New Economics Papers
on Banking
Issue of 2011‒02‒26
23 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Two-way interplays between capital buffers, credit and output: evidence from French banks By Coffinet, J.; Coudert, V.; Pop, A.; Pouvelle, C.
  2. Reversing the Financial Accelerator: Credit Conditions and Macro-Financial Linkages By Reginald Darius; Tamim Bayoumi
  3. Bank Ownership and Financial Stability By Enrico Perotti; Marcel Vorage
  4. Overborrowing, Financial Crises and ‘Macro-prudential’ Policy? By Javier Bianchi; Enrique G. Mendoza
  5. Banking risk and regulation: Does one size fit all? By Jeroen Klomp
  6. The Macroeconomics of the Credit Crisis: In Search of Externalities for Macro-Prudential Supervision By Frank A.G. den Butter
  7. Market Timing, Investment, and Risk Management By Patrick Bolton; Hui Chen; Neng Wang
  8. Consolidated Regulation and Supervision in the United States By Ashok Vir Bhatia
  9. Hedge Fund Leverage By Andrew Ang; Sergiy Gorovyy; Gregory B. van Inwegen
  10. Cream Skimming in Financial Markets By Patrick Bolton; Tano Santos; Jose A. Scheinkman
  11. Exorbitant Privilege and Exorbitant Duty By Pierre-Olivier Gourinchas; Helene Rey; Nicolas Govillot
  12. Real Output of Bank Services: What Counts Is What Banks Do, Not What They Own By Wang, J. Christina; Inklaar, Robert Christiaan
  13. The promise and performance of the Federal Reserve as Lender of Last Resort 1914-1933 By Michael D. Bordo; David C. Wheelock
  14. Bank-firm relations and the role of Mutual Guarantee Institutions during the crisis By Francesca Bartoli; Giovanni Ferri; Pierluigi Murro; Zeno Rotondi
  15. What Drives the Performance of Selected MENA Banks? A Meta-Frontier Analysis By Hichem Ben-Khedhiri; Barbara Casu; Sami Ben Naceur
  16. Related lending and banking development By Cull, Robert; Haber, Stephen; Imai, Masami
  17. Transition Probability Matrix Methodology for Incremental Risk Charge By Tzahi Yavin; Hu Zhang; Eugene Wang; Michael A. Clayton
  18. How Does the Institutional Setting for Creditor Rights Affect Bank Lending and Risk-Taking? By Mlambo, Kupukile; Murinde, Victor; Zhao, Tianshu
  19. Venture Capital in Bank- and Market-based Economies By Adeline Saillard; Thomas Url
  20. CDOs and the Financial Crisis: Credit Ratings and Fair Premia By Marcin Wojtowicz
  21. Dependence of defaults and recoveries in structural credit risk models By Rudi Sch\"afer; Alexander F. R. Koivusalo
  22. Contágio marginal no novo Sistema de Pagamentos Brasileiro By Rodrigo Peñaloza
  23. A Random Matrix Approach on Credit Risk By Michael C. M\"unnix; Rudi Sch\"afer; Thomas Guhr

  1. By: Coffinet, J.; Coudert, V.; Pop, A.; Pouvelle, C.
    Abstract: We assess the extent to which capital buffers (the capital banks hold in excess of the regulatory minimum) exacerbate rather than reduce the cyclical behavior of credit. We empirically study the relationships between output gap, capital buffers and loan growth with firm-level data for French banks over the period 1993—2009. Our findings reveal that bank capital buffers intensify the cyclical credit fluctuations arising from the output gap developments, all the more as better quality capital is considered. Moreover, by performing Granger causality tests at the bank level, we find evidence of a two-way causality between capital buffers and loan growth, pointing to mutually reinforcing mechanisms. Overall, those empirical results lend support to a countercyclical financial regulation that focuses on highest-quality capital and aims at smoothing loan growth.
    Keywords: Bank Capital Regulation, Procyclicality, Capital Buffers, Business Cycle Fluctuations, Basel III.
    JEL: G28 G21
    Date: 2011
  2. By: Reginald Darius; Tamim Bayoumi
    Abstract: This paper examines the role of credit markets in the transmission of U.S. macro-financial shocks through the prism of a financial conditions index (FCI) based on a vector autoregression (VAR) methodology. It explores the relative predictive power of market variables compared to credit standards/conditions. The main conclusion is that under plausible specifications credit conditions dominate market variables, highlighting the importance of credit supply. The fact that direct measures of credit conditions anticipate future movements in asset prices has an extremely important implication. Most models of the credit channel see it as an amplifier of underlying changes in financial wealth. The impact of credit conditions on growth compared to other market variables implies that credit supply drives other financial variables rather than responding to them.
    Keywords: Asset prices , Business cycles , Capital markets , Credit , Economic models ,
    Date: 2011–02–01
  3. By: Enrico Perotti (University of Amsterdam); Marcel Vorage (University of Amsterdam)
    Abstract: We study a politician's choice for state or private control of banks. The choice trades of lobbying contributions against social welfare, weighted by political accountability.
    Keywords: Political Economy; Bank Control; Lobbying; Instability
    JEL: D70 G21 G28
    Date: 2010–02–19
  4. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: This paper studies overborrowing, financial crises and macro-prudential policy in an equilibrium model of business cycles and asset prices with collateral constraints. Agents in a decentralized competitive equilibrium do not internalize the negative effects of asset fire-sales on the value of other agents' assets and hence they borrow too much" ex ante, compared with a constrained social planner who internalizes these effects. Average debt and leverage ratios are slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises are much larger. Excess asset returns, Sharpe ratios and the market price of risk are also much larger. State-contigent taxes on debt and dividends of about 1 and -0.5 percent on average respectively support the planner’s allocations as a competitive equilibrium and increase social welfare.
    Keywords: Borrowing , Business cycles , Credit , Economic models , Financial crisis , Global Financial Crisis 2008-2009 ,
    Date: 2011–02–01
  5. By: Jeroen Klomp
    Abstract: Using data for more than 200 banks from 21 OECD countries for the period 2002 to 2008, we examine the impact of bank regulation and supervision on banking risk.
    JEL: E44 G2
    Date: 2010–12
  6. By: Frank A.G. den Butter (VU University Amsterdam)
    Abstract: In the analysis of the credit crisis of 2007-2010 a clear distinction should be made between (i) the initial shock; (ii) the propagation and amplification of the initial shock to the systemic crisis of the financial markets; and (iii) the transmission of the credit crisis to the real economic sector causing a major cyclical downturn now known as the great recession. This paper argues that banking supervision failed to anticipate and repair the market failure that caused the huge amplification of the relatively small initial shock. As the repair of market failure is the only sound economic argument for regulation, banking supervisors should now focus on the externalities that caused the amplification of the shock and use that knowledge for adequate macro-prudential supervision in the future. Macro-economic models can be helpful in this search for externalities. The character and timing of future shocks are unpredictable, but contagion in the propagation mechanisms should be mitigated as much as possible.
    Keywords: credit crisis; externalities; macro-prudential supervision; contagion; fallacy of composition
    JEL: E42 E58 G38
    Date: 2010–05–17
  7. By: Patrick Bolton; Hui Chen; Neng Wang
    Abstract: Firms face uncertain financing conditions and are exposed to the risk of a sudden rise in financing costs during financial crises. We develop a tractable model of dynamic corporate financial management (cash accumulation, investment, equity issuance, risk management, and payout policies) for a financially constrained firm facing time-varying external financing costs. Firms value financial slack and build cash reserves to mitigate financial constraints. However, uncertainty about future financing opportunities also induce firms to rationally time the equity market, even if they have no immediate needs for cash. The stochastic financing conditions have rich implications for investment and risk management: (1) investment can be decreasing in financial slack; (2) firms may invest less as expected future financing costs fall; (3) investment-cash sensitivity, marginal value of cash, and firm's risk premium can all be non-monotonic in cash holdings; (4) speculation (as opposed to hedging) can be value-maximizing for financially constrained firms.
    JEL: E22 G12 G3
    Date: 2011–02
  8. By: Ashok Vir Bhatia
    Abstract: This paper builds on a Technical Note produced as part of the IMF’s 2010 Financial Sector Assessment Program (FSAP) review of the United States. It addresses enterprise-wide oversight of financial groups, a key tool to mitigate systemic risk. Focusing on legal arrangements, it recommends eliminating exceptions for holding companies owning certain limited-purpose banks, harmonizing arrangements for bank and thrift holding companies, and bringing into the net a few systemic nonbank financial groups, with the Federal Reserve as the sole consolidated regulator and supervisor.
    Keywords: Bank regulations , Bank supervision , Banking sector , Financial systems , Nonbank financial sector , United States ,
    Date: 2011–01–31
  9. By: Andrew Ang; Sergiy Gorovyy; Gregory B. van Inwegen
    Abstract: We investigate the leverage of hedge funds in the time series and cross section. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the market leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economy-wide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values both forecast increases in hedge fund leverage. Decreases in fund return volatilities predict future increases in leverage.
    JEL: G1 G12 G18 G21 G23 G28 G32
    Date: 2011–02
  10. By: Patrick Bolton; Tano Santos; Jose A. Scheinkman
    Abstract: We propose an equilibrium occupational choice model, where agents can choose to work in the real sector (become entrepreneurs) or to become informed dealers in financial markets. Agents incur costs to become informed dealers and develop skills for valuing assets up for trade. The financial sector comprises a transparent competitive exchange, where uninformed agents trade and an opaque over-the-counter (OTC) market, where informed dealers offer attractive terms for the most valuable assets entrepreneurs put up for sale. Thanks to their information advantage and valuation skills, dealers are able to provide incentives to entrepreneurs to originate good assets. However, the opaqueness of the OTC market allows dealers to extract informational rents from entrepreneurs. Trade in the OTC market imposes a negative externality on the organized exchange, where only the less valuable assets end up for trade. We show that in equilibrium the dealers' informational rents in the OTC market are too large and attract too much talent to the financial industry.
    JEL: G1 G14 G18 G2 G24 G28
    Date: 2011–02
  11. By: Pierre-Olivier Gourinchas (Associate Professor, Univeresity of California, Berkeley (; Helene Rey (Professor, London Business School); Nicolas Govillot (Ecole des Mines)
    Abstract: We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an gexorbitant privilegeh that significantly weakens its external constraint. In exchange for this gexorbitant privilegeh we document that the US provides insurance to the rest of the world, especially in times of global stress. This gexorbitant dutyh is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.
    Date: 2010–08
  12. By: Wang, J. Christina; Inklaar, Robert Christiaan (Groningen University)
    Abstract: The measurement of bank output, a difficult and contentious issue, has become even more important in the aftermath of the devastating financial crisis of recent years. In this paper, we argue that models of banks as processors of information and transactions imply a quantity measure of bank service output based on transaction counts instead of balances of loans and deposits. Compiling new and comparable output measures for the United States and a range of European countries, we show that our counts?based output series exhibit significantly different growth patterns than our balances?based output series over the years 1997 to 2009. Since the U.S. official statistics rely on counts while European statistics rely on balances, this implies a potentially considerable bias in the estimate of bank output growth in Europe vis?à?vis that in the United States.
    Date: 2011
  13. By: Michael D. Bordo (Rutgers University and NBER); David C. Wheelock (Federal Reserve Bank of St. Louis)
    Abstract: This paper examines the origins and early performance of the Federal Reserve as lender of last resort. The Fed was established to overcome the problems of the National Banking era, in particular an “inelastic” currency and the absence of an effective lender of last resort. As conceived by Paul Warburg and Nelson Aldrich at Jekyll Island in 1910, the Fed’s discount window and bankers acceptance-purchase facilities were expected to solve the problems that had caused banking panics in the National Banking era. Banking panics returned with a vengeance in the 1930s, however, and we examine why the Fed failed to live up to the promise of its founders. Although many factors contributed to the Fed’s failures, we argue that the failure of the Federal Reserve Act to faithfully recreate the conditions that had enabled European central banks to perform effectively as lenders of last resort, or to reform the inherently unstable U.S. banking system, were crucial. The Fed’s failures led to numerous reforms in the mid-1930s, including expansion of the Fed’s lending authority and changes in the System’s structure, as well as changes that made the U.S. banking system less prone to banking panics. Finally, we consider lessons about the design of lender of last resort policies that might be drawn from the Fed’s early history.
    Keywords: Federal Reserve Act, lender of last resort, discount window, banking panics, Great Depression
    JEL: E58 G28 N21 N22
    Date: 2011–02–15
  14. By: Francesca Bartoli (UniCredit Group); Giovanni Ferri (University of Bari); Pierluigi Murro (University of Bari); Zeno Rotondi (Unicredit Group)
    Abstract: We examine the role played by Mutual Guarantee Institutions (MGIs) in the lending policies undertaken by banks at the peak of the Great Crisis of 2007-2009. We address this issue by using a large database on Italian firms built from the credit files of UniCredit banking Group and focusing on small business. We provide an empirical analysis of the determinants of the probability that a borrowing firm will suffer financial tension and obtain two main innovative findings. First, we show that small firms supported by MGIs were less likely to experience financial tensions even at that time of utmost financial stress. Second, our empirical evidence shows that MGIs have played a signalling role beyond the simple provision of a collateral. This latter finding suggests that the information provided by MGIs turned out to be key for bank-firm relations as scoring and rating systems - being typically based on pro-cyclical indicators - had become less informative during the crisis.
    Keywords: financial crisis, bank-firm relationships, asymmetric information, credit guarantee schemes, small business finance, peer monitoring
    JEL: D82 G21 G30
    Date: 2011–01
  15. By: Hichem Ben-Khedhiri; Barbara Casu; Sami Ben Naceur
    Abstract: This study examines the effect of financial-sector reform on bank performance in selected Middle Eastern and North African (MENA) countries in the period 1994 -2008. We evaluate bank efficiency in Egypt, Jordan, Morocco, Lebanon and Tunisia by means of Data Envelopment Analysis (DEA) and we employ a meta-frontier approach to calculate efficiency scores in a cross-country setting. We then employ a second-stage regression to investigate the impact of institutional, financial, and bank specific variables on bank efficiency. Overall, the analysis shows that, despite similarities in the process of financial reforms undertaken in the five MENA countries, the observed efficiency levels of banks vary substantially across markets, with Morocco consistently outperforming the rest of the region.Differences in technology seem to be crucial in explaining efficiency differences. To foster banking sector performance, policies should be aimed at giving banks incentives to improve their risk management and portfolio management techniques. Improvements in the legal system and in the regulatory and supervisory bodies would also help to reduce inefficiency.
    Keywords: Banking sector , Cross country analysis , Economic models , Egypt , Jordan , Lebanon , Middle East , Morocco , North Africa , Tunisia ,
    Date: 2011–02–14
  16. By: Cull, Robert; Haber, Stephen; Imai, Masami
    Abstract: Does related lending have positive or negative effects on the development of banking systems? This paper analyzes a unique cross-country data set covering 74 countries from 1990 to 2007, and finds that related lending, on average, does not have any effect on the growth of credit. The authors do find, however, that there are conditional relationships: related lending tends to retard the growth of banking systems when rule of law is weak, while it tends to promote the growth of banking systems when rule of law is strong. They also find that related lending appears to be associated with looting when banks are owned by non-financial firms, but that it does not when non-financial firms are owned by banks. The results indicate that whether related lending is positive or pernicious depends critically on the institutional context in which it takes place; there is no single"best policy"regarding related lending. These findings are robust to alternative specifications, including instrumental variable regressions.
    Keywords: Banks&Banking Reform,Debt Markets,Bankruptcy and Resolution of Financial Distress,Labor Policies,Economic Theory&Research
    Date: 2011–02–01
  17. By: Tzahi Yavin; Hu Zhang; Eugene Wang; Michael A. Clayton
    Abstract: As part of Basel II's incremental risk charge (IRC) methodology, this paper summarizes our extensive investigations of constructing transition probability matrices (TPMs) for unsecuritized credit products in the trading book. The objective is to create monthly or quarterly TPMs with predefined sectors and ratings that are consistent with the bank's Basel PDs. Constructing a TPM is not a unique process. We highlight various aspects of three types of uncertainties embedded in different construction methods: 1) the available historical data and the bank's rating philosophy; 2) the merger of one-year Basel PD and the chosen Moody's TPMs; and 3) deriving a monthly or quarterly TPM when the generator matrix does not exist. Given the fact that TPMs and specifically their PDs are the most important parameters in IRC, it is our view that banks may need to make discretionary choices regarding their methodology, with uncertainties well understood and managed.
    Date: 2011–02
  18. By: Mlambo, Kupukile; Murinde, Victor; Zhao, Tianshu
    Abstract: This paper investigates how the institutional setting for protection of creditor rights affects bank lending and risk-taking. An analytical model is specified to underpin banks‟ portfolio decisions, between loans and other earning assets such as government securities. The model is augmented with various metrics, which proxy the institutional setting for creditor rights, and is estimated and tested on an unbalanced three-dimensional dataset of commercial banks in 20 African countries for 1995-2008. It is found that three specific metrics induce banks to allocate a high proportion of their earning assets to loans: legal creditor rights; the efficient enforcement of creditor rights; and availability of information sharing mechanisms among banks. However, the three metrics appear to work through different channels. The enforceability of legal rights works not only through mitigating credit risks, but also through a composite effect of market competition and lower costs of information acquisition and contract enforcement. The legal rights metric and information sharing metric exclusively rely on the composite effect.
    Keywords: Africa; Bank risk-taking; Bank lending; Information sharing; Law enforcement; Creditor rights
    Date: 2011–02
  19. By: Adeline Saillard (University of Paris I Panthéon-Sorbonne (CES), Paris School of Economics); Thomas Url (Austrian Institute of Economic Research)
    Abstract: The determinants of venture capital investment have attracted a significant amount of attention from both academics and policymakers. We use a version of the Keuschnigg-Nielsen model for venture-capital financed projects to condition our analysis on a reasonable set of exogenous variables but we focus on one determinant: financial market structure. The type of financial market structure (bank- or market-based) contributes substantially to explaining differences among countries with respect to the extent of venture capital investments in the initial business stages. We will use the cross country and time series variation from a panel of 19 industrialised countries to support the hypothesis that venture capital thrives within market-based financial systems and is confined to an ancillary role in bank-based systems.
    Keywords: Venture capital, financial market structure, local stock markets, panel data
    Date: 2011–02–21
  20. By: Marcin Wojtowicz (VU University Amsterdam)
    Abstract: This paper uses the market-standard Gaussian copula model to show that fair spreads on CDO tranches are much higher than fair spreads on similarly-rated corporate bonds. It implies that credit ratings are not sufficient for pricing, which is surprising given their central role in structured finance markets. Tranche yield enhancement is attributed to a concentration of collateral bonds' risk premia in spreads of non-equity tranches. This illustrates limitations of the rating methodologies, which are solely based on estimates of real-world payoff prospects and thus do not capture risk premia. We also show that payoff prospects and credit quality of CDO tranches are characterized by low stability. If credit conditions deteriorate, then prices and ratings of CDO tranches are likely to fall substantially further than prices and ratings of corporate bonds. Default contagion exacerbates the pace and severity of changes for CDO tranches.
    Keywords: Collateralized debt obligations; Credit ratings; Fair premia; Structured finance; Rating agencies
    JEL: C52 G11
    Date: 2011–02–04
  21. By: Rudi Sch\"afer; Alexander F. R. Koivusalo
    Abstract: The current research on credit risk is primarily focused on modeling default probabilities. Recovery rates are often treated as an afterthought; they are modeled independently, in many cases they are even assumed constant. This is despite of their pronounced effect on the tail of the loss distribution. Here, we take a step back, historically, and start again from the Merton model, where defaults and recoveries are both determined by an underlying process. Hence, they are intrinsically connected. For the diffusion process, we can derive the functional relation between expected recovery rate and default probability. This relation depends on a single parameter only. In Monte Carlo simulations we find that the same functional dependence also holds for jump-diffusion and GARCH processes. We discuss how to incorporate this structural recovery rate into reduced form models, in order to restore essential structural information which is usually neglected in the reduced-form approach.
    Date: 2011–02
  22. By: Rodrigo Peñaloza (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília)
    Abstract: In this paper we adapt Penaloza (2005)s …nite-dimensional model of shadow-prices in real-time gross settlement systems to the new Brazilian Payment System. The novelty of our application is a better treatment of securities and their role in the smoothing of the ow of payments during the day.
    Keywords: shadow-prices, duality theory, Brazilian Central Bank.
    JEL: C61 E51 E52 E58
    Date: 2011–01
  23. By: Michael C. M\"unnix; Rudi Sch\"afer; Thomas Guhr
    Abstract: We consider a structural model for the estimation of credit risk based on Merton's original model. By using Random-Matrix theory we demonstrate analytically that the presence of correlations severely limits the effect of diversification in a credit portfolio if the correlation are not identical zero. The existence of correlations alters the tails of the loss distribution tremendously, even if their average is zero. Under the assumption of randomly fluctuating correlations, a lower bound for the estimation of the loss distribution is provided.
    Date: 2011–02

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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