New Economics Papers
on Banking
Issue of 2011‒06‒18
23 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Revenue diversification in emerging market banks: implications for financial performance By Saoussen Ben Gamra; Dominique Plihon
  2. A Model of Shadow Banking By Nicola Gennaioli; Andrei Shleifer; Robert W. Vishny
  3. Bank optimal portfolio risk level under various regulatory requirements By Alexandra Girod; Olivier Bruno
  4. Paradigm shift? A critique of the IMF’s new approach to capital controls By Daniela Gabor
  5. Communication, Lending Relationship and Collateral. By Serra Garcia, M.
  6. Bank relationships, business cycles, and financial crisis By Galina Hale
  7. Banking Instability and Deposit Insurance: The Role of Moral Hazard By Ngalawa, Harold; Tchana Tchana, Fulbert; Viegi, Nicola
  8. A note on bank lending in times of large bank reserves By Antoine Martin; James McAndrews; David Skeie
  9. Cross-border bank lending to selected SEACEN economies: an integrative report By Pontines, Victor; Siregar, Reza Yamora
  10. Financial Frictions and Credit Spreads By Ke Pang; Pierre L. Siklos
  11. The Bank of North Dakota: a model for Massachusetts and other states? By Yolanda K. Kodrzycki; Tal Elmatad
  12. Volatility Patterns of CDS, Bond and Stock Markets Before and During the Financial Crisis – Evidence from Major Financial Institutions By Ansgar Belke; Christian Gokus
  13. On the Impossibility of Fair Risk Allocation By Peter Csoka; Miklos Pinter
  14. The optimal width of the central bank standing facilities corridor and banks' day-to-day liquidity management By Ulrich Bindseil; Juliusz Jabłecki
  15. Are credit default swaps associated with higher corporate defaults? By Stavros Peristiani; Vanessa Savino
  16. The quality of FHA lending in Pennsylvania, New Jersey, and Delaware By Community Development Studies; Education Department
  17. The rise of emerging markets' financial market architecture: constituting new roles in the global financial goverancen By Metzger, Martina; Taube, Günther
  18. Who Borrows and Who May Not Repay? By Alena Bicakova; Zuzana Prelcova; Renata Pasalicova
  19. Bank bailouts in a global economy: the challenges for international cooperation By Friederike Niepmann
  20. The Availability and Utilization of 401(k) Loans By John Beshears; James J. Choi; David Laibson; Brigitte C. Madrian
  21. FHA lending activity in the past decade: a national overview By Community Development Studies; Education Department
  22. Adopting, using, and discarding paper and electronic payment instruments: variation by age and race By Ronald J. Mann
  23. Regulatory Competition in European Corporate and Capital Market Law: An Empirical Analysis By Hornuf, Lars

  1. By: Saoussen Ben Gamra (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234); Dominique Plihon (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234)
    Abstract: Shaped by structural forces of change, banking in emerging markets has recently experienced a decline in its traditional activities, leading banks to diversify into new business strategies. This paper examines whether the observed shift into non-interest based activities improves financial performance. Using a sample of 714 banks across 14 East-Asian and Latin-American countries over the post 1997-crisis changing structure, we find that diversification gains are more than offset by the cost of increased exposure to the non-interest income, specifically by the trading income volatility. But this diversification performance's effect is found to be no linear with risk, and significantly not uniform among banks and across business lines. An implication of these findings is that banking institutions can reap diversification benefits as long as they well-studied it depending on their specific characteristics, competences and risk levels, and as they choose the right niche.
    Keywords: Diversification revenue; non-interest income; bank performance; emerging markets
    Date: 2011
  2. By: Nicola Gennaioli; Andrei Shleifer; Robert W. Vishny
    Abstract: We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.
    JEL: E44 G21
    Date: 2011–06
  3. By: Alexandra Girod (University of Nice); Olivier Bruno (University of Nice)
    Date: 2011–03
  4. By: Daniela Gabor (University of the West of England)
    Abstract: The global financial crisis forcefully highlighted the importance of developing mechanisms to curb the effects of large and volatile capital inflows on growth and financial stability in developing countries. It led the IMF to reconsider its long-standing rejection of capital controls. This paper explores the analytical framework underlying the IMF’s new position, arguing that its sequencing strategy offers a formulaic solution that neglects the institutional make-up of money and currency markets, is asymmetric in its emphasis on the upturn of the liquidity cycle and sanctions capital-controls only as a last-resort solution. The new approach can have perverse impacts, increasing vulnerability where banks play an important role in the intermediation of capital inflows. The paper offers alternative policy solutions that focus on realigning bank incentives towards longer horizons and sustainable growth models, combining carefully designed central bank liquidity strategies and institutional changes in the banking sector.
    Keywords: IMF, capital controls, financial crisis, global liquidity, shadow banks, sterilizations, central banks.
    JEL: E58 E63 F3 G1 O11 O2
    Date: 2011–06
  5. By: Serra Garcia, M. (Universiteit van Tilburg)
    Date: 2011
  6. By: Galina Hale
    Abstract: Recent literature argues that the structure of a banking network is important for its stability. We use network analysis to formally describe bank relationships in the global banking network between 1980 and 2009 and analyze the effects of recessions and banking crises on these relationships. We construct a novel data set that builds a bank-level global network from loan-level data on syndicated loans to financial institutions. Our network consists of 7938 banking institutions from 141 countries. We find that the network became more interconnected and more asymmetric, and therefore potentially more fragile, prior to 2008, and that its expansion slowed in recent years, dramatically so during the 2008-09 crisis. We use a stylized model to describe potential effects of banking crises and recessions on bank relationships. Empirically, we find that the structure of a global banking network is not invariant to banking crises nor to recessions, especially those in the United States. While recessions appear to encourage banks to make new connections, especially on the periphery of the network, the global financial crisis of 2008-09 made banks very cautious in their lending, meaning that almost no new connections were made during the crisis, particularly in 2009. We also find that during country-specific recessions or banking crises past relationships become more important as few new relationships are formed.
    Keywords: Banks and banking ; Financial crises
    Date: 2011
  7. By: Ngalawa, Harold; Tchana Tchana, Fulbert; Viegi, Nicola
    Abstract: This paper aims at empirically investigating the role of moral hazard in the e¢ ctivity of deposit insurance in achieving banking stability. If the negative e¤ect of deposit insurance on banking stability is through moral hazard, then deposit insurance will be associated with banking insolvency and credit crunch more than with bank runs. To test this hypothesis, we compute measures of these two types of banking instability. We …nd that deposit insurance per se has no signi…cant e¤ect either on bank insolvency and credit crunch or on bank runs. However, when the deposit insurance is coupled with an increase in credit to private sector, it has a positive and signi…cant e¤ect on bank insolvency and credit crunch but not on bank runs.
    Keywords: Banking Crises; Deposit Insurance; Moral hazard
    JEL: E44 G21
    Date: 2011–06–02
  8. By: Antoine Martin; James McAndrews; David Skeie
    Abstract: The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.
    Date: 2011
  9. By: Pontines, Victor; Siregar, Reza Yamora
    Abstract: This study seeks to address a number of rising policy concerns from the aftermath of the recent subprime crisis. Did foreign bank lending decline sharply and transmit the financial shocks from the advanced economies to the SEACEN emerging markets? Was the decline driven by the drying-up in supply of cross-border loans or more by the sharp decline in the demand for this funding? Does greater exposure of foreign banks to a host country lowered the sensitivity of its claims to shocks originating from their own economies? Do bank claims to a country affected by the aggregate changes in claims to another country? How about the stability of these flows? In short, this study aims to ascertain the various multi-faceted aspects of this international bank lending.
    Keywords: International Bank Claims; Cross-border Lending; Bank Exposure; Subprime crisis; East and Southeast Economies.
    JEL: F34 G15 C23 N25 F36
    Date: 2011–06–10
  10. By: Ke Pang; Pierre L. Siklos
    Abstract: This paper uses the credit-friction model developed by Curdia and Woodford, in a series of papers, as the basis for attempting to mimic the behavior of credit spreads in moderate as well as crisis times. We are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. We then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads, unlike quantitative easing, which has opposite effects. The relative advantage of credit easing becomes even clearer when we allow borrowers to default on their loans. Since increases in default offset the beneficial effects of credit easing on spreads, the policy implication is that, in times of financial stress, the central bank should be aggressive when applying credit easing policies.
    Keywords: Credit easing, credit spread, financial friction, quantitative easing.
    JEL: E43 E44 E51 E58
    Date: 2010–12
  11. By: Yolanda K. Kodrzycki; Tal Elmatad
    Abstract: In 2010, Massachusetts legislators considered whether to create a state-owned bank as a means to address concerns about credit availability and other economic challenges stemming from the financial crisis and Great Recession of 2007-09. In 2011 a commission was established to investigate the feasibility of setting up such an institution. This research report informs the work of that commission. ; The report provides an in-depth examination of the only state-owned bank in the nation, the Bank of North Dakota (BND). It discusses BND’s history and current operations, and analyzes the degree to which the bank stabilizes the state economy, provides local businesses improved access to credit, augments the lending capacity of private banks, and contributes revenues to the state government. The authors conclude that, in recent years, BND’s most important role has been to serve as a lending partner for North Dakota’s numerous small banks, but that its willingness and capacity to offset a serious credit crunch has not been shown, owing to the comparatively limited stresses on North Dakota banks in the recent national crisis and economic downturn. The report estimates that the potential costs of starting up a state-owned bank in Massachusetts could be significant.
    Keywords: Banks and banking - Massachusetts ; Banks and banking - North Dakota
    Date: 2011
  12. By: Ansgar Belke; Christian Gokus
    Abstract: This study is motivated by the development of credit-related instruments and signals of stock price movements of large banks during the recent financial crisis. What is common to most of the empirical studies in this field is that they concentrate on modeling the conditional mean. However, financial time series exhibit certain stylized features such as volatility clustering. But very few studies dealing with credit default swaps account for the characteristics of the variances. Our aim is to address this issue and to gain insights on the volatility patterns of CDS spreads, bond yield spreads and stock prices. A generalized autoregressive conditional heteroscedasticity (GARCH) model is applied to the data of four large US banks over the period ranging from January 01, 2006, to December 31, 2009. More specifically, a multivariate GARCH approach fits the data very well and also accounts for the dependency structure of the variables under consideration. With the commonly known shortcomings of credit ratings, the demand for market-based indicators has risen as they can help to assess the creditworthiness of debtors more reliably. The obtained findings suggest that volatility takes a significant higher level in times of crisis. This is particularly evident in the variances of stock returns and CDS spread changes. Furthermore, correlations and covariances are time-varying and also increased in absolute values after the outbreak of the crisis, indicating stronger dependency among the examined variables. Specific events which have a huge impact on the financial markets as a whole (e.g. the collapse of Lehman Brothers) are also visible in the (co)variances and correlations as strong movements in the respective series.
    Keywords: Bond markets; credit default swaps; credit risk; financial crisis; GARCH; stock markets; volatility
    JEL: C53 G21 G24
    Date: 2011–02
  13. By: Peter Csoka (Institute of Economics - Hungarian Academy of Sciences); Miklos Pinter (Department of Mathematics - Corvinus University of Budapest)
    Abstract: Measuring and allocating risk properly are crucial for performance evaluation and internal capital allocation of portfolios held by banks, insurance companies, investment funds and other entities subject to financial risk. We show that by using coherent measures of risk it is impossible to allocate risk satisfying the natural requirements of (Solution) Core Compatibility, Equal Treatment Property and Strong Monotonicity. To obtain the result we characterize the Shapley value on the class of totally balanced games and also on the class of exact games. Our result can also be seen as a downside of coherent measures of risk.
    Keywords: Coherent Measures of Risk, Risk Allocation Games, Totally Balanced Games, Exact Games, Shapley value, Solution core
    JEL: C71 G10
    Date: 2011–04
  14. By: Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Juliusz Jabłecki (National Bank of Poland and Faculty of Economic Sciences, Warsaw University.)
    Abstract: Containing short-term volatility of the overnight interest rate is normally considered the main objective of central bank standing facilities. This paper develops a simple stochastic model to show how the width of the central bank standing facilities corridor affects banks’ day-to-day liquidity management and the volatility of the overnight rate. It is shown that the wider the corridor, the greater the interbank turnover, the leaner the central bank’s balance sheet (i.e. the lower the average recourse to standing facilities) and the greater short-term interest rate volatility. The obtained relationships are matched with central bank preferences to obtain an optimal corridor width. The model is tested against euro area and Hungarian daily data encompassing the financial crisis that began in 2007. JEL Classification: E4, E5.
    Keywords: standing facilities, money market, liquidity management.
    Date: 2011–06
  15. By: Stavros Peristiani; Vanessa Savino
    Abstract: Are companies with traded credit default swap (CDS) positions on their debt more likely to default? Using a proportional hazard model of bankruptcy and Merton’s contingent claims approach, we estimate the probability of default for U.S. nonfinancial firms. Our analysis does not generally find a persistent link between CDS and default over the entire period 2001-08, but does reveal a higher probability of default for firms with CDS over the last few years of that period. Further, we find that firms trading in the CDS market exhibited a higher Moody’s KMV expected default frequency during 2004-08. These findings are consistent with those of Henry Hu and Bernard Black, who argue that agency conflicts between hedged creditors and debtors would increase the likelihood of corporate default. In addition, our paper highlights other explanations for the higher defaults of CDS firms. Consistent with fire-sale spiral theories, we find a positive link between institutional ownership exposure and corporate distress, with CDS firms facing stronger selling pressures during the recent financial turmoil.
    Date: 2011
  16. By: Community Development Studies; Education Department
    Abstract: The Federal Housing Administration (FHA), an agency within the Department of Housing and Urban Development (HUD), insures mortgage loans made by private lenders. All FHA-insured borrowers pay mortgage insurance as one of the terms of their mortgage loan, and this insurance protects the lender against losses if the borrower defaults. In addition to providing a mortgage guarantee, the FHA single-family loan program has features such as a low down payment and a low minimum credit score that benefit borrowers who may not be able to obtain financing in the conventional market. Because of the FHA’s guarantee, lenders are willing to extend credit to borrowers who might otherwise be excluded from the mortgage market. In recent decades, the FHA single-family home loan program has disproportionately served first-time homebuyers as well as low- and moderate-income (LMI) and minority households.
    Keywords: Mortgage loans ; Housing policy
    Date: 2011
  17. By: Metzger, Martina; Taube, Günther
    Abstract: This paper analyses the impact of the global financial crisis on Brazil, India and South Africa whose financial markets have shown strong resilience to the global financial turmoil. The paper shows, that in contrast to advanced countries in these emerging market economies there is contagion from the real sector through a slump in exports and a decline in industrial production. Although exposure to toxic assets has been very low, financial markets of the economies under consideration have come under pressure in the second half of 2008 resulting in steep stock market corrections, and a strong volatility of prices, in particular exchange rates. However, there was no bail-out of financial institutions and in 2009 financial markets of these countries strongly recovered. The paper identifies a combination of a reduction of foreign debt exposure, a macro-prudential approach in supervision and rule-based approach in regulation complemented by a variety of country-specific rules applied by these countries already before the crisis together with non-orthodox monetary and fiscal policy during the crisis as the main features of their success. The paper concludes that this achievement has already changed policy coordination between advanced countries and emerging markets and will continue to do so both in terms of voice and content.
    Keywords: emerging markets; financial sector resilience; art of supervision; foreign debt; global financial governance;
    JEL: G18 E63
    Date: 2010–10
  18. By: Alena Bicakova; Zuzana Prelcova; Renata Pasalicova
    Abstract: In this paper we use Household Budget Survey data to analyze the evolution of the household credit market in the Czech Republic over the period 2000–2008. While the share of households that borrow remained stable and below 40%, the amount of debt outstanding increased. We estimate a series of models of the determinants of borrowing. We next merge our data with the Statistics on Income and Living Conditions in 2005–2008, which contain direct information on repayment behavior, in order to test the validity of the standard debt burden measure as a predictor of default. We propose an alternative indicator – the adjusted debt burden (ADB), defined as the ratio of loan repayments to discretionary income, constructed as net income minus the living minimum (the minimum cost of living for a given household composition as set by the Czech Statistical Office), which turns out to be a superior predictor of default risk. Limited by the data, we use a fairly broad concept of default, namely, the inability to make loan repayments on time. Based on the distribution of default risk across the levels of the adjusted debt burden, we suggest that a 30% ADB threshold should be used as the definition of overindebtedness, with an average default risk of 17%. Finally, we show that overindebtedness and local economic shocks are closely related, suggesting that default risk should be always considered in the context of regional economic conditions.
    Keywords: Debt burden, household credit, regional default risk, repayment.
    JEL: D12 D14 G21 R29
    Date: 2010–12
  19. By: Friederike Niepmann
    Abstract: Friederike Niepmann and Tim Schmidt-Eisenlohr analyse the balance between financial globalisation, national sovereignty and global cooperation in a crisis
    Date: 2011–03
  20. By: John Beshears; James J. Choi; David Laibson; Brigitte C. Madrian
    Abstract: We document the loan provisions in 401(k) savings plans and how participants use 401(k) loans. Although only about 22% of savings plan participants who are allowed to borrow from their 401(k) have such a loan at any given point in time, almost half had used a 401(k) loan over a longer, seven-year horizon. The probability of having a loan follows a hump-shaped pattern with respect to age, job tenure, account balance, and salary, but conditional on having a loan, loan size as a fraction of 401(k) balances declines with respect to these variables. Participants are less likely to use loans in plans that charge a higher interest rate, and loans are smaller when plans allow fewer simultaneously outstanding loans, impose a shorter maximum possible loan duration, or charge a lower interest rate.
    JEL: D14 D91
    Date: 2011–06
  21. By: Community Development Studies; Education Department
    Abstract: The Federal Housing Administration (FHA), which provides insurance for residential mortgage loans, was established by the National Housing Act of 1934 to stimulate housing demand and, in turn, demand for those who build housing. In the housing boom after World War II, FHA loans helped make mortgage credit more widely available to returning veterans. In recent decades, the FHA, which is now part of the Department of Housing and Urban Development (HUD), has disproportionately served first-time homebuyers as well as low- and moderate-income (LMI) and minority households. The FHA allows low down payments and a low minimum credit score and requires that lenders who make FHA-insured loans carry out extensive loss mitigation efforts on seriously delinquent loans to reduce the incidence of foreclosure.
    Keywords: Mortgage loans ; Global financial crisis
    Date: 2011
  22. By: Ronald J. Mann
    Abstract: This paper uses data from the 2008 Survey of Consumer Payment Choice to discuss the adoption, use, and discarding of various common payment instruments. Using a nationally representative sample of individual-level data, it presents evidence in unparalleled detail about how consumers use different payment instruments. Most interestingly, it displays robust evidence of significant age- and race-related differences in payments choices. Among other things, it suggests that the range of payment instruments adopted and regularly used by blacks is narrower than that chosen by whites, presumably because of relatively limited access to financial institutions. With regard to age, it documents pervasive (and complex) age-related patterns at every step of the decisions to adopt, use, and discard payment instruments.
    Keywords: Payment systems ; Consumer surveys ; Credit cards ; Cash transactions ; Electronic funds transfers
    Date: 2011
  23. By: Hornuf, Lars
    Date: 2011–06–01

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