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on Banking |
| By: | Marcella Lucchetta |
| Abstract: | This paper explores theoretically the implications of bank market structure and banking system risks concentration for the functioning of interbank markets. It employs a simple model where banks are exposed to both credit and liquidity risk, there is no asymmetric information, no market power, no friction in secondary markets and deposit contracts are fully contingent. We show that (a) the concentration of risks induced by changes in bank market structure makes interbank market breakdowns more likely; (b) welfare monotonically decreases in risk concentration; and (c) risk concentration and a high probability of interbank market breakdowns can be driven by risk control diseconomies of scale and scope and increases in financial firms’ size. As banking systems become more concentrated, improvement of risk control technologies in financial institutions and in regulatory bodies appear as important as other policies considered in the literature to minimize the probability of interbank market breakdowns. |
| Keywords: | bank market structure; systemic risk; interbank markets |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:rsc:rsceui:2010/76&r=ban |
| By: | Dario Focarelli (ANIA.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alberto Franco Pozzolo (Università del Molise.) |
| Abstract: | It has often been argued during the recent credit crisis that commercial banks’ involvement in investment banking activities might have had an impact on the intensity of their underwriting standards. We turn to evidence from the period prior to the complete revocation of the Glass-Steagall Act in the United States and analyze whether investment banks or – section 20 subsidiaries of – commercial banks underwrote riskier securities. We compare actual defaults of these deals for an extensive sample of about 4,000 corporate debt securities underwritten during the period of the de facto softening of the Act’s restrictions. Securities underwritten by commercial banks’ subsidiaries have a higher probability of default than those underwritten by investment houses. This evidence is stronger in the case of ex-ante riskier and more competitive issues, and during the first years of bank securities’ subsidiaries’ entry into the market. Based on our results, it is not possible to reject that the repeal of the Glass-Steagall led to looser credit screening by broad (universal) banking companies trying to gain market share and/or to the lower initial ability of these banks to correctly evaluate default risk. JEL Classification: G21, G24, N22. |
| Keywords: | Glass-Steagall Act, securities underwriting, default, investment banking. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111287&r=ban |
| By: | Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University); Juan-Ángel Jiménez-Martín (Department of Quantitative Economics, Complutense University of Madrid); Teodosio Pérez-Amaral (Department of Quantitative Economics, Complutense University of Madrid) |
| Abstract: | A risk management strategy that is designed to be robust to the Global Financial Crisis (GFC), in the sense of selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models, was proposed in McAleer et al. (2010c). The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. Such a risk management strategy is robust to the GFC in the sense that, while maintaining the same risk management strategy before, during and after a financial crisis, it will lead to comparatively low daily capital charges and violation penalties for the entire period. This paper presents evidence to support the claim that the median point forecast of VaR is generally GFC-robust. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria. In the empirical analysis, we choose several major indexes, namely French CAC, German DAX, US Dow Jones, UK FTSE100, Hong Kong Hang Seng, Spanish Ibex35, Japanese Nikkei, Swiss SMI and US S&P500. The GARCH, EGARCH, GJR and Riskmetrics models, as well as several other strategies, are used in the comparison. Backtesting is performed on each of these indexes using the Basel II Accord regulations for 2008-10 to examine the performance of the Median strategy in terms of the number of violations and daily capital charges, among other criteria. The Median is shown to be a profitable and safe strategy for risk management, both in calm and turbulent periods, as it provides a reasonable number of violations and daily capital charges. The Median also performs well when both total losses and the asymmetric linear tick loss function are considered |
| Keywords: | Median strategy, Value-at-Risk (VaR), daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel II Accord, global financial crisis (GFC). |
| JEL: | G32 G11 C53 C22 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:757&r=ban |
| By: | Pierre L. Siklos (Wilfrid Laurier University and Viessmann European Research Centre, Waterloo, ON, Canada; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy) |
| Abstract: | This paper examines the communications challenges facing central banks who will be sharing responsibilities with other agencies for macro-prudential objectives, in addition to conventional monetary policy goals. Following a description and analysis of surveys of central banks, and the attributes that make up an index of central bank transparency, some policy proposals are made. It is argued that a hybrid of inflation and price level targeting, combined with a requirement by the macro-prudential regulators to issue press releases much like central banks publish an announcement and rationale for the setting of monetary policy instruments, may improve the central bank communication in a post-crisis world. |
| Keywords: | central bank communication, transparency, price level targeting |
| JEL: | E52 E58 E65 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:04_11&r=ban |
| By: | Kjell Bjørn Nordal (Norges Bank (Central Bank of Norway)); Randi Næs (Norwegian Ministry of Trade and Industr) |
| Abstract: | We investigate the relationship between bankruptcy risk and expected future sales growth for Norwegian non-listed firms for the period 1988-2007. We find that firms with high bankruptcy risk also have high expected future growth. Financial ratios characterizing firms with high bankruptcy risk also characterize firms with high future expected growth. Small firms, firms with low levels of equity and retained earnings, firms with low profitability and low levels of sales per unit of capital, have all higher expected future growth rates than other firms. These findings suggest a tradeoff between the upside potential of high growth and the downside risk of bankruptcy. |
| Keywords: | Non-listed firms, growth, bankruptcy risk |
| JEL: | G10 G30 G33 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2010_31&r=ban |
| By: | Onour, Ibrahim |
| Abstract: | This paper investigates the causal relationships between volatility in Saudi stock market and banks credit for equity investments. Our finding indicate there is a bi-directional feedback effects between the stock price volatility and banks credit loans. In other words, volatility in private credit for equity investments influence volatility in stock price and vice versa. A policy implication of such result is that regulating private credit loans in banking sector could reduce the upnormal swings in Saudi Stock prices. |
| Keywords: | Saudi stock market; Volatility; speculation; banks' credit |
| JEL: | C10 C50 |
| Date: | 2011–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28001&r=ban |
| By: | Alberto Martin |
| Abstract: | We analyze a standard environment of adverse selection in credit markets. In our environment, entrepreneurs who are privately informed about the quality of their projects need to borrow in order to invest. Conventional wisdom says that, in this class of economies, the competitive equilibrium is typically inefficient. We show that this conventional wisdom rests on one implicit assumption: entrepreneurs can only access monitored lending. If a new set of markets is added to provide entrepreneurs with additional funds, efficiency can be attained in equilibrium. An important characteristic of these additional markets is that lending in them must be unmonitored, in the sense that it does not condition total borrowing or investment by entrepreneurs. This makes it possible to attain efficiency by pooling all entrepreneurs in the new markets while separating them in the markets for monitored loans. |
| Keywords: | Adverse Selection, Credit Markets, Collateral, Monitored Lending, Screening |
| JEL: | D82 G20 D62 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1257&r=ban |
| By: | Luigi Cannari (editor) (Bank of Italy, Structural Economic Analysis Department); Marcello Pagnini (editor) (Bank of Italy, Bologna); Paola Rossi (editor) (Bank of Italy, Milan) |
| Abstract: | The volume collects the papers presented at the Conference on "Banks, Local Credit Markets and Credit Supply" held in Milan, on 24 March 2010. The papers presented at the two sessions of the Conference analyse how banks' lending activities are organized and how this affects the supply of credit to small and medium-sized enterprises (SMEs). The first session focuses on new lending technologies and banking organization. The second session studies how these organizational variables affect the lending activity to SMEs. The papers draw on the results of a sample survey of more than 300 Italian banks conducted by the Bank of Italy in 2007. |
| Keywords: | banking organization, credit scoring, relationship lending, soft information |
| JEL: | G2 L2 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:workpa:sec_5&r=ban |
| By: | Esposito, Francesco Paolo |
| Abstract: | This document presents several Credit Risk tools which have been developed for the Credit Derivatives Risk Management. The models used in this context are suitable for the pricing, sensitivity/scenario analysis and the derivation of risk measures for plain vanilla credit default swaps (CDS), standardized and bespoke collateralized debt obligations (CDO) and, in general, for any credit risk exposed A/L portfolio.\\ In this brief work we compute the market implied probability of default (PD) from market spreads and the theoretical CDS spreads from historical default frequencies. The loss given default (LGD) probability distribution has been constructed for a large pool portfolio of credit obligations exploiting a single-factor gaussian copula with a direct convolution algorithm computed at several default correlation parameters. Theoretical CDO tranche prices have been calculated. We finally design stochastic cash-flow stream model simulations to test fair pricing, compute credit value at risk (CV@R) and to evaluate the one year total future potential exposure (FPE) and derive the value at risk (V@R) for a CDO equity tranche exposure. |
| Keywords: | interest rate swap; spot rate term structure; credit default swap; probability of default; copula function; direct convolution; loss given default; collateralized debt obligation; exposure at default; stochastic cash-flow stream model; value at risk; credit value at risk; future potential exposure; Monte Carlo simulation. |
| JEL: | C0 C15 G0 |
| Date: | 2010–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28045&r=ban |
| By: | Subhash C. Ray (University of Connecticut) |
| Abstract: | In the present study we evaluate the overall cost efficiency of a network of branches of a single large public sector bank in India within the city of Calcutta using the data for the year 2002. Our objective is to determine the optimal number of branches within a postal district that could provide the observed amounts of banking services to the customers in that area at the minimum operating cost. Our DEA results show that while in many cases, consolidating multiple branches would be more cost efficient, there are numerous instances, where increasing the number of branches would be optimal. |
| Keywords: | Network Efficiency; DEA; Banking. |
| JEL: | C61 G21 L25 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-03&r=ban |
| By: | Ignazio Angeloni; Ester Faia; Roland Winkler |
| Abstract: | We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using the model of Angeloni and Faia (2010), that combines a standard DSGE framework with a fragile banking sector, suitably modified and calibrated for the euro area. Credibly announced and fast fiscal consolidations dominate – based on simple criteria – alternative strategies incorporating various degrees of gradualism and surprise. The fiscal adjustment should be based on spending cuts or else be relatively skewed towards consumption taxes. The phasing out of monetary accommodation should be simultaneous or slightly delayed. We also find that, contrary to widespread belief, Basel III may well have an expansionary macroeconomic effect |
| Keywords: | exit strategies, debt consolidation, fiscal policy, monetary policy, capital requirements, bank runs |
| JEL: | E63 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1676&r=ban |