New Economics Papers
on Banking
Issue of 2010‒11‒13
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Leverage Bubble By Wanfeng Yan; Ryan Woodard; Didier Sornette
  2. L’efficience des cooperatives de services financiers : Une analyse de la contribution du milieu By Mario Fortin; André Leclerc
  3. Do banks benefit from internationalization? Revisiting the market power-risk nexus By Buch, Claudia M.; Koch, Cathérine Tahmee; Koetter, Michael
  4. The impact of supply constraints on bank lending in the euro area - crisis induced crunching? By Hannah Sabine Hempell; Christoffer Kok Sørensen
  5. Loan Officer Authority and Small Business Lending.Evidence from a survey. By benvenuti, m.; casolaro, l.; del prete, s.; mistrulli, p. e.
  6. Macroeconomic and bank-specific determinants of non-performing loans in Greece: a comparative study of mortgage, business and consumer loan portfolios By Dimitrios P. Louzis; Aggelos T. Vouldis; Vasilios L. Metaxas
  7. Financial Instability and Credit Constraint: Evidence from the Cost of Bank Financing By Bruno S. Martins
  8. Bank capital, liquidity creation and deposit insurance By Fungácová, Zuzana; Weill, Laurent; Zhou, Mingming
  9. What do foreigners want? Evidence from;targets in bank cross-border M&As By Stafano Caiazza; Andrew Clare; Alberto Franco Pozzolo
  10. The certification role of bank directors on;corporate boards By Giacomo Cau; Massimiliano Stacchini
  11. Bridging the gap between migrants and the banking system. By albareto, g.; mistrulli, p.e.
  12. Financial Turmoil in the Banking Sector and the Asian Lamfalussy Process: The Case of Four Economies By Chen-Min Hsu; Chih-Feng Liao
  13. Completeness, interconnectedness and distribution of interbank exposures: A parameterized analysis of the stability of financial networks By Sachs, Angelika
  14. The euro area interbank market and the liquidity management of the eurosystem in the financial crisis By Hauck, Achim; Neyer, Ulrike
  15. Explaining the demand for money by non-financial corporations in the euro area: A macro and a micro view By Carmen Martínez-Carrascal; Julian von Landesberger
  16. On the impossibility of fair risk allocation By Csóka, Péter; Pintér, Miklós
  17. How Should Financial Intermediation Services be Taxed? By Lockwood, Ben
  18. A Re-examination of Credit Rationing in the Stiglitz and Weiss Model By Su, Xunhua
  19. Liquidity Crunch in Late 2008: High-Frequency Differentials between Forward-Implied Funding Costs and Money Market Rates By Matthew S. Yiu; Joseph K. W. Fung; Lu Jin; Wai-Yip Alex Ho
  20. Dynamic Provisioning: Some Lessons from Existing Experiences By Santiago Fernández de Lis; Alicia Garcia-Herrero

  1. By: Wanfeng Yan; Ryan Woodard; Didier Sornette
    Abstract: Leverage is strongly related to liquidity in a market and lack of liquidity is considered a cause and/or consequence of the recent financial crisis. A repurchase agreement is a financial instrument where a security is sold simultaneously with an agreement to buy it back at a later date. Repurchase agreements (repos) market size is a very important element in calculating the overall leverage in a financial market. Therefore, studying the behavior of repos market size can help to understand a process that can contribute to the birth of a financial crisis. We hypothesize that herding behavior among large investors led to massive over-leveraging through the use of repos, resulting in a bubble (built up over the previous years) and subsequent crash in this market in early 2008. We use the Johansen-Ledoit-Sornette (JLS) model of rational expectation bubbles and behavioral finance to study the dynamics of the repo market that led to the crash. The JLS model qualifies a bubble by the presence of characteristic patterns in the price dynamics, called log-periodic power law (LPPL) behavior. We show that there was significant LPPL behavior in the market before that crash and that the predicted range of times predicted by the model for the end of the bubble is consistent with the observations.
    Date: 2010–11
  2. By: Mario Fortin (GREDI, Département d'économique, Université de Sherbrooke); André Leclerc (Université de Moncton)
    Abstract: Le faible niveau moyen d’efficience des institutions bancaires habituellement trouvé dans les études empiriques a été qualifié de « boîte noire » par Berger et Mester (1997). Cette étude cherche à identifier si les caractéristiques de l’environnement de même que celles qui sont propres à une coopérative d’épargne et de crédit pourraient expliquer une partie des écarts de performance apparaissant dans les scores d’efficience. Le modèle de coût que nous avons estimé est basé sur la valeur ajoutée par l’intermédiation financière. Par ailleurs, pour limiter la perte d’informations découlant de la borne à l’unité des scores d’efficience découlant du DEA, nous avons comparé les résultats d’une analyse avec le score d’efficience et de super efficience. Nos résultats montrent qu’au moins 34% des écarts de scores peuvent être expliqués par un ensemble limité de variables : taille de la coopérative, le taux de capitalisation, l’épargne par membre, le nombre de membres et le type de marché.
    Keywords: Banking efficiency, DEA, credit unions
    JEL: G21 L25
    Date: 2010–09–30
  3. By: Buch, Claudia M.; Koch, Cathérine Tahmee; Koetter, Michael
    Abstract: Recent developments on international financial markets have called the benefits of bank globalization into question. Large, internationally active banks have acquired substantial market power, and international activities have not necessarily made banks less risky. Yet, surprisingly little is known about the actual link between bank internationalization, bank risk, and market power. Analyzing this link is the purpose of this paper. We jointly estimate the determinants of risk and market power of banks, and we analyze the effects of changes in terms of the number of foreign countries (the extensive margin) and the volume of foreign assets (the intensive margin). Our paper has four main findings. First, there is a strong negative feedback effect between risk and market power. Second, banks with higher shares of foreign assets, in particular those held through foreign branches, have higher market power at home. Third, holding assets in a large number of foreign countries tends to increase bank risk. Fourth, the impact of internationalization differs across banks from different banking groups and of different size. --
    Keywords: market power-risk nexus,international banking,micro-data,Germany
    JEL: F3 G21
    Date: 2010
  4. By: Hannah Sabine Hempell (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Aggregate loan development typically hinges on a combination of factors that impact simultaneously on the demand and the supply side of bank lending. The financial turmoil starting in mid-2007 had detrimental consequences for banks’ balance-sheets, cost of funds and profitability, thus weighing negatively on their ability to supply new loans. This paper examines the impact of supply constraints on bank lending in the euro area with a special focus on this turmoil period. The empirical evidence presented suggests that banks’ ability and willingness to supply loans affects overall bank lending activity in general and has done so particularly during the financial crisis. Applying a cross-country panel-econometric approach using a unique confidential data set on results from the Eurosystem’s bank lending survey allows us to disentangle loan supply and demand effects. We find that even when controlling for the effects coming from the demand side loan growth is negatively affected by supply-side constraints. This applies both for loans to households for house purchase and for loans to non-financial corporations. We furthermore provide evidence that the impact of supply-side constraints, especially related to disruptions of banks’ access to wholesale funding and their liquidity positions, was reinforced since the eruption of the financial crisis and corresponding adjustments in banks’ loan portfolios seem to have been geared primarily via prices rather than outright quantity restrictions. JEL Classification: C23, E51, E52, G21.
    Keywords: bank credit, loan supply constraints, euro area, panel data.
    Date: 2010–11
  5. By: benvenuti, m.; casolaro, l.; del prete, s.; mistrulli, p. e.
    Abstract: A vast literature has emphasized that small banks are at a comparative advantage in small business lending. In this paper, we show that apart from size, which is negatively correlated with bank specialization in small business lending, organizational characteristics affect bank loan portfolio choices. By using a unique dataset based on a recent survey of Italian banks, we find that after having controlled for bank size, a branch loan officer’s authority has a key role in explaining bank specialization in small business lending. In particular, banks which delegate more decision-making power to their branch loan officers are more willing to lend to small firms than other banks. We approximate loan officers’ authority by controlling for several factors which shape their incentives: loan officer turnover, the amount of money up to which they are allowed to lend autonomously, their role in loan approval and in setting loan interest rates, the kind of information (soft versus hard information) used for screening and monitoring borrowers, and the structure of their compensation schemes.
    Keywords: Bank organization; Small business lending; Loan officer
    JEL: L22 L15 G21
    Date: 2010–09
  6. By: Dimitrios P. Louzis (Bank of Greece and Athens University of Economics and Business); Aggelos T. Vouldis (Bank of Greece and University of Athens); Vasilios L. Metaxas (Bank of Greece)
    Abstract: This paper uses dynamic panel data methods to examine the determinants of non-performing loans (NPLs) in the Greek banking sector, separately for each type of loan (consumer, business and mortgage loans). The study is motivated by the hypothesis that both macroeconomic and bank-specific variables have an effect on loan quality and that these effects vary between different categories of loans. The results show that NPLs in the Greek banking system can be explained mainly by macrofundamentals (GDP, unemployment, interest rates) and management quality. Differences in the quantitative impact of macroeconomic factors among types of loans are evident with non-performing mortgages being the least responsive towards changes in the macroeconomic conditions.
    Keywords: Non-perfoming loans; Greek banking system; Macroeconomic determinants; Bank specific determinants; Dynamic panel data
    JEL: G21 C23
    Date: 2010–09
  7. By: Bruno S. Martins
    Abstract: This paper examines the relation between the degree of firms’ financial constraint and the observed rise in the cost of bank financing during the global financial crisis of 2008. It introduces a new measure of financial constraint: the lending rate paid by each firm on working capital loans. In line with previous research, the findings point to a more severe contraction in credit supply for more credit constrained firms. Additionally, the results show that the existence of collateral and a large portfolio of lenders mitigate the credit supply contraction observed in that period.
    Date: 2010–11
  8. By: Fungácová, Zuzana (BOFIT); Weill, Laurent (BOFIT); Zhou, Mingming (BOFIT)
    Abstract: This paper examines how the introduction of deposit insurance influences the relationship between bank capital and liquidity creation. As discussed by Berger and Bouwman (2009), there are two competing hypotheses on this relationship which can be influenced by the presence of deposit insurance. The introduction of a deposit insurance scheme in an emerging market, Russia, provides a natural experiment to investigate this issue. We study three alternative measures of bank liquidity creation and perform estimations on a large set of Russian banks. Our findings suggest that the introduction of the deposit insurance scheme exerts a limited impact on the relationship between bank capital and liquidity creation and does not change the negative sign of the relationship. The implication is that better capitalized banks tend to create less liquidity, which supports the “financial fragility/crowding-out” hypothesis. This conclusion has important policy implications for emerging countries as it suggests that bank capital requirements implemented to support financial stability may harm liquidity creation.
    Keywords: bank capital; liquidity creation; deposit insurance; Russia
    JEL: G21 G28 G38 P30 P50
    Date: 2010–11–05
  9. By: Stafano Caiazza (Universit… Tor Vergata di Roma); Andrew Clare (Cass Business School, London); Alberto Franco Pozzolo (University of Molise, Centro Studi Luca d'Agliano)
    Abstract: Given the recent traumatic events in the world?s banking industry it is important to understand what drives bankers to create larger and larger, often multinational, banking groups. In this paper we investigate whether the targets in cross-border bank M&As are materially different from those banks targeted in domestic M&A deals. To address this question we use a sample of over 24,000 banks from more than 100 countries. We begin by estimating the probability that a bank will be a M&A target; this probability is based upon both bank specific and country specific characteristics. The sample also naturally includes banks that were not involved in any M&A deal, this set of banks acts as a control sample for the study. We then estimate a multinomial model that distinguishes between (i) targets in domestic operations, (ii) targets in cross-border operations and (iii) non-targets. The main message of the paper is that, with few exceptions, domestic and foreign investors target similar banks. In particular, contrary to what one might expect, bank size does not affect differently the probability of being a domestic or a cross-border target, but it has a positive and highly significant effect in both cases. What differs between national and international M&As are the characteristics of the countries where banks operate. On average, banking systems characterized by lower leverage, higher cost inefficiency and lower liquidity are more likely to be targets of cross-border acquisitions, while none of this characteristics affects the likelihood of being acquired domestically.
    Keywords: M&As, bank, bank internationalisation
    JEL: G15 G21 G34
    Date: 2010–11
  10. By: Giacomo Cau (Banca d'Italia); Massimiliano Stacchini (Banca d'Italia, Economics and International Relations Area)
    Abstract: There is a large literature on the effects of the presence of bankers on firms'boards as these bankers may reduce monitoring costs by facilitating information flows between the lender and the borrower, may credibly certify the financial soundness of the firm to other creditors who are not represented in the board and may act as financial experts for the management. At the same time, lending bankers on boards may have a conflict of interests. In this paper, we study the impact of the presence of bankers on firms' boards on interest rates charged to firms. We have two results.;First, as interest rates on loans from the board director's bank and from other banks are very similar we do not find evidence of a conflict of interests effect. Second, we have strong evidence of certification effects played by bank directors as rates charged by all banks on loans to firms with bankers on boards are lower than those charged by all banks to firms without bankers. The certification effect is even stronger if the banker on board has itself loaned to the firm.
    Date: 2010–11
  11. By: albareto, g.; mistrulli, p.e.
    Abstract: In this paper, we address two related issues. First, we test whether micro firms run by migrants pay more for credit than firms run by native entrepreneurs. Second, we verify whether the differences in the cost of credit between these two groups of entrepreneurs decrease as long as the informational and cultural gap narrow. To this aim we employ a large and unique data set providing us with detailed information about each overdraft loan granted by banks to sole proprietorships based in Italy. We find that firms run by migrants pay, on average, almost 70 basis points more for credit than those run by entrepreneurs born in Italy. The interest rate differential is lower for entrepreneurs born in Italy whose parents were natives of other countries (“second generation” migrants) and, among those born abroad, for migrants whose parents were natives of Italy (“Italian migrants”). These results suggest that cultural differences may matter for the functioning of the credit market. A lengthening in credit history may help migrants to “bridge the gap”. We find that, on average, interest rates lower with the length of the credit history. Furthermore, and more importantly from the paper perspective, firms run by migrants benefit more from a repeated interaction with the banking system. Finally, we find that the size of the migrant community and the improvements in bank ability to deal with cultural diversity both contribute to narrow the interest rate differential between migrant and Italian entrepreneurs.
    Keywords: credit; financial integration; migration;
    JEL: Z10 G21
    Date: 2010–10–05
  12. By: Chen-Min Hsu; Chih-Feng Liao
    Abstract: This paper investigates the prevailing financial regulatory structures and impact of the current financial turmoil on banking performance in four Asian economies: the People's Republic of China (PRC); Hong Kong, China; Singapore; and Taipei,China. Both the PRC and Hong Kong, China operate under a fragmented financial regulatory structure, while Singapore and Taipei,China have integrated structures. We examine the role of an integrated financial regulatory structure in helping financial institutions mitigate the impact of the financial crisis, using financial indicators of banks’ capital structure and operating performance in these four economies between 2003 and 2008. [ADBI Working Paper 221]
    Keywords: financial, People's Republic of China, Hong Kong, China, Singapore
    Date: 2010
  13. By: Sachs, Angelika
    Abstract: This paper assesses the impact of a certain structure of interbank exposures on the stability of a stylized financial system. Given a certain balance sheet structure of financial institutions, a large number of valid matrices of interbank exposures is created by a random generator. Assuming a certain loss given default, domino effects are simulated. The main results are, first, that financial stability depends not only on the completeness and interconnectedness of the network but also on the distribution of interbank exposures within the system (measured by entropy). Second, looking at random graphs, the sign of the correlation between the degree of equality of the distribution of claims and financial stability depends on the connectivity of the financial system as well as on additional parameters that affect the vulnerability of the system to interbank contagion. Third, the more concentrated assets are within a money center model, the less stable it is. Fourth, a money center model with asset concentration among core banks is less stable than a random graph with banks of homogeneous size. Results obtained in this paper extend existing theoretical literature that exclusively focuses on completeness and interconnectedness of the network as well as empirical literature that exclusively focuses on one particular financial network. --
    Keywords: domino effects,interbank lending,financial stability,contagion
    JEL: C63 G21 G28
    Date: 2010
  14. By: Hauck, Achim; Neyer, Ulrike
    Abstract: This paper develops a theoretical model which explains several stylized facts observed in the euro area interbank market after the collapse of Lehman Brothers in 2008. The model shows that if costs of participating in the interbank market are high, the central bank assumes an intermediary function between liquidity surplus banks and liquidity deficit banks and thereby replaces the interbank market. From a policy perspective, we argue that possible measures of the Eurosystem to reactivate the interbank market may conflict, inter alia, with monetary policy aims. --
    Keywords: Liquidity,Monetary Policy Instruments,Interbank Market,Financial Crisis
    JEL: E52 E58 G21
    Date: 2010
  15. By: Carmen Martínez-Carrascal (Banco de España); Julian von Landesberger (European Central Bank)
    Abstract: This paper analyses euro area non-financial corporations (NFCs) money demand, both from a macro and a microeconomic point of view. At a macro level, money holdings are modelled as a function of real gross added value, the price level, the long-term interest rate on bank lending to non-financial corporations, the own rate of return on M3 and the real capital stock of NFCs. The results indicate that NFCs money holdings adjust quickly when deviations from their long-run level are registered, and that the large increase observed recently in NFCs money holdings has been driven by changes in their fundamentals and hence they stand in line with their long-run equilibrium level. The disaggregated analysis also shows that cash holdings are linked to balance-sheet ratios (such as non-liquid short term assets, tangible assets or indebtedness) and other variables such as the firm’ cash flow, its volatility or the size of the firm, which cannot be taken into account in the macro analysis. Likewise, results indicate that the main drivers of the increase in NFCs cash holdings in the last years have been cyclical factors, captured by gross-added value and the cash-flow respectively. Variations in the opportunity cost of holding money, have also contributed to explain M3 developments but more modestly than at the end of the nineties, when its increase contributed negatively to cash accumulation.
    Keywords: keyword, money demand, coinegrated VARs, panel estimation
    JEL: E41 C23 C32 D21
    Date: 2010–11
  16. By: Csóka, Péter; Pintér, Miklós
    Abstract: Measuring and allocating risk properly are crucial for performance evaluation and internal capital allocation of portfolios held by banks, insurance companies, investment funds and other entities subject to financial risk. We show that by using a coherent measure of risk it is impossible to allocate risk satisfying the natural requirements of (Solution) Core Compatibility, Equal Treatment Property and Strong Monotonicity. To obtain the result we characterize the Shapley value on the class of totally balanced games and also on the class of exact games.
    Keywords: Coherent Measures of Risk; Risk Allocation Games; Totally Balanced Games; Exact Games; Shapley value; Solution core
    JEL: C71 G10
    Date: 2010–11–07
  17. By: Lockwood, Ben (CBT, CEPR and Department of Economics, University of Warwick)
    Abstract: This paper considers the optimal taxation of savings intermediation and payment services in a dynamic general equilibrium setting, when the government can also use consumption and income taxes. When payment services are used in strict proportion to final consumption, and the cost of intermediation services is fixed and the same across firms, the optimal taxes are generally indeterminate. But, when firms differ exogenously in the cost of intermediation services, the tax on savings intermediation should be zero. Also, when household time and payment services are substitutes in transactions, the optimal tax rate on payment services is determined by the returns to scale in the conditional demand for payment services, and is generally different to the optimal rate on consumption goods. In particular, with constant returns to scale, payment services should be untaxed. These results can be understood as applications of the Diamond-Mirrlees production efficiency theorem. Finally, as an extension, we endogenize intermediation, in the form of monitoring, and show that it may be oversupplied in equilibrium when banks have monopoly power, justifying a Pigouvian tax in this caseKeywords:
    Keywords: financial intermediation services ; tax design ; banks ; monitoring ;payment services JEL Classification: G21 ; H21 ; H25
    Date: 2010
  18. By: Su, Xunhua (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: To explain the widely observed phenomenon of credit rationing, Stiglitz and Weiss (1981) propose a theory of random rationing under imperfect information. With a simple model plausibly expanding the Stiglitz and Weiss setting, we argue that, random rationing occurs only in some extreme cases and hence is not likely to be a prevalent phenomenon. We start by illustrating that the Stiglitz and Weiss (1981) model and hence random rationing are quite sensitive to the assumption of the ranking of projects. Given that the ranking is according to the Mean-preserving Spread, there is adverse selection but no moral hazard. In the absence of moral hazard, random rationing is almost impossible to occur. Then by presuming the coexistence of adverse selection and moral hazard, we derive two required conditions for the occurrence of random rationing. First, random rationing occurs only if collateral has an overall deadweight cost other than the negative adverse selection effect. As collateral is a widely observed debt feature in practice, such an overall deadweight cost should not be the case for the majority of borrowers. Second, the occurrence of random rationing entails that the potential negative effects of the loan rate, collateral, loan size and any restrictive debt covenant simultaneously overweigh their positive effects exactly at the current contracting level. In this case, the zero-profit curve of the lender degenerates to a single point and borrowers face a take-it-or-leave-it offer. We conjecture that such a required condition leaves little space for the significance of random rationing.
    Keywords: Credit Rationing; Stiglitz and Weiss Model
    JEL: G00
    Date: 2010–11–05
  19. By: Matthew S. Yiu (Hong Kong Monetary Authority); Joseph K. W. Fung (Hong Kong Baptist University and Hong Kong Institute for Monetary Research); Lu Jin (Hong Kong Monetary Authority); Wai-Yip Alex Ho (Hong Kong Monetary Authority and Boston University)
    Abstract: The US Federal Reserve and the European Central Bank have adopted a number of measures, including aggressive policy rate cuts, to ease the liquidity crunch in the financial markets following the collapse of Lehman Brothers. Using high frequency spot and forward foreign exchange and interest rate quotes that are potentially executable for the period surrounding the 2008 global financial turmoil, this study examines the variations of intraday funding liquidity across the global financial markets that span different time zones. Moreover, the paper also tests how and to what extent policy actions undertaken by central banks affect the dynamics of market liquidity conditions. Similar to Hui et al. (2009), the paper uses the differential between the US dollar interest rate implied by the covered interest rate parity condition and the corresponding US dollar interest rate as a proxy for the liquidity (or the lack of it) in the US dollar money market. The study focuses on the EUR/USD exchange rate and compares the most stressful crisis period with other relatively less stressful periods. The intraday funding liquidity condition during the most tumultuous period shows that the pressures in the demand for US dollars through foreign exchange and forward markets spilled over to the Asian markets. The paper also examines how policy announcements by the central banks affect the dynamics of market liquidity. The study employs autoregressive models to capture the potential effects of monetary policy announcements on both the mean and volatility of the liquidity proxy. The empirical results show that the coordinated cuts of policy rates failed to stimulate lending in the short-term US money market, whereas the uncapped currency swap lines offered by the Federal Reserve to other central banks succeeded in easing the liquidity condition in the market. The policy is more effective and persistent for the very short end of the money market.
    Keywords: Financial Crisis, Intraday Liquidity, CIP Deviation, Monetary Policy
    JEL: G14 G15 E5
    Date: 2010–10
  20. By: Santiago Fernández de Lis; Alicia Garcia-Herrero (Asian Development Bank Institute)
    Abstract: After analyzing the different reasons why the financial system and also the regulatory framework induced procyclicality, this paper reviews the experiences of three countries which have introduced dynamic provisioning as a regulatory tool to limit procyclicality. The case of Spain—the country with the longest experience—is reviewed, as well as those of Colombia and Peru—countries that have recently adopted dynamic provisioning. A number of policy lessons are drawn from that comparison.
    Keywords: finance, dynamic provisioning, Spain, Peru, procyclicality
    JEL: E32 G21 G28 G32
    Date: 2010

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