New Economics Papers
on Banking
Issue of 2009‒10‒03
nine papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Price-increasing competition: the curious case of overdraft versus deferred deposit credit By Brian T. Melzer; Donald P. Morgan
  2. Interne Transferpreise für Liquidität By Heidorn, Thomas; Schmaltz, Christian
  3. Bank capital and value in the cross section By Hamid Mehran; Anjan Thakor
  4. When You’ve Seen One Financial Crisis… By Simon van Norden
  5. Rescuing Banks from the Effects of the Financial Crisis By Michele Fratianni; Francesco Marchionne
  6. Real effects of banking crises: a survey of the literature By Luisa Carpinelli
  7. Blockholdings and corporate governance in the EU banking sector By Köhler, Matthias
  8. Size, Efficiency and Financial Reforms in Indian Banking By Pradeep Srivastava
  9. Time to buy or just buying time? The market reaction to bank rescue packages By Michael R King

  1. By: Brian T. Melzer; Donald P. Morgan
    Abstract: We find that banks charge more for overdraft credit when depositors have access to a potential substitute: deferred deposit ("payday") credit. We attribute this rise in prices partly to adverse selection created by banks' practice of charging a flat fee regardless of the overdraft amount--pricing that favors depositors prone to large overdrafts. When deferred deposit credit priced per dollar borrowed is available, depositors prone to small overdrafts switch to that option. That selection works against banks; large overdrafts cost more to supply and, if depositors default, banks lose more, so prices rise. Consistent with this adverse-selection hypothesis, we document that the average dollar amount per returned check at banks and other depository institutions increases when depositors have access to deferred deposit credit. Beyond documenting another case of price-increasing competition, our findings bear on theories of adverse selection in credit markets and contribute to the debate over the pros and cons of payday credit.
    Keywords: Overdrafts ; Bank competition ; Banks and banking - Service charges ; Bank deposits
    Date: 2009
  2. By: Heidorn, Thomas; Schmaltz, Christian
    Abstract: Banks are liquidity brokers: they acquire it at the market in form of deposits and lend it in form of loans. As liquidity is not for free, the costs of its acquisition have to be transferred to those (departments) that lend it. Furthermore, banks take liquidity risk. The costs to hedge this risk have to be transferred to those that bring this risk into the bank. We propose a pricing framework that consistently prices both liquidity and liquidity risk in banks. The transfer prices are based on the cost that liquidity and liquidity risk imply (cost-based pricing) and linked to market variables to avoid discretionary biases. Using a representative balance sheet of a commercial bank, we demonstrate the application of our approach. Our approach ensures that banks incorporate liquidity cost (often neglected so far) in customer prices. Furthermore, they comply with the sound principles of liquidity management that explicitly require a liquidity transfer pricing.
    Keywords: Liquidity,liquidity risk,cost-based pricing,funds transfer prices,bank controlling
    JEL: G21
    Date: 2009
  3. By: Hamid Mehran; Anjan Thakor
    Abstract: We address two questions: (i) Are bank capital structure and value correlated in the cross section, and if so, how? (ii) If bank capital does affect bank value, how are the components of bank value affected by capital? We first develop a dynamic model with a dissipative cost of bank capital that is traded off against the benefits of capital: strengthened incentives for the bank to engage in value-enhancing loan monitoring and a higher probability of avoiding regulatory closure due to loan delinquencies. The model predicts that (i) the total value of the bank and its equity capital are positively correlated in the cross section, and (ii) the various components of bank value--the synergies among the bank's assets and liabilities and the net present value to the shareholders of investing capital in the bank--are also positively cross-sectionally related to bank capital. When we confront the predictions with the data on bank acquisitions, we find strong support. The results are robust to a variety of alternative explanations--growth prospects, desire to acquire toe-hold positions, desire of capital-starved acquirers to buy capital-rich targets, market timing, pecking order, the effect of banks with binding capital requirements, too-big-to-fail, target profitability, risk, and mechanical effects.
    Keywords: Bank capital ; Bank assets
    Date: 2009
  4. By: Simon van Norden
    Abstract: Financial market crises may differ, but severe banking crises typically share many common features. The most recent crisis shares many features with the US Savings and Loan crisis of the 1980s and early 90s as well as some features of the LTCM crisis of 1998. More generally, banking crises are commonly associated with real estate market collapses. Effectively reducing the risk of future crisis requires some combination of reducing the potential size of real estate market collapses and the banking sector’s exposure to real estate losses. <P>Les crises des marchés des capitaux peuvent différer, mais les crises bancaires graves partagent en général de nombreuses caractéristiques. La crise la plus récente ressemble à de nombreux égards à la crise américaine de l’épargne et du crédit (Savings and Loans) des années 80 et du début des années 90, ainsi qu’à la crise LTCM en 1998. De façon plus générale, les crises bancaires sont souvent associées aux effondrements du marché immobilier. Pour réduire efficacement le risque de crises futures, il faut réduire l’ampleur potentielle des effondrements du marché immobilier, diminuer la vulnérabilité du secteur bancaire aux pertes du marché immobilier, ou les deux.
    Keywords: Financial Crisis, banking crisis, bubbles, real estate, financial regulation, regulatory reform , crises financières, crises bancaires, marché immobilier, réglementation financière
    Date: 2009–09–01
  5. By: Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR); Francesco Marchionne (Universit… Politecnica delle Marche, Faculty of Economics "Giorgio Fu…")
    Abstract: This paper examines government policies aimed at rescuing banks from the effects of the great financial crisis of 2007-2009. To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman's failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event study methodology to estimate the benefits of government interventions on banks and their shareholders.;Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods.;General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. General announcements exert cross-area spillovers but are perceived by the home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements exert spillovers on other banks. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the "normal" information flow. The opposite takes place in the turbulent crisis sub-period when announcements are the order of the day and markets mistrust the "normal" information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance.
    Keywords: announcements, financial crisis, rescue plan, undercapitalization
    JEL: G1 G21 N20
    Date: 2009–09
  6. By: Luisa Carpinelli (Banca d'Italia)
    Abstract: The literature is unanimous in highlighting that banking crises have a negative impact on GDP, usually more pronounced in developing economies. The magnitude of the losses is more controversial: the quantitative results of studies on the repercussions of banking crises on economic activity, in fact, are quite uneven. Estimates on the correlation between financial variables and GDP indicate output losses generally greater than ten percentage points of pre-crisis output and exhibit high variability, as a result of the large number of different methodologies adopted to measure real costs. The very high values thus obtained often reflect a problem in identifying the causal nexus between banking crises and real output fluctuations. The most recent literature, which examines the relevance of specific channels of transmission based on individual data, tends to produce a lower estimate of the direct causal effects of banking crises, which are rarely found to cause an output loss exceeding 2 per cent.
    Keywords: banking crises, real effects, transmission channesl, procyclicality
    JEL: G21 E44 E51
    Date: 2009–09
  7. By: Köhler, Matthias
    Abstract: Ownership structures widely differ across the EU. While large blockholdings dominate in the banking sector in Continental Europe, ownership is widely dispersed in the United Kingdom. These differences have consequences for corporate governance in the EU banking sector. This paper analyzes the efficiency of shareholder control and hostile takeovers as corporate governance mechanisms in the EU banking sector against the background of the regulatory environment and differences in the ownership structure of banks. Particular attention is put on current trends in the ownership structure of banks (e. g. sovereign wealth funds). The paper is based on a new dataset on shareholdings in listed banks in the EU banking sector. The results indicate that EU regulations have not always improved corporate governance in the banking sector. While shareholder control has been improved by a better protection of minority shareholder rights, the efficiency of the takeover market has been reduced in Continental Europe.
    Keywords: Banks,blockholdings,corporate governance,hostile takeovers,takeover directive
    JEL: G21 G34 G38 K29
    Date: 2009
  8. By: Pradeep Srivastava
    Abstract: The study seeks to answer two very basic questions in the Indian context: first, are there economies of scale and scope in Indian banking? In other words, are bigger banks better for India? And, second, to what extent has the domestic impetus, i.e., financial-sector policy reforms during the nineties, made banks in India more efficient? [WP no. 49].
    Keywords: banks, Cost Structure, indian banking, Econometric,Economies, mergers, financial services, trade liberalization, Indian, acquisitions
    Date: 2009
  9. By: Michael R King
    Abstract: This paper reviews the market reaction to bank rescue packages announced in six countries between October 2008 and January 2009. The study distinguishes the impact on creditors as seen in the change of CDS spreads from the impact on shareholders as seen in the movement of bank stock prices. Government interventions benefited creditors at the expense of shareholders, with bank CDS spreads narrowing around the announcements in all cases. Despite a brief positive reaction, bank stock prices continued to underperform in all countries except the United States where the favourable terms of the government support allowed bank stocks to outperform.
    Keywords: banking, rescue packages, stock prices, CDS spreads, financial crisis, event study
    Date: 2009–09

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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