New Economics Papers
on Banking
Issue of 2009‒10‒17
seven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Are Banking Systems Increasingly Fragile ? Investigating Financial Institutions’ CDS Returns Extreme Co-Movements By Dima Rahman
  2. Some New Evidence on the Role of Collateral: Lazy Banks or Diligent Banks? By Amedeo Argentiero
  3. The effects of privatization and consolidation on bank productivity: comparative evidence from Italy and Germany By Elisabetta Fiorentino; Alessio De Vincenzo; Frank Heid; Alexander Karmann; Michael Koetter
  4. Stress testing French banks' income subcomponents By Coffinet, J.; Lin, S.; Martin, C.
  5. Measuring the Performance of Islamic Banks by Adapting Conventional Ratios By Ahmed Mohamed Badreldin
  6. Measuring the Quality of Banking Regulation in Egypt By Silvia Rashad Gad Tadros
  7. The European Credit Market and Institutions By Cândida Ferreira

  1. By: Dima Rahman
    Abstract: This paper investigates potential contagion among the major financial institutions in developed economies. Using Credit Default Swaps (CDS) premia as a measure of credit or counterparty risk, our analysis focuses on the extreme co-movements of Financial Institutions' default contracts during the high level of stress undergone by the CDS markets in the aftermath of the 2007 sub-prime crisis. Our approach is twofold: first, under different tail dependence scenarios, we calibrate several multivariate linear propagation models of constant correlation. Our Monte Carlo simulation study finds evidence of contagion for Financial Institutions- notably in the US-and captures a non-normal dependence structure in the tails for the traded contracts. Second, we estimate a multivariate Dynamic Conditional Correlation-GARCH (DCC-GARCH) model, and demonstrate significant ARCH and GARCH effects, as well as time-varying correlations in CDS spreads variations. Our overall analysis rejects the assumption of constant correlation. More importantly, it advocates changing structures in tail dependence for CDS series during times of financial turmoil as an important feature of banks’ increased fragility.
    Keywords: Bank fragility, Counterparty risk, Financial crises, Extreme co-movements, Conditional correlation, Multivariate GARCH, Monte Carlo simulation
    Date: 2009
  2. By: Amedeo Argentiero (University of Rome Tor Vergata - Dept. of Economics and ISAE - Institute for Studies and Economic Analyses)
    Abstract: In the banking literature (Manove et al. (2001)) "Lazy Banks" are defined as those banks that substitute project screening with collateral. This paper aims to test for Italy some empirical implications of the theoretical model of "Lazy Banks": the negative relationship between collateral and project screening, whether collateral is posted by safer borrowers and law enforcement is able to increase the degree of collateralization. Empirical evidence presented here suggests that, both for long-term loans and short-term ones, when project screening increases, the amount of real guarantees with respect to the credit granted increases. Moreover, the data show that collateral seems to be posted by high-risk borrowers and law enforcement does not matter in explaining the presence of real guarantees for long-term loans, whereas it represents a further risk component that generates an increase in collateral for short-term loans. Therefore, a model of "Lazy Banks" does not seem to be verified on the data, suggesting the results rather a sort of "diligence" in the banks' behavior. Furthermore, the empirical findings on our data reveal that the presence of real guarantees is not able to lower ex-post default credit risk. These results are consistent with a view of collateral as a credible mechanism for commitment against informative asymmetries and not as a convenient hedge against realized ex-post credit default risk.
    Keywords: Collateral, Screening, Lazy Banks, Default Risk.
    JEL: D82 G21 H42
    Date: 2009–07
  3. By: Elisabetta Fiorentino (Deutsche Bundesbank); Alessio De Vincenzo (Bank of Italy); Frank Heid (Deutsche Bundesbank); Alexander Karmann (Technische Universität Dresden); Michael Koetter (University of Groningen)
    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 banksÂ’ 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: 2009–09
  4. By: Coffinet, J.; Lin, S.; Martin, C.
    Abstract: Using a broad dataset of individual consolidated data of French banks over the period 1993-2007, we seek to evaluate the sensitivity to adverse macroeconomic scenarios of the three main sources of banking income, namely interest margins, fees and commissions, and trading income. First, we show that the determinants of banking income subcomponents are highly specific: whereas interest rates spread plays a significant role in determining net interest income, stock market measures are significant determinants of trading income. GDP growth impacts significantly on fees and commissions. Second, our macroeconomic stress testing exercises tend to show that fees and commission and to a lesser extent trading incomes are much more sensitive to some adverse macroeconomic shocks than interest income. This could support the view that income diversification is associated with higher banking revenue resilience.
    Keywords: Banking income , Interest margins , Fees and commissions , Trading income , Dynamic panel estimation.
    JEL: C23 G21 L2
    Date: 2009
  5. By: Ahmed Mohamed Badreldin (Faculty of Management Technology, The German University in Cairo)
    Abstract: One consequence of the current financial crisis is that many countries began to reevaluate their financial systems and recognize its flaws and drawbacks. They also began the search for alternative systems for their economies; one of the proposed systems is the current Islamic financial model. This model is still in its infancy and many modifications and additions are required. It also lacks the necessary financial performance measurement tools similar to those used by conventional banks for managers and investors alike. This paper evaluates this lack of performance measures. It then adapts a currently applied ROE Analysis Tool used in conventional banks, to the currently established model of Islamic Banks and tests its applicability and evaluates its usefulness. The findings suggest that such an adapted model would be quite successful for use in Islamic banks and would offer much better analysis and basis of comparison within the Islamic financial system. It also suggests that much of the previously measured performance of Islamic Banks is unsound and should be revised for accuracy and reliability because of the flawed methods used for measurement in the first place.
    Keywords: Performance measurement, ratio analysis, ROE, Islamic banks
    JEL: G21 G29
    Date: 2009–10
  6. By: Silvia Rashad Gad Tadros (Faculty of Management Technology, The German University in Cairo)
    Abstract: The free market economy most countries pursue nowadays is never entirely free from government intervention. Policy makers devote special attention to the regulation of financial markets and with the current financial crisis, the quality of the banking regulations need to be reconsidered. This paper aims to provide a tool to measure the quality of banking regulation and supervision. This is usually a difficult task because it is a qualitative analysis and is arbitrary. However, a regulation index has been modelled that is similar to the concept of a cost-benefit analysis. The input index resembles the cost signifying the efforts made by governments and supervisors to measure the intensity of the regulation. The output index resembles the benefit which shows the outcome of the governments’ efforts. Finally, applying this index on Egypt filled a research gap in this area.
    Keywords: Banking regulation, Quality index, Egypt
    JEL: G28 G21 L51
    Date: 2009–10
  7. By: Cândida Ferreira
    Abstract: This paper uses polled panel OLS robust estimations with quarterly data for 26 EU countries from the 1980s until 2006, comparing the results of three panels of countries during different time periods. The results obtained confirm the high degree of integration among the EU financial systems and demonstrate not only the quite high degree of openness of the financial markets, but also their indebtedness and the dependence of the EU banking institutions on the financial resources of other countries.
    Keywords: European credit market; European bank institutions; financial integration; panel estimates.
    JEL: E4 E5 G2
    Date: 2009–04

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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