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on Banking |
| By: | Cao, Jin |
| Abstract: | This paper provides a compact framework for banking regulation analysis in the presence of uncertainty between systemic liquidity and solvency shocks. Extending the work by Cao & Illing (2009a, b), it is shown that systemic liquidity shortage arises endogenously as part of the inferior mixed strategy equilibrium. The paper compares dierent traditional regulatory policies which intend to fix the ineciencies, and argues that the co-existence of illiquidity and insolvency problems adds extra cost for banking regulation and makes some schemes that are optimal under pure illiquidity risks (such as liquidity regulation with lender of last resort policy) fail. The regulatory cost can be minimized by combining the advantages of several instruments. |
| Keywords: | liquidity risk; insolvency risk; liquidity regulation; equity requirement |
| JEL: | E5 G21 G28 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:11370&r=ban |
| By: | Ben-David, Itzhak (Ohio State University); Franzoni, Francesco (Swiss Finance Institute and University of Lugano); Moussawi, Rabih (University of Pennsylvania) |
| Abstract: | We study hedge funds' trading patterns in the stock market during liquidity crises. On average at the time of a crisis, hedge funds reduce their equity holdings by 9% to 11% per quarter (around 0.3% of total market capitalization). This effect results from large selling by up to a quarter of hedge funds and is not offset by other hedge funds expanding their positions. Dramatic selloffs took place in the 2008 crisis: hedge funds sold about 30% of their stock holdings and almost every fourth hedge fund sold more than 40% of its equity portfolio. We identify two main drivers of this behavior. First, we impute about half of the variation in equity selloffs to a response to lender and investor funding withdrawals. Second, it appears that hedge funds mobilize capital to other (potentially less liquid) markets in the pursuit of more profitable investment opportunities. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2010-2&r=ban |
| By: | Javier Andrés (Universidad de Valencia); Óscar Arce (CNMV); Carlos Thomas (Banco de España) |
| Abstract: | We analyze optimal monetary policy in a model with two distinct financial frictions. First, borrowing is subject to collateral constraints. Second, credit flows are intermediated by monopolistically competitive banks, thus giving rise to endogenous lending spreads. We show that, up to a second order approximation, welfare maximization is equivalent to stabilization of four goals: inflation, output gap, the consumption gap between constrained and unconstrained agents, and the distribution of the collateralizable asset between both groups. Following both financial and non-financial shocks, the optimal monetary policy commitment implies a short-run trade-off between stabilization goals. Such policy tradeoffs become amplified as banking competition increases, due to the fall in lending spreads and the resulting increase in financial leveraging. |
| Keywords: | banking competition, lending spreads, collateral constraints, monetary policy, linear-quadratic method |
| JEL: | E32 E52 G10 G21 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1001&r=ban |
| By: | Sebnem Kalemli-Ozcan (University of Houston and NBER); Elias Papaioannou; José Luis Peydró |
| Abstract: | We investigate the effect of financial integration on the degree of international business cycle synchronization. For identfication, we use a confidential database on banks' bilateral exposure over the past three decades and employ a novel bilateral country-pair panel instrumental vari- ables approach. First, we show that conditional on global shocks and country-pair fixed factors countries that become more financially integrated over time have less synchronized growth pat- terns, in line with the standard theories of output fluctuations. Second, to isolate the one-way impact of financial integration on output co-movement and account for measurement error in the financial integration measure, we exploit variation in the transposition dates of the European Union-wide legislative acts (the "Directives") from the Financial Services Action Plan (FSAP). These laws are designed to harmonize regulation of financial markets in the European Union. We find that increases in financial integration stemming from regulatory-legislative harmoniza- tion policies in capital markets are followed by more divergent output cycles, even when we condition on monetary unification. Our results contrast with those of the previous empirical studies. We reconcile the different results by showing that the earlier estimates suffer from the standard identification problems. |
| Keywords: | Banking Integration, Co-movement, Fluctuations, Financial Legislation |
| JEL: | E32 F15 F36 G21 O16 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1005&r=ban |
| By: | Tobias Adrian; Emanuel Moench; Hyun Song Shin |
| Abstract: | The macro risk premium measures the threshold return for real activity that receives funding from savers. We base our argument in this paper on the relationship between the macro risk premium and the growth of financial intermediaries' balance sheets. The spare capacity of their balance sheets determines the intermediaries' risk appetite, which in turn determines the real projects that receive funding and, hence, the supply of credit. Monetary policy affects risk appetite by changing the ability of intermediaries to leverage their capital. We estimate the time-varying risk appetite of financial intermediaries for the United States, Germany, the United Kingdom, and Japan, and study the joint dynamics of risk appetite using macroeconomic aggregates for the United States. We argue that risk appetite is an important indicator of monetary conditions. |
| Keywords: | Monetary policy ; Intermediation (Finance) ; Risk ; Capital market ; Credit |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:428&r=ban |
| By: | Dirk Tasche |
| Abstract: | The impact of default events on the loss distribution of a credit portfolio can be assessed by determining the loss distribution conditional on these events. While it is conceptually easy to estimate loss distributions conditional on default events by means of Monte Carlo simulation, it becomes impractical for two or more simultaneous defaults as the conditioning event is extremely rare. We provide an analytical approach to the calculation of the conditional loss distribution for the CreditRisk+ portfolio model with independent random loss given default distributions. The analytical solution for this case can be used to study the properties of the conditional loss distributions and to discuss how they relate to the identification of risk concentrations. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1002.2604&r=ban |
| By: | Ansgar Belke; Jens Klose |
| Abstract: | We assess differences that emerge in Taylor rule estimations for the Fed and the ECB before and after the start of the subprime crisis. For this purpose, we apply an explicit estimate of the equilibrium real interest rate and of potential output in order to account for variations within these variables over time. We argue that measures of money and credit growth, interest rate spreads and asset price inflation should be added to the classical Taylor rule because these variables are proxies of a change in the equilibrium interest rate and are, thus, also ikely to have played a major role in setting policy rates during the crisis. Our empirical results gained from a state-space model and GMM estimations reveal that, as far as the Fed is concerned, the impact of consumer price inflation, and money and credit growth turns negative during the crisis while the sign of the asset price inflation coefficient turns positive. Thus we are able to establish significant differences in the parameters of the reaction functions of the Fed before and after the start of the subprime crisis. In case of the ECB, there is no evidence of a change in signs. Instead, the positive reaction to credit growth, consumer and house price inflation becomes even stronger than before. Moreover we find evidence of a less inertial policy of both the Fed and the ECB during the crisis. |
| Keywords: | Subprime crisis, Federal Reserve, European Central Bank, equilibrium real interest rate, Taylor rule |
| JEL: | E43 E52 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp972&r=ban |
| By: | Yuri Katz; Nikolai Shokhirev |
| Abstract: | We develop a generalization of the Black-Cox structural model of default risk. The extended model captures uncertainty related to firms ability to avoid default even if companys liabilities momentarily exceeding its assets. Diffusion in a linear potential with the radiation boundary condition is used to mimic a companys default process. The exact solution of the corresponding Fokker-Planck equation allows for derivation of analytical expressions for the cumulative probability of default and the relevant hazard rate. The obtained closed formulas fit well the historical data on global corporate defaults and demonstrate the split behavior of credit spreads for bonds in different categories of speculative-grade ratings with varying time to maturity. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1002.2909&r=ban |
| By: | Bordo, Michael D. (Rutgers University and NBER); Meissner, Christopher M. (University of California, Davis and NBER); Stuckler, David (Christ Church College, University of Oxford) |
| Abstract: | Foreign currency debt is widely believed to increase risks of financial crisis, especially after being implicated as a cause of the East Asian crisis in the late 1990s. In this paper, we study the effects of foreign currency debt on currency and debt crises and its indirect effects on short-term growth and long-run output effects in both 1880-1913 and 1973-2003 for 45 countries. Greater ratios of foreign currency debt to total debt is associated with increased risks of currency and debt crises, although the strength of the association depends crucially on the size of a country's reserve base and its policy credibility. We found that financial crises, driven by exposure to foreign currency, resulted in significant permanent output losses. We estimate some implications of our findings for the risks posed by currently high levels of foreign currency liabilities in eastern Europe. |
| JEL: | F34 F36 F43 N10 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ucdeco:09-21&r=ban |
| By: | Fiona Stewart |
| Abstract: | Drawing on the experience of the pensions and other financial sectors, this paper examines what sort of risk-management framework pension funds should have in place. Such frameworks are broken down into four main categories: management oversight and culture; strategy and risk assessment; control systems; and information and reporting. Ways in which supervisory authorities can check that such systems are operating are also considered, with a check list provided to assist pension supervisory authorities with their oversight of this important area.<P>Cadre pour la gestion des risques des fonds de pension : réglementation et surveillance<BR>A partir de l’expérience du secteur des retraites et des autres activités financières, ce document examine le type de cadre de gestion des risques dont devraient être dotés les fonds de pension. Un tel cadre devrait reposer sur quatre grands piliers : surveillance de la gestion et culture de gestion ; stratégie et évaluation des risques ; systèmes de contrôle ; information et reporting. Ce document traite également des modalités de surveillance de ces systèmes par les instances de supervision et il contient une liste de référence à l’intention des autorités compétentes à l’égard des organismes de retraite. |
| Keywords: | pensions, risk-management, risk assessment, internal controls, retraites, gestion des risques, évaluation des risques, contrôles internes |
| JEL: | G23 G32 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dafaab:40-en&r=ban |
| By: | Jiří Witzany (University of Economics, Prague, Czech Republic); Michal Rychnovský (University of Economics, Prague, Czech Republic); Pavel Charamza (University of Economics, Prague, Czech Republic) |
| Abstract: | The paper proposes an application of the survival time analysis methodology to estimations of the Loss Given Default (LGD) parameter. The main advantage of the survival analysis approach compared to classical regression methods is that it allows exploiting partial recovery data. The model is also modified in order to improve performance of the appropriate goodness of fit measures. The empirical testing shows that the Cox proportional model applied to LGD modeling performs better than the linear and logistic regressions. In addition a significant improvement is achieved with the modified “pseudo” Cox LGD model. |
| Keywords: | credit risk, recovery rate, loss given default, correlation, regulatory capital |
| JEL: | G21 G28 C14 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2010_02&r=ban |
| By: | Lang, Mark (University of North Carolina, Chapel Hill); Lins, Karl V. (University of Utah); Maffett, Mark (University of North Carolina, Chapel Hill) |
| Abstract: | We examine the relation between transparency, stock market liquidity, and valuation for a global sample of firms. Following the prior literature, we argue that transaction costs will be higher and investors will be less willing to transact if they perceive significant issues with respect to transparency, particularly in international settings where potential information effects are more pronounced Consistent with expectations, we document lower transaction costs and greater liquidity (as measured by lower bid-ask spreads and fewer zero return days) when transparency is likely to be higher (as measured by less evidence of earnings management, better accounting standards, higher quality auditors, more analyst following and more accurate analyst forecasts). We also find evidence that the relation between transparency and liquidity is more pronounced when country-level investor protections and disclosure requirements are poor, suggesting that firm-level transparency matters most when country-level institutions are weak. Finally, we provide evidence that increased liquidity is associated with lower implied cost of capital based on an analyst-forecast-based valuation model, and with higher valuation as measured by Tobin's Q. Magnitudes are substantial, with an interquartile increase in transparency in a low investor protection country associated with a decrease in bid-ask spread from 1.9% to 0.9% and a decrease in cost of capital of 62 basis points. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:upafin:09-3&r=ban |
| By: | Glady, Nicolas; Croux, Christophe |
| Abstract: | A single company provides only a part of the total volume of products or services required by a customer. From the company perspective, this total business volume conducted by a customer, the customer's Size-of-Wallet, is generally unobservable. The percentage of this business done with the company, the customer's Share-of-Wallet, is unobservable as well. This paper focuses on the prediction of these values and on the derived concept of Potential-of-Wallet, which is the di®erence between the Size-of-Wallet and the actual business volume the customer does with the focal company. In the existing literature, the models predicting the customer wallet need survey data to estimate the model parameters. We propose an approach to predicting customer wallet without using survey data. In the empirical application, we show that a company can generate substantial gains by targeting customers with a large Potential-of-Wallet. |
| Keywords: | Customer relationship management; Prediction; Retail banking; Share-of-wallet; |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ner:leuven:urn:hdl:123456789/200989&r=ban |
| By: | Linda S. Goldberg; Craig Kennedy; Jason Miu |
| Abstract: | Following a scarcity of dollar funding available internationally to financial institutions, in December 2007 the Federal Reserve began to establish or expand Temporary Reciprocal Currency Arrangements with fourteen other central banks. These central banks had the capacity to use the swap facilities to provide dollar liquidity to institutions in their jurisdictions. This paper presents the developments in the dollar swap facilities through the end of 2009. The facilities were a response to dollar funding shortages outside the United States and were effective at making dollars more broadly available to financial institutions overseas during a period of market dysfunction. Formal research, as well as more descriptive accounts, suggests that the dollar swap lines among central banks were effective at reducing the dollar funding pressures abroad and the stresses in money markets. While these findings are compelling, it is still difficult to draw definitive lessons on particular facilities given the numerous changes over time in market conditions and policy responses. |
| Keywords: | Banks and banking, Central ; Swaps (Finance) ; Foreign exchange ; Dollar, American ; Liquidity (Economics) ; Currency convertibility ; Federal Reserve System |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:429&r=ban |
| By: | Michael B. Gordy; Søren Willemann |
| Abstract: | In its complexity and its vulnerability to market volatility, the CPDO might be viewed as the poster child for the excesses of financial engineering in the credit market. This paper examines the CPDO as a case study in model risk in the rating of complex structured products. We demonstrate that the models used by S&P and Moody's would have assigned very low probability to the spread levels realized in the investment grade corporate credit default swap market in late 2007, even though these spread levels were comparable to those of 2002. The spread levels realized in the first quarter of 2008 would have been assigned negligibly small probabilities. Had the models put non-negligible likelihood on attaining these high spread levels, the CPDO notes could never have achieved investment grade status. We conclude with larger lessons for the rating of complex products and for modeling credit risk in general. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-05&r=ban |