New Economics Papers
on Banking
Issue of 2011‒06‒11
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Alleviating Coordination Problems and Regulatory Constraints through Financial Risk Management By Marcel Boyer; M. Martin Boyer; René Garcia
  2. Domestic financial regulation and external borrowing By Lanau, Sergi
  3. System-wide liquidity risk in the United Kingdom’s large-value payment system: an empirical analysis By Perlin, Marcelo; Schanz, Jochen
  4. Banks’ responses to funding liquidity shocks: lending adjustment, liquidity hoarding and fire sales By Leo de Haan; Jan Willem van den End
  5. Understanding Liquidity and Credit Risks in the Financial Crisis* By Deborah Gefang; Gary Koop; Simon Potter
  6. A Pigovian Approach to Liquidity Regulation By Enrico Perotti; Javier Suarez
  7. Macroprudential Approach to Regulation-Scope and Issues By Gopinath, Shyamala
  8. Report on a Fact-Finding Survey of the Credit-Decision System and Loan Pricing in Small Business Financing in Japan By NEMOTO Tadanobu; OGURA Yoshiaki; WATANABE Wako
  9. Do migrants’ deposits reduce microfinance institutions’ liquidity risk? By Ritha Sukadi Mata
  10. Systemic risk-taking: amplification effects, externalities, and regulatory responses By Anton Korinek
  11. Risque de crédit et volatilité des spreads sur le marché de la dette privée en euro. By Sodjahin, Amos Aristide
  12. Forecasting Financial Stress By Jan Willem Slingenberg; Jakob de Haan
  13. Tranching and Pricing in CDO-Transactions By Günter Franke; Thomas Weber
  14. Risk Spillovers and Hedging: Why Do Firms Invest Too Much in Systemic Risk? By Willems, Bert; Morbee, J.
  15. Revitalizing the Export-Import Bank By Gary Clyde Hufbauer; Meera Fickling; Woan Foong Wong
  16. Rent-Seeking Origins of Central Banks: The Case of the Federal Reserve System By Tomáš Otáhal
  17. Credit Conditions and the Real Economy: The Elephant in the Room By Muellbauer, John; Williams, David M
  18. Bank Bailouts, International Linkages and Cooperation By Friederike Niepmann; Tim Schmidt-Eisenlohr
  19. The State of Microfinance in India: Emergence, Delivery Models and Issues By Vikas Batra; Sumanjeet

  1. By: Marcel Boyer; M. Martin Boyer; René Garcia
    Abstract: We characterize a firm as a nexus of activities and projects with their associated cash flow distributions across states of the world and time periods. We propose a characterization of the firm where variations in the market price of risk induce adjustments in the value-maximizing combination of projects. Changing the portfolio of projects generates coordination costs. We propose a new role for financial risk management based on the idea that the use of financial derivatives may reduce coordination costs. We find empirical support for this new rationale for the use of financial derivatives, after controlling for the traditional variables explaining the need for financial risk management. <P>Nous caractérisons une entreprise comme un ensemble d'activités et de projets avec leurs flux financiers par état et période. Nous proposons une caractérisation de l'entreprise où les variations dans le prix de marché du risque induisent des ajustements dans la combinaison optimale d’activités ou de projets. Les modifications du portefeuille de projets génèrent des coûts de coordination. Nous proposons un nouveau rôle pour la gestion financière des risques en proposant que l'utilisation de titres financiers puisse réduire les coûts de coordination. Ce nouveau rôle de la gestion financière des risques est vérifié empiriquement, une fois pris en compte les facteurs explicatifs traditionnels de la gestion financière des risques.
    Keywords: Risk Management, firm value, coordination problems, hedging, value at risk., Gestion des risques, valeur d’entreprise, problèmes de coordination, hedging, valeur à risque.
    Date: 2011–05–01
  2. By: Lanau, Sergi (International Monetary Fund)
    Abstract: This paper studies the relationship between domestic financial regulation and the incentive of non-banks to borrow from banks abroad using BIS banking data in a gravity framework. Conditional on a large set of macroeconomic controls, we find that under tighter domestic financial regulation non-banks borrow more abroad. Non-banks in a country on the upper quartile of a financial deregulation index borrow 21%–28% more than non-banks in a country with minimum regulation. The finding also holds for more disaggregated regulation measures. Interest rate controls and entry barriers to the banking sector are the most relevant types of regulation. The results in this paper indicate that international borrowing and lending is a prominent element to be taken into account in designing financial stability tools.
    Keywords: Bank regulation; cross-border banking
    JEL: G15 G28
    Date: 2011–05–31
  3. By: Perlin, Marcelo (Professor Adjunto - Escola de Administração (Federal University of Rio Grande do Sul, Brazil)); Schanz, Jochen (Bank of England)
    Abstract: When settling their own liabilities and those of their clients, settlement banks rely on incoming payments to fund a part of their outgoing payments. We investigate their behaviour in CHAPS, the United Kingdom’s large-value payment system. Our estimates suggest that in normal times, banks increase their payment outflows when their liquidity is above target and immediately following the receipt of payments. We use these estimates to determine the robustness of this payment system to two hypothetical behavioural changes. In the first, a single bank stops sending payments, perhaps because of an operational problem. In the second, it pays out exactly what it previously received, relying exclusively on the liquidity provided by other system members. Using the observed uncertainty around our estimated behavioural equations, we derive probabilistic statements about the time at which the bank’s counterparties would run out of liquidity if they followed their estimated normal-time behaviour.
    Keywords: Payment systems; banks; network models; contagion; systemic risk; liquidity risk
    JEL: G21
    Date: 2011–05–31
  4. By: Leo de Haan; Jan Willem van den End
    Abstract: The crisis of 2007-2009 has shown that financial market turbulence can lead to huge funding liquidity problems for banks. This paper provides empirical evidence on banks’ responses to wholesale funding shocks, using data of seventeen of the largest Dutch banks over the period January 2004 to April 2010. The dynamic interrelations among instruments of bank liquidity management are modelled in a panel Vector Autoregressive (p-VAR) framework. Orthogonalized impulse responses reveal that banks respond to a negative funding liquidity shock in a number of ways. First, banks reduce lending, especially wholesale lending. Second, banks hoard liquidity in the form of liquid bonds and central bank reserves. Third, banks conduct fire sales of securities, especially equity. We also find that fire sales are triggered by liquidity constraints rather than by solvency constraints.
    Keywords: Banks; Funding; Liquidity; Banking crisis
    JEL: G21 G32
    Date: 2011–04
  5. By: Deborah Gefang (Department of Economics, University of Lan~~#badcaster); Gary Koop (Department of Economics, University of Strathclyde); Simon Potter (Research and Statistics Group, Federal Reserve Bank of New York)
    Abstract: This paper develops a structured dynamic factor model for the spreads between London Interbank O¤ered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which relect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 financial crisis were largely driven by liquidity risk. However, credit risk played a more significant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.
    Keywords: LIBOR-OIS spread, factor model, credit default swap, Bayesian
    JEL: C11 C22 G21
    Date: 2011–04
  6. By: Enrico Perotti; Javier Suarez
    Abstract: This paper discusses liquidity regulation when short-term funding enables credit growth but generates negative systemic risk externalities. It focuses on the relative merit of price versus quantity rules, showing how they target different incentives for risk creation. When banks differ in credit opportunities, a Pigovian tax on short-term funding is efficient in containing risk and preserving credit quality, while quantity-based funding ratios are distorsionary. Liquidity buffers are either fully ineffective or similar to a Pigovian tax with deadweight costs. Critically, they may be least binding when excess credit incentives are strongest. When banks differ instead mostly in gambling incentives (due to low charter value or overconfidence), excess credit and liquidity risk are best controlled with net funding ratios. Taxes on short-term funding emerge again as efficient when capital or liquidity ratios keep risk shifting incentives under control. In general, an optimal policy should involve both types of tools.
    Keywords: liquidity requirements; liquidity risk; liquidity risk levies; macroprudential regulation; systemic risk
    JEL: G21 G28
    Date: 2011–04
  7. By: Gopinath, Shyamala (Asian Development Bank Institute)
    Abstract: This paper provides an overview of the Reserve Bank of India's approach to macroprudential regulation and systemic risk management, and reviews lessons drawn from the Indian experience. It emphasizes the need for harmonization of monetary policy and prudential objectives, which may not be possible if banking supervision is separated from central banks. It also notes that supervisors need to have the necessary independence and flexibility to act in a timely manner on the basis of available information. Macroprudential regulation is an inexact science with limitations and needs to be used in conjunction with other policies to be effective.
    Keywords: macroprudential regulation; systemic risk management; monetary policy; banking supervision; central banks
    JEL: E52 E58 G28
    Date: 2011–06–06
  8. By: NEMOTO Tadanobu; OGURA Yoshiaki; WATANABE Wako
    Abstract: In this paper, we report the findings from an interview survey on the system and process of lending decisions and loan pricing, as well as the information that is used in such processes. The survey targeted 19 regional financial institutions, including regional banks and cooperative institutions in Japan. We found that soft information is used in lending decisions but is rarely used directly in loan pricing, and found that each branch exercises greater discretion in loan pricing. Soft information affects loan pricing indirectly through each bank's internal credit rating process. Loan officers at a bank usually revise the financial statements submitted by client firms using soft information in order to more accurately reflect the actual conditions.
    Date: 2011–05
  9. By: Ritha Sukadi Mata
    Abstract: This paper is devoted to the analysis of liquidity risk in microfinance. Using a re-sampling method, we estimate withdrawal rate distributions for migrants’ and locals’ deposits, using an original database of 7,828 deposit contracts issued between 2002 and 2008 by 12 village banks belonging to a major Malian rural microfinance network (PASECA-Kayes). Results show that migrants tend more than locals to default on their deposit contracts. The deposits at risk are also higher when considering migrants’ time deposits compared to locals’ deposits. The liquidity risk associated to migrants’ deposits is then higher compared to locals’ deposits. The article gives an insight on the opportunity migrants’ money (including remittances) could represent for the microfinance industry as a source of stable medium- and long-term funds.
    Keywords: Liquidity risk; Deposits withdrawals; Migrants; Microfinance
    JEL: G21 G32 O16
    Date: 2011–05
  10. By: Anton Korinek (University of Maryland, College Park, 4118F Tydings Hall, MD 20742, USA.)
    Abstract: This paper analyzes the efficiency of risk-taking decisions in an economy that is prone to systemic risk, captured by financial amplification effects that occur in response to strong adverse shocks. It shows that decentralized agents who have unconstrained access to a complete set of Arrow securities choose to expose themselves to such risk to a socially inefficient extent because of pecuniary externalities that are triggered during financial amplification. The paper develops an externality pricing kernel that quantifies the state-contingent magnitude of such externalities and provides welfare-theoretic foundations for macro-prudential policy measures to correct the distortion. Furthermore, it derives conditions under which agents employ ex-ante risk markets to fully undo any expected government bailout. Finally, it finds that constrained market participants face socially insufficient incentives to raise more capital during episodes of financial amplification. JEL Classification: E44, G13, G18, D62, H23.
    Keywords: financial amplification, systemic risk, systemic externalities, externality pricing kernel, macroprudential regulation, bailout neutrality.
    Date: 2011–06
  11. By: Sodjahin, Amos Aristide
    Abstract: Le risque de crédit sur le marché obligataire se matérialise par le possible défaut d’une contrepartie, mais aussi par l’évolution du spread consécutive à une détérioration perçue par le marché de la qualité de crédit de l’émetteur. Cette thèse s’intéresse aux spreads de crédit sur le marché des obligations privées en euro. A la suite du chapitre introductif qui présente certains faits stylisés qui caractérisent l’évolution des spreads de crédit sur ce marché, le reste de la thèse est organisée en trois études empiriques.La première étude propose une modélisation de la variance conditionnelle des spreads dans un cadre non gaussien. A partir de modèles statistiques de type GARCH, nous discutons le choix de la loi de distribution conditionnelle des innovations, capable de rendre compte de l’asymétrie et de l’excès de kurtosis observés. Le modèle EGARCH associé à la distribution Skewed-GED semble intéressant pour caractériser la dynamique des spreads et offre une meilleure prévision de leur volatilité. Se fondant sur les modèles structurels d’évaluation de la dette risquée, la deuxième étude examine l’influence des conditions de marché sur les spreads de crédit. Indépendamment de la situation financière de la firme émettrice, les primes de risque semblent dépendre des taux d’intérêt, de l’état du marché des actions, du marché des changes ainsi que de liquidité des titres. Enfin, la troisième étude est consacrée à l’examen de l’effet des annonces sur les spreads de crédit. Les investisseurs semblent accorder de l’importance aux publications de chiffres américains. Les spreads des émetteurs les plus risqués sont plus affectés, surtout en périodes de crises.
    Abstract: The credit risk on the bond market is characterized by the possible default of a counterparty, but also by changes in the spread following a perceived deterioration, by the market, of the credit quality of the issuer. This thesis focuses on credit spreads on corporate bond market in euros. Following the introductory chapter that presents some stylized facts that characterize the dynamic of credit spreads in this market, the rest of the thesis is organized in three empirical studies. The first study proposes a model of the conditional variance of spreads in a non-Gaussian setting. Within the GARCH family models, we discuss the choice of the conditional distribution of innovations that is able to account for the asymmetry and excess kurtosis observed. The model associated with skewed generalized error distribution (Skewed-GED) seems to characterize the dynamic of credit spreads and performs well in terms of out-of-sample volatility forecast. From the structural models of risky debt, the second study examines the influence of market conditions on credit spreads. Regardless of the financial situation of the bond issuer, risk premiums seem to depend on interest rates, the state of the stock market, the foreign exchange market and the liquidity of the securities. The third study is devoted to examining the effect of macroeconomic news on credit spreads. Investors seem to attach greater importance to the releases of American’s indicators. The spreads of riskier issuers are more affected, especially in times of crisis.
    Keywords: Credit spread in euro; asymmetric effects; conditional probability distribution; volatility forecast; market factor; macroeconomic news; market expectation; financial crisis; Spread de crédit en euro; effets d’asymétrie; distribution de lois conditionnelles; prévision de volatilité; conditions de marché; annonces macroéconomiques; attentes du marché; crises financières;
    JEL: C32 G12 G32
    Date: 2011–01
  12. By: Jan Willem Slingenberg; Jakob de Haan
    Abstract: This paper uses a Financial Stress Index (FSI) for 13 OECD countries to examine which variables can help predicting financial stress. A stress index measures the current state of stress in the financial system and summarizes it in a single statistic. We employ three criteria for indicators to be used in constructing a multi-country FSI (the index covers the entire financial system, indicators used are available at a high frequency for many countries for a long period, and are comparable) to come up with our FSI. Our results suggest that financial stress is hard to predict. Only credit growth has predictive power for most countries. Several other variables have predictive power for some countries, but not for others.
    Keywords: financial stress index; predicting financial stress
    JEL: E5 G10
    Date: 2011–04
  13. By: Günter Franke (Department of Economics, University of Konstanz, Germany); Thomas Weber (Axpo Holding AG (Baden) Aargau, Switzerland)
    Abstract: This paper empirically investigates the tranching and tranche pricing of European securitization transactions of corporate loans and bonds. Tranching allows the originator to issue bonds with strong quality differences and thereby attract heterogeneous investors. We find that the number of differently rated tranches in a transaction is inversely related to the quality of the underlying asset pool. Credit spreads on tranches in a transaction are inversely related to the number of tranches. The average price for transferring a unit of expected default risk, paid in a transaction, is inversely related to the default probability of the underlying asset pool. The average price, paid for a tranche, increases with the rating of the tranche, it is higher for the lowest rated tranche and very high for AAA-tranches in true sale-transactions. It varies little across butterfly spreads obtained from rated tranches except for the most senior spread.
    Keywords: Securitization, information asymmetries, tranching of asset portfolios, risk premiums of tranches
    JEL: G12 G14 G24
    Date: 2011–02–28
  14. By: Willems, Bert; Morbee, J. (Tilburg University, Center for Economic Research)
    Abstract: In this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with incomplete financial markets which limit risk-sharing between market actors. Investments in productive assets affect the distribution of equilibrium prices and quantities, and create risk spillovers. From a societal perspective, entrants underinvest in technologies that would reduce systemic sector risk, and may overinvest in risk-increasing technologies. The inefficiency is shown to disappear when a complete financial market of tradable risk-sharing instruments is available, although the introduction of any individual tradable instrument may actually decrease efficiency. We therefore believe that sectors without well-developed financial markets will benefit from sector-specific regulation of investment decisions.
    Keywords: investments in productive assets;hedging;systemic risk;risk spillovers
    JEL: L51 L97 H23 G11
    Date: 2011
  15. By: Gary Clyde Hufbauer (Peterson Institute for International Economics); Meera Fickling (Peterson Institute for International Economics); Woan Foong Wong (Peterson Institute for International Economics)
    Abstract: Trade finance will play a crucial role in President Barack Obama's goal of doubling US exports by 2015. Almost 90 percent of exports depend on trade finance in some form—direct credit, credit insurance, or loan guarantees. Even though official export credit agencies (ECAs), including the US Export-Import Bank (Ex-Im Bank), play a small part in the whole scheme of export finance, they occupy a crucial niche. They are "lenders of last resort," taking risks shunned by the private market. Ex-Im Bank is up for reauthorization in 2011, so this is a good time to review its prospects and mandate. As new authorization legislation is drafted, the authors recommend that Congress address seven policy issues: (1) enlarge the Ex-Im Bank's funding level to the point where it can finance 5 percent of US exports of goods and services; (2) draw private banks to play a more active role in financing exports of small and medium-sized enterprises; (3) cut the local content requirement from the bank's current level of 85 percent to a maximum of 50 percent; (4) authorize the Ex-Im Bank to support both service components of merchandise exports and stand-alone services exports in a manner similar to the approach of other ECAs; (5) repeal the cargo preference requirement; (6) move the determination of "adverse economic impact" to the US International Trade Commission and limit the review to countries that are subject to antidumping duties, countervailing duties, and safeguard orders; and (7) use concerted pressure to bring China into the OECD Arrangement on Officially Supported Export Credits.
    Date: 2011–06
  16. By: Tomáš Otáhal (Department of Economics, FBE MENDELU in Brno)
    Abstract: What were the purposes for establishment of central banks? Central banks are historically relatively young organizations. Their main purposes are to regulate money supply through interest rates, regulate the banking sector and act as a lender of last resort to banking sector during the time of financial crises. Historical evidence suggests that in the second half of 19th century in the USA private clearing houses were able to provide the banking sector with similar services. In this paper, we follow such evidence and provide Public Choice explanation for establishment of central banks. On the historical example of establishment of the Federal Reserve System we show that the motivation for establishment of the Federal Reserve System might be rather political instead of economic. More precisely, we argue that the Federal Reserve System was established to allow the American Federal Government to control rent- distribution through money supply control and banking sector regulation.
    Keywords: Federal Reserve System, financial markets institutions, historical example, rent-seeking
    JEL: D72 D73 N21 E42 E58
    Date: 2011–04
  17. By: Muellbauer, John; Williams, David M
    Abstract: Changes in credit market architecture are an important but unobservable structural influence on economic activity. For Australian data, we model non-price credit supply conditions within equilibrium correction models of consumption, house prices, mortgage credit and housing equity withdrawal. Our "latent interactive variable equation system" (LIVES) employs a single latent variable to capture evolutionary shifts (in credit conditions) that affect not only the intercept of each equation, but also interact with key economic variables. We show that credit conditions impact on consumption by: (i) lowering the mortgage downpayment constraint facing young households; (ii) introducing a housing collateral channel from house prices to real activity; and (iii) facilitating intertemporal consumption smoothing.
    Keywords: Consumption; credit conditions; house prices; wealth
    JEL: E21 E44 G21 R31
    Date: 2011–05
  18. By: Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: Financial institutions are increasingly linked internationally. As a result, financial crisis and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses and intra- and intercountry income inequality, in the noncooperative game between governments there are inefficiencies due to externalities, no burden sharing and free-riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.
    Keywords: Portfolio choice, international transmission of shocks, monetary policy
    JEL: F31 F41
    Date: 2010–11
  19. By: Vikas Batra (Amity University, Noida, India); Sumanjeet (University of Delhi, India)
    Abstract: In the recent time microfinance has received increased attention among the researchers and financial service providers, as a good alternative in the rural credit market. Various studies revealed that microfinance is a powerful instrument for poverty alleviation, enabling the poor to accumulate the assets, boost their incomes, and reduce their economic vulnerability. There are various opinions about the micro credit demand in India. M-CRIL, a leading micro-credit rating agency provides a conservative estimate for the annual demand at Rs. 480 billion based on 60-70 million poor families with an average household credit demand of Rs. 8,000 (less than $160). In the growing market, to meet this huge demand we require the systems and approaches with comprehensive financial inclusiveness. Within this context, the Self-Help Groups (SHGs) movement in India and particularly the SGSY, SHG-Bank Linkage Programme (SBLP) of the National Bank of Rural and Agriculture Development (NABARD), various MFIs and community based organizations present the rich experience. The present paper explores the role of and performance of various delivery models of microfinance in India. Further the paper explores some issues like outreach, impact, efficiency, sustainability and financial inclusions.
    Date: 2011–04

This issue is ©2011 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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