New Economics Papers
on Banking
Issue of 2010‒06‒18
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Efficiency and risk in european banking By Franco Fiordelisi; David Marques-Ibanez; Phil Molyneux
  2. The African Credit Trap By Svetlana Andrianova; Badi Baltagi; Panicos Demetriades; David Fielding
  3. Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition By Eva Schliephake; Roland Kirstein
  4. Privatización, competencia por depósitos y desempeño bancarios By Ruiz-Porras, Antonio
  5. ATM Direct Charging Reform: the Effect of Independent Deployers on Welfare By Donze, Jocelyn; Dubec, Isabelle
  6. Multilateral Safety Nets for Financial Crises By Eduardo Fernandez-Arias
  7. Empirical analysis of hedging strategies By Magid Maatallah
  8. Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance By Laura Alfaro; Maggie Chen
  9. Managing Growth Risk: Lessons from the Current Crisis By Mathias Schmit; Lin-Sya Chao
  10. The Dynamics of Optimal Risk Sharing By Patrick Bolton; Christopher Harris
  11. Faits saillants de l'Enquête canadienne sur les capacités financières de 2009 dans le domaine de la retraite By Schellenberg, Grant; Ostrovsky, Yuri
  12. Estimating the Structure of the Payment Network in the LVTS: An Application of Estimating Communities in Network Data By James Chapman; Yinan Zhang

  1. By: Franco Fiordelisi (Faculty of Economics, University of Rome III, Via S. D’Amico 77, 00182, Rome, Italy.); David Marques-Ibanez (European Central Bank, Directorate General Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Phil Molyneux (European Central Bank, Directorate General Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We analyze the impact of efficiency on bank risk. We also consider whether bank capital has an effect on this relationship. We model the inter-temporal relationships among efficiency, capital and risk for a large sample of commercial banks operating in the European Union. We find that reductions in cost and revenue efficiencies increase banks’ future risks thus supporting the bad management and efficiency version of the moral hazard hypotheses. In contrast, bank efficiency improvements contribute to shore up bank capital levels. Our findings suggest that banks lagging behind in their efficiency levels might expect higher risk and subdued capital positions in the near future. JEL Classification: G21, D24, C23, E44.
    Keywords: banking risk, capital, efficiency.
    Date: 2010–06
  2. By: Svetlana Andrianova; Badi Baltagi; Panicos Demetriades; David Fielding
    Abstract: We put forward a plausible explanation of African financial underdevelopment in the form of a bad credit market equilibrium. Utilising an appropriately modified IO model of banking, we show that the root of the problem could be unchecked moral hazard (strategic loan defaults) or adverse selection (a lack of good projects). We provide empirical evidence from a large panel of African banks which suggests that loan defaults are a major factor inhibiting bank lending when the quality of regulation is poor. We also find that once a threshold level of regulatory quality has been reached, improvements in the default rate or regulatory quality do not matter, providing support for our theoretical predictions.
    Keywords: Dynamic panel data; African financial under-development; African credit markets
    JEL: G21 O16
    Date: 2010–05
  3. By: Eva Schliephake (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Roland Kirstein (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This paper analyses the competitive effects of capital requirement regulation on an oligopolistic credit market. In the first stage, banks choose the structure of refinancing their assets, thereby making an imperfect commitment to a loan capacity as a function of the chosen degree of capitalization and the regulatory capital requirement. In the second stage, loan price competition takes place. It is shown that a capital requirement regulation may not only decrease the supply of credit through an increased marginal cost effect but can have an additional collusive enhancing effect resulting in even higher credit prices and increased profits for the banks.
    Keywords: equity regulation, oligopoly, capacity constraint
    JEL: G21 K23 L13
    Date: 2010–05
  4. By: Ruiz-Porras, Antonio
    Abstract: In this article we develop a microeconomic framework to study the relationships among privatization, competition for deposits and performance in banking. Particularly, we analyze banking privatization when competitive strategies of the Cournot and Stackelberg types are allowed. Our findings show that some conditions are necessary to justify it under the following criteria: (i) efficiency, (ii) market power/financial stability and (iii) consumption availability for depositors. They also show that privatizations are relatively easy to justify when leader-follower relationships are allowed in the banking system. Even government revenues, due to privatization, are higher when these relationships exist.
    Keywords: banking; privatization; competition; performance; deposits
    JEL: D43 G21
    Date: 2010–04–08
  5. By: Donze, Jocelyn; Dubec, Isabelle
    Abstract: In Australia, on the 3rd of March 2009, the interchange fees on shared ATM transactions were removed and replaced by fees directly set and received by the ATM owners. We develop a model to study how the entry of independent ATM deployers (IADs) affects welfare under this direct charging scheme. Paradoxically, we show that the IAD entry benefits banks. It may be good for consumers if they sufficiently value the associated growth of the ATM network.
    Keywords: ATMs; Direct Charging Reform; Independent Deployers
    JEL: G2 L1
    Date: 2010–06–09
  6. By: Eduardo Fernandez-Arias
    Abstract: There is an increasing need for a system of international lending of last resort (ILLR) to provide a safety net in the event of financial crises in vulnerable countries as financial globalization deepens and spreads. Multilateral progress to address liquidity and solvency crises has been patchy and inconsistent, with no clear distinction between the two; in particular, there is still no framework to address sovereign debt restructuring. This paper proposes an integrated system of specialized ILLR facilities to address problems of liquidity, adjustment, and debt restructuring in a focused but robust way as crises evolve and morph, structured in tiers to cater to countries’ capacity to prequalify for automatic support. It further proposes feasible legal reform to subject creditors to standstills and seniority dilution as in domestic bankruptcy in order to empower ILLR to facilitate orderly workouts in debt restructuring. Multilateral development banks would play important supporting roles.
    Keywords: Safety nets, lender of last resort, liquidity crisis, solvency crisis, sovereign debt restructuring
    JEL: F34 F53
    Date: 2010–06
  7. By: Magid Maatallah (DPMMS - Statistical Laboratory - University of Cambridge, Financial Mathematics Group / Heriot-Watt university - Heriot-Watt University)
    Abstract: We compare the performance of various hedging strategies for index CDO tranches across a variety of models and hedging methods during the recent credit crisis. Our empirical analysis shows evidence for market incompleteness: a large proportion of the risk in CDO tranches appears to be unhedgeable. We also show that, unlike what is commonly assumed, dynamic models do not necessarily perform better the static models, nor do high-dimensional bottom-up models perform better than simpler top-down models. Moreover, top-down and regression-based hedging would have provided significantly better hedges than bottom-up hedging with single name CDS during the Lehman Brothers default event. Our empirical study also reveals that while significantly large moves -” jumps” -do occur in the CDS, index and tranche spreads, these jumps do not necessarily occur on default dates of index constituents, an observation which contradicts the intuition conveyed by some recently proposed credit risk models.
    Keywords: portfolio credit risk models, default contagion, spread risk, sensitivity-based hedging
    Date: 2010–06–06
  8. By: Laura Alfaro (Harvard Business School, Business, Government and the International Economy Unit); Maggie Chen (George Washington University)
    Abstract: We examine in this paper the differential response of establishments to the global financial crisis, with particular emphasis on the role of foreign direct investment (FDI) in determining micro economic performance. Using a new worldwide dataset that reports the activities of more than 12 million establishments before and after 2008, we investigate how multinationals around the world responded to the crisis relative to local firms. We explore three distinct channels through which FDI affects establishment performance, (i) production linkages, (ii) financial linkages, and (iii) multinational networks. Our analysis shows that while multinational owned establishments performed, on average, better than their local competitors, there is considerable heterogeneity in the role of FDI. First, multinationals located in countries that experienced sharper declines in aggregate output, demand, and credit conditions displayed a greater advantage over local firms. Multinationals headquartered in countries with a greater incidence of the crisis, in contrast, fared less satisfactorily abroad. Second, multinationals that engaged in activities with vertical production linkages or stronger financial constraints exhibited particularly better responses compared to local firms. Finally, being part of a larger multinational network also led to superior economic performance.
    Keywords: global financial crisis, establishment response, foreign direct investment, production linkage, financial linkage, network
    JEL: F2 F1
    Date: 2010–06
  9. By: Mathias Schmit; Lin-Sya Chao
    Abstract: The current financial crisis has caused multi-billion dollar losses and broken a long period of strong and steady growth in the investment management industry. Despite the importance of strategic risks, current management practices tend to cope with them poorly, particularly when facing strategic risks linked to growth. Strategic risks are those exposures that materially affect the capacity of a company to survive. By reviewing literature and exploring how the world's top 50 banks recognize strategic risks in their annual reports, this paper highlights that these risks are not adequately perceived by the financial world and draws lessons from the current situation. Furthermore, this paper suggests a clear definition of strategic risk and shows that uncontrolled growth is a major potential source of strategic risk and increases the vulnerability of an organization. Finally, this paper discusses a number of key factors that need to be taken into account to manage growth risk effectively in order to secure sustainable value growth.
    Date: 2010–04–07
  10. By: Patrick Bolton (Finance and Economics Division, Columbia University Business School); Christopher Harris (Department of Economics, University of Cambridge)
    Abstract: We study a dynamic-contracting problem involving risk sharing between two parties – the Proposer and the Responder – who invest in a risky asset until an exogenous but random termination time. In any time period they must invest all their wealth in the risky asset, but they can share the underlying investment and termination risk. When the project ends they consume their final accumulated wealth. The Proposer and the Responder have constant relative risk aversion R and r respectively, with R > r > 0. We show that the optimal contract has three components: a non-contingent flow payment, a share in investment risk and a termination payment. We derive approximations for the optimal share in investment risk and the optimal termination payment, and we use numerical simulations to show that these approximations offer a close fit to the exact rules. The approximations take the form of a myopic benchmark plus a dynamic correction. In the case of the approximation for the optimal share in investment risk, the myopic benchmark is simply the classical formula for optimal risk sharing. This benchmark is endogenous because it depends on the wealths of the two parties. The dynamic correction is driven by counterparty risk. If both parties are fairly risk tolerant, in the sense that 2 > R > r, then the Proposer takes on more risk than she would under the myopic benchmark. If both parties are fairly risk averse, in the sense that R > r > 2, then the Proposer takes on less risk than she would under the myopic benchmark. In the mixed case, in which R > 2 > r, the Proposer takes on more risk when the Responder’s share in total wealth is low and less risk when the Responder’s share in total wealth is high. In the case of the approximation for the optimal termination payment, the myopic benchmark is zero. The dynamic correction tells us, among other things, that: (i) if the asset has a high return then, following termination, the Responder compensates the Proposer for the loss of a valuable investment opportunity; and (ii) if the asset has a low return then, prior to termination, the Responder compensates the Proposer for the low returns obtained. Finally, we exploit our representation of the optimal contract to derive simple and easily interpretable sufficient conditions for the existence of an optimal contract.
    Date: 2005–07
  11. By: Schellenberg, Grant; Ostrovsky, Yuri
    Abstract: L'Enquête canadienne sur les capacités financières (ECCF), dont les données ont été diffusées par Statistique Canada en décembre 2009, a été conçue pour recueillir de l'information concernant les connaissances, les capacités et les comportements des Canadiens en ce qui a trait à la prise de décisions financières. Outre les données sur les approches de gestion de l'argent et de planification financière, l'ECCF a recueilli des données sur des questions pertinentes dans le contexte des discussions actuelles concernant le système de revenu de retraite du Canada. Par exemple, on a interrogé les répondants retraités au sujet de leur niveau de vie financier à la retraite et on leur a demandé si leur revenu de retraite était suffisant pour payer confortablement leurs factures et respecter leurs obligations financières. On a demandé aux Canadiens en âge de travailler comment ils se préparaient financièrement en vue de la retraite. Le présent compte rendu de recherche présente les faits saillants concernant les questions liées à la retraite, à partir de l'ECCF.
    Keywords: Revenu, pensions, dépenses et richesse, Aînés, Travail et retraite
    Date: 2010–06–08
  12. By: James Chapman; Yinan Zhang
    Abstract: In the Canadian large value payment system an important goal is to understand how liquidity is transferred through the system and hence how efficient the system is in settling payments. Understanding the structure of the underlying network of relationships between participants in the payment system is a crucial step in achieving the goal. The set of nodes in any given network can be partitioned into a number of groups (or "communities"). Usually, the partition is not directly observable and must be inferred from the observed data of interaction flows between all nodes. In this paper we use the statistical model of Copic, Jackson, and Kirman (2007) to estimate the most likely partition in the network of business relationships in the LVTS. Specifically, we estimate from the LVTS transactions data different "communities" formed by the direct participants in the system. Using various measures of transaction intensity, we uncover communities of participants that are based on both transaction amount and their physical locations. More importantly these communities were not easily discernible in previous studies of LVTS data since previous studies did not take into account the network (or transitive) aspects of the data.
    Keywords: Payment, clearing, and settlement systems; Financial stability
    JEL: C11 D85 G20
    Date: 2010

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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