New Economics Papers
on Banking
Issue of 2010‒02‒05
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Have more strictly regulated banking systems fared better during the recent financial crisis? By Ahrend, Rudiger; Arnold, Jens; Murtin, Fabrice
  2. Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis By Xin Huang; Hao Zhou; Haibin Zhu
  3. The Value of the “Too Big to Fail” Big Bank Subsidy By Dean Baker; Travis McArthur
  4. Are banks too big to fail? By Chen Zhou
  5. Interbank contagion at work: evidence from a natural experiment By Rajkamal Iyer; José-Luis Peydró
  6. The Decline of Investment in East Asia since the Asian Financial Crisis: An Overview and Empirical Examination By Park, Dong-hyun; Shin, Kwanho; Jongwanich, Juthathip
  7. Bank capital regulation, the lending channel and business cycles By Zhang, Longmei
  8. Interest rates and bank risk-taking By Delis, Manthos D; Kouretas, Georgios
  9. Transparency of regulation and cross-border bank mergers By Köhler, Matthias
  10. Merger control as barrier to EU banking market integration By Köhler, Matthias
  11. On the Possibility of Credit Rationing in the Stiglitz-Weiss Model: A Comment By Itai Agur
  12. Being a Foreigner among Domestic Banks: Asset or Liability? By Stijn Claessens; Neeltje van Horen
  13. Dysfunctional finance : positive shocks and negative outcomes By Hoff, Karla
  14. Returns to private equity: idiosyncratic risk does matter! By Müller, Elisabeth

  1. By: Ahrend, Rudiger; Arnold, Jens; Murtin, Fabrice
    Abstract: We assess whether during the recent financial crisis banking systems in countries with more stringent prudential banking regulation have proved more stable. We find indicators of regulatory strength to be relatively well correlated with the extent to which countries have escaped damage during the recent crisis, as measured either by the degree of equity value destruction in the banking sector or by the fiscal cost of financial sector rescue.
    Keywords: Prudential regulation; banking; stability; financial crisis; crisis cost; banking sector bail-out; banking share prices.
    JEL: G28 G21
    Date: 2009–12–20
  2. 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 summary indicator of market perceived risk that reflects expected default risk of individual banks, risk premia as well as correlated defaults. 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. Further analysis, which is based on our proposed approach to quantifying 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.
    Keywords: systemic risk, Macroprudential regulation, Portfolio distress loss, Credit default swap, Dynamic conditional correlation
    Date: 2010–01
  3. By: Dean Baker; Travis McArthur
    Abstract: One outcome of the TARP and other bank rescue efforts following the collapse of Lehman Brothers in September of 2008 is that the United States has essentially formalized a commitment to a “too big to fail” (TBTF) policy for major banks. This paper uses data from the FDIC on the relative cost of funds for TBTF banks and other banks, before and after the crisis, to quantify the value of the government protection provided by the TBTF policy.
    Keywords: Federal Reserve, Treasury, banks
    JEL: G G2 G21 G24 G28 H H2 H25 E E5 E58
    Date: 2009–09
  4. By: Chen Zhou
    Abstract: Abstract We consider three measures on the systemic importance of a financial institu- tion within a interconnected financial system. Based on the measures, we study the relation between the size of a financial institution and its systemic importance. From both theo- retical model and empirical analysis, we find that in analyzing the systemic risk posed by one financial institution to the system, size should not be considered as a proxy of systemic importance. In other words, the "too big to fail" argument is not always valid, and alter- native measures on systemic importance should be considered. We provide the estimation methodology of systemic importance measures under the multivariate Extreme Value Theory (EVT) framework.
    Keywords: Too big to fail; systemic risk; systemic importance; multivariate extreme value theory.
    JEL: F3 G11 G15
    Date: 2010–01
  5. By: Rajkamal Iyer (University of Amsterdam, Department of Finance, Roetersstraat 11, 1018 WB, Amsterdam, The Netherlands.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper tests financial contagion due to interbank linkages. For identification we exploit an idiosyncratic, sudden shock caused by a large-bank failure in conjunction with detailed data on interbank exposures. First, we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals. Second, the magnitude of contagion is higher for banks with weaker fundamentals. Third, interbank linkages among surviving banks further propagate the shock. Finally, we find results suggesting that there are real economic effects. These results suggest that interbank linkages act as an important channel of contagion and hold important policy implications. JEL Classification: G21, G28, E58.
    Keywords: contagion; systemic risk; macro-prudential analysis; deposit insurance; interbank market; wholesale depositors; bank runs; banking crisis; liquidity dry-ups.
    Date: 2010–01
  6. By: Park, Dong-hyun (Asian Development Bank); Shin, Kwanho (Korea University); Jongwanich, Juthathip (Asian Development Bank)
    Abstract: A key legacy of the Asian financial crisis of 1997–1998 is a sustained drop-off in the investment rates of East Asian countries that were hardest hit by the crisis. We first review the stylized facts of investment in those countries, and then explore and evaluate the various possible explanations for the decline in investment. In our empirical analysis, which expands upon Park and Shin (2009) by updating the data to include 2005–2008, we investigate the extent to which the investment rates of Asian countries can be explained by the underlying fundamental determinants of investment such as gross domestic product (GDP) growth and demographic variables. We also empirically revisit the various hypotheses put forth to explain the investment drop-off, in particular competitive pressures from the People's Republic of China and heightened risk and uncertainty. Our analysis yields two main findings: (i) some evidence of overinvestment in the precrisis period but (ii) very little evidence of underinvestment in the postcrisis period. The results suggest that investment rates are currently more or less at appropriate levels despite their postcrisis decline. The salient policy implication is that quantitatively boosting investment may be less important for future growth than enhancing the investment climate.
    Keywords: Investment; capital accumulation; growth slowdown; East Asia; Asian crisis
    JEL: E22
    Date: 2009–12
  7. By: Zhang, Longmei
    Abstract: This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model to study how the instability of the banking sector can amplify and propagate business cycles. The model builds on Bernanke, Gertler and Gilchrist (BGG) (1999), who consider credit demand friction due to agency cost, but it deviates from BGG in that financial intermediaries have to share aggregate risk with entrepreneurs, and therefore bear uncertainty in their loan portfolios. Unexpected aggregate shocks will drive loan default rate away from expected, and have an impact on both firm and bank's balance sheet via the financial contract. Low bank capital position can create strong credit supply contraction, and have a significant effect on business cycle dynamics. --
    Keywords: Bank capital regulation,banking instability,financial friction,business cycle
    JEL: E32 E44 E52
    Date: 2009
  8. By: Delis, Manthos D; Kouretas, Georgios
    Abstract: In a recent line of research the low interest-rate environment of the early to mid 2000s is viewed as an element that triggered increased risk-taking appetite of banks in search for yield. This paper uses approximately 18,000 annual observations on euro area banks over the period 2001-2008 and presents strong empirical evidence that low interest rates indeed increase bank risk-taking substantially. This result is robust across a number of different specifications that account, inter alia, for the potential endogeneity of interest rates and/or the dynamics of bank risk. Notably, among the banks of the large euro area countries this effect is less pronounced for French institutions, which held on average a relatively low level of risk assets. Finally, the distributional effects of interest rates on bank risk-taking due to individual bank characteristics reveal that the impact of interest rates on risk assets is diminished for banks with higher equity capital and is amplified for banks with higher off-balance sheet items.
    Keywords: Interest rates; bank risk-taking; panel data; euro area banks
    JEL: E43 E52 G21
    Date: 2010–01–01
  9. By: Köhler, Matthias
    Abstract: There is ample anecdotal evidence that political influence constitutes a barrier to the integration of the EU banking market. Based on a dataset on the transparency on the supervisory review process of bank mergers in the EU, I estimate the probability that a bank is taken over as a function of bank and country characteristics and the transparency of merger control. The results indicate that banks are systematically more likely to be taken over by foreign credit institutions if the regulatory process is transparent. Particularly large banks seem to be less likely to be taken over by foreign banks if merger control lacks transparency. --
    Keywords: Mergers and acquisitions,banks,barriers to consolidation,political interference
    Date: 2010
  10. By: Köhler, Matthias
    Abstract: In 2005, the President of the Bank of Italy blocked the cross-border acquisition of two Italian banks for prudential reasons and formal errors. Because it became later public that both deals were not blocked for prudential reasons, but to protect domestic banks from foreign investors. A survey of the EU Commission indicates that the misuse of supervisory powers and political interference is not only a barrier to cross-border consolidation in Italy, but in other EU countries as well. Systematic empirical evidence on the role of merger control as barrier to M&A is, however, still missing. The main problem is the lack of data on the scope for politicians and supervisors to block M&A during merger control. The main contribution of this paper is to collect this data and to construct indices on the political independence of the supervisory authorities and the transparency of merger control. The main source of information is a questionnaire that was sent to the supervisors in the 25 EU member countries between October 2006 and March 2007. --
    Date: 2009
  11. By: Itai Agur
    Abstract: The model of Stiglitz and Weiss ( American Economic Review , 1981, 71(3)) is the seminal analytical work on credit rationing. However, in a recent paper, Arnold and Riley ( American Economic Review , 2009, 99(5)) claim that the distributional assumption on which that model.s main result depends cannot hold. This paper shows that Arnold and Riley.s result is an outcome of their implicit assumption of a one-period Bertrand game between banks. In more realistic modes of bank competition, in which banks have some degree of monopoly power, Stiglitz and Weiss.s result can hold.
    Keywords: Credit rationing; Stiglitz-Weiss; Bank competition; Market Structure
    Date: 2010–01
  12. By: Stijn Claessens; Neeltje van Horen
    Abstract: Do foreign banks have an advantage operating abroad? The existing literature has come up with different answers. Studying the performance of foreign banks relative to domestic banks in a large number of countries between 1999 and 2006, we find that the answer importantly depends on a number of factors. Specifically, foreign banks tend to perform better when from a high income country and when competition in the host country is limited. They also perform better when they are large and rely more on deposits for funding. Foreign banks improve their performance over time, possibly as they adapt to the local institutional environment. Foreign banks from home countries geographical or cultural close to the host country perform better than distant foreign banks. Institutional familiarity, however, does not help (improve) foreign banks' performance. These findings show that it is important to control for heterogeneity among foreign banks when studying their performance and help reconcile some contradictory results found in the literature.
    Keywords: foreign direct investment; international banking; information; institutions.
    JEL: D40 L11
    Date: 2009–11
  13. By: Hoff, Karla
    Abstract: This paper shows how badly a market economy may respond to a positive productivity shock in an environment with asymmetric information about project quality: some, all, or even more than all the benefits from the increase in productivity may be dissipated. In the model, based on Bernanke and Gertler (1990), entrepreneurs with a low default probability are charged the same interest rate as entrepreneurs with a high default probability. The implicit subsidy from good types to bad means that the marginal entrant will have a negative-value project. An example is presented in which, after a positive productivity shock, the presence of enough bad types forces the interest rate so high that it drives all entrepreneurs out of the market. This happens in an industry in which there are good projects that are productive. The problem is that they are contaminated in the capital market by bad projects because of the banks’ inability to distinguish good projects from bad. One possible explanation for the lack of development in some countries, is that screening institutions are sufficiently weak that impersonal financial markets cannot function. If industrialization entails learning spillovers concentrated within national boundaries, and if initially informational asymmetries are sufficiently great that the capital market does not emerge, then neither industrialization nor the learning that it would foster will occur.
    Keywords: Debt Markets,Access to Finance,Economic Theory&Research,Banks&Banking Reform,Markets and Market Access
    Date: 2010–01–01
  14. By: Müller, Elisabeth
    Abstract: Owners of private companies often invest a substantial share of their net worth in one company, which exposes them to idiosyncratic risk. For US companies we investigate whether owners require compensation for lack of diversification in the form of higher returns to equity. Exposure to idiosyncratic risk is measured as the share of the owner’s net worth invested in the company. Equity returns are measured as the earnings rate and as capital gains. For both returns measures we find a positive and significant influence of exposure to idiosyncratic risk. This paper improves our understanding of returns to private equity. --
    Keywords: returns to private equity,exposure to idiosyncratic risk,private companies
    JEL: G32 G11 L26
    Date: 2009

This issue is ©2010 by Christian Calmès. 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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