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on Banking |
| By: | Jan Annaert (Universiteit Antwerpen); Marc De Ceuster (Universiteit Antwerpen); Patrick Van Roy (National Bank of Belgium, Financial Stability Department; Université Libre de Bruxelles); Cristina Vespro (National Bank of Belgium, Financial Stability Department) |
| Abstract: | This paper decomposes the explained part of the CDS spread changes of 31 listed euro area banks according to various risk drivers. The choice of the credit risk drivers is inspired by the Merton (1974) model. Individual CDS liquidity and other market and business variables are identified to complement the Merton model and are shown to play an important role in explaining credit spread changes. Our decomposition reveals, however, highly changing dynamics in the credit, liquidity, and business cycle and market wide components. This result is important since supervisors and monetary policy makers extract different signals from liquidity based CDS spread changes than from business cycle or credit risk based changes. For the recent financial crisis, we confirm that the steeply rising CDS spreads are due to increased credit risk. However, individual CDS liquidity and market wide liquidity premia played a dominant role. In the period before the start of the crisis, our model and its decomposition suggest that credit risk was not correctly priced, a finding which was correctly observed by e.g. the International Monetary Fund |
| Keywords: | credit default spreads, credit risk, financial crisis, financial sector, liquidity premia, structural model |
| JEL: | G12 G21 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201005-10&r=ban |
| By: | Christopher F. Baum (Boston College; DIW Berlin); Dorothea Schäfer (DIW Berlin); Oleksandr Talavera (School of Economics, University of East Anglia) |
| Abstract: | We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and activity level influence their financial constraints. For this purpose we merge Almeida et al. (2004), a path-breaking new design for evaluating a firm's financial constraints, with Levine (2002), who paved the way for comparative analysis of financial systems around the world. We conjecture that a country's financial system, both in terms of its structure and its level of development, influences the cash flow sensitivity of cash of constrained firms but leaves unconstrained firms unaffected. We test our hypothesis with a large international sample of 80,000 firm-years from 1989 to 2006. Our findings reveal that both the structure of the financial system and its level of development matter. Bank-based financial systems provide the constrained firms with easier access to external financing. |
| Keywords: | financial constraints, financial system, cash flow sensitivity of cash |
| JEL: | G32 G30 |
| Date: | 2010–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:uea:aepppr:2010_03&r=ban |
| By: | F.R. Liedorp; L. Medema; M. Koetter; R.H. Koning; I. van Lelyveld |
| Abstract: | We test if interconnectedness in the interbank market is a channel through which banks affect each others riskiness. The evidence is based on quarterly bilateral exposures of all banks active in the Dutch interbank market between 1998 and 2008. A spatial lag model, borrowed from regional science, is used to test if z -scores of other banks affect individual bank’s z -scores through the network of the interbank market. Larger dependence on interbank borrowing and lending increases bank risk. But only interbank funding exposures to other banks in the system exhibit significant spill-over coefficients. Spatial lags for lending are insignificant while borrowing from other banks reduces individual bank risk if neighbors are stable, too. Vice versa, stability shocks at interbank counterparties in the system spill over through the liability side of banks balance sheets. |
| Keywords: | Interbank market; bank risk; spatial lag model |
| JEL: | G21 L1 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:248&r=ban |
| By: | Martin Saldías Zambrana |
| Abstract: | Based on contingent claims theory, this paper develops a method to monitor systemic risk in the European banking system. Aggregated Distance-to-Default series are generated using option prices information from systemically important banks and the DJ STOXX Banks Index. These indicators provide methodological advantages in monitoring vulnerabilities in the banking system over time: 1) they capture interdependences and joint risk of distress in systemically important banks; 2) their forward-looking feature endow them with early signaling properties compared to traditional approaches in the literature and other market-based indicators; and 3) they produce simultaneously both smooth and informative long-term signals and quick and clear reaction to market distress. |
| Keywords: | Systemic risk ; Banks and banking - Europe |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1005&r=ban |
| 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:qau10-1&r=ban |
| By: | Ronel Elul; Nicholas S. Souleles; Souphala Chomsisengphet; Dennis; Glennon; Robert Hunt |
| Abstract: | This paper assesses the relative importance of two key drivers of mortgage default: negative equity and illiquidity. To do so, the authors combine loan-level mortgage data with detailed credit bureau information about the borrower's broader balance sheet. This gives them a direct way to measure illiquid borrowers: those with high credit card utilization rates. The authors find that both negative equity and illiquidity are significantly associated with mortgage default, with comparably sized marginal effects. Moreover, these two factors interact with each other: The effect of illiquidity on default generally increases with high combined loan-to-value ratios (CLTV), though it is significant even for low CLTV. County-level unemployment shocks are also associated with higher default risk (though less so than high utilization) and strongly interact with CLTV. In addition, having a second mortgage implies significantly higher default risk, particularly for borrowers who have a first-mortgage LTV approaching 100 percent. |
| Keywords: | Mortgages ; Default (Finance) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-13&r=ban |
| By: | Burcu Duygan-Bump; Patrick M. Parkinson; Eric S. Rosengren; Gustavo A. Suarez; Paul S. Willen |
| Abstract: | Following the failure of Lehman Brothers in September 2008, short-term credit markets were severely disrupted. In response, the Federal Reserve implemented new and unconventional facilities to help restore liquidity. Many existing analyses of these interventions are confounded by identification problems because they rely on aggregate data. Two unique micro datasets allow us to exploit both time series and cross-sectional variation to evaluate one of the most unusual of these facilities - the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The AMLF extended collateralized loans to depository institutions that purchased asset-backed commercial paper (ABCP) from money market funds, helping these funds meet the heavy redemptions that followed Lehman's bankruptcy. The program, which lent $150 billion in its first 10 days of operation, was wound down with no credit losses to the Federal Reserve. Our findings indicate that the facility was effective as measured against its dual objectives: it helped stabilize asset outflows from money market mutual funds, and it improved liquidity in the ABCP market. Using a differences-in-differences approach we show that after the facility was implemented, money market fund outflows decreased more for those funds that held more eligible collateral. Similarly, we show that yields on AMLF-eligible ABCP decreased significantly relative to those on otherwise comparable AMLF-ineligible commercial paper. |
| Keywords: | Bank liquidity ; Global financial crisis ; Federal Reserve Bank of Boston ; Asset-backed financing ; Commercial paper ; Money market funds ; Discount window |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:qau10-3&r=ban |
| By: | Salvador Barrios; Per Iversen; Magdalena Lewandowska; Ralph Setzer |
| Abstract: | This paper provides an empirical analysis of the determinants of government bond yield spreads in the euro area with a focus on developments during the global financial crisis that started in 2007. In line with the previous literature, we find that international factors, in particular general risk perception, play a major role in explaining governments bond yields differentials. While domestic factors such as liquidity and sovereign risk appear to be smaller but non-negligible drivers of yield spreads our results point to significant interaction of general risk aversion and macroeconomic fundamentals. Moreover, the impact of domestic factors on bond yield spreads increase significantly during the crisis, when international investors started to discriminate more between countries. In particular, the combination of high risk aversion and large current account deficits tend to magnify the incidence of deteriorated public finances on government bond yield spreads. Overall, our results suggest that an improvement in global risk perception will lead to a narrowing of intra-euro area bond yield differentials. However, the differing impact of the crisis on Member States' public finances and the expected higher risk awareness of investors after the crisis could keep government bond yield spreads at a higher level then in the pre-crisis period. |
| Keywords: | sovereign bond, intra-euro area government bond spreads, spread determinants, financial crisis Barrios, Iversen, Lewandowska, Setzer |
| JEL: | E44 F36 G12 G15 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0388&r=ban |
| By: | Christopher F. Baum (Boston College; DIW Berlin); Mustafa Caglayan (University of Sheffield); Oleksandr Talavera (School of Economics, University of East Anglia) |
| Abstract: | This paper analyzes the effects of parliamentary election cycles on the Turkish banking system. Using annual bank-level data representing all banks in Turkey during 1963-2005, we find that there are meaningful differences in the structure of assets, liabilities and financial performance across different stages of the parliamentary election cycle. However, we find that government-owned banks operate similarly to both domestic and foreign-owned private sector banks before, during and after elections. Our estimates also show that government-owned banks underperform their domestic and foreign-owned private sector counterparts. |
| Keywords: | elections, state banks, domestic banks, foreign-owned banks, loans, interest rate margin |
| JEL: | G21 G28 |
| Date: | 2010–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:uea:aepppr:2010_02&r=ban |
| By: | Simon H. Kwan |
| Abstract: | This paper estimates the amount of tightening in bank commercial and industrial (C&I) loan rates during the financial crisis. After controlling for loan characteristics and bank fixed effects, as of 2010:Q1, the average C&I loan spread was 66 basis points or 23 percent above normal. From about 2005 to 2008, the loan spread averaged 23 basis points below normal. Thus, from the unusually loose lending conditions in 2007 to the much tighter conditions in 2010:Q1, the average loan spread increased by about 1 percentage point. I find that large and medium-sized banks tightened their loan rates more than small banks; while small banks tended to tighten less, they always charged more. ; Using loan size to proxy for bank-dependent borrowers, while small loans tend to have a higher spread than large loans, I find that small loans actually tightened less than large loans in both absolute and percentage terms. Hence, the results do not indicate that bank-dependent borrowers suffered more from bank tightening than large borrowers. ; The channels through which banks tightened loan rates include reducing the discounts on large loans and raising the risk premium on more risky loans. There also is evidence that noncommitment loans were priced significantly higher than commitment loans at the height of the liquidity shortfall in late 2007 and early 2008, but this premium dropped to zero following the introduction of emergency liquidity facilities by the Federal Reserve. ; In a cross section of banks, certain bank characteristics are found to have significant effects on loan prices, including loan portfolio quality, capital ratios, and the amount of unused loan commitments. These findings provide evidence o n the supply-side effect of loan pricing. |
| Keywords: | Bank loans |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-11&r=ban |
| By: | Karl Whelan (University College Dublin) |
| Abstract: | Did global imbalances cause the financial crisis? A number of influential figures have argued that inflows of foreign capital into the US due to the current account deficit helped to trigger the crisis. This paper argues that the evidence for this position is weak. The capital inflows into the US associated with the current account deficit were also not the key factor driving foreign purchases of US toxic assets. The so-called global savings glut was not as significant a pattern as is often presented. Macroeconomic policies that reduced global imbalances could have been adopted but these would probably not have prevented the crisis. Global policy efforts to prevent a recurrence of the financial crisis need to focus on improved banking regulation. Reducing global imbalances should be of secondary importance. |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201013&r=ban |
| By: | Robert E. Krainer (University of Wisconsin Madison) |
| Abstract: | In this paper we compare a traditional demand oriented model to a non-traditional capital budgeting model of bank lending based on movements in the equity cost of capital for France, Germany, and the Euro area. Using non-nested hypothesis tests and omitted variables tests, we find that we reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions in France and the Euro area. For Germany the results are inconclusive. Even though Europe is a bank-based financial system, it appears the stock market plays a key role in the lending decisions of banks. |
| Keywords: | Bank Loans, Stock Market, Non-nested Hypothesis Tests. |
| JEL: | E3 E5 G2 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:10_09&r=ban |
| By: | Huberto M. Ennis; John A. Weinberg |
| Abstract: | It is often the case that banks in the US are willing to borrow in the fed funds market (the interbank market for funds) at higher rates than the ones they could obtain by borrowing at the Fed's discount window. This phenomenon is commonly explained as the consequence of the existence of a stigma effect attached to borrowing from the window. Most policymakers and empirical researchers consider the stigma hypothesis plausible. Yet, no formal treatment of the issue has ever been provided in the literature. In this paper, we fill that gap by studying a model of interbank credit where: (1) banks benefit from engaging in intertemporal trade with other banks and with outside investors; and (2) physical and informational frictions limit those trade opportunities. In our model, banks obtain loans in an over-the-counter market (involving search, bilateral matching, and negotiations over the terms of the loan) and hold assets of heterogeneous qualities which in turn determine their ability to repay those loans. When asset quality is not observable by outside investors, information about the actions taken by a bank in the credit market may influence the price at which it can sell its assets. In particular, under some conditions, discount window borrowing may be regarded as a negative signal about the quality of the borrower's assets. In such cases, some of the banks in our model, just as in the data, are willing to accept loans in the interbank market at higher rates than the ones they could obtain at the discount window. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:10-07&r=ban |
| By: | George Pennacchi |
| Abstract: | This paper develops a structural credit risk model of a bank that issues deposits, shareholders' equity, and fixed or floating coupon bonds in the form of contingent capital or subordinated debt. The return on the bank's assets follows a jump-diffusion process, and default-free interest rates are stochastic. The equilibrium pricing of the bank's deposits, contingent capital, and shareholders' equity is studied for various parameter values haracterizing the bank's risk and the contractual terms of its contingent capital. Allowing for the possibility of jumps in the bank's asset value, as might occur during a financial crisis, has distinctive implications for valuing contingent capital. Credit spreads on contingent capital are higher the lower is the value of shareholders' equity at which conversion occurs and the larger is the conversion discount from the bond's par value. The effect of requiring a decline in a financial stock price index for conversion (dual price trigger) is to make contingent capital more similar to non-convertible subordinated debt. The paper also examines the bank's incentive to increase risk when it issues different forms of contingent capital as well as subordinated debt. In general, a bank that issues contingent capital has a moral hazard incentive to raise its assets' risk of jumps, particularly when the value of equity at the conversion threshold is low. However, moral hazard when issuing contingent capital tends to be less than when issuing subordinated debt. Because it reduces effective leverage and the pressure for government bailouts, contingent capital deserves serious consideration as part of a package of reforms that stabilize the financial system and eliminate "Too-Big-to-Fail." |
| Keywords: | Bank capital ; Risk ; Bank failures |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1004&r=ban |
| By: | Putkuri, Hanna (Bank of Finland Research) |
| Abstract: | This paper examines how housing loan rates are determined, using data on new housing loans in Finland. Finland is an example of a bank-based euro area country where the majority of loans are granted at variable rates. The paper extends the earlier interest rate pass-through literature by taking explicitly into account the changing of lending rate margins. A standard lending rate pass-through model, empirically specified as an error-correction model, is extended with variables predicted by a theoretical bank interest rate setting model. The results show that, since the mid-1990s, short-run movements in housing loan rates can be largely explained by changes in money market rates, and that long-run developments have also been affected by less volatile cost and credit risk factors. The roles of loan competition and capital regulation are also considered, but these effects are more difficult to identify empirically. |
| Keywords: | housing loan; lending rate; lending rate margin; error-correction model |
| JEL: | E43 G21 |
| Date: | 2010–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2010_010&r=ban |
| By: | Kerstin Bernoth; Roberta Colavecchio; Magdolna Sass |
| Abstract: | A strong private equity market is a cornerstone for commercialization and innovation in modern economies. However, substantial differences exist in the relative amounts raised and invested in private equity across European countries. We investigate the macro-determinants of private equity investment in Europe, focusing on the comparison between CEE and Western European countries. Our estimations are based on a data set running from 2001 to 2008 and covers 14 Western European and three CEE countries. Applying robust estimation techniques we identify a 'robust' set of determinants of private equity activity in both regions. We find similarities as well as differences in the driving forces of private equity investments in Western European and CEE countries. Our results suggest that commercial bank lending, equity market capitalization, unit labour costs and corporate tax rates are significant determinants of private equity activity. |
| Keywords: | Private Equity, Extreme Bounds Analysis, Central and Eastern European Countries |
| JEL: | C23 C52 E22 G24 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1002&r=ban |
| By: | Michał Brzoza-Brzezina (National Bank of Poland, ul. Świętokrzyska 11/21, 00-919 Warszawa, Poland.); Tomasz Chmielewski (Warsaw School of Economics, al. Niepodległości 162, 02-554 Warszawa, Poland.); Joanna Niedźwiedzińska (National Bank of Poland, ul. Świętokrzyska 11/21, 00-919 Warszawa, Poland.) |
| Abstract: | In this paper we analyse the impact of monetary policy on total bank lending in the presence of a developed market for foreign currency denominated loans and potential substitutability between domestic and foreign currency loans. Our results, based on a panel of four biggest Central European countries (the Czech Republic, Hungary, Poland and Slovakia) confirm significant and probably strong substitution between these loans. Restrictive monetary policy leads to a decrease in domestic currency lending but simultaneously accelerates foreign currency denominated loans. This makes the central bank’s job harder. JEL Classification: E44, E52, E58. |
| Keywords: | Domestic and foreign currency loans, substitution, monetary policy, Central Europe. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101187&r=ban |
| By: | Hooi Hooi Lean; Michael McAleer (University of Canterbury); Wing-Keung Wong |
| Abstract: | This paper examines the market efficiency of oil spot and futures prices by using both mean-variance (MV) and stochastic dominance (SD) approaches. Based on the West Texas Intermediate crude oil data for the sample period 1989-2008, we find no evidence of any MV and SD relationships between oil spot and futures indices. This infers that there is no arbitrage opportunity between these two markets, spot and futures do not dominate one another, investors are indifferent to investing in spot or futures, and the spot and futures oil markets are efficient and rational. The empirical findings are robust to each sub-period before and after the crises for different crises, and also to portfolio diversification. |
| Keywords: | Stochastic dominance; risk averter; oil futures market; market efficiency |
| JEL: | C14 G12 G15 |
| Date: | 2010–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:10/18&r=ban |