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on Banking |
| By: | Viral Acharya; Hamid Mehran; Til Schuermann; Anjan Thakor |
| Abstract: | Banks’ leverage choices represent a delicate balancing act. Credit discipline argues for more leverage, while balance-sheet opacity and ease of asset substitution argue for less. Meanwhile, regulatory safety nets promote ex post financial stability, but also create perverse incentives for banks to engage in correlated asset choices and to hold little equity capital. As a way to cope with these distorted incentives, we outline a two-tier capital framework for banks. The first tier is a regular core capital requirement that helps deter excessive risk-taking incentives. The second tier, a novel aspect of our framework, is a special capital account that limits risk taking but preserves creditors’ monitoring incentives. |
| Keywords: | Bank assets ; Credit ; Bank capital ; Banks and banking - Regulations ; Systemic risk |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:490&r=ban |
| By: | Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), Chaire d'information financière et organisationnelle, ESG-UQAM, and Laboratory for Research in Statistics and Probability); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal), Chaire d'information financière et organisationnelle, ESG-UQAM, and Université du Québec (Outaouais)) |
| Abstract: | During the last decades, banks off-balance sheet (OBS) activities (e.g. securitization, trading and fee-based activities) have greatly contributed to the increase in bank risk. However, the standard financial indicators such as the Value-at-Risk and the accounting leverage, exclude these non-traditional activities, and neglect the increased risk market-oriented banking generates. In this paper, we study various measures of leverage in the context of shadow banking, relying on a dynamic setting, which features Kalman filter procedures and different detrending methods. Applying this framework to Canadian data, we can detect the increase in risk associated to banks new business lines years before what the conventional risk measures predict. We also find that the elasticity measures of leverage, compared to the simple balance sheet ratios like the ratio of assets to equity or the mandatory leverage measure, are generally more forward-looking indicators of bank risk, and better capture the cyclical pattern of bank leverage. The main contribution of this paper is to show that OBS activities exert a stronger influence on these leverage measures during expansion periods. |
| Keywords: | Leverage, Banking, Off-balance sheet activities, Liquidity, Kalman Filter. |
| JEL: | C13 C22 C51 G21 G32 |
| Date: | 2011–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:022011&r=ban |
| By: | Rajnish Mehra; Facundo Piguillem; Edward C. Prescott |
| Abstract: | The neoclassical growth model is extended to include costly intermediated borrowing and lending between households. This is an important extension as substantial resources are used in intermediating the large amount of borrowing and lending between households. In 2007, in the United States, the amount intermediated was 1.7 times GNP, and the resources used in this intermediation amounted to at least 3.4 percent of GNP. The theory implies that financial intermediation services are an intermediate good and that the spread between borrowing and lending rates measures the efficiency of the financial sector. ; This paper was previously published as Working Paper 655 and Staff Report 405 under the title "Intermediated Quantities and Returns." |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:685&r=ban |
| By: | Fiorella De Fiore; Harald Uhlig |
| Abstract: | We present a dynamic general equilibrium model with agency costs where: i) firms are heterogeneous in the risk of default; ii) they can choose to raise finance through bank loans or corporate bonds; and iii) banks are more efficient than the market in resolving informational problems. The model is used to analyze some major long-run differences in corporate finance between the US and the euro area. We suggest an explanation of those differences based on information availability. Our model replicates the data when the euro area is characterized by limited availability of public information about corporate credit risk relative to the US, and when european firms value more than US firms the flexibility and information acquisition role provided by banks. |
| JEL: | C68 E20 E44 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16979&r=ban |
| By: | Santiago Carbó-Valverde (University of Granada and Federal Reserve Bank of Chicago, USA.); David Marqués-Ibáñez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Francisco Rodríguez Fernández (University of Granada, Spain.) |
| Abstract: | While the 2007-2010 financial crisis has hit a variety of countries asymmetrically, the case of Spain is particularly illustrative: this country experienced a pronounced housing bubble partly funded via spectacular developments in its securitization markets leading to looser credit standards and subsequent financial stability problems. We analyze the sequential deterioration of credit in this country considering rating changes in individual securitized deals and on balance sheet bank conditions. Using a sample of 20,286 observations on securities and rating changes from 2000Q1 to 2010Q1 we build a model in which loan growth, on balancesheet credit quality and rating changes are estimated simultaneously. Our results suggest that loan growth significantly affects on balance-sheet loan performance with a lag of at least two years. Additionally, loan performance is found to lead rating changes with a lag of four quarters. Importantly, bank characteristics (in particular, observed solvency, cash flow generation and cost efficiency) also affect ratings considerably. Additionally, these other bank characteristics seem to have a higher weight in the rating changes of securities issued by savings banks as compared to those issued by commercial banks. JEL Classification: G21, G12. |
| Keywords: | securitization, lending, risk, financial instability. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111329&r=ban |
| By: | Kent Matthews (Cardiff University and Hong Kong Institute for Monetary Research) |
| Abstract: | Risk Management in Chinese banks has traditionally been the Cinderella of its internal functions. Political stricture and developmental imperative have often overridden standard practice of risk management resulting in large non-performing loan (NPL) ratios. One of the stated aims of opening up the Chinese banks to foreign strategic investment is the development of risk management functions. In recent years NPL ratios have declined through a mixture of recovery, asset management operation and expanded balance sheets. However, the training and practice of risk managers remain second class compared with foreign banks operating in China. This paper evaluates bank performance using a Network DEA approach where an index of risk management practice and an index of risk management organisation are used as intermediate inputs in the production process. The two indices are constructed from a survey of risk managers in domestic banks and foreign banks operating in China. The use of network DEA can aid the manager in identifying the stages of production that need attention. |
| Keywords: | Risk Management, Risk Organisation, Managerial Efficiency, Network DEA |
| JEL: | D23 G21 G28 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:102011&r=ban |
| By: | Sirio Aramonte; Marius del Giudice Rodriguez; Jason J. Wu |
| Abstract: | Trading portfolios at Financial institutions are typically driven by a large number of financial variables. These variables are often correlated with each other and exhibit by time-varying volatilities. We propose a computationally efficient Value-at-Risk (VaR) methodology based on Dynamic Factor Models (DFM) that can be applied to portfolios with time-varying weights, and that, unlike the popular Historical Simulation (HS) and Filtered Historical Simulation (FHS) methodologies, can handle time-varying volatilities and correlations for a large set of financial variables. We test the DFM-VaR on three stock portfolios that cover the 2007-2009 financial crisis, and find that it reduces the number and average size of back-testing breaches relative to HS-VaR and FHS-VaR. DFM-VaR also outperforms HS-VaR when applied risk measurement of individual stocks that are exposed to systematic risk. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-19&r=ban |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, BPCE - BPCE) |
| Abstract: | The Basel Advanced Measurement Approach requires financial institutions to compute capital requirements on internal data sets. In this paper we introduce a new methodology permitting capital requirements to be linked with operational risks. The data are arranged in a matrix of 56 cells. Constructing a vine architecture, which is a bivariate decomposition of a n-dimensional structure (n > 2), we present a novel approach to compute multivariate operational risk VaRs. We discuss multivariate results regarding the impact of the dependence structure on the one hand, and of LDF modeling on the other. Our method is simple to carry out, easy to interpret and complies with the new Basel Committee requirements. |
| Keywords: | Operational risks, vine copula, loss distribution function, nested structure, VaR. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00587706&r=ban |
| By: | Fernandez-Corugedo, Emilio (Bank of England); McMahon, Michael (University of Warwick, and Centre for Economic Performance, LSE); Millard, Stephen (Bank of England); Rachel, Lukasz (Bank of England) |
| Abstract: | The most recent recession has been associated with a financial crisis that led to a large widening of spreads and quantitative restrictions on lending. As well as affecting investment, such a credit contraction is likely to have had a large effect on the working capital positions of UK firms and this, in turn, is likely to have affected the United Kingdom’s supply potential, at least temporarily. However, the role of such disruptions in the business cycle is not well understood. In this paper we first document the behaviour of working capital in the United Kingdom. In order to understand the effects of working capital on macroeconomic variables, we then solve and calibrate a DSGE model that introduces an explicit role for the components of working capital (net cash, inventories, and trade credit). We find that this model produces the standard responses of macroeconomic variables to productivity shocks, but we also find that financial intermediation shocks, similar to those experienced in the United Kingdom post-2007, have persistent negative effects on economic activity; these effects are reinforced by reductions in trade credit. Our model also documents a crucial role for monetary policy to offset such shocks. |
| Keywords: | Working capital; business cycle model; spreads; financial crisis. |
| JEL: | E20 E51 E52 |
| Date: | 2011–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0422&r=ban |
| By: | Gilles Dufrénot (DEFI - Centre de Recherche en Développement Economique et Finance Internationale - Université de la Méditerranée - Aix-Marseille II); Valérie Mignon (CEPII - Centre d'études prospectives et d'informations internationales - Université de Paris X - Nanterre); Anne Peguin-Feissolle (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | The aim of this article is to answer the following question: can the considerable rise in the volatility of the LAC stock markets in the aftermath of the 2007/2008 crisis be explained by the worsening financial environment in the US markets? To this end, we rely on a time-varying transition probability Markov-switching model, in which "crisis" and "non-crisis" periods are identified endogenously. Using daily data from January 2004 to April 2009, our findings do not validate the "financial decoupling" hypothesis since we show that the financial stress in the US markets is transmitted to the LAC's stock market volatility, especially in Mexico. |
| Keywords: | Stock markets; volatility; financial stress; regime-switching; Markov-switching model |
| Date: | 2011–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00587460&r=ban |
| By: | Christophe Boucher (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, A.A.Advisors-QCG - ABN AMRO); Bertrand Maillet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, A.A.Advisors-QCG - ABN AMRO, EIF - Europlace Institute of Finance) |
| Abstract: | We provide an economic valuation of the riskiness of risk models by directly measuring the impact of model risks (specification and estimation risks) on VaR estimates. We find that integrating the model risk into the VaR computations implies a substantial minimum correction of the order of 10-40% of VaR levels. We also present results of a practical method - based on a backtesting framework - for incorporating the model risk into the VaR estimates. |
| Keywords: | Model risk, quantile estimation, VaR, Basel II validation test. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00587779&r=ban |
| By: | Manju Puri; Jörg Rocholl; Sascha Steffen |
| Abstract: | This paper examines the broader effects of the US financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany using a unique data set of German savings banks during the period 2006 through 2008 for which we have the universe of loan applications and loans granted. Our experimental setting allows us to distinguish between savings banks affected by the US financial crisis through their holdings in Landesbanken with substantial subprime exposure and unaffected savings banks. The data enable us to distinguish between demand and supply side effects of bank lending and find that the US financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down, it is not substantially different for the affected and nonaffected banks. More important, we find evidence of a significant supply side effect in that the affected banks reject substantially more loan applications than nonaffected banks. This result is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared with consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects. |
| JEL: | F34 G21 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16967&r=ban |
| By: | Aiyar, Shekhar (Bank of England) |
| Abstract: | Evidence abounds on the propagation of financial stresses originating in the US mortgage market to banking systems worldwide through international funding markets. But the transmission of this external funding shock to the real economy via bank lending is surprisingly underexamined, given the central importance ascribed to this channel of contagion by policymakers. This paper provides evidence of this transmission for the UK-resident banking system, the largest in the world by asset size. It uses a novel data set, created from detailed and confidential balance sheet data reported by individual banks quarterly to the Bank of England. I find that the shock to foreign funding caused a substantial pullback in domestic lending. The results are derived using a range of instruments to correct for endogeneity and omitted variable bias. Foreign subsidiaries and branches reduced lending by a larger amount than domestically owned banks, while the latter calibrated the reduction in domestic lending more closely to the size of the funding shock. |
| Keywords: | Liquidity shock; transmission mechanism; bank lending; instrumental variables. |
| JEL: | E30 E50 G20 |
| Date: | 2011–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0424&r=ban |
| By: | Niyogi Sinha Roy, Tanima; Bhattacharya, Basabi |
| Abstract: | The paper undertakes a macroprudential analysis of the credit risk of Public Sector Banks during the liberalization period. Using the Vector Autoregression methodology, the paper investigates the dynamic impact of changes in the macroeconomic variables on the default rate, the Financial Stability Indicator of banks by simulating interactions among all the variables included in the model. Feedback effects from the banking sector to the real economy are also estimated. The impact of variations in different Monetary Policy Instruments such as Bank Rate, Repo Rate and Reverse Repo Rate on the asset quality of banks is examined using three alternative baseline models. Impulse Response Functions of the estimated models are augmented by conducting sensitivity and scenario stress testing exercises to assess the banking sector’s vulnerability to credit risk in the face of hypothetically generated adverse macroeconomic shocks. Results indicate the absence of cyclicality and pro-cyclicality of the default rate. Adverse shocks to output gap, Real Effective Exchange Rate appreciation above its trend value, inflation rate and policy-induced monetary tightening significantly affect bank asset quality. Of the three policy rates, Bank Rate affects bank soundness with a lag and is more persistent while the two short-term rates impact default rate instantaneously but is much less persistent. Scenario stress tests reveal default rate of Public Sector Banks could increase on an average from 4% to 7% depending on the type of hypothetical macroeconomic scenario generated. An average buffer capital of 3% accumulated during the period under consideration could thus be inadequate for nearly twice the amount of Non-Performing Assets generated if macroeconomic conditions worsened. An important policy implication of the paper is that as the Indian economy moves gradually to Full Capital Account Convertibility, the banking sector is likely to come under increased stress in view of the exchange rate volatility with adverse repercussions on interest rates and bank default rates. In this emerging scenario, monetary policy stance thus emerges as an important precondition for banking stability. The study also highlights the inadequacy of existing capital reserves should macroeconomic conditions deteriorate and the urgency to strengthen the buffer capital position. |
| Keywords: | Banks; Macro Prudential analysis; Stress test |
| JEL: | E52 G21 |
| Date: | 2011–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30263&r=ban |
| By: | Zuzana Irsova |
| Abstract: | This article provides an empirical insight on the heterogeneity in the estimates of banking efficiency produced by the stochastic frontier ap- proach. Using data from five countries of Central and Eastern Europe, we study the sensitivity of the efficiency score and the efficiency ranking to a change in the design of the frontier. We found that the average scores are significantly smaller when the transcendental logarithmic functional form is used in the profit efficiency measurement and when the scaling effect is neglected in the cost efficiency measurement. The implied bank ranking is robust to changes in the stochastic frontier definition for cost efficiency, but not for profit efficiency. |
| Keywords: | Banking, Eciency Analysis, Stochastic Frontier Approach, Transitional Countries |
| JEL: | C13 G21 L25 |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-998&r=ban |
| By: | Jason J. Wu; Aaron L. Game |
| Abstract: | This paper proposes a residual based cointegration test with improved power. Based on the idea of Hansen (1995) and Elliott & Jansson (2003) in the unit root testing case, stationary covariates are used to improve the power of the residual based Augmented Dickey Fuller (ADF) test. The asymptotic null distribution contains difficult to estimate nuisance parameters for which there is no obvious method of estimation, therefore we propose a bootstrap methodology to obtain test critical values. Local-to-unity asymptotics and Monte Carlo simulations are used to evaluate the power of the test in large and small samples, respectively. These exercises show that the addition of covariates increases power relative to the ADF and Johansen tests, and that the power depends on the long-run correlation between the covariates and the cointegration candidates. The new test is used to test for cointegration between Credit Default Swap (CDS) and corporate bond spreads for a panel of U.S. firms during the 2007-2009 financial crisis. The new test finds stronger evidence for cointegration between the two spreads for more firms, relative to ADF and Johansen tests. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-18&r=ban |
| By: | Benjamin Born (University of Bonn.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Central banks regularly communicate about financial stability issues, by publishing Financial Stability Reports (FSRs) and through speeches and interviews. The paper asks how such communications affect financial markets. Building a unique dataset, it provides an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock market returns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and do not generate a volatility reduction during tranquil times, but have had a substantial effect during the 2007-10 financial crisis. The findings suggest that financial stability communication by central banks are perceived by markets to contain relevant information, and they underline the importance of differentiating between communication tools, their content and the environment in which they are employed. JEL Classification: E44, E58, G12. |
| Keywords: | central bank, financial stability, communication, event study. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111332&r=ban |
| By: | Marlène Isoré |
| Abstract: | This paper develops a two-country multi-frictional model where the freeze on liquidity access to commercial banks in one country raises unemployment rates via credit rationing in both countries. The expenditure-switching channel, whereby asymmetric monetary shocks traditionally lead to negative comovements of home and foreign outputs, is considerably weakened via opposite forces driving the exchange rate. Meanwhile, it is proved that financial market integration forms a transmission channel per se, without resorting to international cross-holdings of risky assets. The search and matching modeling serves two purposes. First, it accounts for the time needed to restore a normal level of confidence following financial market disruptions. Second, it allows dissociating pure liquidity contractions from non-walrasian financial shocks, arriving despite global excess savings and due to heterogeneity in the quality of the banking system. The former induce negative comovements of home and foreign outputs, in accordance with the literature, whereas the new type of financial shocks does generate financial contagion. |
| Keywords: | matching theory, financial markets, credit rationing, financial multiplier, international transmission, financial crises, open economy macroeconomics |
| JEL: | C78 E44 E51 F41 F42 G15 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2011:i:068&r=ban |
| By: | Maria Abascal; Luis Carranza; Mayte Ledo; Arnoldo Lopez Marmolejo |
| Abstract: | This article analyzes the potential impact of a higher level of capital and liquidity of banks on the credit penetration and the economic development in emerging countries. To do so, it employs an econometric exercise in two stages. In the first stage it is estimated the impact of capital and liquidity on the quantity and the price of credit. In the second stage it is quantified the impact of credit and its price on the GDP per capita. Thus, the impact of regulation on output is estimated using a chain rule. The article shows that in general the effects of capital and liquidity are higher in emerging countries in terms of banking penetration and GDP per capita. |
| Keywords: | Basel III, capital, liquidity, banking penetration. |
| JEL: | G21 G28 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1108&r=ban |