New Economics Papers
on Banking
Issue of 2010‒04‒24
eleven papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Developing the model of the credit risk assessment of the commercial bank credit loans portfolio By Pustovalova, Tatiana A.
  2. Is Government Ownership of Banks Really Harmful to Growth? By Svetlana Andrianova; Panicos Demetriades; Anja Shortland
  3. Do multinational banks create or destroy economic value? By Mohamed Azzim Gulamhussen; Carlos Pinheiro; Alberto Franco Pozzolo
  4. How do banks respond to increased funding uncertainty? By Robert A. Ritz
  5. Risk monitoring tools in bank regulation and supervision – developments since the collapse of Barings Plc. By Ojo, Marianne
  6. Bank and Official Interest Rates: How Do They Interact over Time? By C. L. Chua; G. C. Lim; Sarantis Tsiaplias
  7. Any Regulation of Risk Increases Risk By Philip Z. Maymin; Zakhar G. Maymin
  8. A trust-driven financial crisis. Implications for the future of financial markets By Luigi Guiso
  9. How Risky Is the Value at Risk? By Roxana Chiriac; Winfried Pohlmeier
  10. A Direct Test of Rational Bubbles By Friedrich Geiecke; Mark Trede
  11. The Spanish Business Bankruptcy Puzzle and the Crisis By Marco Celentani; Miguel García-Posada; Fernando Gómez

  1. By: Pustovalova, Tatiana A.
    Abstract: Over the past decade, commercial banks have devoted many resources to developing internal models to better quantify their financial risks and assign economic capital. These efforts have been recognized and encouraged by bank regulators. Recently, banks have extended these efforts into the field of credit risk modeling. The Basel Committee on Banking Supervision proposes a capital adequacy framework that allows banks to calculate capital requirement for their banking books using internal assessments of key risk drivers. Hence the need for systems to assess credit risk. In this work, we describe the case of successful application of VAR methodology for credit risk estimation. Executive summary is available at pp. 32.
    Keywords: banking, credit risk, default, Basel 2, value of risk,
    Date: 2010
  2. By: Svetlana Andrianova; Panicos Demetriades; Anja Shortland
    Abstract: We show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to adding more 'fundamental' determinants of economic growth. We also present new cross-country evidence for 1995-2007 which suggests that, if anything, government ownership of banks has been robustly associated with higher long run growth rates. While acknowledging that cross-country results need not imply causality, we nevertheless provide a conceptual framework, drawing on the global financial crisis of 2008-09, which explains why under certain circumstances government owned banks could be more conducive to economic growth than privately-owned banks.
    Keywords: Public banks, economic growth, quality of governance, regulation, political institutions
    JEL: O16 G18 G28 K42
    Date: 2010
  3. By: Mohamed Azzim Gulamhussen (Lisbon University Institute); Carlos Pinheiro (Caixa Geral de Dep¢sitos); Alberto Franco Pozzolo (Universit… degli Studi del Moliste)
    Abstract: Multinational banks are a distinctive feature of today's globalized economy, with some institutions now operating in more than 100 countries. Despite the thorough analyses of bank internationalization over the last decades, the literature has failed to provide clear evidence that crossborder expansion is a profitable process from a firm's perspective. Following the long tradition of the analyses of the costs and benefits of focusing or diversifying the activities of a firm, in this paper we provide an answer to the question of whether bank cross-border diversification is value enhancing, comparing the value of internationally diversified commercial banks with that of more domestically focused intermediaries. Adapting the methodology of Laeven and Levine (2007), we measure a bank's excess value as the difference between its Tobin's q and the benchmark of multinational banks, and relate it to the degree of international diversification of its activities. In a large sample of more than 500 banks from 56 countries between 2001 and 2007, we find evidence of a statistically and economically significant diversification premium, that is robust to the use of different definitions of diversification, to the possible effects of outliers, and to controlling for potential endogeneity problems. Our results shown that the benefits of scale and scope economies generated by multinational banks more than offset the typical agency costs of managing larger and more complex companies, thus providing a strong rationale for the rapid growth in banks' international activities during the last couple of decades.
    Keywords: Corporate diversification, Foreign Direct Investment, Gepgraphival diversification, Multinational banking
    JEL: F23 F36 G15 G21 G34 L22
    Date: 2010–04
  4. By: Robert A. Ritz
    Abstract: This paper presents a simple model of risk-averse banks that face uncertainty over funding conditions in the money market. It shows when increased funding uncertainty causes interest rates on loans and deposits to rise, while bank lending and bank profitability fall. It also finds that funding uncertainty typically dampens the rate of pass-through from changes in the central bank’s policy rate to market interest rates. These results help explain observed bank behaviour and reduced effectiveness of monetary policy in the 2007/9 financial crisis. Funding uncertainty also has strong implications for consumer welfare, and can turn deposits into a “loss leader” for banks.
    Keywords: Bank lending, Interbank market, Interest rate pass-through, Loan-to-deposite ratio, Loan-deposit synergies, Loss leader, Monetary policy
    JEL: E43 G21
    Date: 2010
  5. By: Ojo, Marianne
    Abstract: This paper consolidates the work of its predecessor, “International Framework for Liquidity Risk Measurement, Standards and Monitoring: Corporate Governance and Internal Controls”, by considering monitoring tools which are considered to be essential if risks,(and in particular liquidity risks which are attributed to a bank), are to be managed and measured effectively by its management. It also considers developments which have triggered the need for particular monitoring tools – not only in relation to liquidity risks, but also to the rise of conglomerates and consolidated undertakings. It highlights weaknesses in financial supervision – weaknesses which were revealed following the collapses of Barings and Lehman Brothers. As well as attempting to draw comparisons between the recommendations which were made by the Board of Banking Supervision (BoBS) following Barings’ collapse, and the application issues raised by the Basel Committee in its 2009 Consultative Document, International Framework for Liquidity Risk Measurement, Standards and Monitoring, it highlights the links and relevance between both recommendations. In drawing attention to the significance of corporate governance, audit committees, and supervisory boards, the importance of effective communication between management at all levels, to ensure transmission and communication of timely, accurate and complete information, is also highlighted. Through a comparative analysis of two contrasting corporate governance systems, namely, Germany and the UK, it analyses and evaluates how the design of corporate governance systems could influence transparency, disclosure, as well as higher levels of monitoring and accountability. Whilst highlighting the need for, and the growing importance of formal risk assessment models, the paper also emphasises the dangers inherent in formalism – as illustrated by a rules based approach to regulation. It will however, demonstrate that detailed rules could still operate within a system of principles based regulation – whilst enabling a consideration of the substance of the transactions which are involved. In addressing the issues raised by principles based regulation, the extent to which such issues can be resolved, to a large extent, depends on adequate compliance with Basel Core Principle 17 (for effective banking supervision) – and particularly on the implementation, design and compliance with “clear arrangements for delegating authority and responsibility.”
    Keywords: liquidity; principles based regulation; risks; corporate governance; audit; creative compliance
    JEL: K2 G3 M42 G21
    Date: 2010–04–20
  6. By: C. L. Chua (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); G. C. Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Sarantis Tsiaplias (KPMG, Melbourne)
    Abstract: This paper implements a procedure to evaluate time-varying bank interest rate adjustments over a sample period which includes changes in industry structure, market and credit conditions and varying episodes of monetary policy. The model draws attention to the pivotal role of official rates and provides estimates of the equilibrium policy rate. The misalignment of actual official rates and their changing sensitivity to banking conditions is identified. Results are also provided for the variation in intermediation margins and pass-throughs as well as the interactions between lending and borrowing behaviour over the years, including behaviour before, during and after the global financial crisis. The case studies are the US and Australian banking systems.
    Keywords: bank interest rates; time-varying asymmetric adjustments; monetary interest rate policy
    JEL: C32 E43 G2
    Date: 2010–04
  7. By: Philip Z. Maymin; Zakhar G. Maymin
    Abstract: We show that any objective risk measurement algorithm mandated by central banks for regulated financial entities will result in more risk being taken on by those financial entities than would otherwise be the case. Furthermore, the risks taken on by the regulated financial entities are far more systemically concentrated than they would have been otherwise, making the entire financial system more fragile. This result leaves three directions for the future of financial regulation: continue regulating by enforcing risk measurement algorithms at the cost of occasional severe crises, regulate more severely and subjectively by fully nationalizing all financial entities, or abolish all central banking regulations including deposit insurance to let risk be determined by the entities themselves and, ultimately, by their depositors through voluntary market transactions rather than by the taxpayers through enforced government participation.
    Date: 2010–04
  8. By: Luigi Guiso
    Abstract: The financial crisis has brought to light diffuse opportunistic behaviour and some serious frauds.Because of this trust towards banks, bankers, brokers and the stock market has collapsed to unprecedented levels and there are so far no signs of recovery. This paper uses survey-based information to document the collapse of trust, show its link to the emergence of frauds in the financial industry and discuss its consequences for the demand of financial instruments, investors portfolios and more generally investors reliance on financial markets. It argues that unless serious changes happen in the behaviour of the financial industry, the move towards safer portfolios and away from ambiguous securities that lack of trust entails, will have adverse effects on the availability and cost of equity financing. Accordingly a number of proposals to restore trust are discussed. Their common feature is to restore trust – a belief – by limiting the scope for opportunistic behaviour through a transfer of power from financial intermediaries to investors.
    Date: 2010
  9. By: Roxana Chiriac (University of Konstanz, CoFE); Winfried Pohlmeier (University of Konstanz, CoFE, ZEW, RCEA)
    Abstract: The recent financial crisis has raised numerous questions about the accuracy of value-at-risk (VaR) as a tool to quantify extreme losses. In this paper we present empirical evidence from assessing the out-of-sample performance and robustness of VaR before and during the recent financial crisis with respect to the choice of sampling window, return distributional assumptions and stochastic properties of the underlying financial assets. Moreover we develop a new data driven approach that is based on the principle of optimal combination and that provides robust and precise VaR forecasts for periods when they are needed most, such as the recent financial crisis.
    Keywords: Value at Risk, model risk, optimal forecast combination
    JEL: C21 C5 G28 G32
    Date: 2010–01
  10. By: Friedrich Geiecke; Mark Trede
    Abstract: The recent introduction of new derivatives with future dividend payments as underlyings allows to construct a direct test of rational bubbles. We suggest a simple, new method to calculate the fundamental value of stock indices. Using this approach, bubbles become observable. We calculate the time series of the bubble component of the Euro-Stoxx 50 index and investigate its properties. Using a formal hypothesis test we find that the behavior of the bubble is compatible with rationality.
    Keywords: brand equity, price premium, hedonic regression, Bayesian estimation, dynamic linear model
    JEL: A
    Date: 2010–03
  11. By: Marco Celentani; Miguel García-Posada; Fernando Gómez
    Abstract: Spain has the world’s lowest business bankruptcy rate (number of formal business bankruptcies divided by number of firms). We document this fact, analyze the Spanish institutional framework and compare it with those of other European countries. We argue that a way to organize the documented evidence is to keep into account both the ex-post and the ex-ante efficiency repercussions of the Spanish institutional framework. We propose a view that is based on the idea that the unattractiveness of bankruptcy procedures and the efficiency of mortgage collateral lead Spanish firms to reduce the risk of bankruptcy. We show that this view is compatible with stylized features of firms’ capital structures, asset structures, and profitability. We conclude with a description of recent developments in bankruptcies and bankruptcy legislation in Spain, and with a brief discussion of potential policy implications.
    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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