New Economics Papers
on Banking
Issue of 2009‒11‒07
twelve papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. The Bonus-Driven “Rainmaker” Financial Firm: How These Firms Enrich Top Employees, Destroy Shareholder Value and Create Systemic Financial Instability By James Crotty
  2. Sub Prime Crisis: Old and New Lessons By Natasa Spes; Sebastjan Strasek; Timotej Jagric
  3. Paying for Banking Services: What Determines the Fees? By Pavel Dvorak; Jan Hanousek
  4. Measures for a Prudential Efficiency Surveillance of Credit Institutions By Medar Lucian-Ion; Voica Irina Elena
  5. Determinants for using visible reserves in German banks: an empirical study By Bornemann, Sven; Homölle, Susanne; Hubensack, Carsten; Kick, Thomas; Pfingsten, Andreas
  6. Staying, dropping, or switching : the impacts of bank mergers on small firms By Hans Degryse; Nancy Masschelein; Janet Mitchell
  7. Electronic Banking Services in Economy Based on Knowledge By Rabontu Cecilia Irina
  8. Bank regulation and bank crisis By Sigbjørn Atle Berg; Øyvind Eitrheim
  9. From Default Rates to Default Matrices: a complete measurement of Brazilian banks' consumer credit delinquency By Ricardo Schechtman
  10. Improved Modeling of Double Default Effects in Basel II - An Endogenous Asset Drop Model without Additional Correlation By Sebastian Ebert; Eva Lütkebohmert
  11. Interaction between foreign financial services and foreign direct investment in Transition Economies: An empirical analysis with focus on the manufacturing sector By Guido Cazzavillan; Krzysztof Olszewski
  12. The reform of UK financial regulation By Maximilian J. B. Hall

  1. By: James Crotty (University of Massachusetts Amherst)
    Abstract: We recently experienced a global financial crisis so severe that only massive rescue operations by governments around the world prevented a total financial market meltdown and perhaps another global Great Depression. One necessary precondition for the crisis was the perverse, bonus-driven compensation structure employed in important financial institutions such as investment banks. This structure provided the rational incentive for key decision makers in these firms (who I call “rainmakers”) to take the excessive risk and employ the excessive leverage in the bubble that created the preconditions for the crisis. This paper presents and evaluates extensive data on compensation practices in investment banks and other important financial institutions. These data show that rainmaker compensation has been rising rapidly, is very large, and has asymmetric properties that induce reckless risk-taking. Since boom-period bonuses do not have to be returned if rainmaker decisions eventually lead to losses for their firms, and since large bonuses continue to be paid even when firms in fact suffer large losses, it is rational for rainmakers to use unsustainable leverage to invest in recklessly risky assets in the bubble. A review of the modest literature on financial firm compensation practices in general and those of investment banks in particular demonstrates that the giant bonuses of the recent past are not efficient returns to human capital – they are unjustified rents. The paper discusses possible answers to the challenging questions: what is the source of rainmaker rents and how are they sustained over time? Answers to these questions can help guide debates over the appropriate regulation of financial markets. They are also necessary inputs to the development of an adequate theory of the “rainmaker” financial firm that can help us understand how these firms were able to maximize the compensation of their key employees through policies that destroyed shareholder value and created systemic financial fragility. To my knowledge, no such theory currently exists. JEL Categories: G01; G24; G10
    Keywords: bonuses; investment banks; leverage; financial crisis; perverse incentives
    Date: 2009–10
  2. By: Natasa Spes; Sebastjan Strasek; Timotej Jagric (Faculty of Economic and Business, University of Maribor, Slovenia)
    Abstract: Using generation approach we examine the genesis and mechanisms in major financial crisis and focus on the recent sub – prime crisis. We believe that in the era of increased financial globalization a reliable approach has to consider besides fundamental factors multiple equilibriums and self – fulfilling character of financial crises. In recent global crisis again financial globalization implemented in periods of high international capital mobility have reputedly produced international banking crises. Progressing integration and increasing sophistication of the product and financial markets brought new forms and more global character of the crises events in the recent sub – prime crisis.
    Keywords: financial crisis, sub-prime crisis, financial globalization, international capital, financial market
    JEL: E2 E4 E6 O11 R11
    Date: 2009–05
  3. By: Pavel Dvorak; Jan Hanousek
    Abstract: We analyze a unique dataset to test an empirical model of retail bank fee determinants in five Central European countries. Due to the data structure we can cope with heterogeneity and cross-subsidization by employing a representative fee index instead of using variables associated with individual fees. We find support for the Structure-Conduct-Performance hypothesis about the effect of industry concentration, the importance of differences in reliance on cashless payments, and differences in the labor intensity and technology level of bank operations. We also show that cross-country differences in retail bank fees can be explained by fundamental economic factors.
    Keywords: Banking, bank fees, Central and Eastern Europe, international comparison, Structure-Conduct-Performance hypothesis.
    JEL: G21 L11 G28 D41 C81
    Date: 2009–08
  4. By: Medar Lucian-Ion; Voica Irina Elena (Constantin Brancusi University of Targu Jiu, Faculty of Economics, Romania)
    Abstract: In this period of financial crisis, the efficiency and profitability of the banking sector received a strong blow and therefore, the banking prudence is a constant concern to all entities that comprise the European banking system. Major role in Romania of National Bank of Romania is to prevent systemic risk by promoting effective banking supervision, in order to ensure achievement of stability for entirely banking system.
    Keywords: financial crisis, banking sector, National Bank of Romania
    JEL: H83 F3 G21 G24
    Date: 2009–05
  5. By: Bornemann, Sven; Homölle, Susanne; Hubensack, Carsten; Kick, Thomas; Pfingsten, Andreas
    Abstract: The German Commercial Code (HGB) allows banks to build visible reserves for general banking risks according to section 340g HGB. These GBR reserves may, in addition to their risk provisioning function, be used to enhance capital endowment, for internal financing, signaling or earnings management purposes. We analyze financial statements of German banks for the period from 1995 through 2007 to reveal specific patterns in the use of GBR reserves. Our empirical investigation is based on a large, unbalanced panel of German banks including 32,023 bank-year observations. We see an increase in the use of GBR reserves over time. Furthermore, we can say that GBR reserves are primarily used by large banks, banks with comparatively low regulatory capital endowment, as well as those with lower risks. Furthermore, GBR reserves are used by fairly profitable banks, those reporting according to international financial reporting standards in addition to HGB, and banks which are not thrifts or cooperative banks. Finally, we find that banks which make use of hidden reserves according to section 340f HGB also tend to hold GBR reserves. We explain our findings with regulatory factors and existing information asymmetries as well as banks' size and ownership structure.
    Keywords: Bank regulation,informational asymmetries,risk provisioning,visible reserves,hidden reserves
    JEL: G21 G32 M41
    Date: 2009
  6. By: Hans Degryse (CentER, EBC, TILEC, Tilburg University); Nancy Masschelein (National Bank of Belgium, Financial Department; Financial Architects); Janet Mitchell (National Bank of Belgium, Financial Department; CEPR)
    Abstract: Assessing the impacts of bank mergers on small firms requires separating borrowers with single versus multiple banking relationships and distinguishing the three alternatives of "staying," "dropping," and "switching" of relationship. Single-relationship borrowers who "switch" to another bank following a merger will be less harmed than those whose relationship is "dropped" and not replaced. Using Belgian data, we find that single-relationship borrowers of target banks are more likely than other borrowers to be dropped. We track post-merger performance and show that many dropped target-bank borrowers are harmed by the merger. Multiple-relationship borrowers are less harmed, as they can better hedge against relationship discontinuations
    Keywords: Bank mergers, bank lending relationships, SME loans
    JEL: G21 G28 G34
    Date: 2009–10
  7. By: Rabontu Cecilia Irina (Constantin Brancusi University, Faculty of Economics, Romania)
    Abstract: The term "electronic banking" or "ebanking" covers both computer and telephone banking. Using computer banking, a charity’s computer either dials directly into its bank's computer or gains access to the bank’s computer over the internet. Using telephone banking, the charity controls its bank accounts by giving the bank instructions over the telephone. Both computer and telephone banking involve the use of passwords which give access to the charity’s accounts. Technological innovation and competition among existing banking organizations have allowed a wider array of banking products and services to become accessible and delivered through the Internet. The rapid development of e-banking capabilities carries risks as well as benefits. The bankers are to recognize, address and manage banking institutions in a prudent manner according to the fundamental characteristics and challenges of e-banking services.
    Keywords: banking system, electronic banking, telephone banking, internet banking, internet-based payments
    JEL: G21 G24 D23 O11
    Date: 2009–05
  8. By: Sigbjørn Atle Berg (Norges Bank (Central Bank of Norway)); Øyvind Eitrheim (Norges Bank (Central Bank of Norway))
    Abstract: The Norwegian experiences of the past thirty years illustrate what we believe are two general tendencies in bank regulation. The first one is that a bank crisis will tend to focus regulators' minds and lead to stricter regulations. The second one is that cycles in regulation tend to interact with the economic cycle, in the sense that the rationale for strong regulation tends to become somewhat blurred when the economy is booming. These patterns appear in the Norwegian experience after the banking crisis of 1988-92, and they can presumably also be recognized in many other jurisdictions.
    Keywords: Banking crises, history of bank regulation, capital adequacy, Basel I & II
    JEL: G28 N44
    Date: 2009–10–21
  9. By: Ricardo Schechtman
    Abstract: Despite the manifold utilities of monitoring credit default rates, little attention is usually devoted to the underlying default definition. This paper proposes working simultaneously with different default severities, related to several past-due ranges, by means of transition matrices (to be named default matrices). In this way, default, as well as recovery, are depicted in a multidimensional way with the purpose of avoiding missing relevant information. The challenge lies on performing comparisons between default matrices, which requires specific metrics. In this paper, the default matrices are built to measure consumer credit delinquency at four large Brazilian banks. The study is able to draw relevant information from comparisons between estimations techniques, between default criteria, between banks and over time, as well as with recent applied literature on matrices of rating agencies.
    Date: 2009–10
  10. By: Sebastian Ebert; Eva Lütkebohmert
    Abstract: In 2005 the Internal Ratings Based (IRB) approach of `Basel II' was enhanced by a `treatment of double default effects' to account for credit risk mitigation techniques such as ordinary guarantees or credit derivatives. This paper reveals several severe problems of this approach and presents a new method to account for double default effects. This new it asset drop technique can be applied within any structural model of portfolio credit risk. When formulated within the IRB approach of Basel II, it is very well suited for practical application as it does not pose extensive data requirements and economic capital can still be computed
    Keywords: Basel II, double default, IRB approach, regulatory capital, structural credit portfolio models
    JEL: G31 G28
    Date: 2009–10
  11. By: Guido Cazzavillan (Department of Economics, University Of Venice Cà Foscari); Krzysztof Olszewski (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This paper studies the nexus between financial and non-financial foreign direct investment and its effect on manufacturing value added in Transition Economies, which are members of the EU. Three questions, which are pointed out in the theoretical literature, are discussed in the paper. We investigate whether financial services foreign direct investment has an effect on non-financial foreign direct investment; whether banks follow their clients; and whether there is any effect of foreign direct investment on economic growth. Those questions are tackled with empirical analysis using a dataset for 9 Transition Economies over the period 1996-2007. For most regressions we apply GMM and for one regression 2SLS, to tackle the endogeneity problem. The empirical results lead to three important statements: non-financial FDI is positively affected by financial services FDI and by market potential. Foreign banks in the EU Transition Economies are mainly driven by non-financial FDI and the capital intensity of a country. FDI crowds out domestic investment in the manufacturing sector.
    Keywords: Foreign direct investment, financial services, manufacturing sector, bilateral stocks, Transition Economies
    JEL: F21 F3 O11 O16
    Date: 2009
  12. By: Maximilian J. B. Hall (Dept of Economics, Loughborough University)
    Abstract: Since the enactment of the new Banking Act in February 2009, with a new 'Special Resolution Regime' at its heart, the debate about how to reform the UK's financial regulatory and supervisory framework has intensified. A major catalyst for this was the publication of Lord Turner's 'Review' in March 2009, which was followed by the Government's White Paper on financial reform in July. The same month the Conservative Party revealed its own White Paper on the subject, with both the Bank of England and the Financial Services Authority contributing to the debate at frequent intervals. The purpose of this article is to review and analyse these documents and viewpoints before coming to a conclusion about the most appropriate way forward on the domestic financial regulatory front.
    Date: 2009–10

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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