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on Banking |
| By: | Lev Ratnovski; Rocco Huang |
| Abstract: | Banks increasingly use short-term wholesale funds to supplement traditional retail deposits. Existing literature mainly points to the "bright side" of wholesale funding: sophisticated financiers can monitor banks, disciplining bad but refinancing good ones. This paper models a "dark side" of wholesale funding. In an environment with a costless but noisy public signal on bank project quality, short-term wholesale financiers have lower incentives to conduct costly monitoring, and instead may withdraw based on negative public signals, triggering inefficient liquidations. Comparative statics suggest that such distortions of incentives are smaller when public signals are less relevant and project liquidation costs are higher, e.g., when banks hold mostly relationship-based small business loans. |
| Date: | 2010–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/170&r=ban |
| By: | Olivier Jeanne (Peterson Institute for International Economics); Anton Korinek |
| Abstract: | We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model with reference to (1) the US small and medium-sized enterprise sector and (2) the household sector and find the optimal tax to be countercyclical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms. |
| Keywords: | boom-bust cycles, financial crises, systemic externalities, macroprudential regulation, precautionary savings |
| JEL: | E44 G38 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp10-12&r=ban |
| By: | Young Shin Kim; Rachev, Svetlozar T.; Bianchi, Michele Leonardo; Mitov, Ivan; Fabozzi, Frank J. |
| Abstract: | There appears to be a consensus that the recent instability in global financial markets may be attributable in part to the failure of financial modeling. More specifically, current risk models have failed to properly assess the risks associated with large adverse stock price behavior. In this paper, we first discuss the limitations of classical time series models for forecasting financial market meltdowns. Then we set forth a framework capable of forecasting both extreme events and highly volatile markets. Based on the empirical evidence presented in this paper, our framework offers an improvement over prevailing models for evaluating stock market risk exposure during distressed market periods. -- |
| Keywords: | ARMA-GARCH model,»-stable distribution,tempered stable distribution,value-at-risk (VaR),average value-at-risk (AVaR) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:2&r=ban |
| By: | Yannick Malevergne (COACTIS - Université Lumière - Lyon II : EA4161 - Université Jean Monnet - Saint-Etienne); Rey Beatrice (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429) |
| Abstract: | We introduce the notion of cross-risk vulnerability to generalize the concept of risk vulnerability introduced by Gollier and Pratt [Gollier, C., Pratt, J.W. 1996. Risk vulnerability and the tempering effect of background risk. Econometrica 64, 1109–1124]. While risk vulnerability captures the idea that the presence of an unfair financial background risk should make risk-averse individuals behave in a more risk-averse way with respect to an independent financial risk, cross-risk vulnerability extends this idea to the impact of a non-financial background risk on the financial risk. It provides an answer to the question of the impact of a background risk on the optimal coinsurance rate and on the optimal deductible level. We derive necessary and sufficient conditions for a bivariate utility function to exhibit cross-risk vulnerability both toward an actuarially neutral background risk and toward an unfair background risk. We also analyze the question of the sub-additivity of risk premia and show to what extent cross-risk vulnerability provides an answer. |
| Keywords: | Risk aversion; Risk vulnerability; Multivariate risk; Background risk |
| Date: | 2009–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00520050_v1&r=ban |
| By: | Nicola Gennaioli (UPF and CREI); Andrei Shleifer (Harvard University); Robert Vishny (University of Chicago) |
| Abstract: | We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive. Financial innovation can make both investors and intermediaries worse off. The model mimics several facts from recent historical experiences, and points to new avenues for financial reform. |
| Keywords: | Financial Innovation, Financial Fragility, Securities, Risks |
| JEL: | G G11 G15 G2 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.114&r=ban |
| By: | Vittoria Cerasi (Bicocca University); Barbara Chizzolini (Bocconi University); Marc Ivaldi (Toulouse School of Economics and EHESS, Toulouse University) |
| Abstract: | This paper analyses the relation between competition and concentration in the banking sector. The empirical answer is given by testing a monopolistic competition model of bank branching behaviour on individual bank data at county level (départements and provinces) in France and Italy. We propose a measure of the degree of competiveness in each local market that is function also of market structure indicators. We then use the econometric model to evaluate the impact of horizontal mergers among incumbent banks on competition and discuss when, depending on the pre-merger structure of the market and geographic distribution of branches, the merger is anti-competitive. The paper has implications for competition policy as it suggests an applied tool to evaluate the potential anti-competitive impact of mergers. |
| Keywords: | Banking Industry, Competition and Market Structure, Merger Policy |
| JEL: | G21 L13 L59 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.95&r=ban |
| By: | James Aitken; Manmohan Singh |
| Abstract: | This paper examines the sizable role of rehypothecation in the shadow banking system. Rehypothecation is the practice that allows collateral posted by, say, a hedge fund to its prime broker to be used again as collateral by that prime broker for its own funding. In the United Kingdom, such use of a customer’s assets by a prime broker can be for an unlimited amount of the customer’s assets while in the United States rehypothecation is capped. Incorporating estimates for rehypothecation (and the associated re-use of collateral) in the recent crisis indicates that the collapse in non-bank funding to banks was sizable. We show that the shadow banking system was at least 50 percent bigger than documented so far. We also provide estimates from the hedge fund industry for the - churning - factor or re-use of collateral. From a policy angle, supervisors of large banks that report on a global consolidated basis may need to enhance their understanding of the off-balance sheet funding that these banks receive via rehypothecation from other jurisdictions. |
| Keywords: | Banking , Nonbank financial sector , Hedge funds , Shadow economy , |
| Date: | 2010–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/172&r=ban |
| By: | Chun, Sun Eae; Nagano, Mamoru; Lee, Min Hwan |
| Abstract: | This study analyzes the effects of managerial ownership on the risk-taking behavior of Korean and Japanese banks during the relatively regulated period of the late 1990s to the early 2000s. It finds that managerial ownership alone does not affect either the risk or the profit levels of Korean banks. In contrast, an increase in managerial ownership adds to the total risk of Japanese banks. However, increased risk-taking behavior does not produce higher levels of profit for Japanese banks. The coefficients of the interaction term between franchise value and managerial ownership are negative and statistically significant for both the Korean and the Japanese banking industries. This means that an increase in managerial ownership at banks with high franchise values discourages risk-taking behavior. The result confirms the disciplinary role of franchise value on the risk-taking behavior of banks. It also falls in line with previous literature supporting the moral hazard hypothesis based on research into the economies of the U.S. and other countries. |
| Keywords: | Bank ownership structure; managerial ownership; moral hazard; franchise value; risk-taking behavior |
| JEL: | G32 G21 G20 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25334&r=ban |
| By: | Luis Garicano; Rosa Lastra |
| Abstract: | In this paper we use insights from organizational economics and financial regulation to studythe optimal architecture of supervision. We suggest that the new architecture should revolvearound the following principles: (i) banking, securities and insurance supervision should befurther integrated; (ii) macro prudential supervisory function must be in the hands of thecentral bank; (iii) the relation between macro and micro supervisors must be articulatedthrough a management by exception system involving direct authority of the macrosupervisor over enforcement and allocation of tasks; (iv) given the difficulty of measuringoutput on supervisory tasks, the systemic risk supervisor must necessarily be moreaccountable and less independent than Central Banks are on their monetary task; (v) thesupervisory agency cannot rely on high powered incentives to motivate supervisors, and mustrely on culture instead; (vi) the supervisor must limit its reliance on self regulation; and (vii)the international system should substitute the current loose, networked structure for a morecentralized and hierarchical one. |
| Keywords: | Banks, international financial markets, systematic risk |
| JEL: | E61 G21 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0990&r=ban |
| By: | Chernobai, Anna; Menn, Christian; Rachev, Svetlozar T.; Trück, Stefan |
| Abstract: | The recently finalized Basel II Capital Accord requires banks to adopt a procedure to estimate the operational risk capital charge. Under the Advanced Measurement Approaches, that are currently mandated for all large internationally active US banks, require the use of historic operational loss data. Operational loss databases are typically subject to a minimum recording threshold of roughly $10,000. We demonstrate that ignoring such thresholds leads to biases in corresponding parameter estimates when the threshold is ignored. Using publicly available operational loss data, we analyze the effects of model misspecification on resulting expected loss, Value-at-Risk, and Conditional Value-at-Risk figures and show that underestimation of the regulatory capital is a consequence of such model error. The choice of an adequate loss distribution is conducted via in-sample goodness-of-fit procedures and backtesting, using both classical and robust methodologies. -- |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:4&r=ban |
| By: | Karim Youssef; Manmohan Singh |
| Abstract: | Probability of default (PD) measures have been widely used in estimating potential losses of, and contagion among, large financial institutions. In a period of financial stress however, the existing methods to compute PDs and generate loss estimates that may vary significantly. This paper discusses three issues that should be taken into account in using PD-based methodologies for loss or contagion analyses: (i) the use of - risk-neutral probabilities - vs. -real-world probabilities; - (ii) the divergence between movements in credit and equity markets during periods of financial stress; and (iii) the assumption of stochastic vs. fixed recovery for financial institutions’ assets. All three elements have nontrivial implications for providing an accurate estimate of default probabilities and associated losses as inputs for setting policies related to large banks in distress. |
| Date: | 2010–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/190&r=ban |
| By: | Masaaki Fujii (The University of Tokyo); Yasufumi Shimada (Shinsei Bank, Limited); Akihiko Takahashi (The University of Tokyo) |
| Abstract: | In recent years, we have observed dramatic increase of collateralization as an important credit risk mitigation tool in over the counter (OTC) market [6]. Combined with the significant and persistent widening of various basis spreads, such as Libor-OIS and cross currency basis, the practitioners have started to notice the importance of difference between the funding cost of contracts and Libors of the relevant currencies. In this article, we integrate the series of our recent works [1, 2, 4] and explain the consistent construction of term structures of interest rates in the presence of collateralization and all the relevant basis spreads, their no-arbitrage dynamics as well as their implications for derivative pricing and risk management. Particularly, we have shown the importance of the choice of collateral currency and embedded hcheapestto- deliverh (CTD) option in a collateral agreement. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf230&r=ban |
| By: | Concepción Ausín; Pedro Galeano; Pulak Ghosh |
| Abstract: | Financial time series analysis deals with the understanding of data collected on financial markets. Several parametric distribution models have been entertained for describing, estimating and predicting the dynamics of financial time series. Alternatively, this article considers a Bayesian semiparametric approach. In particular, the usual parametric distributional assumptions of the GARCH-type models are relaxed by entertaining the class of location-scale mixtures of Gaussian distributions with a Dirichlet process prior on the mixing distribution, leading to a Dirichlet process mixture model. The proposed specification allows for a greater exibility in capturing both the skewness and kurtosis frequently observed in financial returns. The Bayesian model provides statistical inference with finite sample validity. Furthermore, it is also possible to obtain predictive distributions for the Value at Risk (VaR), which has become the most widely used measure of market risk for practitioners. Through a simulation study, we demonstrate the performance of the proposed semiparametric method and compare results with the ones from a normal distribution assumption. We also demonstrate the superiority of our proposed semiparametric method using real data from the Bombay Stock Exchange Index (BSE-30) and the Hang Seng Index (HSI). |
| Keywords: | Bayesian estimation, Deviance information criterion, Dirichlet process mixture, Financial time series, Location-scale Gaussian mixture, Markov chain Monte Carlo |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws103822&r=ban |
| By: | Güner, Biliana; Rachev, Svetlozar T.; Edelman, Daniel; Fabozzi, Frank J. |
| Abstract: | Recently, a body of academic literature has focused on the area of stable distributions and their application potential for improving our understanding of the risk of hedge funds. At the same time, research has sprung up that applies standard Bayesian methods to hedge fund evaluation. Little or no academic attention has been paid to the combination of these two topics. In this paper, we consider Bayesian inference for alpha-stable distributions with particular regard to hedge fund performance and risk assessment. After constructing Bayesian estimators for alpha-stable distributions in the context of an ARMA-GARCH time series model with stable innovations, we compare our risk evaluation and prediction results to the predictions of several competing conditional and unconditional models that are estimated in both the frequentist and Bayesian setting. We find that the conditional Bayesian model with stable innovations has superior risk prediction capabilities compared with other approaches and, in particular, produced better risk forecasts of the abnormally large losses that some hedge funds sustained in the months of September and October 2008. -- |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:1&r=ban |
| By: | Pavla, Vodová |
| Abstract: | The aim of this paper is to assess with price indicators the extent to which markets of loans provided to households in Visegrad countries are integrated with euro zone countries. Analysis of alignment and beta and sigma convergence concept showed that mortgage loan markets were much more integrated than consumer loan markets in period from January 2005 to March 2010. Czech and Slovak consumer loans market and Polish and Hungarian mortgage loans market have statistically significant relatively higher speed of convergence. However, barriers of integration are still very important. |
| Keywords: | credit market integration; price indicators; beta convergence; sigma convergence |
| JEL: | C23 F36 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25250&r=ban |
| By: | Shin-ichi Fukuda (University of Tokyo) |
| Abstract: | This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf229&r=ban |
| By: | Isabelle Agier; Ariane Szafarz |
| Abstract: | Microfinance institutions serve a majority of female borrowers. But do men and women benefit from same credit conditions? This paper investigates this issue by presenting an original model and testing its predictions on an exceptional database including 34,000 loan applications from a Brazilian microfinance institution over an eleven-year period. The model considers a lender that offers standardized loan contracts with a fixed interest rate, which is common practice in microfinance. It demonstrates that biased loan attribution may lead to three different outcomes, depending on the bias intensity: 1) denial of all applications from a given group, 2) a “glass ceiling” effect, namely loan downsizing of the largest projects from a given group, or 3) no impact. The empirical analysis detects no gender bias in approval rate, but uncovers a glass ceiling effect hurting female applicants. Moreover, this effect is insensitive to the credit officer's gender. In conclusion, the good news is that the microfinance practice does ensure a fair access to credit. The bad news is the presence of a glass ceiling faced by female entrepreneurs with larger projects. |
| Keywords: | Microcredit; Microfinance; Discrimination; Loan Size; Loan Approval; Gender |
| JEL: | O16 D82 J33 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/64289&r=ban |
| By: | Evarist Stoja; Arnold Polanski |
| Abstract: | We propose two simple evaluation methods for time varying density forecasts of continuous higher dimensional random variables. Both methods are based on the probability integral transformation for unidimensional forecasts. The first method tests multinormal densities and relies on the rotation of the coordinate system. The advantage of the second method is not only its applicability to any continuous distribution but also the evaluation of the forecast accuracy in specific regions of its domain as defined by the user’s interest. We show that the latter property is particularly useful for evaluating a multidimensional generalization of the Value at Risk. In simulations and in an empirical study, we examine the performance of both tests. |
| Keywords: | Multivariate Density Forecast Evaluation, Probability Integral Transformation, Multidimensional Value at Risk, Monte Carlo Simulations |
| JEL: | C52 C53 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:09/617&r=ban |
| By: | Kyoko Yagi (University of Tokyo); Ryuta Takashima (Chiba Institute of Technology) |
| Abstract: | In this paper, we examine the optimal investment policy of the firm which is financed by issuing equity, straight debt and convertible debt with the senior-sub structure. The senior-sub structure gives preference to straight debt over convertible debt and to convertible debt over equity when the default occurs. We investigate how the senior-sub structure affects the optimal policies for default, conversion and investment the values of equity, straight debt, convertible debt and investment. In particular, we show that the senior-sub structure for the equity, the straight debt and the convertible debt leads to the accelerating conversion, decreases the values of convertible debt and investment, and does not really affect the default and the investment. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf204&r=ban |
| By: | Shigenori Shiratsuka (Associate Director-General, Head of Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shigenori.shiratsuka boj.or.jp)); Wataru Takahashi (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: wataru.takahashi boj.or.jp)); Yuki Teranishi (Deputy Director, Institute for Monetary and Economic Studies (currently, Financial Systems and Bank Examination Department), Bank of Japan (E-mail: yuuki.teranishi boj.or.jp)); Kozo Ueda (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp)) |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-21&r=ban |
| By: | Damiano Brigo; Claudio Nordio |
| Abstract: | Within the context of risk integration, we introduce in risk measurement stochastic holding period (SHP) models. This is done in order to obtain a `liquidity-adjusted risk measure' characterized by the absence of a fixed time horizon. The underlying assumption is that - due to changes on market liquidity conditions - one operates along an `operational time' to which the P&L process of liquidating a market portfolio is referred. This framework leads to a mixture of distributions for the portfolio returns, potentially allowing for skewness, heavy tails and extreme scenarios. We analyze the impact of possible distributional choices for the SHP. In a multivariate setting, we hint at the possible introduction of dependent SHP processes, which potentially lead to non linear dependence among the P&L processes and therefore to tail dependence across assets in the portfolio, although this may require drastic choices on the SHP distributions. We finally discuss potential developments following future availability of market data. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1009.3760&r=ban |
| By: | Donze, Jocelyn; Dubec, Isabelle |
| Abstract: | In Australia, on the 3rd of March 2009, the interchange fees on shared ATM transactions were removed and replaced by fees directly set and received by the ATM owners. We develop a model to study how the entry of independent ATM deployers (IADs) aspects welfare under this direct charging scheme. Paradoxically, we show that the IAD entry benefits banks. It may be good for consumers if they sufficiently value the associated growth of the ATM network. |
| JEL: | G2 L1 |
| Date: | 2010–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22718&r=ban |
| By: | Adam Gersl; Petr Jakubik |
| Abstract: | This paper presents the results of an analysis of data on individual bank loans of nonfinancial corporations in the Czech Republic taken from the CNB’s Central Credit Register. It focuses on the question of how firms obtain financing from domestic banks. The results show that the vast majority of non-financial corporations use the services of just one relationship lender. Small and young firms in technology- and knowledge-intensive industries tend to concentrate their credit needs in a single bank, whereas less creditworthy firms and firms in cyclical industries tend to borrow from more than one bank. The analysis also reveals different behaviour of firms towards financing banks in the case of multiple lenders. Finally, it turns out that the level of credit risk at bank level decreases in line with the extent to which firms applying single relationship lending occur in the bank’s portfolio. |
| Keywords: | Credit risk, relationship banking. |
| JEL: | G21 G32 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2010/01&r=ban |