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

  1. Bank Competition, Risk and Asset Allocations By Gianni De Nicoló; John H. Boyd; Abu M. Jalal
  2. Estimating the intensity of price and non-price competition in banking By Carbo Valverde, Santiago; Fernández de Guevara y Rodoselovics, Juan; Humphrey, David; Maudos, Joaquin
  3. Financial Intermediation, Competition, and Risk: A General Equilibrium Exposition By Gianni De Nicoló; Marcella Lucchetta
  4. Beyond the Third Pillar of Basel Two: Taking Bond Market Signals Seriously By Adrian Pop
  5. Banking Crises and the Rules of the Game By Charles Calomiris
  6. Capital Requirements and Business Cycles with Credit Market Imperfections By Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
  7. Banks and Real Estate Prices By Hott, Christian
  8. Why Are Canadian Banks More Resilient? By Lev Ratnovski; Rocco Huang
  9. Banking Crises and Crisis Dating: Theory and Evidence By Gianni De Nicoló; John H. Boyd; Elena Loukoianova
  10. Estimating Default Frequencies and Macrofinancial Linkages in the Mexican Banking Sector By Rodolphe Blavy; Marcos Souto
  11. French Banks Amid the Global Financial Crisis By Yingbin Xiao
  12. Development of the Commercial Banking System in Afghanistan: Risks and Rewards By Jelena Pavlovic; Joshua Charap
  13. Requiem for Market Discipline and the Specter of TBTF in Japanese Banking By Adrian Pop; Diana Pop
  14. On the Behaviour and Determinants of Risk-Based Capital Ratios: Revisiting the Evidence from UK Banking Institutions By William Francis; Matthew Osborne
  15. Modernizing Bank Regulation in Support of Financial Deepening: The Case of Uruguay By Mario Mansilla; Gustavo Adler; Torsten Wezel
  16. Does Good Financial Performance Mean Good Financial Intermediation in China? By Tarhan Feyzioglu
  17. Lebanon-Determinants of Commercial Bank Deposits in a Regional Financial Center By Harald Finger; Heiko Hesse
  18. Credit Growth in Sub-Saharan Africa - Sources, Risks, and Policy Responses By Plamen Iossifov; May Y. Khamis
  19. Credit rationing and credit view: empirical evidence from loan data By Leonardo Becchetti; Melody Garcia; Giovanni Trovato

  1. By: Gianni De Nicoló; John H. Boyd; Abu M. Jalal
    Abstract: We study a banking model in which banks invest in a riskless asset and compete in both deposit and risky loan markets. The model predicts that as competition increases, both loans and assets increase; however, the effect on the loans-to-assets ratio is ambiguous. Similarly, as competition increases, the probability of bank failure can either increase or decrease. We explore these predictions empirically using a cross-sectional sample of 2,500 U.S. banks in 2003, and a panel data set of about 2600 banks in 134 non-industrialized countries for the period 1993-2004. With both samples, we find that banks' probability of failure is negatively and significantly related to measures of competition, and that the loan-to-asset ratio is positively and significantly related to measures of competition. Furthermore, several loan loss measures commonly employed in the literature are negatively and significantly related to measures of bank competition. Thus, there is no evidence of a trade-off between bank competition and stability, and bank competition seems to foster banks' willingness to lend.
    Keywords: Asset management , Banking , Bankruptcy , Banks , Competition , Credit risk , Cross country analysis , Depositories , Economic models , Financial crisis , Time series , United States ,
    Date: 2009–07–10
  2. By: Carbo Valverde, Santiago; Fernández de Guevara y Rodoselovics, Juan; Humphrey, David; Maudos, Joaquin
    Abstract: We model bank oligopoly behaviour using price and non-price competition as strategic variables in an expanded conjectural variations framework. Rivals can respond to changes in both loan and deposit market prices as well as (non-price) branch market shares. The model is illustrated using data for Spain which, over 1986-2002, eliminated interest rate and branching restrictions and set off a competitive race to lock-in expanded market shares. Banks use both interest rates and branches as strategic variables and both have changed over time. We illustrate the results using a regional vs. a national specification for the relevant markets.
    Keywords: non-price competition; banking; market shares
    JEL: L13 D43 G21
    Date: 2009
  3. By: Gianni De Nicoló; Marcella Lucchetta
    Abstract: We study a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents. We show that more bank competition results in lower economy-wide risk, lower bank capital ratios, more efficient production plans and Pareto-ranked real allocations. Perfect competition supports a second best allocation and optimal levels of bank risk and capitalization. These results are at variance with those obtained by a large literature that has studied a similar environment in partial equilibrium. Importantly, they are empirically relevant, and demonstrate the need of general equilibrium modeling to design financial policies aimed at attaining socially optimal levels of systemic risk in the economy.
    Keywords: Banking sector , Banks , Borrowing , Capital , Competition , Corporate sector , Economic models , Financial intermediation , Financial risk , Investment , Risk management ,
    Date: 2009–05–21
  4. By: Adrian Pop (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: The logic behind the indirect channel of market discipline presumes that the pricing of bank debt in the secondary market, if accurate, conveys to supervisor and other market participants a reliable signal of bank's financial conditions and default risk. By collecting a unique dataset of spreads, ratings, and accounting measures of bank risk for a sample of large European banking organizations during the 1995—2002 period, we empirically test whether secondary market prices accurately reflect financial conditions of bank issuers. Our results complement the findings obtained by Sironi [Testing for market discipline in the European banking industry: Evidence from subordinated debt issues. Journal of Money, Credit, and Banking 35 (2003) 443-472] on the primary market of bank subordinated debt
    Date: 2009–09–23
  5. By: Charles Calomiris
    Abstract: When and why do banking crises occur? Banking crises properly defined consist either of panics or waves of costly bank failures. These phenomena were rare historically compared to the present. A historical analysis of the two phenomena (panics and waves of failures) reveals that they do not always coincide, are not random events, cannot be seen as the inevitable result of human nature or the liquidity transforming structure of bank balance sheets, and do not typically accompany business cycles or monetary policy errors. Rather, risk-inviting microeconomic rules of the banking game that are established by government have always been the key additional necessary condition to producing a propensity for banking distress, whether in the form of a high propensity for banking panics or a high propensity for waves of bank failures. Some risk-inviting rules took the form of visible subsidies for risk taking, as in the historical state-level deposit insurance systems in the U.S., Argentina’s government guarantees for mortgages in the 1880s, Australia’s government subsidization of real estate development prior to 1893, the Bank of England’s discounting of paper at low interest rates prior to 1858, and the expansion of government-sponsored deposit insurance and other bank safety net programs throughout the world in the past three decades, including the generous government subsidization of subprime mortgage risk taking in the U.S. leading up to the recent crisis. Other risk-inviting rules historically have involved government-imposed structural constraints on banks, which include entry restrictions like unit banking laws that constrain competition, prevent diversification of risk, and limit the ability to deal with shocks. Another destabilizing rule of the banking game is the absence of a properly structured central bank to act as a lender of last resort to reduce liquidity risk without spurring moral hazard. Regulatory policy often responds to banking crises, but not always wisely. The British response to the Panic of 1857 is an example of effective learning, which put an end to the subsidization of risk through reforms to Bank of England policies in the bills market. Counterproductive responses to crises include the decision in the U.S. not to retain its early central banks, which reflected misunderstandings about their contributions to financial instability in 1819 and 1825, and the adoption of deposit insurance in 1933, which reflected the political capture of regulatory reform.
    JEL: E5 E58 G2 N2
    Date: 2009–10
  6. By: Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
    Abstract: The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. A key feature of the model is that bank capital increases incentives for banks to monitor borrowers, thereby reducing the probability of default. Basel I- and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Numerical simulations show that, depending on the elasticities that relate the repayment probability to its micro and macro determinants, and the elasticity of the risk weight (under Basel II) with respect to the repayment probability, Basel I may be more procyclical than Basel II in response to adverse supply and demand shocks.
    Date: 2009
  7. By: Hott, Christian (Swiss National Bank)
    Abstract: The willingness of banks to provide funding for real estate purchases depends on the creditworthiness of their borrowers. Beside other factors, the creditworthiness of borrowers depends on the development of real estate prices. Real estate prices, in turn, depend on the demand for homes which is influenced by the willingness of banks to provide funding for real estate purchases. In this paper I develop a theoretical model which describes and explains this circular relationship. Using this model, I show how different kinds of expectation formations can lead to fluctuations of real estate prices. Furthermore, I show that banks make above average profits in the upswing phase of the real estate cycle but suffer high losses when the market turns.
    Keywords: Credit Cycle; Real Estate Prices; Bubbles
    JEL: E51 G12 G21
    Date: 2009–09–01
  8. By: Lev Ratnovski; Rocco Huang
    Abstract: This paper explores factors behind Canadian banks' relative resilience in the ongoing credit turmoil. We identify two main causes: a higher share of depository funding (vs. wholesale funding) in liabilities, and a number of regulatory and structural factors in the Canadian market that reduced banks' incentives to take excessive risks. The robust predictive power of the depository funding ratio is confirmed in a multivariate analysis of the performance of 72 largest commercial banks in OECD countries during the turmoil.
    Keywords: Bank regulations , Banking crisis , Banking sector , Canada , Commercial banks , Cross country analysis , Depositories , Economic models , Financial stability , Monetary policy ,
    Date: 2009–07–20
  9. By: Gianni De Nicoló; John H. Boyd; Elena Loukoianova
    Abstract: Many empirical studies of banking crises have employed "banking crisis" (BC) indicators constructedusing primarily information on government actions undertaken in response to bank distress. Weformulate a simple theoretical model of a banking industry which we use to identify and constructtheory-based measures of systemic bank shocks (SBS). Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators based on four major BCseries that have appeared in the literature. Therefore, BC indicatorsactually measure lagged government responses to systemic bank shocks, rather than the occurrence of crises per se. We re-examine the separate impact of macroeconomic factors, bank market structure, deposit insurance, andexternal shocks on the probability of a systemic bank shocks and on the probability of governmentresponses to bank distress. The impact of these variables on the likelihood of a government responseto bank distress is totally different from that on the likelihood of a systemic bank shock.Disentangling the effects of systemic bank shocks and government responses turns out to be crucial inunderstanding the roots of bank fragility. Many findings of a large empirical literature need to be re-assessed and/or re-interpreted.
    Keywords: Banking crisis , Banking sector , Banks , Cross country analysis , Deposit insurance , Economic models , External shocks , Financial crisis ,
    Date: 2009–07–10
  10. By: Rodolphe Blavy; Marcos Souto
    Abstract: The credit risk measures we develop in this paper are used to investigate macrofinancial linkages in the Mexican banking system. Domestic and external macro-financial variables are found to be closely associated with banking soundness. At the aggregate level, high external volatility and domestic interest rates are associated with higher expected default probability. Though results vary substantially across individual banks, domestic activity and U.S. growth, and higher asset prices, are generally associated with lower credit risks, while increased volatility worsens credit risks. The expected default probability is also found to be a leading indicator of traditional financial stability indicators.
    Keywords: Bank soundness , Banking sector , Banks , Credit risk , Data analysis , Economic models , Mexico ,
    Date: 2009–05–27
  11. By: Yingbin Xiao
    Abstract: This paper runs the gamut of qualitative and quantitative analyses to examine the performance of French banks during 2006-2008 and the financial support measures taken by the French government. French banks were not immune but proved relatively resilient to the global financial crisis reflecting their business and supervision features. An event study of the impact of government measures on CDS, debt, and equity markets points to the reduction of credit risk and financing cost as well as the redistribution of resources. With the crisis still unfolding, uncertainties remain and challenges lie ahead, calling for continued vigilance and enhanced risk management.
    Keywords: Asset management , Bank restructuring , Bank soundness , Bank supervision , Banking sector , Business cycles , Corporate sector , Credit risk , Financial crisis , Financial instruments , France , Liquidity management , Profits , Risk management ,
    Date: 2009–09–17
  12. By: Jelena Pavlovic; Joshua Charap
    Abstract: Lending practices of commercial banks in Afghanistan were analyzed using CAMEL ratings. Statistically significant correlations were found: Banks with worse ratings (a) had more lending to domestic clients and (b) paid less tax. There was no statistically significant relationship between profits and total assets or between lending/assets versus profit/assets. Interviews of senior management of 8 banks accounting for about 90 percent of the commercial banking system corroborated evidence that poorly rated banks lend to domestic clients, whereas highly rated banks do not lend. Banks that lend extensively domestically engage in extra-judicial, non-traditional contract enforcement.
    Keywords: Afghanistan, Islamic Republic of , Banking , Banking sector , Commercial banks , Emerging markets , Financial sector , Loans , Profits ,
    Date: 2009–07–16
  13. By: Adrian Pop (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Diana Pop (GRANEM - Department of Law, Economics, and Management - Université d'Angers)
    Abstract: This study examines the reaction of private market participants to the enhancement of the “Too-Big-To-Fail” (TBTF) doctrine in the Japanese banking sector. The event justifying the use of the “TBTF” label occurred on May 17th , 2003, when the Japanese government decided to bailout Resona Holdings, the 5th largest financial group in the country. By using a sample of all Japanese listed banks and the standard event study methodology, we document significant and positive wealth effects in the stock market accruing to large banks and negative (though non-significant) effects accruing to smaller banks. Besides the effect on bank equity values, we also document a significant abnormal volume of trading on days following the bailout announcement date for the largest banks only. We extend our empirical analysis on stock prices and trading volumes by detecting an original “pure” risk effect in the Credit Default Swap (CDS) market.
    Date: 2009–09–23
  14. By: William Francis (Financial Services Authority); Matthew Osborne (Financial Services Authority)
    Abstract: Using bank-level panel data from the United Kingdom, this paper investigates the factors that influence banking institutions' choice of risk-based capital ratios. Special focus is placed on evaluating whether and how institutions respond to changes in regulatory capital requirements and if these responses vary across the economic cycle. This issue is of particular interest to policymakers that rely on capital regulation in conjunction with other supervisory tools to affect bank behaviours and maintain market confidence and financial stability more broadly. The paper also explores the extent to which UK banks’ capital management practices were procyclical under Basel I. Understanding whether such practices existed under this less risk-sensitive (and potentially, less procyclical) regulatory capital regime is a useful first step towards determining if banks, in their capital management practices, consider swings in economic conditions on their capital positions and lending capacities, which may, in turn, impact on the severity and duration of such economic cycles. We find a statistically significant association between banks' risk-based capital ratios and individual capital requirements set by regulators in the UK. We also find that the rate at which banks respond to changing capital requirements depends significantly on certain characteristics of the bank (e.g., size, exposure to market discipline, nearness to regulatory threshold) as well as the direction of the economic cycle. We find a (marginally statistically significant) negative association between capital ratios and the economic cycle, but no association when we focus only on the largest banks in the UK, suggesting that systemically important banks tend to maintain risk-based capital ratios over the cycle (although we note that this finding is based on a sample period which does not contain a significant downturn). Further, we note a positive association between capital ratios and capital quality, suggesting that reliance on capital with relatively higher adjustment costs (e.g., tier 1 capital) may raise the profile of that consideration in capital management practices and lead cost-minimizing banks to maintain higher total risk-based capital ratios overall. Finally, we find a positive marginal effect of market discipline on total risk-based capital ratios held by UK banks. We interpret this result as suggesting that banks mitigate expected market reactions (e.g., on their funding costs or ability to access certain capital markets activities) to their business decisions by holding higher capital ratios.
    Keywords: bank, capital, financial regulation, prudential policy
    Date: 2009–03
  15. By: Mario Mansilla; Gustavo Adler; Torsten Wezel
    Abstract: This paper studies how Uruguay's regulatory framework was gradually strengthened to address shortcomings identified during the 2002-03 crisis, to align with international standards and, more recently, to deal with cyclical pressures resulting in an acceleration of bank lending. In particular, regulatory reforms pertaining to loan classification and provisioning as well as liquidity requirements are reviewed and evaluated against best practices. The paper concludes that prudential regulation in Uruguay now generally conforms to high standards while also embracing innovative elements such as dynamic provisioning.
    Keywords: Bank reforms , Bank regulations , Bank supervision , Banking sector , Basel Core Principles , Business cycles , Credit expansion , Credit risk , Financial crisis , Financial soundness indicators , Liquidity management , Loans , Risk management , Uruguay ,
    Date: 2009–09–17
  16. By: Tarhan Feyzioglu
    Abstract: Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001-07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.
    Keywords: Bank supervision , Banking , Banking sector , Banks , China, People's Republic of , Depositories , Economic models , Financial intermediation , Financial management , Loans , Monetary policy , Performance indicators , Profits ,
    Date: 2009–08–12
  17. By: Harald Finger; Heiko Hesse
    Abstract: This paper empirically examines the demand for commercial bank deposits in Lebanon, a regional financial center. With Lebanon's high fiscal deficits financed largely by domestic commercial banks that rely on deposit funding, deposit growth is a key variable to assess government financing conditions. At the macro level, we find that domestic factors such as economic activity, prices, and the interest differential between the Lebanese pound and the U.S. dollar are significant in explaining deposit demand, as are external factors such as advanced economy economic and financial conditions and variables proxying the availability of funds from the Gulf. Impulse response functions and variance decomposition analyses underscore the relative importance of the external variables. At the micro level, we find that in addition, bank-specific variables, such as the perceived riskiness of individual banks, their liquidity buffers, loan exposure, and interest margins, bear a significant influence on the demand for deposits.
    Keywords: Bank soundness , Banking sector , Commercial banks , Demand for money , Depositories , Economic models , Financial systems , Lebanon , Liquidity , Profits ,
    Date: 2009–09–14
  18. By: Plamen Iossifov; May Y. Khamis
    Abstract: In this paper, we analyze credit growth in Sub-Saharan Africa over the past decade focusing on the post-2002 rapid credit growth in select countries. We develop regression models of the fundamental determinants of bank credit and use them to examine whether they can fully explain developments in rapid credit growth countries. We then argue that rapid credit expansion, whether a manifestation of a credit boom or driven by fundamentals, can give rise to prudential and macroeconomic risks. We detail these risks and discuss the choice of policies to mitigate them. We conclude by evaluating the likely impact of the ongoing global recession and financial crisis on credit growth in Sub-Saharan Africa.
    Keywords: Bank credit , Bank supervision , Banking sector , Credit demand , Credit expansion , Credit risk , Cross country analysis , Economic models , Financial crisis , Fiscal policy , Household credit , Private sector , Sub-Saharan Africa , Time series ,
    Date: 2009–08–25
  19. By: Leonardo Becchetti (Faculty of Economics, University of Rome "Tor Vergata"); Melody Garcia (Faculty of Economics, University of Rome "Tor Vergata"); Giovanni Trovato (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: The empirical literature tries to identify credit rationing and its determinants by using balance sheet data or evidence from corporate surveys. Observational equivalence, identification problems, and interview biases are serious problems in these studies. We analyse the determinants of credit rationing directly on credit files by looking at the difference between the amount demanded and supplied to each borrower from official bank records. Our findings provide microeconomic evidence in support of the credit view hypothesis showing that the European Central Bank refinancing rate is significantly and positively related to partial (but not total) credit rationing. This finding is consistent with the hypothesis that such variable affects the total volume of commercial bank loans.
    Keywords: credit rationing, credit view, loan data.
    JEL: E51 G21
    Date: 2009–09–30

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