New Economics Papers
on Banking
Issue of 2010‒01‒30
twenty-six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financial intermediation, asset prices, and macroeconomic dynamics By Tobias Adrian; Emanuel Moench; Hyun Song Shin
  2. Solving the Present Crisis and Managing the Leverage Cycle By John Geanakoplos
  3. The Leverage Cycle By John Geanakoplos
  4. Evaluating Value-at-Risk models via Quantile Regression By Wagner Piazza Gaglianone; Luiz Renato Lima; Oliver Linton; Daniel Smith
  5. Monetary cycles, financial cycles, and the business cycle By Tobias Adrian; Arturo Estrella; Hyun Song Shin
  6. How Central Should the Central Bank Be? By Alan S. Blinder
  7. The Federal Reserve's Commercial Paper Funding Facility By Tobias Adrian; Karin Kimbrough; Dina Marchioni
  8. Repo market effects of the Term Securities Lending Facility By Michael J. Fleming; Warren B. Hrung; Frank M. Keane
  9. Policy perspectives on OTC derivatives market infrastructure By Darrell Duffie; Ada Li; Theo Lubke
  10. The Impact Of The Global Crisis on Canada: What Do Macro-Financial Linkages Tell Us? By Natalia Barrera; Rupa Duttagupta
  11. Financial crises and financial reforms in Spain: What have we learned? By Pablo Martín-Aceña; Ángeles Pons; Concepción Beltrán
  12. Forecasting Romanian Financial System Stability using a Stochastic Simulation Model By Claudiu Tiberiu Albulescu
  13. Lending Relationships and Monetary Policy By Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy,
  14. Investigating the Perceptions of Credit Constraints in the European Union By Canton, E.J.F.; Grilo, I.; Monteagudo, J.; Zwan, P. van der
  15. Liquidity crunch in the interbank market: is it credit or liquidity risk, or both? By Angelo Baglioni
  16. Russian banking: The state makes a comeback? By Vernikov, Andrei
  17. Inherited or Earned? Performance of Foreign Banks in Central and Eastern Europe By Emilia Magdalena Jurzyk; Olena Havrylchyk
  18. Return to retail banking and payments. By Iftekhar Hasan; Heiko Schmiedel; Liang Song
  19. Effect of Liberalization on Banking Competition By Gloria Pasadilla; Melanie Milo
  20. Payment scale economies, competition, and pricing. By David B. Humphrey
  21. Credit card use after the final mortgage payment: does the magnitude of income shocks matter? By Barry Scholnick
  22. Credit card interchange fees. By Jean-Charles Rochet; Julian Wright
  23. Pricing payment cards. By Özlem Bedre-Defolie; Emilio Calvano
  24. SEPA, efficiency, and payment card competition. By Wilko Bolt; Heiko Schmiedel
  25. How effective are rewards programs in promoting payment card usage? Empirical evidence. By Santiago Carbó-Valverde; José M. Liñares-Zegarra
  26. Choosing and using payment instruments: evidence from German microdata. By Ulf von Kalckreuth; Tobias Schmidt; Helmut Stix

  1. By: Tobias Adrian; Emanuel Moench; Hyun Song Shin
    Abstract: Fluctuations in the aggregate balance sheets of financial intermediaries provide a window on the joint determination of asset prices and macroeconomic aggregates. We document that financial intermediary balance sheets contain strong predictive power for future excess returns on a broad set of equity, corporate, and Treasury bond portfolios. We also show that the same intermediary variables that predict excess returns forecast real economic activity and various measures of inflation. Our findings point to the importance of financing frictions in macroeconomic dynamics and provide quantitative guidance for preemptive macroprudential and monetary policies.
    Keywords: Macroeconomics ; Intermediation (Finance) ; Assets (Accounting) ; Forecasting
    Date: 2010
  2. By: John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: The present crisis is the bottom of a recurring problem that I call the leverage cycle, in which leverage gradually rises too high then suddenly falls much too low. The government must manage the leverage cycle in normal times by monitoring and regulating leverage to keep it from getting too high. In the crisis stage the government must stem the scary bad news that brought on the crisis, which often will entail coordinated write downs of principal; it must restore sane leverage by going around the banks and lending at lower collateral rates (not lower interest rates), and when necessary it must inject optimistic capital into firms and markets than cannot be allowed to fail. Economists and the Fed have for too long focused on interest rates and ignored collateral.
    Keywords: Leverage, Collateral, Margins, Leverage cycle, Externality, Principal
    JEL: E3 E32 G12
    Date: 2010–01
  3. By: John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: Equilibrium determines leverage, not just interest rates. Variations in leverage cause fluctuations in asset prices. This leverage cycle can be damaging to the economy, and should be regulated.
    Keywords: Leverage, Collateral, Cycle, Crisis, Regulation
    JEL: E3 E32 G12
    Date: 2009–07
  4. By: Wagner Piazza Gaglianone; Luiz Renato Lima; Oliver Linton; Daniel Smith
    Abstract: This paper is concerned with evaluating value at risk estimates. It is well known that using only binary variables, such as whether or not there was an exception, sacrifices too much information. However, most of the specification tests (also called backtests) available in the literature, such as Christoffersen (1998) and Engle and Maganelli (2004) are based on such variables. In this paper we propose a new backtest that does not rely solely on binary variables. It is shown that the new backtest provides a sufficient condition to assess the finite sample performance of a quantile model whereas the existing ones do not. The proposed methodology allows us to identify periods of an increased risk exposure based on a quantile regression model (Koenker & Xiao, 2002). Our theoretical findings are corroborated through a Monte Carlo simulation and an empirical exercise with daily S&P500 time series.
    Keywords: Value-at-Risk, Backtesting, Quantile Regression
    JEL: C12 C14 C52 G11
    Date: 2009–05
  5. By: Tobias Adrian; Arturo Estrella; Hyun Song Shin
    Abstract: One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. The economic rationale for this forecasting power usually appeals to expectations of future interest rates, which affect the slope of the term structure. In this paper, we propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries. When monetary tightening is associated with a flattening of the term spread, it reduces net interest margin, which in turn makes lending less profitable, leading to a contraction in the supply of credit. We provide empirical support for this hypothesis, thereby linking monetary cycles, financial cycles, and the business cycle.
    Keywords: Monetary policy ; Intermediation (Finance) ; Interest rates ; Forecasting ; Business cycles
    Date: 2010
  6. By: Alan S. Blinder (Princeton University)
    Abstract: About six years ago, I published a small book entitled The Quiet Revolution (Blinder 2004). Though its subtitle was Central Banking Goes Modern, I never imagined the half of it. Since March 2008, the Federal Reserve has gone post-modern with a bewildering variety of unprecedented actions that have either changed the nature and scope of the central bank’s role or stretched it beyond the breaking point, depending on your point of view. And that leads straight to the central question of this essay: What should--and shouldn’t--the Federal Reserve do?
    Keywords: Federal reserve bank, monetary policy, central bank
    JEL: E42 E50 E60 G21
    Date: 2010–01
  7. By: Tobias Adrian; Karin Kimbrough; Dina Marchioni
    Abstract: The Federal Reserve created the Commercial Paper Funding Facility (CPFF) in the midst of severe disruptions in money markets following the bankruptcy of Lehman Brothers on September 15, 2008. The CPFF finances the purchase of highly rated unsecured and asset-backed commercial paper from eligible issuers via primary dealers. The facility is a liquidity backstop to U.S. issuers of commercial paper, and its creation was part of a range of policy actions undertaken by the Federal Reserve to provide liquidity to the financial system. This paper documents aspects of the financial crisis relevant to the creation of the CPFF, reviews the operation of the CPFF, discusses use of the facility, and draws conclusions for lender-of-last-resort facilities in a market-based financial system.
    Keywords: Federal Reserve System ; Commercial paper ; Financial crises ; Liquidity (Economics) ; Federal Reserve Bank of New York
    Date: 2010
  8. By: Michael J. Fleming; Warren B. Hrung; Frank M. Keane
    Abstract: The Term Securities Lending Facility (TSLF) was introduced by the Federal Reserve to promote liquidity in the financing markets for Treasury and other collateral. We evaluate one aspect of the program--the extent to which it has narrowed repo spreads between Treasury collateral and less liquid collateral. We find that TSLF operations have precipitated a significant narrowing of repo spreads. More refined tests indicate the market conditions and types of operations associated with the program's effectiveness. Various additional tests, including a split-sample test, suggest that our findings are robust.
    Keywords: Liquidity (Economics) ; Treasury bonds ; Repurchase agreements ; Federal Reserve Bank of New York
    Date: 2010
  9. By: Darrell Duffie; Ada Li; Theo Lubke
    Abstract: In the wake of the recent financial crisis, over-the-counter (OTC) derivatives have been blamed for increasing systemic risk. Although OTC derivatives were not a central cause of the crisis, the complexity and limited transparency of the market reinforced the potential for excessive risk-taking, as regulators did not have a clear view into how OTC derivatives were being used. We discuss how the New York Fed and other regulators could improve weaknesses in the OTC derivatives market through stronger oversight and better regulatory incentives for infrastructure improvements to reduce counterparty credit risk and bolster market liquidity, efficiency, and transparency. Used responsibly with these reforms, over-the-counter derivatives can provide important risk management and liquidity benefits to the financial system.
    Keywords: Derivative securities ; Over-the-counter markets ; Federal Reserve Bank of New York ; Credit ; Systemic risk ; Financial market regulatory reform
    Date: 2010
  10. By: Natalia Barrera; Rupa Duttagupta
    Abstract: This paper builds a Bayesian VAR estimation model of growth for Canada, by focusing specifically on the role of external and domestic financial indicators, including credit conditions. A variance decomposition shows that financial conditions explain one-third of the total variability in Canada's real GDP growth, although changes in U.S. real GDP growth still account for a larger share of volatility in Canadian growth. A macro-financial conditions index built from the VAR's impulse responses shows that U.S. real GDP growth and lending standards will increasingly bear on Canada's growth, implying that a normalization of the U.S. economic and financial conditions is key for a sustained recovery in Canada.
    Keywords: Bank credit , Canada , Credit controls , Economic forecasting , Economic growth , Economic models , External sector , Financial crisis , Global Financial Crisis 2008-2009 , Gross domestic product , Monetary policy , Spillovers ,
    Date: 2010–01–11
  11. By: Pablo Martín-Aceña; Ángeles Pons; Concepción Beltrán
    Abstract: Like the rest of the world, Spain has suffered frequent financial crises and undergone several changes in its regulatory framework. There have been crises that have been followed by reforms of the financial structure, and also troubled financial times with no modification of the regulatory and supervisory regime. In various instances, regulatory changes have predated financial crises, but in others banking crises have occurred without reference to changes in the regulatory regime. Regulation and supervision has been usually absent in the XIXth century, while in the XXth century policy makers have been more active and diligent. Moreover, all major financial crises have been followed by intense financial restructuring, although as elsewhere banking restructuring and interventions not always have been successful (in fact, the cases of failures and mixed results overcome the successful cases). The paper provides a short history of the major financial crises in Spain from 1856 to the present, and also reviews the main financial reforms and the distinctive regulatory regimes that have been in place in this last 150 years time span.
    Keywords: Spanish banking, Financial crisis, Financial regulations, Banking reforms
    JEL: N2 N4 G18
    Date: 2010–01
  12. By: Claudiu Tiberiu Albulescu (CRIEF, University of Poitiers)
    Abstract: The aim of this paper is to develop an aggregate stability index for the Romanian financial system, which is meant to enhance the set of analysis used by authorities to assess the financial system stability. The index takes into consideration indicators related to financial system development, vulnerability, soundness and also indicators which characterise the international economic climate. Another purpose of our study is to forecast the financial stability level, using a stochastic simulation model. The outcome of the study shows an improvement of the Romanian financial system stability during the period 1999-2007. The constructed aggregate index captures the financial turbulences periods like 1998-1999 Romanian banking crisis and 2007 subprime crisis. The forecasted values of the index show a deterioration of financial stability in 2009, influenced by the estimated decline of the financial and economic activity.
    Keywords: financial stability, aggregate financial stability index, forecasting systemic stability, stochastic simulation model
    JEL: C43 C51 C53
    Date: 2009
  13. By: Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy, (,
    Abstract: Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.
    Keywords: Endogenous Banking Spread; Credit Markets; Cost Chanell of Monetary Transmission; Firm-bank Relationships
    JEL: E44 E52 G21
    Date: 2010–01–21
  14. By: Canton, E.J.F.; Grilo, I.; Monteagudo, J.; Zwan, P. van der (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The promotion and support of small and medium-sized enterprises (SMEs) forms an essential ingredient in policies to help improve Europe’s economic performance. A key issue in this context is whether SMEs face undue difficulty when trying to access credit. Using survey data from 2005 and 2006 covering almost 5,000 SMEs in the European Union, we investigate the determinants of firms’ perceived financing constraints, focusing on bank loans. It turns out that a firm’s age plays an important role in that older firms perceive external financing as being less difficult. Also, relationship banking helps to perceive an increased availability to credit. On the other hand, the ownership structure of a firm is not systematically related to perceived credit constraints, while turnover relaxes firms’ perceptions in the “new†EU 10 countries, but not in the “old†Member States. There exist significant country differences and this cross-country variation can be partly explained by the degree of competition in the banking sector. It has to be stressed that these survey data have been collected well before the present economic crisis; the results here do not describe the present situation but rather the more structural elements of the relationship between perceived access to credit and the determinants studied in a normal economic situation.
    Keywords: financing constraints;credit rationing;SMEs;Europe
    Date: 2010–01–04
  15. By: Angelo Baglioni (DISCE, Università Cattolica)
    Abstract: The interplay between liquidity and credit risks in the interbank market is analyzed. Banks are hit by idiosyncratic random liquidity shocks. The market may also be hit by a bad news at a future date, implying the insolvency of some participants and creating a lemon problem; this may end up with a gridlock of the interbank market at that date. Anticipating such possible contingency, banks currently long of liquidity ask a liquidity premium for lending beyond a short maturity, as a compensation for the risk of being short of liquidity later and being forced to liquidate some illiquid assets. Then banks currently short of liquidity may prefer to borrow short term. The model is able to explain some stylized facts of the 2007- 2009 liquidity crunch affecting the money market at the international level: (i) high spreads between interest rates at different maturities; (ii) "flight to overnight" in traded volumes; (iii) ineffectiveness of open market operations, leading the central banks to introduce some relevant innovations into their operational framework.
    Keywords: Global financial crisis, Money market, Liquidity, Central banking.
    JEL: G21 E43 E50
    Date: 2009–11
  16. By: Vernikov, Andrei (BOFIT)
    Abstract: The purpose of this paper is to carefully assess the size of public sector within the Russian banking industry. We identify and classify at least 78 state-influenced banks. For the state-owned banks, we distinguish between those that are majority-owned by federal executive authorities or Central Bank of Russia, by sub-federal (regional and municipal) authorities, by state-owned enterprises and banks, and by ‘state corporations’. We estimate their combined market share to have reached 56% of total assets by July 1, 2009. Banks indirectly owned by public capital are the fastest-growing group. Concentration is increasing within the public sector of the industry, with the top five state-controlled banking groups in possession of over 49% of assets. We observe a crowding out and erosion of domestic private capital, whose market share is shrinking from year to year. Several of the largest state-owned banks now constitute a de facto intermediate tier at the core of the banking system. We argue that the direction of ownership change in Russian banking is different from that in CEE countries.
    Keywords: Russian banks; transition; banking; state; government; public sector; state-owned banks; state-controlled banks; state-influenced banks
    JEL: G21 G28 P31 P43
    Date: 2010–01–21
  17. By: Emilia Magdalena Jurzyk; Olena Havrylchyk
    Abstract: Using a combination of propensity score matching and difference-in-difference techniques we investigate the impact of foreign bank ownership on the performance and market power of acquired banks operating in Central and Eastern Europe. This approach allows us to control for selection bias as larger but less profitable banks were more likely to be acquired by foreign investors. We show that during three years after the takeover, banks have become more profitable due to cost minimization and better risk management. They have additionally gained market share, because they passed their lower cost of funds to borrowers in terms of lower lending rates. Previous studies failed to pick up the improvements in performance of takeover banks, because they did not account for the performance of financial institutions before acquisitions.
    Keywords: Bank restructuring , Banking sector , Central and Eastern Europe , Economic models , Foreign investment , Profits , Risk management ,
    Date: 2010–01–08
  18. By: Iftekhar Hasan (The Lally School of Management and Technology of Rensselaer Polytechnic Institute, 110 8th Street - Pittsburgh Building, Troy, NY12180, U.S.A.); Heiko Schmiedel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Liang Song (Rensselaer Polytechnic Institute, 110 8th Street - Pittsburgh Building, Troy, NY 12180, U.S.A.)
    Abstract: The European banking industry joined forces to achieve a fully integrated market for retail payment services in the euro area: the Single Euro Payments Area (SEPA). Against this background, the present paper examines the fundamental relationship between retail payment business and overall bank performance. Using data from across 27 European markets over the period 2000-07, we analyse whether the provisions of retail payment services are reflected in improved bank performance, using accounting ratios and efficiency measures. The results confirm that the performance of banks in countries with more developed retail payment service markets is better. This relationship is stronger in countries with a relatively high adoption of retail payment transaction technologies. Retail payment transaction technology itself can also improve bank performance, and evidence shows that heterogeneity in retail payment instruments is associated with enhanced bank performance. Similarly, a higher usage of electronic retail payment instruments seems to stimulate banking business. We also show that retail payment services have a more significant impact on savings and cooperative bank performance although they have a positive influence on the performance of commercial banks. Additionally, findings reveal that impact of retail services on bank performance is dominated by fee income. Finally, an effective payment service market is found to be associated with higher bank stability. Our findings are robust to different regression specifications. The results may also be informative for the industry when reconsidering its business models in the light of current financial market developments. JEL Classification: G21, G28.
    Keywords: retail payment; bank performance; cost and profit efficiency.
    Date: 2009–12
  19. By: Gloria Pasadilla; Melanie Milo (Philippine Institute for Development Studies)
    Abstract: The paper analyzes the impact of major policy changes on banking structure, performance and competition, using bank-specific data from 1990-2002. We find that the entry of more market players is correlated with drops in interest spread and profits which, partly, bespeaks of possible dissipation of previous monopoly profits of large commercial banks. We also compute the H-stat based on the Panzar-Rosse methodology and find that, in general, despite the characteristic presence of few, large commercial banks, the sector is fairly competitive, specially in the loan-granting business. Moreover, competition has increased in the latter half of 1990s, primarily due to the presence of more small commercial banks, rather than big banks.
    Keywords: banking reform, bank liberalization, h-statistics, competition policy, Panzar- Rosse methodology
    JEL: G21 O16 O10
    Date: 2010–01
  20. By: David B. Humphrey (Department of Finance, Florida State University, 600 W. College Avenue, Tallahassee, FL 32306, United States.)
    Abstract: Payment scale economies affect banking costs, competition in payment services, and pricing. Our scale measure relates operating cost to physical measures of European banking "output", finding large economies. This differs from relating total cost to the value of balance sheet assets (the conventional approach). Interest expenses are excluded since differences here are primarily due to mix, not scale. Also, since standard indicators of competition can give inconsistent results, a revenue-based frontier measure is developed and applied to European banks, with little difference evident across countries. Existing differences in bank prices (EC report) are associated with small differences in competition. JEL Classification: E41, C53.
    Keywords: Payment scale economies; bank competition; frontier analysis; European banks.
    Date: 2009–12
  21. By: Barry Scholnick (School of Business, University of Alberta Edmonton, Alberta, Canada, T6G 2R6.)
    Abstract: We test the hypothesis that consumption smoothing occurs after large, but not small, expected future income shocks. Even though this hypothesis has often been discussed, formal evidence in support of it is rare. We use individual level, monthly, bank account data to examine how expected income shocks from final mortgage payments impact credit card consumption, and the repayment of credit card debt. Our data allows us to identify the exact magnitude and date of final mortgage payments, and also to exploit the random timing of these expected income shocks across individuals. Our results are consistent with the magnitude hypothesis.
    Date: 2009–12
  22. By: Jean-Charles Rochet (Toulouse School of Economics, Manufacture de Tabacs, 21 allées de Brienne - 31000 Toulouse, France.); Julian Wright (Department of Economics, National University of Singapore, 21 Lower Kent Ridge Road, Singapore 119077.)
    Abstract: We build a model of credit card pricing that explicitly takes into account credit functionality. We show that a monopoly card network always selects an interchange fee that exceeds the level that maximizes consumer surplus. If regulators only care about consumer surplus, a conservative regulatory approach is to cap interchange fees based on retailers’ net avoided costs from not having to provide credit themselves. In the model, this always raises consumer surplus compared to the unregulated outcome, sometimes to the point of maximizing consumer surplus.
    Date: 2009–12
  23. By: Özlem Bedre-Defolie (Toulouse School of Economics, Manufacture de Tabacs, 21 allées de Brienne – 31000 Toulouse, France.); Emilio Calvano (Department of Economics, Harvard University, Littauer Center, 1805 Cambridge Street, Cambridge, MA 02138, U.S.A)
    Abstract: In a payment card association such as Visa, each time a consumer pays by card, the bank of the merchant (acquirer) pays an interchange fee (IF) to the bank of the cardholder (issuer) to carry out the transaction. This paper studies the determinants of socially and privately optimal IFs in a card scheme where services are provided by a monopoly issuer and perfectly competitive acquirers to heterogeneous consumers and merchants. Different from the literature, we distinguish card membership from card usage decisions (and fees). In doing so, we reveal the implications of an asymmetry between consumers and merchants: the card usage decision at a point of sale is delegated to cardholders since merchants are not allowed to turn down cards once they are affiliated with a card network. We show that this asymmetry is sufficient to induce the card association to set a higher IF than the socially optimal IF, and thus to distort the structure of user fees by leading to too low card usage fees at the expense of too high merchant fees. Hence, cap regulations on IFs can improve the welfare. These qualitative results are robust to imperfect issuer competition, imperfect acquirer competition, and to other factors affecting final demands, such as elastic consumer participation or strategic card acceptance to attract consumers. JEL Classification: G21; L11; L42; L31; L51; K21.
    Keywords: Payment card associations; Interchange fees; Merchant fees.
    Date: 2009–12
  24. By: Wilko Bolt (De Nederlandsche Bank, Research Department, Postbus 98, 1000 AB Amsterdam, The Netherlands.); Heiko Schmiedel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyzes the welfare implications of creating a Single Euro Payments Area. We study the e®ects of increased network compatibility and payment scale economies on consumer and merchant card fees and its impact on card usage. In particular, we model competition among debit cards and between debit and credit cards. We show that competitive pressures dampen merchant fees and increase total card acceptance. The paper argues that there is room for multilateral interchange fee arrangements to achieve optimal consumer and merchant fees, taking safety, income uncertainty, default risk, merchant's pricing power, and the avoided cost of cash at the retailers side into account. Consumers and merchants are likely to benefit the most from the creation of SEPA when sufficient payment card competition alleviates potential monopolistic tendencies. JEL Classification: L11; G21; D53.
    Keywords: SEPA; card network competition; optimal pricing; economic welfare.
    Date: 2009–12
  25. By: Santiago Carbó-Valverde (University of Granada, Department of Economic Theory and History, Campus Universitario de Cartuja s/n, E-18071 Granada, Spain.); José M. Liñares-Zegarra (University of Alicante, Department of Economics, Campus de San Vicente, 03083 Alicante, Spain.)
    Abstract: Card issuers have mainly relied on rewards programs as their main strategic driver to increase electronic payments. However, there is scarce evidence on the effectiveness of rewards programs. This paper offers novel evidence on two key issues: i) it measures the impact of rewards programs on the use of payment cards; and ii) it quantifies their economic impact in terms of the cash substitution. The results show that rewards may significantly modify preferences for card payments, their economic impact vary significantly across types of rewards and merchant activities and rewards seem to be more effective on average for debit cardholders. JEL Classification: G20, D12, E41.
    Keywords: payment cards; rewards; preferences; merchants; cardholders.
    Date: 2009–12
  26. By: Ulf von Kalckreuth (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, D-60431 Frankfurt am Main, Germany.); Tobias Schmidt (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, D-60431 Frankfurt am Main, Germany.); Helmut Stix (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1090 Vienna, Austria.)
    Abstract: Germans are still very fond of using cash. Of all direct payment transactions, cash accounts for an astounding 82% in terms of number, and for 58% in terms of value. With a new and unique dataset that combines transaction information with survey data on payment behaviour of German consumers, we shed light on how individuals choose payment instruments and why cash remains so important. We propose a two-stage empirical framework which jointly explains credit card ownership and the use of cash. Our results indicate that the pattern of cash usage is compatible with systematic economic decision making. Consumers decide upon the adoption of payment cards and then use available payment media according to their transaction and personal characteristics, the relative costs of cash and card usage, and their assessment of payment instruments’ characteristics. Whereas older consumers use significantly more cash, the comparison with younger consumers shows that the difference in payment behaviour is not explained by age as such but to a large extent by differences in the characteristics of these two groups. It is interesting that the possession of a credit card, especially alongside a debit card, does not significantly affect the use of cash in Germany. JEL Classification: E41, E58, D12.
    Keywords: Payment instruments; payment cards; payment behaviour; payment innovation; cash usage; cash substitution; debit cards; credit cards; survey data.
    Date: 2009–12

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