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on Banking |
| By: | Leonard I. Nakamura; Kasper Roszbach. |
| Abstract: | In this paper, the authors use credit rating data from two Swedish banks to elicit evidence on banks' loan monitoring ability. They test the banks' ability to forecast credit bureau ratings, and vice versa, and show that bank ratings are able to predict future credit bureau ratings. This is evidence that bank credit ratings, consistent with theory, contain valuable private information. However, the authors also find that public ratings have an ability to predict future bank ratings, implying that internal bank ratings do not fully or efficiently incorporate all publicly available information. This suggests that risk analyses by banks or regulators should be based on both internal bank ratings and public ratings. They also document that the credit bureau ratings add information to the bank ratings in predicting bankruptcy and loan default. The methods the authors use represent a new basket of straightforward techniques that enables both financial institutions and regulators to assess the performance of credit ratings systems. |
| Keywords: | Credit ratings ; Risk assessment |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-21&r=ban |
| By: | Samy Ben Naceur (Laboratoire d’Economie et Finance Appliquées (LEFA) and Institut des Hautes Etudes Commerciales (IHEC)); Hichem Ben-Khedhiri; Barbara Casu |
| Abstract: | In the past two decades, both developed and developing countries have deregulated their banking and financial systems with the aim of improving the efficiency, productivity and profitability of the sectors and increasing international competitiveness. This study attempts to examine the effect of institutional and financial variables on the banking industry performance of selected Middle Eastern and North African (MENA) countries. Evaluating bank efficiency in a non-parametric setting (Data Envelopment Analysis, DEA), we then employ a second-stage Tobit regression to investigate the impact of regulatory variables on banks’ efficiency. The first stage indicates that Morocco and Tunisia have more efficient banking systems compared to the other selected MENA countries, although banks in Jordan seem to catch up with best practice from 2003 onwards. The Tobit regressions show a robust association of some environmental measures with cost efficiency. In this context, our results reveal that higher bank efficiency in our sample is influenced by the quality of the legal system, well capitalized and liquid banks. We also find that banking sector development measured by credit to private sector by banks in low regulated environments—like the one in our sample countries—tends to reduce bank efficiency. However, the impact of stock market development is positive and significant in all specification confirming the complementary role of bank and capital market. Besides, a highly concentrated banking sector in our sample reduces significantly the efficiency of banks. Finally, efficiency is improving in our sample thanks to the financial reforms variables not accounted for in our control variables and Egyptian banks display the lowest efficiency in the region for the entire sample period. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:499&r=ban |
| By: | Christiano Arrigoni Coelho (Banco Central do Brasil e Department of Economics PUC-Rio); João Manoel Pinho de Mello (Department of Economics PUC-Rio); MArcio Gomes Pinto Garcia (Department of Economics PUC-Rio) |
| Abstract: | Using the different response timings of credit demand and supply, we isolate supply shifts after monetary policy shocks. We show that the bank lending channel exists in Brazil: after an increase (decrease) in the basic interest rate (Selic), banks reduce (increase) the quantity of new loans and raise (lower) interest rates. However, contrary to the empirical literature for the US, we find evidence that large banks react more than smaller ones to monetary policy shocks. Results may have important implications for monetary policy transmission in light of the recent wave of concentration in the Brazilian banking industry. |
| Keywords: | monetary policy transmission; credit markets; bank lending channel. JEL Code: E52; E58 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:574&r=ban |
| By: | Canan Yildirim (Kadir Has University) |
| Abstract: | This paper analyzes the role of moral hazard and corporate governance structures in bank failures within the context of the 2000-2001 currency and financial crises experienced in Turkey. The findings suggest that poor performers with lower earnings potential and managerial quality, and hence lower franchise value, were more likely to respond to moral hazard incentives provided by the regulatory failures and full coverage deposit insurance system. The findings also suggest that ownership and control variables are significantly related to the probability of failure. Privately owned Turkish commercial banks were more likely to fail. Moreover, among the privately owned Turkish commercial banks, the existence of family involvement on the board increased the probability of failure. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:486&r=ban |
| By: | Mandira Sarma; Yuko Nikaido |
| Abstract: | In this paper an analytical review of the capital adequacy regime and the present state of capital to risk-weighted asset ratio (CRAR) of the banking sector in India has been presented. In the current regime of Basel I, Indian banking system is performing reasonably well, with an average CRAR of about 12 per cent, which is higher than the internationally accepted level of 8 per cent as well as India’s own minimum regulatory requirement of 9 per cent. As the revised capital adequacy norms, Basel II, are being implemented from March 2008, several issues emerge. These issues from the Indian perspective has been examined.[Working Paper No. 196] |
| Keywords: | Capital Adequacy Ratio, Basel I, Basel II, Reserve Bank of India, SMEs lending |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2559&r=ban |
| By: | Christiano Arrigoni Coelho (Banco Central do Brasil e Department of Economics PUC-Rio); Bruno Funchal (FUCAPE Business School); João Manoel Pinho de Mello (Department of Economics PUC-Rio) |
| Abstract: | In 2004, Brazil provided an interesting natural experiment concerning personal credit. A new law was enacted allowing banks to offer loans with repayment through automatic payroll or social security benefit deduction, thus removing a significant part of the moral hazard problem by eliminating the choice of default when debtors are able to pay their loans out of their wages. We estimate the impact of the new law using car loans as a control group. We find that, at the industry level, the new law has caused a reduction in interest rates and an increase in the volume of personal credit. |
| Keywords: | Credit markets, collateral, difference-in-differences. JEL Code: G21; D01; C33; K00; E44. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:573&r=ban |
| By: | Panagiotis Liargovas; Spyridon Repousis |
| Abstract: | This paper investigates the reaction of Greek banks’ stocks to three major international terrorist events (September 11 2001 attacks in New York, Madrid train bombing in March 11, 2004 and London train bombing in July 7, 2005). Using event study methodology and market model, this study finds out that of the three terrorist attacks, only September 11th resulted in significant abnormal returns in the Greek bank stocks. Positive and negative excess returns indicate that the Athens Stock Exchange may have overreacted to the terrorist attacks and pre-event negative excess returns may have driven by expectation of an impending anomaly. Several reasons may be responsible for these results but September 11th was more catastrophic due to the dominant position of USA economy worldwide. index. |
| Keywords: | Terrorism, stock returns, banks, Event Study, Efficient markets |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:uop:wpaper:0050&r=ban |
| By: | E. Luciano |
| Abstract: | This paper examines a new model of credit risk measurement, the Variance Gamma- Merton one, which seems to be adequate for describing single default occurrence and default correlation in turbulent times. It is based on the notion of business time. Business time runs faster than calendar time when the market is very active and a lot of information arrives; it runs at a slower pace than calendar time when few information arrives. We report a calibration to USA spread data, which shows the accurateness of the model at the single default level; we also compare the perfeormance wrt a traditional structural model at the joint default level. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpmath:16-2010&r=ban |
| By: | Christophe J. Godlewski (LaRGE Research Center, Université de Strasbourg); Bulat Sanditov (University of Maastricht); Thierry Burger-Helmchen (BETA Research Center, Université de Strasbourg) |
| Abstract: | We investigate the network structure of syndicated lending markets and evaluate the impact of lenders’ network centrality, considered as measures of their experience and reputation, on borrowing costs. We show that the market for syndicated loans is a “small world” characterized by large local density and short social distances between lenders. Such a network structure allows for better information and resources flows between banks thus enhancing their social capital. We then show that lenders’ experience and reputation play a significant role in reducing loan spreads and thus increasing borrower’s wealth. |
| Keywords: | Agency costs, bank syndicate, experience, loan syndication, reputation, small world, social network analysis. |
| JEL: | G21 G24 L14 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2010-07&r=ban |
| By: | Domenico Delli Gatti; Mauro Gallegati; Bruce Greenwald; Alberto Russo; Joseph E. Stiglitz |
| Abstract: | We model a network economy with three sectors: downstream firms, upstream firms, and banks. Agents are linked by productive and credit relationships so that the behavior of one agent influences the behavior of the others through network connections. Credit interlinkages among agents are a source of bankruptcy diffusion: in fact, failure of fulfilling debt commitments would lead to bankruptcy chains. All in all, the bankruptcy in one sector can diffuse to other sectors through linkages creating a vicious cycle and bankruptcy avalanches in the network economy. Our analysis show how the choices of credit supply by both banks and firms are interrelated. While the initial impact of monetary policy is on bank behaviour, we show the interactive play between the choices made by banks, the choices made by firms in their role as providers of credit, and the choices made by firms in their role as producers. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1006.3521&r=ban |
| By: | Patrick Bolton; Christopher Harris |
| 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. |
| JEL: | D86 G22 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16094&r=ban |
| By: | Konstantinos Spiliopoulos; Richard B. Sowers |
| Abstract: | We consider the effect of recovery rates on a pool of credit assets. We allow the recovery rate to depend on the defaults in a general way. Using the theory of large deviations, we study the structure of losses in a pool consisting of a continuum of types. We derive the corresponding rate function and show that it has a natural interpretation as the favored way to rearrange recoveries and losses among the different types. Numerical examples are also provided. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1006.2711&r=ban |
| By: | Javier Bianchi; Enrique G. Mendoza |
| Abstract: | We study overborrowing and financial crises in an equilibrium model of business cycles and asset prices with collateral constraints. Private agents in a decentralized competitive equilibrium do not internalize the effects of their individual borrowing plans on the market price of assets at which collateral is valued and on the wage costs relevant for working capital financing. Compared with a constrained social planner who internalizes these effects, they undervalue the benefits of an increase in net worth when the constraint binds and hence they borrow "too much" ex ante. Quantitatively, average debt and leverage ratios are only slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises is much larger. Excess asset returns, Sharpe ratios and the market price of risk are also much larger. A state-contingent tax on debt of about 1 percent on average supports the planner's allocations as a competitive equilibrium and increases social welfare. |
| JEL: | D62 E32 E44 F32 F41 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16091&r=ban |