New Economics Papers
on Banking
Issue of 2011‒04‒02
25 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Countercyclical Capital Buffer of Basel III: A Critical Assessment By Repullo, Rafael; Saurina, Jesús
  2. What Happens After Default? Stylized Facts on Access to Credit By Diana Bonfim; Daniel Dias; Christine Richmond
  3. The Real Effects of Financial Sector Interventions During Crises By Luc Laeven; Fabian Valencia
  4. Loan-to-Value Ratio as a Macro-Prudential Tool - Hong Kong's Experience and Cross-Country Evidence By Eric Wong; Ka-fai Li; Henry Choi
  5. The Challenges Confronting the Banking System Reform in China: An Analysis in Light of Japan's Experience of Financial Liberalization By Kumiko Okazaki; Masazumi Hattori; Wataru Takahashi
  6. BASEL III: Long-term impact on economic performance and fluctuations By Angelini, P.; Clerc, L.; Cúrdia, V.; Gambacorta, L.; Gerali, A.; Locarno, A.; Motto, R.; Roeger, W.; Van den Heuvel, S.; Vlcek, J.
  7. Liquidity hoarding By Douglas Gale; Tanju Yorulmazer
  8. Securitization markets and central banking: an evaluation of the term asset-backed securities loan facility By Sean Campbell; Daniel Covitz; William Nelson; Karen Pence
  9. Creditless Recoveries By Abdul Abiad; Bin (Grace) Li; Giovanni Dell'Ariccia
  10. The Impact of Legislation on Credit Risk - Comparative Evidence From the United States, the United Kingdom and Germany By Christian Schmieder; Philipp Schmieder
  11. The Impact of Cross-Border Banking on Financial Stability By Dirk Schoenmaker; Wolf Wagner
  12. Regulation, Credit Risk Transfer, and Bank Lending By Thilo Pausch; Peter Welzel
  13. A structural model of central bank operations and bank intermediation By Ulrich Bindseil; Juliusz Jabłecki
  14. The status of bank lending to SMES in the Middle East and North Africa region : the results of a joint survey of the Union of Arab Bank and the World Bank By Rocha, Roberto; Farazi, Subika; Khouri, Rania; Pearce, Douglas
  15. Creating an EU-level supervisor for cross-border banking groups: Issues raised by the U.S. experience with dual banking By Larry D. Wall; María J. Nieto; David Mayes
  16. An Empirical Analysis on Board Monitoring Role and Loan Portfolio Quality Measurement in Banks By Stefanelli, Valeria; Matteo, Cotugno
  17. Substitution or complementarity between Information “soft” and information “hard”: why and which effect on bank profitability? By Herve Alexandre; Aymen Smondel
  18. Productivity of Banks and its Impact on the Capital Investments of Client Firms By MIYAKAWA Daisuke; INUI Tomohiko; SHOJI Keishi
  19. Bank Ownership and the Effects of Financial Liberalization: Evidence from India By Sanjaya Panth; Poonam Gupta; Kalpana Kochhar
  20. Bank Credit and Business Networks By Khwaja, Asim Ijaz; Mian, Atif; Qamar, Abid
  21. Determinants of Bank Credit in Emerging Market Economies By Vahram Stepanyan; Kai Guo
  22. Preferences for banking and payment services among low- and moderate-income households By Michael S. Barr; Jane K. Dokko; Eleanor M. Feit
  23. Credit cycle and adverse selection effects in consumer credit markets -- evidence from the HELOC market By Paul Calem; Matthew Cannon; Leonard Nakamura
  24. Size Value and Asset Quality Premium in European Banking Stocks By Nawazish Mirza; Herve Alexandre
  25. To switch or not to switch - Can individual lending do better in microfinance than group lending? By Helke Waelde

  1. By: Repullo, Rafael; Saurina, Jesús
    Abstract: We provide a critical assessment of the countercyclical capital buffer in the new regulatory framework known as Basel III, which is based on the deviation of the credit-to-GDP ratio with respect to its trend. We argue that a mechanical application of the buffer would tend to reduce capital requirements when GDP growth is high and increase them when GDP growth is low, so it may end up exacerbating the inherent pro-cyclicality of risk-sensitive bank capital regulation. We also note that Basel III does not address pro-cyclicality in any other way. We propose a fully rule-based smoothing of minimum capital requirements based on GDP growth.
    Keywords: Bank capital regulation; Basel III; Business cycles; Credit crunch; Pro-cyclicality
    JEL: E32 G28
    Date: 2011–03
  2. By: Diana Bonfim; Daniel Dias; Christine Richmond
    Abstract: In this paper we investigate what happens to firms after they default on their bank loans. We approach this question by establishing a set of stylized facts concerning the evolution of default and its resolution, focusing on access to credit after default. Using a unique dataset from Portugal, we observe that half of the default episodes last 5 quarters or less and that larger firms have shorter default periods. Most firms continue to have access to credit immediately after default, though only a minority has access to new loans. Firms have more difficulties in regaining access to credit if they are small, if their default was long and severe, if they borrow from only one bank or if they default with their main lender. Further, half of the defaulting firms record another default in the future. We observe that firms with repeated defaults are, on average, smaller and have experienced longer and more severe defaults.
    JEL: C41 G21 G32 G33
    Date: 2011
  3. By: Luc Laeven; Fabian Valencia
    Abstract: We collect new data to assess the importance of supply-side credit market frictions by studying the impact of financial sector recapitalization packages on the growth performance of firms in a large cross-section of 50 countries during the recent crisis. We develop an identification strategy that uses the financial crisis as a shock to credit supply and exploits exogenous variation in the degree to which firms depend on external financing for investment needs, and focus on policy interventions aimed at alleviating the bank capital crunch. We find that the growth of firms dependent on external financing is disproportionately positively affected by bank recapitalization policies, and that this effect is quantitatively important and robust to controlling for other financial sector support policies. We also find that fiscal policy disproportionately boosted growth of firms more dependent on external financing. These results provide new evidence of a quantitatively important role of credit market frictions in influencing real economic activity.
    Keywords: Banking crisis , Banking sector , Capital , Central banks , Credit , External shocks , Financial crisis , Financial sector , Liquidity management , Monetary policy ,
    Date: 2011–03–02
  4. By: Eric Wong (Research Department, Hong Kong Monetary Authority); Ka-fai Li (Research Department, Hong Kong Monetary Authority); Henry Choi (Research Department, Hong Kong Monetary Authority)
    Abstract: This study assesses the effectiveness and drawbacks of maximum loan-to-value (LTV) ratios as a macroprudential tool based on Hong Kong¡¦s experience and econometric analyses of panel data from 13 economies. The tool is found to be effective in reducing systemic risk stemming from the boom-and-bust cycle of property markets. Although the tool could impose higher liquidity constraints on homebuyers, empirical evidence shows that mortgage insurance programmes (MIPs) that protect lenders from credit losses on the portion of loans over maximum LTV thresholds can mitigate this drawback without undermining the effectiveness of the tool. This finding indicates the important role of MIPs in enhancing the net benefits of LTV policy. Our estimations also show that the dampening effect of LTV policy on household leverage is more apparent than its effect on property market activities, suggesting that the policy effect may mainly manifest in impacts on household sector leverage.
    Keywords: systemic risk, macroprudential policy, loan-to-value ratio, Hong Kong
    JEL: G21 G28
    Date: 2011–02
  5. By: Kumiko Okazaki (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Masazumi Hattori (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Wataru Takahashi (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: China's banking system reform has made notable progress since 2002. After restoring their balance sheets, Chinese banks have aggressively increased lending and contributed to supporting the country' s economy given the global financial crisis. Thus far, the regulated deposit and lending interest rates, undeveloped capital markets, and restrictions in cross-border capital transactions have given banks an advantage in gaining profits. However, along with the full-blown reform of the economic system toward a market-oriented economy, the conditions protecting banks' profits will change in the future. The experiences of Japanese banks under the financial liberalization that occurred during the 1970s and 1980s indicate how important it is for commercial banks to change their business models in accordance with the fundamental changes in the economy. These experiences may be useful for considering the subsequent reform process of the financial system in China.
    Keywords: Banking System Reform, Financial Liberalization, State-owned Commercial Banks, Rent for Banks
    JEL: G21 O16 O53 P34
    Date: 2011–03
  6. By: Angelini, P.; Clerc, L.; Cúrdia, V.; Gambacorta, L.; Gerali, A.; Locarno, A.; Motto, R.; Roeger, W.; Van den Heuvel, S.; Vlcek, J.
    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 the 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 policy.
    JEL: E44 E61 G21
    Date: 2011
  7. By: Douglas Gale; Tanju Yorulmazer
    Abstract: Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planner’s problem and show that the market equilibrium is constrained inefficient, with too little liquidity and inefficient hoarding. Our model features a precautionary as well as a speculative motive for hoarding liquidity, but the inefficiency of liquidity provision can be traced to the incompleteness of markets (due to private information) and the increased price volatility that results from trading assets for cash.
    Keywords: Bank liquidity ; Bank assets ; Interbank market
    Date: 2011
  8. By: Sean Campbell; Daniel Covitz; William Nelson; Karen Pence
    Abstract: In response to the near collapse of US securitization markets in 2008, the Federal Reserve created the Term Asset-Backed Securities Loan Facility, which offered non-recourse loans to finance investors' purchases of certain highly rated asset-backed securities. We study the effects of this program and find that it lowered interest rate spreads for some categories of asset-backed securities but had little impact on the pricing of individual securities. These findings suggest that the program improved conditions in securitization markets but did not subsidize individual securities. We also find that the risk of loss to the US government was small.
    Keywords: Asset-backed financing ; Mortgage-backed securities ; Financial crises ; Term Asset-Backed Securities Loan Facility
    Date: 2011
  9. By: Abdul Abiad; Bin (Grace) Li; Giovanni Dell'Ariccia
    Abstract: Recoveries that occur in the absence of credit growth are often dubbed miracles and named after mythical creatures. Yet these are not rare animals, and are not always miracles. About one out of five recoveries is "creditless", and average growth during these episodes is about a third lower than during "normal" recoveries. Aggregate and sectoral data suggest that impaired financial intermediation is the culprit. Creditless recoveries are more common after banking crises and credit booms. Furthermore, sectors more dependent on external finance grow relatively less and more financially dependent activities (such as investment) are curtailed more during creditless recoveries.
    Keywords: Bank credit , Banking crisis , Business cycles , Credit expansion , Cross country analysis , Developed countries , Economic growth , Economic recovery , Emerging markets , Financial crisis , Industrial investment , Private sector ,
    Date: 2011–03–15
  10. By: Christian Schmieder; Philipp Schmieder
    Abstract: This study investigates the link between bankruptcy and security legislation and potential credit losses faced by banks based on a cross-country study for the United States (US), the United Kingdom (UK) and Germany. Focusing on corporate credit, we find that legislation produces the highest credit risk in the US, followed by Germany, while UK law is found to be most favorable for banks. US banks gains from the higher number of informal restructurings (without losses) but lose from the low level of recovery in formal proceedings. German banks demand more credit risk mitigants than UK and US banks do, but still recover less than do UK banks. To be at par with UK banks, US banks would have to recover more than twice as much in formal proceedings, while German proceedings would have to be shortened by about one half.
    Keywords: Bankruptcy , Banks , Corporate sector , Credit risk , Cross country analysis , Economic models , Germany , Legislation , Loans , United Kingdom , United States ,
    Date: 2011–03–11
  11. By: Dirk Schoenmaker (Duisenberg School of Finance & VU University Amsterdam); Wolf Wagner (CentER, Tilburg University & European Banking Center, Tilburg)
    Abstract: This paper focuses on the stability aspects of cross-border banking. We first argue that cross-border banking brings about various benefits and costs for financial stability. Based on this, we draw conclusions for the desirability of cross-border banking in the EU, and derive implications for its optimal form. Next, we derive metrics that allow quantifying whether cross-border banking in a country (or region) takes a desirable form and apply these metrics to the EU countries. Our results suggest that the countries with the largest banking centers, UK and Germany, are well diversified. By contrast, the New Member States (NMS) are highly dependent on a few West-European banks and thus vulnerable to contagion effects. The Nordic and Baltic regions are also much interwoven without much diversification. At the system-wide level, the EU banking system is weakly diversified, with an overexposure to the US and an underexposure to Japan and China. This explains why the recent US originated financial crisis had such a large impact on European banks.
    Keywords: International Banking; Portfolio Diversification; Financial Stability
    JEL: G21 G28
    Date: 2011–03–17
  12. By: Thilo Pausch (Deutsche Bundesbank Frankfurt); Peter Welzel (University of Augsburg, Department of Economics)
    Abstract: We integrate Basel II (and III) regulations into the industrial organization approach to banking and analyze lending behavior and risk sensitivity of a risk-neutral bank. The bank is exposed to credit risk and may use credit default swaps (CDS) for hedging purposes. Regulation is found to induce the risk-neutral bank to behave in a more risk-sensitive way: Compared to a situation without regulation the optimal volume of loans decreases more as the riskiness of loans increases. CDS trading is found to interact with the former effect when regulation accepts CDS as an instrument to mitigate credit risk. Under the Substitution Approach in Basel II (and III) a risk-neutral bank will over-, fully or under-hedge its total exposure to credit risk conditional on the CDS price being downward biased, unbiased or upward biased. This interaction promotes the intention of the Basel II (and III) regulations to “strengthen the soundness and stability of banks”, since capital adequacy regulation without accounting for the risk-mitigating effect of CDS trading would stimulate a risk-neutral bank to take more extreme positions in the CDS market.
    Keywords: banking, regulation, credit risk
    JEL: G21 G28
    Date: 2011–02
  13. By: Ulrich Bindseil (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Juliusz Jabłecki (National Bank of Poland and Faculty of Economic Sciences, Warsaw University.)
    Abstract: The banking system is modeled in a closed system of financial accounts, whereby the equilibrium volume of bank intermediation between households and corporates reflects structural parameters such as household preferences, comparative cost structures of heterogeneous banks, loan demand of corporates, and the difference between the borrowing rate and the deposit facility rate of the central bank. The model also allows understanding the link between this difference (the width of the central bank standing facilities corridor) and the stance of monetary policy, and how this link changes during a financial crisis. It is shown how the narrowing of the standing facilities corridor can make more accommodating the stance of monetary policy in a financial crisis. JEL Classification: E43, E44, G21.
    Keywords: bank intermediation, central bank operations, standing facilities, central bank crisis measures.
    Date: 2011–03
  14. By: Rocha, Roberto; Farazi, Subika; Khouri, Rania; Pearce, Douglas
    Abstract: Among the principal constraints for SME lending is the lack of SME transparency, poor credit information from credit registries and bureaus, and weak creditor rights. If constraints can be addressed, lending can potentially reach bank targets of 21 percent. State banks still play an important role in financing SMEs in the MENA region, but they use less sophisticated risk management systems than private banks. On another hand, credit guarantee schemes are a popular form of support to SME finance in the region, and are associated with higher levels of SME lending. The paper concludes that MENA policy makers should prioritize improvements in financial infrastructure, including greater coverage and depth of credit bureaus, improvements in the collateral regime (especially for movable assets), and increased competition between banks and also non-banks. Weaknesses in insolvency regimes and credit reporting systems should also be alleviated. Direct policy interventions through public banks, guarantee schemes, lower reserve requirements and subsidized lending and other measures have played a role in compensating for MENA's weak financial infrastructure, but more sustainable structural solutions are needed.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Financial Intermediation,Bankruptcy and Resolution of Financial Distress
    Date: 2011–03–01
  15. By: Larry D. Wall; María J. Nieto; David Mayes
    Abstract: The European Union (EU) has been facilitating the growth of cross-border banking groups, but bank supervision remains the responsibility of national supervisors. This mismatch has long been recognized and various proposals have been offered to address this weakness. An alternative that would retain the most important advantages of full centralization is that of centralization only for those cross-border groups that are systemically important. All other banks would remain national responsibilities. To identify some of the issues (but not necessarily the best answers) raised by partial centralization in the EU, we look to the dual banking arrangements in the United States, which has long had both federal and state charters. One issue is that of who qualifies for and/or is required to adopt an EU charter. The U.S. policy of low-cost chartering changes encourages both good and bad competition among supervisors. A second issue is that of the potential mismatch between EU responsibility for prudential supervision of some banks and national provision of deposit insurance and lender of last resort services for all banks. A third potential issue is who should provide business conduct regulation.
    Date: 2011
  16. By: Stefanelli, Valeria; Matteo, Cotugno
    Abstract: This paper aims to analyze the effectiveness of the board monitoring role on specific loan portfolio quality measures in banks (default rate, recovery rate and provisioning rate). We use a sample comprises a totality of Italian-based banks, listed at Borsa Italiana SpA in 2006-2008 and a number of accounting proxies to express the loan portfolio quality of a bank. The results of the analysis show an overall weakness of the board role (expressed by Independents and Audit Committee on board) in monitoring loan portfolio quality of the bank, with the subsequent damage of the interests of stakeholders. A positive contribution of board monitoring, even if partial, is highlighted in two cases: Independents seems improve recovery rate, while the Audit committee enhances provisioning rate in banks. With reference to default rate, a total negative effect of board monitoring is reported. On the base of these results, some managerial implications are proposed.
    Keywords: Banks; Corporate governance; Board of directors; Loan Portfolio Quality
    JEL: G34 G21
    Date: 2010–08
  17. By: Herve Alexandre (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX); Aymen Smondel (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)
    Abstract: The Basel II committee set up directives encouraging banks to use internal scores in order to assess the risk of their customers. This new form of information competes with the existing ones. SMEs are most concerned by these new stakes, due to the lack of transparency. The aim of this paper is to understand the determinants of the choice between substitution and complementarity between the two types of information: “soft” and “hard”, to test a potential effect of this choice on the banking performance and to describe which variables are involved in the decision-making process. The originality of this work is to try to quantify the information costs and to use it as a variable which is affecting the adopted choice.
    Keywords: Basel directives, “soft” information, “hard” information, credit decision-making process, bank performance, Bank-SMEs relationship.
    Date: 2010–06–25
  18. By: MIYAKAWA Daisuke; INUI Tomohiko; SHOJI Keishi
    Abstract: This paper proposes one measure for the productivity of banks and studies how it affects the sensitivity of a client firm's capital investment with respect to investment opportunity. As a direct measure for the productivity of banks, we employ the risk-adjusted profit of an individual bank, which is considered as output in a modified version of the FISIM (Financial Intermediation Services Indirectly Measured) concept, per its operating cost. We combine such productivity panel-data with bank and firm characteristics as well as the loan relationship data between Japanese listed companies and banks over the past three decades. The panel estimations for an extended investment equation based on Q-theory show, in a statistically and economically significant manner, that firms under cash flow constraints—as compared to those not—are more sensitive to capital investment opportunities, provided that these firms hold close relationships with a high performance bank. These results imply that it is necessary to relate firm performances not only to the discrete characteristics of banks, e.g., relations with the main bank, as in the extant literature, but to the continuously measured characteristics of the banks having relationships with the firms.
    Date: 2011–03
  19. By: Sanjaya Panth; Poonam Gupta; Kalpana Kochhar
    Abstract: Do financial sector reforms necessarily result in expansion of credit to the private sector? How does bank ownership affect the availability of credit to the private sector? Empirical evidence is somewhat mixed on these issues. We use the Indian experience with liberalization of the financial sector to inform this debate. Using bank-level data from 1991-2007, we ask whether public and private banks deployed resources freed up by reduced state preemption to increase credit to the private sector. We find that even after liberalization, public banks allocated a larger share of their assets to government securities than did private banks. Crucially, we also find that public banks were more responsive in allocating relatively more resources to finance the fiscal deficit even during periods when state pre-emption (measured in terms of the requirement to hold government securities as a share of assets) formally declined. These findings suggest that in developing countries, where alternative channels of financing may be limited, government ownership of banks, combined with high fiscal deficits, may limit the gains from financial liberalization.
    Keywords: Banks , Credit expansion , Financial sector , India , Private sector , Public enterprises ,
    Date: 2011–03–08
  20. By: Khwaja, Asim Ijaz (Harvard University); Mian, Atif (University of California, Berkeley); Qamar, Abid (State Bank of Pakistan)
    Abstract: We construct the topology of business networks across the population of firms in an emerging economy, Pakistan, and estimate the value that membership in large yet diffuse networks brings in terms of access to bank credit and improving financial viability. We link two firms if they have a common director. The resulting topology includes a "giant network" that is order of magnitudes larger than the second largest network. While it displays "small world" properties and comprises 5 percent of all firms, it accesses two-thirds of all bank credit. We estimate the value of joining this giant network by exploiting "incidental" entry and exit of firms over time. Membership increases total external financing by 16.6 percent, reduces the propensity to enter financial distress by 9.5 percent, and better insures firms against industry and location shocks. Firms that join improve financial access by borrowing more from new lenders, particularly those already lending to their (new) giant-network neighbors. Network benefits also depend critically on where a firm connects to in the network and on the firm's pre-existing strength.
    JEL: D02 D85 L14 O16
    Date: 2011–03
  21. By: Vahram Stepanyan; Kai Guo
    Abstract: We examine changes in bank credit across a wide range of emerging market economies during the last decade. The rich time-series and cross-section information allows us to draw broader lessons compared to many existing researches, which focus on a specific set of emerging market economies or on shorter time periods. Our results show that domestic and foreign funding contribute positively and symmetrically to credit growth. The results also indicate that stronger economic growth leads to higher credit growth, and high inflation, while increasing nominal credit, is detrimental to real credit growth. We also find that loose monetary conditions, either domestic or global, result in more credit, and that the health of the banking sector also matters. Finally, we discuss some policy lessons.
    Keywords: Bank credit , Banking sector , Credit expansion , Cross country analysis , Economic growth , Emerging markets , Inflation , Monetary policy ,
    Date: 2011–03–09
  22. By: Michael S. Barr; Jane K. Dokko; Eleanor M. Feit
    Abstract: This paper characterizes the features of an account-based payment card--including bank debit cards, prepaid debit cards, and payroll cards--that elicit a high take-rate among low- and moderate-income (LMI) households, particularly those without bank accounts. We apply marketing research techniques, specifically choice modeling, to identify the design of a specific financial services product for LMI households, who often face difficulties maintaining standard bank accounts but need banking services. After monthly cost, we find that, on average, non-monetary features of a payment card, such as the availability of federal protection and the type of card, are factors LMI consumers weigh most heavily when choosing among differently designed payment cards. We estimate a high take rate for a well-designed payment card that is decreasing in its cost. The sensitivity of the take-rate with respect to cost varies by income and bank account ownership. These results can guide private and public sector initiatives to expand the range of financial services available to LMI households.
    Keywords: Debit cards ; Credit cards ; Payment systems ; Consumer protection
    Date: 2011
  23. By: Paul Calem; Matthew Cannon; Leonard Nakamura
    Abstract: The authors empirically study how the underlying riskiness of the pool of home equity line of credit originations is affected over the credit cycle. Drawing from the largest existing database of U.S. home equity lines of credit, they use county-level aggregates of these loans to estimate panel regressions on the characteristics of the borrowers and their loans, and competing risk hazard regressions on the outcomes of the loans. The authors show that when the expected unemployment risk of households increases, riskier households tend to borrow more. As a consequence, the pool of households that borrow on home equity lines of credit worsens along both observable and unobservable dimensions. This is an interesting example of a type of dynamic adverse selection that can worsen the risk characteristics of new lending, and suggests another avenue by which the precautionary demand for liquidity may affect borrowing.
    Keywords: Home equity loans ; Risk
    Date: 2011
  24. By: Nawazish Mirza (CREB - Centre for Research in Economics and Business - Lahore School of Economics - Lahore School of Economics); Herve Alexandre (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)
    Abstract: Banking firms exhibit unique business and financial dynamics that are priced in their stock returns. This paper compares traditional empirical asset pricing models on portfolio of banking firms from fourteen European countries and proposes a banking specific risk factor. We compared a single factor CAPM with three factors Fama and French model on exchange rate adjusted returns and found substantial support for firm specific factors of size and value. We propose that asset quality premium (proportion of non-performing loans to total advances and measured as BMG - bad minus good) constitutes an important asset pricing factor for banking stocks. The portfolios sorted on size, value and asset quality explained the maximum variation in returns depicting asset quality as a critical investment factor for banking stocks. These results have considerable implications for investment appraisals, cost of capital and risk management in financial stocks.
    Keywords: Banking Stocks, Asset Quality, Size Premiuim, Value Premium, factor model
    Date: 2010–07–07
  25. By: Helke Waelde (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: These days it has been witnessed, that banks other individual loans instead of group loans and develop products based on individual liability in developing coun- tries. In order to study this surprising turn, we expand the conventional approach on decision making of individuals. A social prestige function is introduced that re- ‡ects the non-monetary impacts of group membership on the individual and on her decisions. If a borrower possesses more than a critical level of wealth, it is optimal for her to switch to individual borrowing. From a welfare perspective, a mixture of individual and group loans is desirable. However, the average borrower switches from group to individual lending too soon.
    JEL: E43 E52 E58 D44
    Date: 2011–03–07

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