New Economics Papers
on Banking
Issue of 2010‒11‒06
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Non-Price Competition in Credit Card Markets Through Bundling and Bank Level Benefits By G. Gulsun Akin; Ahmet Faruk Aysan; Gazi Ishak Kara; Levent Yildiran
  2. Eficiência Bancária e Inadimplência: testes de Causalidade By Benjamin M. Tabak; Giovana L. Craveiro; Daniel O. Cajueiro
  3. The impact of payment splitting on liquidity requirements in RTGS By Denbee, Edward; Norman, Ben
  4. Capital Requirement and Financial Frictions in Banking: Macroeconomic Implications By Ali Dib
  5. When do we have borrower or credit volume rationing in competitive credit markts with imperfect infomation? By Daniel Kraus
  6. The Brazilian Interbank Network Structure and Systemic Risk By Edson Bastos e Santos; Rama Cont
  7. Sturm und Drang in money market funds: When money market funds cease to be narrow By Jank, Stephan; Wedow, Michael
  8. Interest rate pass-through and risk By Iris Biefang Frisancho-Mariscal; Peter Howells
  9. Unilateral CVA for CDS in Contagion Model_with Volatilities and Correlation of Spread and Interest By Bao, Qunfang; Chen, Si; Liu, Guimei; Li, Shenghong
  10. Tell-tale tails: A data driven approach to estimate unique market information shares By Grammig, Joachim; Peter, Franziska J.
  11. The co-movement of asset returns and the micro-macro focus of prudential oversight By Majnoni, Giovanni
  12. The Determinants of International Financial Integration Revisited: The Role of Networks and Geographic Neutrality. By Pérez García Francisco; Tortosa-Ausina Emili; Arribas Fernández Iván

  1. By: G. Gulsun Akin (Bogazici University); Ahmet Faruk Aysan; Gazi Ishak Kara; Levent Yildiran
    Abstract: Attempts to explain high and sticky credit card rates have given rise to a vast literature on credit card markets. This paper endeavors to explain the rates in the Turkish market using measures of non-price competition. In this market, issuers compete monopolistically by differentiating their credit card products. The fact that credit cards and all other banking services are perceived as a bundle by consumers allows banks to deploy also bank level characteristics to differentiate their credit cards. Thus, credit card rates are expected to be affected by the features and service quality of banks. Panel data estimations also control various costs associated with credit card lending. The results show significant and robust effects of the non-price competition variables on credit card rates.
    Date: 2010–10
  2. By: Benjamin M. Tabak; Giovana L. Craveiro; Daniel O. Cajueiro
    Abstract: Periods of Financial Stability are associated to low bank efficiency and high non-performing loans in credit portfolios. Therefore, this paper studies the relationship between bank efficiency and non-performing loans. To evaluate the bank efficiency, we employ a Data Envelopment Analysis. We employ the Arelano-Bond dynamic panel approach and a panel-VAR to test whether non-performing loans Granger cause bank efficiency (bad luck hypothesis) or whether bank efficiency affects loan quality (management with risk aversion). Empirical results for the Brazilian case corroborate the second hypothesis.
    Date: 2010–10
  3. By: Denbee, Edward (Bank of England); Norman, Ben (Bank of England)
    Abstract: This paper examines the impact that payment splitting could have upon the liquidity requirements and efficiency of a large-value payment system, such as the United Kingdom’s CHAPS. Using the Bank of Finland Payment and Settlement Simulator and real UK payments data we find that payment splitting could reduce the liquidity required to settle payments. The reduction in required liquidity would increase as the payment splitting threshold decreased but the relationship is non-linear. Liquidity savings are not homogeneously distributed, with some banks benefiting more than others.
    Keywords: Payment systems; simulations; payment splitting; liquidity-saving mechanisms
    JEL: C63 E42
    Date: 2010–10–28
  4. By: Ali Dib
    Abstract: The author develops a dynamic stochastic general-equilibrium model with an active banking sector, a financial accelerator, and financial frictions in the interbank and bank capital markets. He investigates the importance of banking sector frictions on business cycle fluctuations and assesses the role of a regulatory capital requirement in propagating the effects of shocks in the real economy. Bank capital is introduced to satisfy the regulatory capital requirement, and serves as collateral for borrowing in the interbank market. Financial frictions are introduced by assuming asymmetric information between lenders and borrowers that creates moral hazard and adverse selection problems in the interbank and bank capital markets, respectively. Highly leveraged banks are vulnerable and therefore pay higher costs when raising funds. The author finds that financial frictions in the interbank and bank capital markets amplify and propagate the effects of shocks; however, the capital requirement attenuates the real impacts of aggregate shocks (including financial shocks), reduces macroeconomic volatilities, and stabilizes the economy.
    Keywords: Economic models; Business fluctuations and cycles; Financial markets; Financial stability
    JEL: E32 E44 G1
    Date: 2010
  5. By: Daniel Kraus (University of Rostock)
    Abstract: This paper examines the conditions for credit volume or borrower rationing in a competitive credit market in which the project characteristics are private information of the borrowers. There can only be credit volume rationing if the higher-risk credit applicants have a higher return in the event of a project success than the lower-risk credit applicants. Then the higher-risk borrowers are not rationed and obtain the social efficient credit volume. If the incentive compatibility constraint of the higher risk borrowers is binding, the lower-risk borrowers are credit volume rationed such that the constraint holds as an equation. If credit volume rationing is not sufficient to separate the borrower types, there is additionally a rationing of the low-risk borrowers. If the low-risk borrowers prefer a pooling to a separating contract, then there will not be a Cournot-Nash separating equilibrium, but a Wilson and a Grossmann pooling equilibrium.
    Keywords: Credit rationing, Credit Size, Loan, Asymmetric Information, Adverse Selection, Non-linear optimization
    JEL: D82 G21
    Date: 2010–10–25
  6. By: Edson Bastos e Santos; Rama Cont
    Abstract: ...
    Date: 2010–10
  7. By: Jank, Stephan; Wedow, Michael
    Abstract: This paper investigates the returns and flows of German money market funds before and during the liquidity crisis of 2007/2008. The main findings of this paper are: in liquid times, money market funds enhanced their returns by investing in less liquid papers. By doing so they outperformed other funds as long as liquidity in the market was high. Investing in less liquid assets, however, widens the narrow structure of money market funds and makes them vulnerable to runs. During the shortening of liquidity caused by the subprime crisis, illiquid funds experienced runs, while more liquid funds functioned as a safe haven. --
    Keywords: Money Market Funds,Liquidity Crisis,Strategic Complementarities,Runs,Narrow Banking
    JEL: G12 G20 G21
    Date: 2010
  8. By: Iris Biefang Frisancho-Mariscal (University of the West of England, Bristol); Peter Howells (University of the West of England, Bristol)
    Abstract: One of the most striking features of the financial crisis that began in the autumn of 2007 has been the associated upheaval in conventional interest rate spreads. In the UK, this is most frequently symbolised by the widening (and increased volatility) of the spread between 3-month Libor and the Bank of England’s policy rate. This paper uses a vector error correction model to look at the way in which the recent crisis has affected a wide range of interest rate spreads. We look for changes in the coefficient on the policy rate (the ‘pass-through’) and at changes in the speed of adjustment to changes in the policy rate, since both are important for policy. We find, as others have done, that the conventional behaviour of almost all spreads is swept away after August 2007. By developing a model which incorporates measures of counterparty and liquidity risk, we show that market rates are now subject to additional influences, but except for secured loans, still incorporate the effects of changes in the policy rate much as they did before the crisis. This contrasts with the widely-held view that the relationship between policy and money market rates in particular has been severely disrupted by the crisis. For secured loans, however, there is evidence that the mark-up has risen while at the same time the policy pass-through has fallen since August 2007. The same applies to deposit rates, albeit to a lesser extent, with the result that the sharp reduction in policy rate since the end of 2007 has had a larger effect on deposit than loan rates.
    Keywords: intrest rates; risk; VAR; Financial crisis
    JEL: E43 E52 E58
    Date: 2010–10
  9. By: Bao, Qunfang; Chen, Si; Liu, Guimei; Li, Shenghong
    Abstract: The price of financial derivative with unilateral counterparty credit risk can be expressed as the price of an otherwise risk-free derivative minus a credit value adjustment(CVA) component that can be seen as shorting a call option, which is exercised upon default of counterparty, on MtM of the derivative. Therefore, modeling volatility of MtM and default time of counterparty is key to quantification of counterparty risk. This paper models default times of counterparty and reference with a particular contagion model with stochastic intensities that is proposed by Bao et al. 2010. Stochastic interest rate is incorporated as well to account for positive correlation between spread and interest. Survival measure approach is adopted to calculate MtM of risk-free CDS and conditional survival probability of counterparty in defaultable environment. Semi-analytical solution for CVA is attained. Affine specification of intensities and interest rate concludes analytical expression for pre-default value of MtM. Numerical experiments at the last of this paper analyze the impact of contagion, volatility and correlation on CVA.
    Keywords: Credit Value Adjustment; Contagion Model; Stochastic Intensities and Interest; Survival Measure; Affine Specification
    JEL: G12 C63 C15 G13
    Date: 2010–10–28
  10. By: Grammig, Joachim; Peter, Franziska J.
    Abstract: The trading of securities on multiple markets raises the question of each market's share in the discovery of the informationally efficient price. We exploit salient distributional features of multivariate financial price processes to uniquely determine these contributions. Thereby we resolve the main drawback of the widely used Hasbrouck (1995) methodology which merely delivers upper and lower bounds of a market's information share. When these bounds diverge, as is the case in many applications, informational leadership becomes blurred. We show how fat tails and tail dependence of price changes, which emerge as a result of differences in market design and liquidity, can be exploited to estimate unique information shares. The empirical application of the new methodology emphasizes the leading role of the credit derivatives market compared to the corporate bond market in pricing credit risk during the pre-crisis period. --
    Keywords: price discovery,information share,fat tails,tail dependence,liquidity,credit risk
    JEL: G10 G14 C32
    Date: 2010
  11. By: Majnoni, Giovanni
    Abstract: The integration of micro-prudential oversight with the macro-approach to financial stability -- long in the making -- raises several issues of coordination of regulatory responsibilities. This paper argues that a decomposition of the covariance of asset returns into an endogenous volatility component -- which can be reduced -- and an exogenous volatility component -- which we have to live with -- helps address these coordination issues and provides the basis for financial health diagnostics and supervisory responses to observed symptoms of financial instability. By linking risk origination and risk control, the paper may also contribute to the search for an operational definition of the term"macro-prudential."
    Keywords: Mutual Funds,Debt Markets,Markets and Market Access,Emerging Markets,Labor Policies
    Date: 2010–10–01
    Abstract: Over the last two decades, the degree of international financial integration has increased substantially, becoming an important area of research for many financial economists. This working paper explores the determinants of the asymmetries in the international integration of banking systems. We consider an approach based on both network analysis and the concept of geographic neutrality. Our analysis focuses on the banking systems of 18 advanced economies between 1999 and 2005. Results indicate that banking integration should be assessed from the perspective of both inflows and outflows, given that they show different patterns for different countries. Using standard techniques, our results reinforce previous findings by the literature-especially the remarkable role of both geographic distance and trade integration. Nonparametric techniques reveal that the effect of the covariates on banking integration is not constant over the conditional distribution, which (in practical terms) implies that the sign of the relationship varies across countries.
    Keywords: Banking integration, geographic neutrality, network analysis, nonparametric regression.
    Date: 2009–11

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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