New Economics Papers
on Banking
Issue of 2010‒04‒04
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Post Crisis Challenges to Bank Regulation By Xavier Freixas
  2. Bank Liquidity, Interbank Markets and Monetary Policy By Xavier Freixas; Antoine Martin; David Skeie
  3. New Monetarist Economics: Methods By Williamson, Stephen D.; Wright, Randall
  4. Bank owners or bank managers: who is keen on risk? Evidence from the financial crisis By Gropp, Reint; Köhler, Matthias
  5. The effects of focus versus diversification on bank performance: Evidence from Chinese banks By Berger, Allen N.; Hasan, Iftekhar; Zhou, Mingming
  6. No bank, one bank, several banks: does it matter for investment? By Alexander Karaivanov; Sonia Ruano; Jesús Saurina; Robert Townsend
  7. The Risk of Operational Incidents in Banking Institutions By Isaic-Maniu, Alexandru; Dragan, Irina-Maria
  8. Contagion in financial networks By Gai, Prasanna; Kapadia, Sujit
  9. The growth and size of the Brazilian mutual fund industry By Varga, Gyorgy; Wengert, Maxim
  10. Financial System and Innovations: Determinants of Early Stage Venture Capital in Europe By Christian Schröder
  11. Innovationen und Transatlantische Bankenkrise: Eine ordnungspolitische Analyse By Paul J.J. Welfens
  12. A macroeconomic credit risk model for stress testing the South African banking sector By Havrylchyk, Olena
  13. Market power in the Russian banking industry By Fungacova, Zuzana; Solanko, Laura; Weill, Laurent
  14. Do Islamic banks have greater market power? By Weill, Laurent
  15. How do financial crises affect commercial bank liquidity? Evidence from Latin America and the Caribbean By Moore, Winston
  16. From proximity to distant banking: Spanish banks in the EMU By Alfredo Martín-Oliver
  17. Credit availability in the crisis: which role for the European Investment Bank Group? By A. Fedele; A. Mantovani; F. Liucci

  1. By: Xavier Freixas
    Abstract: The current crisis has swept aside not only the whole of the US investment banking industry but also the consensual perception of banking risks, contagion and their implication for banking regulation. As everyone agrees now, risks where mispriced, they accumulated in neuralgic points of the financial system, and where amplified by procyclical regulation as well as by the instability and fragility of financial institutions. The use of ratings as carved in stone and lack of adequate procedure to swiftly deal with systemic institutions bankruptcy (whether too-big-to-fail, too complex to fail or too-many to fail). The current paper will not deal with the description and analysis of the crisis, already covered in other contributions to this issue will address the critical choice regulatory authorities will face. In the future regulation has to change, but it is not clear that it will change in the right direction. This may occur if regulatory authorities, possibly influenced by public opinion and political pressure, adopt an incorrect view of financial crisis prevention and management. Indeed, there are two approaches to post-crisis regulation. One is the rare event approach, whereby financial crises will occur infrequently, but are inescapable.
    Date: 2009–12
  2. By: Xavier Freixas; Antoine Martin; David Skeie
    Abstract: A major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs. This paper studies the efficiency of the interbank lending market in allocating funds. We consider two different types of liquidity shocks leading to different implications for optimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held among banks, the central bank should lower the interbank rate. This view implies that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two different instruments, interest rates and liquidity injection, are therefore required to cope with the two different types of liquidity shocks. Finally, we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.
    Keywords: Bank liquidity, interbank markets, central bank policy, financial fragility, bank runs.
    JEL: G21 E43 E44 E52 E58
    Date: 2010–02
  3. By: Williamson, Stephen D.; Wright, Randall
    Abstract: This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: it has something in common with Old Monetarism, but there are also some important differences; it has little in common with Old or New Keynesianism. We describe the key principles of these schools and contrast them with our approach. To show how it works in practice, we build a benchmark New Monetarist model, and use it to address frontier issues concerning asset markets and banking.
    Keywords: New Monetarism; Monetary economoics; financial intermediation; New Keynesian
    JEL: E5 E6 E10 E4 G21
    Date: 2010–03–17
  4. By: Gropp, Reint; Köhler, Matthias
    Abstract: In this paper, we analyse whether bank owners or bank managers were the driving force behind the risks incurred in the wake of the financial crisis of 2007/2008. We show that owner controlled banks had higher profits in the years before the crisis, and incurred larger losses and were more likely to require government assistance during the crisis compared to manager-controlled banks. The results are robust to controlling for a wide variety of bank specific, country specific, regulatory and legal variables. Regulation does not seem to mitigate risk taking by bank owners. We find no evidence that profit smoothing drives our findings. The results suggest that privately optimal contracts aligning the incentives of management and shareholders may not be socially optimal in banks. --
    Keywords: Banks,risk taking,corporate governance,ownership structure,financial crisis
    JEL: G21 G30 G34
    Date: 2010
  5. By: Berger, Allen N. (BOFIT); Hasan, Iftekhar (BOFIT); Zhou, Mingming (BOFIT)
    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 indices, which are 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: 2010–03–25
  6. By: Alexander Karaivanov (Simon Fraser University); Sonia Ruano (Banco de España); Jesús Saurina (Banco de España); Robert Townsend (MIT)
    Abstract: This paper examines whether financial constraints affect firms’ investment decisions for older (larger) firms. We compare a group of unbanked firms to firms that rely on formal financing. Specifically, we combine data from the Spanish Mercantile Registry and the Bank of Spain Credit Registry (CIR) to classify firms according to their number of banking relations: one, several, or none. Our empirical strategy combines two approaches based on a common theoretical model. First, using a standard Euler equation adjustment cost approach to investment, we find that single-banked firms in our sample are most likely to exhibit cash flow sensitivity while unbanked firms are not. Second, using structural maximum likelihood estimation, we find that unbanked firms have a financial structure which is close to credit subject to moral hazard with unobserved effort, whereas single-banked firms have a financial structure which is more limited, as in an exogenously imposed traditional debt model. Firms in the unbanked category do not rely on bonds, equity, or formal financial markets, but rather on other firms in a financial or family-tied group (with either pyramidal or informal structure). We are among the first to document the importance of such groups in a European country. We control for reverse causality by treating bank relationships as endogenous and/or by appropriate stratifications of the sample.
    Keywords: financial constraints, bank lending, investment Euler equations, moral hazard, structural estimation and testing
    JEL: C61 D82 D92 G21 G30
    Date: 2010–03
  7. By: Isaic-Maniu, Alexandru; Dragan, Irina-Maria
    Abstract: Banking-financial institutions are organizations which might be included in the category of complex systems. Consequently, they can be applied after adaptation and particularization, in the general description and assessment methods of the technical or organizational systems. The banking-financial system faces constrains regarding the functioning continuity. Interruptions in continuity as well as operational incidents represent risks which can lead to the interruption of financial flows generation and obviously of profit. Banking incidents include from false banknote, cloned cards, informatics attacks, false identity cards to ATM attacks. The functioning of banking institutions in an incident-free environment generates concern from both risk assessment and forecasting points of view.
    Keywords: operational risk, banking reliability, complex systems, incident probability, the risk of functioning interruption
    JEL: C46 G32
    Date: 2009–12
  8. By: Gai, Prasanna (Australian National University); Kapadia, Sujit (Bank of England)
    Abstract: This paper develops an analytical model of contagion in financial networks with arbitrary structure. We explore how the probability and potential impact of contagion is influenced by aggregate and idiosyncratic shocks, changes in network structure, and asset market liquidity. Our findings suggest that financial systems exhibit a robust-yet-fragile tendency: while the probability of contagion may be low, the effects can be extremely widespread when problems occur. And we suggest why the resilience of the system in withstanding fairly large shocks prior to 2007 should not have been taken as a reliable guide to its future robustness.
    Keywords: Contagion; network models; systemic risk; liquidity risk; financial crises
    JEL: D85 G21
    Date: 2010–03–23
  9. By: Varga, Gyorgy; Wengert, Maxim
    Abstract: This article describes the evolution of the Brazilian mutual fund industry, its regulatory framework, organization, types of investors and managers, economic environment and its relative growth. It shows the evolution of this industry in Brazil and its idiosyncrasies providing a deeper look into one of the largest emerging market mutual fund industries. It emphasizes the growth of independent managers with more complex assets and sophisticated strategies that resemble international hedge funds. There are many popular and academic explanations for the mutual funds growth, some of which were tested in this article using a time series framework. The results suggest that financial market innovation and market risk are significant variables in explaining growth. Common variables like economic growth, regulation and taxes were not found to be statistically significant. We conclude with a comparison between the evolution of the Brazilian and US mutual fund industries.
    Keywords: emerging markets, Brazilian financial market, hedge funds, mutual funds, international asset allocation.
    JEL: G11 G23 G15 N26
    Date: 2010–03–16
  10. By: Christian Schröder (EUropäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: This paper highlights the role of financial development in producing innovative products and services. Venture Capitalists (VCs) seem to play a crucial role in achieving product and service innovation. Young entrepreneurs particularly face the problem of financial constraints if starting their business, and risk capital could be their sole solution. However, the level of early-stage venture capital (VC) investments across European countries differ profoundly. I employ a panel analysis to illustrate whether technical and innovative opportunities as well as entrepreneurial environment influence early-stage venture capital investments. In addition, I emphasize the role of the financial system in attracting early stage VC. The empirical analysis was conducted in 15 European countries and looked at the period from 1995 to 2005. The results show that technical and innovation opportunities as well as entrepreneurial environment influence the level of early-stage risk capital. Taking the financial system also into account, the analysis revealed that a bank-based system has a negative impact on the relative amount of early stage VC investments, as a market-based system attracts risk capital for young entrepreneurs. Assumedly, venture capital and debt provided by banks are found not to be complements but rather substitutes.
    Keywords: Early Stage Venture Capital, Risk Capital, Financial System, Financing Innovations
    JEL: G23
    Date: 2009–10
  11. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The US banking crisis and the transatlantic banking crisis, respectively, have caused a global recession and thus raised the debt-GDP ratio in many OECD countries and worldwide. In the analysis presented at first some critical points about financial market innovations and inconsistencies in the institutional framework of the economies are raised. Moreover, the main drivers of the banking crisis have been identified and at the same time a short list of key pro-posals for reforms are presented; a major element for national policymakers here is the introduction of a new tax system which taxes the variance of the rate of return on equity capital - this is an institutional innovation which would criti-cally affect the incentives in the banking sector. The main impact is not necessar-ily to raise the overall tax burden for the banking sector but rather to give incen-tives for sustainable banking: Bankers should face incentives to take a more long term view and to thereby contribute to systemic stability in the banking sector and in the overall economy. Governments which consider responsible economic policy reforms as a key priority on the way to more stability and also as a means for limiting the debt-GDP ratio will pick up the proposed innovation in tax pol-icy. Some of the relevant potential key features based on German data are sketched in the analysis presented. The analysis presented here shows the relevance of institutional developments for the banking crisis and also highlights the need to adequately adjust the institutional framework in OECD countries.
    Keywords: Institutionelle Inovationen, Innovationen in Steuerpolitik, Bankenkrise, nachhaltige Enwicklung
    JEL: E61 F20 G21 O11 H23
    Date: 2009–08
  12. By: Havrylchyk, Olena
    Abstract: In this study a macroeconomic credit risk model for stress testing the South African banking sector was developed. The findings demonstrate that macroeconomic shocks have a large impact on credit losses. However, owing to a high level of current capitalisation, the South African banking sector is resilient to severe economic shocks. At the same time, banks are rather sensitive to changes in real interest rates and property prices due to the high share of mortgages at flexible interest rates in their credit portfolios.
    Keywords: macro stress testing; financial stability; credit risk
    JEL: G18 G21
    Date: 2010–03
  13. By: Fungacova, Zuzana (BOFIT); Solanko, Laura (BOFIT); Weill, Laurent (BOFIT)
    Abstract: The aim of this paper is to analyze bank competition in Russia by measuring the market power of Russian banks and its determinants over the period 2001-2007 with the Lerner index. Earlier studies on bank competition have focused on developed countries whereas this paper contributes to the analysis of bank competition in emerging markets. We find that bank competition has only slightly improved during the period studied. The mean Lerner index for Russian banks is of the same magnitude as those observed in developed countries, which suggests that the Russian banking industry is not plagued by weak competition. Furthermore, we find no greater market power for state-controlled banks nor less market power for foreign-owned banks. We would consequently qualify the procompetitive role of foreign bank entry and privatization. Finally, our analysis of the determinants of market power enables the identification of several factors that influence competition, including market concentration and risk as well as the nonlinear influence of size.
    Keywords: market power; bank competition; Russia
    JEL: G21 P34
    Date: 2010–03–25
  14. By: Weill, Laurent (BOFIT)
    Abstract: The aim of this paper is to investigate whether Islamic banks have greater market power than con-ventional banks. An Islamic bank, for example, might enjoy enhanced market power if a captive clientele adhering to religious principles permits it to charge higher prices. To measure market power, we compute Lerner indices for a sample of banks from 17 countries where Islamic and conventional banks coexist. Comparison of Lerner indices shows no significant difference between Islamic banks and conventional banks over the period 2000-2007. When including control variables, regression of Lerner indices even suggests that Islamic banks have less market power than conventional banks. A robustness check with the Rosse-Panzar model confirms that Islamic banks are no less competitive than conventional banks. Thus, any reduced market power of Islamic banks can be attributed to differences in norms and incentives.
    Keywords: Islamic banks; Lerner index; bank competition
    JEL: D43 D82 G21
    Date: 2010–02–26
  15. By: Moore, Winston
    Abstract: The 1990s were a turbulent time for Latin American and Caribbean countries. During this period, the region suffered from no less than sixteen banking crises. One of the most important determinants of the severity of banking crises is commercial bank liquidity. Banking systems, which are relatively liquid, are better able to deal with the large deposit withdrawals that tend to accompany bank runs. This study provides an assessment of the main determinants of bank liquidity as well as an evaluation of the impact of banking crises on liquidity. The results show that on average, bank liquidity is about 8% less than what is consistent with economic fundamentals during financial crises.
    Keywords: Liquidity; Financial Crisis; Banks
    JEL: E44 G21
    Date: 2009–03–27
  16. By: Alfredo Martín-Oliver (Banco de España)
    Abstract: This paper examines the nature of competition in the Spanish banking industry during the years before and after Spain joined the European Monetary Union (EMU). The paper models competition in a product-differentiated market where banks choose from a list of price (interest rates of loans and deposits) and non-price variables (branches, advertising, IT capital). The empirically estimated demand and cost functions are used to simulate the values of the endogenous variables of the representative bank in response to the historically low official interest rates of the post Euro period. The results show that there has been a convergence in the levels of price competition in the loans and deposits markets during the post Euro period. Additionally, the paper finds that branches have lost weight in the mix of competition variables in benefit of advertising and IT capital. This is interpreted as evidence that traditional proximity banking is evolving towards distant banking. Finally, the simulation results highlight the high imbalances between loans and deposits for the representative bank in the regime of low official interest rates of the Euro zone.
    Keywords: banking competition, product differentiation, intangibles, simulation
    JEL: G21 D24
    Date: 2010–03
  17. By: A. Fedele; A. Mantovani; F. Liucci
    Abstract: In this paper we consider a moral hazard problem between a creditworthy firm which needs funding and a bank. We first study under which conditions the firm does not obtain the loan. We then determine whether and how the intervention of an external financial institution can facilitate the access to credit. In particular, we focus on the European Investment Bank Group (EIBG), which provides (i) specific credit lines to help banks that finance small and medium-sized enterprises (SMEs)and (ii) guarantees for portfolios of SMEs'loans. We show that only during crises the EIBG intervention allows to totally overcome the credit crunch.
    JEL: D82 D21
    Date: 2010–03

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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