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on Banking |
| By: | Cao, Jin; Illing, Gerhard |
| Abstract: | The paper provides a baseline model for regulatory analysis of systemic liquidity shocks. We show that banks may have an incentive to invest excessively in illiquid long term projects. In the prevailing mixed strategy equilibrium the allocation is inferior from the investor’s point of view since some banks free-ride on the liquidity provision as a result of limited liability. The paper compares different regulatory mechanisms to cope with the externalities. It is shown that the combination of liquidity regulation ex ante and lender of last resort policy ex post is able to implement the outcome maximizing investor’s payoff. In contrast, both “narrow banking” and imposing equity requirements as buffer are inferior mechanisms for coping with systemic liquidity risk. |
| Keywords: | Liquidity Regulation; Systemic risk; Lender of last resort; Financial Stability |
| JEL: | E5 G21 G28 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:11306&r=ban |
| By: | Jan Kregel |
| Abstract: | Past experience suggests that multifunctional banking is the leading source of financial crisis, while large bank size contributes to contagion and systemic risk. This indicates that resolving large banks will not solve the problems associated with multifunctional banking--a conclusion reached after every financial crisis, and one that should apply to the present crisis as well. Senior Scholar Jan Kregel observes that it is important to recognize that past solutions may not be appropriate for present conditions. The approach to the current financial crisis has been to resolve small- and medium-size banks through the FDIC, while banks considered "too big to fail" are given direct and indirect government support. Many of these large government-supported banks have been allowed to absorb smaller banks through FDIC resolution, creating even larger banks. As these institutions repay their direct government support, the problem of "too big to fail" is simply aggravated. Thus, the current thrust of government regulatory reform--increased capital and liquidity requirements, and further legislation--is unlikely to lessen the systemic risks these institutions pose. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:09-11&r=ban |
| By: | Li, Hui |
| Abstract: | Basel II suggests that banks estimate downturn loss given default (DLGD) in capital requirement calculation. There have been studies that focused on the dependence of default rates and loss given defaults through economic cycles. However, the models proposed are still not satisfactory. In this paper, we propose a new model framework based on our recent work of stochastic spot recovery for Gaussian copula. We also compare our model with the previous approaches. |
| Keywords: | Basel II; Downturn Loss Given Default; Stochastic Recovery; Spot Recovery; Factor Credit Models; Default Time Copula; Gaussian Copula; Large Homogeneous Pool; Credit VaR; Expected Shortfall |
| JEL: | G32 G13 |
| Date: | 2010–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20010&r=ban |
| By: | Johansson, Anders C. (China Economic Research Center) |
| Abstract: | This paper analyzes equity market movements in East Asia and Europe during the global financial crisis. Extending the methodology in Chakrabarti and Roll (2002), we study regional as well as country-regional volatility, covariance and correlation. We also analyze regional and country-regional tail dependence in the two regions. The results show that volatility and covariance patterns in East Asia and Europe were relatively stable until the second half of 2008. Correlations were higher in Europe, but relatively high in East Asia as well. Both regions thus exhibit an overall increase in comovements compared to the time of the Asian financial crisis. There was a sharp decline in regional correlation during the third quarter of 2008 in both East Asia and Europe, which was then followed by a strong increase. The spread of the crisis affected Europe more, with resulting higher regional comovements. Moreover, average tail dependence stayed relatively stable in both regions throughout the pre-crisis and crisis periods with a notably higher level of tail dependence in Europe. Surprisingly, countries in East Asia such as China that are usually seen as insulated from the rest of the region show signs of increasing market integration with the rest of the region. The increasing level of financial market integration and the high level of comovements during times of international financial turmoil demonstrate the limited benefit of diversification in regional portfolios. |
| Keywords: | East Asia; Europe; Financial crisis; Financial integration; Correlation; Copula; Tail dependence |
| JEL: | F36 F41 G15 |
| Date: | 2010–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hacerc:2010-013&r=ban |
| By: | Morgan Kelly (University College Dublin) |
| Date: | 2009–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:200932&r=ban |
| By: | Palombini, Edgardo |
| Abstract: | Factor models for portfolio credit risk assume that defaults are independent conditional on a small number of systematic factors. This paper shows that the conditional independence assumption may be violated in one-factor models with constant default thresholds, as conditional defaults become independent only including a set of observable (time-lagged) risk factors. This result is confirmed both when we consider semi-annual default rates and if we focus on small firms. Maximum likelihood estimates for the sensitivity of default rates to systematic risk factors are obtained, showing how they may substantially vary across industry sectors. Finally, individual risk contributions are derived through Monte Carlo simulation. |
| Keywords: | Asset correlation; factor models; loss distribution; portfolio credit risk; risk contributions. |
| JEL: | C13 C15 G21 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20107&r=ban |
| By: | Uhde, André; Heimeshoff, Ulrich |
| Abstract: | Using aggregate balance sheet data from banks across the EU-25 over the period from 1997 to 2005 this paper provides empirical evidence that national banking market concentration has a negative impact on European banks' financial soundness as measured by the Z-score technique while controlling for macroeconomic, bank-specific, regulatory, and institutional factors. Furthermore, we find that Eastern European banking markets exhibiting a lower level of competitive pressure, fewer diversification opportunities and a higher fraction of government-owned banks are more prone to financial fragility whereas capital regulations have supported financial stability across the entire European Union. -- |
| Keywords: | Market structure,Financial stability,Banking regulation |
| JEL: | G21 G28 G34 L16 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwqwdp:022009&r=ban |
| By: | Ojo, Marianne |
| Abstract: | The main argument of this paper is, namely, the need for greater emphasis on disclosure requirements and measures – particularly within the securities markets. This argument is justified on the basis of lessons which have been drawn from the recent Financial Crises, one of which is the inability of bank capital requirements on their own to address funding and liquidity problems. The engagement of market participants in the corporate reporting process, a process which would consequently enhance market discipline, constitutes a fundamental means whereby greater measures aimed at facilitating prudential supervision could be extended to the securities markets. Auditors, in playing a vital role in financial reporting, as tools of corporate governance, contribute to the disclosure process and towards engaging market participants in the process. This paper will however consider other means whereby transparency and disclosure of financial information within the securities markets could be enhanced, and also the need to accord greater priority to prudential supervision within the securities markets. Furthermore, the paper draws attention to the need to focus on Pillar 3 of Basel II, namely, market discipline. It illustrates how through Pillar 3, market participants like credit agencies can determine the levels of capital retained by banks – hence their potential to rectify or exacerbate pro cyclical effects resulting from Pillars 1 and 2. The challenges encountered by Pillars 1 and 2 in addressing credit risk is reflected by problems identified with pro cyclicality, which are attributed to banks’ extremely sensitive internal credit risk models, and the level of capital buffers which should be retained under Pillar Two. Such issues justify the need to give greater prominence to Pillar 3. As a result of the influence and potential of market participants in determining capital levels, such market participants are able to assist regulators in managing more effectively, the impact of systemic risks which occur when lending criteria is tightened owing to Basel II's procyclical effects. Regulators are able to respond and to manage with greater efficiency, systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. This being particularly the case when such firms decide to cut back on lending activities, and the decisions of such firms cannot be justified in situations where such firms’ credit risk models are extremely sensitive – hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements. In elaborating on Basel II's pro cyclical effects, the gaps which exist with internal credit risk model measurements will be considered. Gaps which exist with Basel II's risk measurements, along with the increased prominence and importance of liquidity risks - as revealed by the recent financial crisis, and proposals which have been put forward to mitigate Basel II's procyclical effects will also be addressed. |
| Keywords: | Capital Requirements Directive (CRD); Post BCCI Directive; prudential supervision; liquidity; capital; maturity mismatches; regulation |
| JEL: | K2 G3 D82 D53 G2 F3 F21 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20013&r=ban |
| By: | Simone Raab (University of Augsburg, Department of Economics); Peter Welzel (University of Augsburg, Department of Economics) |
| Abstract: | Cooperation among savings and cooperative banks was criticized by the European Commission because of potentially anti-competitive effects. In an industrial economics model of banks taking deposits and giving loans we look at regional demarcation as one of such cooperative practices. There are two adjacent markets with one savings or cooperative bank being focused on each one and one private commercial bank serving both. We find that abolishing regional demarcation indeed increases total loan volume. Savings or cooperative banks always improve market performance and do better without regional demarcation which shields the private commercial bank from aggressive competition by these banks. |
| Keywords: | banking, competition, cooperation, non-profit firms |
| JEL: | G21 L41 L44 L33 L13 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:aug:augsbe:0308&r=ban |
| By: | Daisuke Tsuruta (National Graduate Institute for Policy Studies) |
| Abstract: | We investigate the financial resources used by small businesses in Japan during the period of recovery from a severe recession. Unlike large listed firms, small businesses cannot easily issue commercial debt or equity. Therefore, small businesses largely depend on trade credit and bank loans. Many previous studies argue that bank loans are cheaper than trade credit; so many firms (particularly unconstrained firms) use bank loans, especially in financially developed economies. However, the Japanese evidence does not support this view. First, small businesses with higher credit demand increase trade credit more during the period of the recovery from a severe recession. Second, creditworthy firms (for example, firms with more collateral assets) also increase trade credit to finance their growth opportunities. Third, firms in unstable industries increase trade credit more. This suggests that suppliers are able to offer credit, unlike banks, as they have a relative advantage in day-by-day monitoring. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:09-19&r=ban |
| By: | Pulina, Manuela; Paba, Antonello |
| Abstract: | This paper analyses the demographic, socio-economics and banking specific determinants that influence the risk of fraud in a portfolio of credit cards. The data are from recent account archives for cards issued throughout Italy. A logit framework is employed that incorporates cards at a risk of fraud as the dependent variable and a set of explanatory variables (e.g. gender, location, credit line, number of transactions in euros and in non euros currency). The empirical results provide useful indicators on the factors that are responsible for potential risk of fraud. |
| Keywords: | credit card; fraud; demographic and socio-economics factors; logit modelling. |
| JEL: | D12 C35 G21 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20019&r=ban |