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on Banking |
| By: | Berger, Allen N. (BOFIT); Hasan, Iftekhar (BOFIT); Korhonen, Iikka (BOFIT); Zhou, Mingming (BOFIT) |
| Abstract: | Conventional wisdom in banking argues that diversification tends to reduce bank risk and improve performance, but the recent financial crisis suggests that aggressive diversification strategies may have resulted in increased risk taking and poor performance. This paper addresses this important question by evaluating the empirical relationship between diversification strategies and the risk-return tradeoff in banking. Our data set covers Russian banks during the 1999-2006 period and finds somewhat mixed results. Specifically, we find that banks’ performance tends to be non-monotonically related to their diversification strategy. The marginal effects of focus indices (inverse measures of diversification) on performance are nonlinearly associated with the level of risk and foreign ownership. A focused strategy is found to be associated with increased profit and decreased risk only up to a certain threshold. Additionally, when foreign ownership is either very high or very low, banks tend to benefit more from being diversified. This analysis provides important strategic and policy implications for bank managers and regulators in Russia as well as in other emerging economies. |
| Keywords: | banks; diversification; focus; Russia; foreign ownership; scope economies |
| JEL: | G21 G28 G34 |
| Date: | 2010–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2010_009&r=ban |
| By: | Hajime Tomura |
| Abstract: | This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected. |
| Keywords: | Financial stability; Financial system regulation and policies |
| JEL: | E44 G21 D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-22&r=ban |
| By: | Mariya Teteryatnikova |
| Abstract: | This paper studies systemic risk and the scale of systemic breakdown in the frequently observed tiered banking system. The banking network is constructed from a number of banks which are linked by interbank exposures with a certain predefined probability. In this framework, the tiered structure is represented either by a network with negative correlation in connectivity of neighboring banks, or alternatively, by a network with a scale-free distribution of connectivity. The main findings of the paper highlight the advantages of tiering in terms of both the resilience of the banking network to systemic shocks and the extent of necessary government intervention should a crisis evolve. |
| JEL: | C63 D85 G21 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1007&r=ban |
| By: | Sophocles N. Brissimis (Bank of Greece, Economic Research Department, 21 E. Venizelos Avenue, Athens 10250, Greece.); Manthos D. Delis (University of Ioannina, Department of Economics, Ioannina 45110, Greece.) |
| Abstract: | Heterogeneity in the response of banks to a change in monetary policy is an important element in the transmission of this policy through banks. This paper examines the role of bank liquidity, capitalization and market power as internal factors influencing banks’ reaction in terms of lending and risk-taking to monetary policy impulses. The ultimate impact of a monetary policy change on bank performance is also considered. The empirical analysis, using large panel datasets for the United States and the euro area, elucidates the sources of differences in the response of banks to changes in policy interest rates by disaggregating down to the individual bank level. This is achieved by the use of a Local GMM technique that also enables us to quantify the degree of heterogeneity in the transmission mechanism. It is argued that the extensive heterogeneity in banks’ response identifies overlooked consequences of bank behavior and highlights potential monetary sources of the current financial distress. JEL Classification: E44, E52, G21, C14. |
| Keywords: | Monetary policy, Bank heterogeneity, Risk-taking, Bank performance. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101233&r=ban |
| By: | Karas, Alexei (BOFIT); Pyle, William (BOFIT); Schoors, Koen (BOFIT) |
| Abstract: | We explore how the introduction of explicit deposit insurance affects deposit flows into and out of banks of varying risk levels. Using evidence from a natural experiment in Russia, we employ a difference-in-difference estimator to isolate the change in the deposit flows of a newly insured group (households) relative to an uninsured “control” group (firms). This approach improves on earlier studies seeking to identify the effect of deposit insurance on market discipline. We find that the relative sensitivity of households to bank capitalization diminished markedly with the introduction of an insurance program covering their deposits. This was not true for firms, however. We then show the finding is not an artifact of the two groups responding differently to a minor banking crisis that arose at roughly the same time. |
| Keywords: | deposit insurance; market discipline |
| JEL: | E65 G21 G28 P34 |
| Date: | 2010–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2010_008&r=ban |
| By: | Dietrich, Diemo; Hauck, Achim |
| Abstract: | We evaluate policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalize risks, implying overinvestment or excessive risk taking or both. Assistance granted without reference to new activities, like establishing a bad bank, does not generate adverse incentives but may have higher fiscal costs. |
| Keywords: | Banking crisis; debt overhang; bank lending; capital structure |
| JEL: | G28 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24508&r=ban |
| By: | Adams, Charles (Asian Development Bank Institute) |
| Abstract: | This paper reviews recent state interventions in financial crises and draws lessons for crisis management. A number of areas are identified where crisis management could be strengthened, including with regard to the tools and instruments used to involve the private sector in crisis resolution (with a view to reducing the recent enhanced role of official bailouts and the associated moral hazard), to allow for the orderly resolution of systemically important financial firms (to make these firms "safe to fail"), and with regard to achieving better integration with ex ante macroprudential surveillance. The paper proposes the establishment of high level systemic risk councils (SRCs) in each country with responsibility for overseeing systemic risk in both tranquil times and crisis periods and coordinating the activities of key government ministries, agencies, and the central bank. |
| Keywords: | global financial crisis; state intervention; macroprudential surveiilance; crisis resolution; prevention |
| JEL: | E01 E58 |
| Date: | 2010–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0242&r=ban |
| By: | L. Randall Wray |
| Abstract: | Before we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled "Reconstituting the United States’ Financial Structure." This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award–winning paper). Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the "capital development" of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines. |
| Keywords: | China; Hyman Minsky; Banks and Shadow Banks; Money Manager Capitalism; Finance Capital; Financial Instability Hypothesis; Global Financial Crisis; Debt Deflation Theory |
| JEL: | E12 E32 E58 G2 G18 G21 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_612&r=ban |
| By: | Lucjan T. Orlowski |
| Abstract: | Summary for non-specialistsThis study draws attention to the proliferation of tail risks in financial markets prior to and during the course of the recent global financial crisis. It examines the level of tail risks in selected equity, interbank lending and foreign exchange markets in selected EU Member States in relation to the United States. The extent of tail risks is assessed by applying general error distribution (GED) parameterization in GARCH volatility tests of the examined variables. The empirical tests prove that tail risks were pronounced across all of the examined European financial markets throughout the crisis. They were also significant prior to the crisis outbreak. The analyzed interbank lending markets exhibited more extreme volatility outbursts than the equity and foreign exchange markets. Several countercyclical monetary and macroprudential policies aimed at abating tail risks are identified and discussed. Flexible capital adequacy and contingent capital requirements for financial institutions are advocated. |
| Keywords: | Global financial crisis equity markets foreign exchange markets monetary policies macroprudential policies Orlowski |
| JEL: | E44 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0416&r=ban |
| By: | Sá, P. |
| Abstract: | This article reviews the main sources of data on the geographic composition of countries' external balance sheets, covering both international and country-specific sources. It examines the determinants of bilateral financial assets and liabilities and discusses how gravity models, traditionally used in the trade literature, have been applied to explain bilateral financial links. A new dataset is used to derive some stylized facts on how bilateral financial links look like, how they have evolved over time and how they compare with trade links. The role that cross-border financial links play in the international transmission of shocks is discussed, with reference to the 2007-2009 financial crisis. |
| Keywords: | Bilateral financial links, international financial network |
| JEL: | F21 |
| Date: | 2010–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1038&r=ban |
| By: | Arturo J. Galindo, Alejandro Izquierdo, and Liliana Rojas-Suarez |
| Abstract: | This paper explores the impact of international financial integration on credit markets in Latin America. Using a cross-country dataset covering 17 Latin American countries between 1996 and 2008, the authors find that financial integration amplifies the impact of international financial shocks on aggregate credit and interestrate fluctuations. Despite this pernicious effect, the net impact of integration on deepening credit markets is positive and dominates for the large majority of states of nature. The paper also uses a detailed bank-level dataset covering more than 500 banks in Latin America for a similar time period to explore the role of financial integration—captured through the participation of foreign banks—in propagating external shocks. The authors find that interest rates charged and loans supplied by foreign-owned banks respond more to external financial shocks than those supplied by domestically owned banks. However, this result does not hold for all foreign banks: Spanish banks in the sample behave more like domestic banks and do not amplify the impact of foreign shocks on credit and interest rates. Important policy recommendations to avoid foreign banks’ amplification of external financial shocks include the establishment of ring-fencing mechanisms, the development of early-warning systems, and the incorporation for agreements between domestic and foreign supervisors. |
| Keywords: | foreign banks, credit, interest rates, financial shocks |
| JEL: | F36 G0 G21 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:203&r=ban |
| By: | Morgan J. Rose (UMBC) |
| Abstract: | This paper presents evidence that for most types of subprime mortgages, broker-originated loans have a higher probability of foreclosure than bank-originated loans, but only for loans with prepayment penalties. Possible explanations include less careful underwriting on the part of brokers relative to banks when originating loans with multiple risk factors including prepayment penalties, and a greater propensity on the part of brokers to originate loans with prepayment penalties in locales with less financially sophisticated borrowers. State anti-predatory lending law provisions restricting the use of prepayment penalties eliminate the elevated foreclosure risk of broker originations relative to bank originations. |
| Keywords: | foreclosure; prepayment penalties; mortgage brokers; financial regulation; anti-predatory lending laws. |
| JEL: | G21 G28 D18 L85 |
| Date: | 2010–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:umb:econwp:10124&r=ban |