New Economics Papers
on Banking
Issue of 2011‒04‒16
25 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue? By von Furstenberg, George M.
  2. Market-based corrective actions: an experimental investigation By Douglas Davis; Edward S. Prescott; Oleg Korenok
  3. Do capital buffers mitigate volatility of bank lending? A simulation study By Heid, Frank; Krüger, Ulrich
  4. Macroeconomic determinants of bad loans: evidence from Italian banks By Marcello Bofondi; Tiziano Ropele
  5. The Cyclical Behavior of Bank Capital Buffers in an Emerging Economy: Size Do Matters By Andres Felipe García-Suaza; José E. Gómez-González; Andrés Murcia Pabón; Fernando Tenjo-Galarza
  6. A Shot at Regulating Securitization By Kiff, John; Kisser, Michael
  7. Monetary and macroprudential policies By Paolo Angelini; Stefano Neri; Fabio Panetta
  8. Financial imbalances and financial fragility By Frédéric Boissay
  9. Household Debt and Labor Market Fluctuations By Javier Andrés; José Emilio Boscá; Javier Ferri
  10. Theoretical Sensitivity Analysis for Quantitative Operational Risk Management By Takashi Kato
  11. Macro-financial vulnerabilities and future financial stress - Assessing systemic risks and predicting systemic events By Lo Duca, Marco; Peltonen, Tuomas
  12. The determinants of cross-border bank flows to emerging markets: New empirical evidence on the spread of financial crises By Herrmann, Sabine; Mihaljek, Dubravko
  13. Revisiting Bank Pricing Policies in Brazil: evidence from loan and deposit markets By Leonardo S. Alencar
  14. Market reforms, legal changes and bank risk-taking – evidence from transition economies By Fang , Yiwei; Hasan, Iftekhar; Marton, Katherin
  15. The price impact of lending relationships By Stein, Ingrid
  16. Asymmetric Dependence in US Financial Risk Factors? By Chollete, Loran; Ning, Cathy
  17. Banking Geography and Cross-Fertilization in the Productivity Growth of US Commercial Banks By Dogan Tirtiroglu; A. Basak Tanyeri; Ercan Tirtiroglu; Mehmet Kenneth N. Daniels
  18. Risk-taking Incentives, Governance,and Losses in the Financial Crisis By Marc CHESNEY; Jacob STROMBERG; Alexander F. WAGNER
  19. Iceland's Economic and Financial Crisis: Causes, Consequences and Implications By Spruk, Rok
  20. Bankruptcy: is it enough to forgive or must we also forget? By Ronel Elul; Piero Gottardi
  21. On the Pricing of Performance Sensitive Debt By Mjøs, Aksel; Myklebust, Tor Åge; Persson, Svein-Arne
  22. Entry decisions after deregulation: the role of incumbents' market power By Lorenzo Ciari; Riccardo De Bonis
  23. Impact of Interest Rates on Islamic and Conventional Banks: The Case of Turkey By Etem Hakan, Ergeç; Bengül Gülümser, Arslan
  24. Bank ownership and performance in the Middle East and North Africa region By Farazi, Subika; Feyen, Erik; Rocha, Roberto
  25. Bank-characteristics, lending channel and monetary policy in Malaysia: evidence from bank-level data By Abdul Majid, Muhamed Zulkhibri

  1. By: von Furstenberg, George M.
    Abstract: This study examines the promise of reducing expected resolution costs of financial institutions through either voluntary or mandated addition of contingently convertible debt securities to their long-term financing mix. I model the stochastic process by which an initially very well capitalized banking firm may come to violate its minimum capital maintenance requirement. Conversion of cocos then provides a second chance because the firm's initial capitalization is restored. Although regulatory insolvency remains a distant threat, the expected reductions in the cost of bankruptcy and hence the cost of capital are such that cocos may win a place in the liability structure of financial institutions without the need for mandates. --
    Keywords: financial reforms,regulatory insolvency,contingent capital,bank regulations,cocos
    JEL: E44 G33 G38
    Date: 2011
  2. By: Douglas Davis; Edward S. Prescott; Oleg Korenok
    Abstract: We report results from an experiment that evaluates the consequences of having a socially motivated monitor use the market price of a bank's traded assets to decide whether or not to intervene in the bank's operations. Consistent with predictions of a recent theoretical paper by Bond, Goldstein, and Prescott (2009, "BGP"), we find that a possible value-increasing intervention weakens the informational efficiency of markets and that the monitor commits numerous intervention errors. Not anticipated by BGP, we find that a possible value-decreasing action also affects market performance. Further, in both cases the active monitor undermines allocative efficiency, particularly for market fundamentals close to the efficient intervention cutoff.
    Keywords: Financial institutions ; Financial markets
    Date: 2011
  3. By: Heid, Frank; Krüger, Ulrich
    Abstract: Critics claim that capital requirements can exacerbate credit cycles by restricting lending in an economic downturn. The introduction of Basel 2, in particular, has led to concerns that risksensitive capital charges are highly correlated with the business cycle. The Basel Committee is contemplating a revision of the Basel Accord by introducing counter-cyclical capital buffers. Others claim that capital buffers are already large enough to absorb fluctuations in credit risk. We address the question of the pro-cyclical effects of capital requirements in a general framework which takes into account banks' potential adjustment strategies. We develop a dynamic model of bank lending behavior and simulate different regulatory frameworks and macroeconomic scenarios. In particular, we address two related questions in our simulation study: How do business fluctuations affect capital requirements and bank lending? To what extent does the capital buffer absorb fluctuations in the level of mimimum required capital? --
    Keywords: Minimum capital requirements,regulatory capital,capital buffer,cyclical lending,pro-cyclicality
    JEL: C61 E32 E44 G21
    Date: 2011
  4. By: Marcello Bofondi (Banca d'Italia); Tiziano Ropele (Banca d'Italia)
    Abstract: In this paper we use a single-equation time series approach to examine the macroeconomic determinants of banks’ loan quality in Italy in the past twenty years, as measured by the ratio of new bad loans to the outstanding amount of loans in the previous period. We analyse the quality of loans to households and firms separately on the grounds that macroeconomic variables may affect these two classes of borrowers differently. According to our estimated models: i) the quality of lending to households and firms can be explained by a small number of macroeconomic variables mainly relating to the general state of the economy, the cost of borrowing and the burden of debt; ii) changes in macroeconomic conditions generally affect loan quality with a lag; and iii) the out-of-sample prediction accuracy of the models is quite satisfactory and proved to be robust to the recent financial crisis.
    Keywords: bad loans, macroeconomic determinants, Italian banking system
    JEL: G21 C22
    Date: 2011–03
  5. By: Andres Felipe García-Suaza; José E. Gómez-González; Andrés Murcia Pabón; Fernando Tenjo-Galarza
    Abstract: Using a panel of Colombian banks and quarterly data between 1996:1 and 2010:3, we study the relationship between short-run adjustments in bank capital buffers and the business cycle. We follow a partial adjustment framework and control for several variables that have been identified as important determinants of bank capital buffers in previous studies, and find that bank capital buffers vary over the business cycle. We are able to identify a negative co-movement of capital buffers and and the business cycle. However, we also find that capital buffers of small and large banks behave asymmetrically during the business cycle. While the former appear to be constant over time, once the appropriate set of control variables is used, the latter present a countercyclical behavior. Our results suggest the possible need of the implementation of regulatory policy measures in developing countries.
    Date: 2011–03–31
  6. By: Kiff, John (International Monetary Fund); Kisser, Michael (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In order to incentivize stronger issuer due diligence effort, European and U.S. authorities are amending securitization-related regulations to force issuers to retain an economic interest in the securitization products they issue. The idea is that if loan originators and securitizers have more skin in the game they will more diligently screen the loans they originate and securitize. This paper uses a simple model to explore the economics of equity and mezzanine tranche retention in the context of systemic risk, accounting frictions and reduced form informational asymmetries. It shows that screening levels are highest when the loan originating bank retains the equity tranche. However, most of the time a profit maximizing bank would favor retention of the less risky mezzanine tranche, thereby implying a suboptimal screening effort from a regulator's point of view. This is mainly due to lower capital charges, loan screening costs and lower retention levels. This distortion gets even more pronounced in case the economic outlook is positive or profitability is high, thereby making the case for dynamic and countercyclical credit risk retention requirements. Finally, the paper also illustrates the importance of loan screening costs for the retention decision and thereby shows that an unanimous imposition of equity tranche retention might run the risk of shutting down securitization markets.
    Keywords: Securitization-related regulations; the economics of equity
    JEL: G00
    Date: 2011–04–06
  7. By: Paolo Angelini (Banca d'Italia); Stefano Neri (Banca d'Italia); Fabio Panetta (Banca d'Italia)
    Abstract: We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial or housing market shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability.
    Keywords: macroprudential policy, monetary policy, capital requirements
    JEL: E44 E58 E61
    Date: 2011–03
  8. By: Frédéric Boissay (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper develops a general equilibrium model to analyze the link between financial imbalances and financial crises. The model features an interbank market subject to frictions and where two equilibria may (co-)exist. The normal times equilibrium is characterized by a deep market with highly leveraged banks. The crisis times equilibrium is characterized by bank deleveraging, a market run, and a liquidity trap. Crises occur when there is too much liquidity (savings) in the economy with respect to the number of (safe) investment opportunities. In effect, the economy is shown to have a limited liquidity absorption capacity, which depends –inter alia– on the productivity of the real sector, the ultimate borrower. I extend the model in order to analyze the effects of financial integration of an emerging and a developed country. I find results in line with the recent literature on global imbalances. Financial integration permits a more efficient allocation of savings worldwide in normal times. It also implies a current account deficit for the developed country. The current account deficit makes financial crises more likely when it exceeds the liquidity absorption capacity of the developed country. Thus, under some conditions –which this paper spells out– financial integration of emerging countries may increase the fragility of the international financial system. Implications of financial integration and global imbalances in terms of output, wealth distribution, welfare, and policy interventions are also discussed. JEL Classification: E21, F36, G01, G21.
    Keywords: Financial Integration, Global Imbalances, Asymmetric Information, Moral Hazard, Financial Crisis.
    Date: 2011–04
  9. By: Javier Andrés (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain)
    Abstract: The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fluctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. We set up a search model with efficient bargaining and financial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers’ equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages firms from opening vacancies, reducing the impact of the shock on employment. We simulate the effects of a continuous increase in both the loan-to-value ratio and the share of borrowers in total population. Our exercise shows that the response of labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years.
    Keywords: business cycle, labor market, borrowing restrictions
    JEL: E24 E32 E44
    Date: 2011–04
  10. By: Takashi Kato
    Abstract: We study an asymptotic behaviour of the difference between value-at-risks VaR(L) and VaR(L+S) for heavy-tailed random variables L and S as an application to sensitivity analysis of quantitative operational risk management in the framework of an advanced measurement approach (AMA) of Basel II. We have different types of results according to the magnitude relationship of thickness of tails of L and S. Especially if the tail of S is enough thinner than the one of L, then VaR(L + S) - VaR(L) is asymptotically equivalent to an expected loss of S when L and S are independent. We also give some generalized results without the assumption of independence.
    Date: 2011–04
  11. By: Lo Duca, Marco (BOFIT); Peltonen, Tuomas (BOFIT)
    Abstract: This paper develops a framework for assessing systemic risks and for predicting (out-of-sample) systemic events, i.e. periods of extreme financial instability with potential real costs. We test the ability of a wide range of “stand alone” and composite indicators in predicting systemic events and evaluate them by taking into account policy makers’ preferences between false alarms and missing signals. Our results highlight the importance of considering jointly various indicators in a multivariate framework. We find that taking into account jointly domestic and global macro-financial vulnerabilities greatly improves the performance of discrete choice models in forecasting systemic events. Our framework shows a good out-of-sample performance in predicting the last financial crisis. Finally, our model would have issued an early warning signal for the United States in 2006Q2, 5 quarters before the emergence of money markets tensions in August 2007.
    Keywords: early warning indicators; asset price booms and busts; financial stress; macro-prudential policies
    JEL: E44 E58 F01 F37
    Date: 2011–04–05
  12. By: Herrmann, Sabine (BOFIT); Mihaljek, Dubravko (BOFIT)
    Abstract: This paper studies the nature of spillover effects in bank lending flows from advanced to the emerging market economies and identifies specific channels through which such effects occur. We examine a panel data set of cross-border bank flows from 17 advanced to 28 emerging market economies in Asia, Latin America and central and eastern Europe from 1993 to 2008. Our empirical framework is based on a gravity model of financial flows. We augment this model with global, lender and borrower country risk factors, as well as financial and monetary integration variables. The empirical analysis suggests that global as well as country specific factors are significant determinants of cross-border bank flows. Greater global risk aversion and expected financial market volatility have been the most important factors behind the decrease in cross-border bank flows during the crisis of 2007–08. The decrease in cross-border loans to central and eastern Europe was more limited compared to Asia and Latin America, in large measure because of the higher degree of financial and monetary integration in Europe, and relatively sound banking systems in the region. These results are robust to various specification, sub-samples and econometric methodologies.
    Keywords: gravity model; cross-border bank flows; financial crises; emerging market economies; spillover effects; panel data
    JEL: C23 F34 F36 O57
    Date: 2011–04–05
  13. By: Leonardo S. Alencar
    Abstract: This paper addresses the determinants of interest rates in the Brazilian banking market. The results suggest that banks fully adjust their loan interest rates to a change in the monetary policy rate, but we also observe a rigid short-term response for some loan product categories. The study confirms that pricing policies can vary substantially depending on the market. For example, microeconomic factors did not seem to be a major determinant of retail loan rates, but they were found to be important determinants of corporate loan or time deposit rates. As two additional results, market concentration was found to have a robust significant positive effect on loan rates and interest spreads, as well as the international risk perception of Brazil, as proxied by the EMBI Brazil.
    Date: 2011–03
  14. By: Fang , Yiwei (Lally School of Management and Technology, New York); Hasan, Iftekhar (Lally School of Management and Technology, New York, and Bank of Finland,); Marton, Katherin (Fordham University, New York)
    Abstract: The policy changes and structural reforms in transition economies over the past two decades have created exogenous variations in institutional development, which offers us an ideal natural experiment to analyse the causal effects of institutions on bank risk-taking behaviour. This paper examines a wide array of institutional reforms in respect of law and legal institutions, banking liberalization, and enterprise restructuring in privatization and corporate governance. Using a difference-in-difference approach, we find that banks’ financial stability has increased substantially subsequent to the institutional reforms. Further analysis suggests that the enhancement of financial stability mostly comes from the reduction of asset risk. Moreover, the effects of institutional reforms on bank risk are more pronounced for domestic banks than foreign banks. From the policy consideration, our study sheds light on the risk implications of different institutional reforms that have been characterizing transition countries.
    Keywords: institutional development; bank risk; transition banking; foreign ownership
    JEL: G21 P30 P34 P52
    Date: 2011–03–23
  15. By: Stein, Ingrid
    Abstract: This study analyzes the impact of bank relationships on a firm's cost of debt. We focus on relationships with the main bank. We find that a firm's cost of debt decreases with relationship strength, proxied by the share of bank debt provided by the main lender, but rises with relationship length. While the increase over time is weak on average, bank-dependent borrowers face a significant premium after several relationship years. Moreover, cost of debt increases with concentration in the lender's portfolio. Switching the main lender initially leads to only a small price discount on average. However, the discount is considerable for borrowers that switch and had a strong relationship to the previous main lender. Our results indicate that the information advantage acquired by the relationship bank leads to benefits for the firm, but also to potential hold-up costs in the long-term. Moreover, additional costs may result from concentration risks faced by the lender, inducing borrowers to switch to larger relationship banks. --
    Keywords: Lending relationship,SME,German banking system
    JEL: G21 G32
    Date: 2011
  16. By: Chollete, Loran (University of Stavanger); Ning, Cathy (Ryerson University)
    Abstract: .
    Keywords: Asymmetric Dependence; Copulas; Diversification Failure; Risk Factor; Systemic Risk; Time-Varying Downside Risk
    JEL: C14 E44 G11
    Date: 2010–04–04
  17. By: Dogan Tirtiroglu (The University of Adelaide, Business School, Australia); A. Basak Tanyeri (Bilkent University, Faculty of Business Administration Ankara, Turkey); Ercan Tirtiroglu (The University of Adelaide, Business School, Australia); Mehmet Kenneth N. Daniels (Virginia Commonwealth University, School of Business Richmond, VA)
    Abstract: The US banking industry offers a unique, natural and fertile environment to study geography's effects on banks' behavior and performance. The literature on banks' operating performance, while extensive, says little about the influence of spatial interactions on banks' performance. We compute and examine, using a physical distance-based spatio-temporal empirical model, the state-wide total factor productivity growth (TFPG) indices of US commercial banks for each state for the 1971-1995 period. We observe that the productivity growth of commercial banks in state i depends strongly, positively, and contemporaneously on the productivity growth of commercial banks located in state i's contiguous states. Further, “regulatory space” appears to induce frictions and lessen the documented spatial interactions. These findings support our plea that research on commercial banking sector's behavior need to pay a particular attention to the effects of banking geography.
    Keywords: Spatial, Commercial Banks, Total Factor Productivity Growth, Kalman Filter
    JEL: D24 C23 G21 G28 K23
    Date: 2011–04
  18. By: Marc CHESNEY (University of Zurich); Jacob STROMBERG (University of Zurich (SFI Ph.D. program)); Alexander F. WAGNER (University of Zurich, Swiss Finance Institute and Harvard University)
    Abstract: This paper studies the extent to which risk-taking incentives of CEOs and other governance features in a range of years prior to the recent financial crisis were related to the write-downs of U.S. financial institutions during the crisis. We document that institutions whose CEOs had particularly strong risk-taking incentives, weak ownership incentives and independent boards had the highest write-downs, both in absolute terms and relative to total assets. Furthermore, financial institutions with lower Tier-1 ratios and those with CEOs who earned less than their colleagues at comparable firms had larger write-downs.
    Keywords: Executive compensation; Subprime crisis; Write-downs; Corporate governance; Managerial incentives; Risk-taking; Too big to fail
    JEL: G28 G34
    Date: 2010–05
  19. By: Spruk, Rok
    Abstract: Iceland experienced a significant financial meltdown and subsequent economic downturn after the 2008/2009 financial crisis struck the country. It had been the worst crisis ever experienced by a small country from the late 20th century onwards. Since 1980s, Iceland's macroeconomic stability had been constantly deteriorated by the most volatile annual CPI and asset-price inflation dynamics in the OECD. More than a decade of robust growth dynamics left behind an internationally over-exposed banking sector which exceeded the size of country's GDP by nearly 10 times. The failure of Lehman Brothers and a global credit crunch, in turn, raised CDS rates on Icelandic banks which immediately declared insolvency after the global interbank lending froze. The paper provides a comprehensive analysis of the macroeconomic, banking and financial background of the crisis. It also provides a short-term analysis of Iceland's macroeconomic outlook. The main findings of the article conclude that the depth of financial crisis is attributed to the recent decade of unadjusted monetary policy which failed to prevent sharp appreciation of the krona and thus created sufficient conditions for significant asset-price inflation, high interest rate differential and the largest banking collapse in small and open economies. As the size of the banking sector was several times the country's GDP, Icelandic central bank failed to act as a lender of the last resort. The paper concludes that, to prevent future crises of similar proportions, it is impossible for a small country to have a large international banking sector, its own currency and an independent monetary policy.
    Keywords: Iceland; Financial Crisis; Financial Macroeconomics; International Finance; Monetary Policy; Currency Crisis
    JEL: E62 E52 E44 E6 F31 G21
    Date: 2010–02–23
  20. By: Ronel Elul; Piero Gottardi
    Abstract: In many countries, lenders are restricted in their access to information about borrowers' past defaults. The authors study this provision in a model of repeated borrowing and lending with moral hazard and adverse selection. They analyze its effects on borrowers' incentives and access to credit, and identify conditions under which it is optimal. The authors argue that “forgetting” must be the outcome of a regulatory intervention by the government. Their model's predictions are consistent with the cross-country relationship between credit bureau regulations and the provision of credit, as well as the evidence on the impact of these regulations on borrowers' and lenders' behavior.
    Keywords: Bankruptcy
    Date: 2011
  21. By: Mjøs, Aksel (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Myklebust, Tor Åge (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Persson, Svein-Arne (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Performance sensitive debt (PSD) contracts link a loan’s interest rate to the borrower’s measure of credit relevant firm performance, e.g., if the borrower becomes less creditworthy, the interest rate increases according to a predetermined schedule. PSD provisions are included in approximately 35% of all U.S. and Canadian corporate loans (1994 - 2009, Thomson Reuters Dealscan). Based on standard no-arbitrage theory and observed contractual specifications, we derive and empirically test a new pricing model for PSD contracts with a cash flow driven performance measure. Our sample consists of 270 PSD loans where the loan contractual terms are collected from Thomson Reuter’s Dealscan database and the borrower information is collected from Compustat and CRSP. The theoretical market value of a PSD contract is on average 3:2% above par value at the time of issue. By considering the subsamples of only interest increasing and interest decreasing PSD contracts, respectively, we find that the former is overpriced by 7:7% on average, whereas the latter, on average, exhibits no significant mispricing. The empirically observed overpricing of interest increasing contracts is consistent with the signalling hypothesis of Manso, Strulovici & Tchistyi (2010) and the cost of moral hazard explanation of Asquith, Beatty & Weber (2005). The not significant mispricing of interest decreasing contracts is consistent with the idea that borrowers have increased bargaining power in the form of outside alternative financing options for these contracts.
    Keywords: Performance sensitive debt; cash flow ratios; credit ratings
    JEL: G00
    Date: 2011–03–31
  22. By: Lorenzo Ciari (European University Institute - Firenze (I)); Riccardo De Bonis (Banca d'Italia, Economics and International Relations Area)
    Abstract: This paper investigates the role of incumbents' market power in shaping the entry decisions of Italian banks after branching liberalization in 1990. Using a unique dataset on 260 banks, we find that entry over the 1990-1995 period was targeted towards markets that were more competitive to begin with, i.e. where banking spreads were smaller. The results confirm the entry deterrent role of market power in the short-run and show a long run effect of regulation that survives after the removal of administrative barriers. The capacity of market power to discourage entry is confirmed in instrumental variables specifications, where we use the characteristics of the local banking markets in 1936, a proxy for tightness of banking regulation, to identify an exogenous source of variation in the spreads.
    Keywords: banking, barriers to entry, deregulation, market power
    JEL: G28 L1 L5
    Date: 2011–04
  23. By: Etem Hakan, Ergeç; Bengül Gülümser, Arslan
    Abstract: Identifying the impact of the interest rates upon Islamic banks is key to understand the contribution of such institutions to the financial stability, designing monetary policies and devising a proper risk management applicable to these institutions. This article analyzes and investigates the impact of interest rate shock upon the deposits and loans held by the conventional and Islamic banks with particular reference to the period between December 2005 and July 2009 based on Vector Error Correction (VEC) methodology. It is theoretically expected that the Islamic banks, relying on interest-free banking, shall not be affected by the interest rates; however, in concurrence with the previous studies, the article finds that the Islamic banks in Turkey are visibly influenced by interest rates.
    Keywords: Interest-free banking; monetary policy
    JEL: E52 G21
    Date: 2011–01
  24. By: Farazi, Subika; Feyen, Erik; Rocha, Roberto
    Abstract: Although both domestic and foreign private banks have gained ground in MENA in recent years, state banks continue to play an important role in many countries. Using a MENA bank-level panel dataset for the period 2001-08, the paper contributes to the empirical literature by documenting recent ownership trends and assessing the role of ownership and bank performance in MENA while accounting for key bank characteristics such as size and balance sheet composition. The paper analyzes headline performance indicators as well as their key drivers and finds that state banks exhibit significantly weaker performance, despite their larger size. This result is mainly driven by a larger holding of government securities, higher costs due to larger staffing numbers, and larger loan loss provisions reflecting weaker asset quality. The results reflect both operational inefficiencies and policy mandates. The paper also provides a detailed performance analysis of foreign and listed banks. Foreign banks are fairly new in MENA, yet perform on par with domestic banks despite their smaller size and higher investment costs. Listed banks exhibit superior performance driven by higher interest margins even in the face of higher costs associated with listing. Taken together, the results do not reject the development role for state banks, but do show that their intervention comes at a cost. As such, there is scope to reduce the share of state banks in some countries and to clarify the mandates, improve the governance, and strengthen the operational efficiency of most state banks in MENA.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Corporate Law,Bankruptcy and Resolution of Financial Distress
    Date: 2011–04–01
  25. By: Abdul Majid, Muhamed Zulkhibri
    Abstract: Based on a bank-level panel dataset for Malaysian banks from 1997 to 2005, this paper analyzes the effects of bank-specific characteristics, bank specialization and portfolio concentrations on the transmission of monetary policy via bank lending channel in a fairly well-developed financial system. The dynamic panel regression results provide evidence in favour of the bank lending channel theory and consistent with other empirical evidences that the bank lending channel operating via small and low liquidity banks. Furthermore, the evidence suggests that the dividing lines between different categories of financial institutions distinguished by differences in both market structure and regulatory, influence the way financial institutions react to monetary policy shock with finance companies react stronger than commercial banks to monetary shock. The results also suggest that banks with higher concentration of corporate loans seem to face greater financial constraint and limited access to other sources finance.
    Keywords: Banking Lending; Credit Channels; Monetary Policy; Malaysia
    JEL: E58 E52 E44
    Date: 2010–09–01

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