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on Banking |
| By: | Thomas Philippon; Vasiliki Skreta |
| Abstract: | We study interventions to restore efficient lending and investment when financial markets fail because of adverse selection. We solve a design problem where the decision to participate in a program offered by the government can be a signal for private information. We characterize optimal mechanisms and analyze specific programs often used during banking crises. We show that programs attracting all banks dominate those attracting only troubled banks, and that simple guarantees for new debt issuances implement the optimal mechanism, while equity injections and asset buyback do not. We also discuss the consequences of moral hazard. |
| JEL: | D02 D62 D82 D86 E44 E58 G2 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15785&r=ban |
| By: | Francesco Giuli (University of Rome La Sapienza, Department of Public Economics, Italy); Marco Manzo (Ministry of Economics, Italy and OECD) |
| Abstract: | We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bond risks; a unique benevolent public authority aims at maximising investors welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on a firms true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. By establishing the necessary conditions that allow optimal sanctions to produce the first best equilibrium, we show that the core problem of adverse selection in the corporate bond market does not lie so much in the benevolence of the delegated monitoring system, but rather in the possibility of affecting and sanctioning a firms behaviour. |
| Keywords: | Corporate bond, Incentives, Collusion, Regulation |
| JEL: | D82 G28 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200942&r=ban |
| By: | Gary B. Gorton |
| Abstract: | All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprime- related bonds. These price declines were due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) – short-term, collateralized, agreements that the Fed rightly used to count as money. Collateral for repo was, to a large extent, securitized bonds. Firms were forced to sell assets as a result of the banking panic, reducing bond prices and creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears about the locations of subprime risk concentrations among counterparties. This banking system (the “shadow” or “parallel” banking system) – repo based on securitization – is a genuine banking system, as large as the traditional, regulated and banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created. |
| JEL: | G1 G2 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15787&r=ban |
| By: | Ruipeng Liu; Thomas Lux |
| Abstract: | Long memory (long-term dependence) of volatility counts as one of the ubiquitous stylized facts of financial data. Inspired by the long memory property, multifractal processes have recently been introduced as a new tool for modeling financial time series. In this paper, we propose a parsimonious version of a bivariate multifractal model and estimate its parameters via both maximum likelihood and simulation based inference approaches. In order to explore its practical performance, we apply the model for computing value-at-risk and expected shortfall statistics for various portfolios and compare the results with those from an alternative bivariate multifractal model proposed by Calvet et al. (2006) and the bivariate CC-GARCH of Bollerslev (1990). As it turns out, the multifractal models provide much more reliable results than CC-GARCH, and our new model compares well with the one of Calvet et al. although it has an even smaller number of parameters |
| Keywords: | Long memory, multifractal models, simulation based inference, value-at-risk, expected shortfall |
| JEL: | C11 C13 G15 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1594&r=ban |
| By: | Honohan, Patrick; Yoder, Sean |
| Abstract: | Attempts to raise a significant percentage of gross domestic product in revenue from a broad-based financial transactions tax are likely to fail both by raising much less revenue than expected and by generating far-reaching changes in economic behavior. Although the side-effects would include a sizable restructuring of financial sector activity, this would not occur in ways corrective of the particular forms of financial overtrading that were most conspicuous in contributing to the crisis. |
| Keywords: | Debt Markets,Emerging Markets,Taxation&Subsidies,Banks&Banking Reform,Economic Theory&Research |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5230&r=ban |
| By: | Marc Flandreau (Graduate Institute of international and Development Studies in Geneva and CEPR); Juan H. Flores (Department of Economic History, University of Geneva.); Norbert Gaillard (Sciences Po, Paris); Sebastián Nieto-Parra (Development Centre, OECD, Paris) |
| Abstract: | We provide a comparison of salient organizational features of primary markets for foreign government debt over the very long run. We focus on output, quality control, information provision, competition, pricing, charging, and signaling. We find that the market setup experienced a radical transformation in the recent period, and we interpret this as resulting from the rise of liability insurance provided by rating agencies. Underwriters have given up their former role as gatekeepers of liquidity and certification agencies to become aggressive competitors in a new Speculative Grade market. |
| Keywords: | certification, primary bond market, sovereign debt crises, banks competition |
| JEL: | F34 G14 G24 N2 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:10-017&r=ban |
| By: | Stephanou, Constantinos |
| Abstract: | The main objective of this paper is to rethink the use of market discipline for prudential purposes in light of lessons from the financial crisis. The paper develops the main building blocks of a market discipline framework, and argues for the need to take an expansive view of the concept. It also illustrates using actual bank case studies from the United States its apparent failures in the crisis, particularly the failure to prevent the buildup of systemic, as opposed to idiosyncratic, risks. However, while the role of market discipline in the design of macro-prudential regulation appears to be largely constrained, more can be done on the micro-prudential side to promote clearer market signals of bank riskiness and to encourage their use in the supervisory process. |
| Keywords: | Banks&Banking Reform,Debt Markets,Markets and Market Access,Emerging Markets,Access to Finance |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5227&r=ban |
| By: | Asani Sarkar; Jeffrey Shrader |
| Abstract: | The small decline in the value of mortgage-related assets relative to the large total losses associated with the financial crisis suggests the presence of financial amplification mechanisms, which allow relatively small shocks to propagate through the financial system. We review the literature on financial amplification mechanisms and discuss the Federal Reserve's interventions during different stages of the crisis in light of this literature. We interpret the Fed's early-stage liquidity programs as working to dampen balance sheet amplifications arising from the positive feedback between financial constraints and asset prices. By comparison, the Fed's later-stage crisis programs take into account adverse-selection amplifications that operate via increases in credit risk and the externality imposed by risky borrowers on safe ones. Finally, we provide new empirical evidence that increases in the Federal Reserve's liquidity supply reduce interest rates during periods of high liquidity risk. Our analysis has implications for the impact on market prices of a potential withdrawal of liquidity supply by the Fed. |
| Keywords: | Assets (Accounting) ; Bank assets ; Interest rates ; Bank liquidity ; Financial crises ; Federal Reserve System |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:431&r=ban |
| By: | Utzig, Siegfried (Asian Development Bank Institute) |
| Abstract: | Credit rating agencies (CRAs) bear some responsibility for the financial crisis that started in 2007 and remains ongoing. This is acknowledged by policymakers, market participants, and by the agencies themselves. It soon became clear that, given the depth of the crisis, CRAs would not be able to satisfy policymakers by eliminating flaws in their rating methods and improving corporate governance. Although the CRAs were more or less unregulated before the outbreak of the financial crisis, after the crisis started, politicians became increasingly vocal in demanding regulation. Initially, these demands were confined to a more binding form of self-regulation. But as the crisis progressed, the calls for state regulation grew ever louder. It became apparent after the November 2008 G-20 summit in Washington that state regulation could no longer be avoided. <p>In Europe, the course had been set in this direction even before then. Since European policymakers saw the crisis as evidence that the Anglo-Saxon approach to the financial markets had failed, they believed they were now strongly placed to have a decisive influence on shaping a new international financial order. It is remarkable to note the shift in European policy from a self-regulatory approach, which was comparatively liberal in international terms, to quite rigorous state regulation of CRAs. Both the European Commission and the European Parliament drew up far-reaching plans. Although European policymakers knew that only globally consistent regulation would be appropriate for a new world financial order, their initial draft legislation was geared more toward stand-alone European regulation. While the final version of the European Union Regulation on Credit Rating Agencies focuses firmly on the European arena, the key point for all market participants is that this is unlikely to have an adverse effect on the global ratings market. It must nevertheless be recognized that the scope of the selected regulatory approach is extremely narrow. Certainly, it has the potential to improve the corporate governance of CRAs and prevent conflicts of interests. But it can do nothing to address the repeated calls for greater competition or for CRAs to be made liable for their ratings. |
| Keywords: | regulation credit rating agencies; europe credit rating agency; european bank financial crisis; financial crisis; credit rating agency |
| JEL: | G18 G21 G24 |
| Date: | 2010–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0188&r=ban |
| By: | Stijn Ferrari (National Bank of Belgium, Financial Stability Department; Catholic University of Leuven) |
| Abstract: | This paper empirically examines the effects of discriminatory fees on ATM investment and welfare, and considers the role of coordination in ATM investment between banks. Our main findings are that foreign fees tend to reduce ATM availability and (consumer) welfare, whereas surcharges positively affect ATM availability and the different welfare components when the consumers' price elasticity is not too large. Second, an organization of the ATM market that contains some degree of coordination between the banks may be desirable from a welfare perspective. Finally, ATM availability is always higher when a social planner decides on discriminatory fees and ATM investment to maximize total welfare. This implies that there is underinvestment in ATMs, even in the presence of discriminatory fees |
| Keywords: | investment, coordination, ATMs, network industries, empirical entry models, spatial discrete choice demand models |
| JEL: | G21 L10 L50 L89 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201001-29&r=ban |
| By: | Donze, Jocelyn; Dubec, Isabelle |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/2448/&r=ban |
| By: | Muliaman D. Hadad (Bank Indonesia, Jakarta, Indonesia); Maximilian J. B. Hall (Dept of Economics, Loughborough University); Wimboh Santoso (Bank Indonesia, Jakarta, Indonesia); Karligash Kenjegalieva (Dept of Economics, Loughborough University); Richard Simper (Dept of Economics, Loughborough University) |
| Abstract: | In this study, we utilise a new, non-parametric efficiency measurement approach which combines the semi-oriented radial measure data envelopment analysis (SORM-SBM-DEA) approach for dealing with negative data (Emrouznejad et al., 2010) with the slacks-based efficiency measures of Tone (2001, 2002) to analyse productivity changes for Indonesian banks over the period Quarter I 2003 to Quarter II 2007. Having constructed the Malmquist indices, using data provided by Bank Indonesia (the Indonesian central bank), for the banking industry and different bank types (i.e., listed and Islamic) and groupings, we then decomposed the industry’s Malmquist into its technical efficiency change and frontier shift components. Finally, we analysed the banks’ risk management performance, using Simar and Wilson’s (2007) truncated regression approach, before assessing its impact on productivity growth. The first part of the Malmquist analysis showed that average productivity changes for the Indonesian banking industry tended to be driven, over the sample period, by technological progress rather than by frontier shift, although a relatively stable pattern was exhibited for most of the period. However, at the beginning of the considered period, state-owned and foreign banks, as well as Islamic banks, exhibited volatile productivity movements, mainly caused by shifts in the technological frontier. With respect to the risk management analysis, most of the balance sheet variables were shown to have had the expected impact on risk management efficiency. While the risk management decomposition of technical efficiency change and frontier risk components demonstrated that, by the end of the sample period, the change in risk management efficiency and risk management effects had the same dynamic pattern, resulting in the analogous dynamics for technical efficiency changes. Therefore, a strategy based on the gradual adoption of newer technology, with a particular focus on internal risk management enhancement, seems to offer the highest potential for boosting the productivity of the financial intermediary operations of Indonesian banks. |
| Keywords: | Indonesian Finance and Banking; Productivity; Efficiency. |
| JEL: | C23 C52 G21 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2010_04&r=ban |
| By: | Maximilian J. B. Hall (Dept of Economics, Loughborough University); Karligash Kenjegalieva (Dept of Economics, Loughborough University); Richard Simper (Dept of Economics, Loughborough University) |
| Abstract: | This paper examines the evolution of Hong Kong’s banking industry’s technical efficiency, and its macroeconomic determinants, during the period 2000-2006 through the prism of two alternative approaches to efficiency estimation, namely the intermediation and production approaches. Using a modified (Sharp, Meng and Liu, 2006) slacks-based model (Tone, 2001), and purging the efficiency estimates for random errors (Simar and Zelenyuk, 2007) , we firstly analyse the trends in bank efficiency. We then identify the ‘environmental’ factors that significantly affect the efficiency scores using an adaptation (Kenjegalieva et al. 2009) of the truncated regression approach suggested by Simar and Wilson. 2007). The first part of the analysis reveals that the Hong Kong banking industry suffered a severe downturn in estimated technical efficiency during 2001. It subsequently recovered, posting average efficiency scores of 92 per cent and 85 percent under the intermediation and production approaches respectively by the end of 2006. As for the sub-group analysis, commercial banks are, on average, shown to be the most efficient operators, while the investment bank group are shown to be the least efficient. Finally, with respect to the truncated regression analysis, the results suggest that smaller banks are more efficient than their larger counterparts, although larger banks are still able to enjoy gains from scale economies and benefit from the export of financial services. Moreover, private housing rent and the net export of goods and services are found to be negatively correlated with bank efficiency, while private consumption is shown to be positively correlated. |
| Keywords: | Hong Kong Banks; DEA; Slacks; Environmental factors, Negative numbers; Bias. |
| JEL: | C23 C52 G21 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2010_03&r=ban |