New Economics Papers
on Banking
Issue of 2009‒11‒21
fifteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Internal capital markets and corporate politics in a banking group By Martijn Cremers; Rocco Huang; Zacharias Sautner
  2. Banking Deregulations, Financing Constraints, and Firm Entry Size By William Kerr; Ramana Nanda
  3. Credit card redlining revisited By Kenneth P. Brevoort
  4. Did Fair-Value Accounting Contribute to the Financial Crisis? By Christian Laux; Christian Leuz
  5. Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis By Xin Huang; Hao Zhou; Haibin Zhu
  6. A framework for assessing the systemic risk of major financial institutions By Xin Huang; Hao Zhou; Haibin Zhu
  7. Interbank lending, credit risk premia and collateral. By Florian Heider; Marie Hoerova
  8. Measuring bank efficiency: tradition or sophistication? - A note By Daley, Jenifer; Matthews, Kent
  9. Credit allocation, capital requirements and procyclicality By Jokivuolle, Esa; Kiema, Ilkka; Vesala, Timo
  10. A note on US excess bank reserves and the credit contraction By Khemraj, Tarron
  11. Does bank supervision impact nonperforming loans : cross-country determinants using agregate data ? By Boudriga, Abdelakder; Boulila, Neila; Jellouli, Sana
  12. Early Warning Models for Banking Supervision in Romania By Radu Muntean
  13. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008 By Moritz Schularick; Alan M. Taylor
  14. The evolution of a financial crisis: panic in the asset-backed commercial paper market By Daniel M. Covitz; Nellie Liang; Gustavo A. Suarez
  15. A Banking Explanation of the US Velocity of Money: 1919-2004 By Benk, Szilárd; Gillman, Max; Kejak, Michal

  1. By: Martijn Cremers; Rocco Huang; Zacharias Sautner
    Abstract: This study looks inside a large retail-banking group to understand how influence within the group affects internal capital allocations and lending behavior at the member bank level. The group consists of 181 member banks that jointly own a headquarters. Influence is measured by the divergence from one-share-one-vote. The authors find that more influential member banks are allocated more capital from headquarters. They are less likely to decrease lending after negative deposit growth or to increase lending following positive deposit growth. These effects are stronger in situations in which information asymmetry between banks and the headquarters seems greater. The evidence suggests that influence can be useful in overcoming information asymmetry.
    Keywords: Banks and banking ; Corporate governance
    Date: 2009
  2. By: William Kerr; Ramana Nanda
    Abstract: We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects were small compared to the much larger changes in entry rates of small firms following the reforms. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
    JEL: E44 G21 L26 L43 M13
    Date: 2009–11
  3. By: Kenneth P. Brevoort
    Abstract: Using a proprietary dataset of credit bureau records, Cohen-Cole (2008) finds that banks set credit limits on revolving accounts based in part on the racial composition of the neighborhood in which each borrower resides. This paper evaluates the evidence presented in that working paper using the same proprietary database of credit bureau records. The replication effort presented in this paper suggests that decisions about how to calculate the variables used in that study may have resulted in the unnecessary exclusion of one-fifth of available observations from the estimation samples and may have increased the size of the reported effect by over 25 percent. Furthermore, this analysis suggests that when a control for neighborhood income is added to the estimations, the results presented as evidence of redlining activities disappear.
    Date: 2009
  4. By: Christian Laux; Christian Leuz
    Abstract: The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the current financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks’ assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.
    JEL: F3 G15 G21 G24 G38 K22 M41
    Date: 2009–11
  5. By: Xin Huang; Hao Zhou; Haibin Zhu
    Abstract: This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as the insurance cost to protect against distressed losses in a banking system, is a risk-neutral concept of capital based on publicly available information that can be appropriately aggregated across different subsets. An application of our methodology to a portfolio of twenty-two major banks in Asia and the Pacific illustrates the dynamics of the spillover effects of the global financial crisis to the region. The increase in the perceived systemic risk, particularly after the failure of Lehman Brothers, was mainly driven by the heightened risk aversion and the squeezed liquidity. The analysis on the marginal contribution of individual banks to the systemic risk suggests that ``too-big-to-fail" is a valid concern from a macroprudential perspective of bank regulation.
    Date: 2009
  6. By: Xin Huang; Hao Zhou; Haibin Zhu
    Abstract: In this paper we propose a framework for measuring and stress testing the systemic risk of a group of major financial institutions. The systemic risk is measured by the price of insurance against financial distress, which is based on ex ante measures of default probabilities of individual banks and forecasted asset return correlations. Importantly, using realized correlations estimated from high-frequency equity return data can significantly improve the accuracy of forecasted correlations. Our stress testing methodology, using an integrated micro-macro model, takes into account dynamic linkages between the health of major U.S. banks and macrofinancial conditions. Our results suggest that the theoretical insurance premium that would be charged to protect against losses that equal or exceed 15 percent of total liabilities of 12 major U.S. financial firms stood at $110 billion in March 2008 and had a projected upper bound of $250 billion in July 2008.
    Date: 2009
  7. By: Florian Heider (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marie Hoerova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We study the functioning of secured and unsecured interbank markets in the presence of credit risk. The model generates empirical predictions that are in line with developments during the 2007-2009 financial crises. Interest rates decouple across secured and unsecured markets following an adverse shock to credit risk. The scarcity of underlying collateral may amplify the volatility of interest rates in secured markets. We use the model to discuss various policy responses to the crisis. JEL Classification: G01, G21, E58.
    Keywords: Financial crisis, Interbank market, Liquidity, Credit risk, Collateral.
    Date: 2009–11
  8. By: Daley, Jenifer; Matthews, Kent (Cardiff Business School)
    Abstract: The recent literature on measuring bank performance indicates a preference for sophisticated techniques over simple accounting ratios. We explore the results and relationships between bank efficiency estimates using accounting ratios and Data Envelope Analysis (DEA) with bootstrap among Jamaican banks between 1998 and 2007. The results indicate different outcomes for the traditional accounting ratios and the sophisticated DEA methodology in the measurement of bank efficiency. GLS random effects two-variable regression tests for superiority using a risk index for insolvency suggest an advantage in favour of the DEA.
    Keywords: Bank efficiency; Jamaica; Accounting Ratios
    JEL: G21 G28 G29
    Date: 2009–11
  9. By: Jokivuolle, Esa (Bank of Finland Research); Kiema, Ilkka (University of Helsinki); Vesala, Timo (Tapiola Group)
    Abstract: Although beneficial allocational effects have been a central motivator for the Basel II capital adequacy reform, the interaction of these effects with Basel II’s procyclical impact has been less discussed. In this paper, we investigate the effect of capital requirements on the allocation of credit and its interaction with procyclicality, and compare Basel I and Basel II type capital requirements. We consider competitive credit markets where entrepreneurs of varying ability can apply for loans for one-period investment projects of two different risk types. The risk of a project further depends on the state of the economy, modelled as a two-state Markov process. In this type of setting, excessive risk taking typically arises because higher-type borrowers cross-subsidize lower-type borrowers via a pricing regime based on average success rates. We find that risk-based capital requirements (such as Basel II) alleviate the cross-subsidization effect and can be chosen so as to implement first-best allocation. This implies that the ensuing reduction in the proportion of high-risk investments may mitigate the procyclical effect of Basel II on economic activity. Moreover, we find that optimal risk-based capital requirements should be set lower in recessions than in normal times. Our simulations show that when measured by either cumulative output or output variation, Basel II type capital requirements may actual be slightly less procyclical than flat capital requirements. The biggest reduction in procyclicality is however achieved with optimal risk-based capital requirements which are considerably higher than Basel II requirements and which are adjusted downwards in recession periods.
    Keywords: Basel II; bank regulation; capital requirements; credit risk; procyclicality
    JEL: D41 D82 G14 G21
    Date: 2009–09–22
  10. By: Khemraj, Tarron
    Abstract: This paper reports aggregate bank excess liquidity preference curves for the pre-crisis and crisis periods. It is argued that the flat curve reflects a threshold lending rate at which point banks accumulate reserves passively. Moreover, the expansion of reserves – when the lending rate threshold is binding – does not lead to credit expansion. The latter would require policies that directly increase the demand for loans, particularly by the business sector.
    Keywords: bank reserves; minimum loan interest rate; credit crunch
    JEL: E40 E41 G21
    Date: 2009–10
  11. By: Boudriga, Abdelakder; Boulila, Neila; Jellouli, Sana
    Abstract: The paper empirically analyses the cross-countries determinants of nonperforming loans and the potential impact of regulatory factors on credit risk exposure. We employ aggregate banking, financial, economic and legal environment data for a panel of 59 countries over the period 2002-2006. Empirical results indicate that higher capital adequacy ratio and prudent provisionning policy seem to reduce the level of problem loans. We also report a desirable impact of private ownership, foreign participation and bank concentration. Our findings do not support the view that market discipline leads to better economic outcomes and to reduce the level of problem loans. In contrast, all regulatory devices either exert a counterproductive impact on bad loans or do not significantly enhance credit risk exposure for countries with weak institutions, corrupt business environment and little democracy.Our results are interesting for regulators, bankers and investors as well. To reduce credit risk exposure, the effective way to do it is through enhancing the legal system, strengthening institutions and increasing transparency and democracy, rather than focusing only on regulatory and supervisory issues.
    Keywords: Banks; Nonperforming loans; Financial system stability; Banking regulation
    JEL: G28 G21
    Date: 2009–10–19
  12. By: Radu Muntean
    Abstract: In this paper we propose an early warning system for the Romanian banking sector, as an addition to the standardized CAAMPL rating system used by the National Bank of Romania for assessing the local credit institutions. We aim to find the determinants for downgrades as well as for a bank to have a weak overall position, to estimate the respective probabilities and to be able to perform rating predictions. Having this purpose, we build two models with binary dependent variables and one ordered logistic model that accounts for all possible future ratings. One result is that indicators for current position, market share, profitability and assets quality determine rating downgrades, whereas capital adequacy, liquidity and macroeconomic environment are not represented in the model. Banks that will have a weak overall position in one year can be predicted using also indicators for current position, market share, profitability and assets quality, as well as, in this case, capital adequacy and macroeconomic environment, the latter only for the binary dependent variable model, leaving liquidity indicators out again. Based on the ordered logistic model’s capacity for rating prediction, we estimated one year horizon scores and ratings for each bank and we aggregated these results for predicting a measure of assessing the local banking sector as a whole.
    Keywords: early warning system, CAAMPL rating system
    Date: 2009–11
  13. By: Moritz Schularick; Alan M. Taylor
    Abstract: The crisis of 2008–09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870– 2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises, suggesting that such crises are “credit booms gone wrong” and that policymakers ignore credit at their peril. It is only with the long-run comparative data assembled for this paper that these patterns can be seen clearly.
    JEL: E44 E51 E58 G20 N10 N20
    Date: 2009–11
  14. By: Daniel M. Covitz; Nellie Liang; Gustavo A. Suarez
    Abstract: The $350 billion contraction in the asset-backed commercial paper (ABCP) market in the last five months of 2007 played a central role in transforming concerns about the credit quality of mortgage-related assets into a global financial crisis. This paper attempts to better understand why the substantial contraction in ABCP occurred by measuring and analyzing runs on ABCP programs over the period from August 2007 through December 2007. While it has been suggested that commercial paper programs, like commercial banks, may be prone to runs, we are the first to conduct a comprehensive empirical analysis of runs in the ABCP market using a rich and novel issue-level data set for all ABCP programs in the U.S. market. A program is defined as being run when it does not issue new paper during a week despite having a substantial share of its outstandings scheduled to mature, and then continuing in a run until it issues. We find evidence of extensive runs: more than 100 programs (one-third of all ABCP programs) were in a run within weeks of the onset of the turmoil and the odds of subsequently leaving the run state were very low. We interpret this finding as an indication that the ABCP market was subject to a bank-like "panic." We also find that while runs were linked to credit and liquidity exposures of individual programs, runs were also related importantly to non-program specific variables in the first several weeks of the turmoil, indicating that runs were relatively indiscriminate during the early part of the panic. Thus the ABCP market may be inherently unstable and a source of systemic risk.
    Date: 2009
  15. By: Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper shows that US GDP velocity of M1 money has exhibited long cycles around a 1.25% per year upward trend, during the 1919-2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (Ingram et al., 1994). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times.
    Keywords: Volatility; business cycle; credit shocks; velocity
    JEL: E13 E32 E44
    Date: 2009–11

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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