New Economics Papers
on Banking
Issue of 2011‒01‒30
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  2. Credit Risk Transfers and the Macroeconomy By Ester Faia
  3. International Financial Contagion: the Role of Banks By Robert Kollmann; Frédéric Malherbe
  4. Securitization and Dividend Payout by Banks By Andreeva, Desislava
  5. Moral hazard in the credit market when the collateral value is stochastic By Niinimäki, Juha-Pekka
  6. A note on the computation of Waring formula By Areski Cousin; Diana Dorobantu; Didier Rullière
  7. International Evidence on GFC-robust Forecasts for Risk Management under the Basel Accord By Michael McAleer; Juan-Ángel Jiménez-Martín; Teodosio Pérez-Amaral
  8. Collateral Margining in Arbitrage-Free Counterparty Valuation Adjustment including Re-Hypotecation and Netting By Damiano Brigo; Agostino Capponi; Andrea Pallavicini; Vasileios Papatheodorou
  9. An Active Margin System and its Application in Chinese Margin Lending Market By Guanghui Huang; Jianping Wan; Cheng Chen
  10. The Banking Bailout of the Subprime Crisis: Big Commitments and Small Effects? By Michele Fratianni; Francesco Marchionne
  11. Information Sharing and Cross-border Entry in European Banking By Caterina Giannetti; Nicola Jentzsch; Giancarlo Spagnolo
  12. The microstructure of the money market before and after the financial crisis: a network perspective By Silvia Gabrieli
  13. Counterparty Risk Subject To ATE By Zhou, Richard
  14. Democratic corporate governance within fluctuating cooperative banks: A multidisciplinary diagnosis and proposition of orientations. By Rémi Jardat; Patrick Gianfaldoni; David Hiez
  15. From boom to bust: how different has microfinance been from traditional banking? By Wagner, Charlotte
  16. The internationalisation of financial crises: Banking and currency crises 1883-2008 By Lestano; Jacobs, Jan; Dungey, Mardi
  17. Finance and Growth in Africa: The Broken Link By Panicos O. Demetriades; Gregory A. James
  18. Unilateral CVA for CDS in Contagion model: With volatilities and correlation of spread and interest By Bao, Qunfang; Chen, Si; Liu, Guimei; Li, Shenghong
  19. Access to financial services and the financial inclusion agenda around the world : a cross-country analysis with a new data set By Ardic, Oya Pinar; Heimann, Maximilien; Mylenko, Nataliya
  20. The narrative and the algorithm: Genres of credit reporting from the nineteenth century to today By Lipartito, Kenneth
  21. Small and medium enterprises : a cross-country analysis with a new data set By Ardic, Oya Pinar; Mylenko, Nataliya; Saltane, Valentina

    Abstract: We use an incentive model in which improvements to fundamentals boost the ability of leveraged financial firms (banks) to expand the balance sheet (as in Adrian and Shin 2010). The rise in asset prices due to the amplified response of procyclical systems distorts bankers' incentives in providing (costly and non observable) monitoring effort. On the one hand, the fundamental value of assets positively affects the optimal effort of the banker, thus allowing supervisory authorities to relax incentive-compatible capital requirements and boosting asset demand and prices. On the other hand, in a macro perspective, high prices positively affect the banker's payoff in the bad state of asset liquidation (via asset prices), jeopardizing incentives. This type of externality follows from a purely “macro” phenomenon à la Borio (2003) and should be taken into account by the regulatory authority in designing capital requirements. In procyclical and advanced (low agency costs and highly liquid) financial systems, incentive compatibility requires a higher capital requirement in the face of an improvement to fundamentals. Our results provide a theoretical foundation to the countercyclical buffer provided for by the Basel Committee.
    Keywords: Macroprudential regulation; financial stability; capital requirement.
    JEL: D86 G18 E44
    Date: 2011–01–17
  2. By: Ester Faia
    Abstract: The recent financial crisis has highlighted the limits of the “originate to distribute“ model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and in.ation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk
    Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare
    JEL: E3 E5 G3
    Date: 2011–01
  3. By: Robert Kollmann; Frédéric Malherbe
    Abstract: This paper provides an overview of recent theories of international financial contagion, with a focus on models in which the balance sheet constraints of global banks (and other financial institutions) are the key of international transmission.
    Keywords: global financial crisis; international financial contagion; international financial multiplier; global banks; bank balance sheets; capital ratio; leverage ratio; international interbank market; asset prices; credit losses; bank runs
    Date: 2011–01
  4. By: Andreeva, Desislava
    Date: 2010–11–17
  5. By: Niinimäki, Juha-Pekka (Bank of Finland Research)
    Abstract: This theoretical paper explores the effects of costly and non-costly collateral on moral hazard, when collateral value may fluctuate. Given that all collateral is costly, stochastic collateral will entail the same positive incentive effects as nonstochastic collateral, provided the variation in collateral value is modest. If it is large, the incentive effects are smaller under stochastic collateral. With non-costly collateral, stochastic collateral entails positive incentive effects or no effects, if the variation in collateral value is modest. If it is large, the incentive effects may be positive or negative. Thus, collateral can increase moral hazard. The findings are related to the topical subprime crisis and the fluctuating value of real estate collateral.
    Keywords: banking; collateral; moral hazard; subprime lending
    JEL: G21 G22 G28
    Date: 2010–12–21
  6. By: Areski Cousin (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Diana Dorobantu (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Didier Rullière (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: We present in this paper the Waring formula, which is used in several fields, like life-insurance or credit risk. We show that some problems can occur when using this formula, and propose alternative recursions in order to improve the complexity of the calculations, and to cope with the numerical instability of the formula.
    Date: 2011–01–19
  7. By: Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics) Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).); Juan-Ángel Jiménez-Martín (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid); Teodosio Pérez-Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de 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
  8. By: Damiano Brigo; Agostino Capponi; Andrea Pallavicini; Vasileios Papatheodorou
    Abstract: This paper generalizes the framework for arbitrage-free valuation of bilateral counterparty risk to the case where collateral is included, with possible re-hypotecation. We analyze how the payout of claims is modified when collateral margining is included in agreement with current ISDA documentation. We then specialize our analysis to interest-rate swaps as underlying portfolio, and allow for mutual dependences between the default times of the investor and the counterparty and the underlying portfolio risk factors. We use arbitrage-free stochastic dynamical models, including also the effect of interest rate and credit spread volatilities. The impact of re-hypotecation, of collateral margining frequency and of dependencies on the bilateral counterparty risk adjustment is illustrated with a numerical example.
    Date: 2011–01
  9. By: Guanghui Huang; Jianping Wan; Cheng Chen
    Abstract: In order to protect brokers from customer defaults in a volatile market, an active margin system is proposed for the transactions of margin lending in China. The probability of negative return under the condition that collaterals are liquidated in a falling market is used to measure the risk associated with margin loans, and a recursive algorithm is proposed to calculate this probability under a Markov chain model. The optimal maintenance margin ratio can be given under the constraint of the proposed risk measurement for a specified amount of initial margin. An example of such a margin system is constructed and applied to $26,800$ margin loans of 134 stocks traded on the Shanghai Stock Exchange. The empirical results indicate that the proposed method is an operational method for brokers to set margin system with a clearly specified target of risk control.
    Date: 2011–01
  10. By: Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Francesco Marchionne (Universita Politecnica delle Marche)
    Abstract: This paper examines government policies aimed at rescuing banks from the effects of the financial crisis of 2008-2009. Governments responded to the crisis by guaranteeing bank assets and liabilities and by injecting fresh capital into troubled institutions. We employ event study methodology to estimate the benefits of government interventions on banks. Announcements directed at the banking system as a whole were associated with positive cumulative abnormal returns whereas announcements directed at specific banks with negative ones. The effects of foreign general announcements spilled over across different areas and were perceived by home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements produced effects that were consistent with other banks being crowded out for government resources. Multiple specific announcements exacerbated the extent of banks’ moral hazard. Results were sensitive to the information environment. Findings are consistent with the hypothesis that individual institutions were reluctant to seek public assistance.
    Keywords: announcement, bank, event study, financial crisis, rescue plan
    JEL: G21 N20
    Date: 2010–12
  11. By: Caterina Giannetti (GSBC Jena, University of Siena, ECRI); Nicola Jentzsch (DIW Berlin); Giancarlo Spagnolo (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: Information asymmetries can severely limit cross-border border expansion of banks. When a bank enters a new market, it has incomplete information about potential new clients. Such asymmetries are reduced by credit registers, which distribute financial data on bank clients. We investigate the interaction of credit registers and bank entry modes (in form of branching and M&A) by using a new set of time series cross-section data for the EU-27 countries. We study how the presence of public and private credit registers and the type of information exchanged affect bank entry modes during the period 1990-2007. Our analysis shows that the existence of both types of registers increases the share of branching in the overall entries. Additionally, the establishment of public registers reduces concentration ratios, and some banking competition indicators (such as overhead costs/assets). The introduction of a private credit bureau, on the other hand, has no effect on concentration ratios, but positively contributes to competition (by decreasing interest rate margins). This suggests that credit registers facilitate direct entry through a reduction of information asymmetries, which in turn intensifies competition.
    Keywords: credit registries, foreign entry, asymmetric information
    JEL: F37 G21 G34 L13 O16
    Date: 2010–12–21
  12. By: Silvia Gabrieli (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper provides an in depth microstructure analysis of the euro money market by taking a network perspective. Banks are the nodes of the networks; unsecured overnight loans form the links connecting the nodes. Daily interbank networks verify the same stylised facts documented for many real complex systems: they are highly sparse, far from being complete, exhibit the small world property and a power-law distribution of degree (the number of counterparties each bank establishes credit relationships with). On the other hand, the tendency of banks to cluster, i.e. to form groups where ties are relatively denser, is much lower than in other real networks. The time patterns of some network statistics provide interesting insights into the evolution of the potential for financial contagion; the partition of the network into smaller connected subnetworks documents a move against market integration; heterogeneous developments across banks of different size offer insights into banks’ behaviour. An analysis of banks’ prominence in the market is undertaken using centrality measures: the various indicators suggest that the biggest banks are also the most connected before the onset of the crisis; however, medium/small and very small banks’ centralities increase progressively after August 2007 as these banks increase their “influence” as liquidity providers. The rich set of measures described in this paper represents a key input for future research.
    Keywords: Network analysis; Network centrality indicators; Money market; Financial crisis
    JEL: D85 G10 G21
    Date: 2011–01–19
  13. By: Zhou, Richard
    Abstract: Rating trigger ATE (Additional Termination Event) is a counterparty risk mitigant that allows banks to terminate and close out bilateral derivative contracts if the credit rating of the counterparty falls below the trigger level. Since credit default is often preceded by rating downgrades, ATE clause effectively reduces the counterparty credit risk by early termination of exposure. However, there is still the risk that counterparty may default without going through severe downgrade. This article presents a practical model for valuating CVA in the presence of ATE.
    Keywords: Counterparty Risk, Credit Valuation Adjustment, Rating Transition, Rating Trigger, Additional Termination Event
    JEL: C00
    Date: 2010–12
  14. By: Rémi Jardat (ISTEC - Institut supérieur des Sciences, Techniques et Economie Commerciales - ISTEC); Patrick Gianfaldoni (LBNC - Laboratoire Biens, Normes, Contrats - Université d'Avignon : EA3788); David Hiez (Laboratoire de Droit Economique - Université du Luxembourg)
    Abstract: The democratic question became of an ardent actuality within cooperative banks since the end of the 1990's. Founding element of human-sized organizations that were the first mutual or cooperative Caisses, is democracy running the risk to dissolve by necessity in the mature and hybrid giants that are the big banking cooperative groups nowadays? The present article unveils a multidisciplinary synthesis made possible by the conjunction of three researchers studying cooperative banks through three complementary angles: law, economy and management. After a first inventory of the possible symptoms of the disappearance of democracy inherent to the cooperative project, a more differentiating diagnosis is proposed, followed by an outline of some working leads for a creative evolution of cooperative democracy.
    Keywords: Democracy; bank;cooperative; pluridisciplinarity; new cooperative paradigm
    Date: 2010–09–15
  15. By: Wagner, Charlotte
    Abstract: This paper presents an in-depth analysis of developments in the microfinance sector before and after the Lehman Brothers collapse in 2008 by comparing them with developments in traditional banking sectors of emerging market economies and developing countries. The findings indicate that microfinance has been part of the same credit boom observed in the traditional banking sector. Moreover, as in the traditional banking sector, the boom was fostered by substantial inflows of foreign capital. This raises the question whether the crisis resilience the microfinance sector has shown in the past remains a characterizing feature of microfinance or whether the same risk factors associated with excessive credit growth lead - as in the traditional banking sector - to greater vulnerability. The findings indicate that microfinance markets with strong capital inflows, high credit growth rates and rapidly increasing competition experienced a substantial decrease in credit growth and deterioration of portfolio quality in the post-Lehman period. This is in line with the evidence found for the traditional banking sector in emerging markets and developing countries. The paper concludes that by becoming part of the global financial system, microfinance has lost one of the characteristics which distinguish it from traditional banking, namely its higher resilience towards crises in domestic and global financial markets. --
    Keywords: microfinance,crisis resilience,credit boom,financial crisis
    JEL: E44 G21
    Date: 2010
  16. By: Lestano; Jacobs, Jan; Dungey, Mardi (Groningen University)
    Abstract: Financial crises are high cost events which can transmit across international borders. Using data from 1883 to 2008 this paper develops a means of mapping changes in the degree of international synchronisation of banking and currency crises through a formal concordance index. This index speci cally accounts for the typically low incidence and potential serial correlation of crisis data. The results show that banking crises were highly internationalised at the beginning of the 20th century, and became far less so in the strong regulatory environment prevailing after the Depression until the 1980s. A strong increase in the synchronicity of international banking crises is revealed during the late 20th and early 21st century. Currency crises began the century as more idioysncratic, but have tended to become more synchronised over the 115 year sample.
    Date: 2010
  17. By: Panicos O. Demetriades; Gregory A. James
    Abstract: Utilizing the latest panel cointegration methods we provide new empirical evidence from 18 countries that suggests that the link between finance and growth in Sub-Saharan Africa is ‘broken’. Specifically, our findings suggest that banking system development in this region follows economic growth. They also indicate that there is no link between bank credit and economic growth.
    Keywords: Panel cointegration; cross-sectional dependence; African financial under-development; African credit markets
    JEL: G21 O16
    Date: 2011–01
  18. 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
  19. By: Ardic, Oya Pinar; Heimann, Maximilien; Mylenko, Nataliya
    Abstract: Recent empirical evidence highlights that access to basic financial services can make a substantial positive difference in improving poor people's lives. Accordingly, financial sector reforms that promote financial inclusion are increasingly at the core of policymakers’ agendas. The Consultative Group to Assist the Poor and the World Bank Group, in response, launched the Financial Access project, including a cross-country database on financial inclusion topics and an annual report to inform the policy debate. Using this database, this paper (i) counts the number of unbanked adults around the world at 56 percent, (ii) analyzes the state of access to deposit and loan services as well as the extent of retail networks, and (iii) discusses the state of financial inclusion mandates around the world.
    Keywords: Access to Finance,Financial Literacy,Banks&Banking Reform,Debt Markets,Emerging Markets
    Date: 2011–01–01
  20. By: Lipartito, Kenneth
    Abstract: Credit reporting is a contested process whereby parties with distinct interests (borrowers, lenders, and intermediaries) jointly construct the form, method, and style of credit assessment. In contrast to theories that argue information should grow more secure and credit relationships more transparent over time, the conflicted struggle over representation produces different styles or “genres” of credit evaluation that are compromises between the interests of the different parties. Thus, in the United States, trade credit reporting in the nineteenth century evolved an enduring narrative reporting style, incorporating heterogeneous forms of information not easily reducible to a single quantitative score. Lack of institutions for sharing information between creditors, legal precedents, and strong resistance among borrowers to overly intrusive surveillance made the narrative report the best means to handle the diverse business credit market. By contrast, lenders in the consumer credit market established information sharing capabilities, which were enhanced after World War II when banks developed the credit card and card verification systems. Fair credit laws in the 1960s and 70s actually reinforced the move to quantitative scoring based on information shared among creditors, eventually institutionalizing the FICO score as the prime method of consumer credit evaluation.
    Keywords: credit score; credit reporting; credit; information economy; surveillance; FICO
    JEL: Z1 N82 N22
    Date: 2011–01–06
  21. By: Ardic, Oya Pinar; Mylenko, Nataliya; Saltane, Valentina
    Abstract: In the aftermath of the global financial crisis of 2008-2009, there has been an increased interest in the role of small and medium enterprises in job creation and economic growth. However the lack of consistent indicators at the country level restricts extensive cross-country analyses of lending to small and medium enterprises. This paper introduces a new dataset to fill this gap in the small and medium enterprise data landscape. In addition, it provides the first set of results of analyses with this new dataset, predicting the global small and medium enterprise lending volume to be $10 trillion. The bulk of this volume, 70 percent, is in high-income countries. On average, small and medium enterprise loans constitute 13 percent of gross domestic product in developed countries and 3 percent in developing countries. Note that although a unique small and medium enterprise definition does not exist, differences in definitions across countries are not statistically significant in explaining the differences in small and medium enterprise lending volumes.
    Keywords: Access to Finance,Banks&Banking Reform,Debt Markets,Microfinance,Bankruptcy and Resolution of Financial Distress
    Date: 2011–01–01

This issue is ©2011 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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