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on Banking |
| By: | Sanders Shaffer |
| Abstract: | There is a popular belief that the confluence of bank capital rules and fair value accounting helped trigger the recent financial crisis. The claim is that questionable valuations of long term investments based on prices obtained from illiquid markets created a pro-cyclical effect whereby mark to market adjustments reduced regulatory capital forcing banks to sell off investments which further depressed prices. This ultimately led to bank instability and the credit effects that reached a peak late in 2008. This paper analyzes a sample of large banks to attempt to measure the strength of the link between fair value accounting, regulatory capital rules, pro-cyclicality and financial contagion. The focus is on large banks because they value a significant portion of their balance sheets using fair value. They also hold investment portfolios that contain illiquid assets in large enough volumes to possibly affect the market in a pro-cyclical fashion. The analysis is based on a review of recent historical financial data. The analysis does not reveal a clear link for most banks in the sample, but rather suggests that there may have been other more significant factors putting stress on bank regulatory capital. |
| Keywords: | Global financial crisis ; Bank capital ; Banks and banking - Accounting |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:qau10-01&r=ban |
| By: | Caterina Giannetti; Nicola Jentzsch; Giancarlo Spagnolo |
| Abstract: | Information asymmetries can severely limit cross-border border expansion of banks. When a bank enters a new market, it has incomplete information about potential new clients. Such asymmetries are reduced by credit registers, which distribute financial data on bank clients. We investigate the interaction of credit registers and bank entry modes (in form of branching and M&A) by using a new set of time series cross-section data for the EU-27 countries. We study how the presence of public and private credit registers and the type of information exchanged affect bank entry modes during the period 1990-2007. Our analysis shows that the existence of both types of registers increases the share of branching in the overall entries. Additionally, the establishment of public registers reduces concentration ratios, and some banking competition indicators (such as overhead costs/assets). The introduction of a private credit bureau, on the other hand, has no effect on concentration ratios, but positively contributes to competition (by decreasing interest rate margins). This suggests that credit registers facilitate direct entry through a reduction of information asymmetries, which in turn intensifies competition. |
| Keywords: | credit registries, foreign entry, asymmetric information |
| JEL: | F37 G21 G34 L13 O16 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp980&r=ban |
| By: | McAleer, Michael; Jimenez-Martin, Juan-Angel; Perez Amaral, Teodosio |
| Abstract: | In this paper we advance the idea that optimal risk management under the Basel II Accord will typically require the use of a combination of different models of risk. This idea is illustrated by analyzing the best empirical models of risk for five stock indexes before, during, and after the 2008-09 financial crisis. The data used are the Dow Jones Industrial Average, Financial Times Stock Exchange 100, Nikkei, Hang Seng and Standard and Poor’s 500 Composite Index. The primary goal of the exercise is to identify the best models for risk management in each period according to the minimization of average daily capital requirements under the Basel II Accord. It is found that the best risk models can and do vary before, during and after the 2008-09 financial crisis. Moreover, it is found that an aggressive risk management strategy, namely the supremum strategy that combines different models of risk, can result in significant gains in average daily capital requirements, relative to the strategy of using single models, while staying within the limits of the Basel II Accord. |
| Keywords: | Optimal risk management; average daily capital requirements; alternative risk strategies; value-at-risk forecasts; combining risk models |
| JEL: | G11 C53 C22 G32 |
| Date: | 2009–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20975&r=ban |
| By: | Vicente Cuñat; Luis Garicano |
| Abstract: | Did financial institutions with better governance arrangements weather the recent financial crisis better? And how about those with more qualified chairmen? We answer these questions in the context of the Spanish Savings and Loans (Cajas). We find that neither formal governance institutions (e.g. the way the board is appointed) nor real governance (e.g. the actual composition of the board and the role played by political parties in it) are highly correlated with the composition of the loan book at the peak of the financial crisis (the size of the portfolios of real estate and individual loans) or with the performance of these loans (the amount of non performing loans in the crisis or the decrease in ratings). On the other hand, we find a clear and significant impact of the human capital of the Caja chairmen on the measures of loan book composition and performance. In particular, we find that (1) Cajas whose chairman was previously a political appointee have had significantly worse loan performance; (2) Cajas whose chairman did not have postgraduate education have significantly worse performance; and (3) Cajas whose chairman had no banking experience had significantly worse performance.We examine the implications of these findings for our understanding of the origins of the crisis and for the future regulation of the Cajas. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2010-08&r=ban |
| By: | Kenneth P. Brevoort; John A. Holmes; John D. Wolken |
| Abstract: | In a seminal article on small business lending, Petersen & Rajan (2002) argue that technological changes have revolutionized small business lending markets, weakening the reliance of small businesses on local lenders and increasing geographic distances between firms and their credit suppliers. While their data only cover through 1993, they conjecture that the pace of change accelerated after 1993. Using the 1993, 1998, and 2003 Surveys of Small Business Finances (SSBFs), we test whether the distance changes identified by Petersen and Rajan continued or accelerated during the following decade. Using a novel application of Oaxaca-Blinder decomposition, we identify the extent to which specific observable characteristics are associated with distance changes and draw three conclusions. First, while distances increased between 1993 and 1998 at a faster rate than found by Petersen & Rajan, distance increases appear to have halted or possibly reversed between 1998 and 2003. Second, rather than increasing proportionally for all small firms, distance increases were uneven across firms over the decade, with higher credit quality firms and firms with more experienced ownership realizing greater gains in distance than other firms. Finally, distances increased faster at older firms and, regardless of firm age, increases in distance have only affected some product types, primarily those involving asset-back loans (including mortgages). For relationships that involved the provision of either lines of credit or multiple types of credit, distances increased very little or not at all during the decade. This analysis provides a detailed and nuanced view of how the market for small business credit has evolved during a period of rapid technological change. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-08&r=ban |
| By: | Ansgar Belke; Robert Czudaj |
| Abstract: | In this paper we present an empirically stable euro area money demand model. Using a sample period until 2009:2 shows that the current financial and economic crisis that started in 2007 does not appear to have any noticeable impact on the stability of the euro area money demand function. We also compare single equation methods like the ARDL approach, FM-OLS, CCR and DOLS with the commonly used cointegrated Johansen VAR framework and show that the former are under certain circumstances more appropriate than the latter. What is more, they deliver results that are more in line with the economic theory. Hence, FMOLS, CCR and DOLS are useful in estimating standard money demand as well, although they have only been rarely applied for this purpose in previous studies. |
| Keywords: | ARDL model, cointegration, euro area, financial crisis, money demand |
| JEL: | C12 C22 C32 E41 E43 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp982&r=ban |
| By: | Williamson, Stephen D.; Wright, Randall |
| Abstract: | he purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets. |
| Keywords: | monetarism; monetary theory; monetary policy; banking; financial intermediation |
| JEL: | E5 E4 E3 |
| Date: | 2010–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21030&r=ban |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Wayne Tarrant (Wingate University - Department of Mathematics) |
| Abstract: | The banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements. |
| Keywords: | Risk measure ; Value at Risk ; Bank capital ; Basel II Accord |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00460901_v1&r=ban |
| By: | Fragata, Anabela (Instituto Politécnico de Viseu); Muñoz-Gallego, Pablo A. (Departamento de Administración y Economía de la Empresa, Facultad de Economía y Empresa, Universidad de Salamanca) |
| Abstract: | We develop a model to analyse the relations between perceived service quality, customer satisfaction, loyalty and intention to increase utilization of banking services by medium/large corporate banking customers. We suggest that perceived service quality will have a positive indirect effect on bank loyalty via customer satisfaction; perceived service quality will have a positive effect on bank via customer satisfaction; perceived service quality will have a positive effect on bank loyalty will have a direct positive effect on intention to increase utilization of banking services. After validation of the measurement scales, the hypotheses are contrasted through Structural Equation Modelling (SEM) |
| Keywords: | Perceived service quality, customer satisfaction, bank loyalty, medium/large corporate banking customer |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ntd:wpaper:2009-05&r=ban |
| By: | Damiano Brigo; Mirela Predescu; Agostino Capponi |
| Abstract: | We review different approaches for measuring the impact of liquidity on CDS prices. We start with reduced form models incorporating liquidity as an additional discount rate. We review Chen, Fabozzi and Sverdlove (2008) and Buhler and Trapp (2006, 2008), adopting different assumptions on how liquidity rates enter the CDS premium rate formula, about the dynamics of liquidity rate processes and about the credit-liquidity correlation. Buhler and Trapp (2008) provides the most general and realistic framework, incorporating correlation between liquidity and credit, liquidity spillover effects between bonds and CDS contracts and asymmetric liquidity effects on the Bid and Ask CDS premium rates. We then discuss the Bongaerts, De Jong and Driessen (2009) study which derives an equilibrium asset pricing model incorporating liquidity effects. Findings include that both expected illiquidity and liquidity risk have a statistically significant impact on expected CDS returns. We finalize our review with a discussion of Predescu et al (2009), which analyzes also data in-crisis. This is a statistical model that associates an ordinal liquidity score with each CDS reference entity and allows one to compare liquidity of over 2400 reference entities. This study points out that credit and illiquidity are correlated, with a smile pattern. All these studies highlight that CDS premium rates are not pure measures of credit risk. Further research is needed to measure liquidity premium at CDS contract level and to disentangle liquidity from credit effectively. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1003.0889&r=ban |
| By: | Liuling Li (Nankai University); Bruce Mizrach (Rutgers University) |
| Abstract: | We compare several models for Bear Stearns' credit default swap spreads estimated via a Markov chain Monte Carlo algorithm. The Bayes Factor selects a CKLS model with GARCH-EPD errors as the best model. This model captures the volatility clustering and extreme tail returns of the swaps during the crisis. Prior to November 2007, only four months ahead of Bear Stearns' collapse though, the swap spreads were indistinguishable statistically from the risk free rate. |
| Keywords: | Bear Stearns, credit default swap, Bayesian analysis, exponential power distribution |
| JEL: | C11 G13 G24 |
| Date: | 2010–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201003&r=ban |
| By: | Marco Galbiati; Simone Giansante |
| Abstract: | This paper develops and simulates a model of emergence of networks in an interbank, RTGS payment system. A number of banks, faced with random streams of payment orders, choose whether to link directly to the payment system, or to use a correspondent bank. Settling payments directly via the system imposes liquidity costs, which depend on the maximum liquidity overdraft incurred during the day. On the other hand, using a correspondent entails paying a flat fee, charged by the correspondent to recoup liquidity costs and to extract a profit. We specify a protocol whereby banks sequentially choose whether to link directly to the system or to become clients of other banks, thus generating a client-correspondent network. We calibrate our model on real data on the UK payment system, and we compare the networks it produces with i) the true client-correspondent network, ii) the outcomes of two ‘dummy' benchmark models. The model is found to outperform the benchmarks. Its predicted networks reproduce some key features of the real UK network. |
| Keywords: | RTGS, network formation, tiering, correspondent bank, Nash bargaining. |
| JEL: | C7 G2 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:usi:depfid:0110&r=ban |
| By: | Diego Caprara (Banca d'Italia); Amanda Carmignani (Banca d'Italia); Alessio D'Ignazio (Banca d'Italia) |
| Abstract: | This paper provides a statistical overview of the extent and composition of publicly-funded loans granted by banks to Italian firms. The analysis is based on the universe of reports to the Central Credit Register (CR). Between 1998 and 2007 the subsidized loans recorded by the CR amounted to about 0.3 per cent of GDP and involved approximately 27,000 firms, mainly limited companies. Our results confirm that publicly-subsidized loans are the most common type of subsidy in the Centre and North, while in the South non-returnable grants have traditionally been more predominant. Among the regions of the Centre and North, subsidies of this kind figure most prominently in Friuli Venezia Giulia, Veneto, and Trentino Alto Adige. The share of subsidized lending is greater among larger enterprises, especially agricultural firms and in industry excluding construction. |
| Keywords: | firms, financial subsidies |
| JEL: | G2 H2 R0 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_60_10&r=ban |
| By: | Bolívar Gacitúa, Claudio Marcelo (Departamento de Administración y Economía de la Empresa, Facultad de Economía y Empresa, Universidad de Salamanca); Lozano García, María Belén (Departamento de Administración y Economía de la Empresa, Facultad de Economía y Empresa, Universidad de Salamanca) |
| Abstract: | Dentro del tema de la adquisición de empresas esta investigación aborda el estudio del descuento que se aplica en el precio de adquisición de empresas cuando éstas no cotizan en el mercado de capitales. La estimación de nuestro modelo utilizando una muestra de empresas no cotizadas que han sido adquiridas entre los años 1998 a 2008 en el Reino Unido nos permite señalar que los problemas de liquidez que enfrentan las empresas no cotizadas son determinantes para definir el descuento. Adicionalmente, nosotros también verificamos otros factores que podrían influir en el descuento, como son los relacionados con la calidad de los estados financieros de las empresas no cotizadas y la información asimétrica, sin embargo estos resultan ser no significativos. |
| Keywords: | Adquisiciones, empresas no cotizadas, descuento, factores, Reino Unido. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ntd:wpaper:2009-06&r=ban |
| By: | Michael Pykhtin; Dan Rosen |
| Abstract: | We address the problem of allocating the counterparty-level credit valuation adjustment (CVA) to the individual trades composing the portfolio. We show that this problem can be reduced to calculating contributions of the trades to the counterparty-level expected exposure (EE) conditional on the counterparty's default. We propose a methodology for calculating conditional EE contributions for both collateralized and non-collateralized counterparties. Calculation of EE contributions can be easily incorporated into exposure simulation processes that already exist in a financial institution. We also derive closed-form expressions for EE contributions under the assumption that trade values are normally distributed. Analytical results are obtained for the case when the trade values and the counterparty's credit quality are independent as well as when there is a dependence between them (wrong-way risk). |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-10&r=ban |
| By: | Feldmann, Horst |
| Abstract: | This paper finds that more readily available venture capital is likely to have lowered unemployment rates and raised employment rates in industrial countries over the period 1982 to 2003. More readily available venture capital is also likely to have lowered the share of long-term unemployed in the total number of unemployed. The magnitude of the effects appears to have been substantial. To measure access to venture capital, we use answers from surveys of senior business executives. We also employ a large number of control variables. Our regression results are robust to variations in specification and sample size. |
| Keywords: | employment; labor market; unemployment; venture capital |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:01/10&r=ban |
| By: | Ulrich Horst; Traian A. Pirvu; Gonçalo Dos Reis |
| Abstract: | We propose an equilibrium framework within which to price financial securities written on non- tradable underlyings such as temperature indices. We analyze a financial market with a finite set of agents whose preferences are described by a convex dynamic risk measure generated by the solution of a backward stochastic differential equation. The agents are exposed to financial and non-financial risk factors. They can hedge their financial risk in the stock market and trade a structured derivative whose payoff depends on both financial and external risk factors. We prove an existence and uniqueness of equilibrium result for derivative prices and characterize the equilibrium market price of risk in terms of a solution to a non-linear BSDE. |
| Keywords: | Backward stochastic differential equations, dynamic risk measures, partial equilibrium, equilibrium pricing, market completion |
| JEL: | G12 D52 C62 C68 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-010&r=ban |
| By: | Andrea Macrina (King's College London and Institute of Economic Research, Kyoto University); Priyanka A. Parbhoo (University of the Witwatersrand) |
| Abstract: | In this paper incomplete-information models are developed for the pricing of securities in a stochastic interest rate setting. In particu- lar we consider credit-risky assets that may include random recovery upon default. The market ltration is generated by a collection of information processes associated with economic factors, on which in- terest rates depend, and information processes associated with mar- ket factors used to model the cash flows of the securities. We use information-sensitive pricing kernels to give rise to stochastic interest rates. Semi-analytical expressions for the price of credit-risky bonds are derived, and a number of recovery models are constructed which take into account the perceived state of the economy at the time of default. The price of European-style call bond options is deduced, and it is shown how examples of hybrid securities, like inflation-linked credit-risky bonds, can be valued. Finally, a cumulative information process is employed to develop pricing kernels that respond to the amount of aggregate debt of an economy. |
| Keywords: | Asset pricing, incomplete information, stochastic interest rates, credit risk, recovery models, credit-inflation hybrid securities, information-sensitive pricing kernels |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:695&r=ban |
| By: | Chen, Hui; Parsley, David; Yang, Ya-wen |
| Abstract: | Corporate lobbying activities are designed to influence legislators and thus to further company goals by encouraging favorable policies and/or outcomes. Using data made available by the Lobbying Disclosure Act of 1995, this study examines corporate lobbying activities from a financial perspective. We find that on average, lobbying is positively related to accounting and market measures of financial performance. These results are robust across a number of empirical specifications and continue to hold when we account for potential sample selection. We also report market performance evidence using a portfolio approach. We find that portfolios of firms with the highest lobbying intensities significantly outperform their benchmarks in the three years following portfolio formation. |
| Keywords: | Corporate Lobbying; accounting performance; market returns; portfolio |
| JEL: | G30 G10 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21114&r=ban |