New Economics Papers
on Banking
Issue of 2010‒03‒28
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Lessons and Policy Implications from the Global Financial Crisis By Luc Laeven; Deniz Igan; Stijn Claessens; Giovanni Dell'Ariccia
  2. The effects of focus versus diversification on bank performance: Evidence from Chinese banks By Berger, Allen N.; Hasan, Iftekhar; Zhou, Mingming
  3. The Financial Crisis and the Regulation of Credit Rating Agencies: A European Banking Perspective By Siegfried Utzig
  4. Cooperation for Innovation in Payment Systems: The Case of Mobile Payments By Marc Bourreau; Marianne Verdier
  5. Responding to Banking Crises: Lessons from Cross-Country Evidence By Giang Ho; Enrica Detragiache
  6. The Effectiveness of Corporate Boards: Evidence from Bank Loan Contracting By Francis, Bill; Hasan, Iftekhar; Koetter, Michael; Wu, Qiang
  7. The Ugly and the Bad: Banking and Housing Crises Strangle Output Permanently, Ordinary Recessions Do Not By Jens Hogrefe; Nils Jannsen; Carsten-Patrick Meier
  8. Bank Credit during the 2008 Financial Crisis: A Cross-Country Comparison By Ari Aisen; Michael Franken
  9. Recovery Determinants of Distressed Banks: Regulators, Market Discipline, or the Environment? By Tigran Poghosyan; Michael Koetter; Thomas Kick
  10. Risk and the Corporate Structure of Banks By Giovanni Dell’Ariccia; Robert Marquez
  11. Efficiency in the Japanese trust banking industry: A stochastic distance function approach By Yamori, Nobuyoshi; Harimaya, Kozo
  12. Extremal Events in a Bank Operational Losses By Hela Dahen; Georges Dionne; Daniel Zajdenweber
  13. Direct and indirect state ownership on banks in Russia By Vernikov, Andrei
  14. Strengthening the resilience of the banking sector: Proposals to strengthen global capital and liquidity regulations By Ojo, Marianne
  15. Systemic Risks and the Macroeconomy By Gianni De Nicoló; Marcella Lucchetta
  16. FX Swaps: Implications for Financial and Economic Stability By Li L. Ong; Bergljot Barkbu
  17. Measuring market risk using extreme value theory By Mapa, Dennis S.; Suaiso, Oliver Q.
  18. Securitized Products, Financial Regulation, and Systemic Risk By Mariko Fujii
  19. Policy Measures to Alleviate Foreign Currency Liquidity Shortages under Aggregate Risk with Moral Hazard By Hiroshi Fujiki
  20. Good Governance in Crisis or a Good Crisis for Governance? A Comparison of the EU and the US. By Waltraud Schelkle
  21. Cross-Border Investment in Small International Financial Centers By Gian Maria Milesi-Ferretti; Philip R. Lane

  1. By: Luc Laeven; Deniz Igan; Stijn Claessens; Giovanni Dell'Ariccia
    Abstract: The ongoing global financial crisis is rooted in a combination of factors common to previous financial crises and some new factors. The crisis has brought to light a number of deficiencies in financial regulation and architecture, particularly in the treatment of systemically important financial institutions, the assessments of systemic risks and vulnerabilities, and the resolution of financial institutions. The global nature of the financial crisis has made clear that financially integrated markets, while offering many benefits, can also pose significant risks, with large real economic consequences. Deep reforms are therefore needed to the international financial architecture to safeguard the stability of an increasingly financially integrated world.
    Keywords: Asset prices , Bank regulations , Bank supervision , Central bank role , Financial crisis , Financial sector , Fiscal policy , Fiscal reforms , Global Financial Crisis 2008-2009 , International financial system , Intervention , Liquidity management , Price increases , Stabilization measures ,
    Date: 2010–02–22
  2. By: Berger, Allen N.; Hasan, Iftekhar; Zhou, Mingming
    Abstract: This paper investigates the effects of focus versus diversification on bank performance using data on Chinese banks during the 1996-2006 period. We construct a new measure, economies of diversification, and compare the results to those of the more conventional focus index, which is based on the sum of squares of shares in different products or regions. Diversification is captured in four dimensions: loans, deposits, assets, and geography. We find that all four dimensions of diversification are associated with reduced profits and higher costs. These results are robust regardless of alternative measures of diversification and performance. Furthermore, we observe that banks with foreign ownership (both majority and minority ownership) and banks with conglomerate affiliation – are associated with fewer diseconomies of diversification, suggesting that foreign ownership and conglomerate affiliation play an important mitigating role. This analysis may provide important implications for bank managers and regulators in China as well as in other emerging economies.
    Keywords: Diversification, Focus, Efficiency, Chinese Banking
    JEL: G21 G28 G34
    Date: 2009–11
  3. By: Siegfried Utzig (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. 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: credit rating agencies, financial crisis, financial regulation, European Regulation
    JEL: G18 G21 G24
    Date: 2010
  4. By: Marc Bourreau; Marianne Verdier
    Abstract: In this paper, we study the development of mobile payments as an innovation in developed countries. In particular, we introduce five cooperation models that have emerged or could emerge between banks, mobile network operators, and payment systems, for the development of this new payment method. We also discuss the regulatory issues posed by the presence of mobile operators in the payments market
    Keywords: mobile payments; payment systems; mobile banking; mobile commerce.
    JEL: E42 G21 L96
    Date: 2010
  5. By: Giang Ho; Enrica Detragiache
    Abstract: A common legacy of banking crises is a large increase in government debt, as fiscal resources are used to shore up the banking system. Do crisis response strategies that commit more fiscal resources lower the economic costs of crises? Based on evidence from a sample of 40 banking crises we find that the answer is negative. In fact, policies that are riskier for the government budget are associated with worse, not better, post-crisis performance. We also show that parliamentary political systems are more prone to adopt bank rescue measures that are costly for the government budget. We take advantage of this relationship to instrument the policy response, thereby addressing concerns of joint endogeneity. We find no evidence that endogeneity is a source of bias.
    Keywords: Bank restructuring , Banking crisis , Banking sector , Cross country analysis , Economic growth , Economic models , Economic recovery , Fiscal policy , Governance , Government expenditures , Public finance , Stabilization measures ,
    Date: 2010–01–25
  6. By: Francis, Bill; Hasan, Iftekhar; Koetter, Michael; Wu, Qiang
    Abstract: This paper investigates the role of corporate boards in bank loan contracting. We find that when corporate boards are more independent, both price and non-price loan terms (e.g., interest rates, collateral, covenants and performance pricing) are more favorable and syndicated loans comprise more lenders. In addition, board size, board diversity, audit committee structure and other director characteristics also influence bank loan price. However they do not consistently affect all non-price loan terms except for audit committee independence. Moreover, the impact of board independence on bank loans varies with borrower characteristics (e.g., leverage, tangibility and anti-takeover environments) and loan characteristics (e.g., loan types and loan structures). Overall, our study provides strong evidence that banks tend to recognize the benefits of board monitoring in mitigating agency risk and information risk, and reward borrowers with higher quality boards with more favorable loan contract terms.
    Keywords: Bank loan contracting, Boards of directors, Corporate governance, Monitoring, SOX
    JEL: G21 G34
    Date: 2009–11
  7. By: Jens Hogrefe; Nils Jannsen; Carsten-Patrick Meier
    Abstract: This paper provides statistical evidence suggesting that in industrial countries, recessions that are associated with either banking crises or housing crises dampen output far more than ordinary recessions. Using a parametric panel framework that allows for a bounceback of the level of output in the course of the cyclical recovery, we find that ordinary recessions are followed by strong recoveries that make up for almost all the preceding shortfall in output. This bounceback tends to be significantly smaller following recessions associated with banking crises or housing crises. Our paper corroborates the practice of focusing exclusively on severe crises used in an emerging macroeconomic literature and integrates it with the earlier literature on recessions and recoveries
    Keywords: business cycle, banking crisis, housing crisis, panel data, asymmetry, persistence
    JEL: E32 C33
    Date: 2010–01
  8. By: Ari Aisen; Michael Franken
    Abstract: This paper empirically estimates the main determinants of bank credit growth during the 2008 financial crisis. Using a sample covering over 80 countries, this paper finds that larger bank credit booms prior to the crisis and lower GDP growth of trading partners are among the most important determinants of the post-crisis bank credit slowdown. Structural variables such as financial depth and integration were also relevant. Finally, countercyclical monetary policy and liquidity played a critical role in alleviating bank credit contraction after the 2008 financial crisis, suggesting that countries should pursue appropriate institutional and macroeconomic frameworks conducive to countercyclical monetary policies.
    Keywords: Bank credit , Banking systems , Business cycles , Credit expansion , Cross country analysis , Economic growth , Economic integration , Economic models , Financial crisis , Global Financial Crisis 2008-2009 , Liquidity , Monetary policy ,
    Date: 2010–02–25
  9. By: Tigran Poghosyan; Michael Koetter; Thomas Kick
    Abstract: Based on detailed regulatory intervention data among German banks during 1994-2008, we test if supervisory measures affect the likelihood and the timing of bank recovery. Severe regulatory measures increase both the likelihood of recovery and its duration while weak measures are insignificant. With the benefit of hindsight, we exclude banks that eventually exit the market due to restructuring mergers. Our results remain intact, thus providing no evidence of "bad" bank selection for intervention purposes on the side of regulators. More transparent publication requirements of public incorporation that indicate more exposure to market discipline are barely or not at all significant. Increasing earnings and cleaning credit portfolios are consistently of importance to increase recovery likelihood, whereas earnings growth accelerates the timing of recovery. Macroeconomic conditions also matter for bank recovery. Hence, concerted micro- and macro-prudential policies are key to facilitate distressed bank recovery.
    Keywords: Bank regulations , Bank resolution , Bank soundness , Bank supervision , Banking crisis , Banks , Capital , Credit risk , Economic models , Germany , Risk management ,
    Date: 2010–02–02
  10. By: Giovanni Dell’Ariccia; Robert Marquez
    Abstract: We identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary-based corporate structures benefit from greater protection against economic risk because of affiliate-level limited liability, but are more exposed to the risk of capital expropriation than are branches. Thus, branch-based structures are preferred to subsidiary-based structures when expropriation risk is high relative to economic risk, and vice versa. Greater cross-country risk correlation and more accurate pricing of risk by investors reduce the differences between the two structures. Furthermore, the corporate structure affects bank risk taking and affiliate size.
    Keywords: Capital , Corporate governance , Credit risk , Economic models , Financial risk , Foreign direct investment , International banking , International banks , Political economy ,
    Date: 2010–02–19
  11. By: Yamori, Nobuyoshi; Harimaya, Kozo
    Abstract: This paper aims to assess the technical efficiency of Japanese trust banks by using the stochastic distance function approach, which is suitable for analyzing complex trust banks but has never applied for Japanese trust banks. Although the trust banking industry has been one of the most restricted financial sectors in Japan, it has recently been deregulated, particularly in terms of entry restrictions. Most noteworthy was the approval of the entry of the foreign-owned trust banks that represented the financial liberalization at that time. The traditional theory expects that allowing new entry makes market more competitive and therefore players become more efficient to survive. Therefore, it is interesting to investigate whether the liberalization made Japanese banks more efficient. The results indicate that the traditional domestic trust banks possess a technical efficiency superior to new entrants (i.e., foreign-owned trust banks). However, we failed to find an apparent tendency for trust banks to be more efficient now than in the pre-liberalization period.
    Keywords: Japanese trust banking industry; Deregulation; Foreign-owned banks; Technical efficiency
    JEL: G28 G21
    Date: 2010–03–06
  12. By: Hela Dahen; Georges Dionne; Daniel Zajdenweber
    Abstract: Operational losses are true dangers for banks since their maximal values to signal default are difficult to predict. This risky situation is unlike default risk whose maximum values are limited by the amount of credit granted. For example, our data from a very large US bank show that this bank could suffer, on average, more than four major losses a year. This bank had seven losses exceeding hundreds of millions of dollars over its 52 documented losses of more than $1 million during the 1994-2004 period. The tail of the loss distribution (a Pareto distribution without expectation whose characteristic exponent is 0.95 ? ? ? 1) shows that this bank can fear extreme operational losses ranging from $1 billion to $11 billion, at probabilities situated respectively between 1% and 0.1%. The corresponding annual insurance premiums are evaluated to range between $350 M and close to $1 billion.
    Keywords: Bank operational loss, value at risk, Pareto distribution, insurance premium, extremal event
    JEL: G21 G28
    Date: 2010
  13. By: Vernikov, Andrei
    Abstract: This paper uses the banking industry case to show that the boundaries of public property in Russia are blurred. A messy state withdrawal in 1990s left publicly funded assets beyond direct reach of official state bodies. While we identify no less than 50 state-owned banks in a broad sense, the federal government and regional authorities directly control just 4 and 12 institutions, respectively. 31 banks are indirectly state-owned, and their combined share of state-owned banks’ total assets grew from 11% to over a quarter between 2001 and 2010. The state continues to bear financial responsibility for indirectly owned banks, while it does not benefit properly from their activity through dividends nor capitalization nor policy lending. Such banks tend to act as quasi private institutions with weak corporate governance. Influential insiders (top-managers, current and former civil servants) and cronies extract their rent from control over financial flows and occasional appropriation of parts of bank equity.
    Keywords: Russian banks; state; government; public sector; state-owned banks; state-controlled banks
    JEL: P43 P31 G28 G21
    Date: 2010–03
  14. By: Ojo, Marianne
    Abstract: As well as addressing the Basel Committee's proposals to strengthen global capital and liquidity regulations, this paper also considers several reasons why information disclosure should be encouraged. These include the fact that imperfect information is considered to be a cause of market failure which “reduces the maximisation potential of regulatory competition”, and also because disclosure requirements would contribute to the reduction of risks which could be generated when granting reduced capital level rewards to banks who may have poor management systems. Furthermore it draws attention to the need for greater measures aimed at consolidating regulation within (and also extending regulation to) the securities markets – given the fact that „the globalisation of financial markets has made it possible for investors and capital seeking companies to switch to lightly regulated or completely unregulated markets.“
    Keywords: capital; liquidity; regulations; bank; Basel II; risks; disclosure
    JEL: K2 G2 D8
    Date: 2010–03
  15. By: Gianni De Nicoló; Marcella Lucchetta
    Abstract: This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4- 2009Q1.
    Keywords: Banking sector , Capital markets , Economic forecasting , Economic indicators , Economic models , External shocks , Financial risk , Group of seven , International financial system , Time series ,
    Date: 2010–02–04
  16. By: Li L. Ong; Bergljot Barkbu
    Abstract: The proliferation of foreign exchange (FX) swaps as a source of funding and as a hedging tool has focused attention on the role of the FX swap market in the recent crisis. The turbulence in international money markets spilled over into the FX swap market in the second-half of 2007 and into 2008, giving rise to concerns over the ability of banks to roll over their funding requirements and manage their liquidity risk. The turmoil also raised questions about banks' ability to continue their supply of credit to the local economy, as well as the external financing gap it could create. In this paper, we examine the channels through which FX swap transactions could affect a country's financial and economic stability, and highlight the strategies central banks can employ to mitigate market pressures. While not offering any judgment on the instrument itself, we show that the use of FX swaps for funding and hedging purposes is not infallible, especially during periods of market stress.
    Keywords: Balance of payments , Banks , Capital , Central bank role , Credit demand , Credit risk , Currency swaps , Economic stabilization , Exchange rates , Financial institutions , Financial stability , Liquidity management , Reserves , Stabilization measures ,
    Date: 2010–03–08
  17. By: Mapa, Dennis S.; Suaiso, Oliver Q.
    Abstract: The adoption of Basel II standards by the Bangko Sentral ng Pilipinas initiates financial institutions to develop value-at-risk (VaR) models to measure market risk. In this paper, two VaR models are considered using the peaks-over-threshold (POT) approach of the extreme value theory: (1) static EVT model which is the straightforward application of POT to the bond benchmark rates; and (2) dynamic EVT model which applies POT to the residuals of the fitted AR-GARCH model. The results are compared with traditional VaR methods such as RiskMetrics and AR-GARCH-type models. The relative size, accuracy and efficiency of the models are assessed using mean relative bias, backtesting, likelihood ratio tests, loss function, mean relative scaled bias and computation of market risk charge. Findings show that the dynamic EVT model can capture market risk conservatively, accurately and efficiently. It is also practical to use because it has the potential to lower a bank’s capital requirements. Comparing the two EVT models, the dynamic model is better than static as the former can address some issues in risk measurement and effectively capture market risks.
    Keywords: extreme value theory; peaks-over-threshold; value-at-risk; market risk; risk management
    JEL: G12 C22 C01
    Date: 2009–12
  18. By: Mariko Fujii (Asian Development Bank Institute)
    Abstract: It is widely believed that the practice of securitization is one of the causes that led to the 2007–08 financial crisis. In this paper, I show that securitized products such as collateralized debt obligations (CDO) are particularly vulnerable to systematic risk and tend to show higher tail risk. These characteristics, in turn, are closely associated with joint failures and systemic risk. In order to achieve greater stability of the financial system, it is important to prevent the recurrence of the collapse of specific markets as this may lead to the collapse of other components of the financial system. From this perspective, the financial regulations that should be applied to these problematic financial products and their relation to possible systemic risks are discussed.
    Keywords: secirotozation, CDO, financial crisis, financial regulations, systemic risk
    JEL: G11 G28
    Date: 2010
  19. By: Hiroshi Fujiki (Associate Director-General and Senior Monetary Affairs Department, Bank of Japan (E-mail: hiroshi.fujiki
    Abstract: During the recent global financial crisis, some central banks introduced two innovative cross-border operations to deal with the problems of foreign currency liquidity shortages: domestic liquidity operations using cross-border collaterals and operations for supplying foreign currency based on standing swap lines among central banks. We show theoretically that central banks improve the efficiency of equilibrium under foreign currency liquidity shortages by those two innovative temporary policy measures.
    Keywords: Standing swap lines, Operations supplying US dollar funds outside the US, Cross-border collateral arrangements
    JEL: E58 F31 F33
    Date: 2010–03
  20. By: Waltraud Schelkle
    Abstract: The crisis since August 2007 provides an opportunity to observe the workings of good governance institutions under an extreme stress test and in radically different political settings. Institutions such as independent central banks, fiscal rules and regulatory oversight of public finances were meant to depoliticize macroeconomic stabilization. The comparison of responses to the crisis in the United States and in the European Union shows that good governance institutions are in crisis in the US while it has been a good crisis for governance so far in the EU. Levels of fiscal stimulus and monetary easing are surprisingly similar between the EU and the US, yet the ECB has maintained its independence and member states have been restrained from inserting protectionist elements in their stimulus measures. By contrast, the boundaries between economic stabilization and distributive politics have been wiped out in the US because neither the political forces in the states nor the economic forces in the financial sector erected many defences. In the EU, the boundaries as drawn are inimical to joint stabilization efforts but this is exactly why they are politically self-enforcing.
    Keywords: central bank independence, crisis, depoliticization, European Union, fiscal rules, United States
    Date: 2010–01
  21. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: This note documents and assesses the role of small financial centers in the international financial system using a newly-assembled dataset. It presents estimates of the foreign asset and liability positions for a number of the most important small financial centers, and places these into context by calculating the importance of these locations in the global aggregate of cross-border investment positions. It also reports some information on bilateral cross-border investment patterns, highlighting which countries engage in financial trade with small financial centers.
    Keywords: Asset management , Banking , Capital flows , Cross country analysis , Financial institutions , Foreign direct investment , International financial system ,
    Date: 2010–02–18

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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