New Economics Papers
on Banking
Issue of 2009‒11‒27
fifteen papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Basel core principles and bank soundness : does compliance matter ? By Demirguc-Kunt, Asli; Detragiache, Enrica
  2. Accounting discretion of banks during a financial crisis By Huizinga, Harry; Laeven, Luc
  3. Regulatory Competition and Bank Risk Taking By Agur, Itai
  4. "It Pays to Violate: How Effective are the Basel Accord Penalties?" By Bernardo da Veiga; Felix Chan; Michael McAleer
  5. The Impact of Regional and Demographic Factors on the Efficiency of German Savings Banks By Alexander Conrad; Doris Neuberger; Lucinda Trigo Gamarra
  6. Real Effects of Bank Governance: Bank Ownership and Corporate Innovation By Haselmann, Rainer; Marsch, Katharina; Weder di Mauro, Beatrice
  7. Were Universal Banks More Vulnerable to Banking Failures? Evidence From the 1931 German Banking Crisis By Muge Adalet
  8. On the Real Effects of Bank Bailouts: Micro-Evidence from Japan By Giannetti, Mariassunta; Simonov, Andrei
  9. The Effect of Financial Structure on Crises: Universal Banking in Interwar Europe By Muge Adalet
  10. Gender and Banking: Are Women Better Loan Officers? By Beck, Thorsten; Behr, Patrick; Güttler, Andre
  11. Mitigating the Procyclicality of Basel II By Repullo, Rafael; Saurina, Jesús; Trucharte, Carlos
  12. Trust in Banks? Evidence from normal times and from times of crises By Markus Knell; Helmut Stix
  13. Banking and Transparency: Is More Information Always Better? By Allenspach, Nicole
  14. A Fallacy of Division: The Failure of Market Concentration as a Measure of Competition in U.S. Banking By Jaap W.B. Bos; Ivy Chan; James W. Kolari; Jiang Yuan
  15. Who Gets the Credit? And Does It Matter? Household vs. Firm Lending across Countries By Beck, Thorsten; Büyükkarabacak, Berrak; Rioja, Felix; Valev, Neven

  1. By: Demirguc-Kunt, Asli; Detragiache, Enrica
    Abstract: This paper studies whether compliance with the Basel Core Principles for effective banking supervision is associated with bank soundness. Using data for more than 3,000 banks in 86 countries, the authors find that neither the overall index of compliance with the Basel Core Principles nor the individual components of the index are robustly associated with bank risk measured by Z-scores. The results of the analysis cast doubt on the usefulness of the Basel Core Principles in ensuring bank soundness.
    Keywords: Banks&Banking Reform,Public Sector Corruption&Anticorruption Measures,Financial Intermediation,Debt Markets,Hazard Risk Management
    Date: 2009–11–01
  2. By: Huizinga, Harry; Laeven, Luc
    Abstract: This paper presents evidence of banks using accounting discretion to overstate the value of distressed assets. In particular, we show that the stock market applies far greater discounts to a bank’s real estate loans and mortgage-backed securities than are implicit in the book values of these assets, especially following the onset of the U.S. mortgage crisis. This suggests that bank balance sheets overvalue real estate related assets during economic slowdowns. Estimated discounts are smaller for distressed banks, as these banks derive relatively large benefits from the financial safety net to offset asset impairment. We also find that bank share prices, especially for banks with large exposures to mortgage-backed securities, react favorably to recent changes in accounting rules that relax fair value accounting. Banks with large exposures to mortgage-backed securities are also found to provision less for bad loans. Finally, we find that banks, and especially distressed banks, use discretion in the classification of mortgage-backed securities so as to inflate the book value of these securities. Our results provide several pieces of compelling evidence that banks’ balance sheets offer a distorted view of the financial health of the banks, especially for banks with large exposures to real estate loans and mortgage-backed securities, and suggest that recent changes that relax fair value accounting may further distort this picture.
    Keywords: accounting standards; bank regulation; fair value accounting; financial crisis; mortgage-backed securities; real estate loans
    JEL: G14 G21
    Date: 2009–07
  3. By: Agur, Itai
    Abstract: How damaging is competition between bank regulators? This paper models regulators that compete because they want to supervise more banks. Both banks' risk profiles and their access to wholesale funding are endogenous, leading to rich interactions. The sensitivity of regulatory standards to bank moral hazard, adverse selection, liquidity risk and the degree of regulatory bias is investigated. A calibration suggests that regulatory reform can halve bank default rates. The paper also shows how a decline in regulators' monitoring capacity gives rise to a gradual rise in bank risk, followed by a sudden interbank crisis.
    Keywords: Arbitrage; Bank default; Interbank market; Moral hazard; Supervision
    JEL: G21 G28
    Date: 2009–10
  4. By: Bernardo da Veiga (School of Economics and Finance, Curtin University of Technology); Felix Chan (School of Economics and Finance, Curtin University of Technology); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo)
    Abstract: The internal models amendment to the Basel Accord allows banks to use internal models to forecast Value-at-Risk (VaR) thresholds, which are used to calculate the required capital that banks must hold in reserve as a protection against negative changes in the value of their trading portfolios. As capital reserves lead to an opportunity cost to banks, it is likely that banks could be tempted to use models that underpredict risk, and hence lead to low capital charges. In order to avoid this problem the Basel Accord introduced a backtesting procedure, whereby banks using models that led to excessive violations are penalised through higher capital charges. This paper investigates the performance of five popular volatility models that can be used to forecast VaR thresholds under a variety of distributional assumptions. The results suggest that, within the current constraints and the penalty structure of the Basel Accord, the lowest capital charges arise when using models that lead to excessive violations, thereby suggesting the current penalty structure is not severe enough to control risk management. In addition, an alternative penalty structure is suggested to be more effective in aligning the interests of banks and regulators.
    Date: 2009–10
  5. By: Alexander Conrad (University of Rostock); Doris Neuberger (University of Rostock); Lucinda Trigo Gamarra (University of Rostock)
    Abstract: This paper examines the influence of environmental factors on technical, cost, scale and revenue efficiency of German savings banks in 2001‐2005. Taking into account growing regional disparities in economic wealth and population size, it differentiates between declining and growing regions. Regional and demographic factors explain part of the variation in efficiency levels. Population density and branch penetration positively affect efficiency in growing regions. A negative impact of economic power and a positive impact of competitive pressure on efficiency support the quiet life hypothesis. In declining regions, a larger share of elder people reduces bank efficiency. Savings banks seem to be well adapted to unfavorable environmental conditions.
    Keywords: savings banks, efficiency, Data Envelopment Analysis, demographic change, regional disparities
    JEL: G21 D21 D24 R1
    Date: 2009
  6. By: Haselmann, Rainer; Marsch, Katharina; Weder di Mauro, Beatrice
    Abstract: In this paper we analyze the impact of government and private ownership of banks on firms’ probability to innovate. We estimate firms’ decision to innovate and their selection of a main lender for a sample of 9000 German manufacturing companies. Since these two decisions may be simultaneously made we use the number of private and government bank branches located in close proximity to our sample firms as an instrument for the selection of each firm’s main lender. We find that the probability of a firm to innovate is about 10 to 13 percent higher if the main lender is a private compared to a government bank (after controlling for firm characteristics and selectivity bias). The ownership type of the main lender is especially important for small firms since their access to finance is more dependent on the local supply of lenders. Therefore, extensive government involvement in the allocation of credit comes at the cost of lower corporate innovation and economic growth.
    Keywords: Bank governance; Government ownership; Innovation; Relationship lending
    JEL: F34 F37 G21 G28 G33 K39
    Date: 2009–10
  7. By: Muge Adalet (Koc University)
    Abstract: This paper examines the 1931 German banking crisis using a bank-level data set. It specifically focuses on the link between banking structure and financial stability. The universality of banks, a key characteristic of the German banking system, is shown to increase the probability of bank failure after controlling for other bank-level characteristics and macroeconomic variables.
    Keywords: Great Depression, Banking Crisis, Universal Banking
    JEL: N24 E44
    Date: 2009–11
  8. By: Giannetti, Mariassunta; Simonov, Andrei
    Abstract: Exploiting the Japanese banking crisis as a laboratory, we provide firm-level evidence on the real effects of bank bailouts. Government recapitalizations result in positive abnormal returns for the clients of recapitalized banks. After recapitalizations, banks extend larger loans to their clients and some firms increase investment, but do not create more jobs than comparable firms. Most importantly, recapitalizations allow banks to extend larger loans to low and high quality firms alike, and low quality firms experience higher abnormal returns than other firms. Interestingly, recapitalizations by private investors have similar effects. Moreover, bank mergers engineered to enhance bank stability appear to hurt the borrowers of the sounder banks involved in the mergers.
    Keywords: banking crisis; merger; Recapitalization
    JEL: G21 G34
    Date: 2009–09
  9. By: Muge Adalet (Koc University)
    Abstract: This paper examines the link between banking structure and financial fragility across Europe during the 1920s and 1930s using a new database. Monthly and annual data are analyzed to show that countries with universal banking were more likely to experience crises. Furthermore, those countries with universal banking, which have a crisis, are shown to experience a slowdown in their economic growth.
    Keywords: Great Depression, Banking Crisis, Real Effects of Crises, Universal Banking
    JEL: N24 E44
    Date: 2009–10
  10. By: Beck, Thorsten; Behr, Patrick; Güttler, Andre
    Abstract: We analyze gender differences associated with loan officer performance. Using a unique data set for a commercial bank in Albania over the period 1996 to 2006, we find that loans screened and monitored by female loan officers show statistically and economically significant lower default rates than loans handled by male loan officers. This effect comes in addition to a lower default rate of female borrowers and cannot be explained by sample selection, overconfidence of male loan officers or experience differences between female and male loan officers. Our results seem to be driven by differences in monitoring, as loan officers of different gender do not seem to screen borrowers differently based on observable borrower characteristics. This suggests that gender indeed matters in banking.
    Keywords: Behavioral banking; gender; loan default; loan officers; monitoring; screening
    JEL: G21 J16
    Date: 2009–08
  11. By: Repullo, Rafael; Saurina, Jesús; Trucharte, Carlos
    Abstract: This paper compares alternative procedures to mitigate the procyclicality of the new risk-sensitive bank capital regulation (Basel II). We estimate a model of the probabilities of default (PDs) of Spanish firms during the period 1987-2008, and use the estimated PDs to compute the corresponding series of Basel II capital requirements per unit of loans. These requirements move significantly along the business cycle, ranging from 7.6% (in 2006) to 11.9% (in 1993). The comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each smoothed series with respect to the Hodrick-Prescott trend of the original series. The results show that the best procedures are either to smooth the inputs of the Basel II formula by using through-the-cycle PDs or to smooth the output with a multiplier based on GDP growth. Our discussion concludes that the latter is better in terms of simplicity, transparency, and consistency with banks’ risk pricing and risk management systems. For the portfolio of Spanish commercial and industrial loans and a 45% loss given default (LGD), the multiplier would amount to a 6.5% surcharge for each standard deviation in GDP growth. The surcharge would be significantly higher with cyclically-varying LGDs.
    Keywords: Bank capital regulation; Basel II; Business cycles; Credit crunch; Procyclicality
    JEL: E32 G28
    Date: 2009–07
  12. By: Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner Platz 3, POB 61, A-1011 Vienna); Helmut Stix (Oesterreichische Nationalbank)
    Abstract: Trust in financial institutions is of great importance for financial intermediation. Against this background, we study two questions: Has trust in banks declined during the global financial crisis and what factors determine the level of trust in banks? Employing survey evidence from Austrian households, we show that trust in banks is mainly affected by "subjective" variables like the individuals' assessment of the current economic and financial situation and by their future outlooks. After controlling for these variables we show that the financial crisis has caused a reduction in trust (around -7.5pp) which is sizable but not dramatic. Even at its lowest point (in the first quarter of 2009) 65% still report to have trust in the banking system, which is a higher percentage than for many other institutions. Furthermore, the drop is only slightly larger than the drop observed after a small, non-systemic crisis that occurred in 2006. Thus, the much-stressed notion of a genuine "trust crisis" is not reflected in our data. Finally, we provide evidence that the degree of individual information does not influence trust, that banking trust is contagious and that the extension of deposit insurance coverage in October 2008 had a positive effect on trust.
    Keywords: Trust, Banking Sector, Financial Crisis
    JEL: G21 Z13 O16
    Date: 2009–11–10
  13. By: Allenspach, Nicole (Swiss National Bank)
    Abstract: This paper shows that transparency in banking can be harmful from a social planner’s point of view. According to our model, enhancing transparency above a certain level may lead to the inefficient liquidation of a bank. The reason lies in the nature of a standard deposit contract: its payoff scheme has limited upside gains (cap) but leaves the depositor with the downside risk. Accordingly, depositors will not take into account possible future upside gains of the bank when deciding whether or not to withdraw their deposits. Our result points towards a trade-off the regulator faces: while enhancing transparency may be useful to reduce incentives for excessive risk-taking (moral hazard), it may also increase the risk of inefficient bank runs.
    Keywords: banking; transparency; financial stability; bank run
    JEL: D82 G21 G28
    Date: 2009–09–01
  14. By: Jaap W.B. Bos; Ivy Chan; James W. Kolari; Jiang Yuan
    Abstract: Empirical literature and related legal practice using concentration as a proxy for competition measurement are prone to a fallacy of division, as concentration measures are appropriate for perfect competition and perfect collusion but not intermediate levels of competition. Extending the classic Cournot-type competition model of Cowling and Waterson (1976) and Cowling (1976) used to derive the Hirschman-Herfindahl Index (HHI) of market concentration, we propose an adaptation of this model that allows collusive rents for all, none, or some of the firms in a market. Application of our model to data for U.S. commercial banks in the period 1984-2004 confirms that concentration measures are unreliable competition metrics. While collusion is prevalent in the banking industry at the state level, the critical market shares at which market power is achieved, rents earned from collusion, and collusive concentration levels vary widely across states. These and other results lead us to conclude that a fallacy of division exists in concentration-based competition tests.
    Keywords: SCP hypothesis, competition, Cournot, conjectural variation, efficiency hypothesis
    JEL: G21 L11 L22
    Date: 2009–11
  15. By: Beck, Thorsten; Büyükkarabacak, Berrak; Rioja, Felix; Valev, Neven
    Abstract: While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity.
    Keywords: Financial intermediation; Firm credit; Household credit
    JEL: D14 G21 G28
    Date: 2009–08

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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