New Economics Papers
on Banking
Issue of 2010‒07‒03
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How Market Power Influences Bank Failures Evidence from Russia By Zuzana Fungacova; Laurent Weill
  2. Market Power in the Russian Banking Industry By Zuzana Fungacova; Laura Solanko; Laurent Weill
  3. The cost-efficiency of French banks By Jimborean, Ramona; Brack, Estelle
  4. Banks and financial intermediation in emerging Asia: reforms and new risks By Madhusudan Mohanty; Philip Turner
  5. Les banques étrangères dans les pays d’Europe Centrale et Orientale : source de vulnérabilité ou facteur de stabilisation By BEURAN, Monica; BRACK, Estelle
  6. Banking and sovereign risk in the euro area By Gerlach, Stefan; Schulz, Alexander; Wolff, Guntram B.
  7. Central bank co-operation and international liquidity in the financial crisis of 2008-9 By William Allen; Richhild Moessner
  8. Kisan Credit Card By Danish Faruqui
  9. Qu’attend-on de la finance mondiale après la crise ? Les quatre commandements oubliés By BRACK, Estelle; SAIDANE, Dhafer
  10. Analytical Solution for Expected Loss of a Collateralized Loan: A Square-root Intensity Process Negatively Correlated with Collateral Value By Satoshi Yamashita; Toshinao Yoshiba
  11. Sovereign Wealth Funds as domestic investors of last resort during crises By Hélène Raymond
  12. Realized Volatility Risk By David E. Allen; Michael McAleer; Marcel Scharth
  13. Microenvironment-specific Effects in the Application Credit Scoring Model By Khudnitskaya, Alesia S.
  14. A systematic approach to multi-period stress testing of portfolio credit risk By Thomas Breuer; Martin Jandačka; Javier Mencía; Martin Summer
  15. Resolving the financial crisis: are we heeding the lessons from the Nordics? By Claudio Borio; Bent Vale; Goeth von Peter
  16. Exposure-Based Cash-Flow-at-Risk for Value-Creating Risk Management under Macroeconomic Uncertainty By Andrén, Niclas; Jankensgård, Håkan; Oxelheim, Lars
  17. Matching for Credit: Risk and Diversification in Thai Microcredit Groups By Christian Ahlin
  18. Do social networks prevent bank runs? By Alfonso Rosa García; Hubert Janos Kiss; Ismael Rodríguez Lara

  1. By: Zuzana Fungacova (BOFIT, Bank of Finland); Laurent Weill (LaRGE Research Center, Université de Strasbourg)
    Abstract: There has been a notable debate in the banking literature on the impact of bank competition on financial stability. While the dominant view sees a detrimental impact of competition on the stability of banks, this view has recently been challenged by Boyd and De Nicolo (2005) who see the reverse effect. The aim of this paper is to contribute to this literature by providing the first empirical investigation of the role of bank competition on the occurrence of bank failures. We analyze this issue based on a large sample of Russian banks over the period 2001-2007 and in line with the previous literature we employ the Lerner index as the metric of bank competition. Our findings clearly support the view that tighter bank competition enhances the occurrence of bank failures. The normative implication of our findings is therefore that measures that increase bank competition could undermine financial stability.
    Keywords: Bank competition, bank failure, Russia.
    JEL: G21 P34
    Date: 2010
  2. By: Zuzana Fungacova (BOFIT, Bank of Finland); Laura Solanko (BOFIT, Bank of Finland); Laurent Weill (LaRGE Research Center, Université de Strasbourg)
    Abstract: The aim of this paper is to analyze bank competition in Russia by measuring the market power of Russian banks and its determinants over the period 2001-2007 with the Lerner index. Earlier studies on bank competition have focused on developed countries whereas this paper contributes to the analysis of bank competition in emerging markets. We find that bank competition has only slightly improved during the period studied. The mean Lerner index for Russian banks is of the same magnitude as those observed in developed countries, which suggests that the Russian banking industry is not plagued by weak competition. Furthermore, we find no greater market power for state-controlled banks nor less market power for foreign-owned banks. We would consequently qualify the procompetitive role of foreign bank entry and privatization. Finally, our analysis of the determinants of market power enables the identification of several factors that influence competition, including market concentration and risk as well as t the nonlinear influence of size.
    Keywords: Market power, bank competition, Russia.
    JEL: G21 P34
    Date: 2010
  3. By: Jimborean, Ramona; Brack, Estelle
    Abstract: The paper addresses the issue of French banks efficiency, compared to their homologous from Europe and the United States. The analysis is realized on a sample formed by the ten biggest banks from France, Germany, Italy, Spain, the United Kingdom and the United States, over the period 1994-2006. The Data Envelopment Analysis (DEA) method is employed. The results show an improvement in cost-efficiency of French and Spanish banks, while in the other countries a decline in cost-efficiency is noted. We proceed to several tests of convergence, showing that inefficient banks have reduced the gap during the period 1994-2006. In a second step analysis, we focus on the factors standing behind the efficiency scores obtained through DEA methodology. These are bank-specific variables, the macro environment, the regulatory regime and the non-bank financial sector development. We use a standard censured Tobit model and show that capitalized, newly established banks, with tighter ratios of Tier 1 capital and operating in a country with a lower GDP per capita record the highest cost-efficiency scores.
    Keywords: Cost-efficiency; Banking systems; Data envelopment analysis
    JEL: C6 L25 C14 D24 G21
    Date: 2010–03
  4. By: Madhusudan Mohanty; Philip Turner
    Abstract: The conventional view is that microeconomic reforms after the 1997-98 Asian financial crisis have greatly strengthened banking systems in Asia. Banks have become better capitalised, external exposures have been reduced and credit risk has been managed more effectively. But this conventional view does not take enough account of the macroeconomic background. A sharp rise in domestic savings, combined with the recent large-scale sterilised intervention and easy monetary policy, has led to very easy financing conditions for banks. Bank credit expanded. Banks have accumulated a large stock of government bonds. How these conditions will change and how this will affect banks in Asia is uncertain. Supervisory authorities therefore need to be sure that the present very liquid position of most banking systems in Asia does not allow significant (but so far only latent) increases in market and credit risk to go undetected.
    Keywords: Banking system, Asia, Financial markets, foreign exchange intervention
    Date: 2010–06
  5. By: BEURAN, Monica; BRACK, Estelle
    Abstract: We study the impact of foreign banks' presence in Central and Eastern Europe's countries on their economic development and on the financial crisis they went through. We show that, despite a certain vulnerability of the domestic banking systems, the consequences of the opening of the banking markets to the foreign banks was globally positive. Thanks to local acquisitions by foreign investors, domestic banks have been recapitalized and transformed into effective and profitable banks with modern methods of risk management. Their access to international financial markets allowed the increase of credit supply and returned this supply less sensitive to domestic shocks. Without this opening the existing financing methods would not have been adequate to the economic development these countries knew the last years. The presence of foreign banks is so identified as a factor of stabilization.
    Keywords: Financial crisis contagion economic development regional integration foreign banks
    JEL: F23 E44 G21
    Date: 2009–10
  6. By: Gerlach, Stefan; Schulz, Alexander; Wolff, Guntram B.
    Abstract: We study the determinants of sovereign bond spreads in the euro area since the introduction of the euro. We show that an aggregate risk factor is a main driver of spreads. This factor also plays an important indirect role for risk spreads through its interaction with the size and structure of national banking sectors. When aggregate risk increases, countries with large banking sectors and low equity ratios in the banking sector experience greater widening in yield spreads, suggesting that financial markets perceive a larger risk that governments will have to rescue banks, increasing public debt and therefore sovereign risk. Moreover, government debt levels and forecasts of future fiscal deficits are also significant determinants of sovereign spreads. --
    Keywords: Sovereign bond markets,banking,liquidity,EMU
    JEL: E43 E44 G12
    Date: 2010
  7. By: William Allen; Richhild Moessner
    Abstract: The financial crisis that began in August 2007 has blurred the sharp distinction between monetary and financial stability. It has also led to a revival of practical central bank co-operation. This paper explains how things have changed. The main innovation in central bank cooperation during this crisis was the emergency provision of international liquidity through bilateral central bank swap facilities, which have evolved to form interconnected swap networks. We discuss the reasons for establishing swap facilities, relate the probability of a country receiving a swap line in a currency to a measure of currency-specific liquidity shortages based on the BIS international banking statistics, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We also discuss the role and effectiveness of swap lines in relieving currency-specific liquidity shortages, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the international liquidity policies of governments and central banks.
    Keywords: Central bank cooperation, central bank swap lines, FX swaps, international liquidity, lender of last resort
    Date: 2010–06
  8. By: Danish Faruqui
    Abstract: Provision of timely and adequate credit has been one of the major challenges for banks in India in dispensation of agricultural and rural credit to the farmers. Constant innovation is required in order to achieve the aim. Agricultural credit cards are not a new concept in the field of agricultural banking in India. The scheme had already been introduced in a number of public sector banks in a few states much earlier. These schemes were niche-marketed and were exclusively preserved for the privileged class of farmers and the small and marginal farmers did not have much access to them. Similarly cash credit facilities were being extended by several public sector banks and cooperative banks to farmers with the view to improving their access to credit. Again this scheme was used only selectively. The KCC scheme was started by the Government of India (GOI) in consultation with the RBI (Reserve Bank of India) and NABARD (National Bank for Agricultural and Rural Development) 1998-99 to join the features of both these schemes and to overcome their shortcomings.[Working Paper No. 0011]
    Keywords: timely, adequate credit, dispensation, India, agricultural, Government of India, NABARD
    Date: 2010
  9. By: BRACK, Estelle; SAIDANE, Dhafer
    Abstract: The recent crisis should not be used to prouve the failure of the entire financial system. Global banking systems are regulated by rules, that have not been applied correctly all over the place. And just one "hole" in the regulatory net is sufficient to make it useless.
    Keywords: Financial crisis; core banking economics; banking model; transparency; state intervention; market discipline
    JEL: L5 G21
    Date: 2010–01
  10. By: Satoshi Yamashita (Associate Professor, The Institute of Statistical Mathematics (E-mail:; Toshinao Yoshiba (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In this study, we derive an explicit solution for the expected loss of a collateralized loan, focusing on the negative correlation between default intensity and collateral value. Three requirements for the default intensity and the collateral value are imposed. First, the default event can happen at any time until loan maturity according to an exogenous stochastic process of default intensity. Second, default intensity and collateral value are negatively correlated. Third, the default intensity and collateral value are non-negative. To develop an explicit solution, we propose a square-root process for default intensity and an affine diffusion process for collateral value. Given these settings, we derive an explicit solution for the integrand of the expected recovery value within an extended affine model. From the derived solution, we find the expected recovery value is given by a Stieltjes integral with a measure-changed survival probability.
    Keywords: stochastic recovery, default intensity model, affine diffusion, extended affine, survival probability, measure change
    JEL: G21 G32 G33
    Date: 2010–06
  11. By: Hélène Raymond
    Abstract: Usual definitions of Sovereign Wealth Funds (SWFs) put emphasis on their foreign investments. But after September 2008, some Sovereign Wealth Funds refrained from foreign investments and intervened to support their home economies during the crisis. We show that the interventions of Sovereign Wealth Funds as domestic “investors of last resort” are far from marginal and that they are not a passing innovation of the last global crisis. We review first the cases of interventions of SWFs as “shareholders of last resort” and differentiate interventions targeted on banks, from more general interventions designed to support non financial firms. We also run some regressions to quantify the impact of Gulf SWFs’ interventions on their home Stock returns and volatility. We find that the interventions of the Kuwaiti SWF were unsuccessful, whereas the Qatari intervention of October 2008 managed to rise effectively the Stock market return in the short run. We then turn to the interventions of SWFs as “lenders of last resort” and insurance funds against major crises. In some cases (Russia, 2009; Australia, 2007-2008) the lending by SWFs is targeted on the home banking sector. SWFs can provide medium term financing to ease the liquidity constraints of banks, whereas Central Banks’ loans are mostly at short term. But the intervention of Saudi Arabian SWF in 2008 was of a different kind, as the lending was targeted on non financial firms to make up for banks’ reluctance to lend and stimulate the economy. Lastly we discuss the role of Sovereign Wealth Funds as insurance funds against major crisis. SWFs may be used for government spending during crises or even intervene on Stock markets to counter speculative attacks, as was illustrated by the interventions of the Singaporean SWF GIC and of the HKMA.
    Date: 2010
  12. By: David E. Allen; Michael McAleer (University of Canterbury); Marcel Scharth
    Abstract: In this paper we document that realized variation measures constructed from high- frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly gaussian, this unpredictability brings considerably more uncertainty to the empirically relevant ex ante distribution of returns. Carefully modeling this volatility risk is fundamental. We propose a dually asymmetric realized volatility (DARV) model, which incorporates the important fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks.
    Keywords: Realized volatility; volatility of volatility; volatility risk; value-at-risk; forecasting; conditional heteroskedasticity
    Date: 2010–05–01
  13. By: Khudnitskaya, Alesia S.
    Abstract: Paper introduces the improved version of a credit scoring model which assesses credit worthiness of applicants for a loan. The scorecard has a two-level multilevel structure which nests applicants for a loan within microenvironments. Paper discusses several versions of the multilevel scorecards which includes random-intercept, random-coefficients and group-level variables. The primary benefit of the multilevel scorecard compared to a conventional scoring model is a higher accuracy of the model predictions.
    Keywords: Credit scoring; Hierarchical clustering; Multilevel model; Random-coefficient; Random-intercept; Monte Carlo Markov chain
    JEL: C53 D14 G21
    Date: 2009–12
  14. By: Thomas Breuer (Research Centre PPE); Martin Jandačka (Research Centre PPE); Javier Mencía (Banco de España); Martin Summer (Oesterreichische Nationalbank)
    Abstract: We propose a new method for analysing multiperiod stress scenarios for portfolio credit risk more systematically than in the current practice of macro stress testing. Our method quantifies the plausibility of scenarios by considering the distance of the stress scenario from an average scenario. For a given level of plausibility our method searches systematically for the most adverse scenario for the given portfolio. This method therefore gives a formal criterion for judging the plausibility of scenarios and it makes sure that no plausible scenario will be missed. We show how this method can be applied to a range of models already in use among stress testing practitioners. While worst case search requires numerical optimisation we show that for practically relevant cases we can work with reasonably good linear approximations to the portfolio loss function that make the method computationally very efficient and easy to implement. Applying our approach to data from the Spanish loan register and using a portfolio credit risk model we show that, compared to standard stress test procedures, our method identifies more harmful scenarios that are equally plausible.
    Keywords: Stress Testing, Credit Risk, Worst Case Search, Maximum Loss
    JEL: G28 G32 G20 C15
    Date: 2010–06
  15. By: Claudio Borio; Bent Vale; Goeth von Peter
    Abstract: How does the management and resolution of the current crisis compare with the response of the Nordic countries in the early 1990s, widely regarded as exemplary? We argue that, while intervention has been prompter, the measures taken so far remain less comprehensive and in-depth. In particular, the cleansing of balance sheets has proceeded more slowly, and less attention has been paid to reducing excess capacity and avoiding competitive distortions. In general, policymakers have given higher priority to sustaining aggregate demand in the short term than to encouraging adjustment in the financial sector and containing moral hazard. We argue that three factors largely explain this outcome: the more international nature of the crisis; the complexity of the instruments involved; and, hardly appreciated so far, the effect of accounting practices on the dynamics of the events, reflecting in particular the prominent role of fair value accounting (and mark to market losses) in relation to amortised cost accounting for loan books. There is a risk that the policies followed so far may delay the establishment of the basis for a sustainably profitable and less risk-prone financial sector.
    Keywords: Crisis management and resolution, principles for successful resolution, Nordic countries, fair value and amortised cost accounting, mark to market losses
    Date: 2010–06
  16. By: Andrén, Niclas (Department of Business Administration); Jankensgård, Håkan (Department of Business Administration); Oxelheim, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: A strategically minded CFO will realize that strategic corporate risk management is about finding the right balance between risk prevention and proactive value generation. Efficient risk and performance management requires adequate assessment of risk and risk exposures on the one hand and performance on the other. Properly designed, a risk measure should provide information on to what extend the firm's performance is at risk, what is causing that risk, the relative importance of non-value-adding and value-adding risk, and the possibilities to use risk management to reduce total risk. In this chapter, we present an approach – exposure-based cash-flow-at-risk – to calculating a firm's downside risk conditional on the firm's exposure to non-value-adding macroeconomic and market risk and to analyzing corporate performance adjusted for the impact of non-value-adding risk.
    Keywords: Cash-flow-at risk; Value at risk; Risk management; Value creation; Total risk
    JEL: E32 G32 G33 G34 M21
    Date: 2010–06–21
  17. By: Christian Ahlin
    Abstract: How has the microcredit movement managed to push financial frontiers? In a context in which borrowers vary in unobservable risk, Ghatak (1999, 2000) shows that group-based, joint liability contracts price for risk more accurately than individual contracts, provided that borrowers match homogeneously by risk-type. This more accurate risk-pricing can attract safe borrowers and rouse an otherwise dormant credit market. We extend the theory to include correlated risk, and show that borrowers will anti-diversify risk within groups, in order to lower chances of facing liability for group members. We directly test risk-matching and intra-group diversification of risk using data on Thai microcredit borrowing groups. We propose a non-parametric univariate methodology for assessing homogeneity of matching; structural multivariate analysis is carried out using Fox's (2008) matching maximum score estimator. We find evidence of a) homogeneous sorting by risk and b) risk anti-diversification within groups, though not along occupational lines. Thus there is evidence that group lending improves risk-pricing in this context and is part of the explanation of the rise in financial intermediation among the poor. However, the anti-diversification results reveal a potentially negative aspect of voluntary group formation and point to limitations of microcredit groups as risk-sharing mechanisms.[Working Paper No. 251]
    Keywords: microcredit, matching, credit markets, adverse selection, risk-sharing
    Date: 2010
  18. By: Alfonso Rosa García (Universidad de Murcia); Hubert Janos Kiss (Universidad Autónoma de Madrid); Ismael Rodríguez Lara (Universidad de Alicante)
    Abstract: We develop, both theoretically and experimentally, a stereotypical environment that allows for coordination breakdown, leading to a bank run. Three depositors are located at the nodes of a network and have to decide whether to keep their funds deposited or to withdraw. One of the depositors has immediate liquidity needs, whereas the other two depositors do not. Depositors act sequentially and observe others actions only if connected by the network. Theoretically, a link connecting the first two depositors to decide is sufficient to avoid a bank run. However, our experimental evidence shows that subjects¿ choice is not affected by the existence of the link per se. Instead, being observed and the particular action that is observed determine subjects¿ choice. Our results highlight the importance of initial decisions in the emergence of a bank run. In particular, Bayesian analysis reveals that subjects clearly depart from predicted behavior when observing a withdrawal.
    Keywords: bank runs, coordination failures, experimental evidence, networks
    JEL: C70 C90 D85 G21
    Date: 2009–10

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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