New Economics Papers
on Banking
Issue of 2010‒05‒29
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Recovery determinants of distressed banks: Regulators, market discipline, or the environment? By Kick, Thomas; Koetter, Michael; Poghosyan, Tigran
  2. Is the Leverage of European Commercial Banks Pro-Cyclical? By Angelo Baglioni; Andrea Boitani; Massimo Liberatore; Andrea Monticini
  3. Financial factors in economic fluctuations By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  4. Competition and stability in banking By Vives, Xavier
  5. Attributing systemic risk to individual institutions By Nikola Tarashev; Claudio Borio; Kostas Tsatsaronis
  6. Statistical Confidence Intervals for the Bank of Canada's Business Outlook Survey By Daniel de Munik
  7. Value-at-Risk for Country Risk Ratings By Michael McAleer; Bernardo da Veiga; Suhejla Hoti
  8. The financial crisis.. By Corsetti, Giancarlo; Devereux, Michael P.; Hassler, John; Jenkinson, Tim; Saint-Paul, Gilles; Sinn, Hans-Werner; Sturm, Jan-Egbert; Vives, Xavier
  9. Predicting Instability By Razzak, Weshah
  10. Liquidity and Capital Requirements and the Probability of Bank Failure By Philipp Johann König
  11. Cross-Border Financial Surveillance: A Network Perspective By Marco Espinosa-Vega; Juan Sole
  12. Heterogeneity in Bank Pricing Policies: The Czech Evidence By Roman Horvath; Anca Maria Podpiera
  13. The Global Credit Crunch and Foreign Banks' Lending to Emerging Markets: Why Did Latin America Fare Better? By Herman Kamil; Kulwant Rai
  14. Reputational contagion and optimal regulatory forbearance By Alan D. Morrison; Lucy White
  15. The Global Financial Crisis and its Impact on the Chilean Banking System By Jorge A. Chan-Lau
  16. Balance Sheet Network Analysis of Too-Connected-to-Fail Risk in Global and Domestic Banking Systems By Jorge A. Chan-Lau
  17. Supplementary results for “Geographic Variation in Subprime Loan Features, Foreclosures and Prepayments” By Morgan J. Rose
  18. Geographic Consistency of Subprime Loan Features and Foreclosures By Morgan J. Rose
  19. Short-Versus Long-Term Credit and Economic Performance: Evidence from the WAEMU By Kangni Kpodar; Kodzo Gbenyo
  20. The role of state aid control in improving bank resolution in Europe By André Sapir; Mathias Dewatripont
  21. Deriving the term structure of banking crisis risk with a compound option approach: The case of Kazakhstan By Eichler, Stefan; Karmann, Alexander; Maltritz, Dominik
  22. Russian banking: a comeback of the state. By Vernikov, A.

  1. By: Kick, Thomas; Koetter, Michael; Poghosyan, Tigran
    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. Results seem not to be driven by regulators directing measures to particularly bad banks. That is, our results remain intact when we exclude banks that eventually exit the market due to restructuring mergers or moratoria. 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 distress,capital support,regulation,recovery
    JEL: G28 C41 G21
    Date: 2010
  2. By: Angelo Baglioni (DISCE, Università Cattolica); Andrea Boitani (DISCE, Università Cattolica); Massimo Liberatore (DISCE, Università Cattolica); Andrea Monticini (DISCE, Università Cattolica)
    Abstract: Detecting whether banks?leverage is indeed procyclical is relevant to support the view that booms and crises may be reinforced by some sort of supply side ?nancial accelerator, whilst ?nding a plausible ex- planation of banks?behaviour is crucial to trace the road for a sensible reform of ?nancial regulation and managers? incentives. The paper shows that procyclical leverage appears to be well entrenched in the behaviour of a sample of major European banks, which are commonly labelled as mainly "commercial banks".
    Keywords: Banks, Pro-cyclicality, Financial Regulation.
    JEL: G21 E3
    Date: 2010–05
  3. By: Lawrence Christiano (Northwestern University, 633 Clark Street Evanston, IL 60208 Evanston, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We augment a standard monetary DSGE model to include a banking sector and financial markets. We fit the model to Euro Area and US data. We find that agency problems in financial contracts, liquidity constraints facing banks and shocks that alter the perception of market risk and hit financial intermediation — ‘financial factors’ in short — are prime determinants of economic fluctuations. They have been critical triggers and propagators in the recent financial crisis. Financial intermediation turns an otherwise diversifiable source of idiosyncratic economic uncertainty, the ‘risk shock’, into a systemic force. JEL Classification: E3, E22, E44, E51, E52, E58, C11, G1, G21, G3.
    Keywords: DSGE model, Financial frictions, Financial shocks, Bayesian estimation, Lending channel, Funding channel.
    Date: 2010–05
  4. By: Vives, Xavier (IESE Business School)
    Abstract: I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition.
    Keywords: trade-off; competition; stability; banking;
    Date: 2010–04–05
  5. By: Nikola Tarashev; Claudio Borio; Kostas Tsatsaronis
    Abstract: An operational macroprudential approach to financial stability requires tools that attribute system-wide risk to individual institutions. Making use of constructs from game theory, we propose an attribution methodology that has a number of appealing features: it can be used in conjunction with popular risk measures, it provides measures of institutions’ systemic importance that add up exactly to the measure of system-wide risk and it easily accommodates uncertainty about the validity of the risk model. We apply this methodology to a number of constructed examples and illustrate the interactions between drivers of systemic importance: size, the institution’s risk profile and strength of exposures to common risk factors. We also demonstrate how the methodology can be used for the calibration of macroprudential capital rules.
    Keywords: Systemic importance, macroprudential approach, Shapley value
    Date: 2010–05
  6. By: Daniel de Munik
    Abstract: While a number of central banks publish their own business conditions indicators that rely on non-random sampling, knowledge about their statistical accuracy has been limited. Recently, de Munnik, Dupuis, and Illing (2009) made some progress in this area for the Bank of Canada's Business Outlook Survey (BOS) by estimating the impact of the Bank's non-random sampling on the accuracy of the survey results. They found no evidence that the Bank's firm-selection process results in significantly biased estimates and/or wider confidence intervals than in the random-selection case. The author deepens and extends this work by (i) outlining the statistical properties of population-proportion and balance-of-opinion questions, and demonstrating how their design affects the calculation of the confidence intervals; (ii) examining the variation in statistical confidence associated with changes in the underlying response distribution using actual quarterly BOS results; (iii) considering the possibility that statistical accuracy varies across questions; and (iv) investigating whether the statistical accuracy of the survey results changes with variations in the business cycle. The main findings are that confidence intervals around the population-proportion questions are about half of those for the balance-of-opinion questions, and that the confidence bands around both types of question can change from survey to survey when the underlying response distribution becomes more or less concentrated in particular response categories (such as “higher,” “the same,” or “lower”). The author finds that confidence intervals around the BOS population-proportion questions become somewhat narrower during periods of recession, while those for the balance-of-opinion questions vary within a similar range across the cycle.
    Keywords: Business Fluctuations and cycles; Central bank research; Regional economic developments
    JEL: C46 C81
    Date: 2010
  7. By: Michael McAleer (University of Canterbury); Bernardo da Veiga; Suhejla Hoti
    Abstract: The country risk literature argues that country risk ratings have a direct impact on the cost of borrowings as they reflect the probability of debt default by a country. An improvement in country risk ratings, or country creditworthiness, will lower a country’s cost of borrowing and debt servicing obligations, and vice-versa. In this context, it is useful to analyse country risk ratings data, much like financial data, in terms of the time series patterns, as such an analysis would provide policy makers and the industry stakeholders with a more accurate method of forecasting future changes in the risks and returns of country risk ratings. This paper considered an extension of the Value-at-Risk (VaR) framework where both the upper and lower thresholds are considered. The purpose of the paper was to forecast the conditional variance and Country Risk Bounds (CRBs) for the rate of change of risk ratings for ten countries. The conditional variance of composite risk returns for the ten countries were forecasted using the Single Index (SI) and Portfolio Methods (PM) of McAleer and da Veiga [10,11]. The results suggested that the country risk ratings of Switzerland, Japan and Australia are much mode likely to remain close to current levels than the country risk ratings of Argentina, Brazil and Mexico. This type of analysis would be useful to lenders/investors evaluating the attractiveness of lending/investing in alternative countries.
    Keywords: Country risk; risk ratings; value-at-risk; risk bounds; risk management
    Date: 2010–05–01
  8. By: Corsetti, Giancarlo; Devereux, Michael P.; Hassler, John; Jenkinson, Tim; Saint-Paul, Gilles; Sinn, Hans-Werner; Sturm, Jan-Egbert; Vives, Xavier
    Date: 2010
  9. By: Razzak, Weshah
    Abstract: Unanticipated shocks could lead to instability, which is reflected in statistically significant changes in distributions of independent Gaussian random variables. Changes in the conditional moments of stationary variables are predictable. We provide a framework based on a statistic for the Sample Generalized Variance, which is useful for interrogating real time data and to predicting statistically significant sudden and large shifts in the conditional variance of a vector of correlated macroeconomic variables. Central banks can incorporate the framework in the policy making process.
    Keywords: Sample Generalized Variance; Conditional Variance; Sudden and Large Shifts in the Moments
    JEL: E66 C3 C1
    Date: 2010–05–19
  10. By: Philipp Johann König
    Abstract: Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank’s failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banks’ asset portfolios.
    Keywords: prudential regulation, liquidity requirements, minimum capital requirements, global games
    JEL: G21 G28
    Date: 2010–05
  11. By: Marco Espinosa-Vega; Juan Sole
    Abstract: Effective cross-border financial surveillance requires the monitoring of direct and indirect systemic linkages. This paper illustrates how network analysis could make a significant contribution in this regard by simulating different credit and funding shocks to the banking systems of a number of selected countries. After that, we show that the inclusion of risk transfers could modify the risk profile of entire financial systems, and thus an enriched simulation algorithm able to account for risk transfers is proposed. Finally, we discuss how some of the limitations of our simulations are a reflection of existing information and data gaps, and thus view these shortcomings as a call to improve the collection and analysis of data on cross-border financial exposures.
    Keywords: Bank credit , Banking systems , Chile , Credit risk , Cross country analysis , Economic models , External shocks , Financial crisis , Financial risk , Financial sector , Global Financial Crisis 2008-2009 , Risk management ,
    Date: 2010–04–23
  12. By: Roman Horvath; Anca Maria Podpiera
    Abstract: In this paper, we estimate the interest rate pass-through from money market to bank interest rates using various heterogeneous panel cointegration techniques to address bank heterogeneity. Based on our micro-level data from the Czech Republic, the results indicate that the nature of interest rate pass-through differs across banks in the short term (rendering estimators that constrain coefficients across groups to be identical inconsistent) and becomes homogeneous across banks only in the long term, supporting the notion of the law of one price. Mortgage rates and firm rates typically adjust to money market changes, but often less than fully in the long run. Large corporate loans have a smaller mark-up than small loans. Consumer rates have a high mark-up and are not found to exhibit a cointegration relationship with money market rates. Next, we examine how bank characteristics determine the nature of interest rate pass-through in a cross-section of Czech banks. We find evidence for relationship lending, as banks with a stable pool of deposits smooth interest rates and require a higher spread as compensation. Large banks are not found to price their products less competitively. Greater credit risk increases vulnerability to money market shocks.
    Keywords: Bank pricing policies, financial structure, monetary transmission.
    JEL: E43 E58 G21
    Date: 2009–12
  13. By: Herman Kamil; Kulwant Rai
    Abstract: The recent global financial turmoil raised questions about the stability of foreign banks' financing to emerging market countries. While foreign banks' lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks' lending to LAC countries-whether extended directly by their headquarters abroad or by their local affiliates in host countries-we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks' lending was channeled in domestic currency. We also show that foreign banks' involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks' lending.
    Keywords: Bank credit , Caribbean , Credit restraint , Cross country analysis , Economic models , Emerging markets , International banking , International banks , International capital markets , Latin America , Liquidity ,
    Date: 2010–04–19
  14. By: Alan D. Morrison (Said Business School, University of Oxford, United Kingdom.); Lucy White (Harvard Business School, Soldiers Field, Boston, Massachusetts 02163, USA.)
    Abstract: This paper examines common regulation as cause of interbank contagion. Studies based on the correlation of bank assets and the extent of interbank lending may underestimate the likelihood of contagion because they do not incorporate the fact that banks have a common regulator. In our model, the failure of one bank can undermine the public’s confidence in the competence of the banking regulator, and hence in other banks chartered by the same regulator. Thus depositors may withdraw funds from other, unconnected, banks. The optimal regulatory response to this ‘panic’ behaviour can be to privately exhibit forbearance to the initially failing bank in the hope that it - and hence other vulnerable banks - survives. By contrast, public bailouts are ineffective in preventing panics and must be bolstered by other measures such as increased deposit insurance coverage. Regulatory transparency improves confidence ex ante but impedes regulators’ ability to stem panics ex post. JEL Classification: G21, G28.
    Keywords: Contagion, Reputation, Bank Regulation.
    Date: 2010–05
  15. By: Jorge A. Chan-Lau
    Abstract: This paper explores how the global turmoil affected the risk of banks operating in Chile, and provides evidence that could help strengthen work on vulnerability indicators and off-site supervision. The analysis is based on the study of default risk codependence, or CoRisk, between Chilean banks and global financial institutions. The results suggest that the impact of the global financial crisis was limited, inducing at most a one-rating downgrade to banks operating in Chile. The paper concludes by assessing government measures aimed at reducing systemic risk in the domestic banking sector and the recommendations to allocate SWF assets to domestic banks.
    Keywords: Banking sector , Chile , Credit risk , Economic models , Financial crisis , Financial systems , Fiscal policy , Global Financial Crisis 2008-2009 , International banking , International banks , Stabilization measures ,
    Date: 2010–04–28
  16. By: Jorge A. Chan-Lau
    Abstract: The 2008/9 financial crisis highlighted the importance of evaluating vulnerabilities owing to interconnectedness, or Too-Connected-to-Fail risk, among financial institutions for country monitoring, financial surveillance, investment analysis and risk management purposes. This paper illustrates the use of balance sheet-based network analysis to evaluate interconnectedness risk, under extreme adverse scenarios, in banking systems in mature and emerging market countries, and between individual banks in Chile, an advanced emerging market economy.
    Keywords: Bank accounting , Banking systems , Capital , Credit risk , Developed countries , Emerging markets , Financial institutions , Financial risk , Globalization , International banking , Risk management ,
    Date: 2010–04–27
  17. By: Morgan J. Rose (University of Maryland-Baltimore County)
    Abstract: This document provides supplementary results to the analyses of Rose (2010), “Geographic Variation in Subprime Loan Features, Foreclosures and Prepayments,” which examines the geographic variation in the effects of prepayment penalties, balloon loans, and reduced documentation on the probabilities of foreclosure and prepayment. Specifically, this supplement presents results indicating that for my sample, clustering by month alone yields very similar standard errors to clustering by both month and loan. It also presents complete results for all multinomial logit specifications used in that paper, including side-by-side comparisons of results from models that do and do not adjust for unobserved heterogeneity. Results are extremely similar across models. The similarities across different approaches to unobserved heterogeneity and to clustering standard errors with respect to mortgage outcome data are substantial contributions of Rose (2010). Due to space limitations in that paper, the full evidence for those contributions appears here.
    Keywords: foreclosure; prepayment; subprime mortgages; financial regulation; unobserved heterogeneity; clustering
    JEL: G21 G28 C52 H77
    Date: 2010–05–01
  18. By: Morgan J. Rose (University of Maryland-Baltimore County)
    Abstract: The recent rise in subprime foreclosures has prompted restrictions at the federal, state, and municipal levels against a range of loan features loosely termed “predatory.” The effectiveness of federal regulation depends on the consistency of those features’ impacts on foreclosures in markets nationwide. Using data on subprime refinance and purchase mortgages in ten metropolitan areas, I examine the impact of long prepayment penalty periods, balloon payments, and reduced documentation on the probability of foreclosure. Results indicate that reduced documentation is consistently associated with higher probabilities of foreclosure, while the impacts of the other features are more sporadic.
    Keywords: subprime mortgages; foreclosure; financial regulation; prepayment penalties; reduced documentation
    JEL: G21 G28 H77
    Date: 2009–06–01
  19. By: Kangni Kpodar; Kodzo Gbenyo
    Abstract: This paper studies the link between financial development and economic growth in the West African Economic and Monetary Union (WAEMU). Using panel data for WAEMU countries over the period 1995-2006, the results suggest that while financial development does support growth in the region, long-term bank financing has a greater impact on economic growth than short-term financing because long-term projects have higher returns adjusted for risks. Given that in the WAEMU short-term credit accounts for about 70 percent of credit to the private sector, WAEMU countries are less able to reap the full benefits of improvements in their financial systems. The results also highlight the importance of macroeconomic stability, a creditor-friendly environment, political stability, and the availability of long-term financial resources in fostering banks’ supply of long-term loans.
    Keywords: Bank credit , Banking sector , Credit risk , Cross country analysis , Economic growth , Economic models , Excess liquidity , Financial incentives , Human capital , Loans , Political economy , Time series , West African Economic and Monetary Union ,
    Date: 2010–05–06
  20. By: André Sapir; Mathias Dewatripont
    Abstract: The financial crisis exposed Europe's inadequacy in developing an effective banking resolution framework that could bring together national authorities and set guidelines for their coordination. The European Commission, through its assessment of state aid cases, managed to avoid single market distortions and mitigate moral hazard. This Policy Contribution explains why in the long-term Europe needs a single resolution authority. The authors Bruegel Senior Research Fellow André Sapir, Mathias Dewatripont, ULB and CEPR; Gregory Nguyen, National Bank of Belgium, and Peter Praet, National Bank of Belgium, show how in the short-term, the European Commission, through its state aid control discipline, can set the foundation for a new crisis resolution architecture. It can act as a substitute to improve coordination among member states and complement a European resolution authority once it is set up.
    Date: 2010–05
  21. By: Eichler, Stefan; Karmann, Alexander; Maltritz, Dominik
    Abstract: We use a compound option-based structural credit risk model to infer a term structure of banking crisis risk from market data on bank stocks in daily frequency. Considering debt service payments with different maturities this term structure assigns a separate estimator for short- and long-term default risk to each maturity. Applying the Duan (1994) maximum likelihood approach, we find for Kazakhstan that the overall crisis probability was mainly driven by short-term risk, which increased from 25% in March 2007 to 80% in December 2008. Concurrently, the long-term default risk increased from 20% to only 25% during the same period. --
    Keywords: Banking crisis,bank default,option pricing theory,compound option,liability structure
    JEL: G21 G32 G12 G18
    Date: 2010
  22. By: Vernikov, A.
    Abstract: The purpose of this paper is to assess the size of public sector within the Russian banking industry. We identify and classify at least 78 state-influenced banks. We distinguish between banks that are majority-owned by federal executive authorities or Central Bank of Russia, by sub-federal (regional and municipal) authorities, by state-owned enterprises and banks, and by "state corporations". We estimate their combined market share to have reached 56% of total assets by July 1, 2009. Banks indirectly owned by public capital are the fastest-growing group. Concentration is increasing within the public sector of the industry, with the top five state-controlled banking groups in possession of over 49% of assets. We observe a crowding out and erosion of domestic private capital, whose market share is shrinking from year to year. Several of the largest state-owned banks now constitute a de facto intermediate tier at the core of the banking system. We argue that the direction of ownership change in Russian banking is different from that in CEE countries.
    Date: 2010–02

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