particular reference to the Capital Requirements Directive. The Capital Requirements Directive (CRD), which comprises the 2006/48/EC Directive on the taking up and pursuit of the business of credit institutions and the 2006/49/EC Directive on the capital adequacy of investment firms and credit institutions, implemented the revised framework for the International Convergence of Capital Measurement and Capital Standards (Basel II) within EU member states. Pro cyclicality has attracted a lot of attention – particularly with regards to the recent financial crisis, owing to concerns arising from increased sensitivity to credit risk under Basel II. This paper not only considers whether such concerns are well-founded, but also the beneficial and not so beneficial consequences emanating from Basel II’s increased sensitivity to credit risk (as illustrated by the Internal Ratings Based approaches). In so doing it considers the effects of Pillar 2 of Basel II, namely, supervisory review, with particular reference to buffer levels, and whether banks’ actual capital ratios can be expected to correspond with Basel capital requirements given the fact that they are expected to hold certain capital buffers under Pillar 2. Furthermore, it considers how regulators can respond to prevent systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. In deciding to cut back on lending activities, are the decisions of such firms justified in situations where such firms’ credit risk models are extremely and unduly sensitive - hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements ?
    Keywords: Basel II; Capital Requirements Directive; pro cyclicality; risk; regulation; banks
    JEL: E0 D0 K2 E5 E3
    Date: 2009–09–18
  2. By: Hamza Fekir (LEG)
    Abstract: In order to adapt to the liberalization of the financial sphere started in the Eighties, marked in particular by the end of the framing of credit, the disappearance of the various forms of protection of the State whose profited the banks, and the privatization of the near total of the establishments in Europe, the banking regulation evolved to a prudential approach, perceived like the only mode of regulation not entering in contradiction with the rules of the market. The current banking regulation is pressed on the supervision, the discipline of the market and the ratios prudential; in particular the ratios of the minimal own capital stocks. The object of this article is the presentation of the architecture of the new agreement of Basle (1999) which is based on three pillars consolidating it self mutually.
    Date: 2009–05
  3. By: Fungacova, Zuzana (BOFIT); Weill, Laurent (BOFIT)
    Abstract: There has been a notable debate in the banking literature on the impact of bank competition on financial stability. While the dominant view sees a detrimental impact of competition on the stability of banks, this view has recently been challenged by Boyd and De Nicolo (2005) who see the reverse effect. The aim of this paper is to contribute to this literature by providing the first empirical investigation of the role of bank competition on the occurrence of bank failures. We analyze this issue based on a large sample of Russian banks over the period 2001-2007 and employ the Lerner index as the metric of bank competition. The Russian banking industry is a unique example of an emerging market which has undergone a large number of bank failures during the last decade. Our findings clearly support the view that tighter bank competition is detrimental for financial stability. This result is robust to tests controlling for the measurement of market power, the definition of bank failure, the set of control variables, and the particular linear specification of the relationship. The normative implication of our findings is therefore that measures that increase bank competition could undermine financial stability.
    Keywords: bank competition; bank failure; Russia
    JEL: G21 P34
    Date: 2009–09–10
  4. By: Fidrmuc, Jarko; Süß, Philipp Johann
    Abstract: Russian banks have been strongly influenced by the worldwide financial crisis which started in the second half of 2008. This was caused by a combination of domestic, regional and international factors. We estimate an early warning model for the Russian crisis. We identified 47 Russian banks which failed after September 2008. Using the Bankscope data set, we show that balance sheet indicators were informative about possible failures of these banks as early as 2006. The early predictive indicators include especially equity, net interest revenues, return on average equity, net loans, and loan loss reserves.
    Keywords: Banking and financial crisis; early warning models; Russia; Logit.
    JEL: G33 G21 C25
    Date: 2009–09–17
  5. By: Chairlone, Stefano; Ghosh, Saibal
    Abstract: The article provides a snapshot of Indian banking and explores certain contextual issues
    Keywords: banking; India
    JEL: G21
    Date: 2009–01
  6. By: Yoshi Fujiwara; Hideaki Aoyama; Yuichi Ikeda; Hiroshi Iyetomi; Wataru Souma
    Abstract: We present a new approach to understanding credit relationships between commercial banks and quoted firms, and with this approach, examine the temporal change in the structure of the Japanese credit network from 1980 to 2005. At each year, the credit network is regarded as a weighted bipartite graph where edges correspond to the relationships and weights refer to the amounts of loans. Reduction in the supply of credit affects firms as debtor, and failure of a firm influences banks as creditor. To quantify the dependency and influence between banks and firms, we propose a set of scores of banks and firms, which can be calculated by solving an eigenvalue problem determined by the weight of the credit network. We found that a few largest eigenvalues and corresponding eigenvectors are significant by using a null hypothesis of random bipartite graphs, and that the scores can quantitatively describe the stability or fragility of the credit network during the 25 years.
    Date: 2009–01
  7. By: Alexei Karas; William Pyle; Koen Schoors
    Abstract: We explore how the introduction of explicit deposit insurance affects deposit flows into and out of banks of varying risk levels. Using evidence from a natural experiment in Russia, we employ a difference-in-difference estimator to isolate the change in the deposit flows of the newly insured group (i.e., households) relative to the uninsured “control” group (i.e., firms), thus improving upon prior studies that have sought to identify the effect of deposit insurance on market discipline. We find that the relative sensitivity of household deposits to bank capitalization diminished markedly after the introduction of an insurance program covering their deposits but not those of firms. The finding, we demonstrate, is not an artifact of the two groups responding differently to a banking crisis that occurred in Russia at roughly the same time.
    Date: 2009–05
  8. By: Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM)
    Abstract: This paper revisits the impact of off-balance-sheet (OBS) activities on banks risk-return trade-off. Recent studies (e.g., Stiroh and Rumble 2006) suggest that increasing OBS activities do not necessarily yield straightforward diversification benefits for banks. However, introducing a risk premium in the standard banks returns models, and resorting to an ARCH-M procedure, Canadian data suggest that banks risk-return trade-off displays a structural break around 1997. In the second subperiod of our sample (1997-2007), we find that the noninterest income generated by OBS activities no longer impacts banks returns negatively. While during the first period (1988-1996) the volatility variable is not significant in any returns equations, a risk premium eventually emerged, pricing the risk associated to OBS activities risks.
    Keywords: Regulatory changes; Noninterest income; Diversification; Structural break; Risk premium.
    JEL: G20 G21
    Date: 2009–08–12

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