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on Banking |
| By: | Gabriel Jiménez (Banco de España); Steven Ongena (Center–Tilburg University and CEPR); José-Luis Peydró (European Central Bank); Jesús Saurina (Banco de España) |
| Abstract: | To identify credit availability we analyze the extensive and intensive margins of lending with loan applications and all loans granted in Spain. We find that during the period analyzed both worse economic and tighter monetary conditions reduce loan granting, especially to firms or from banks with lower capital or liquidity ratios. Moreover, responding to applications for the same loan, weak banks are less likely to grant the loan. Our results suggest that firms cannot offset the resultant credit restriction by turning to other banks. Importantly the bank-lending channel is notably stronger when we account for unobserved time-varying firm heterogeneity in loan demand and quality. |
| Keywords: | non-financial and financial borrower balance-sheet channels, financial accelerator, firm borrowing capacity, credit supply, business cycle, monetary policy, credit channel, net worth, capital, liquidity, 2007-09 crisis |
| JEL: | E32 E44 E5 G21 G28 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1030&r=ban |
| By: | Mark J. Flannery; Simon H. Kwan; Mahendrarajah Nimalendran |
| Abstract: | Doubts about the accuracy with which outside investors can assess a banking firm’s value motivate many government interventions in the banking market. The recent financial crisis has reinforced concerns about the possibility that banks are unusually opaque. Yet the empirical evidence, thus far, is mixed. This paper examines the trading characteristics of bank shares over the period from January 1990 through September 2009. We find that bank share trading exhibits sharply different features before vs. during the crisis. Until mid-2007, large (NYSE-traded) banking firms appear to be no more opaque than a set of control firms, and smaller (NASD-traded) banks are, at most, slightly more opaque. During the crisis, however, both large and small banking firms exhibit a sharp increase in opacity, consistent with the policy interventions implemented at the time. Although portfolio composition is significantly related to market microstructure variables, no specific asset category(s) stand out as particularly important in determining bank opacity. |
| Keywords: | Banks and banking ; Stock market ; Financial crises |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-27&r=ban |
| By: | Ben Craig; Goetz von Peter |
| Abstract: | This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for fitting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks. |
| Keywords: | interbank markets, intermediation, networks, tiering, core and periphery, market structure |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:322&r=ban |
| By: | Fabian Valencia |
| Abstract: | An important role for bank capital is that of a buffer against unexpected losses. As uncertainty about these losses increases, the theory predicts an increase in the optimal level of bank capital. This paper investigates this implication empirically with U.S. Commercial Banks data and finds statistically significant and robust evidence supporting it. A counterfactual experiment suggests that a decline in uncertainty to the lowest level measured in the sample generates an average reduction in bank capital ratios of slightly over 1 percentage point. However, I also find suggestive evidence that the intensity of this precautionary motive is stronger during recessions. From a policy perspective, these results suggest that the effectiveness of countercyclical capital requirements during bad times will be undermined by banks desire to hold more capital in response to increased uncertainty. |
| Keywords: | Banking , Banks , Business cycles , Capital , Debt , Economic models , Financial crisis , Financial risk , Global Financial Crisis 2008-2009 , Risk management , United States , |
| Date: | 2010–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/208&r=ban |
| By: | Changchun Hua; Li-Gang Liu |
| Abstract: | This paper investigates whether there is any consistency between banks’ financial strength ratings (bank rating) and their risk-return profiles. It is expected that banks with high ratings tend to earn high expected returns for the risks they assume and thereby have a low probability of experiencing financial distress. Bank ratings, a measure of a bank’s intrinsic safety and soundness, should therefore be able to capture the bank’s ability to manage financial distress while achieving risk-return efficiency. We first estimate the expected returns, risks, and financial distress risk proxy (the inverse z-score), then apply the stochastic frontier analysis (SFA) to obtain the risk-return efficiency score for each bank, and finally conduct ordered logit regressions of bank ratings on estimated risks, risk-return efficiency, and the inverse z-score by controlling for other variables related to each bank’s operating environment. We find that banks with a higher efficiency score on average tend to obtain favorable ratings. It appears that rating agencies generally encourage banks to trade expected returns for reduced risks, suggesting that these ratings are generally consistent with banks’ risk-return profiles. [ADBI Working Paper 240] |
| Keywords: | bank, financial, high ratings, safety, efficiency, |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2944&r=ban |
| By: | Beck, Thorsten; Cull, Robert; Fuchs, Michael; Getenga, Jared; Gatere, Peter; Randa, John; Trandafir, Mircea |
| Abstract: | Although Kenya's financial system is by far the largest and most developed in East Africa and its stability has improved significantly over the past years, many challenges remain. This paper assesses the stability, efficiency, and outreach of Kenya's banking system, usingaggregate, bank-level, and survey data. Banks'asset quality and liquidity positions have improved, making the system more resistant to shocks, and interest rate spreads have declined, in part due to reduction in the overhead costs of foreign banks. Outreach remains limited, but has improved in recent years, driven by mobile payments services in the domestic remittance market. Fostering a level regulatory playing field for all deposit-taking institutions is a key remaining challenge. Specifically, an effective but not overly burdensome framework for regulation and supervision of microfinance institutions and cooperatives is a priority. Maintaining an openness to new, and non-bank, providers of financial services, which has enabled the success of mobile payments, could also further outreach. |
| Keywords: | Banks&Banking Reform,Access to Finance,Debt Markets,Emerging Markets,Bankruptcy and Resolution of Financial Distress |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5442&r=ban |
| By: | Memmel, Christoph |
| Abstract: | We use a unique dataset of German banks' exposure to interest rate risk to derive the following statements about their exposure to this risk and their earnings from term transformation. The systematic factor for the exposure to interest rate risk moves in sync with the shape of the term structure. At bank level, however, the time variation of the exposure is largely determined by idiosyncratic effects. Over time, changes in earnings from term transformation have a large impact on interest income. Across banks, however, the earnings from term transformation do not seem to be a decisive factor for the interest margin. -- |
| Keywords: | interest rate risk,term transformation,interest income |
| JEL: | G11 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:201007&r=ban |
| By: | Heiko Hesse; Raphael A. Espinoza; Adolfo Barajas; Ralph Chami |
| Abstract: | This paper examines the recent credit slowdown among Middle Eastern and North African (MENA) countries from three analytical angles. First, it finds that, similar to other regions and to its past history, a credit boom preceded the current slowdown, and that a protracted period of sluggish growth is likely going forward. Second, it uncovers a key role played by bank funding (deposit growth and external borrowing slowed considerably) but whose effect was frequently dampened by expansionary monetary policy. Third, bank-level fundamentals - capitalization and loan quality - helped to explain differences in credit growth across banks and countries. |
| Keywords: | Bank credit , Banking sector , Credit expansion , Cross country analysis , Economic growth , Middle East , Monetary policy , North Africa , |
| Date: | 2010–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/219&r=ban |
| By: | Joshua Aizenman; Reuven Glick |
| Abstract: | This paper presents a model comparing the optimal degree of asset class diversification abroad by a central bank and a sovereign wealth fund. We show that if the central bank manages its foreign asset holdings in order to meet balance of payments needs, particularly in reducing the probability of sudden stops in foreign capital inflows, it will place a high weight on holding safer foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We also show how the diversification differences between the strategies of the bank and SWF is affected by the government’s delegation of responsibilities and by various parameters of the economy, such as the volatility of equity returns and the total amount of public foreign assets available for management. |
| Keywords: | Banks and banking, Central ; Sovereign wealth fund |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-20&r=ban |
| By: | Laura Valderrama |
| Abstract: | The use of collateral has become one of the most widespread risk mitigation techniques. While it brings stabilizing effects to the individual lender we argue that it may exacerbate systemic risk through margin call activation. We show how a liquidity shock to the cash lender may propagate as a solvency shock via liquidity hoarding even if the cash lender remains solvent in all states of nature. Albeit a cost-effective response of the cash lender to a liquidity shock, liquidity hoarding may lead to the bankruptcy of its repo counterparties triggering contagion across asset classes. To buttress the resilience of the financial system, we lay out a menu of macroprudential policies that deactivate this channel of financial contagion. |
| Date: | 2010–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/220&r=ban |
| By: | Philippe Bacchetta; Cédric Tille; Eric van Wincoop |
| Abstract: | Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price. This link implies that risk about tomorrow's asset price depends on uncertainty about risk tomorrow. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and self-fulfilling shifts in risk. We show that this can generate risk panics. The impact of the panic is larger when the shift from a low to a high risk equilibrium takes place in an environment of weak fundamentals. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can account well for the developments during the recent financial crisis. |
| Keywords: | financial panics and sunspot-like equilibria |
| JEL: | E44 G11 G12 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:10.05&r=ban |
| By: | Raphael A. Espinoza; Ananthakrishnan Prasad |
| Abstract: | According to a dynamic panel estimated over 1995 - 2008 on around 80 banks in the GCC region, the NPL ratio worsens as economic growth becomes lower and interest rates and risk aversion increase. Our model implies that the cumulative effect of macroeconomic shocks over a three year horizon is indeed large. Firm-specific factors related to risk-taking and efficiency are also related to future NPLs. The paper finally investigates the feedback effect of increasing NPLs on growth using a VAR model. According to the panel VAR, there could be a strong, albeit short-lived feedback effect from losses in banks’ balance sheets on economic activity, with a semi-elasticity of around 0.4. |
| Date: | 2010–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/224&r=ban |
| By: | Karl Whelan (University College Dublin) |
| Abstract: | The past few months have exposed serious problems in relation to Europe’s ability to cope with financial stress. Placing the new Financial Stability funds on a permanent basis, in the form of a new European Monetary Fund will be required if Europe is to deal effectively with the serious debt problems of some Eurozone countries. However, this fund should exist to manage sovereign defaults in an orderly manner, not to prevent them altogether. Bank supervisors also need to publish regular stress tests, change their regulations on the risk weighting of sovereign debt and put new resolution procedures in place. Together, these reforms will allow Europe to deal with future sovereign debt problems without provoking a crisis. |
| Date: | 2010–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201027&r=ban |
| By: | Zheng Liu; Pengfei Wang |
| Abstract: | We present a model with heterogeneous firms, in which credit constraints may give rise to self-fulfilling, sunspot-driven business cycle fluctuations. We derive optimal incentive-compatible loan contracts, under which a firm’s borrowing capacity is constrained by expected equity value. Interactions between debt and equity value made possible by credit constraints generate a credit externality, which leads to procyclical total factor productivity (TFP) and, with sufficiently high cost of financial intermediation, to equilibrium indeterminacy. At the aggregate level, the credit externality is observationally equivalent to production externality. Aggregate dynamics in our model with credit constraints and constant returns technology at the firm level are isomorphic to those in an aggregate economy with increasing returns, such as that studied by Benhabib and Farmer (1994). |
| Keywords: | Credit |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-22&r=ban |
| By: | James Chapman, Jonathan Chiu, and Miguel Molico |
| Abstract: | We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut. |
| Keywords: | Payment, clearing, and settlement systems; Central bank research; Monetary policy implementation; Financial system regulation and policies; Financial services |
| JEL: | E40 E50 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-23&r=ban |
| By: | Masaaki Fujii (Graduate School of Economics, University of Tokyo); Yasufumi Shimada (Capital Markets Division, Shinsei Bank, Limited); Akihiko Takahashi (Faculty of Economics, 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 "cheapestto- deliver" (CTD) option in a collateral agreement. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2010cf762&r=ban |
| By: | Ke Pang; Pierre L. Siklos |
| Abstract: | This paper uses the credit-friction model developed by C´urdia and Woodford, in a series of papers, as the basis for attempting to mimic the behavior of credit spreads in moderate as well as in times of crisis. We are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. We then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads unlike quantitative easing which has opposite effects. The relative advantage of credit easing becomes even clearer when we allow borrowers to default on their loans. Since increases in default offset the beneficial effects of credit easing on spreads, the policy implication is that, in times of financial stress, the central bank should be aggressive when applying credit easing policies. |
| JEL: | E43 E44 E51 E58 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2010-28&r=ban |
| By: | Todd Keister |
| Abstract: | How does the belief that policymakers will bail out investors in the event of a crisis affect the allocation of resources and the stability of the financial system? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the efficient policy response is to use public resources to augment the private consumption of those investors facing losses. The anticipation of such a “bailout” distorts ex ante incentives, leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility. Prohibiting bailouts is not necessarily desirable, however: it induces intermediaries to become too liquid from a social point of view and may, in addition, leave the economy more susceptible to a crisis. A policy of taxing short-term liabilities, in contrast, can correct the incentive problem while improving financial stability. |
| Keywords: | Intermediation (Finance) ; Financial crises ; Liquidity (Economics) ; Taxation ; Business failures |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:473&r=ban |
| By: | Støve, Bård (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Tjøstheim, Dag (Dept. of Mathematics, University of Bergen); Hufthammer, Karl Ove (Dept. of Mathematics, University of Bergen) |
| Abstract: | This paper examines financial contagion, that is, whether the cross-market linkages in financial markets increases after a shock to a country. We introduce the use of a new measure of local dependence (introduced by Hufthammer and Tjøstheim (2009)) to study the contagion effect. The central idea of the new approach is to approximate an arbitrary bivariate return distribution by a family of Gaussian bivariate distributions. At each point of the return distribution there is a Gaussian distribution that gives a good approximation at that point. The correlation of the approximating Gaussian distribution is taken as the local correlation in that neighbourhood. By examining the local Gaussian correlation before the shock (in a stable period) and after the shock (in the crisis period), we are able to test whether contagion has occurred by a proposed bootstrap testing procedure. Examining the Mexican crisis of 1994, the Asian crisis of 1997-1998 and the financial crisis of 2007-2009, we find some evidence of contagion based on our new procedure. |
| Keywords: | Financial Contagion; Crisis; Gaussian Correlation |
| JEL: | C10 |
| Date: | 2010–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2010_012&r=ban |
| By: | Marta Cardin (Dept. of Applied Mathematics, University Ca'Foscari of Venice); Miguel Couceiro (Mathematics Research Unit, University of Luxembourg) |
| Abstract: | In this short note, we aim at a qualitative framework for modeling multivariate risk. To this extent, we consider completely distributive lattices as underlying universes, and make use of lattice functions to formalize the notion of risk measure. Several properties of risk measures are translated into this general setting, and used to provide axiomatic characterizations. Moreover, a notion of quantile of a lattice-valued random variable is proposed, which shown to retain several desirable properties of its real-valued counterpart. |
| Keywords: | lattice; risk measure; Sugeno integral; quantile. |
| JEL: | C02 C40 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpaper:200&r=ban |