New Economics Papers
on Banking
Issue of 2011‒07‒02
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. A model of liquidity hoarding and term premia in inter-bank markets By Viral V. Acharya; David Skeie
  2. Bank Behavior in Response to Basel III: A Cross-Country Analysis By Dalia Hakura; Thomas F. Cosimano
  3. Risky Bank Lending and Optimal Capital Adequacy Regulation By Michael Kumhof; Jaromir Benes
  4. Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-financial Linkages Framework By Tao Sun
  5. Impact of the Global Crisis on Banking Sector Soundness in Asian Low-Income Countries By Jack Joo K. Ree
  6. Credit Spead Interdependencies of European States and Banks during the Financial Crisis By Adrian Alter; Yves Stephan Schüler
  7. The Great Liquidity Freeze: What Does It Mean for International Banking? By Domanski, Dietrich; Turner, Philip
  8. Measuring and testing for the systemically important financial institutions By Carlos Castro; Stijn Ferrari
  9. Quantitative easing and bank lending: evidence from Japan By David Bowman; Fang Cai; Sally Davies; Steven Kamin
  10. Pricing Full Deposit Insurance in Germany amidst the Financial Crisis 2008-2010 By Markus R. Kosters; Stefan T.M. Streatmans; Mario Maggi
  11. Returns to scale, productivity and efficiency in US banking (1989-2000): the neural distance function revisited By Panayotis G. Michaelides; Angelos T. Vouldis; Efthymios G. Tsionas
  12. On the geography of international banking: the role of third-country effects By Georgios Fotopoulos; Helen Louri

  1. By: Viral V. Acharya; David Skeie
    Abstract: Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank loans, reflected in the one-month and three-month Libor. We explain such stress by modeling leveraged banks’ precautionary demand for liquidity. Asset shocks impair a bank’s ability to roll over debt because of agency problems associated with high leverage. In turn, banks hoard liquidity and decrease term lending as their rollover risk increases over the term of the loan. High levels of short-term leverage and illiquidity of assets lead to low volumes and high rates for term borrowing. In extremis, inter-bank markets can completely freeze.
    Keywords: Interbank market ; Bank liquidity ; Financial leverage ; Risk management ; Debt ; Bank loans
    Date: 2011
  2. By: Dalia Hakura; Thomas F. Cosimano
    Abstract: This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks’ marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks’ responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks’ net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates.
    Keywords: Bank regulations , Bank supervision , Banking sector , Basel Core Principles , Capital , Commercial banks , Cross country analysis , Developed countries , Economic models , Loans ,
    Date: 2011–05–24
  3. By: Michael Kumhof; Jaromir Benes
    Abstract: We study the welfare properties of a New Keynesian monetary economy with an essential role for risky bank lending. Banks lend funds deposited by households to a financial accelerator sector, and face penalties for maintaining insufficient net worth. The loan contract specifies an unconditional lending rate, which implies that banks can make loan losses. Their main response is to raise lending rates to rebuild net worth. Prudential rules that adjust minimum capital adequacy requirements in response to loan losses significantly increase welfare. But the gains from eliminating limited liability and moral hazard would be an order of magnitude larger.
    Date: 2011–06–06
  4. By: Tao Sun
    Abstract: This paper attempts to identify the indicators that can demonstrate the vulnerabilities in systemically important financial institutions. The paper finds that (i) indicators on leverage, liquidity, and business scope can help identify the differences between the intervened and non-intervened financial institutions during the subprime crisis; (ii) the expected default frequencies react positively to shocks to leverage, inflation, global financial stress, and global excess liquidity, and negatively to return on assets and equity prices; and (iii) leverage has been the most robust factor with a long-run causal effect on the expected default frequencies.
    Keywords: Banking crisis , Banking sector , Credit risk , Economic models , Financial institutions ,
    Date: 2011–05–09
  5. By: Jack Joo K. Ree
    Abstract: The paper takes stock of the impact of the global financial crisis that began in late 2007 on banking sectors of Asian low-income countries, by exploring bank-level data provided by Bankscope. The paper examines three key channels of possible crisis spillovers: exposures to (i) valuation changes of mark-to-market financial assets, (ii) a drop in crossborder funding, and (iii) rises in NPLs prompted by international real economic linkages. The paper finds that despite relatively low financial integration, the impact of the crisis on LIC banks, particularly the largest ones, were not insignificant. Impacts were most palpable through a loan-to-crossborder funding nexus.
    Keywords: Asia , Banking sector , Credit risk , Economic models , Emerging markets , Financial crisis , Financial risk , Global Financial Crisis 2008-2009 , Low-income developing countries , Spillovers ,
    Date: 2011–05–17
  6. By: Adrian Alter (Department of Economics, University of Konstanz, Germany); Yves Stephan Schüler (Department of Economics, University of Konstanz, Germany)
    Abstract: This study analyzes the relationship between the default risk of several European states and financial institutions during the period June 2007 - May 2010. It investigates how this linkage was impacted by government bailout schemes. We consider sovereign credit default swap (CDS) spreads from seven EU countries (France, Germany, Italy, Ireland, Netherlands, Portugal, and Spain) together with a selection of bank CDS series from these states. Long-run and short-run dependencies between states and their domestic banks are studied within a vector error correction framework and additionally considering generalized impulse responses. Our main findings suggest that in the period preceding government interventions the contagion from bank credit spreads disperses into the sovereign CDS market. After government interventions, sovereign spreads are found relatively more important in the price discovery mechanism of banks’ CDS series. Moreover, the variability in linkages between bank and sovereign CDS spreads can be associated with differences in state support measures accessed by each bank. We suggest that country specific characteristics may explain the noticeable differences in outcomes of government interventions.
    Keywords: credit default swaps, private-to-public risk transfer, cointegration, generalized impulse responses.
    JEL: G18 G21
    Date: 2011–05–15
  7. By: Domanski, Dietrich (Asian Development Bank Institute); Turner, Philip (Asian Development Bank Institute)
    Abstract: In mid-September 2008, following the bankruptcy of Lehman Brothers, international interbank markets froze and interbank lending beyond very short maturities virtually evaporated. Despite massive central bank support operations and purchases of key assets, many financial markets remained impaired for a long time. Why was this funding crisis so much worse than other past major bank failures and why has it proved so hard to cure? This paper suggests that much of that answer lies in the balance sheets of international banks and their customers. It outlines the basic building blocks of liquidity management for a bank that operates in many currencies and then discusses how the massive development of foreign exchange (forex) and interest rate derivatives markets transformed banks’ strategies in this area. It explains how the pervasive interconnectedness between major banks and markets magnified contagion effects. Finally, the paper provides some recommendations for how strategic borrowing choices by international banks could make them more stable and how regulators could assist in this process.
    Keywords: banking financial stability; financial markets; international banking; international interbank markets; liquidity management
    JEL: E44 G15 G18 G24 G28
    Date: 2011–06–24
  8. By: Carlos Castro; Stijn Ferrari
    Abstract: This paper analyzes the measure of systemic importance ΔCoVaR proposed by Adrian and Brunnermeier (2009, 2010) within the context of a similar class of risk measures used in the risk management literature. Inaddition, we develop a series of testing procedures, based on ΔCoVaR, toidentify and rank the systemically important institutions. We stress the importance of statistical testing in interpreting the measure of systemic importance. An empirical application illustrates the testing procedures, using equity data for three European banks.
    Date: 2011–06–21
  9. By: David Bowman; Fang Cai; Sally Davies; Steven Kamin
    Abstract: Prior to the recent financial crisis, one of the most prominent examples of unconventional monetary stimulus was Japan's "quantitative easing policy" (QEP). Most analysts agree that QEP did not succeed in stimulating aggregate demand sufficiently to overcome persistent deflation. However, it remains unclear whether QEP simply provided little stimulus, or whether its positive effects were overwhelmed by the contractionary forces in Japan's post-bubble economy. In the spirit of Kashyap and Stein (2000) and Hosono (2006), this paper uses bank-level data from 2000 to 2009 to examine the effectiveness in promoting bank lending of a key element of QEP, the Bank of Japan's injections of liquidity into the interbank market. We identify a robust, positive, and statistically significant effect of bank liquidity positions on lending, suggesting that the expansion of reserves associated with QEP likely boosted the flow of credit. However, the overall size of that boost was probably quite small. First, the estimated response of lending to liquidity positions in our regressions is small. Second, much of the effect of the BOJ's reserve injections on bank liquidity was offset as banks reduced their lending to each other. Finally, the effect of liquidity on lending appears to have held only during the initial years of QEP, when the banking system was at its weakest; by 2005, even before QEP was abandoned, the relationship between liquidity and lending had evaporated.
    Date: 2011
  10. By: Markus R. Kosters (School of Business and Economics, Maastricht University); Stefan T.M. Streatmans (Maastricht research school of Economics of Technology and Organizations); Mario Maggi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: This paper investigates the pricing of full deposit insurance in Germany in the context of its political promise by the German government. We implement the characteristics of the mutual guarantee framework of German banks and the specifics of the German deposit insurance system into a Monte Carlo model. The analysis suggests that banks have an incentive to increase their riskiness if they do not have to bear the fair value of the insurance costs of their deposits. On the other hand, the government should incentivise banks to reduce their size and become more specialized to achieve better diversification in the German banking landscape.
    Keywords: Asset pricing, financial crisis, deposit insurance, mutual guarantee framework
    Date: 2011–05
  11. By: Panayotis G. Michaelides (National Technical University of Athens); Angelos T. Vouldis (Bank of Greece); Efthymios G. Tsionas (Athens University of Economics and Business)
    Abstract: Productivity and efficiency analyses have been indispensable tools for evaluating firms’ performance in the banking sector. In this context, the use of Artificial Neural Networks (ANNs) has been recently proposed in order to obtain a globally flexible functional form which is capable of approximating any existing output distance function while enabling the a priori imposition of the theoretical properties dictated by production theory, globally. Previous work has proposed and estimated the so-called Neural Distance Function (NDF) which has numerous advantages when compared to widely adopted specifications. In this paper, we carefully refine some of the most critical characteristics of the NDF. First, we relax the simplistic assumption that each equation has the same number of nodes because it is not expected to approximate reality with any reasonable accuracy and different numbers of nodes are allowed for each equation of the system. Second, we use an activation function which is known to achieve faster convergence compared to the conventional NDF model. Third, we use a relevant approach for technical efficiency estimation based on the widely adopted literature. Fitting the model to a large panel data we illustrate our proposed approach and estimate the Returns to Scale, the Total Factor Productivity and the Technical Efficiency in US commercial banking (1989-2000). Our approach provides very satisfactory results compared to the conventional model, a fact which implies that the refined NDF model successfully expands and improves the conventional NDF approach.
    Keywords: Output distance function; Neural networks; Technical efficiency; US banks
    JEL: C50 C45 C30
    Date: 2011–03
  12. By: Georgios Fotopoulos (University of Peloponnese and visiting scholar at the Bank of Greece); Helen Louri (Bank of Greece)
    Abstract: International banking is a complex phenomenon. Among its determinants, distance has been found to be critical. But does distance only have a simple negative direct effect? Or is the role of geography more intricate? Applying spatial analysis techniques on BIS data of bank foreign claims in 178 countries in 2006, evidence of positive spatial autocorrelation under alternative spatial weights schemes is brought to light. The geographical aspects of international banking are further explored by a spatial autoregressive gravity model. The results obtained support that the operation of a spatial lag leads to important indirect or third-country effects. Evidence of such financial spillovers is further corroborated by results of a spatial autoregressive Tobit model. Geography is more important than the effect of distance on its own would suggest. Third-country effects operate in a manner that subsequently connects countries through links beyond those immediately involved in borrowing (destination) and lending (origin) relationships. Confirming earlier results, the economic size of sending and recipient countries, cultural similarity and in-phase business cycles enhance international banking, while distance and exchange rate volatility hinder it. Also, while lower political risk has a positive role, so do higher financial and economic risks, reflecting-to some extent-some of the reasons behind the current financial crisis.
    Keywords: international banking ;financial spillovers; gravity model; spatial econometrics
    Date: 2011–03

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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