New Economics Papers
on Banking
Issue of 2010‒10‒09
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Relationship Lending, Firms’ Behaviour and Credit Risk: Evidence from the Czech Republic By Adam Gersl; Petr Jakubík
  2. Macroeconomic propagation under different regulatory regimes: Evidence from an estimated DSGE model for the euro area By Matthieu Darracq Pariès; Christoffer Kok Sørensen; Diego Rodriguez Palenzuela
  3. Bank Specific, Business and Institutional Environment Determinants of Banks Nonperforming Loans: Evidence from MENA Countries By Abdelkader Boudriga; Neila Boulila Taktak; Sana Jellouli
  4. The EU Stress Test and Sovereign Debt Exposures By Adrian Blundell-Wignall; Patrick Slovik
  5. Banks' financial conditions and the transmission of monetary policy: a FAVAR approach. By Jimborean, R.; Mésonnier, J-S.
  6. Une approche Macroprudentielle du risque systémique en zone CEMAC By Nguenang, Christian; Kamgna, Sévérin yves; Tinang, Nzeusseu Jules
  7. Bank risk-taking, securitization, supervision and low interest rates: Evidence from the euro area and the U.S. lending standards By Angela Maddaloni; José-Luis Peydró
  8. Banks versus venture capital when the venture capitalist values private benefits of control By Inci, Eren; Barlo, Mehmet
  9. Modeling a Distribution of Mortgage Credit Losses By Petr Gapko; Martin Šmíd
  10. Interbank market integration, loan rates, and firm leverage By Steven Ongena; Alexander Popov
  11. The Role of the State in Managing and Forestalling Systemic Financial Crises: Some Issues and Perspectives By Charles Adams
  12. A Hierarchical Agency Model of Deposit Insurance By Jonathan Carroll; Shino Takayama
  13. The Consequences of Banking Crises for Public Debt By Davide Furceri; Aleksandra Zdzienicka
  14. Macroprudential stress-testing practices of central banks in central and south eastern Europe : an overview and challenges ahead By Melecky, Martin; Podpiera, Anca Maria
  15. Foreign currency borrowing of households in new EU member states By Attila Csajbók; András Hudecz; Bálint Tamási
  16. The Euro overnight interbank market and ECB's liquidity management policy during tranquil and turbulent times By Nuno Cassola; Michael Huetl
  17. Contingent Capital: The Case for COERCs By Pennacchi, George G.; Vermaelen, Theo; Wolff, Christian C
  18. Macro-prudential Approach to Regulation - Scope and Issues By Shyamala Gopinath
  19. The Effect of Regulating Interchange Fees at Cost on the ATM Market. By Donze, Jocelyn; Dubec, Isabelle
  20. The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis By Hui Tong; Shang-Jin Wei

  1. By: Adam Gersl (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Jakubík (European Central Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper presents the results of an analysis of data on individual bank loans of non-financial 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 case of multiple lenders. Finally, the paper shows 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: relationship banking; credit risk
    JEL: G21 G32
    Date: 2010–09
  2. By: Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Diego Rodriguez Palenzuela (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The financial crisis clearly illuminated the potential amplifying role of financial factors on macroeconomic developments. Indeed, the heavy impairments of banks’ balance sheets brought to the fore the banking sector’s ability to provide a smooth flow of credit to the real economy. However, most existing structural macroeconomic models fail to take into account the crucial role of banks’ balance sheet adjustment in the propagation of shocks to the economy. This paper contributes to fill this gap, analyzing the role of credit market frictions in business cycle fluctuations and in the transmission of monetary policy. We estimate a closed-economy dynamic stochastic general equilibrium (DSGE) model for the euro area with financially-constrained households and firms and embedding an oligopolistic banking sector facing capital constraints. Using this setup we examine the macroeconomic implications of various financial frictions on the supply and demand of credit, and in particular we assess the effects of introducing risk-sensitive and more stringent capital requirements. Finally, we explore the scope for counter-cyclical bank capital rules and the strategic complementarities between macro-prudential tools and monetary policy. JEL Classification: E4, E5, F4.
    Keywords: DSGE models, Bayesian estimation, Banking, Financial regulation.
    Date: 2010–10
  3. By: Abdelkader Boudriga (University of Tunis); Neila Boulila Taktak; Sana Jellouli
    Abstract: The paper empirically analyzes the determinants of nonperforming loans (NPL) and the potential impact of both business and institutional environment on credit risk exposure of banks in the MENA region. Looking at a sample of 46 banks in 12 countries over the period 2002–2006, we find that, among bank specific factors, foreign participation coming from developed countries, high credit growth and loan loss provisions reduce the NPL level. However, highly capitalized banks experience high level of credit exposure. Credit quality of banks is also positively affected by the relevance of the information published by public and private bureaus. Finally, our findings highlight the importance of institutional environment in enhancing banks credit quality. Specifically, a better control of corruption, a sound regulatory quality, a better enforcement of rule of law, and a free voice and accountability play an important role in reducing NPL in the MENA countries.
    Date: 2010–09
  4. By: Adrian Blundell-Wignall; Patrick Slovik
    Abstract: This working paper’s quantifications show that most sovereign debt is held on the banking books of banks, whereas the EU stress test considered only their small trading book exposures. It discusses why sovereign debt held in the banking book cannot be ignored by investors and creditors, because of: (a) recovery values in the event of individual bank failures; and (b) fiscal sustainability and structural competitiveness issues which mean the market cannot give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the European Financial Stability Facility Special Purpose Vehicle (EFSF SPV) comes to an end. How the SPV could operate to shift sovereign risk from banks to the public sector is also an important part of the discussion.
    Keywords: financial stability
    JEL: E62 G21 G28
    Date: 2010–08
  5. By: Jimborean, R.; Mésonnier, J-S.
    Abstract: We propose a novel approach to assess whether banks' financial conditions, as reflected by bank-level information, matter for the transmission of monetary policy, while reconciling the micro and macro levels of analysis. We include factors summarizing large sets of individual bank balance sheet ratios in a standard factor-augmented vector autoregression model (FAVAR) of the French economy. We first find that factors extracted from banks' liquidity and leverage ratios predict macroeconomic fluctuations. This suggests a potential scope for macroprudential policies aimed at dampening the procyclical effects of adjustments in banks' balance sheets structure. However, we also find that fluctuations in bank ratio factors are largely irrelevant for the transmission of monetary shocks. Thus, there is little point monitoring the information contained in bank balance sheets, above the information already contained in credit aggregates, as far as monetary policy transmission is concerned.
    Keywords: Monetary transmission; Credit channel; Factor Augmented Vector Autoregression (FAVAR).
    JEL: E44 E52 G21
    Date: 2010
  6. By: Nguenang, Christian; Kamgna, Sévérin yves; Tinang, Nzeusseu Jules
    Abstract: In this study, we identifie a small number of indicators of macro-prudential supervision important to monitoring of the banking’s system. We use the theory of Markov stochastic processes to measure the systemic risk of CEMAC by calculating the degree of fragility of system and we determine the variables that influent on it degradation by using a logit model on panel data. Following this analysis, it appears that the claims on the private sector in a period, foreign direct investment (FDI), private sector credit and exports increase the risk of failure of the banking system, while the equity, The rate of inflation, exchange rates, while rising, downward influence the likelihood of degradation of the banking system in CEMAC
    Keywords: Banking System; Macro-Prudential Indicators;Degradation; Systemic risk;Markov stochastic processes; Monetary Policy CEMAC; BEAC; ;
    JEL: C13 C12 G28 G21
    Date: 2010
  7. By: Angela Maddaloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Using a unique dataset of the Euro area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards, for household and corporate loans. This softening – especially for mortgages – is amplified by securitization activity, weak supervision for bank capital and too low for too long monetary policy rates. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor-rule residuals experienced a worse economic performance afterwards. These results help shed light on the origins of the crisis and have important policy implications. JEL Classification: G01, G21, G28, E44, E5.
    Keywords: lending standards, monetary policy, securitization, bank capital, financial stability.
    Date: 2010–10
  8. By: Inci, Eren; Barlo, Mehmet
    Abstract: If control of their firms allows entrepreneurs to derive private benefits, it also allows other controlling parties. Private benefits are especially relevant for venture capitalists, who typically get considerable control in their portfolio firms, but not for banks, which are passive loan providers. We incorporate this difference between banks and venture capital and analyze entrepreneurs' financing strategy between the two. We find that, in all strict Nash Equilibria, entrepreneurs who value private benefits more choose banks while the rest choose venture capital. Thus, bank-financed entrepreneurs allocate more resources to tasks that yield private benefits while VC-backed entrepreneurs have higher profitability.
    Keywords: bank; control; entrepreneurship; private benefit; venture capital
    JEL: L26 G32 G24 M13 G21
    Date: 2010–07–27
  9. By: Petr Gapko (Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Martin Šmíd (Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic)
    Abstract: One of the biggest risks arising from financial operations is the risk of counterparty default, commonly known as a “credit risk”. Leaving unmanaged, the credit risk would, with a high probability, result in a crash of a bank. In our paper, we will focus on the credit risk quantification methodology. We will demonstrate that the current regulatory standards for credit risk management are at least not perfect, despite the fact that the regulatory framework for credit risk measurement is more developed than systems for measuring other risks, e.g. market risks or operational risk. Generalizing the well known KMV model, standing behind Basel II, we build a model of a loan portfolio involving a dynamics of the common factor, influencing the borrowers’ assets, which we allow to be non-normal. We show how the parameters of our model may be estimated by means of past mortgage deliquency rates. We give a statistical evidence that the non-normal model is much more suitable than the one assuming the normal distribution of the risk factors. We point out how the assumption that risk factors follow a normal distribution can be dangerous. Especially during volatile periods comparable to the current crisis, the normal distribution based methodology can underestimate the impact of change in tail losses caused by underlying risk factors.
    Keywords: Credit Risk, Mortgage, Delinquency Rate, Generalized Hyperbolic Distribution, Normal Distribution
    JEL: G21
    Date: 2010–09
  10. By: Steven Ongena (Tilburg University, Warandelaan 2 5037 AB Tilburg, Netherlands.); Alexander Popov (European Central Bank, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We study the effect of interbank market integration on small firm finance in the build-up to the 2007-2008 financial crisis. We use a comprehensive data set that contains contract terms on individual loans to 6,047 firms across 14 European countries between 1998:01 and 2005:12. We account for the selection that arises in the loan request and approval process. Our findings imply that integration of interbank markets resulted in less stringent borrowing constraints and in substantially lower loan rates. The decrease was strongest in markets with competitive banking sectors. We also find that in the most rapidly integrating markets, firms became substantially overleveraged during the build-up to the crisis. JEL Classification: E51, G15, G21, G34.
    Keywords: interbank markets, selection, loan rates, bank competition, firm leverage.
    Date: 2010–10
  11. By: Charles Adams
    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 failâ€), 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. [ADBI Working Paper 242]
    Keywords: state, financial crises, crisis management, instruments, financial, government ministries, agencies, central bank
    Date: 2010
  12. By: Jonathan Carroll; Shino Takayama (School of Economics, The University of Queensland)
    Abstract: This paper develops a hierarchical agency model of deposit insurance. The main purpose is to undertake a game theoretic analysis of the consequences of deposit insurance schemes and their effects on monitoring incentives for banks. Using this simple framework, we analyze both risk- independent and risk-dependent premium schemes along with reserve requirement constraints. The results provide policymakers with not only a better understanding of the effects of deposit insurance on welfare and the problem of moral hazard, but also the policy implications implied in the design of de- posit insurance schemes. Our finding is consistent with the empirical research on depositor discipline.
    Date: 2010
  13. By: Davide Furceri; Aleksandra Zdzienicka
    Abstract: The aim of this paper is to assess the consequences of banking crises for public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises are associated with a significant and long-lasting increase in government debt. The effect is a function of the severity of the crisis. In particular, for severe crises, comparable to the most recent one in terms of output losses, banking crises are followed by a medium-term increase of about 37 percentage points in the government gross debt-to-GDP ratio. Measuring the increase in debt in this manner seems more appropriate than some of the measures used in the literature that have provided off-quoted and very large numbers for the run-up in debt. In addition, the debt ratio increased more in countries with a higher initial gross debt-to-GDP ratio and with a higher initial foreign debt-to-GDP ratio.<P>Les conséquences des crises bancaires pour la dette publique<BR>L’objectif de ce document est de déterminer l’impact des crises bancaires sur la dette publique. Les résultats obtenus utilisant un panel non-cylindré de 154 pays sur la période 1980-2006 montrent que les crises bancaires provoquent une augmentation significative et persistante de la dette publique. Cet effet dépend de la sévérité de la crise. Plus précisément, les crises dont la sévérité est comparable à la crise la plus récente en termes de pertes de PIB augmentent la dette publique brute par rapport PIB d’environ 37 points de pourcentage à moyen terme. Cette approche semble être plus appropriée par rapport à celles utilisées dans la littérature qui centrées sur la dette publique elle-même rapportent l’impact beaucoup plus important des crises bancaires. De plus, l’impact des crises bancaires croît en fonction du niveau initial de la dette public et de la dette extérieur par rapport au PIB.
    Keywords: public debt, financial crisis, banking crisis, dette publique, crise financière, crise bancaire
    JEL: E6 G1
    Date: 2010–08–25
  14. By: Melecky, Martin; Podpiera, Anca Maria
    Abstract: Stress tests are the main practical tools of macroprudential oversight. This paper reviews the stress-testing practices of central banks in Central and South Eastern Europe (CSEECBs) and outlines the challenges in the area of stress testing going forward. The authors discuss good practice and the applied approaches by CSEECBs focusing on the main components of a typical macroprudential stress test, i.e. constructing the baseline and stress scenarios, mapping macroeconomic scenarios and microeconomic factors to risk factors, calculating risk exposures to different risk indicators, and estimating outcome indicators to inform macroprudential policy. The main challenges for the CSEECBs going forward involve needed improvements in data reliability, consideration of quantitative microprudential indicators in macroprudential stress tests, explicit incorporation of dynamics in stress tests to include reaction functions of banks and macroprudential policy, institutionalization of macroprudential policy responses to alarming stress-test results, use of the top-down and bottom-up stress test results in supervisory communication, cooperation of macroprudential and microprudential supervision, and information exchange for better cross-border supervision of international banking groups.
    Keywords: Banks&Banking Reform,Debt Markets,Currencies and Exchange Rates,Emerging Markets,Financial Intermediation
    Date: 2010–09–01
  15. By: Attila Csajbók (Magyar Nemzeti Bank); András Hudecz (Magyar Nemzeti Bank); Bálint Tamási (Magyar Nemzeti Bank)
    Abstract: The post-Lehman phase of the financial crisis has exposed a number of weaknesses in the banking sectors of the European Union’s New Member States (NMSs). One of these is the prevalence of lending in foreign currency. While banks themselves in these countries have not taken on sizeable currency risk directly, they passed it on to households and the corporate sector. With large depreciations taking place or looming in the region, the currency risk at households and corporates without a natural hedge is now being transformed into credit risk for the banking sector. This is creating a serious problem in maintaining financial stability and cripples monetary policy in countries where it operates primarily through the exchange rate channel. The patterns of foreign currency lending to households in NMSs vary widely both across countries and time periods. For example, FX lending to households is virtually non-existent in the Czech Republic while in some Baltic countries its share is close to 100 per cent of total household lending. The main goal of the paper is (1) to present the stylised facts of pre-crisis FX lending in NMSs systematically and (2) to try to explain these differing patterns in an econometric model. In order to do so, a panel database of household FX borrowing is compiled, covering 10 NMSs in the period 1999-2008. Our estimation results suggest that the degree of household FX borrowing depends on the interest rate differential, the institutional features of mortgage financing and the monetary regime. Household FX borrowing tends to be less prevalent if the interest rate differential is small, fixed interest rate mortgage financing is available and the monetary authority’s “fear of floating” is low.
    Keywords: foreign currency lending, new member states, credit risk, monetary policy
    JEL: E44 E50 G21
    Date: 2010
  16. By: Nuno Cassola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Huetl (University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, 9000 St. Gallen, Switzerland.)
    Abstract: We analyze the impact of the recent financial market crisis on the Euro Overnight Index Average (EONIA) and interbank market trading and assess the effectiveness of the ECB liquidity policy between 07/2007 - 08/2008. We extend the model of [QM06] by (i) incorporating the microstructure of the EONIA market including the ECB fine-tuning operation on the last day of the maintenance period (MP) and banks’ daily excess liquidity, (ii) giving insight into banks’ trading behavior characterized by an endogenous regime-switch and suggesting an efficient procedure to simulate the entire MP, and (iii) proposing a model for market distortion due to lending constraints which lead to a bid-ask spread for the EONIA rate. The model is calibrated by simulation fitting daily EONIA rates and aggregate liquidity measures observed between March 2004 and September 2008. Besides lending constraints we consider market segmentation and aggregate liquidity shocks as possible market distortions in the crisis period. For a calibration cross-check and for estimating the timing of the endogenous regime-switch we use panel data covering liquidity data of 82 Euro Area commercial banks for the period 03/2003 - 07/2007. With the calibrated model the ECB policy of liquidity frontloading is evaluated and compared with a reserve band system policy similar to the Bank of England’s framework. We find that liquidity frontloading is a small scale central bank intervention which is capable of stabilizing interest rates in both frictionless and distorted markets. Simulations suggest that without frontloading the EONIA would have been, on average, 23 basis points above the policy rate (target); with frontloading, the overnight rate is, on average, on target. JEL Classification: E44, E52, G21.
    Keywords: liquidity management, open market operations, simulation, microstructure.
    Date: 2010–10
  17. By: Pennacchi, George G.; Vermaelen, Theo; Wolff, Christian C
    Abstract: In this paper we propose a new security, the Call Option Enhanced Reverse Convertible (COERC). The security is a form of contingent capital, i.e. a bond that converts into equity when the market value of equity relative to debt falls below a certain trigger. The conversion price is set significantly below the trigger price and, at the same time, equity holders have the option to buy back the shares from the bondholders at the conversion price. Compared to other forms of contingent capital proposed in the literature, the COERC is less risky in a world where bank assets can experience sudden jumps. Moreover, the structure eliminates concerns about putting the company in a “death spiral” as a result of manipulation or panic. A bank that issues COERCs also has a smaller incentive to choose investments that are subject to large losses.
    Keywords: Banks; Financial crisis; Financial stability; Security design
    JEL: G20
    Date: 2010–09
  18. By: Shyamala Gopinath
    Abstract: It is being acknowledged that a macro prudential perspective is critical in designing and pursuing micro prudential regulation of institutions and markets. Two distinct but highly inter-related constructs have come to epitomize this post-crisis framework: macro prudential regulation and systemic risk management. Both these concepts are philosophically appealing and conceptually sound, but operationally quite challenging. Understanding the nuanced interplay between these would be crucial in designing an efficient operative framework for financial stability. [Paper presented at the ADBI-BNM Conference on “Macroeconomic and Financial Stability in Asian Emerging Marketsâ€, Kuala Lumpur].
    Keywords: asian, emerging, markets, macro prudential, micro, crisis, philosophically, framework, financial stability, institutions, markets, risk management, economic, procyclical, bank, capital,
    Date: 2010
  19. By: Donze, Jocelyn; Dubec, Isabelle
    Date: 2010–05
  20. By: Hui Tong (International Monetary Fund); Shang-Jin Wei (Columbia University and Tsinghua University and National Bureau of Economic Research and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research)
    Abstract: This paper studies whether the volume and composition of capital flows affect the degree of credit crunch during the 2007-2009 crisis. Using data on 3823 firms in 24 emerging countries, we find that, on average, the decline in stock prices was more severe for firms that are intrinsically more dependent on external finance for working capital. Interestingly, while the volume of capital flows per se has no significant effect, the composition matters a lot. In particularly, greater dependence on non-FDI capital inflows before the crisis worsens the credit crunch during the crisis, while exposure to FDI alleviates the liquidity constraint.
    Keywords: Financial Globalization, Financial Crisis, Spillover, Liquidity Constraint
    JEL: F3 G2 G3
    Date: 2010–06

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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