New Economics Papers
on Banking
Issue of 2011‒03‒05
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banks, oligopolistic competition, and the business cycle: A new financial accelerator approach By Totzek, Alexander
  2. Self-Fulfilling Risk Panics By Philippe Bacchetta; Cedric Tille; Eric van Wincoop
  3. Cyclical Effects of Bank Capital Requirements with Imperfect Credit Markets By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  4. Does Size of Banks Really Matter? Evidence from CDS Market Data By Ýlker Arslan
  5. The role of securitization in mortgage renegotiation By Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas D. Evanoff
  6. International liquidity provision during the financial crisis: a view from Switzerland By Raphael Auer; Sebastien Kraenzlin
  7. Credit conditions indices: Controlling for regime shifts in the Norwegian credit market By Eilev S. Jansen and Tord S. H. Krogh
  8. Market-based loss mitigation practices for troubled mortgages following the financial crisis By Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas D. Evanoff
  9. Regulation of Credit Rating Agencies - Evidence from Recent Crisis By Mai Hassan; Christian Kalhoefer
  10. Volatility Patterns of CDS, Bond and Stock Markets before and during the Financial Crisis: Evidence from Major Financial Institutions By Ansgar Belke; Christian Gokus
  11. Calibration of structural and reduced-form recovery models By Alexander F. R. Koivusalo; Rudi Sch\"afer
  12. Liquidity problems and early payment default among subprime mortgages By Nathan B. Anderson; Jane K. Dokko
  13. Toward Reasonable Regulation of Debit Card Interchange Fees: The Case for Modifying the Federal Reserve Board’s December 16, 2010 Proposals By Litan, Robert E.; Baily, Martin Neil
  14. Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation By Sa, Filipa; Towbin, Pascal; wieladek, tomasz
  15. Policy Rate Pass-through and the Adjustment of Retail Interest Rates in Malaysia? Empirical Evidence from Commercial Banks and Finance Companies By Abdul Majid, Muhamed Zulkhibri
  16. European integration and banking efficiency: a panel cost frontier approach By Cândida Ferreira
  17. Efficiency and integration in European banking markets By Cândida Ferreira
  18. Central bank capital adequacy for central banks with or without a monetary policy By Luca Papi
  19. The relationship between trade credit, bank credit and financial structure : from firm-level non-linearities to financial development heterogeneity. A study on MENA firm-level data. By Jézabel Couppey-Soubeyran; Jérôme Héricourt

  1. By: Totzek, Alexander
    Abstract: In the last two decades a body of literature highlights the role of financial frictions for explaining the development of key macroeconomic variables. Moreover, the financial crisis 2007-2009 again sheds light on the importance of this topic. In this paper, we contribute to the literature by simultaneously explaining two empirical observations. First, mark-ups on the loan market react counter-cyclical. Second, the number of banks operating in the economy significantly co-moves with GDP. Therefore, we develop a DSGE model which incorporates an oligopolistic banking sector with endogenous bank entry. The resulting model generates significant accelerating effects which are even larger than those obtained in the famous financial accelerator model of Bernanke et al. [Bernanke, B., Gertler, M., Gilchrist, S., 1999. The financial accelerator in a quantitative business cycle framework. In: Handbook of Macroeconomics. North-Holland, Amsterdam] and performs remarkable well when comparing the generated second moments of real and financial variables with those observed in the data. --
    Keywords: Oligopolistic competition,Bank entry,Financial accelerator
    JEL: E44 E32
    Date: 2011
  2. By: Philippe Bacchetta (University of Lausanne, Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Cedric Tille (Graduate Institute, Geneva, Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Eric van Wincoop (University of Virginia, National Bureau of Economic Research and Hong Kong Institute for Monetary Research)
    Abstract: Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price. This link implies that risk about tomorrow's asset price depends on uncertainty about risk tomorrow. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and self-fulfilling shifts in risk. We show that this can generate risk panics. The impact of the panic is larger when the shift from a low to a high risk equilibrium takes place in an environment of weak fundamentals. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can account well for the developments during the recent financial crisis.
    Date: 2010–11
  3. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Date: 2011–01
  4. By: Ýlker Arslan (Department of Economics, Izmir University of Economics)
    Abstract: In this study we try to find that whether markets take into account the phenomenon of Too Big to Fail. With the help of CDS market data, which reflects the risk, markets attribute on banks, we calculate the default probabilities of banks in one, two, and three years. Then we regress these results with financial values like total assets, total shareholders? equity and net income. Later on we extend our study and repeat our regression analysis using Return on Assets as dependent variable. We find that markets give more importance to profitability of a bank than its size when pricing the riskiness of the bank. We conclude that Too Big to Fail is not a valid term as thought but may be Too Profitable to Fail may be better.
    Keywords: Banking, Too Big to Fail, CDS Market
    JEL: G21 G28
    Date: 2010–11
  5. By: Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas D. Evanoff
    Abstract: We study the effects of securitization on renegotiation of distressed residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observe lender renegotiation actions and cover more than 60% of the U.S. mortgage market. Exploiting within-servicer variation in these 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 rates 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.
    Keywords: Mortgage loans ; Asset-backed financing ; Securities ; Mortgages
    Date: 2011
  6. By: Raphael Auer; Sebastien Kraenzlin
    Abstract: We document the provision of CHF liquidity by the Swiss National Bank (SNB) to banks domiciled outside Switzerland during the recent financial crisis. What makes the Swiss case special is the size of this liquidity provision—making up 80 percent of all short term CHF liquidity provided by the SNB—and also the measures that were adopted to distribute this liquidity. In addition to making CHF available to other central banks via SWAP facilities, the SNB also allows banks domiciled outside Switzerland to directly participate in its REPO transactions. Although this policy was adopted for reasons that predate the financial crisis, during the crisis it proved tremendously helpful as it gave the European banking system direct access to the primary funding facility for CHF.
    Keywords: Demand for money ; Monetary policy - Switzerland ; International finance
    Date: 2011
  7. By: Eilev S. Jansen and Tord S. H. Krogh (Statistics Norway)
    Abstract: The interaction between financial markets and the macroeconomy can be strongly affected by changes in credit market regulations. In order to take account of these effects we control explicitly for regime shifts in a system of debt equations for Norway using a common, flexible trend. The estimated shape of the trend matches the qualitative development in the regulations, and we argue that it can be viewed as a measure of relative credit availability, or credit conditions, for the period 1975-2008 -- a credit conditions index (CCI). This entails years of strict credit market regulations in the 1970s, its gradual deregulation in the 1980s, followed by a full-blown banking crisis in the years around 1990 and the development thereafter up to the advent of the current financial crisis. Our study is inspired by Fernandez-Corugedo and Muellbauer (2006), which introduced the methodology and provided estimates of a CCI for the UK. The trend conditions on a priori knowledge about changes in the Norwegian regulatory system, as documented in Krogh (2010b), and it shows robustness when estimated recursively.
    Keywords: financial credit conditions; flexible trend; financial deregulation; household loan.
    JEL: E44 G21 G28
    Date: 2011–02
  8. By: Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas D. Evanoff
    Abstract: The meltdown in residential real-estate prices that commenced in 2006 resulted in unprecedented mortgage delinquency rates. Until mid-2009, lenders and servicers pursued their own individual loss mitigation practices without being significantly influenced by government intervention. Using a unique dataset that precisely identifies loss mitigation actions, we study these methods—liquidation, repayment plans, loan modification, and refinancing—and analyze their effectiveness. We show that the majority of delinquent mortgages do not enter any loss mitigation program or become a part of foreclosure proceedings within 6 months of becoming distressed. We also find that it takes longer to complete foreclosures over time, potentially due to congestion. We further document large heterogeneity in practices across servicers, which is not accounted for by differences in borrower population. ; Consistent with the idea that securitization induces agency conflicts, we confirm that the likelihood of modification of securitized loans is up to 70% lower relative to portfolio loans. Finally, we find evidence that affordability (as opposed to strategic default due to negative equity) is the prime reason for redefault following modifications. While modification terms are more favorable for weaker borrowers, greater reductions in mortgage payments and/or interest rates are associated with lower redefault rates. Our regression estimates suggest that a 1 percentage point decline in mortgage interest rate is associated with a nearly 4 percentage point decline in default probability. This finding is consistent with the Home Affordable Modification Program (HAMP) focus on improving mortgage affordability.
    Keywords: Asset-backed financing ; Financial crises ; Securities ; Mortgages
    Date: 2011
  9. By: Mai Hassan (Faculty of Management Technology, The German University in Cairo); Christian Kalhoefer (Faculty of Management Technology, The German University in Cairo)
    Abstract: The importance of ratings for investors’ decisions and for the perceptions of the financial health of a nation pointed out the need that credit rating agencies should be regulated in some way. Regulators and market participants believed that the credit rating agencies need to abide by standards of corporate governance and supervision due to their pivotal role in the US subprime crisis. This belief was amplified recently because the rating agencies were deeply involved in the European debt crisis after various sovereign debt ratings were significantly downgraded. Therefore, the paper highlights the critique against the agencies’ role in the two most recent crises and reviews the regulation proposals which subject the rating agencies to behavioral standards.
    Keywords: Credit rating agencies, subprime, Euro crisis
    JEL: G15 G24 G38
    Date: 2011–02
  10. By: Ansgar Belke; Christian Gokus
    Abstract: This study is motivated by the development of credit-related instruments and signals of stock price movements of large banks during the recent financial crisis. What is common to most of the empirical studies in this field is that they concentrate on modeling the conditional mean. However, financial time series exhibit certain stylized features such as volatility clustering. But very few studies dealing with credit default swaps account for the characteristics of the variances. Our aim is to address this issue and to gain insights on the volatility patterns of CDS spreads, bond yield spreads and stock prices. A generalized autoregressive conditional heteroscedasticity (GARCH) model is applied to the data of four large US banks over the period ranging from January 01, 2006, to December 31, 2009. More specifically, a multivariate GARCH approach fits the data very well and also accounts for the dependency structure of the variables under consideration. With the commonly known shortcomings of credit ratings, the demand for market-based indicators has risen as they can help to assess the creditworthiness of debtors more reliably. The obtained findings suggest that volatility takes a significant higher level in times of crisis. This is particularly evident in the variances of stock returns and CDS spread changes. Furthermore, correlations and covariances are time-varying and also increased in absolute values after the outbreak of the crisis, indicating stronger dependency among the examined variables. Specific events which have a huge impact on the financial markets as a whole (e.g. the collapse of Lehman Brothers) are also visible in the (co)variances and correlations as strong movements in the respective series.
    Keywords: bond markets, credit default swaps, credit risk, financial crisis, GARCH, stock markets, volatility
    JEL: C53 G21 G24
    Date: 2011
  11. By: Alexander F. R. Koivusalo; Rudi Sch\"afer
    Abstract: In recent years research on credit risk modelling has mainly focused on default probabilities. Recovery rates are usually modelled independently, quite often they are even assumed constant. Then, however, the structural connection between recovery rates and default probabilities is lost and the tails of the loss distribution can be underestimated considerably. The problem of underestimating tail losses becomes even more severe, when calibration issues are taken into account. To demonstrate this we choose a Merton-type structural model as our reference system. Diffusion and jump-diffusion are considered as underlying processes. We run Monte Carlo simulations of this model and calibrate different recovery models to the simulation data. For simplicity, we take the default probabilities directly from the simulation data. We compare a reduced-form model for recoveries with a constant recovery approach. In addition, we consider a functional dependence between recovery rates and default probabilities. This dependence can be derived analytically for the diffusion case. We find that the constant recovery approach drastically and systematically underestimates the tail of the loss distribution. The reduced-form recovery model shows better results, when all simulation data is used for calibration. However, if we restrict the simulation data used for calibration, the results for the reduced-form model deteriorate. We find the most reliable and stable results, when we make use of the functional dependence between recovery rates and default probabilities.
    Date: 2011–02
  12. By: Nathan B. Anderson; Jane K. Dokko
    Abstract: The lack of property tax escrow accounts among subprime mortgages causes borrowers to make large lump-sum tax payments that reduce liquidity. Different property tax collection dates across states and counties create exogenous variation in the time between loan origination and the first property tax due date, affording the opportunity to estimate the causal effect of loan-level exposure to liquidity reductions on mortgage default. We find that a nine-month delay in owing property taxes reduces the probability of first-year default by about 4 percent, or about one-third of the effect of a reduction in equity from 10 percent to negative 20 percent.
    Date: 2011
  13. By: Litan, Robert E.; Baily, Martin Neil
    Abstract: This paper shows why the Federal Reserve Board’s proposed alternatives for regulating interchange fees are not “reasonable” and therefore in direct violation of the statutory mandate that these rules be “reasonable” and “proportional” to the costs incurred by debit card issuers. The Board’s December 16, 2010 proposal is not “reasonable” because it would lead to a series of “unreasonable” outcomes, which, in significant part, flow from the predictable responses issuers of debit cards would take in response to the proposal. Policy makers cannot reasonably assume that banks in competitive markets will sit idly by while being forced to reduce their current market-determined debit card interchange fees, which comprise much of their debit-card revenues and a material portion of bank profits, by anywhere from 73 to 84 percent. To the contrary, banks will attempt to make up as much of the lost revenue as they can by some combination of higher fees on checking accounts, fees or reductions of benefits for debit card use, or more refusals by issuers to permit consumers to conduct higher-cost types of transactions that impose greater fraud risk. We argue that the Board should find that, in the absence of empirical evidence evaluated using the analytical framework governing two-sided markets proving otherwise, market-set interchange fees are reasonable and proportional to cost. Any other decision would lead to the unreasonable outcomes.
    Date: 2011–02
  14. By: Sa, Filipa (; Towbin, Pascal (Banque de France); wieladek, tomasz (Bank of England)
    Abstract: A number of OECD countries experienced an environment of low interest rates and a rapid increase in housing market activity during the last decade. Previous work suggests three potential explanations for these events: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this study we examine the effects of these three factors on the housing market. We estimate a panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions. To explore how these effects change with the structure of the mortgage market and the degree of securitisation, we augment the VAR to let the coefficients vary with mortgage market characteristics. Our results suggest that both types of shocks have a significant and positive effect on real house prices, real credit to the private sector and real residential investment. The responses of housing variables to both types of shocks are stronger in countries with more developed mortgage markets, roughly doubling the responses to a monetary policy shock. The amplification effect of mortgage-backed securitisation is particularly strong for capital inflows shocks, increasing the response of real house prices, residential investment and real credit by a factor of two, three and five, respectively.
    Keywords: House prices; capital flows; financial innovation; monetary policy
    JEL: C33 E51 F32 G21
    Date: 2011–02–21
  15. By: Abdul Majid, Muhamed Zulkhibri
    Abstract: This paper examines the interest rate pass-through from money market rates to various retail lending and deposit rates for financial institutions in Malaysia. The evidence shows that vast majority of retail lending rates pass-through is less than complete, while the speed of adjustment varies across administered interest rates. Adjustment in lending rates tended to be more sluggish than that of deposit rates. The finance companies, moreover, are quicker in adjusting their deposit rates than the commercial banks, but are slower in adjusting their loan rates. The empirical analysis also shows that interest rate adjustment is asymmetric and faster in the period of monetary easing rather than in the period of monetary tightening. The evidence suggests the importance of financial institutions in the transmission of monetary policy reflecting the adjustment processes are not uniform across different types of institutions and instruments.
    Keywords: Interest rate pass-through; Price rigidity; Monetary Policy; Malaysia
    JEL: E43 E52 E44
    Date: 2010–09–01
  16. By: Cândida Ferreira
    Abstract: The aim of this paper is to contribute to the relatively scarce published research on the relationship between European integration and banking efficiency. Estimating cost translog frontier functions for different panels of European Union countries for the time period 1994- 2008 we conclude that there is always technical inefficiency. Additionally, although country inefficiencies have decreased in recent years (2000-2008), there are no remarkable changes in the countries’ ranking positions. Our results also point to the existence of a quite slow convergence process across EU countries during the period analysed, as well as its acceleration after the establishment of the European Monetary Union.
    Keywords: Bank efficiency; European integration; convergence; cost frontier approach.
    JEL: G15 G21 F36
    Date: 2011–02
  17. By: Cândida Ferreira
    Abstract: This paper seeks to contribute to the relatively scarce published research on the relationship between bank efficiency and European integration in the wake of the recent financial crisis. Using Stochastic Frontier Analysis and Data Envelopment Analysis approaches, the study estimates bank efficiency for different panels of European Union countries during the time period 1994-2008. The main conclusions point to the persistence of inefficiencies, which decreased with the implementation of the European Monetary Union (in the time period 2000- 2008) but then increased slightly in the most recent phase (2004-2008), during which the EU had to adapt to the new universe of 27 member-states. On the other hand, there is evidence of a convergence process, although this is very slow and not strong enough to avoid the differences in the country efficiency scores.
    Date: 2011–02
  18. By: Luca Papi (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Date: 2011–01
  19. By: Jézabel Couppey-Soubeyran (Centre d'Economie de la Sorbonne); Jérôme Héricourt (EQUIPPE-Université de Lille et Centre d'Economie de la Sorbonne)
    Abstract: Using a database of more than 1,100 firms in the MENA region, this article looks at the determinants of demand for trade credit, particularly access to bank credit, size, age and the quality of the firm's financial structure. We show that the difficulty of gaining acces to bank credit positively influences the use of trade credit, and thus demonstrate the substitutability of bank credit and trade credit. Besides, firm's non-financial characteristics, namely age and size do not influence similarly the probability of having trade credit and the volume of trade credit raised. Additional investigations strongly support the existence of non-linearities in the relationship between trade credit and firm's financial structure and size. Finally, financial development emerges as a key feature of the demand for trade credit. Indeed, we show that most firm-level characteristics lose their influence on trade credit when financial development is high enough. With financial development, trade credit gets primarily driven by trade relationships and does not appear any more as a palliative solution when bank credit access is difficult.
    Keywords: Trade credit, bank credit, financial constraints, financial development.
    JEL: F4 G2 O16 O55
    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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