New Economics Papers
on Banking
Issue of 2009‒12‒05
seven papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Information sharing and information acquisition in credit markets By Artashes Karapetyan; Bogdan Stacescu
  2. Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach By Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
  3. Bank liquidity and the board of directors By Delis, Manthos D; Gaganis, Chrysovalantis; Pasiouras, Fotios
  4. Endogenous choice of bank liquidity: the role of fire sales By Acharya, Viral; Song Shin, Hyun; Yorulmazer, Tanju
  5. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008 By Schularick, Moritz; Taylor, Alan M.
  6. The heavenly liquidity twin : the increasing importance of liquidity risk By Montes-Negret, Fernando
  7. Liquidity Scenario Analysis in the Luxembourg Banking Sector By ?tefan Rychtárik

  1. By: Artashes Karapetyan; Bogdan Stacescu
    Abstract: Since information asymmetries have been identified as an important source of bank profits, it may seem that the establishment of information sharing will lead to lower investment in acquiring information. However, banks base their decisions on both hard and soft information, and it is only the former type of data that can be communicated credibly. We show that when hard information is shared, banks will invest more in soft, relationship-specific information. These will lead to more accurate lending decisions, favor small, informationally opaque borrowers, and increase welfare. Since relationship banking focuses on the usage of soft information, the model implies that investment in relationship banking will increase. We test our theory using a large sample of firm-level data from 24 countries.
    Keywords: Bank competition, information sharing, relationship banking, hard information, soft information
    JEL: G21 L13
    Date: 2009–11
  2. By: Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
    Abstract: This paper develops a dynamic stochastic general equilibrium model with interactions between a heterogeneous banking sector and other private agents. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbank market. Our aim is to understand the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real data and used for simulations. We show that liquidity injections reduce financial instability but have ambiguous effects on output fluctuations. The model also confirms the partial equilibrium literature results on the procyclicality of Basel II.
    Keywords: DSGE, Banking sector, Default risk, Supervision, Money
    JEL: E13 E20 G21 G28
    Date: 2008–10
  3. By: Delis, Manthos D; Gaganis, Chrysovalantis; Pasiouras, Fotios
    Abstract: This short paper presents the first attempt to examine empirically the relationship between the level of bank liquidity and the structure of the board of directors, in terms of board size and independence. A novel database on these board characteristics is built that includes banks operating in 10 OECD countries during the period 2000-2006. We find a negative relationship between board size and liquidity, while the impact of board independence is U-shaped. Therefore, we contend that considerations linked to these effects can have interesting implications for the design of bank conduct and for the quality of bank portfolios.
    Keywords: Banks; Board size and independence; Liquidity risk
    JEL: G32 G21
    Date: 2009–11–17
  4. By: Acharya, Viral (London Business School); Song Shin, Hyun (Princeton University Bendheim Center for Finance); Yorulmazer, Tanju (Federal Reserve Bank of New York)
    Abstract: Banks’ liquidity is a crucial determinant of the adversity of banking crises. In this paper, we consider the effect of fire sales and entry during crises on banks’ ex-ante choice of liquid asset holdings. We consider a setting with limited pledgeability of risky cash flows relative to safe ones and a differential expertise between banks and outsiders in employing banking assets. When a large number of banks fail, market for assets clears only at fire-sale prices and outsiders enter the market if prices fall sufficiently low. In such states, there is a private benefit of liquid holdings to banks from purchasing assets. There is also a social benefit since greater banking system liquidity reduces inefficiency from liquidation of assets to outsiders. When pledgeability of risky cash flows is high, for instance, in countries with well-developed capital markets, banks hold less liquidity than is socially optimal due to risk-shifting incentives; otherwise, banks may hold even more liquidity than is socially optimal to capitalise on fire sales. However, if there is a systemic cost associated with crises, for example, in the form of fiscal costs associated with provision of deposit insurance, then socially optimal liquidity may always be higher than the privately optimal one, and, in turn, regulation in the form of prudent liquidity requirements may be desirable. We provide some international evidence on banks’ liquid holdings that is consistent with model’s predictions.
    Keywords: Crises; systemic risk; distress; limited pledgeability; lender of last resort
    JEL: D61 E58 G21 G28 G32
    Date: 2009–11–27
  5. By: Schularick, Moritz; Taylor, Alan M.
    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
    Keywords: banking; central banking; financial stability; liquidity; monetary policy
    JEL: E44 E51 E58 G20 N10 N20
    Date: 2009–11
  6. By: Montes-Negret, Fernando
    Abstract: Liquidity and solvency have been called the"heavenly twins"of banking (Goodhart, Charles,'Liquidity Risk Management', Financial Stability Review -- Special Issue on Liquidity, Banque de France, No. 11, February, 2008). Since these"twins"interact in complex ways, it is difficult -- particularly at times of crisis--to distinguish between them, especially in the presence of information asymmetries (Information asymmetry occurs when one party has more or better information than the other, creating an imbalance of power, giving rise to adverse selection and moral hazard ). An insolvent bank can be liquid or illiquid, and a solvent bank may be at times illiquid. In the latter case, insolvency is not far away, since banking is grounded in information and confidence, and it is confidence which in the end determines liquidity. In other words, liquidity is very much endogenous, determined by the general condition of a bank, as well as the perception of it by the public and market participants. Dealing with liquidity risk is more challenging than dealing with other risks, since liquidity is the result of all the operations of a bank and it is fundamentally a relative concept which compares segments of the balance sheet on the asset and liability sides. It does not deal with absolutes, like arguably the concept of capital and it explains why there is not an internationally recognized"Liquidity Accord". This Working Paper addresses key concepts like market and funding liquidity and basic tools to address liquidity issues like cash flows, liquidity gaps and some selected financial ratios. It aims at providing an introductory guide to risk assessment and management, and provides useful and practical guidelines to undertake liquidity assessments which could prove useful in preparing Financial Assessment Programs (FSAPS) in member countries of the Bretton Woods institutions.
    Keywords: Debt Markets,Banks&Banking Reform,Currencies and Exchange Rates,Emerging Markets,Bankruptcy and Resolution of Financial Distress
    Date: 2009–11–01
  7. By: ?tefan Rychtárik
    Abstract: This paper aims to develop the basis for an approach to measure the liquidity risk sensitivity of banks in Luxembourg and to test it on real banking sector data. For this purpose we have developed four different scenarios: run on a bank, use of committed loans by counterparties, netting of the position with the parent financial group and changes in conditions of refinancing operations with the Eurosystem. The impact of all four simulations is measured by relative changes of liquidity ratios that have been introduced for this purpose. In a second step, this methodology is tested on a sample of 32 banks active in the Luxembourg banking sector aiming at identifying the most severe scenario or a combination of scenarios and the most vulnerable banks of the sample.
    Keywords: Liquidity risk, Scenario analysis, Banking sector, Stress testing
    JEL: G21
    Date: 2009–09

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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