New Economics Papers
on Banking
Issue of 2010‒07‒10
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Lessons from Japan's Banking Crisis, 1991–2005 By Fujii, Mariko; Kawai, Masahiro
  2. Interbank overnight interest rates - gains from systemic importance By Q. Farooq Akram; Casper Christophersen
  4. "Three Futures for Postcrisis Banking in the Americas: The Financial Trilemma and the Wall Street Complex" By Gary A. Dymski
  5. I.T. Investment and intangibles: evidence from banks By Alfredo Martín-Oliver; Vicente Salas-Fumás
  6. Identifying VARs through Heterogeneity: An Application to Bank Runs By De Graeve, Ferre; Karas, Alexei
  7. Financial Turmoil in the Banking Sector and the Asian Lamfalussy Process: The Case of Four Economies By Hsu, Chen-Min; Liao, Chih-Feng
  8. Liquidity Risk, Credit Risk and the Overnight Interest Rate Spread: A Stochastic Volatility Modelling Approach By John Beirne; Guglielmo Maria Caporale; Nicola Spagnolo
  9. A Dynamical Model for Forecasting Operational Losses By Marco Bardoscia; Roberto Bellotti
  10. Safety-First and Portfolio Selection: An Econometric Study for Pakistan's Banking Sector By J L Ford; Zahid Muhammad
  11. A parsimonious default prediction model for Italian SMEs By Chiara Pederzoli; Costanza Torricelli
  12. Bank lending networks, experience, reputation, and borrowing costs. By Christophe J. Godlewski; Bulat Sanditov; Thierry Burger-Helmchen
  13. Self-Fulfilling Risk Panics By Philippe Bacchetta; Cédric Tille; Eric van Wincoop
  14. Testing for Contagion: a Time-Scale Decomposition By Andrea Cipollini; Iolanda Lo Cascio

  1. By: Fujii, Mariko (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: The Japanese government's response to the financial crisis in the 1990s was late, unprepared and insufficient; it failed to recognize the severity of the crisis, which developed slowly; faced no major domestic or external constraints; and lacked an adequate legal framework for bank resolution. Policy measures adopted after the 1997–1998 systemic crisis, supported by a newly established comprehensive framework for bank resolution, were more decisive. Banking sector problems were eventually resolved by a series of policies implemented from that period, together with an export-led economic recovery. Japan's experience suggests that it is vital for a government not only to recapitalize the banking system but also to provide banks with adequate incentives to dispose of troubled assets from their balance sheets, even if that required the government to mobilize regulatory measures to do so, as was done in Japan in 2002. Economic stagnation can cause new nonperforming loans to emerge rapidly, and deplete bank capital. If the authorities do not address the banking sector problem promptly, then the crisis will prolong and economic recovery will be substantially delayed.
    Keywords: japan banking crisis; 1990s; bank capital; financial regulation
    JEL: G21 G28
    Date: 2010–06–29
  2. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Casper Christophersen (Norges Bank (Central Bank of Norway))
    Abstract: We study overnight interbank interest rates paid by banks in Norway over the period 2006-2009. We observe large variations in interest rates across banks and over time. During the financial crisis, the interest rates are found to be substantially below indicative quotes of interest rates provided by major banks. Our econometric model attributes the interest rate variation partly to differences in banks' characteristics including relative size and connectedness, implying favorable terms for banks of systemic importance. Moreover, interest rates are found to depend not only on overall liquidity in the interbank market, but possibly on its distribution among banks as well, suggesting exploitation of market power by banks with surplus liquidity. There is also evidence of stronger effects on interest rates of systemic importance, credit ratings and liquidity demand and supply since the start of the current financial crisis.
    Keywords: Interbank money market, Interest rates, Systemic importance
    JEL: G21 E42 E43 E58
    Date: 2010–06–30
  3. By: Max Bruche (CEMFI, Centro de Estudios Monetarios y Financieros); Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Due to limited liability, banks that are essentially insolvent may have incentives to roll over bad loans as a gamble for resurrection, even though it is socially inefficient to do so. This paper considers the problem of making such banks remove and/or foreclose bad loans, when the proportion of loans on a bank's balance sheet that has gone bad is private information. The private information implies that many plausible schemes are likely to generate widfall gains for bank equity holders, which is undesirable. We propose a scheme with voluntary participation, under which banks (i) reveal the proportion of bad loans on their balance sheet, (ii) remove or foreclose them, and (iii) bank equity holders are no better off than they would be in the absence of the scheme, that is, the scheme produces no windfall gains for bank equity holders.
    Date: 2010–03
  4. By: Gary A. Dymski
    Abstract: This would seem an opportune moment to reshape banking systems in the Americas. But any effort to rethink and improve banking must acknowledge three major barriers. The first is a crisis of vision: there has been too little consideration of what kind of banking system would work best for national economies in the Americas. The other two constraints are structural. Banking systems in Mexico and the rest of Latin America face a financial regulation trilemma, the logic and implications of which are similar to those of smaller nations’ macroeconomic policy trilemma. The ability of these nations to impose rules that would pull banking systems in the direction of being more socially productive and economically functional is constrained both by regional economic compacts (in the case of Mexico, NAFTA) and by having a large share of the domestic banking market operated by multinational banks. For the United States, the structural problem involves the huge divide between Wall Street megabanks and the remainder of the U.S. banking system. The ambitions, modes of operation, and economic effects of these two different elements of U.S. banking are quite different. The success, if not survival, of one element depends on the creation of a regulatory atmosphere and set of enabling federal government subsidies or supports that is inconsistent with the success, or survival, of the other element.
    Keywords: Banking; Financial Crisis; Trilemma; Wall Street; Mexico; United States; Financial Regulation; Megabanks; Regional Compacts; NAFTA
    JEL: E5 F3 G1 G2 O1 P5
    Date: 2010–06
  5. By: Alfredo Martín-Oliver (Banco de España); Vicente Salas-Fumás (Universidad de zaragoza)
    Abstract: This paper models the investment behaviour of a multi-asset firm with market power that accumulates valuable intangible assets to complement the IT capital. The investment model is estimated using data from Spanish banks on assets of different nature: material (branches, financial), immaterial (advertising and IT) and intangible (training of workers). The paper estimates that the representative bank spends five additional Euros per Euro invested in IT-related assets in complementary intangible assets or, equivalently, intangibles amount to approximately 10% of the economic value of the representative bank. The remaining economic value is distributed between 28% from rents attributed to market power, and 62% to the cost of market-purchased assets.
    Keywords: multi-asset firm, investment, intangible assets, banks
    JEL: G21 D92
    Date: 2010–06
  6. By: De Graeve, Ferre (Research Department, Central Bank of Sweden); Karas, Alexei (Roosevelt Academy)
    Abstract: We propose to incorporate cross-sectional heterogeneity into structural VARs. Heterogeneity provides an additional dimension along which one can identify structural shocks and perform hypothesis tests. We provide an application to bank runs, based on microeconomic deposit market data. We impose identification restrictions both in the cross-section (across insured and non-insured banks) and across variables (as in macro SVARs). We thus (i) identify bank runs, (ii) quantify the contribution of competing theories, and, (iii) evaluate policies such as deposit insurance. The application suggests substantial promise for the approach and has strong policy implications.
    Keywords: Identification; SVAR; panel-VAR; Heterogeneity; Bank run
    JEL: C30 E50 G21
    Date: 2010–07–01
  7. By: Hsu, Chen-Min (Asian Development Bank Institute); Liao, Chih-Feng (Asian Development Bank Institute)
    Abstract: This paper investigates the prevailing financial regulatory structures and impact of the current financial turmoil on banking performance in four economies: the People's Republic of China (PRC); Hong Kong China; Singapore; and Taipei,China. Both the PRC and Hong Kong, China operate under a fragmented financial regulatory structure, while Singapore and Taipei,China have integrated structures. We examine the role of an integrated financial regulatory structure in helping financial institutions mitigate the impact of the financial crisis, using financial indicators of banks' capital structure and operating performance in these four economies between 2003 and 2008. Our analysis of the indicators reveals that banking performance under a fragmented financial regulatory structure is not worse than under integrated regulation. This implies that financial regulatory structure is not the main reason why Asian financial institutions suffered only limited losses from the current global financial crisis. However, given the growing complexity of the global financial system, and the relative weakness of current financial regulatory structures in Asia, this paper suggests that East Asian governments should refer to the Lamfalussy Process in the European Union and set up an Asia Financial Stability Dialogue to facilitate policy coordination for regional financial sector stability and development.
    Keywords: asian financial regulation; global financial crisis; asian banking; prc; asian financial institutions; asian financial sector
    JEL: F42 G18 G21
    Date: 2010–06–28
  8. By: John Beirne; Guglielmo Maria Caporale; Nicola Spagnolo
    Abstract: In this paper we model the volatility of the spread between the overnight interest rate and the central bank policy rate (the policy spread) for the euro area and the UK during the two main phases of the financial crisis that began in late 2007. During the crisis, the policy spread exhibited signs of volatility, owing to the breakdown in interbank market activity. The determinants of this volatility are assessed using Stochastic Volatility models to gauge the role played by liquidity risk, credit risk (financial and sovereign), and interest rate expectations. Our results suggest that liquidity risk is the main determinant of the volatility of the policy spread, but also that private bank credit risk has become more apparent in the post-Lehman collapse phase of the crisis for the euro area as financial CDS premia rose due to possible default fears. In addition, the ECB appears to have been more effective in addressing liquidity risk since the onset of the crisis, and this may be related to its greater direct access to a broader range of counterparties and its acceptance of a broader range of eligible collateral. The main implication is that, in crisis times, a sufficiently flexible operational framework for monetary policy implementation produces the most timely response to market tensions.
    Keywords: Overnight Interest Rate Spread, Liquidity Risk, Credit Risk, Stochastic Volatility
    JEL: C32 E52 E58
    Date: 2010
  9. By: Marco Bardoscia; Roberto Bellotti
    Abstract: A novel dynamical model for the study of operational risk in banks is proposed. The equation of motion takes into account the interactions among different bank's processes, the spontaneous generation of losses via a noise term and the efforts made by the banks to avoid their occurrence. A scheme for the estimation of some parameters of the model is illustrated, so that it can be tailored on the internal organizational structure of a specific bank. We focus on the case in which there are no causal loops in the matrix of couplings and exploit the exact solution to estimate also the parameters of the noise. The scheme for the estimation of the parameters is proved to be consistent and the model is shown to exhibit a remarkable capability in forecasting future cumulative losses.
    Date: 2010–06
  10. By: J L Ford; Zahid Muhammad
    Abstract: A.D. Roy's original formulation of the Safety-First Principle is used to derive models of the portfolio composition of the banking sector in Pakistan. To estimate the models we use data for 1964-2005 and for 2005-2008 for forecasting. Various models are estimated, wherein loads are segrated into their various classes, with and without restrictions implied by the theory, such as symmetry on asset characteristics and the equivalent of Engel conditions. The best specification of the system of asset demand equations is a dynamic version which allows for adjustment costs or adjustment constraints in the alignment of the portfolio. It is also demonstrated that a model that diaggregates the various types of bank loans dominates one wherein they are treated as perfect substitutes. The superior model provides information on the complements and the substitutes amongst the assets that conforms to economic intuition. That model also fits the data well.
    Keywords: Safety-First Principle, asset demand equations, symmetry, homogeneity, adding-up constraints, dynamic adjustment, disaggregation versus aggregation of loans
    JEL: G11 G21
    Date: 2010–06
  11. By: Chiara Pederzoli; Costanza Torricelli
    Abstract: In the light of the fundamental role played by small and medium enterprises (SMEs) in the economy of many countries including Italy and of the specific treatment of this issue within the Basel II regulation, the aim of this work is to build a default prediction model for the Italian SMEs. Specifically, we develop a logit model based on financial ratios: using the AIDA database, we focus the attention on a specific region in Italy, Emilia Romagna, where SMEs represent the firms’ majority . We find that a parsimonious model based on only four explanatory variables fits well the default data.
    Keywords: credit default prediction; SMEs; Basel II
    JEL: G28 G31
    Date: 2010–06
  12. By: Christophe J. Godlewski; Bulat Sanditov; Thierry Burger-Helmchen
    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
  13. By: Philippe Bacchetta; Cédric Tille; Eric van Wincoop
    Abstract: Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price. This link implies that risk about tomorrow's asset price depends on uncertainty about risk tomorrow. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and self-fulfilling shifts in risk. We show that this can generate risk panics. The impact of the panic is larger when the shift from a low to a high risk equilibrium takes place in an environment of weak fundamentals. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can account well for the developments during the recent financial crisis.
    JEL: E44 G11 G12
    Date: 2010–07
  14. By: Andrea Cipollini; Iolanda Lo Cascio
    Abstract: The aim of the paper is to test for ¯nancial contagion by estimating a simultaneous equation model subject to structural breaks. For this purpose, we use the Maximum Overlapping Discrete Wavelet Transform, MODWT, to decompose the covariance matrix of four asset returns on a scale by scale basis. This decomposition will enable us to identify the structural form model and to test for spillover e®ects between country speci¯c shocks during a crisis period. We distinguish between the case of the structural form model with a single dummy and the one with multiple dummies capturing shifts in the co-movement of asset returns occurring during periods of ¯nancial turmoil. The empirical results for four East Asian emerging stock markets show that, once we account for interdependence through an (unobservable) common factor, there is hardly any evidence of contagion during the 1997-1998 financial turbulence.
    Keywords: wavelets; simultaneous equations model; financial contagion
    JEL: C30 C51 G15
    Date: 2010–06

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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