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on Banking |
| By: | Robert Kollmann; Zeno Enders; Gernot J. Mueller |
| Abstract: | This paper incorporates a global bank into a two-country business-cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007–09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the U.S. and the euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis. |
| Keywords: | Equity ; Bank capital ; Productivity ; Default (Finance) ; Loans |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:72&r=ban |
| By: | Jakob Bosma |
| Abstract: | This paper considers the effects of imperfectly communicated information about whether a regulator initiates a bailout program for financially distressed banks. The theoretical framework allows for determining whether, and to what extent, it is optimal for a regulator to be imprecise in communicating its bank bailout strategy. Banks do not only rely on their prediction of the regulator’s action, but also on their beliefs about other banks’ predictions to infer the regulator’s strategy. Results indicate that the regulator may substitute higher capital adequacy requirements for being less precise in communicating whether to initiate a bailout program to maintain risk taking by banks. |
| Keywords: | bank bailout support; noisy communication; regulation; risk taking |
| JEL: | D82 L51 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:277&r=ban |
| By: | Vincent Bouvatier; Antonia López-Villavicencio; Valérie Mignon |
| Abstract: | This paper investigates the relationship between bank competition and credit procyclicality for 17 OECD countries on the 1986-2009 period. We account for heterogeneity among countries in terms of bank competition through the use of a hierarchical clustering methodology. We then estimate panel VAR models for the identified sub-groups of economies to investigate whether credit procyclicality is more important when the degree of bank competition is high. Our findings show that while credit significantly responds to shocks to GDP, the degree of bank competition is not essential in assessing the procyclicality of credit for OECD countries. |
| Keywords: | Credit cycle, economic cycle, bank competition, financial stability, panel VAR. |
| JEL: | C33 E32 E51 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2011-2&r=ban |
| By: | Willem Spanjers (Institute for Research in Economic Evolution, University of Freiburg, Germany; School of Economics, Kingston University, United Kingdom; The Rimini Centre for Economic Analysis (RCEA), Italy) |
| Abstract: | For an economy with dysfunctional intertemporal financial markets the financial sector is modelled as a competitive banking sector oering deposit contracts. In a setting similar to Allen and Gale (1998) properties of the optimal liquidity provision are analyzed for illiquid assets with ambiguous returns. In the context of the model, ambiguity | i.e. incalculable risk | leads to dynamically inconsistent investor behaviour. If the financial sector fails to recognize the presence of ambiguity, unanticipated fundamental crises may occur, which are incorrectly blamed on investors 'loosing their nerves' and 'panicing'. The basic mechanism of the current financial crisis resembles a banking panic in the presence of ambiguous asset returns. The combination of providing additional liquidity and supporting distressed financial institutions implements the regulatory policy suggested by the model. A credible commitment to such 'bail-out policy' does not create a moral hazard problem. Rather, it implements the second best efficient outcome by discouraging excessive caution. Reducing ambiguity by increasing stability, transparency and predictability | as suggested by ordo-liberalism and the 'Freiburger Schule’ | enhances ex-ante welfare. |
| Keywords: | Financial Intermediation, Liquidity, Ambiguity, Choquet Expected Utility, Financial Crisis |
| JEL: | D8 G1 G2 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:10_11&r=ban |
| By: | Co-Pierre Georg (School of Economics and Business Administration, Friedrich-Schiller-University Jena) |
| Abstract: | One of the most pressing questions in the aftermath of the financial crisis is how to deal with systemically important financial institutions (SIFIs). The purpose of this paper is to review the recent literature on systemic risk and evaluate the regulation proposals in the Basel III framework with respect to this literature. A number of shortcomings in the current framework are analyzed and three measures for future reform are proposed: counter-cyclical risk-weights, dynamic asset value correlation multipliers, and enhanced transparency requirements for SIFIs. |
| Keywords: | systemic risk, SIFIs, regulation |
| JEL: | C63 E52 E58 G21 |
| Date: | 2011–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:17-2011&r=ban |
| By: | Agarwal, Sumit (Federal Reserve Bank of Chicago); Amromin, Gene (Federal Reserve Bank of Chicago); Ben-David, Itzhak (Ohio State University); Chomsisengphet, Souphala (Office of the Comptroller of Currency); Evanoff, Douglas D. (Federal Reserve Bank of Chicago) |
| Abstract: | We study the effects of securitization on post-default renegotiation of residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observes lender renegotiation actions and covers more than 60% of US mortgage market. Exploiting within-servicer variation in this data, we find that bank-held loans are 26% to 36% more likely to be renegotiated than comparable securitized mortgages (4.2 to 5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification bank-held loans have lower post-modification default rate by 9% (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans. |
| JEL: | D10 D80 G10 G20 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2011-2&r=ban |
| By: | Ronald Heijmans; Richard Heuver; Daniëlle Walraven |
| Abstract: | We investigate the euro unsecured interbank money market during the current financial crisis. To identify the loans traded in this market and settled in TARGET2, we extend the algorithm developed by Furfine (1999) and adapt it to the European interbank loan market with maturity up to one year. This paper solves the problem of systematic errors which occur when you only look at overnight loans (as the Furfine algorithm does). These errors especially occur in times of (very) low interest rates. The algorithm allows us to track the actual interest rates rather than quoted interest rates on liquidity trading by participants of the Dutch part of the euro large value payment system (TARGET2-NL). The algorithm enables us to constitute the Dutch part of the EONIA, making it possible to compare the interest rates developments in the Dutch market to the European average ones. Based on the new algorithm, we develop a policy tool to monitor the interbank money market, both at macro level (whole market) and individual bank level (Money Market Monitoring Dashboard). |
| Keywords: | payment systems; financial stability; experiment; decision making |
| JEL: | E42 E44 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:276&r=ban |
| By: | Juan Pablo Painceira |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:rmf:dpaper:17&r=ban |
| By: | Hao Wang; Hao Zhou; Yi Zhou |
| Abstract: | We find that firm-level variance risk premium, estimated as the difference between option-implied and expected variances, has a prominent explanatory power for credit spreads in the presence of market- and firm-level risk control variables identified in the existing literature. Such a predictability complements that of the leading state variable--leverage ratio--and strengthens significantly with lower firm credit rating, longer credit contract maturity, and model-free implied variance. We provide further evidence that: (1) variance risk premium has a cleaner systematic component and Granger-causes implied and expected variances, (2) the cross-section of firms' variance risk premia seem to price the market variance risk correctly, and (3) a structural model with stochastic volatility can reproduce the predictability pattern of variance risk premia for credit spreads. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-02&r=ban |
| By: | Diana Hancock; Wayne Passmore |
| Abstract: | We employ empirical pricing models for mortgage-backed security (MBS) yields and for mortgage rates to measure deviations from normal market functioning in order to assess how the Federal Reserve MBS purchase program--a 16 month program announced on November 25, 2008 and completed on March 31, 2010--affected risk premiums that were embedded in mortgage and swap markets. Our pricing models suggest that the announcement of the program, which signaled strong and credible government backing for mortgage markets in particular and for the financial system more generally, reduced mortgage rates by about 85 basis points between November 25 and December 31, 2008, even though no MBS had (yet) been purchased by the Federal Reserve ; Once the Federal Reserve's MBS program started purchasing MBS, we estimate that the abnormal risk premiums embedded mortgage rates decreased roughly 50 basis points. However, observed mortgage rates declined only slightly because of generally rising interest rates. ; After May 27, 2009 fairly normal pricing conditions existed in U.S. primary and secondary mortgage markets; that is, the relationship between mortgage rates and its determinants was similar to that observed prior to the financial crisis. After the end of the Federal Reserve's MBS purchase program on March 31, 2010, mortgage rates and interest rates more generally were significantly less than they had been at the beginning. ; In sum, we estimate that the Federal Reserve's MBS purchase program removed substantial risk premiums embedded in mortgage rates because of the financial crisis. The Federal Reserve also re-established a robust secondary mortgage market, which meant that the marginal mortgage borrower was funded by the capital markets and not directly by the banks during the financial crisis-had bank funding been the only source of funds, primary mortgage rates would have been much higher. ; Lastly, many observers have attributed part of the Federal Reserve's effect from purchasing MBS to portfolio rebalancing. We find that if portfolio rebalancing had a substantial effect, it may have had its greatest importance only after the Federal Reserve's purchases ended, but while the Federal Reserve held a substantial portion of the stock of outstanding MBS. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-01&r=ban |
| By: | Ralf R. Meisenzahl |
| Abstract: | Which of the strategies for financing constraints in economic models is the most empirically plausible? This paper tests two commonly used models of financing constraints, costly state verification (Townsend, 1979) and moral hazard (Holmstrom and Tirole, 1997), using a comprehensive data set of US small business credit contracts. The data include detailed information about the business, its owner, bank balance sheet information, and the terms of credit. In line with the predictions of models of financing constraints, I find that an additional dollar of net worth accounts for about 30 cents of external finance. More than two thirds of the business credit contracts can be rationalized by one period debt contracts with costly state verification. The parameter values obtained in the costly state verification model imply bankruptcy costs of 28% of expected output and a rate of return ranging between 5% and 8% annually, which are consistent with studies on bankruptcy incidences and returns to entrepreneurial investment. The moral hazard model, however, performs poorly. The correlation between model implied interest rates and actual interest rates paid is close to zero because the bank variables emphasized by this model do not explain loan interest rates. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-04&r=ban |
| By: | Guillaume Rocheteau; Pierre-Olivier Weill |
| Abstract: | On November 14-15, 2008, the Federal Reserve Bank of Cleveland hosted a conference on “Liquidity in Frictional Asset Markets.” In this paper we review the literature on asset markets with trading frictions in both finance and monetary theory using a simple search-theoretic model, and we discuss the papers presented at the conference in the context of this literature. We will show the diversity of topics covered in this literature, e.g., the dynamics of housing and credit markets, the functioning of payment systems, optimal monetary policy and the cost of inflation, the role of banks, the effect of informational frictions on asset trading. |
| Keywords: | Liquidity (Economics) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1105&r=ban |
| By: | Jaromír Baxa (Institute of Economic Studies, Charles University, Prague and Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic); Roman Horváth (Czech National Bank and Institute of Economic Studies, Charles University, Prague); Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) |
| Abstract: | We examine whether and how main central banks responded to episodes of financial stress over the last three decades. We employ a new methodology for monetary policy rules estimation, which allows for time-varying response coefficients as well as corrects for endogeneity. This flexible framework applied to the U.S., U.K., Australia, Canada and Sweden together with a new financial stress dataset developed by the International Monetary Fund allows not only testing whether the central banks responded to financial stress but also detects the periods and type of stress that were the most worrying for monetary authorities and to quantify the intensity of policy response. Our findings suggest that central banks often change policy rates: mainly decreasing it in the face of high financial stress. However, the size of a policy response varies substantially over time as well as across countries, with the 2008-2009 financial crisis being the period of the most severe and generalized response. With regards to the specific components of financial stress, most central banks seemed to respond to stock market stress and bank stress, while exchange rate stress is found to drive the reaction of central banks only in more open economies. |
| Keywords: | financial stress, Taylor rule, monetary policy, time-varying parameter model, endogenous regressors. |
| JEL: | E43 E52 E58 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea1101&r=ban |
| By: | Jakob de Haan; Fabian Amtenbrink |
| Abstract: | This paper critically reviews the debate on CRAs and, in the light thereof, analyses the European regulatory approach to CRAs, thereby combining insights from economics and law. We first provide some basic background on the function of CRAs. Thereafter, we focus on the two main tasks for which CRAs have come under criticism, namely the issuing of sovereign ratings and the rating of structured instruments. Finally, we zoom in on the question of whether and how CRAs should be regulated given their function, focusing on recent European legislation that aims to standardize the conduct of CRAs. |
| Keywords: | Credit rating; regulation |
| JEL: | G21 G18 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:278&r=ban |
| By: | Batiz-Lazo, Bernardo; Noguchi, Masayoshi |
| Abstract: | This paper examines how accounting–based regulation was introduced through the House Purchase and Housing Act, 1959 (HPHA59) and Building Societies Act, 1960 (BSA60). It also tells how it was put into practice by the Registrar of Friendly Societies (RFS). The discussion is framed by the so called ‘disciplinary perspective’ of accounting as represented by Hoskin and Macve (1986; 1988; 1994a; 1994b; 1996; 2000). Fieldwork documents cases of intervention by the RFS under new powers granted by BSA60. These new powers were used to discipline targeted societies or those revealing inadequate use of their funds and thus, observed important deviations from specified accounting-based criteria which was generally recognized as financially sound within the industry. As a result we provide evidence of how accounting-based regulation affected the operation of the societies. This evidence amends other studies claiming that managers of British financial intermediaries disregarded accounting information in their operation and strategic plans (or that they incorporated such criteria until the 1990s). |
| Keywords: | accounting-based regulation; House Purchase and Housing Act; 1959 (HPHA59); Building Societies Act; 1960 (BSA60); Chief Registrar of Friendly Societies (CRFS); the Building Societies Association (Association); disciplinary power; reserve ratio |
| JEL: | N8 M41 N2 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28374&r=ban |
| By: | Lamont K. Black; Chenghuan Sean Chu; Andrew Cohen; Joseph B. Nichols |
| Abstract: | Differences in the organizational structure of CMBS loan originators may reflect differences in the incentives they face for underwriting risky loans. We treat an originator's type--that is, commercial bank, investment bank, insurance company, finance company, conduit lender, or foreign-owned entity--as a proxy for incentives related to warehousing risk, balance sheet lending, and regulatory constraints. After controlling for observable credit characteristics of over 30,000 loans securitized into CMBS after 1999, we find considerable differences in loan performance across originator types. The results suggest that moral hazard--captured by lack of warehousing risk-negatively affected the quality of loans underwritten by conduit lenders. On the other hand, despite opportunities for adverse selection, balance sheet lenders--commercial banks, insurance companies and finance companies--actually underwrote higher quality loans. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-05&r=ban |
| By: | Martin Brown (Swiss National Bank, Tilburg University); Ralph De Haas (EBRD) |
| Abstract: | Based on survey data from 193 banks in 20 countries we provide the first bank-level analysis of the determinants of foreign currency (FX) lending in emerging Europe. We find that FX lending by all banks, regardless of their ownership structure, is strongly determined by the macroeconomic environment. We find no evidence of foreign banks ‘pushing’ FX loans indiscriminately because of easier access to wholesale funding in foreign currency. In fact, while foreign banks do lend more in FX to corporate clients, they do not do so to retail clients. We also find that after a take-over by a foreign bank, the acquired bank does not increase its FX lending any faster than a bank which remains in domestic hands. |
| JEL: | O1 P2 P5 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ebd:wpaper:122&r=ban |
| By: | José Eduardo Gómez-González; Nidia Ruth Reyes |
| Abstract: | We study the effect of relationship lending on small firms´ failure probability using a uniquely rich data set comprised of information on individual loans of a large number of small firms in Colombia. We control for firm-specific variables and find that small firms involved in long-term liaisons with commercial banks have a significantly lower probability of becoming bankrupt than otherwise identical firms not involved in a long-term credit relationship. We also find that small firms with multiple banking relationships face a lower failure hazard than otherwise identical firms involved in a unique long-term relationship. |
| Date: | 2011–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:007873&r=ban |
| By: | Paul Dower (New Economic School and the Center for Economic and Financial Research); Elizabeth Potamites |
| Abstract: | Many land titling programs have produced lackluster results in terms of achieving access to credit for the poor. This may re ect insucient empha- sis on local banking practices. Bankers commonly use sophisticated methods other than collateral to ensure repayment. Some methods rely on ex-ante in- formation ows and formal land titles can improve these ows by signaling to the bank important characteristics about borrowers. Using a household survey from Indonesia, we provide evidence that formal land titles do have a positive and significant eect on access to credit and at least part of this effect is best interpreted as an improvement in ex-ante information ows. This result stands in contrast to the prevailing notion that land titles only function as collateral. Analysts who neglect local banking practices may misinterpret the observed effect of systematic land titling programs on credit access because these programs tend to dampen the signaling value of formal land titles. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0155&r=ban |
| By: | CHATTI, Mohamed Ali; KABLAN, Sandrine; YOUSFI, Ouidad |
| Abstract: | The current paper analyzes the performance and the choice of portfolio in Islamic banks. We consider a sample of 8 Malaysian universal Islamic banks between 2004 and 2008. We use the Herfindahl-Hirschman Index (HHI) as an indicator of the degree of diversification. The performance of the banks is measured by the return on assets ratio (ROA) and the Risk Adjusted Return On Capital ratio (RAROC). Finally, we use the Modern Portfolio Theory (MPT) of Markowitz to define the efficient frontier and the optimal portfolio.The results show that the corporate and investment activity increases significantly returns on assets. However, retail and commercial activity improves the results and performance of these banks. We find evidence that the level of diversification is not too high and recommend that they become concentrated on just one type of these activities. Finally, the MPT supports the idea that Islamic banks are not efficient. |
| Keywords: | Diversification; performance; Islamic banks; Herfindhal Hirschmann Index; Modern Portfolio Theory. |
| JEL: | G11 C01 G21 |
| Date: | 2010–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28348&r=ban |
| By: | Siregar, Reza; Lim, Vincent, C.S. |
| Abstract: | The deepening financial liberalisation and the tightening of financial integration globally have made it more challenging to manage macroeconomic policies in general, and to contain the spread of financial turbulence in particular. The financial sector has been shown to be inherently pro-cyclical and capable of amplifying macroeconomic volatilities, making management of monetary policy increasingly complex. In these ever changing financial landscapes, the success of monetary policy and macroeconomic policies, in general, hinges on the ability of policy makers to design policies that explicitly take into account macro-financial channels, and to interpret more cautiously the potential risk in financial system disruptions that can rapidly destabilise macroeconomic stability. The objective of this study is to take stock and examine the impact of linkages between macroeconomic development and financial market condition with a special focus on the SEACEN economies. |
| Keywords: | Macro-financial linkages; Macro-prudential; Stress-testing; Cross-border supervision; Basel III. |
| JEL: | E58 G18 G28 |
| Date: | 2011–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28417&r=ban |