New Economics Papers
on Banking
Issue of 2010‒07‒17
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Resolution of Banking Crises: The Good, the Bad, and the Ugly By Luc Laeven; Fabian Valencia
  2. U.S. Bank Behavior in the Wake of the 2007-2009 Financial Crisis By Adolfo Barajas; Ralph Chami; Dalia Hakura; Thomas F. Cosimano
  3. Measuring the effect of virtual mergers on banks’ efficiency levels:A non parametric analysis By Halkos, George; Tzeremes, Nickolaos
  4. Banking Efficiency and Financial Development in Sub-Saharan Africa By Sandrine Kablan
  5. Financial Connections and Systemic Risk By Franklin Allen; Ana Babus; Elena Carletti
  6. Funding liquidity risk: definition and measurement By Mathias Drehmann; Kleopatra Nikolaou
  7. Monetary Policy and Risk Taking By Ignazio Angeloni
  8. Systemic risk in the financial sector; A review and synthesis By Michiel Bijlsma; Jeroen Klomp; Sijmen Duineveld
  9. The determinants of cross-border bank flows to emerging markets: new empirical evidence on the spread of financial crises By Sabine Herrmann; Dubravko Mihaljek
  10. Dynamic provisioning: Some lessons from existing experiences By Santiago Fernández de Lis; Alicia Garcia Herrero
  11. Parallel Journeys: Adam Smith and Milton Friedman on the Regulation of Banking By Hugh Rockoff
  12. Three Essays on Liquidity Crisis, Monetary Policy, and Banking Regulation By Cao, Jin
  13. International Transmission of Bank and Corporate Distress By Hiroko Oura; Papa M'B. P. N'Diaye; Qianying Chen; Dale F. Gray; Natalia T. Tamirisa
  14. The Consequences of Banking Crises for Public Debt By Davide Furceri; Aleksandra Zdzienicka-Durand
  15. The Impact of Banking Sector Stability on the Real Economy By Monnin, Pierre; Jokipii, Terhi
  16. Daytime is money By Kraenzlin, Sébastien; Nellen, Thomas
  17. Dynamic Loan Loss Provisions in Uruguay: Properties, Shock Absorption Capacity and Simulations Using Alternative Formulas By Torsten Wezel

  1. By: Luc Laeven; Fabian Valencia
    Abstract: This paper presents a new database of systemic banking crises for the period 1970-2009. While there are many commonalities between recent and past crises, both in terms of underlying causes and policy responses, there are some important differences in terms of the scale and scope of interventions. Direct fiscal costs to support the financial sector were smaller this time as a consequence of swift policy action and significant indirect support from expansionary monetary and fiscal policy, the widespread use of guarantees on liabilities, and direct purchases of assets. While these policies have reduced the real impact of the current crisis, they have increased the burden of public debt and the size of government contingent liabilities, raising concerns about fiscal sustainability in some countries.
    Date: 2010–06–17
  2. By: Adolfo Barajas; Ralph Chami; Dalia Hakura; Thomas F. Cosimano
    Abstract: The paper examines the slowdown of lending by large U.S. banks over the period 2007Q3 - 2009Q2, focusing on: (i) whether capital or liquidity was the binding constraint; (ii) factors influencing banks’ decision to hold capital; and (iii) their pricing behavior. Using quarterly data for the largest U.S. banks, the paper finds that capital, rather than liquidity, constrained lending. Banks took actions to increase capital by slowing lending and raising profit margins, not fully passing through the Federal Reserve’s interest rate cuts. Banks optimally choose capital based on the expected future demand for loans and the marginal cost of capital.
    Date: 2010–05–28
  3. By: Halkos, George; Tzeremes, Nickolaos
    Abstract: This study illustrates how the recent developments in efficiency analysis and statistical inference can be applied when evaluating banks’ performance issues from a potential merger. By using a sample of 29 Greek commercial banks the paper provides a six step procedure in order to evaluate whether a potential bank merger can exhibit economies of scale and characterized as favorable.
    Keywords: Data Envelopment Analysis; Bootstrap techniques; Virtual Mergers; Bank efficiency.
    JEL: C14 C61 C67 G21 C60
    Date: 2010–03–13
  4. By: Sandrine Kablan
    Abstract: This study assesses the determinants of banking system efficiency in sub-Saharan Africa (SSA) and asks what, besides the degree of efficiency, explains the low level of financial development in the region. It uses stochastic frontier analysis to measure efficiency and a generalized method of moments system to explain financial development. SSA banks are found to be generally cost-efficient, but nonperforming loans undermine efficiency, which suggests that improvement in the regulatory and credit environments should improve efficiency. The political and the economic environment have held back financial development in SSA.
    Keywords: Banking systems , Banks , Cross country analysis , Development , Economic models , Financial management , Sub-Saharan Africa ,
    Date: 2010–05–17
  5. By: Franklin Allen; Ana Babus; Elena Carletti
    Abstract: We develop a model where institutions form connections through swaps of projects in order to diversify their individual risk. These connections lead to two different network structures. In a clustered network groups of financial institutions hold identical portfolios and default together. In an unclustered network defaults are more dispersed. With long term finance welfare is the same in both networks. In contrast, when short term finance is used, the network structure matters. Upon the arrival of a signal about banks’ future defaults, investors update their expectations of bank solvency. If their expectations are low, they do not roll over the debt and there is systemic risk in that all institutions are early liquidated. We compare investors’ rollover decisions and welfare in the two networks.
    Date: 2010
  6. By: Mathias Drehmann; Kleopatra Nikolaou
    Abstract: Funding liquidity risk has played a key role in all historical banking crises. Nevertheless, a measure based on publicly available data remains so far elusive. We address this gap by showing that aggressive bidding at central bank auctions reveals funding liquidity risk. We can extract an insurance premium from banks' bids which we propose as measure of funding liquidity risk. Using a unique data set consisting of all bids in the main refinancing operation auctions conducted at the ECB between June 2005 and October 2008 we find that funding liquidity risk is typically stable and low, with occasional spikes, especially around key events during the recent crisis. We also document downward spirals between funding liquidity risk and market liquidity. As measurement without clear definitions is impossible, we initially provide definitions of funding liquidity and funding liquidity risk.
    Keywords: funding liquidity, liquidity risk, bidding behavior, central bank auctions, interbank markets
    Date: 2010–07
  7. By: Ignazio Angeloni
    Abstract: In this paper Bruegel Visiting Scholar Ignazio Angeloni (European Central Bank), Ester Faia (Goethe University Frankfurt, Kiel IfW and CEPREMAP)  and Marco Lo Duca (European Central Bank) examine the links between monetary policy, financial risk and the business cycle, combining data evidence and a new DSGE model with banks. The model includes banks (modeled as in Diamond and Rajan, JF 2000 and JPE 2001) and a financial accelerator (Bernanke et al., 1999 Handbook). A monetary expansion increases the propensity of banks to assume risks. In turn, financial risks affect economic activity and prices. This "risk-taking" channel of monetary transmission, absent in pure financial accelerator models, operates via the leverage decisions of banks. The model results match certain features of the data, as emerged in recent panel data studies and in our own time series estimates for the US and the euro area.
    Date: 2010–02
  8. By: Michiel Bijlsma; Jeroen Klomp; Sijmen Duineveld
    Abstract: The financial crisis has put systemic risk firmly on the policy agenda. In such a crisis, an initial shock gets amplified while it propagates to other financial intermediaries, ultimately disrupting the financial sector. We review the literature on such amplification mechanisms which create externalities from risk taking. We distinguish between two classes of mechanisms: contagion within the financial sector and pro-cyclical connection between the financial sector and the real economy. Regulation can diminish systemic risk by reducing these externalities. However, regulation of systemic risk faces several problems. First, systemic risk and its costs are difficult to quantify. Second, banks have strong incentives to evade regulation meant to reduce systemic risk. Third, regulators are prone to forbearance. Finally, the inability of governments to commit not to bail out systemic institutions creates moral hazard and reduces the market’s incentive to price systemic risk. Strengthening market discipline can play an important role in addressing these problems, because it reduces the scope for regulatory forbearance, does not rely on complex information requirements, and is difficult to manipulate.
    Keywords: Financial markets; Contagion; Systemic risk
    JEL: G28
    Date: 2010–07
  9. By: Sabine Herrmann; Dubravko Mihaljek
    Abstract: This paper studies the nature of spillover effects in bank lending flows from advanced to the emerging market economies and identifies specific channels through which such effects occur. Based on a gravity model we examine a panel data set on cross-border bank flows from 17 advanced to 28 emerging market economies in Asia, Latin America and central and eastern Europe from 1993 to 2008. The empirical analysis suggests that global as well as country specific factors are significant determinants of cross-border bank flows. Greater global risk aversion and expected financial market volatility seem to have been the most important factors behind the decrease in cross-border bank flows during the crisis of 2007-08. The decrease in cross-border loans to central and eastern Europe was more limited compared to Asia and Latin America, in large measure because of the higher degree of financial and monetary integration in Europe, and relatively sound banking systems in the region. These results are robust to various specification, sub-samples and econometric methodologies.
    Keywords: gravity model, cross-border bank flows, financial crises, emerging market economies, spillover effects, panel data
    Date: 2010–07
  10. By: Santiago Fernández de Lis; Alicia Garcia Herrero
    Abstract: After analyzing the different reasons why the financial system and also the regulatory framework induced procyclicality, this paper reviews the experiences of three countries which have introduced dynamic provisioning as a regulatory tool to limit procyclicality. The case of Spain—the country with the longest experience—is reviewed as well as those of Colombia having recently adopted dynamic provisioning. A number of policy lessons are drawn from that comparison.
    Keywords: Financial Stability, banking regulation, dynamic provisioning, Spain, Peru
    JEL: E32 G21 G28 G32
    Date: 2010–05
  11. By: Hugh Rockoff (Rutgers)
    Abstract: Adam Smith and Milton Friedman are famous for championing Laissez Faire, yet both supported government regulation of the banking system. In both cases their deviation from free market orthodoxy was based on a careful reading of financial history: especially Smith's reading of the Crisis of 1772 and Friedman's reading of the Crisis of 1929-33. In both cases they based their reading on a complex and nuanced account of human nature. This paper describes their parallel journeys to the conclusion that banking requires government regulation.
    Keywords: banking, Adam Smith, Milton Friedman
    JEL: B10
    Date: 2010–03–19
  12. By: Cao, Jin
    Date: 2010–02–10
  13. By: Hiroko Oura; Papa M'B. P. N'Diaye; Qianying Chen; Dale F. Gray; Natalia T. Tamirisa
    Abstract: The paper evaluates how increases in banks’ and nonfinancial corporates’ default risk are transmitted in the global economy, using in a vector autoregression model for 30 advanced and emerging economies for the period from January 1996 to December 2008. The results point to two-way causality between bank and corporate distress and to significant global macroeconomic and financial spillovers from either type of distress when it originates in a systemic economy. Corporate distress in advanced economies has a larger impact on economic growth in emerging economies than bank distress in advanced economies has. In contrast, activity in advanced economies is more vulnerable to bank distress than to corporate distress.
    Keywords: Banking sector , Corporate sector , Credit risk , Developed countries , Economic models , Emerging markets , Financial risk , Spillovers ,
    Date: 2010–05–20
  14. By: Davide Furceri (OCDE - Organisation de coopération et de développement économiques - OCDE); Aleksandra Zdzienicka-Durand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: The aim of this paper is to assess the consequences of banking crises for public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises are associated with a significant and long- lasting increase in government debt. The effect is a function of the severity of the crisis. In particular, we find that for severe crises, comparable to the most recent one in terms of output losses, banking crises are followed by a medium-term increase of about 37 percentage points in the government gross debt-to-GDP ratio. We also find that the debt ratio increased more in countries with a worse initial fiscal position (in terms of the gross debt-to-GDP ratio) and with a higher share of foreign debt.
    Keywords: Output Growth, Financial Crisis, CEECs
    Date: 2010
  15. By: Monnin, Pierre (Swiss National Bank); Jokipii, Terhi (Swiss National Bank)
    Abstract: This article studies the relationship between the degree of banking sector stability and the subsequent evolution of real output growth and inflation. Adopting a panel VAR methodology for a sample of 18 OECD countries, we find a positive link between banking sector stability and real output growth. This finding is predominantly driven by periods of instability rather than by very stable periods. In addition, we show that an unstable banking sector increases uncertainty about future output growth. No clear link between banking sector stability and inflation seems to exist. We then argue that the link between banking stability and real output growth can be used to improve output growth forecasts. Using Fed forecast errors, we show that banking sector stability (instability) results in a significant underestimation (overestimation) of GDP growth in the subsequent quarters.
    Keywords: Banking sector stability; real output growth; output growth forecasts
    JEL: E20 E44 G21
    Date: 2010–04–01
  16. By: Kraenzlin, Sébastien (Swiss National Bank); Nellen, Thomas (Swiss National Bank)
    Abstract: Based on real-time trade data from the Swiss franc overnight interbank repo market and SIX Interbank Clearing (SIC) – the Swiss real-time gross settlement (RTGS) system – we are able to gain valuable insights on the daytime value of money and its determinants: First, an implicit hourly interbank interest rate can be derived from the intraday term structure of the overnight rate. We thereby provide evidence that an implicit intraday money market exists. Second, we show that after the introduction of the foreign exchange settlement system CLS the value of intraday liquidity has increased during the hours of the CLS settlement cycle. Third, the turnover as well as the liquidity in SIC influence the intraday rate correspondingly. These facts provide evidence for the cost of immediacy. Features like RTGS, delivery-versus-payment and payment-versus-payment substitute credit risk with liquidity risk which in turn increases the value of intraday liquidity. The analysis is central bank policy relevant insofar as different designs of intraday liquidity facilities and different collateral policies result in different intraday term structures for the overnight money market.
    Keywords: interbank money market; intraday credit; term structure
    JEL: E58 G21 G28
    Date: 2010–01–31
  17. By: Torsten Wezel
    Abstract: This paper assesses the merits of countercyclical loan loss provisioning in Uruguay. Using a stress test methodology, it quantifies the protection against macroeconomic shocks provided by the stock of dynamic provisions accumulated since 2001 and finds that medium-sized shocks would be fully absorbed, offsetting the additional costs caused by rising specific provisions. In addition, the paper simulates the path of dynamic provisions under the formulas used in Spain, Peru and Bolivia, showing that the alternative paths diverge significantly from the actual buildup and in part better conform to the Uruguayan credit cycle.
    Keywords: Banks , Business cycles , Credit risk , Economic models , Latin America , Loans , Uruguay ,
    Date: 2010–05–21

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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