New Economics Papers
on Banking
Issue of 2010‒09‒03
nine papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Capital Regulation after the Crisis: Business as Usual? By Martin Hellwig
  2. How committed are bank lines of credit? Experiences in the subprime mortgage crisis By Rocco Huang
  3. Financial Policies and the Financial Crisis: How Important Was the Systemic Credit Contraction for Industrial Corporations? By Kathleen M. Kahle; René M. Stulz
  4. « La crise financière et l'application des accords de Bâle : est ce le meilleur remède ? ». By Hamza Fekir
  5. Stock market reaction to debt financing arrangements in Russia By Godlewski, Christophe J.; Fungacova, Zuzana; Weill, Laurent
  6. Solicited and Unsolicited Credit Ratings: A Global Perspective By Poon, Winnie P. H.; Chan, Kam C.
  7. Modelling and Forecasting UK Mortgage Arrears and Possessions By Janine Aron; John Muellbauer
  8. Predictive Ability of Value-at-Risk Methods: Evidence from the Karachi Stock Exchange-100 Index By Javed Iqbal; Sara Azher; Ayesha Ijza
  9. Smoke and Mirrors: Evidence of Microfinance Impact from an Evaluation of SEWA Bank in India By Duvendack, Maren

  1. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The paper discusses the reform of capital regulation of banks in the wake of the financial crisis of 2007/2009. Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.
    Keywords: financial crisis, Basel Accord, banking regulation, capital requirements, modelbased approach, systemic risk
    JEL: G21 G28
    Date: 2010–08
  2. By: Rocco Huang
    Abstract: Using the subprime mortgage crisis as a shock, this paper shows that commercial borrowers served by more distressed banks (as measured by recent bank stock returns or the nonperforming loan ratio) took down fewer funds from precommitted, formal lines of credit. The credit constraints affected mainly smaller, riskier (by internal loan ratings), and shorter-relationship borrowers, and depended also on the lenders' size, liquidity condition, capitalization position, and core deposit funding. The evidence suggests that credit lines provided only contingent and partial insurance during the crisis since bank conditions appeared to influence credit line utilization in the short term. It provides a new explanation as to why credit lines are not perfect substitutes for cash holdings for some (e.g. small) firms. Finally, loan level analyses show that more distressed banks charged higher credit spreads on newly negotiated loans but not on funds disbursed from precommitted, formal credit lines. The author's analyses are based on commercial loan flow data from the confidential Survey of Terms of Business Lending (STBL).
    Keywords: Commercial credit ; Global financial crisis
    Date: 2010
  3. By: Kathleen M. Kahle; René M. Stulz
    Abstract: Although firm financial policies were affected by a credit contraction during the recent financial crisis, the impact of increased uncertainty and decreased growth opportunities was stronger than that of the credit contraction per se. From the start of the financial crisis (third quarter of 2007) to its peak (first quarter of 2009), both large and investment-grade non-financial firms show no evidence of suffering from an exceptional systemic credit contraction. Instead of decreasing their cash holdings as would be expected with a temporarily impaired credit supply, these firms increase their cash holdings sharply (by 17.8% in the case of investment-grade firms) after the fall of Lehman. Though small and unrated firms have exceptionally low net debt issuance at the peak of the crisis, their net debt issuance in the first year of the crisis is no different from the last year of the credit boom. In contrast, however, the net equity issuance of small and unrated firms is low throughout 2008, whereas an impaired credit supply by itself would have encouraged firms to increase their equity issuance. On average, the cumulative financing impact of the decrease in net equity issuance from the start to the peak of the crisis is approximately twice the cumulative impact of the decrease in net debt issuance. The decrease in net equity issuance and the increase in cash holdings are also economically important for firms with no debt.
    JEL: E22 E32 E51 G32 G35 N1
    Date: 2010–08
  4. By: Hamza Fekir (LEG - Laboratoire d'Economie et de Gestion - CNRS : UMR5118 - Université de Bourgogne)
    Abstract: Afin de s'adapter à la libéralisation de la sphère financière entamée dans les années 80, marquée notamment par la fin de l'encadrement de crédit, la disparition des différentes formes de protection de l'Etat dont bénéficiaient les banques, et la privatisation de la quasi-totalité des établissements en Europe, la réglementation bancaire a évolué vers une approche prudentielle, perçue comme le seul mode de régulation n'entrant pas en contradiction avec les règles du marché. La réglementation bancaire actuelle ‘Bâle II' s'appuie sur la supervision, la discipline du marché et les ratios prudentiels, en particulier les ratios des fonds propres minimaux. La crise financière dénommée de ‘subprime' qu'a traversé le monde durant ces dernières années a poussé plusieurs économistes à se demander si cette réglementation prudentielle est toujours d'actualité, et surtout pourquoi n'a pas-t-elle permis de prévoir et d'éviter la crise actuelle. L'objet donc, de cet article est de présenter l'architecture du nouvel accord de Bâle qui se base sur trois piliers se consolidant mutuellement, et surtout d'expliquer quel rôle a-t-il pu jouer dans cette crise financière.
    Keywords: Banque, réglementation prudentielle, risques, crise financière.
    Date: 2010
  5. By: Godlewski, Christophe J. (BOFIT); Fungacova, Zuzana (BOFIT); Weill, Laurent (BOFIT)
    Abstract: This paper investigates stock market reaction to debt arrangements in Russia. The analysis of the valuation of debt arrangements by stock markets provides information about the use of debt by Russian companies. We apply the event study methodology to check whether debt announcements lead to abnormal returns using a sample of Russian listed companies that issued syndicated loans or bonds between June 2004 and December 2008. We find a negative reaction of stock markets to debt arrangements that can be explained by moral hazard behavior of shareholders at the expense of debtholders. Further, we observe no significant difference between announcements of syndicated loans and bonds. Thus, our findings support the view that Russian companies could have incentives to limit their reliance on external debt.
    Keywords: corporate bonds; event study; Russia; stock returns; syndicated loans
    JEL: G14 G20 P30
    Date: 2010–08–25
  6. By: Poon, Winnie P. H. (Asian Development Bank Institute); Chan, Kam C. (Asian Development Bank Institute)
    Abstract: We conducted a global study of the long-term issuer ratings of nonfinancial firms from Standard and Poor's Ratings Services (S&P) for the period 1998–2003. Specifically, we focused on the solicited versus unsolicited ratings and sample-selection bias in the analysis. Unlike the literature, we adopted an improved method using Wooldridge’s instrumental-variable approach to mitigate the concern of specification errors in Heckman’s model. We found that the probability of seeking a long-term issuer rating is positively related to the size and profitability of the firm, and negatively related to the growth opportunities and debt levels of the firm. The credit rating is positively related to the sovereign rating, size, and profitability of the issuer, and negatively related to the debt ratio of the issuer. Consistent with the literature, we found sample-selection bias in credit ratings. Our findings suggest that the firms with solicited ratings seem to be more profitable, more liquid, and have lower leverage than the issuers with unsolicited ratings. After controlling for sample-selection bias and some key financial ratios, we found that unsolicited firms, on average, seem to have lower long-term issuer ratings.
    Keywords: corporate long-term issuer ratings; solicited and unsolicited
    JEL: D53 G15 G24
    Date: 2010–08–23
  7. By: Janine Aron; John Muellbauer
    Abstract: This paper presents new models for aggregate UK data on mortgage possessions (foreclosures) and mortgage arrears (payment delinquencies). The innovations include the treatment of difficuly to observe variations in loan quality and shifts in forbearance policy by lenders, by common latent variables estimated in a system of equations for arrears and possessions, for quarterly data over 1983-2009. A second innovation is the theory-justified use of an estimate of the proportion of mortgages in negative equity, based on an average debt to equity ratio, as one of the key drivers of possessions and arrears. A third is the systematic treatment of measurement bias in the months in arrears measures. Finally, the paper does not impose a proportional long-run relationship between possessions and arrears assumed in the previous UK literature. A range of economic forecast scenarios for forecasts to 2013 reveals the sensitivity of mortgage possessions and arrears to different economic conditions, highlighting potential risks faced by the UK and its mortgage lenders. A comprehensive review of data on arrears and possessions completes the paper.
    Keywords: Foreclosures, Mortgage possessions, Mortgage payment delinquencies, Mortgage arrears, UK mortgage market, Defaults, Unobserved components model
    JEL: G21 G28 R21 C51 C53 E27
    Date: 2010
  8. By: Javed Iqbal; Sara Azher; Ayesha Ijza
    Abstract: Value-at-risk (VaR) is a useful risk measure broadly used by financial institutions all over the world. VaR has been extensively used to measure systematic risk exposure in developed markets like of the US, Europe and Asia. This paper analyzes the accuracy of VaR measure for Pakistan’s emerging stock market using daily data from the Karachi Stock Exchange-100 index January 1992 to June 2008. We computed VaR by employing data on annual basis as well as for the whole 17 year period. Overall we found that VaR measures are more accurate when KSE index return volatility is estimated by GARCH (1,1) model especially at 95% confidence level. In this case the actual loss of KSE-100 index exceeds VaR in only two years 1998 and 2006. At 99% confidence level no method generally gives accurate VaR estimates. In this case ‘equally weighted moving average’, ‘exponentially weighted moving average’ and ‘GARCH’ based methods yield accurate VaR estimates in nearly half of the number of years. On average for the whole period 95% VaR is estimated to be about 2.5% of the value of KSE-100 index. That is on average in one out of 20 days KSE-100 index loses at least 2.5% of its value. We also investigate the asset pricing implication of downside risk measured by VaR and expected returns for decile portfolios sorted according to VaR of each stock. We found that portfolios with higher VaR have higher average returns. Therefore VaR as a measure of downside risk is associated with higher returns.
    Keywords: Downside risk; Emerging Markets; Value-at-Risk.
    JEL: C5 C52 G1 G10
    Date: 2010–08–18
  9. By: Duvendack, Maren
    Abstract: Microfinance has been on the development agenda for more than 30 years, heralded as the wondrous tool that reduces poverty and empowers women (Hulme and Mosley, 1996; Rutherford, 2001; Morduch and Haley, 2002; Khandker, 1998). Doubts, however, have recently been raised about the success of microfinance (Dichter and Harper, 2007; Banerjee et al, 2009; Roodman and Morduch, 2009; Karlan and Zinman, 2009; Bateman and Chang, 2009). Given this context, this paper re-examines the microfinance impact evaluation of SEWA Bank conducted by the United States Agency for International Development (USAID) in India in 1998 and 2000. The USAID panel and a new cross-section data set are analysed using propensity score matching (PSM) and panel data techniques to address selection bias. Sensitivity analysis of the matching results is used to explore their reliability. Various sub-group comparisons between borrowers, savers and controls are also conducted to shed some light on the impact of savings versus credit. The paper concludes that doubts remain about the quality of the impact estimates obtained through advanced econometric techniques. Direct observation and the outcome of sensitivity analysis of the PSM analysis suggest that the application of PSM and differences-in-differences (DID) to these observational data were probably unable to account for selection on unobservables.
    Keywords: Impact evaluation; evaluation methods; selection bias; microfinance; India
    JEL: O1 O16 C01
    Date: 2010–08

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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