New Economics Papers
on Banking
Issue of 2011‒04‒09
23 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Risk-Taking Abroad: Does Home-Country Regulation and Supervision Matter By Ongena, S.; Popov, A.; Udell, G.F.
  2. Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? By Michael McAleer; Juan-Ángel Jiménez-Martín; Teodosio Pérez-Amaral
  3. Systemic risk across sectors; Are banks different? By Michiel Bijlsma; Sander Muns
  4. Sovereign Default Risk and Bank Fragility in Financially Integrated Economies By Patrick Bolton; Olivier Jeanne
  5. Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline By Demirgüc-Kunt, A.; Huizinga, H.P.
  6. Repo Market Microstructure in Unusual Monetary Policy Conditions By Dunne, Peter; Fleming, Michael J.; Zholos, Andrey
  7. Implied correlation from VaR By John Cotter; Fran\c{c}ois Longin
  8. Tranching in the Syndicated Loan Market By Cumming, D.; McCahery, J.A.; Schwienbacher, A.
  9. Financial Sector Shocks, External Finance Premium and Business Cycle . By Zhang, Hongru
  10. Entropy Coherent and Entropy Convex Measures of Risk By Laeven, R.J.A.; Stadje, M.A.
  11. Determinantes del riesgo del crédito comercial en Colombia By Ángela González Arbeláez
  12. Does Banking Competition Alleviate or Worsen Credit Constraints Faced by Small and Medium Enterprises? Evidence from China By Chong, T.T.L.; Lu, L.; Ongena, S.
  13. Bank Reputation in the Private Debt Market By McCahery, J.A.; Schwienbacher, A.
  14. Some preliminary but troubling evidence on group credits in microfinance programmes By Helke Waelde
  15. Misallocation of Capital in a Model of Endogenous Financial Intermediation and Insurance By Radim Bohacek; Hugo Rodríguez-Mendizábal
  16. Extreme Spectral Risk Measures: An Application to Futures Clearinghouse Margin Requirements By John Cotter; Kevin Dowd
  17. Exponential Spectral Risk Measures By Kevin Dowd; John Cotter
  18. Estimating financial risk measures for futures positions: a non-parametric approach By john cotter; kevin dowd
  19. Which Households Use Banks? Evidence from the Transition Economies By Thorsten Beck; Martin Brown
  20. Analysis of Non-Fund Based Financial Services: Some Insights From Inida By Kainth, Dr Gursharan Singh
  21. Foreign Currency Loans - Demand or Supply Driven? By Martin Brown; Karolin Kirschenmann; Steven Ongena
  22. Stock Markets, Banks and Long Run Economic Growth: A Panel Cointegration-Based Analysis By Laurent Cavenaile; Christian Gengenbach; Franz Palm
  23. Are Lending Relationships Beneficial or Harmful for Public Credit Guarantees? Evidence from Japan's Emergency Credit Guarantee Program By ONO Arito; UESUGI Iichiro; YASUDA Yukihiro

  1. By: Ongena, S.; Popov, A.; Udell, G.F. (Tilburg University, Center for Economic Research)
    Abstract: This paper provides the first empirical evidence on how home-country regulation and supervision affects bank risk-tailing in host-country markets. We analyze lending by 136 banks to 8,253 firms in 1,513 different localities across 13 countries. We find strong evidence that laxer regulatory restrictions in the home country are associated with higher loan rejection rates by banks in host-country markets, but that the resulting loans are mostly to small, unaudited, nonexporting, and innovative firms. The results are stronger when banks are less efficiently supervised at home, and they are observed independently from the effect that bank balance sheet have on lending. These findings imply that loose home-country regulation and supervision are associated with important negative externalities for the host-country in terms of more risk-taking by cross-border banks.
    Keywords: bank regulation;cross-border financial institutions;financial risk.
    JEL: G21 G28 G32
    Date: 2011
  2. By: Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University); Juan-Ángel Jiménez-Martín (Department of Quantitative Economics, Complutense University of Madrid); Teodosio Pérez-Amaral (Department of Quantitative Economics, Complutense University of 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. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 financial crisis. These issues are illustrated using Standard and Poor's 500 Index, with an emphasis on how market risk management practices were encouraged by the Basel II Accord regulations during the financial crisis.
    Keywords: Value-at-Risk (VaR), daily capital charges, exogenous and endogenous violations, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel II Accord, global financial crisis.
    JEL: G32 G11 C53 C22
    Date: 2011–04
  3. By: Michiel Bijlsma; Sander Muns
    Abstract: This research compares systemic risk in the banking sector, the insurance sector, the construction sector, and the food sector. To measure systemic risk, we use extreme negative returns in stock market data for a time-varying panel of the 20 largest U.S. firms in each sector.
    JEL: G11 G21
    Date: 2011–04
  4. By: Patrick Bolton; Olivier Jeanne
    Abstract: We analyze contagious sovereign debt crises in financially integrated economies. Under financial integration banks optimally diversify their holdings of sovereign debt in an effort to minimize the costs with respect to an individual country's sovereign debt default. While diversification generates risk diversification benefits ex ante, it also generates contagion ex post. We show that financial integration without fiscal integration results in an inefficient equilibrium supply of government debt. The safest governments inefficiently restrict the amount of high quality debt that could be used as collateral in the financial system and the riskiest governments issue too much debt, as they do not take account of the costs of contagion. Those inefficiencies can be removed by various forms of fiscal integration, but fiscal integration typically reduce the welfare of the country that provides the "safe-haven" asset below the autarky level.
    JEL: E44 E62 F15 F34
    Date: 2011–03
  5. By: Demirgüc-Kunt, A.; Huizinga, H.P. (Tilburg University, Center for Economic Research)
    Abstract: For an international sample of banks, we construct measures of a bank’s absolute size and its systemic size defined as size relative to the national economy. We then 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. While 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, we find 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, our 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. While 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: Bank size;systemic risk;market discipline.
    JEL: G21 G28
    Date: 2011
  6. By: Dunne, Peter (Central Bank of Ireland); Fleming, Michael J. (Federal Reserve Bank of New York); Zholos, Andrey (Queen’s University Management School)
    Abstract: The financial turmoil that began in mid-2007 produced severe stress in interbank markets and prompted significant changes in central banks’ funding operations. We examine the changing characteristics of ECB official interventions through the crisis and assess how they affected the efficiency and reliability of the secondary repo market as a mechanism for the distribution of interbank funding. The limit orderbook from the BrokerTec electronic repo trading platform is reconstructed to provide a range of indicators of participating banks’ aversion to the risk of failing to fund their liquidity needs. These indicators anticipate similar variables from ECB reverse repo auctions and are also affected by surprise outcomes of auctions.
    Keywords: Repo, Financial crisis, liquidity, market microstructure, monetary policy operations
    Date: 2011–03
  7. By: John Cotter; Fran\c{c}ois Longin
    Abstract: Value at risk (VaR) is a risk measure that has been widely implemented by financial institutions. This paper measures the correlation among asset price changes implied from VaR calculation. Empirical results using US and UK equity indexes show that implied correlation is not constant but tends to be higher for events in the left tails (crashes) than in the right tails (booms).
    Date: 2011–03
  8. By: Cumming, D.; McCahery, J.A.; Schwienbacher, A. (Tilburg University, Center for Economic Research)
    Abstract: We use data comprising over 100,000 loans from 115 countries during 1995-2009 to examine factors that affect the extent of loan tranching, and the range of tranche spreads. The data show five factors that drive them: asymmetric information, borrower risk, transaction costs, the presence of institutional investors, and the legal system. Tranching is more extensive and generates greater differences in spreads between tranches of a same loan when asymmetric information and risk are more pronounced. Economic and institutional factors driving tranching are more directly applicable to non-investment grade loans. For developing countries, the data highlight factors that affect the extent of tranching but such factors show little sensitivity to the pricing of the relative spreads.
    Keywords: Loan;Debt finance;Tranche;Law and finance.
    JEL: G2 G21 K22
    Date: 2011
  9. By: Zhang, Hongru (Cardiff Business School)
    Abstract: This paper extends Nolan and Thoenissen (2009), hence NT, model with an explicit financial intermediary that transfer funds from households to entrepreneurs subject to a well defined loan production function. The loan productivity shock is treated as the supply side financial disturbance. Together with NT.s net worth shock that resembles the credit demand perturbation, both of the two-sided shocks are robustly extracted by combining the model with US quarterly data. The two shocks are found to be tightly linked with the post-war recessions. Each recession happens when both of the two shocks become contractionary. A few potential economic downturns seem to have been avoided because of the expansion of credit which offset the simultaneous contraction of entrepreneurial net wealth. This new introduced shock has significant explanatory power for the variance of EFP and the model simulated EFP holds high correlation with various spreads as proxies for empirical EFP.
    Keywords: DSGE modeling; corporate net wealth shock; loan productivity shock; external financing; shock construction; historical decomposition; variance decomposition
    JEL: E32 E44 G21
    Date: 2011–03
  10. By: Laeven, R.J.A.; Stadje, M.A. (Tilburg University, Center for Economic Research)
    Abstract: We introduce two subclasses of convex measures of risk, referred to as entropy coherent and entropy convex measures of risk. We prove that convex, entropy convex and entropy coherent measures of risk emerge as certainty equivalents under variational, homothetic and multiple priors preferences, respectively, upon requiring the certainty equivalents to be translation invariant. In addition, we study the properties of entropy coherent and entropy convex measures of risk, derive their dual conjugate function, and prove their distribution invariant representation. Some financial applications and examples of entropy coherent and entropy convex measures of risk are also investigated.
    Keywords: Multiple priors;Variational and homothetic preferences;Robustness;Convex risk measures;Exponential utility;Relative entropy;Translation invariance;Convexity;Indifference valuation.
    JEL: D81 G10 G20
    Date: 2011
  11. By: Ángela González Arbeláez
    Abstract: En este trabajo se estima la probabilidad de incumplimiento de las empresas, sus determinantes y el nivel de riesgo crediticio corporativo agregado del sistema financiero. Se utiliza un modelo logit ordenado generalizado con variables explicativas que contienen información a nivel de firmas y variables macroeconómicas que no han sido utilizadas en otros trabajos para Colombia, de tal manera que se puedan capturar los efectos que tiene la dinámica de la economía sobre la probabilidad de default, diferenciando por las categorías de riesgo asociadas a los créditos corporativos. Los resultados muestran que el conjunto de variables macroeconómicas mejora el poder explicativo del modelo, a la vez que se encuentra una alta persistencia en la categorías asociadas con mayor riesgo crediticio.
    Date: 2011–03–27
  12. By: Chong, T.T.L.; Lu, L.; Ongena, S. (Tilburg University, Center for Economic Research)
    Abstract: Banking competition may enhance or hinder the financing of small and medium enterprises (SMEs). Using a survey on the financing of China’s SMEs combined with detailed bank branch information, we investigate how concentration in the local banking market affects the availability of credit. It is found that lower market concentration alleviates financing constraints. The un-concentrated presence of joint stock banks has a larger effect on alleviating credit constraints, while the presence of state-owned banks has a smaller effect, than the presence of city commercial banks.
    Keywords: Banking Competition;SMEs Financing;Credit Constraints.
    JEL: D41 D43 G21
    Date: 2011
  13. By: McCahery, J.A.; Schwienbacher, A. (Tilburg University, Center for Economic Research)
    Abstract: We examine the impact of lead arrangers’ reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender-borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.
    Keywords: private debt;syndicated loans;bank reputation;syndication;certification.
    JEL: G2 G21
    Date: 2011
  14. By: Helke Waelde (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: Group lending programs are said to be the key factor of success of microÂ…nance. They are said to reduce information asymmetries in credit contracts and to increase repayment rates. Despite that, in recent years more and more individual credits without collateral are given, even if there is no mutual monitoring of the borrowers. We use basic descriptive statistics on individual- and group panel data, which we construct out of a World Bank data set. We provide Â…rst evidence that individuals that are not participating in group credits accumulate wealth more quickly than participants of group credit programs.
    JEL: E43 E52 E58 D44
    Date: 2010–12–07
  15. By: Radim Bohacek; Hugo Rodríguez-Mendizábal
    Abstract: In this paper we analyze productivity and welfare losses from capital misallocation in a general equilibrium model of occupational choice and endogenous financial intermediation. We study the effects of borrowing and lending, insurance, and risk sharing on the optimal allocation of resources. We find that financial markets together with general equilibrium effects have large impact on entrepreneurs' entry and firm-size decisions. Efficiency gains are increasing in the quality of financial markets, particularly in their ability to alleviate a financing constraint by providing insurance against idiosyncratic risk.
    Keywords: Financial markets and the macroeconomy; Occupational choice; Personal income and wealth and their distributions
    JEL: E44 J24 D31
    Date: 2011–03–15
  16. By: John Cotter; Kevin Dowd
    Abstract: This paper applies the Extreme-Value (EV) Generalised Pareto distribution to the extreme tails of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses tail estimators from these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user's risk-aversion function. It compares these to VaR and Expected Shortfall (ES) risk measures, and compares the precision of their estimators. It also discusses the usefulness of these risk measures in the context of clearinghouses setting initial margin requirements, and compares these to the SPAN measures typically used. Keywords: Spectral risk measures, Expected Shortfall, Value at Risk, Extreme Value
    Date: 2011–03
  17. By: Kevin Dowd; John Cotter
    Abstract: Spectral risk measures are attractive risk measures as they allow the user to obtain risk measures that reflect their subjective risk-aversion. This paper examines spectral risk measures based on an exponential utility function, and finds that these risk measures have nice intuitive properties. It also discusses how they can be estimated using numerical quadrature methods, and how confidence intervals for them can be estimated using a parametric bootstrap. Illustrative results suggest that estimated exponential spectral risk measures obtained using such methods are quite precise in the presence of normally distributed losses.
    Date: 2011–03
  18. By: john cotter; kevin dowd
    Abstract: This paper presents non-parametric estimates of spectral risk measures applied to long and short positions in 5 prominent equity futures contracts. It also compares these to estimates of two popular alternative measures, the Value-at-Risk (VaR) and Expected Shortfall (ES). The spectral risk measures are conditioned on the coefficient of absolute risk aversion, and the latter two are conditioned on the confidence level. Our findings indicate that all risk measures increase dramatically and their estimators deteriorate in precision when their respective conditioning parameter increases. Results also suggest that estimates of spectral risk measures and their precision levels are of comparable orders of magnitude as those of more conventional risk measures. Running head: financial risk measures for futures positions
    Date: 2011–03
  19. By: Thorsten Beck; Martin Brown
    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.
    Keywords: Access to finance, Bank-ownership, Deposit insurance, Payment system, Creditor protection.
    JEL: G2 G18 O16 P34
    Date: 2011
  20. By: Kainth, Dr Gursharan Singh
    Abstract: Merchant banking services strengthen the economic development of a country as they acts as sources of funds and information for corporations. Considering the way the Indian economy is growing, the role of merchant banking services in India is indispensable. These financial institutes also act as corporate advisory bodies to help corporations rightly get involved in various financial activities. The need of merchant banking services in India arises from the fact that high level industrialization is taking place in the country. Some of the PSBs have formed their fully owned subsidiaries for this purpose. Analysis of merchant banking business of some PSBs clearly indicates that the merchant banking activities of the banks are showing declining trend especially after 1993-94 due to depressed capital market conditions and subdued activity in primary market.
    Keywords: Merchant banking; Public sector banks;Punjabnatioanl bank
    JEL: G28 G21
    Date: 2010–12
  21. By: Martin Brown; Karolin Kirschenmann; Steven Ongena
    Abstract: Motivated by concerns over foreign currency exposures of banks in Emerging Europe, we examine the currency denomination of business loans made in Bulgaria during the period 2003-2007. We analyze a unique dataset including information on the requested and granted currency for more than hundred thousand loans granted by one bank to sixty thousand different firms. This data set allows us to disentangle demand-side from supply-side determinants of foreign currency loans. We find that 32% of the foreign currency loans disbursed in our sample were actually requested in local currency by the firm. Our analysis suggests that the bank lends in foreign currency, not only to less risky firms, but also when the firm requests a long-term loan and when the bank itself has more funding in euro. These results imply that foreign currency borrowing in Eastern Europe is not only driven by borrowers who try to benefit from lower interest rates but also by banks hesitant to lend longterm in local currency and eager to match the currency structure of their assets and liabilities.
    Keywords: foreign currency debt, banking
    JEL: G21 G30 F34 F37
    Date: 2011
  22. By: Laurent Cavenaile; Christian Gengenbach; Franz Palm
    Abstract: The aim of this paper is to investigate the long run relationship between the development of banks and stock markets and economic growth. We make use of the Groen and Kleibergen (2003) panel cointegration methodology to test the number of cointegrating vectors among these three variables for 5 developing countries. In addition, we test the direction of potential causality between financial and economic development. Our results conclude to the existence of a single cointegrating vector between financial development and growth and of causality going from financial development to economic growth. We find little evidence of reverse causation as well as bi-directional causality.
    Date: 2011
  23. By: ONO Arito; UESUGI Iichiro; YASUDA Yukihiro
    Abstract: This paper examines the effectiveness of Japan's Emergency Credit Guarantee (ECG) program set up during the financial turmoil following the failure of Lehman Brothers, in increasing credit availability and improving the ex-post performance of small businesses. In particular, using a unique firm-bank matched dataset, the paper examines whether lending relationships enhanced or dampened the effects of the ECG program. It is found that the ECG program significantly improved credit availability for firms using the program. However, when it is a relationship lender (main bank) that extends an ECG loan, the increased availability is partially, if not completely, offset by a decrease in non-ECG loans by the same bank. Further, propensity score matching estimations show that the ex-post performance of firms that received ECG loans from the main bank deteriorates more than that of firms that received non-ECG loans. We do not find such loan "substitution" or performance "deterioration" effects when a non-main bank extends ECG loans. Our findings suggest that close firm-bank relationships may have perverse effects on the efficacy of public credit guarantees.
    Date: 2011–03

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