New Economics Papers
on Banking
Issue of 2010‒08‒06
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Do Firm-Bank `Odd Couples' Exacerbate Credit Rationing? By Giovanni Ferri; Pierluigi Murro; Zeno Rotondi
  2. Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe By Nikolov, Pavel
  3. Who Needs Credit and Who Gets Credit in Eastern Europe? By Brown, Martin; Ongena, Steven; Popov, Alexander; Yesin, Pinar
  4. Price support in the stock market By Benjamin Golez; José M. Marín
  5. The Diversification Benefits of Universal Banking By Fabrizio Casalin; Enzo Dia
  6. Enhancing Financial Stability Through Better Regulation in Hungary By Margit Molnar
  7. Liquidity costs and tiering in large-value payment systems By Adams, Mark; Galbiati, Marco; Giansante, Simone
  8. The German Banking System: Lessons from the Financial Crisis By Felix Hüfner
  9. Financial stability challenges in EU candidate countries - Financial systems in the aftermath of the global crisis By Thierry Bracke; Éva Katalin Polgár; Kristel Buysse; Desislava Rusinova; Alexandre Francart; Jakob Ekholdt Christensen; Corinna Knobloch; Nikolaos Stavrianou; Pavel Diev; Emidio Cocozza; Jon Frost; Sándor Gardó; David Farelius
  10. The sterling unsecured loan market during 2006-08: insights from network theory By Wetherilt, Anne; Zimmerman, Peter; Soramaki, Kimmo
  11. Opacity of Banks and Runs with Solvency By D'Avino , Carmela; Lucchetta, Marcella
  12. The Korean financial system: overcoming the global financial crisis and addressing remaining problems By Masahiko Tsutsumi; Randall S. Jones; Thomas F. Cargill
  13. Bank globalization and the balance sheet channel of monetary transmission By Sami Alpanda; Uluc Aysun
  14. A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks By Ignazio Angeloni
  15. Securitization and the balance sheet channel of monetary transmission By Uluc Aysun; Melanie Guldi; Ralf Hepp
  16. An Assessment of the Bank of Canada's Term PRA Facility By Emanuella Enenajor; Alex Sebastian; Jonathan Witmer
  17. Profit Versus Non Profit: A Third Way? The Case of the Italian Mutual Cooperative Banks. By Ivana Catturani; Sandro Trento
  18. Liquidity-saving mechanisms and bank behaviour By Galbiati, Marco; Soramaki, Kimmo
  19. Extraordinary measures in extraordinary times: Public measures in support of the financial sector in the EU and the United States By Stolz, Stéphanie Marie; Wedow, Michael
  20. Counter-cyclical Economic Policy By Douglas Sutherland; Peter Hoeller; Balázs Égert; Oliver Röhn
  21. "Changes in Central Bank Procedures during the Subprime Crisis and Their Repercussions on Monetary Theory" By Marc Lavoie
  22. Analytical Framework for Credit Portfolios By Mikhail Voropaev

  1. By: Giovanni Ferri (University of Bari); Pierluigi Murro (University of Bari); Zeno Rotondi (UniCredit Group's Retail Research Division)
    Abstract: We start considering an optimal matching of opaque (transparent) borrowing firrms with relational (transactional) lending main banks. Next we contemplate the possibility that firm-bank "odd couples" materialize where opaque (transparent) firrms end up matched with transactional (re- lational) main banks. We conjecture the "odd couples" emerge either since the bank's lending technology is not perfectly observable to the rm or because riskier firrms - even though opaque - strategically select transac- tional banks in the hope of being classified as lower risks. Our econometric results show the probability of rationing is larger when firrms and banks match in "odd couples".
    Keywords: Relationship Banking, Credit Rationing and Asymmetric Information
    JEL: G21 D84
    Date: 2010–07
  2. By: Nikolov, Pavel
    Abstract: This paper examines the relationship between adverse shocks to the banking system and their effect on the general economy in Europe. This topic was brought to the spotlight during the 2007-2009 financial and economic crisis, when the relatively healthy, at that time, European economy was severely hit by the spread of the US sub-prime mortgage problems. This interbanking contagion may have been one of the main, if not the primary, reasons why the region entered into a recession during the period. If significant evidence can be found to support this theory, it will make the need for more regulations on the financial system and stricter capital requirements even more apparent. The research includes comprehensive literature survey on past and recent financial crises, procyclical banking practices and their impact on the economy. Then it goes on to developing a theoretical model of the transmission of negative economic shocks from the financial system to the rest of the economy. The theoretical model is empirically tested on a range of banking specific and macroeconomic variables. The results show that a loss of confidence in the financial system and banking losses are followed by a significant decrease in the new loans to non-financial companies and subsequent economic contraction. Moreover, countries with better capitalized banks experienced smaller declines during the crisis and in general Tier 1 capital is correlated positively with economic growth.
    Keywords: economic shocks, financial crisis, banking system stability, procyclical effects
    JEL: E0 E32 E5
    Date: 2010–06–11
  3. By: Brown, Martin (Swiss National Bank); Ongena, Steven (Universiteit van Tilburg (Tilburg University)); Popov, Alexander (European Central Bank); Yesin, Pinar (Swiss National Bank)
    Abstract: Based on survey data covering 8,387 firms in 20 countries we compare credit demand and credit supply for firms in Eastern Europe to those for firms in selected Western European countries. We find that, while 30% of firms do not need credit in Eastern Europe, their need for credit is higher than in Western Europe. The firm-level determinants of credit needs in Eastern Europe are quite similar to that in Western Europe: Firms with alternative financings sources, i.e. government-owned, foreign-owned and internally financed firms, are less likely to need credit. Small firms are also less likely to demand credit than larger firms, suggesting that they may have limited investment opportunities. We find that a higher share of firms is discouraged from applying for a loan in Eastern Europe than in Western Europe. Firms in Eastern Europe seem particularly discouraged by high interest rates compared to firms in Western Europe, with collateral conditions and loan application procedures also more discouraging. The higher rate of discouraged firms in Eastern Europe is related to a stronger reluctance of small and financially opaque firms to apply for a loan compared to Western Europe. While many discouraged firms correctly anticipate that their loan applications would be rejected, a large majority of discouraged firms seem to be creditworthy. At the country-level we find that the higher rate of discouraged firms in Eastern Europe is driven more by the presence of foreign banks than by the macroeconomic environment or the lack of creditor protection. We find no evidence that foreign bank presence leads to stricter loan approval decisions. Our findings suggest to policy makers that the low incidence of bank credit among firms in Eastern Europe, compared to Western Europe, is not driven by less need for credit or banks’ reluctance to extend loans. The main driver seems to be that many (creditworthy) firms are discouraged from applying for a loan, due to high interest rates, collateral conditions and cumbersome lending procedures. As discouragement is particularly high among small and opaque firms, as well as in countries with a strong presence of foreign banks, it seems that firms perceive lending standards to have become more reliant on “hard information” with the entry of foreign banks. However, as loan rejection rates are not related to foreign bank presence, it seems that firms’ perceptions of the likely lending conditions may be too pessimistic. Thus more transparency about credit eligibility and conditions may improve credit access, particularly in countries with a high presence of foreign banks.
    Keywords: Banking; Credit; Transition economies
    JEL: G21 O16
    Date: 2010–03–01
  4. By: Benjamin Golez (Universitat Pompeu Fabra); José M. Marín (IMDEA Social Sciences Institute)
    Abstract: The interplay of delegated portfolio management and asset management ownership generates a double agency problem that may result on trading to support security prices. We test this hypothesis analyzing the trading patterns of mutual funds a¢ liated with banks with the stocks of their controlling banks. We show that affiliated mutual funds tend to increase the holdings of the parent bank stock following a large drop in the stock price of the bank. Further, we provide evidence that these patterns of trading are not consistent with portfolio rebalancing into the banking sector, contrarian trading or timing skills. We also provide evidence that the patterns of trading are not information-driven. This leads us to conclude that affiliated mutual funds follow this strategy to support the price of the parent bank.
    Keywords: price support; con‡ict of interests; agency problem; mutual funds; asset management; fund families; banks; prosecution
    JEL: G30 G23 G32 G28 G21 K22
    Date: 2010–08–02
  5. By: Fabrizio Casalin; Enzo Dia
    Abstract: We find that both the aggregate issuance of bonds, and the volume of commercial and industrial loans outstanding in the US, respond to fluctuations in industrial production and interest rates, but in opposite directions. This empirical result suggests that universal banks can reduce the cyclical fluctuations of their income, by jointly providing direct lending and security underwriting services.
    Keywords: Universal Banking, Diversification
    JEL: G21 G24
    Date: 2010–07
  6. By: Margit Molnar
    Abstract: The global crisis exposed weaknesses in the Hungarian financial system that pose risks to financial stability. Excessive risk-taking by banks and households had been masked by relatively stable exchange rates, the expected early adoption of the euro and unusually lax credit conditions in international markets. With credit becoming scarcer and dearer, the domestic economy was hit through multiple channels. The steep depreciation of the forint boosted households’ debt burden, while banks were hit by the drying up of liquidity, including in swap markets for Swiss francs. A major lesson learnt from the crisis is that the approach to household lending needs to change: a stronger protection for borrowers should be combined with a tighter regulation of lenders. Enhancing competition in the banking market would also impose discipline on lending behaviour. Financial supervision should be strengthened by enhancing the powers of the financial supervisor to avoid abusive practices and excessive risk taking. A better early-warning system needs to be created for the monitoring and assessment of systemic risks, in which a more formal Financial Stability Council should play a prominent role. This Working Paper relates to the 2010 OECD Economic Survey of Hungary (<P>Renforcer la stabilité financière en améliorant la réglementation en Hongrie<BR>La crise mondiale a révélé des faiblesses du système financier hongrois qui mettent en péril la stabilité financière. Les risques excessifs pris par les banques et les ménages avaient été masqués par la relative stabilité du taux de change, les anticipations d'adoption rapide de l'euro, et la détente inhabituelle des conditions de crédit sur les marchés internationaux. Quand le crédit est devenu plus rare et plus cher, l'économie hongroise a été touchée de multiples façons. La forte dépréciation du forint a beaucoup alourdi l'endettement des ménages, tandis que les banques ont souffert de l'assèchement de la liquidité, notamment sur le marché des contrats d'échange de forints contre francs suisses. Une des principales leçons de la crise est qu'il est nécessaire de modifier les modalités des prêts aux ménages : il faut conjuguer une plus grande protection des emprunteurs et l'application d'une réglementation plus rigoureuse aux prêteurs. Un renforcement de la concurrence sur le marché bancaire disciplinerait aussi le comportement des prêteurs. Il convient de renforcer la surveillance financière en donnant davantage de pouvoirs à l'autorité de régulation financière pour empêcher les pratiques abusives et la prise de risques excessifs. Il faut aussi créer un meilleur système d'alerte précoce pour le suivi et l'évaluation des risques systémiques, dans le cadre duquel un Conseil de stabilité financière ayant un caractère plus formel devrait jouer un rôle prédominant. Ce document de travail est lié à l'Étude économique de l'OCDE sur la Hongrie de 2010 (
    Keywords: Hungary, government policy and regulation, bank, financial crisis, financial markets and the macroeconomy, Hongrie, banque, crise financière, marchés de capitaux et macroéconomie, réglementation et politiques publiques
    JEL: E44 G18 G21
    Date: 2010–06–17
  7. By: Adams, Mark (Bank of England); Galbiati, Marco (Bank of England); Giansante, Simone (CCFEA, University of Essex)
    Abstract: This paper develops and simulates a model of the emergence of networks in an interbank, RTGS payment system. A number of banks, faced with random streams of payment orders, choose whether to link directly to the payment system, or to use a correspondent bank. Settling payments directly on the system imposes liquidity costs which depend on the maximum liquidity overdraft incurred during the day. On the other hand, using a correspondent entails paying a flat fee, charged by the correspondent to recoup liquidity costs and to extract a profit. We specify a protocol whereby one bank in each period can revisit its choice whether to link directly to the system, or to become clients of other banks, thus generating a dynamic client-correspondent network. We simulate this protocol, observing the emergence of different network structures. The liquidity pricing regime chosen by a central bank is found to affect the tiering process and the network structures it produces. A calibration exercise on data from the UK CHAPS system suggests that the model is able to generate realistic predictions, ie a network topology similar to that observed in reality, driven solely by the underlying pattern of payments and the structure of liquidity costs.
    Keywords: Tiering; liquidity cost; large-value payment system; RTGS; network formation
    JEL: C70 G20
    Date: 2010–07–29
  8. By: Felix Hüfner
    Abstract: The German banking system came under pressure during the financial crisis, not least due to its significant exposure to toxic assets which originated in the US. In the short run, the stability of the system has been achieved, in large part through substantial government support measures. However, ensuring adequate capitalization of the banking system remains a major challenge going forward and may require more active government involvement. The underlying causes of the banking sector problems are related to: i) the activities of the Landesbanken which benefitted from government guarantees without a proper business model; ii) weak capitalization and high fragmentation of the whole banking system, possibly related to the particularly rigid three-pillar structure; and iii) deficiencies in banking regulation and supervision. The challenge is to address these three causes in order to raise the long-run stability of the banking system. This paper relates to the 2010 OECD Economic Review of Germany (<P>Le système bancaire : les leçons de la crise financière<BR>Le système bancaire allemand a subi des tensions durant la crise financière, notamment en raison de sa forte exposition à des actifs toxiques générés aux États-Unis. À court terme, la stabilité du système a pu être assurée en grande partie au moyen de mesures substantielles de soutien de la part du gouvernement. Néanmoins, parvenir à une capitalisation convenable du système bancaire reste un défi majeur pour la période à venir et nécessitera sans doute une intervention plus active des pouvoirs publics. Les causes profondes des problèmes du système bancaire sont liées aux facteurs suivants : i) les activités des Landesbanken qui ont bénéficié des garanties de l’État sans avoir de véritable modèle économique ; ii) la capitalisation et la rentabilité médiocres du système bancaire dans son ensemble, éventuellement liée à son organisation particulièrement rigide autour de trois piliers ; et iii) les carences de la réglementation et du contrôle bancaire. Tout le problème consiste à s’attaquer à ces trois causes pour accroître la stabilité de long terme du système. Ce document se rapporte à l’Étude économique de l’Allemagne de l’OCDE, 2010, (
    Keywords: financial crisis, financial stability, Landesbanken, banking sector, banking supervision, secteur bancaire, crise financière, stabilité financière, Landesbanken, contrôle bancaire
    JEL: G15 G21 G38
    Date: 2010–07–01
  9. By: Thierry Bracke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Éva Katalin Polgár (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Kristel Buysse (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Desislava Rusinova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Alexandre Francart (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Jakob Ekholdt Christensen (Danmarks Nationalbank, Havnegade 5, 1093 Copenhagen K, Danmark.); Corinna Knobloch (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, D-60431 Frankfurt am Main, Germany.); Nikolaos Stavrianou (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Pavel Diev (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Emidio Cocozza (Banca d’Italia,Via Nazionale 91, I-00184 Rome, Italy.); Jon Frost (De Nederlandsche Bank, Postbus 98, 1000 AB Amsterdam, The Netherlands.); Sándor Gardó (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.); David Farelius (Sveriges Riksbank, 103 37, Stockholm, Sweden.)
    Abstract: This paper reviews financial stability challenges in the EU candidate countries: Croatia, the former Yugoslav Republic of Macedonia and Turkey. It follows a macro-prudential approach, emphasising systemic risks and the stability of financial systems as a whole. The paper recalls that the economies of all three countries experienced a recession in 2008-09 and shows how this slowed the rapid process of financial deepening that had been taking place since the beginning of the last decade. The deteriorating economic and financial conditions manifested themselves, first and foremost, through a marked deterioration in asset quality. These direct credit risks were compounded by the transformation of exchange and interest rate risks through a widespread use of foreign exchange-denominated or indexed loans and variable or adjustable interest rate loans. Moreover, funding and liquidity risks also materialised to some extent, although fully fledged bank runs were avoided, and none of the countries experienced a sharp reversal in external financing. Overall, the deterioration in asset quality has so far been managed well by the banking systems of the candidate countries, facilitated by large capital buffers, pro-active macro-prudential policies pursued by the authorities both before and during the crisis and the relative stability of exchange rates. Looking ahead, although uncertainties remain high regarding credit quality, the shock-absorbing capacities of the banking systems are fairly robust, as also evidenced by their relative resilience so far. Nevertheless, as the economic recovery sets in, the central banks should return to and possibly reinforce the implementation of measures to avoid a pro-cyclical build-up of credit (asset) boom-bust cycles. Furthermore, given the relevance of foreign-owned banks in two of the three countries, a continued strengthening of home-host cooperation in the supervisory area will be crucial to avoid any kind of regulatory arbitrage. JEL Classification: F32, F41, G21, G28
    Keywords: Europe, banking sector, vulnerability indicators, macro-prudential approach, emerging markets
    Date: 2010–07
  10. By: Wetherilt, Anne (Bank of England); Zimmerman, Peter (Bank of England); Soramaki, Kimmo (Helsinki University of Technology)
    Abstract: We model the unsecured overnight market in the United Kingdom as a network of relationships and examine how the structure has changed over the recent period of crisis. Using established network techniques, we find strong evidence of the existence of a core of highly connected banks alongside a periphery. We find that membership of this core expanded during the crisis and suggest that this is due to a few intermediate banks becoming more connected. The widened reserve target bands may have also had an effect, by partially alleviating the need to manage reserve accounts close to a target and therefore allowing banks to exercise more discretion in forming relationships. However, there is an asymmetry between borrowers and lenders in the overnight market, with borrowers more reliant on the most established of the core banks during the crisis.
    Keywords: Network; topology; interbank; unsecured loan; systemic risk; financial stability.
    JEL: D85 E58 G21
    Date: 2010–07–29
  11. By: D'Avino , Carmela; Lucchetta, Marcella
    Abstract: In absence of bank risk-taking behavior, opacity is defined as the inability of depositors, speculators and central banker to disentangle default risk and asset's return from the asset's value. We show the conditions under which opacity leads to runs on a solvent bank in equilibrium and uncertainty on fundamental values of the asset. The main repercussion of the opacity is, however, on the central bank's policy response which is inefficient during a banking crisis.
    Keywords: Opacity; Bank Runs; Central Bank Intervention; Cash-in-Market Pricing.
    JEL: G1 E5 E61 G21
    Date: 2010
  12. By: Masahiko Tsutsumi; Randall S. Jones; Thomas F. Cargill
    Abstract: The intensification of the global financial crisis in late 2008 led to large capital outflows from Korea and turmoil in its capital markets. However, the prompt response by the government and the central bank stabilised Korea’s financial sector in early 2009 and recovery followed relatively quickly. In contrast to 1997, financial institutions have overcome the crisis without significant damage. Increased assistance for small and medium-sized enterprises has played a large role in overcoming the crisis, but should be scaled back to avoid supporting non-viable firms and to expand banks’ capacity for risk appraisal, leading to a more market-oriented financial system. As a small open economy, Korea also needs to reduce its vulnerability to sudden capital outflows. In addition, it is important to use prudential regulations effectively to limit the risk of mortgage lending, upgrade the corporate governance of financial institutions and develop securitisation by ensuring transparency.<P>Le système financier coréen : surmonter la crise financière mondiale et régler les problèmes qui subsistent<BR>L’intensification de la crise financière mondiale à la fin de 2008 s’est traduite par d’amples sorties de capitaux et de fortes turbulences sur les marchés financiers coréens. Mais la prompte réponse du gouvernement et de la banque centrale a stabilisé le secteur financier coréen au début de 2009 et la reprise s’est engagée assez rapidement. Contrairement à ce qui s’était passé en 1997, les institutions financières ont surmonté la crise sans sévères dommages. Les aides renforcées aux petites et moyennes entreprises ont joué un grand rôle pour surmonter la crise, mais il faudrait les éliminer afin de ne pas soutenir des entreprises non viables et de faire en sorte que les banques développent leurs capacités d’évaluation des risques ; le système financier reposerait ainsi davantage sur les mécanismes du marché. Petite économie ouverte, la Corée doit aussi prendre des mesures pour être moins sensible à de soudaines sorties de capitaux. Il faut en outre utiliser efficacement la réglementation prudentielle en vue de limiter les risques liés aux prêts hypothécaires, améliorer le gouvernement d’entreprise des institutions financières et développer la titrisation dans la transparence.
    Keywords: capital markets, bank, Small and Medium-sized Enterprises, securitisation, capital injections, credit rating agencies, Basel II, global financial crisis, Korean financial sector, short-term foreign debt, capital adequacy rules, FSS, FSC, Bank of Korea, KAMCO, housing prices, LTV, DTI, foreign exchange reserves, banque, marchés de capitaux, petites et moyennes entreprises, titrisation, injections de capitaux, agences de notation financières, Bâle II, crise financière mondiale, règles relatives aux fonds propres, Banque de Corée, KAMCO, prix de l'immobilier d'habitation, LTV, DTI, Secteur financier coréen, FSS, FSC
    JEL: Q28 Q54 Q56 Q58
    Date: 2010–07–28
  13. By: Sami Alpanda (Amherst College); Uluc Aysun (University of Connecticut)
    Abstract: The literature typically finds that the development of financial markets has decreased the ability of central banks to affect the real economy. This paper shows that this negative relationship does not hold for the balance sheet channel of monetary transmission and bank globalization -- one aspect of financial development. The reason is that global banks are more sensitive to borrowers' leverage. By affecting this leverage, monetary policy has a larger impact on global banks' lending and aggregate economic activity. We use bank-level, Call Report data to obtain this disparity between more and less global banks. We then use this data in the estimation of a general equilibrium model and find that the balance sheet channel of monetary policy operates mainly through more global banks.
    Keywords: balance sheet channel, bank globalization, financial accelerator
    JEL: E44 F31 F41 O16
    Date: 2010–07
  14. By: Ignazio Angeloni
    Abstract: In a paper co-written with Ester Faia of Geothe University Frankfurt, Visiting Fellow Ignazio Angeloni introduces banks into a standard DSGE model and uses this framework to study the role of banks in the transmission of shocks, the effects of monetary policy when banks are exposed to runs, and the interplay between monetary policy and Basel-like capital ratios. 
    Date: 2009–10
  15. By: Uluc Aysun (University of Connecticut); Melanie Guldi (Mount Holyoke College); Ralf Hepp (Fordham University)
    Abstract: This paper shows that the balance sheet channel of monetary transmission works mainly through U.S. bank holding companies that securitize their assets. This finding is different, in spirit, from the widely-found negative relationship between financial development and the strength of the lending channel of monetary transmission. Focusing on the balance sheet channel, and using bank-level observations, we find that securitized banks are more sensitive to borrowers' balance sheets and that monetary policy has a greater impact on this sensitivity for securitizing bank holding companies. The optimality conditions from a simple partial equilibrium framework suggest that the positive effects of securitization on policy effectiveness could be due to the high sensitivity of security prices to policy rates.
    Keywords: balance sheet channel, banks, bank holding companies, securitization.
    JEL: E44 F31 F41 O16
    Date: 2010–07
  16. By: Emanuella Enenajor; Alex Sebastian; Jonathan Witmer
    Abstract: This paper empirically assesses the effectiveness of the Bank of Canada's term Purchase and Resale Agreement (PRA) facility in reducing short-term bank funding pressures, as measured by the CDOR-OIS spread. It examines the behaviour of this spread around both term PRA announcement dates and term PRA operation dates, using an event-study methodology to control for developments in other money markets (i.e., using the U.S. LIBOR-OIS spread) as well as proxies for Canadian banking sector credit risk. Overall, there is robust evidence that the term PRA announcements reduced bank funding costs at both 1-month and 3-month terms, whereas we find no evidence of an impact from term PRA operations. However, given the small number of term PRA announcements in our sample, caution should be taken in attributing the reduction in the CDOR-OIS spread solely to the term PRA announcements, since other concurrent events (including other announcements by the Bank of Canada) may have also contributed to a compression in the CDOR-OIS spread.
    Keywords: Financial markets; Financial stability
    JEL: E58 G12 G18
    Date: 2010
  17. By: Ivana Catturani; Sandro Trento
    Abstract: The traditional distinction between profit and non profit firms does not necessarily apply to some types of cooperative firms, such as the Italian mutual cooperative banks (MCBs). These MCBs present a peculiar governance structure, a combination between a public company governance model and a non-profit one. Similarly to a “not for profit organization”, the ownership of the MCBs is widely diffused among borrowerowners, but dividends are not typically redistributed. Like in “public company bank”, MCBs have a spread ownership and a board of directors. MCBs work in order to maximise social utility rather than profits, as a social entrepreneurship. MCBs represent a kind of third way governance model in the financial sector. The board of directors of a MCB acts as a public-good administrator in deciding on how to invest, with a deep impact on the local community. However, the governance of these banks is affected by structural problems. The mutual and co-operative nature of these banks is challenged by the increase in the number of members-owners and in the heterogeneity of the member-owners group. This study aims at investigating the democratic voting mechanism of the board (one-head one-vote) and its appropriateness given enlargement of the member’s community. The research would tackle the issue of governance structure and incentive to efficient behavior.
    Keywords: cooperative firm; mutualism; cooperative banks; corporate governance; italian banking sector
    JEL: G21 G34 J54 L31
    Date: 2010–07
  18. By: Galbiati, Marco (Bank of England); Soramaki, Kimmo (Helsinki University of Technology)
    Abstract: This paper investigates the effect of liquidity-saving mechanisms (LSMs) in interbank payment systems. We model a stylised two-stream payment system where banks choose (a) how much liquidity to post and (b) which payments to route into each of two ‘streams’: the RTGS stream, and an LSM stream. Looking at equilibrium choices we find that, when liquidity is expensive, the two-stream system is more efficient than the vanilla RTGS system without an LSM. This is because the LSM achieves better co-ordination of payments, without introducing settlement risk. However, the two-stream system still only achieves a second-best in terms of efficiency: in many cases, a central planner could further decrease system-wide costs by imposing higher liquidity holdings, and without using the LSM at all. Hence, the appeal of the LSM resides in its ability to ease (but not completely solve) strategic inefficiencies stemming from externalities and free-riding. Second, ‘bad’ equilibria too are theoretically possible in the two-stream system. In these equilibria banks post large amounts of liquidity and at the same time overuse the LSM. The existence of such equilibria suggests that some co-ordination device may be needed to reap the full benefits of an LSM. In all cases, these results are valid for this particular model of an RTGS payment system and the particular LSM.
    Keywords: Payment system; RTGS; liquidity-saving mechanism
    JEL: C70
    Date: 2010–07–29
  19. By: Stolz, Stéphanie Marie; Wedow, Michael
    Abstract: The extensive public support measures for the financial sector have been key for the management of the current financial crisis. This paper gives a detailed description of the measures taken by central banks and governments and attempts a preliminary assessment of the effectiveness of such measures. The geographical focus of the paper is on the European Union (EU) and the United States. The crisis response in both regions has been largely similar in terms of both tools and scope, and monetary policy actions and bank rescue measures have become increasingly intertwined. However, there are important differences, not only between the EU and the United States (e.g. with regard to the involvement of the central bank), but also within the EU (e.g. asset relief schemes). --
    Keywords: Bank rescue measures,public crisis management
    JEL: E58 E61 G21 G38
    Date: 2010
  20. By: Douglas Sutherland; Peter Hoeller; Balázs Égert; Oliver Röhn
    Abstract: What changes are needed to make counter-cyclical economic policy more effective in the aftermath of the recent crisis? An important lesson from the severity of the recent recession is that policy in various areas will have to be more prudent during upswings and to build in greater safety margins to be able to react to large adverse shocks. In the period leading up to the crisis, cycles became more synchronised, while asset prices became more volatile. Recent events also underline the difficulties encountered in detecting and reacting to asset price misalignments. The confluence of the turn in asset prices, financial market crisis and slump in trade challenged the ability of counter-cyclical policies to cope with the severe downturn, although experience reveals that countries where the fiscal position was sound and inflation under control were better able to cushion the shocks. Furthermore, robust micro-prudential regulation can help the financial sector withstand shocks. In this light, existing policies should be strengthened to ensure that there is room for manoeuvre going into a downturn. In order to deal with similar shocks in the future, macroeconomic and financial sector policies should consider precautionary policy settings and macro-prudential regulation to address systemic threats to stability.<P>Politique économique contracyclique<BR>Quels changements sont necessaires pour que la politique economique contracyclique soit plus efficace a l.issue de la crise ? On peut tirer une lecon essentielle de la recession recente : il faudra que, dans plusieurs domaines, la politique economique soit plus prudente en periode d.expansion et comporte plus de marges de securite pour pouvoir reagir a un choc de grande ampleur. Avant la crise, on a pu observer une plus grande synchronisation des cycles et une plus forte volatilite des prix des actifs. Les evenements recents mettent egalement en lumiere les difficultes rencontrees pour detecter les dephasages des prix des actifs et pour y reagir. La conjonction d.un retournement des prix des actifs, d.une crise financiere et d.un effondrement des echanges fait que les mesures contracycliques n.ont plus ete a meme de contrecarrer une profonde recession. Cela etant, l.experience montre que les pays dont les finances publiques etaient saines et l.inflation maitrisee ont pu mieux amortir les chocs. De plus, une solide reglementation microprudentielle peut aider le secteur financier a resister en cas de choc. C.est pourquoi il faudrait renforcer les politiques actuelles pour conserver une marge de manoeuvre face a une recession. Pour parer a des chocs similaires a l.avenir, les mesures macroeconomiques et celles applicables au secteur financier devraient s.appuyer sur un cadre d.action guide par la precaution et sur une reglementation macroprudentielle afin d.ecarter les menaces pour la stabilite qui ont un caractere systemique.
    Keywords: macroeconomic policies, financial sector regulation, politique macro-économique, réglementation du secteur financier
    JEL: E61 G28
    Date: 2010–05–05
  21. By: Marc Lavoie
    Abstract: The subprime financial crisis has forced several North American and European central banks to take extraordinary measures and to modify some of their operational procedures. These changes have made even clearer the deficiencies and lack of realism in mainstream monetary theory, as can be found in both undergraduate textbooks and most macroeconomic models. They have also forced monetary authorities to reject publicly some of the assumptions and key features of mainstream monetary theory, fearing that, on that mistaken basis, actors in the financial markets would misrepresent and misjudge the consequences of the actions taken by the monetary authorities. These changes in operational procedures also have some implications for heterodox monetary theory; in particular, for post-Keynesian theory. The objective of this paper is to analyze the implications of these changes in operational procedures for our understanding of monetary theory. The evolution of the operating procedures of the Federal Reserve since August 2007 is taken as an exemplar. The American case is particularly interesting, both because it was at the center of the financial crisis and because the U.S. monetary system and its federal funds rate market are the main sources of theorizing in monetary economics.
    Keywords: Federal Funds Rate; Corridor System; Interest on Bank Reserves; Money Multiplier
    JEL: E42 E43 E58
    Date: 2010–08
  22. By: Mikhail Voropaev
    Abstract: Analytical, free of time consuming Monte Carlo simulations, framework for credit portfolio systematic risk metrics calculations is presented. Techniques are described that allow calculation of portfolio-level systematic risk measures (standard deviation, VaR and Expected Shortfall) as well as allocation of risk down to individual transactions. The underlying model is the industry standard multi-factor Merton-type model with arbitrary valuation function at horizon (in contrast to the simplistic default-only case). High accuracy of the proposed analytical technique is demonstrated by benchmarking against Monte Carlo simulations.
    Date: 2010–07

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