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on Banking |
| By: | Paolo Angelini; Laurent Clerc; Vasco Cúrdia; Leonardo Gambacorta; Andrea Gerali; Alberto Locarno; Roberto Motto; Werner Roeger; Skander Van den Heuvel; Jan Vlcek |
| Abstract: | We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b). |
| Keywords: | Basel III, countercyclical capital buffers, financial (in)stability, procyclicality, macroprudential |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:338&r=ban |
| By: | Guillaume Plantin (Toulouse School of Economics and CEPR (E-mail: guillaume.plantin@tse-fr.eu)) |
| Abstract: | I use a simple banking model to study the circumstances under which excessive and inefficient securitization may occur. I first stress that increasing securitization rates that reduce banks' incentives to screen borrowers and thus lead to more defaults need not be inefficient. This may be an efficient response to higher gains from trade between banks and fixed-income markets in the presence of bank moral hazard. I then argue that if reaping such higher gains from trade induces a reduction in the informational efficiency of the securitization market, then there is room for excessive securitization. The model points at increased transparency and informational efficiency of the securitization market as key improvements for the future of the banking system. |
| Keywords: | banking; securitization; liquidity |
| JEL: | G18 G21 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-04&r=ban |
| By: | Éric Tymoigne |
| Abstract: | With the Great Recession and the regulatory reform that followed, the search for reliable means to capture systemic risk and to detect macrofinancial problems has become a central concern. In the United States, this concern has been institutionalized through the Financial Stability Oversight Council, which has been put in charge of detecting threats to the financial stability of the nation. Based on Hyman Minsky's financial instability hypothesis, the paper develops macroeconomic indexes for three major economic sectors. The index provides a means to detect the speed with which financial fragility accrues, and its duration; and serves as a complement to the microprudential policies of regulators and supervisors. The paper notably shows, notably, that periods of economic stability during which default rates are low, profitability is high, and net worth is accumulating are fertile grounds for the growth of financial fragility. |
| Keywords: | Financial Fragility; Financial Regulation; Financial Crises; Macroprudential Risk; Debt-Deflation Process; Ponzi Finance |
| JEL: | E32 G18 G28 G38 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_654&r=ban |
| By: | Demirguc-Kunt , Asli; Huizinga, Harry |
| Abstract: | For an international sample of banks, the authors construct measures of a bank's absolute size and its systemic size defined as size relative to the national economy. They examine how a bank's risk and return, its activity mix and funding strategy, and the extent to which it faces market discipline depend on both size measures. Although absolute size presents banks with a trade-off between risk and return, systemic size is an unmitigated bad, reducing return without a reduction in risk. Despite too-big-to-fail subsidies, the analysis finds that systemically large banks are subject to greater market discipline as evidenced by a higher sensitivity of their funding costs to risk proxies, suggesting that they are often too big to save. The finding that a bank's interest cost tends to rise with its systemic size can also in part explain why a bank's rate of return on assets tends to decline with systemic size. Overall, the results cast doubt on the need to have systemically large banks. Bank growth has not been in the interest of bank shareholders in small countries, and it is not clear whether those in larger countries have benefited. Although market discipline through increasing funding costs should keep systemic size in check, clearly it has not been effective in preventing the emergence of such banks in the first place. Inadequate corporate governance structures at banks seem to have enabled managers to pursue high-growth strategies at the expense of shareholders, providing support for greater government regulation. |
| Keywords: | Banks&Banking Reform,Debt Markets,Economic Theory&Research,Access to Finance,Bankruptcy and Resolution of Financial Distress |
| Date: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5576&r=ban |
| By: | Shigenori Shiratsuka (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shigenori.shiratsuka@boj.or.jp)) |
| Abstract: | This paper explores a policy framework for central banks from a macroprudential perspective, to pursue price and financial system stability in a consistent and sustainable manner. Triggered by the recent financial crisis, fundamental reform of the financial system is advocated to establish more stable foundations for supporting sustainable growth in the global economy. Achieving higher stability purely by more stringent microprudential regulations tends to result in lower efficiency in financial intermediation. Crises are fundamentally endogenous to the financial system and arise from exposure to common risks among financial institutions, underpinned by complicated incentives at both the micro and macro levels. In that context, macroprudential policy is often pointed out as a missing element in the current policy framework in order to strike a balance between the efficiency and stability of the financial system as a whole. Pursuing both price and financial system stability in a consistent and sustainable manner requires combination of monetary and prudential policies, especially macroprudential policy. To that end, this paper proposes to extend constrained discretion for monetary policy, proposed as the conceptual basis for flexible inflation targeting, to overall central banking, encompassing monetary and macroprudential policies. |
| Keywords: | Macroprudential policy, Procyclicality, Financial imbalances, Asset-price and credit bubble, Constrained discretion. |
| JEL: | E58 G28 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-03&r=ban |
| By: | Thorsten Beck (EBC, Tilburg University.); Martin Brown (University of St. Gallen.) |
| Abstract: | This paper uses survey data for 29,000 households from 29 transition economies to explore how the use of banking services is related to household characteristics, bank ownership structure and the development of the financial infrastructure. At the household level we find that the holding of a bank account or bank card increases with income, wealth and education in most countries and also find evidence for an urban-rural gap, as well as for a role of religion and social integration. Our results show that foreign bank ownership is associated with more bank accounts among high-wealth, high-income, and educated households. State ownership, on the other hand, does not induce financial inclusion of rural and poorer households. We find that higher deposit insurance coverage, better payment systems and creditor protection encourage the holding of bank accounts in particular by highincome and high-wealth households. All in all, our findings shed doubt on the ability of policy levers to broaden the financial system to disadvantaged groups. JEL Classification: G2, G18, O16, P34. |
| Keywords: | Access to finance, Bank-ownership, Deposit insurance, Payment system, Creditor protection. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111295&r=ban |
| By: | Song Han (Federal Reserve Board and Hong Kong Institute for Monetary Research); Hao Zhou (Federal Reserve Board) |
| Abstract: | We estimate the nondefault component of corporate bond yield spreads and examine its relationship with bond liquidity. We measure bond liquidity using intraday transactions data and estimate the default component using the term structure of credit default swaps (CDS) spreads. With swap rate as the risk free rate, the estimated nondefault component is generally moderate but statistically significant for AA-, A-, and BBB-rated bonds and increasing in this order. With Treasury rate as the risk free rate, the estimated nondefault component is the largest in basis points for BBB-rated bonds but, as a fraction of yield spreads, it is the largest for AAA-rated bonds. Controlling for the unobservable firm heterogeneity, we find a positive and significant relationship between the nondefault component and illiquidity for investment-grade bonds but no significant relationship for speculative-grade bonds. We also find that the nondefault component comoves with indicators for macroeconomic conditions. |
| Keywords: | Corporate Bond Yield Spreads, Credit Default Swaps, Liquidity, CDS-Bond Basis |
| JEL: | G12 G13 G14 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:022011&r=ban |
| By: | Sule Alan (Faculty of Economics and CFAP University of Cambridge, UK and Koc University, Turkey); Ruxandra Dumitrescu (Faculty of Economics and CFAP University of Cambridge, UK); Gyongyi Loranth (Faculty of Business, Economics and Statistics University of Vienna and CEPR) |
| Abstract: | We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data set from a UK credit card company. We were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007. Access to such information is rare. We first calibrate an intertemporal consumption model to show that the experimental design has sufficient statistical power to detect economically plausible responses among borrowers. We then find that individuals who tend to utilize their credit limits fully do not reduce their demand for credit when subject to increases in interest rates as high as 3 percentage points. This finding is naturally interpreted as evidence of binding liquidity constraints. We also demonstrate the importance of isolating exogenous variation in interest rates when estimating credit demand elasticities. We show that estimating a standard credit demand equation with the nonexperimental variation in the data leads to severely biased estimates. This is true even when conditioning on a rich set of controls and individual fixed effects. |
| Keywords: | subprime credit; randomized trials; liquidity constraints |
| JEL: | D11 D12 D14 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1105&r=ban |
| 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); Chia-Lin Chang (NCHU Department of Applied Economics (Taiwan)); 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: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer, Jimenez-Martin and Perez- Amaral (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices. We examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). We find that an aggressive strategy of choosing the Supremum of the single model forecasts is preferred to the other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, though these are admissible under the Basel II Accord. |
| Keywords: | Median strategy, Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel II Accord, VIX futures, global financial crisis (GFC). |
| JEL: | G32 G11 C53 C22 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1102&r=ban |
| By: | Giacomo Masier (Previnet, Italy.); Ernesto Villanueva (Research Department, Banco de España, Alcala 48, 28014 Madrid, Spain.) |
| Abstract: | Economic theory predicts that the consumption path of unconstrained homeowners responds to the interest rate, while the consumption path of credit constrained homeowners is determined by the size and timing of payments (mortgage maturity). We exploit the rapid expansion of mortgage markets during the last decade in Spain and a very detailed survey on household finances to estimate group-specific consumption responses to changes in the credit conditions. Our estimates suggest that the consumption of households headed by an individual with high school responds more to mortgage maturity than to the interest rate spread. The consumption of the rest of indebted households is insensitive to loan maturity. Those results are confirmed when we instrument loan maturity exploiting the fact that banks are reluctant to offer contracts with age at maturity above 65. An interpretation of those results is that households headed by middle education individuals, 8% of our sample, behave as credit constrained. JEL Classification: D91, E91. |
| Keywords: | Credit constraints, mortgages, household consumption. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111297&r=ban |
| By: | Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva |
| Abstract: | This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic (financial) stability is defined in terms of the volatility of nominal income (real house prices). Numerical experiments show that even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of interest rate smoothing, and the stronger the policymaker's concern with macroeconomic stability, the larger is the sensitivity of the regulatory rule to credit growth gaps. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:154&r=ban |
| By: | William T. Shaw |
| Abstract: | We show how to reduce the problem of computing VaR and CVaR with Student T return distributions to evaluation of analytical functions of the moments. This allows an analysis of the risk properties of systems to be carefully attributed between choices of risk function (e.g. VaR vs CVaR); choice of return distribution (power law tail vs Gaussian) and choice of event frequency, for risk assessment. We exploit this to provide a simple method for portfolio optimization when the asset returns follow a standard multivariate T distribution. This may be used as a semi-analytical verification tool for more general optimizers, and for practical assessment of the impact of fat tails on asset allocation for shorter time horizons. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1102.5665&r=ban |
| By: | L. Randall Wray |
| Abstract: | In the aftermath of the global financial collapse that began in 2007, governments around the world have responded with reform. The outlines of Basel III have been announced, although some have already dismissed its reform agenda as being too little (and too late!). Like the proposed reforms in the United States, it is argued, Basel III would not have prevented the financial crisis even if it had been in place. The problem is that the architects of reform are working around the edges, taking current bank activities as somehow appropriate and trying to eliminate only the worst excesses of the 2000s. Hyman Minsky would not be impressed. Before we can reform the financial system, we need to understand what the financial system does—or, better, what it should do. To put it as simply as possible, Minsky always insisted that the proper role of the financial system is to promote the "capital development" of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. In this paper, we first examine Minsky's general proposals for reform of the economy—how to restore stable growth that promotes job creation and rising living standards. We then turn to his proposals for financial reform. We will focus on his writing in the early 1990s, when he was engaged in a project at the Levy Economics Institute on reconstituting the financial system (Minsky 1992a, 1992b, 1993, 1996). As part of that project, he offered his insights on the fundamental functions of a financial system. These thoughts lead quite naturally to a critique of the financial practices that precipitated the global financial crisis, and offer a path toward thorough-going reform. |
| Keywords: | Global Financial Crisis; Hyman Minsky; Financial Reform; Basel III; Capital Development; Banks |
| JEL: | B22 B25 B52 E11 E12 E44 G18 G20 G21 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_655&r=ban |
| By: | Bhattacharya, Rabi (University of AZ); Majumdar, Mukul (Cornell University) |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:corcae:11-01&r=ban |
| By: | Yochanan Shachmurove (Department of Economics, University of Pennsylvania and The City College of The City University of New York) |
| Abstract: | The economic history of the United States is riddled with financial crises and banking panics. During the nineteenth-century, eight major such episodes occurred. In the period following World War II, some believed that these crises would no longer happen, and that the U.S. had reached a time of everlasting financial stability and sustainable growth. The Savings and Loans Crisis of the 1980s, the 2001 dot-com bust and the 2007 housing bubble that led to the current global financial crises demonstrate that these phenomena are still reoccurring. Regulators and policy makers should keep aware of the recurrence of such crises. |
| Keywords: | Financial Crises; Financial Regulations and Reforms; Banking Panics; Banking Runs; Nineteenth and Twentieth Century Crises; Bankruptcies; Federal Reserve Bank; Subprime Mortgage; Troubled Asset Relief Program (TARP); Collateralized Debt Obligations (CDO); Mortgage Backed Securities (MBO); Glass-Steagall Act; J.P. Morgan Chase; Bear Stearns; Augustus Heinze; Timothy Geithner; Paul Volcker. |
| JEL: | E0 E3 E44 E5 E6 N0 N1 N2 G0 G18 G38 |
| Date: | 2011–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-006&r=ban |
| By: | Jo\~ao P. da Cruz; Pedro G. Lind |
| Abstract: | The social role of any company is to get the maximum profitability with the less risk. Due to Basel III, banks should now raise their minimum capital levels on an individual basis, with the aim of lowering the probability for a large crash to occur. Such implementation assumes that with higher minimum capital levels it becomes more probable that the value of the assets drop bellow the minimum level and consequently expects the number of bank defaults to drop also. We present evidence that in such new financial reality large crashes are avoid only if one assumes that banks will accept quietly the drop of business levels, which is counter-nature. Our perspective steams from statistical physics and gives hints for improving bank system resilience. Stock markets exhibit critical behavior and scaling features, showing a power-law for the amplitude of financial crisis. By modeling a financial network where critical behavior naturally emerges it is possible to show that bank system resilience is not favored by raising the levels of capital. Due to the complex nature of the financial network, only the probability of bank default is affected and not the magnitude of a money market crisis. Further, assuming that banks will try to restore business levels, raising diversification and lowering their individual risk, the dimension of the entire financial network will increase, which has the natural consequence of raising the probability of large crisis. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1103.0717&r=ban |
| By: | Pflüger, Michael P. (University of Passau); Russek, Stephan (University of Passau) |
| Abstract: | The risk of default that business firms face is very significant and differs widely across countries. This paper explores the links between countries' business conditions and international trade embedment and the default risk at the country level from a theoretical point of view. Our main contribution is to set up a general equilibrium model which allows us to derive sharp predictions concerning how key factors which shape a country's business and trade environment impact on the default risk of firms which operate in these environments. The predictions are in accord with readily available data. |
| Keywords: | firm death, firm heterogeneity, business conditions and firm productivity, trade integration |
| JEL: | F12 F13 F15 L25 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5541&r=ban |
| By: | L. Randall Wray |
| Abstract: | This paper begins by defining, and distinguishing between, money and finance, and addresses alternative ways of financing spending. We next examine the role played by financial institutions (e.g., banks) in the provision of finance. The role of government as both regulator of private institutions and provider of finance is also discussed, and related topics such as liquidity and saving are explored. We conclude with a look at some of the new innovations in finance, and at the global financial crisis, which could be blamed on excessive financialization of the economy. |
| Keywords: | Money; Money of Account; Finance; Financial Instruments; Financial Institutions; Financial Innovation; Financialization; Liquidity; Saving; State Money; Chartalism; Shadow Bank; Hyman Minsky; Securitization; Robert Clower |
| JEL: | B14 B15 B22 B52 E12 E40 E42 E50 E51 E52 G14 G21 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_656&r=ban |
| By: | Kumiko Okazaki (Director and Senior Economist, Deputy Head of Planning and Coordination Group, Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kumiko.okazaki@boj.or.jp)); Tomoyuki Fukumoto (Associate Director-General, Head of Planning and Coordination Division, International Department, Bank of Japan (E-mail: tomoyuki.fukumoto@boj.or.jp)) |
| Abstract: | As China's economic integration with the global economy deepens, the amount of capital flow to/from China has been increasing significantly, especially since it joined the WTO. In spite of such environment, the recent global financial crisis has not severely affected the Chinese financial markets because of China's relatively strict control of cross-border capital transactions and its strong economic and financial fundamentals. The government's stimulus policies worked effectively to realize a quick recovery of the country's economic growth. However, on the horizon, the factors that protected the Chinese economy during the crisis also seem to carry with them substantial risks and challenges to its sustainable growth. This paper reviews the factors that have kept the Chinese economy and financial markets relatively stable and analyzes the recent changes in China's macro financial linkage overseas, and highlights the challenges that China faces in realizing a sustainable and efficient economic development. |
| Keywords: | Macro-financial Linkage, Financial Deepening, Cross-border Capital Flow, Bank Lending |
| JEL: | F36 O53 P34 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-02&r=ban |
| By: | Markus Hoermann (TU Dortmund University); Andreas Schabert (University of Amsterdam, and TU Dortmund University) |
| Abstract: | We present a simple macroeconomic model with open market operations that allows examining the effects of quantitative and credit easing. The central bank controls the policy rate, i.e. the price of money in open market operations, as well as the amount and the type of assets that are accepted as collateral for money. When the policy rate is sufficiently low, this set-up gives rise to an (il-)liquidity premium on non-eligible assets. Then, a quantitative easing policy, which increases the size of the central bank's balance sheet, can increase real activity and prices, while a credit easing policy, which changes the composition of the balance sheet, can lower interest rate spreads, stimulate real activity, and reduce prices. The effectiveness of quantitative and credit easing is however limited to the extent that eligible assets are scarce. Nevertheless, they can help escaping from the zero lower bound. |
| Keywords: | Monetary policy; collateralized lending; quantitative easing; credit easing; liquidity premium; zero lower bound |
| JEL: | E4 E5 E32 |
| Date: | 2011–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110001&r=ban |
| By: | Sagamba, Moïse (Université Lumiére de Bujumbura and Université de Bretagne Occidentale); Shchetinin, Oleg (Department of Economics, School of Business, Economics and Law, Göteborg University); Yusupov, Nurmukhammad (Chaire Banque Populaire, Audencia Nantes School of Management) |
| Abstract: | The mission of microfinance is generally perceived as compensation for the failure of the mainstream financial institutions to deliver access to finance to the poor. Microloan officers have significant influence on microloans allocation as they contact loan applicants and process information inside microfinance institutions (MFIs). We conduct a choice experiment with microloan officers in Burundi to determine which clients are preferred for microloan allocation and whether the less advantaged are indeed targeted. The results suggest that the allocation of microloans is slightly in favor of the less advantaged, whereas the main determinant is the quality of the applicants' business projects. Somewhat surprisingly, we find only small differences in the determinants of the targeted groups between non-profit and profit-seeking MFIs.<p> |
| Keywords: | microfinance; choice experiment; microloan officers; non-profit organizations |
| JEL: | C93 G21 L31 O55 |
| Date: | 2011–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0492&r=ban |