New Economics Papers
on Banking
Issue of 2010‒03‒06
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. On Dividend Restrictions and the Collapse of the Interbank Market By Dimitrios Tsomocos; Charles Goodhart; M.U. Peiris; Alexandros Vardoulakis
  2. Risk Appetite and Endogenous Risk By Jean-Pierre Zigrand; Hyun Song Shin; Jon Danielsson
  3. Interbank Offered Rate: Effects of the financial crisis on the information content of the fixing By Vincent Brousseau; Alexandre Chailloux; Alain Durré
  4. Modelling a Housing and Mortgage Crisis By Alexandros Vardoulakis; Dimitrios Tsomocos; Charles Goodhart
  5. Tests of Ex Ante Versus Ex Post Theories of Collateral Using Private and Public Information By Berger, A.N.; Frame, W.S.; Ioannidou, V.
  6. Corporate governance and current regulation in the German banking sector: an overview and assessment By Köhler, Matthias
  7. Better borrowers, fewer banks? By Christophe J. Godlewski; Frédéric Lobez; Jean-Christophe Statnik
  8. The Role of Central Banks in Sustaining Economic Recovery and in Achieving Financial Stability By Siregar, Reza Yamora; Lim, CS Vincent
  9. Risk heterogeneity and credit supply: evidence from the mortgage market By Bealey, Timothy; Meads, Neil; Surico, Paolo
  10. Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs By Linda S. Goldberg; Craig Kennedy; Jason Miu
  11. Further evidence on the (in-) efficiency of the U.S. housing market By Schindler, Felix
  12. Unlearned Lessons from Risk, Debt Service, Bank Credit, and Asymmetric Information By Muradali V. Ibrahimo; Carlos P. Barros;
  13. A Productivity analysis of Eastern European banking taking into account risk decomposition and environmental variables By Karligash Kenjegalieva; Richard Simper
  14. Information Asymmetry in Pricing of Credit Derivatives By Caroline Hillairet; Ying Jiao
  15. Failing and Merging as Competing Alternatives during Times of Financial Distress: Evidence from the Colombian Financial Crisis By Jose Eduardo Gómez-González; Juan Carlos Mendoza
  16. State Aid and Competition in Banking: The Case of China in the Late Nineties By Xiaoqiang Cheng; Patrick VAN CAYSEELE
  17. Bank cost efficiency in Kazakhstan and Russia By Peresetsky, Anatoly
  18. Assembling a Real-Financial Micro-Dataset for Canadian Households By Umar Faruqui

  1. By: Dimitrios Tsomocos; Charles Goodhart; M.U. Peiris; Alexandros Vardoulakis
    Abstract: Until recently, financial services regulation remained largely segmented along national lines. The integration of financial markets, however, calls for a systematic and coherent approach to regulation. This paper studies the effect of market based regulation on the proper functioning of the interbank market. Specifically, we argue that restrictions on the payout of dividends by banks can reduce their expected default on (interbank) loans, stimulate trade in this market and improve the welfare of consumers.
    Date: 2010–02
  2. By: Jean-Pierre Zigrand; Hyun Song Shin; Jon Danielsson
    Abstract: Risk is endogenous. Equilibrium risk is the fixed point of the mapping that takes perceived risk to actual risk. When risk-neutral traders operate under Value-at-Risk constraints, market conditions exhibit signs of fluctuating risk appetite and amplification of shocks through feedback effects. Correlations in returns emerge even when underlying fundamental shocks are independent. We derive a closedform solution of equilibrium returns, correlation and volatility by solving the fixed point problem in closed form. We apply our results to stochastic volatility and option pricing.
    Date: 2010–02
  3. By: Vincent Brousseau (IESEG School of Management); Alexandre Chailloux (International Monetary Fund); Alain Durré (IESEG School of Management, LEM-CNRS (UMR 8179))
    Abstract: With the onset of the financial turmoil in August 2007, pricing references on the money market interest rates have been shocked. The segment of unsecured deposit transactions, which represent the cornerstone of capital markets, and is used as basis for the setting of money market benchmark essential to the indexing of trillions of derivative contracts and loans, has been particularly damaged by the surge in counterparty risk. The lack of confidence between traders and the growing fear of counterparty’s bankruptcies have led progressively to a drying out of the unsecured market turnover. After a relative improvement in early 2008, market activity in the unsecured market has again dried up with the reinforcement of the financial crisis following the collapse of Lehman Brothers. Although there are good reasons to think that the market activity in the cash unsecured segment of the money market has remained distorted, in particular for maturities beyond the very short-term, the OIS-LIBOR spreads have been declining extremely steadily since January 2009, both in major currencies and at various maturities, seemingly pointing to a normalization of the money market. On the basis of a simple econometric supported by statistical evidence applied to the euro area date, this paper analyses whether recent developments in the unsecured interest rates actually support a diagnosis of renewed market activity, and of normalization of the unsecured market.
    Keywords: LIBOR, EURIBOR, secured segment, fixings, market distortions, financial crisis.
    JEL: G14 C02 C32
    Date: 2009–12
  4. By: Alexandros Vardoulakis; Dimitrios Tsomocos; Charles Goodhart
    Abstract:  The purpose of this paper is to explore financial instability in this case due to a housing crisis and defaults on mortgages. The model incorporates heterogeneous banks and households. Mortgages are secured by collateral, which is equal to the amount of housing which agents purchase. Individual default is spread through the economy via the interbank market. Several comparative statics illustrate the directional effects of a variety of shocks in the economy.
    Date: 2010–02
  5. By: Berger, A.N.; Frame, W.S.; Ioannidou, V. (Tilburg University, Center for Economic Research)
    Abstract: Collateral is a widely used, but not well understood, debt contracting feature. Two broad strands of theoretical literature explain collateral as arising from the existence of either ex ante private information or ex post incentive problems between borrowers and lenders. However, the extant empirical literature has been unable to isolate each of these effects. This paper attempts to do so using a credit registry that is unique in that it allows the researcher to have access to some private information about borrower risk that is unobserved by the lender. The data also includes public information about borrower risk, loan contract terms, and ex post performance for both secured and unsecured loans. The results suggest that the ex post theories of collateral are empirically dominant, although the ex ante theories are also valid for customers with short borrower-lender relationships that are relatively unknown to the lender.
    Keywords: Collateral;Asymmetric Information;Banks
    JEL: G21 D82 G38
    Date: 2010
  6. By: Köhler, Matthias
    Abstract: This paper gives an overview over corporate governance and banking regulation in Germany. Particular attention is put on legal and regulatory changes that were made in response to the financial market crisis. The paper shows that the changes mainly focus on the remuneration of managers and on further professionalizing the supervisory board. Problematic is that several laws that were enacted in the past years to improve corporate governance focus on listed firms. Furthermore, some of the recommendations and suggestions made to improve corporate governance in Germany are not legally binding even for stock corporations. Recent empirical evidence, moreover, suggests that bank shareholders pushed for greater risk-taking and not managers. This contrast with public view that the bank managers are pushed by aggressive remunerations schemes to increase risk-taking and indicates that the recent legal and regulatory changes fail to remove all weaknesses of the German corporate governance system. --
    Keywords: Corporate governance,banks,regulation,remuneration schemes,supervisory board
    JEL: G21 G34 G38
    Date: 2010
  7. By: Christophe J. Godlewski (LaRGE Research Center, Université de Strasbourg); Frédéric Lobez (European Center for Corporate Control Studies, Université de Lille Nord de France); Jean-Christophe Statnik (European Center for Corporate Control Studies, Université de Lille Nord de France; GREGOR, Sorbonne Graduate Business School, Université Paris 1)
    Abstract: We investigate the relationship between borrower quality and the structure of the pool of banks. First, we develop a theoretical model where the size of the banking pool is a credible signal of firm quality. We argue that better borrowers seek to disclose their quality in a credible way through the structure of the banking pool involving fewer banks. Second, we test our prediction using a sample of more than 3,000 loans from 19 European countries. We perform regressions of the number of bank lenders on various proxies of borrower quality. Our empirical tests corroborate the theoretical redictions. The size of the banking pool is a signal of borrower quality. Hence, good quality firms have fewer lenders in their banking pools.
    Keywords: Bank lending, borrower quality, multiple banking, number of lenders, signaling, Europe.
    JEL: D82 G21 G32
    Date: 2010
  8. By: Siregar, Reza Yamora; Lim, CS Vincent
    Abstract: Whenever a financial crisis occurs, threatening a possible financial meltdown, central banks have to be at the forefront in combating, neutralizing the crisis and restoring financial stability and economic growth. In this regards, the present sub-prime crisis which originated from the US highlights a few key issues for the Southeast Asian Central banks (SEACEN). This paper reviews the policy responses to the crisis which include exit policy strategies from stimulus monetary packages. To strengthen the soundness of the financial system, going forward, the paper also highlights counter-cyclical and macro-prudential regulations that central banks may want to actively look into. These include cross-border policy cooperation and coordination, particularly in the form of the college of supervisors.
    Keywords: - SEACEN; -Central Banks; - Financial Stability; - Prudential Regulation; -Supervision.
    JEL: E58 E44 E41
    Date: 2010–02–15
  9. By: Bealey, Timothy; Meads, Neil; Surico, Paolo
    Abstract: This paper uses a unique data set on more than 600,000 mortgage contracts to estimate a credit supply function which allows for risk-heterogeneity. Non-linearity is modelled using quantile regressions. We propose an instrumental variable approach in which changes in the tax treatment of housing transactions are used as an instrument for loan demand. The results are suggestive of considerable risk heterogeneity with riskier borrowers penalised more for borrowing more.
    Keywords: individual mortgage data; credit supply; risk pricing; heterogeneous effects; instrumental variable.
    JEL: D10 E21 G21
    Date: 2010–02
  10. By: Linda S. Goldberg; Craig Kennedy; Jason Miu
    Abstract: Following a scarcity of dollar funding available internationally to banks and financial institutions, starting in December 2007 the Federal Reserve established or expanded Temporary Reciprocal Currency Arrangements with fourteen foreign central banks. These central banks had the capacity to use these 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 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 stresses in money markets. The central bank dollar swap facilities are an important part of a toolbox for dealing with systemic liquidity disruptions.
    JEL: E44 F36 G32
    Date: 2010–02
  11. By: Schindler, Felix
    Abstract: Extending the controversial findings from relevant literature on testing the efficient market hypothesis for the U.S. housing market, the results from the monthly and quarterly transaction-based Case-Shiller indices from 1987 to 2009 provide further empirical evidence on the rejection of the weak-form version of efficiency in the U.S. housing market. In addition to conducting parametric and non-parametric tests, we apply technical trading strategies to test whether or not the inefficiencies can be exploited by investors earning excess returns. The empirical findings suggest that investors might be able to obtain excess returns from both autocorrelation- and moving average-based trading strategies compared to a buy-and-hold strategy. --
    Keywords: Housing market,weak-form market efficiency,random walk hypothesis,variance ratio tests,runs test,trading strategies
    JEL: G12 G14 G15 R31
    Date: 2010
  12. By: Muradali V. Ibrahimo; Carlos P. Barros;
    Abstract: This paper presents a model of the economy that explains the economic bubbles, based on bank credit, debt service and risk. In the first period of the model, banks offer too much credit seeking to maximise their expected profits. The excessive debt created in the boom period generates, in the second-period, the expansion of the debt bubble, which induces failures in the financial market and the downturn of the overall economy. Business cycles are inherent in the free market systems. They may be caused by endogenous factors of financial markets and, given the absence of adequate, effective regulation, they may be unavoidable. Credit crunch in the financial market is therefore highly probable. In order to reduce substantially the risk of such occurrences, economic and financial policies are proposed. Key words: Asymmetric information, bank credit, risk, debt service and business cycle
    Date: 2009–10
  13. By: Karligash Kenjegalieva (Dept of Economics, Loughborough University); Richard Simper (Dept of Economics, Loughborough University)
    Abstract: This paper develops a new Luenberger productivity which is applied to a technology where the desirable and undesirable outputs are jointly produced and are possibly negative. The components of this Luenberger productivity index - the efficiency change and the components of the technological shift - are then decomposed into factors determined by the technology, adjusted for ‘risk and environment’, ‘risk management’ and ‘environmental effects’. The method is applied to Central and Eastern European banks operating during 1998–2003 utilising three alternative input/output methodologies (intermediation, production and profit/revenue). Additionally, the comparative analysis of the sensitivity of the productivity indices in the choice of the methodologies is undertaken using statistical and kernel density tests. It is found that the main driver of productivity change in Central and Eastern European banks is technological improvement, which, in the beginning of the analysed period, hinged on the banks’ ability to capitalise on advanced technology and successfully take into account risk and environmental factors. Whereas, in the later sampled periods, we show that one of the most important factors of technological improvement/decline is risk management. Finally, the tests employed confirm previous findings, such as Pasiouras (2008) in this journal, that different input/output methodologies produce statistically different productivity results. Indeed, we also find that external factors, such as a risk in the economy and banking production, and a ‘corruption perception’ affect the productivity of banks.
    Keywords: Luenberger productivity index; DEA; banking; undesirable outputs; negative data.
    JEL: C14 G2 L1
    Date: 2010–01
  14. By: Caroline Hillairet (CMAP); Ying Jiao (PMA)
    Abstract: We study the pricing of credit derivatives with asymmetric information. The managers have complete information on the value process of the firm and on the default threshold, while the investors on the market have only partial observations, especially about the default threshold. Different information structures are distinguished using the framework of enlargement of filtrations. We specify risk neutral probabilities and we evaluate default sensitive contingent claims in these cases.
    Date: 2010–02
  15. By: Jose Eduardo Gómez-González; Juan Carlos Mendoza
    Abstract: This paper studies the determinants of individual bank failures and M&A processes in Colombia during the financial crisis of the late 1990s. Using bank-specific data we estimate competing risk hazards models and find that while profitability and capitalization are the most important determinants of the probability of failing, bank´s size, efficiency and capitalization are the main determinants of the probability of participating in an integration process. All else constant, an increase in capitalization reduces the probability of disappearing, whether due to the occurrence of bankruptcy, a merge or an acquisition. However, a marginal increase in capitalization reduces significantly more the probability of bankruptcy than the probability of integration. This study is the first to present a competing risks hazard model to identify covariates that excerpt significant influence on the probability of failing or merging for banks of an emerging economy.
    Date: 2010–02–21
  16. By: Xiaoqiang Cheng; Patrick VAN CAYSEELE
    Abstract: A reduced form model where banks can pursue other goals than profit maximization is presented. This allows us to test for behavioral changes of banks over time. This model provides a framework to evaluate whether moral hazard issues may plague banks receiving state aid, which concerns greatly the recent debate on government intervention in financial markets during the global financial crisis in 2008. To test the impact of state aid, a natural experiment in the banking sector in China in the 1990s is examined. The possibility of receiving state aid triggers moral hazard prone conduct cannot be rejected.
    Keywords: banks, moral hazard, Europe, history, banking, crisis, commercial banks, Panzar –Rosse Model, monopoly environment, revenue maximization , output maximization, revenue elasticity, United Statesgovernment intervention, china, financial markets
    Date: 2010
  17. By: Peresetsky, Anatoly (BOFIT)
    Abstract: The Kazakhstan banking system is increasingly viewed as more advanced than the Russian system. Kazakhstan adopted the International Accounting System (IAS) in 2003 and the Basel II norms in 2005, while Russia has yet to fully adopt either IAS or Basel II. In this paper, bank data for 2002-2006 are used to estimate models of bank cost efficiency. In contrast to most previous papers, no significance difference is found for the average cost efficiency scores of banks for the two countries during 2002-2006. How banks are ranked for efficiency depends upon the chosen model (input and output sets). An interesting insight is the finding that most banks in both countries are below optimal size.
    Keywords: cost efficiency; banks; stochastic frontier approach
    JEL: D21 F30 G21
    Date: 2010–02–26
  18. By: Umar Faruqui
    Abstract: The lack of consolidated Canadian micro data on household balance sheets and expenditures has been an important impediment to empirical research into real-financial linkages in the Canadian household sector. Our paper attempts to fill this data gap by merging household balance sheet data from the Canadian Financial Monitor survey with household expenditure data from the Survey of Household Spending. The merge process uses a categorical matching framework aimed at preserving the heterogeneity in the underlying datasets. The resulting combined dataset is a novel source of Canadian micro data on household finances and spending patterns. The dataset covers the period 1999 till 2005 and contains roughly 11,000 observations (households) for each year. We plan to use these combined data to test key real-financial linkages (like those between house prices, debt and household expenditures) for the Canadian household sector.
    Keywords: Sectoral balance sheet
    JEL: D10 C81
    Date: 2010

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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