New Economics Papers
on Banking
Issue of 2011‒06‒25
eleven papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk By Viral V. Acharya; Itamar Drechsler; Philipp Schnabl
  2. International Taxation and Cross-Border Banking By Huizinga, H.P.; Voget, J.; Wagner, W.B.
  3. Does Customer Relationship Management Matter in the Banking System? The Case of Iran By Dehghan Nejad, Omid
  4. The history of interbank settlement arrangements: exploring central banks’ role in the payment system By Norman, Ben; Shaw, Rachel; Speight, George
  5. Evidence for Dynamic Contracts in Sovereign Bank Lending By Peter Benczur; Cosmin Ilut
  6. Government Policy, Credit Markets and Economic Activity By Lawrence Christiano; Daisuke Ikeda
  7. Natural Barrier to Entry in the Credit Rating Industry By Jeon, Doh-Shin; Lovo, Stefano
  8. Forecasting Value-at-Risk Using Nonlinear Regression Quantiles and the Intra-day Range By Cathy W. S. Chen; Richard Gerlach; Bruce B. K. Hwang; Michael McAleer
  9. CDS as Insurance: Leaky Lifeboats in Stormy Seas By Stephens, Eric; Thompson, James
  10. Trade Credit Contracts By Leora F. Klapper; Luc Laeven; Raghuram Rajan
  11. Why Use ROSCAs When You Can Use Banks? Theory and Evidence from Ethiopia By Kedir, Abbi M.; Disney, Richard; Dasgupta, Indraneel

  1. By: Viral V. Acharya; Itamar Drechsler; Philipp Schnabl
    Abstract: We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy by ameliorating the under-investment problem of the financial sector. However, increasing taxation of the non-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the sovereign's creditworthiness. This deterioration feeds back onto the financial sector, reducing the value of its guarantees and existing bond holdings and increasing its sensitivity to future sovereign shocks. We provide empirical evidence for this two-way feedback between financial and sovereign credit risk using data on the credit default swaps (CDS) of the Eurozone countries for 2007-10. We show that the announcement of financial sector bailouts was associated with an immediate, unprecedented widening of sovereign CDS spreads and narrowing of bank CDS spreads; however, post-bailouts there emerged a significant co-movement between bank CDS and sovereign CDS, even after controlling for banks' equity performance, the latter being consistent with an effect of the quality of sovereign guarantees on bank credit risk.
    JEL: D62 E58 G21 G28 G38
    Date: 2011–06
  2. By: Huizinga, H.P.; Voget, J.; Wagner, W.B. (Tilburg University, Center for Economic Research)
    Abstract: This paper examines empirically how international taxation affects the volume and pricing of cross-border banking activities for a sample of banks in 38 countries over the 1998-2008 - period. Home country corporate income taxation of foreign-source bank income is found to reduce banking-sector FDI. Furthermore, such taxation is almost fully passed on into higher interest margins charged abroad. These results imply that international double taxation distorts the activities of international banks, and that the incidence of international double taxation of banks is on bank customers in the foreign subsidiary country. Our analysis informs the debate about additional taxation of the financial sector that has emerged in the wake of the recent financial crisis.
    Keywords: Cross-border banking;International taxation;Interest margins.
    JEL: G21 F23 H25
    Date: 2011
  3. By: Dehghan Nejad, Omid
    Abstract: In the last few years, the Iranian banking system has consistently ignored customer-orientation and its fundamental. Therefore, the banking system has not been able to use recent modern marketing very well, because of various economic and social problems such as the governmental banking system and the excess of the demand rate over supply. People do not have any incentive to use Iranian banking system, because banking system do not pay attention to their priority values and needs and just present similar services in all branches of country’s banks. Therefore, the customers refer to the banks inevitably to satisfy their elementary needs, in other words it should said that, in the current situation the people serve the banks, not the banks serve people. Regarding the environmental changes that are front of us, the banks should emphasize on its equipping, recognizing the customer’s need and expectations and regard to market situation. Because every bank can recognize and secure these needs before rivals will success in the competition field. This study attempted to analysis the role of customer communication management in Iranian banks and its weakness, strengths and goals, in addition, its executing effects and the basic role of customer as a basic and critical element for remaining the banking system. Finally, some suggestions present for reforming and improving the quality of services in the banking system.
    Keywords: Customer Relationship Management, customer, satisfaction, services
    JEL: G2 O32 J53 J5
    Date: 2011–06–05
  4. By: Norman, Ben (Bank of England); Shaw, Rachel (Bank of England); Speight, George (Bank of England)
    Abstract: Modern central banks have come to view payment systems as a key area of strategic interest, both as part of their responsibilities for financial stability and for the implementation of monetary policy. By considering the evolution of interbank settlement arrangements and central banking functions in the context of a number of diverse historical country case studies, this paper seeks to improve understanding of the development of, and reasons for, central banks’ current roles. Starting from a situation where the earliest banks gradually began to accept claims on each other, banks introduced a variety of innovations to clear and settle between themselves more efficiently. Focusing particularly on the lender of last resort function – a key characteristic of a central bank – this paper explores whether institutions at the centre of clearing and settlement arrangements developed central bank-like characteristics.
    Keywords: Monetary history; central banking; payments clearing and settlement
    JEL: N21 N23
    Date: 2011–06–13
  5. By: Peter Benczur; Cosmin Ilut
    Abstract: This paper presents direct evidence for self-enforcing dynamic contracts in sovereign bank lending. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems on current spreads (a "punishment" effect in prices) from an indirect effect through higher expected future default probabilities. Such a punishment provides positive surplus to lenders after a default, a feature that characterizes dynamic contracts. Using data on bank loans to developing countries between 1973-1981 and constructing continuous variables for credit history, we find evidence that most of the influence of past repayment problems is through the direct, punishment channel.
    Keywords: reputation, dynamic contracts, sovereign bank loan spreads, rational expectations, default risk
    JEL: C73 D86 F34 G12 G14 G15
    Date: 2011
  6. By: Lawrence Christiano; Daisuke Ikeda
    Abstract: The US government has recently conducted large scale purchases of assets and implemented policies that reduced the cost of funds to financial institutions. Arguably these policies have helped to correct credit market dysfunctions, allowing interest rate spreads to shrink and output to begin a recovery. We study four models of financial frictions which explore di¤erent channels by which these e¤ects might have occured. Recent events have sparked a renewed interest in leverage restrictions and the consequences of bailouts of the creditors of banks with under-performing assets. We use two of our models to consider the welfare and other effects of these policies.
    JEL: E42 E58 E63
    Date: 2011–06
  7. By: Jeon, Doh-Shin; Lovo, Stefano
    Abstract: We present an infinite horizon model that studies the competition between a relatively ineffective incumbent Credit Rating Agency (CRA) and a sequence of entrant CRAs that are potentially more e¤ective but whose ability in appraising default risk is unproven at the time they enter the market. We show that free entry competition in the credit rating business fails in selecting the most competent CRA as long as two conditions are met. First, investors and issuers trust the incumbent CRA to provide a sincere, although imperfect, assessment of issuersdefault risk. Second, CRAs cannot charge higher fees for low rating than for high rating. Under these conditions a rather incompetent CRA can dominate the market without being worried about potentially more competent entrants. We derive policy implications.
    JEL: D82 G29 L11 L13 L15
    Date: 2011–05–10
  8. By: Cathy W. S. Chen (College of Business, Feng Chia University); Richard Gerlach (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics), Erasmus Universiteit); Bruce B. K. Hwang (Graduate Institute of Statistics and Actuarial Science, Feng Chia University); Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics) Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).)
    Abstract: Value-at-Risk (VaR) is commonly used for financial risk measurement. It has recently become even more important, especially during the 2008-09 global financial crisis. We pro- pose some novel nonlinear threshold conditional autoregressive VaR (CAViaR) models that incorporate intra-day price ranges. Model estimation and inference are performed using the Bayesian approach via the link with the Skewed-Laplace distribution. We examine how a range of risk models perform during the 2008-09 financial crisis, and evaluate how the crisis aects the performance of risk models via forecasting VaR. Empirical analysis is conducted on five Asia-Pacific Economic Cooperation stock market indices as well as two exchange rate series. We examine violation rates, back-testing criteria, market risk charges and quantile loss function values to measure and assess the forecasting performance of a variety of risk models. The proposed threshold CAViaR model, incorporating range information, is shown to forecast VaR more eficiently than other models, across the series considered, which should be useful for financial practitioners.
    Keywords: Individual forecasts, mean forecasts, efficient estimation, generated regressors, replicable forecasts, non-replicable forecasts, expert intuition.
    JEL: C53 C22 E27 E37
    Date: 2011
  9. By: Stephens, Eric (University of Alberta, Department of Economics); Thompson, James (University of Waterloo, School of Accounting and Business)
    Abstract: In this paper we update the traditional insurance economics framework to incorporate key features of the credit default swap (CDS) market. First, we allow for insurer insolvency, with asymmetric information as to its probability. We find that stable insurers become less stable because they are forced to compete on price. When insurer type is known, increased competition among insurers can create instability for the same reason. Second, we allow the insured party to have heterogeneous motivations for purchasing CDS. For example, some may own the underlying asset and purchase CDS for risk management, while others buy these contracts purely for speculation. We show that speculators will choose to contract with less stable insurers, resulting in higher counterparty risk in this market relative to that of traditional insurance; however, a regulatory policy that disallows speculative trading can, perversely, cause market counterparty risk to increase. Third, we relax the standard assumption of contract exclusivity, which does not apply to the CDS market, by allowing the insured to purchase contracts from many insurers. In contrast to the traditional insurance model, we show that separation of risk type among insured parties can be achieved through insurer choice. We use our model to shed light on the debate over Central Counterparties (CCP). We show that requiring CDS contracts to be negotiated through CCPs can push stable insurers out of the market, mitigating the benefi t of risk pooling.
    Keywords: credit default swaps; insurance; counterparty risk; banking; regulation
    JEL: D82 G18 G21 G22
    Date: 2011–06–16
  10. By: Leora F. Klapper; Luc Laeven; Raghuram Rajan
    Abstract: We employ a novel dataset on almost 30,000 trade credit contracts to describe the broad characteristics of the parties that contract together, the key contractual terms such as the discount for early payment and the days by when payment is due. Whereas prior work has typically used information on only one side of the buyer-seller transaction, this paper utilizes information on both. We find that the largest and most creditworthy buyers receive contracts with the longest maturities from smaller suppliers, with the latter extending credit to the former perhaps as a way of certifying product quality. Discounts for early payment seem to be offered to riskier buyers to limit the potential nonpayment risk when credit is extended for these non-financial reasons.
    JEL: G32
    Date: 2011–06
  11. By: Kedir, Abbi M. (University of Leicester); Disney, Richard (University of Nottingham); Dasgupta, Indraneel (Centre for Studies in Social Sciences, Calcutta)
    Abstract: Much of the existing literature on the use of informal credit arrangements such as ROSCAs (Rotating and Credit Saving Associations) theorises the use of such institutions as arising from market failures in the development of formal saving and credit mechanisms. As economic development proceeds, formal institutions might therefore be expected to displace ROSCAs. We show, using household data for Ethiopia, that in fact use of formal institutions and ROSCAs can co-exist, even in the same household. We examine usage of both formal and informal institutions across the household income gradient, and provide a theoretical model consistent with these empirical facts.
    Keywords: household saving, credit institutions, ROSCAs, Ethiopia
    JEL: O16 O17
    Date: 2011–06

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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