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on Banking |
| By: | Ross Levine |
| Abstract: | In this postmortem, I find that the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system’s demise. The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble and the herding behavior of financiers rushing to create and market increasingly complex and questionable financial products. Rather, the evidence indicates that regulatory agencies were aware of the growing fragility of the financial system associated with their policies during the decade before the crisis and yet chose not to modify those policies. |
| JEL: | E60 G20 G28 H1 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15956&r=ban |
| By: | Giorgio Barba Navaretti (University of Milan and Centro Studi Luca d’Agliano); Giacomo Calzolari (University of Bologna, CEPR and Centro Studi Luca d’Agliano); Alberto Franco Pozzolo (University of Molise, Centro Studi Luca d’Agliano and MoFiR); Micol Levi (Centro Studi Luca d’Agliano) |
| Abstract: | This paper examines whether multinational banks have a stabilising or a destabilising role during times of financial distress. With a focus on Europe, it looks at how these banks‟ foreign affiliates have been faring during the recent financial crisis. It finds that retail and corporate lending of these foreign affiliates have been stable and even increasing between 2007 and 2009. This pattern is related to the functioning of the internal capital market through which these banks funnel funds across their units. The internal capital market has been an effective tool to support foreign affiliates in distress and to isolate their lending from the local availability of financial resources, notwithstanding the systemic nature of the recent crisis. This effect has been particularly large within the EU integrated financial market and for the EMU countries, thus showing complementarity between economic integration and multinational banks‟ internal capital markets. In light of these findings, this paper supports the call for an integration of the European supervisory and regulatory framework overseeing multinational banks. The analysis is based on an analytical framework which derives the main conditions under which the internal capital market can perform this support function under idiosyncratic and systemic stresses. The empirical evidence uses both aggregate evidence on foreign claims worldwide, and firm-level evidence on the behaviour of banking groups‟ affiliates, compared to standing alone national banks. |
| Keywords: | multinational banking, financial stability, regulation and supervision, internal capital markets, financial crises |
| JEL: | G15 G18 |
| Date: | 2010–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:292&r=ban |
| By: | Ugo Albertazzi (Bank of Italy); Domenico J. Marchetti (Bank of Italy) |
| Abstract: | This paper analyzes the effects of the financial crisis on credit supply by using highly detailed data on bank-firm relationships in Italy after Lehman’s collapse. We control for firms’ unobservable characteristics, such as credit demand and borrowers’ risk, by exploiting multiple lending. We find evidence of a contraction of credit supply, associated to low bank capitalization and scarce liquidity. The ability of borrowers to compensate through substitution across banks appears to have been limited. We also document that larger less-capitalized banks reallocated loans away from riskier firms, contributing to credit pro-cyclicality. Such ‘flight to quality’ has not occurred for smaller less-capitalized banks. We argue that this may have reflected, among other things, evergreening practices. We provide corroborating evidence based on data on borrowers' productivity and interest rates at bank-firm level. |
| Keywords: | credit supply, bank capital, flight to quality, evergreening |
| JEL: | E44 E51 G21 G34 L16 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_756_10&r=ban |
| By: | Riccardo De Bonis (Banca d'Italia, Economics and International Relations Area); Massimiliano Stacchini (Banca d'Italia, Economics and International Relations Area) |
| Abstract: | Given the importance of banking intermediation, we investigate the determinants of the size of bank loans in 18 OECD countries in the period 1981-1997. The aim of the paper is to show that the ratio of government debt to GDP has a negative effect on the level of bank credit. Second, countries with a German legal origin have higher ratios of loans to GDP than common law countries. Our results are robust to including such variables in the regressions as per capita GDP, stock market capitalization, the banking reserve requirement, the level of inflation and its volatility, openness to trade and the use of different econometric methods. |
| Keywords: | bank loans, financial repression, government debt, legal origin of finance |
| JEL: | C23 G18 G21 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:39&r=ban |
| By: | Francisco J. Santos-Arteaga (Universidad Complutense de Madrid,Instituto Complutense de Estudios Internacionales (ICEI)) |
| Abstract: | The literature on bank runs reduces all coordination mechanisms triggering attacks on banks to exogenous sunspots. We present a general equilibrium version of these models where the uncertainty faced by depositors is modeled explicitly, such that bank runs arise as optimal equilibrium outcomes corresponding to Bayesian coordination games played by rational agents before depositing. Differentials in information sets between the bank and its depositors lead to rational self-contained equilibrium runs. The coexistence of different beliefs in equilibrium jointly with the self-fulfilling nature of the attacks follow from Adam Smith's invisible hand principle. The runs obtained do not violate the revelation principle. |
| Keywords: | Bank runs, Self-contained attacks, Bayesian coordination games, Revelation principle, Invisible hand principle, Pánicos bancarios, Ataques autocontenidos, Juegos de coordinación Bayesianos, Principio de revelación, Principios de la mano invisible. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:wpaper:02-10&r=ban |
| By: | Yasuyuki Sawada (Department of Economics, University of Tokyo); Kazumitsu Nawata (Department of Economics, University of Tokyo); Masako Ii (Department of Economics, Hitotsubashi University); Mark J. Lee (Department of Economics, Towson University) |
| Abstract: | We investigate whether and how the credit crunch during the financial crisis in Japan affected household welfare. We estimate the consumption Euler equation with endogenous credit constraints using household panel data for 1993–1999, generating several findings. First, a small but non-negligible portion of the households faced credit constraints during the crisis, rejecting the standard consumption Euler equation. Second, the credit crunch affected household welfare negatively, albeit not seriously. The estimated welfare loss ranges between two to ten percent increases in marginal utility, depending on income level. Finally, our results corroborate that the credit crunch in Japan was supply-driven. |
| Keywords: | Credit crunch, Consumption Euler equation, Household Welfare. |
| JEL: | D91 E21 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2010-11&r=ban |
| By: | Riccardo De Bonis (Banca d'Italia, Economics and International Relations Area); Giovanni Ferri (Universit… degli Studi di Bari); Zeno Rotondi (UniCredit Group, Head of Research and Competitors Benchmarking,, Retail Division) |
| Abstract: | We show that a longer relationship length with the main bank fosters Italian firms' foreign direct investment (FDI) and, weakly, production off-shoring abroad. Possibly, longer bank relationships help secure external financing for these companies, which have become more opaque because of their internationalization. In contrast, other than for smaller-sized companies, we detect no impact on firms' propensity to export, suggesting that exporting alters enterprises' financial set-up less than shifting production internationally. We also find a link between the internationalization of the main creditor bank and firm FDIs. Our evidence suggests that reexisting strong bank-firm relationships support manufacturing firms' production internationalization. |
| Keywords: | bank-firm relationships, export, external finance, foreign direct investments, internationalization, off-shoring |
| JEL: | D21 F10 F21 F23 G21 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:37&r=ban |
| By: | Giulio Bottazzi; Federico Tamagni |
| Abstract: | Exploiting a large database of Italian manufacturing firms we investigate the relationships between default rate and firm size. Default events, defined as conditions of actual or likely insolvency, are a signal of deep business troubles. They are unanticipated, costly and dangerous for the firm as well as for the economy, and should be in principle avoided. Our evidence, based on data provided by a large Italian banking group, reveals that the default probability of firms increases with their size. This finding contrasts with typical results on exit events based on business registries data, and suggests to revise the common wisdom that sees the core of the industry as a safe place and its members as most valuable economic assets. |
| Keywords: | firm default and exit, firm size,bootstrap probit regressions. |
| JEL: | C14 C25 G30 L11 |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2010/07&r=ban |
| By: | Ben Ali Chiraz (ESC Amiens - ESC Amiens); Cédric Lesage (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959) |
| Abstract: | Minority expropriation could result when controlling shareholders can expropriate minority shareholders and profit from private benefits of control. This agency conflict (named Type II) has been rarely studied, as the most commonly assumed agency conflict resides between managers and shareholders (Type I). We want to study the role of the auditors in reducing the type II agency conflict. Using an audit fees model derived from Simunic (1980), we study the impact of type I and type II agency conflicts on audit fees in code law vs common law countries. We then focus two civil law countries (Germany and France) providing a lower investor protection level, and two common law countries (the USA and UK) providing a higher investor protection level (La Porta et al. 1998, 2000). Our results show 1) a negative relation between audit fees and managerial shareholding, which is stronger for common law than for civil law countries; 2) a curvilinear (concave) relation between audit fees and controlling shareholding for civil law countries; 3) no Type II conflict in the common law countries. These results illustrate the mixed effects of the legal environment and of each agency conflict on audit fees. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00476923_v1&r=ban |
| By: | Balli, Faruk; Basher, Syed Abul; Ozer-Balli, Hatice |
| Abstract: | Following the launch of the Euro in 1999, integration among Euro area financial markets increased considerably. As a result, portfolio home bias declined across the European financial markets. However, greater market integration has generated a new bias: portfolio Euro bias, a situation where Euro investors tend to hold large proportion of assets issued within the Euro region. The first part of this paper presents an empirical analysis of the economic factors at play behind the switch from home bias to Euro bias. We find that decline in default risk and transaction cost are two key determinants of the rise in portfolio Euro bias. The second part of the paper goes deeper into the effects of Euro bias on Euro area bond and equity markets. We observe that both government and corporate bond markets revealed clear signs of strain during the recent financial turmoil. Our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification. |
| Keywords: | Financial integration; home bias; Euro bias; transaction costs. |
| JEL: | G11 G12 F21 F36 |
| Date: | 2010–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22430&r=ban |