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

  1. Distress Dependence and Financial Stability By Miguel A. Segoviano; Charles Goodhart
  2. Competition and Stability in Banking By Xavier Vives
  3. The Global Financial Crisis By Franklin Allen; Elena Carletti
  4. Conditional Value-at-Risk and Average Value-at-Risk: Estimation and Asymptotics By Chun, So Yeon; Shapiro, Alexander; Uryasev, Stan
  5. Recessions and Financial Disruptions in Emerging Markets: A Bird´s Eye View. By Stijn Claessens; M. Ayhan Kose; Marco E. Terrones
  6. The Credit Channel and Monetary Transmission in Brazil and Chile: A Structural VAR Approach By Luis Catão;; Adrian Pagan
  7. The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment By James D. Hamilton; Jing Cynthia Wu
  8. Stress Tests for Banking Sector: A Technical Note By Rodrigo Alfaro; Andrés Sagner
  9. Banking and the Determinants of Credit Crunches By Holmberg, Ulf
  10. Market-Based Measures of Bank Risk and Bank Aggressiveness. By Knaup, M
  11. Risk Management of Risk under the Basel Accord Forecasting Value-at-Risk of VIX Futures By Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer; Teodosio Pérez-Amaral
  12. The Cyclical Behavior of Bank Capital Buffers in an Emerging Economy: Size Does Matter By Andrés Felipe García-Suaza; Jose Eduardo Gómez-González; Andrés Murcia pabón; Feenando tenjo Galarza
  13. Systemic risk diagnostics: coincident indicators and early warning signals By Bernd Schwaab; Siem Jan Koopman; André Lucas
  14. The predictive accuracy of credit ratings: Measurement and statistical inference By Orth, Walter
  15. Macroprudential Regulation, Financial Stability and Capital Flows By José De Gregorio
  16. Supply and Demand Identification in the Credit Market By Mauricio Calani C.; Pablo García S.; Daniel Oda Z.
  17. Borrowing Constraints and Credit Demand By Jaime Ruiz-Tagle; Francis Vella
  18. Banker's Pay Structure And Risk By John Thanassoulis
  19. Eficiencia Bancaria en Chile: un Enfoque de Frontera de Beneficios By José Luis Carreño; Gino Loyola; Yolanda Portilla
  20. Market-specific and Currency-specific Risk During the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London By Shin-ichi Fukuda
  21. Household Credit Markets During the Financial Crisis of 2008/2009 By Gabriel Aparici; Fernando Sepúlveda
  22. Collateralized CDS and Default Dependence -Implications for the Central Clearing- By Masaaki Fujii; Akihiko Takahashi
  23. Instrumentos derivados crediticios By Miguel Delfiner; Anabela Gómez

  1. By: Miguel A. Segoviano; Charles Goodhart
    Abstract: This paper defines a set of systemic financial stability indicators which measure distress dependence among the financial institutions in a system, thereby allowing to analyze stability from three complementary perspectives: common distress in the system, distress between specific banks, and cascade effects associated with a specific bank. Our approach defines the banking system as a portfolio of banks and infers the system’s multivariate density (BSMD) from which the proposed measures are estimated. The BSMD embeds the banks’ default inter-dependence structure that captures linear and non-linear distress dependencies among the banks in the system, and its changes at different times of the economic cycle. The BSMD is recovered using the CIMDO-approach, a new approach that, in the presence of restricted data, improves density specification without explicitly imposing parametric forms that, under restricted data sets, are difficult to model. Thus, the proposed measures can be constructed from a very limited set of publicly available data and can be provided for a wide range of both developing and developed countries.
    Date: 2010–04
  2. By: Xavier Vives
    Abstract: I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition.
    Date: 2010–05
  3. By: Franklin Allen; Elena Carletti
    Abstract: Until Lehman Brothers' bankruptcy in September 2008, the conventional wisdom was that the crisis was the result of problems in the financial sector. However, after the dramatic falls in industrial production in countries such as Japan and Germany starting in the last quarter of 2008, it became clear that the origins of the crisis were deeper. This paper argues that there was an economic crisis that was due to the bursting of a property and stock bubble in the US and a number of other countries. Just as in Japan in the 1990's, this greatly affected the real economy. The problems in the financial system were a symptom rather than a cause, but there was a strong feedback effect into the real economy. The structure of the global financial system and the nature of banking regulation have been severely inadequate. The paper suggests reforms in the structure of the IMF, the governance of central banks and the form of banking regulation.
    Date: 2010–05
  4. By: Chun, So Yeon; Shapiro, Alexander; Uryasev, Stan
    Abstract: We discuss linear regression approaches to conditional Value-at-Risk and Average Value-at-Risk (Conditional Value-at-Risk, Expected Shortfall) risk measures. Two estimation procedures are considered for each conditional risk measure, one is direct and the other is based on residual analysis of the standard least squares method. Large sample statistical inference of the estimators obtained is derived. Furthermore, finite sample properties of the proposed estimators are investigated and compared with theoretical derivations in an extensive Monte Carlo study. Empirical results on the real-data (different financial asset classes) are also provided to illustrate the performance of the estimators.
    Keywords: Value-at-Risk; Average Value-at-Risk; Conditional Value-at-Risk; Expected Shortfall; linear regression; least squares residual; quantile regression; conditional risk measures; statistical inference
    JEL: C53 D81 G32 C15 C1
    Date: 2011–04–03
  5. By: Stijn Claessens; M. Ayhan Kose; Marco E. Terrones
    Abstract: This paper provides an overview of the implications of recession and financial disruption episodes in emerging markets. We report three major findings. First, compared to advanced countries, recessions and financial disruptions in emerging markets are often more costly. Second, recessions associated with financial disruption episodes, such as credit crunches, equity price busts and financial crises, tend to be deeper than other recessions in emerging markets. Third, the temporal dynamics of macroeconomic and financial variables around these episodes in emerging markets are different than those in advanced countries. In light of these broad observations, the paper provides a review of recessions and financial market disruptions in Chile
    Date: 2010–06
  6. By: Luis Catão;; Adrian Pagan
    Abstract: We use an expectation-augmented SVAR representation of an open economy New Keynesian model to study monetary transmission in Brazil and Chile. The underlying structural model incorporates key structural features of Emerging Market economies, notably the role of a bank-credit channel. We find that interest rate changes have swifter effects on output and inflation in both countries compared to advanced economies and that exchange rate dynamics plays an important role in monetary transmission, as currency movements are highly responsive to changes in policy-controlled interest rates. We also find the typical size of credit shocks to have large effects on output and inflation in the two economies, being stronger in Chile where bank penetration is higher.
    Date: 2010–05
  7. By: James D. Hamilton; Jing Cynthia Wu
    Abstract: This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope and curvature term-structure risk. We find these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if in December of 2006, the Fed were to have sold off all its Treasury holdings of less than one-year maturity (about $400 billion) and use the proceeds to retire Treasury debt from the long end, this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, such a maturity swap would have the same effects as buying $400 billion in long-term maturities outright with newly created reserves, and could reduce the 10-year rate by 13 basis points without raising short-term yields.
    JEL: E43 E52 G12 H63
    Date: 2011–04
  8. By: Rodrigo Alfaro; Andrés Sagner
    Abstract: Credit and market risks are crucial for financial institutions. In this paper we present the model used by the Central Bank of Chile to conduct the stress tests for commercial banks in Chile. Market risk uses a balance-sheet approach that is consistent with the credit risk. For exchange rate risk we consider a change in the value of the portfolio under an unexpected change in the exchange rate by X%, meanwhile the interest rate risk is computed using a model for the whole yield curve. In particular, the modeling of this risk follows Nelson and Siegel (1987). Credit risk is computed using a non-linear VAR that relates banking system aggregates (loan loss provisions, credit growth, and write-offs) with macroeconomics variables (output growth, short and long term interest rates, terms of trade, and unemployment). For each Financial Stability Report (FSR) the model is calibrated using data from 1997 to the most recent date at monthly frequency. The effect on individual banks is computed adjusting the loan loss provision and total loans of each bank with the forecast value for the system. Given that forecasts are separated by type of loans (commercial, mortgage, and consumer) then the final effect on a particular bank depend on its initial composition.
    Date: 2011–02
  9. By: Holmberg, Ulf (Department of Economics, Umeå University)
    Abstract: Why do banks suddenly tighten the criteria needed for credit? Credit crunches are often explained by the implementation of new regulatory rules or by sudden drops in firm quality. We present a novel model of an artificial credit market and show that crunches have a tendency to occur even if firm quality remains constant, as well as when there are no new regulatory rules stipulating lenders capital requirements. We find evidence in line with the asset deterioration hypothesis and results that emphasise the importance of accurate firm quality estimates. In addition, we find that an increase in the debts’ time to maturity reduces the probability of a credit crunch and that a conservative lending approach is intrinsically related to the onset of crunches. Thus, our results suggest some up till now partially overlooked components contributing to the financial stability of an economy.
    Keywords: lending; screening; agent based model; financial stability
    JEL: C63 E51 G21
    Date: 2011–04–07
  10. By: Knaup, M (Tilburg University)
    Date: 2011
  11. By: Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer; Teodosio Pérez-Amaral
    Abstract: The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer, Jimenez-Martin and Perez-Amaral (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices. We examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). We find that an aggressive strategy of choosing the Supremum of the single model forecasts is preferred to the other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, though these are admissible under the Basel II Accord.
    Keywords: Median strategy; Value-at-Risk (VaR); daily capital charges; violation penalties; optimizing strategy; aggressive risk management; conservative risk management; Basel II Accord; VIX futures; global financial crisis (GFC)
    JEL: G32 G11 C53 C22
    Date: 2011–02–01
  12. By: Andrés Felipe García-Suaza; Jose Eduardo Gómez-González; Andrés Murcia pabón; Feenando 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 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: 2011–04–10
  13. By: Bernd Schwaab (European Central Bank, Financial Markets Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Siem Jan Koopman (Department of Econometrics, VU University Amsterdam and Tinbergen Institute.); André Lucas (Department of Finance, VU University Amsterdam, and Duisenberg school of finance.)
    Abstract: We propose a novel framework to assess financial system risk. Using a dynamic factor framework based on state-space methods, we construct coincident measures (‘thermometers’) and a forward looking indicator for the likelihood of simultaneous failure of a large number of financial intermediaries. The indicators are based on latent macro-financial and credit risk components for a large data set comprising the U.S., the EU-27 area, and the respective rest of the world. Credit risk conditions can significantly and persistently de-couple from macro-financial fundamentals. Such decoupling can serve as an early warning signal for macro-prudential policy. JEL Classification: G21, C33.
    Keywords: financial crisis, systemic risk, credit portfolio models, frailty-correlated defaults, state space methods.
    Date: 2011–04
  14. By: Orth, Walter
    Abstract: Credit ratings are ordinal predictions for the default risk of an obligor. To evaluate the accuracy of such predictions commonly used measures are the Accuracy Ratio or, equivalently, the Area under the ROC curve. The disadvantage of these measures is that they treat default as a binary variable thereby neglecting the timing of the default events and also not using the full information from censored observations. We present an alternative measure that is related to the Accuracy Ratio but does not suffer from these drawbacks. As a second contribution, we study statistical inference for the Accuracy Ratio and the proposed measure in the case of multiple cohorts of obligors with overlapping lifetimes. We derive methods that use more sample information and lead to more powerful tests than alternatives that filter just the independent part of the dataset. All procedures are illustrated in the empirical section using a dataset of S\&P Long Term Credit Ratings.
    Keywords: Ratings; predictive accuracy; Accuracy Ratio; Harrell's C; overlapping lifetimes
    JEL: C41 G32 G24
    Date: 2010–03–22
  15. By: José De Gregorio
    Date: 2010–09
  16. By: Mauricio Calani C.; Pablo García S.; Daniel Oda Z.
    Abstract: This paper identifies supply and demand functions in the Chilean credit market. The analysis divides credit into three categories by debtor type, namely consumption, commercial and housing loans. We successfully exploit novel bank-level data on non-price covenants to address the simultaneous equation endogeneity problem in the estimation of interest rate elasticities. Our truly unique panel data set covers the 2003-2009 period and combines information on loan amount allocation, interest rates, balance sheet indicators with information from the “Survey on General Conditions and Standards in the Credit Market”, conducted by the Central Bank of Chile since 2003. Additionally, we characterize the statistical determinants of the survey responses, and later we use our estimation results for understanding the credit contraction episode of the second half of 2008, during the global financial turmoil.
    Date: 2010–04
  17. By: Jaime Ruiz-Tagle; Francis Vella
    Abstract: This paper investigates the determinants of credit demand in the presence of borrowing constraints for the Chilean economy using a recently collected detailed and innovative data set, the Households Financial Survey. The estimation procedure employed allows for the observed debt to be a function of multiple selection rules and incorporates the endogeneity of income and assets into the debt equation. The paper provides compelling evidence that the relationship between household income and debt, both secured and non secured, is highly non linear. This result has clear implications for the level of household debt in the face of financial deregulation.
    Date: 2010–05
  18. By: John Thanassoulis
    Abstract: This paper studies the contracting problem between banks and their bankers, embedded in a competitive labour market for banker talent. To motivate effort banks must use some variable remuneration. Such remuneration introduces a risk-shifting problem by creating incentives to inflate early earnings: to manage this some bonus pay is optimally deferred. As competition between banks for bankers rises it becomes more expensive to manage the risk-shifting problem than the moral hazard problem. If competition grows strong enough, contracts which permit some risk-shifting become optimal. Empirically I demonstrate that balance sheets have changed in a manner which triggers this mechanism.
    Keywords: Risk-shifting, moral hazard, incentives, bonuses, banks, bankers' pay
    JEL: G21 G34
    Date: 2011
  19. By: José Luis Carreño; Gino Loyola; Yolanda Portilla
    Abstract: This paper characterizes the evolution of the efficiency X in the Chilean banking industry over 1987 to 2007, based on a profit frontier approach. Our results suggest that over this period the Chilean banking sector has attained just a 15% over its maximum profits. This inefficiency basically arises from a technical source rather than an assignative one, and mainly affects domestic and small banks. Nevertheless, the level of efficiency X of the industry as a whole has dramatically improved since the late 1990’s, which is consistent with important economic, technological and regulatory transformations.
    Date: 2010–12
  20. By: Shin-ichi Fukuda
    Abstract: This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets.
    JEL: E44 F32 F36
    Date: 2011–04
  21. By: Gabriel Aparici; Fernando Sepúlveda
    Abstract: In this paper we study several elements that allow us to explain the greater resilience of household credit markets in emerging economies, and particularly in Chile during the international financial crisis of 2008-2009. The main features identified are primarily related to the development dynamics of these markets, such as a stronger presence of traditional banking in financial intermediation, marginally relevant structured finance markets and derivative products operations of a less diverse and complex nature. In the particular case of the Chilean economy we also analyze idiosyncratic factors such as, for instance, the consolidation of a selective demand driven by institutional investors. Regarding the regulatory issues analyzed, we argue that the basic set of tools available, for either advanced or emerging economies, tends to lose effectiveness in the face of the highly complex financial interactions observed in some of the advanced economies most affected by the crisis. Finally, based on this latter argument, we propose some topics for discussion that could contribute in the development of the financial system in Chile; such as expanding the reach of supervision and regulation, moving towards a consolidated supervision scheme and reducing potential procyclicalities in the available prudential regulation tools.
    Date: 2010–09
  22. By: Masaaki Fujii (Faculty of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: In this paper, we have studied the pricing of a continuously collateralized CDS. We have made use of the hsurvival measureh to derive the pricing formula in a straightforward way. As a result, we have found that there exists irremovable trace of the counter party as well as the investor in the price of CDS through their default dependence even under the perfect collateralization, although the hazard rates of the two parties are totally absent from the pricing formula. As an important implication, we have also studied the situation where the investor enters an offsetting back-to-back trade with another counter party. We have provided simple numerical examples to demonstrate the change of a fair CDS premium according to the strength of default dependence among the relevant names, and then discussed its possible implications for the risk management of the central counter parties.
    Date: 2011–04
  23. By: Miguel Delfiner; Anabela Gómez
    Abstract: Los derivados crediticios constituyen una amplia gama de instrumentos financieros cuyo valor se genera por la ocurrencia de eventos crediticios. Son usualmente negociados en forma bilateral a través del mercado OTC aunque esta tendencia puede modificarse a futuro. Su volumen y complejidad experimentó un crecimiento sustancial en los últimos años, habiéndosele adjudicado un rol importante en la reciente crisis financiera originada por las hipotecas subprime; ello explica que su tratamiento regulatorio esté siendo revisado en la actualidad en diversos ámbitos. En este trabajo se estudia el mercado de los instrumentos derivados crediticios con foco en los principales productos, sus riesgos y su tratamiento regulatorio (con especial énfasis en Basilea II). También se releva la normativa que se les aplica en algunos países, incluyendo economías de Latinoamérica. Finalmente se presenta el debate actual respecto del tratamiento a brindar a estos productos en la regulación.
    Date: 2011–04

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