New Economics Papers
on Banking
Issue of 2011‒07‒13
thirty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank capital and risk in the South Eastern European region By Athanasoglou, Panayiotis
  2. Financial intermediation and the international business cycle: The case of small countries with big banks By Gunes Kamber; Christoph Thoenissen
  3. The Financial and Macroeconomic Implications of Banking Frictions and Banking Riskiness By Yi Jin; Zhixiong Zeng
  4. Do domestic and cross-border M&As differ? Cross-country evidence from the banking sector By Stafano Caiazza; Alberto Franco Pozzolo; Giovanni Trovato
  5. Home Bank Intermediation of Foreign Direct Investment By Steven Poelhekke
  6. Credit ratings and credit risk By Jens Hilscher; Mungo Wilson
  7. 'Global Player' im Bankenwesen - ökonomisch sinnvoll oder problembehaftet? By Horst Gischer; Toni Richter
  8. Relationships and The Availability of Credit To New Small Firms By Colombatto, Enrico; Melnik, Arie; Monticone, Chiara
  9. Do banking relationships improve credit conditions for Spanish SMEs?. By Cardone Riportella, Clara; Casasola, María José; Samartín Sáenz, Margarita
  10. What drives bank securitisation? The Spanish experience. By Cardone Riportella, Clara; Samaniego Medina, Reyes; Trujillo Ponce, Antonio
  11. Efectos del aval de las SGRs en la financiación de las PYME y los requerimientos de capital de Basilea II. By Cardone Riportella, Clara; Trujillo Ponce, Antonio
  12. Diversification and Financial Stability By Paolo Tasca; Stefano Battiston
  13. Revenue diversification in emerging market banks: implications for financial performance By Saoussen Ben Gamra; Dominique Plihon
  14. Securitization Rating Performance and Agency Incentives By Daniel Roesch; Harald Scheule
  15. Strengthening Bank Regulation: OSFI's Contingent Capital Plan By John F. Chant
  16. Revisiting the merger and acquisition performance of European banks By Athanasoglou, Panayiotis P.; Asimakopoulos, Ioannis
  17. Debt Enforcement and Relational Contracting By Brown, Martin; Serra-Garcia, Marta
  18. Credit Reporting, Access to Finance and Identification Systems: International Evidence By Caterina Giannetti; Nicola Jentzsch
  19. The international propagation of the financial crisis of 2008 and a comparison with 1931 By William A. Allen; Richhild Moessner
  20. Mattresses versus Banks - The Effect of Trust on Portfolio Composition By Tom Coupe
  21. Could dishonest banks be disciplined ? By Nabi, Mahmoud Sami; Ben Souissi, Souraya
  22. Forecasting Value-at-Risk Using Nonlinear Regression Quantiles and the Intraday Range By Chen, C.W.S.; Gerlach, R.; Hwang, B.B.K.; McAleer, M.J.
  23. Ownership structure and Risk at Colombian banks By Constanza Martínez; Manuel Ramírez
  24. Bailout Uncertainty in a Microfounded General Equilibrium Model of the Financial System By Cukierman, Alex; Izhakian, Yehuda
  25. Card acceptance and surcharging: the role of costs and competition By Nicole Jonker
  26. Financial Literacy ad Indebtedness: New Evidence for UK Consumers By Richard Disney; John Gathergood
  27. The collapse of a European bank in the financial crisis: an analysis from strategic, stakeholder, ethical and governance perspectives By Y. FASSIN; D. GOSSSELIN
  28. The impact of house prices on household debt when controlling for home ownership By Dag Henning Jacobsen; Bjørn Helge Vatne
  29. A single european union deposit insurance scheme? an overview. By Cardone Riportella, Clara
  30. Credit Rationing and Public Support of Commercial Credit By Karel Janda
  31. Transparency of banking supervisors By Carin van der Cruijsen; Jakob de Haan; Franka Liedorp; Robert Mosch
  32. The internationalisation process of Spanish banks: a tale of two times. By Cardone Riportella, Clara; Cazorla Papis, Leonardo

  1. By: Athanasoglou, Panayiotis
    Abstract: This paper examines the simultaneous relationship between bank capital and risk. A model is set up which assumes that banks’ decisions regarding capital and risk are made endogenously in a dynamic pattern. A simultaneous equation system was estimated using an unbalanced panel of SEE banks from 2001 to 2009. A key result for the whole sample of banks is the relationship between regulatory (equity) capital and risk which is positive (negative). However, a positive two-way relationship between regulatory capital and risk was found only in less than-adequately capitalized banks, which also increased substantially their risk in 2009. Thus, banks’ decisions differentiate between equity capital and risk and regulatory capital and risk. A positive, significant and robust effect of liquidity on capital was identified. Both regulatory and equity capital exhibit procyclical behaviour, whilst the relationship between risk and rate of growth of GDP is ambitious.
    Keywords: Banking; capital; risk; liquidity; regulation; panel estimation
    JEL: G32 C33 G21
    Date: 2011–05
  2. By: Gunes Kamber; Christoph Thoenissen
    Abstract: We examine the transmission mechanism of banking sector shocks in a two-country DSGE model. Assuming that the home country is small relative to the rest of world, we find that spillovers from foreign banking sector shocks are modest unless banks in the small country hold foreign banking assets. The correlation between home and foreign GDP rises with the exposure of the of the domestic banking sector to foreign bank assets.
    Date: 2011–06–21
  3. By: Yi Jin; Zhixiong Zeng
    Abstract: This paper develops a model of banking frictions and banking riskiness, the importance of which is highlighted by the recent Global Financial Crisis (GFC). We propose a model-based approach to decompose the effect of a banking riskiness shock into a pure default effect and a risk effect when risk sharing among the depositors is imperfect. Although the default effect is quantitatively more important, the risk effect is not to be neglected. When the shock generates a bank spread similar in value to the peak during the GFC, the overall effect is a decline in employment by 6:57 percent. The pure default effect leads to a 4:76 percent employment decline by a “within-model” measure, and a 5:05 decline by a “between-model” measure. The remaining is attributed to the risk effect.
    Keywords: Banking riskiness shocks; two-sided debt contract; default effects; risk effects; financial crisis.
    JEL: E44 E32 D82 D86
    Date: 2011–06
  4. By: Stafano Caiazza (Universit… Tor Vergata di Roma); Alberto Franco Pozzolo (University of Molise, Centro Studi Luca d'Agliano); Giovanni Trovato (Universit… Tor Vergata di Roma)
    Abstract: Are the drivers of domestic and cross-border M&As in the banking sector different? Despite the intense research on bank M&As in the last decade, the attention paid to this issue is surprisingly limited. We fill this gap studying the ex-ante determinants of national and international acquisitions in the banking sector in an unbalanced panel of nearly 1,000 banks from 50 world countries, from 1992 to 2007. Our results show that size and profitability have a stronger impact on the probability that a bank is a bidder in a cross-border deal than in a domestic deal. Consistent with the findings of the literature on the determinants of the internationalization of manufacturing firms, international expansion in the banking sector is therefore easier for countries with a number of large "national champions", that are more capable to overcome the fixed costs of internationalization and have a stronger incentive to diversify the idiosyncratic risks of their domestic activities.
    Keywords: M&As, bank, bank intrenationalization
    JEL: G15 G21 G34
    Date: 2011–06
  5. By: Steven Poelhekke
    Abstract: This paper investigates the benefits of banks’ direct investment in foreign subsidiaries and branches for non-financial multinationals. The paper builds on the literature on international banks which has primarily focused on the implications for host countries, rather than for its international clients, and on the literature on foreign direct investment (FDI), which emphasizes significant costs of investment. Using a new detailed data set of non-stationary sector-level outward FDI, this paper finds that the volume of FDI by home market banks boosts FDI by non-financial firms from the same home market. Domestic and third-country foreign banking provide imperfect substitutes, especially in countries that are corrupt or have weak rule of law. The result rests on banks' FDI in local branches and subsidiaries rather than cross-border lending. These findings are consistent with a role for home market multinational banks in intermediating information asymmetry in opaque foreign markets. The sale of a major international bank to third-country counter parties during the recent crisis may thus result in persistently lower volumes of outward FDI from the bank's home market.
    Keywords: outward sector-level FDI; banks; asymmetric information; panel non-stationarity
    JEL: F21 G21 O16 C33
    Date: 2011–05
  6. By: Jens Hilscher (International Business School, Brandeis University); Mungo Wilson (University of Oxford)
    Abstract: This paper investigates the information in corporate credit ratings. We examine the extent to which firms' credit ratings measure raw probability of default as opposed to systematic risk of default, a firm's tendency to default in bad times. We find that credit ratings are dominated as predictors of corporate failure by a simple model based on publicly available financial information (`failure score'), indicating that ratings are poor measures of raw default probability. However, ratings are strongly related to a straightforward measure of systematic default risk: the sensitivity of firm default probability to its common component (`failure beta'). Furthermore, this systematic risk measure is strongly related to credit default swap risk premia. Our findings can explain otherwise puzzling qualities of ratings.
    Keywords: Credit Rating, Credit Risk, Default Probability, Forecast Accuracy, Systematic Default Risk
    JEL: G12 G24 G33
    Date: 2011–06
  7. By: Horst Gischer (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Toni Richter (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Although recent experiences made during the ongoing international financial crisis call for smaller entities in banking systems, consolidation still takes place in many industrialized economies. The often stretched argument that large banks are able to establish economies of scale as well as econo-mies of scope, ignores at least the risks of financial intermediaries becoming ‘too big to fail’ or ‘too interconnected to fail’. Our analysis presents reliable evidence that even the assumption that big banks are less inefficient than small ones is far away from being convincing. We apply a range of indicators to test for both performance and risk taking capability of banks in different financial sys-tems. Our findings suggest empirical merits of diversified banking systems and higher systemic risk for financial industries dominated by global players.
    Keywords: consolidation, bank performance
    JEL: G21 L11 L16 L25
    Date: 2011–06
  8. By: Colombatto, Enrico; Melnik, Arie; Monticone, Chiara
    Abstract: We analyze the loans that small, newly established firms obtain from the banks by certain relationships based on a set of small, young Italian companies founded during the 1992–2004 period. According to our investigation, the amount of borrowing is determined primarily by the size of the firm, and the ability to offer collateral. Contrary to expectations, however perceived risk has a weak influence. The length of relationship influences borrowing in a none linear way.
    Keywords: young firms, bank loans, collateral, relationships
    JEL: L26 G21 G32
    Date: 2011–07
  9. By: Cardone Riportella, Clara; Casasola, María José; Samartín Sáenz, Margarita
    Abstract: Small and medium-sized companies are extremely important for the Spanish economy. However, they face difficulties when trying to obtain financing (credit rationing). As a result, and given their limited possibilities to obtain finance in the capital market, they turn to the credit market, which is the main provider of funds for such companies. The main aim of this study is to provide an insight into the banking relationships that are developed in this market and their impact on credit rationing. Previous literature has studied this situation by focusing on price rationing and quantity rationing. This study furthers research into banking relationships by examining the effects that these relationships may have on compensation demanded for debt and the relationship with long-term credit rationing. After studying 386 SMEs listed in the Spanish Guide of Exporting Companies, the main conclusions drawn were as follows: i) SMEs working with larger numbers of financial entities and with longer relationships with these entities enjoy better access to credit; ii) SMEs that develop banking relationships by contracting financial products manage to reduce their credit costs; iii) SMEs that have longer banking relationships with banking entities benefit from better long-term credit conditions; and iv) the maintenance of banking relationships through the rendering of services reduces bank requirements in terms of guarantees in credit applications.
  10. By: Cardone Riportella, Clara; Samaniego Medina, Reyes; Trujillo Ponce, Antonio
    Abstract: This paper analyses the reasons why Spanish banks securitised in the period 2000–2007 on such a large scale that Spain has become the European country with the second-largest issuance volume after the UK. The results obtained by applying a logistic regression model to a sample of 408 observations indicate that liquidity and the search for improved performance are the decisive factors in securitisation. We find no evidence to support hypotheses regarding credit risk transfer and regulatory capital arbitrage. Our study also presents a more detailed analysis that differentiates between asset and liability securitisation programmes.
    Keywords: Securitisation; ABS; CDO; Credit risk transfer; Regulatory capital arbitrage;
    JEL: G21 G28
  11. By: Cardone Riportella, Clara; Trujillo Ponce, Antonio
    Abstract: El objetivo del presente trabajo es analizar cómo influye el aval que las Sociedades de Garantía Recíproca (SGR) conceden a las Pequeñas y Medianas Empresas (PYME) en los fondos propios exigidos a las entidades financieras en el nuevo Acuerdo de Capital, conocido como Basilea II. Con ello se pretende examinar el efecto de la garantía sobre la prima de riesgo que los bancos debieran cargar a sus empresas clientes, y si esta previsible disminución en los tipos de interés aplicables se ve compensada por el coste del aval para la PYME. Entre las principales conclusiones encontramos que, dado que el coste del aval de una SGR, en España, se sitúa en el 0,73%, a una PYME que acceda al mercado del crédito este aval le resultará rentable toda vez que la probabilidad de impago de la sociedad garante sea inferior al 1%, si el sistema aplicado por la entidad financiera para calcular su capital regulatorio se basa en la valoración interna del riesgo (enfoque IRB). En el caso de que el banco aplique el enfoque estándar, este límite se sitúa en el 2,5% aproximadamente.
    Abstract: The objective of this work is to analyse how the references that the Loan Guarantee Association (LGA) give to the Small and Medium Enterprises (SMEs) influence in the own funds that the International Convergence of Capital Measurement and Capital Standards. A Revised Framework (known as Basel II Accord) requires to the financial entities. With this, the authors intend to study the collateral’s effect on the premium risk that banks should charge to their corporate clients, and if this predictable reduction in the interest rate may be balanced by the cost of the reference for the SME. Among the main conclusions, we have found that, considering that the cost of the LGA’ reference is, in Spain, 0.73%, this reference would be economic for SMEs going to the credit market whereas the LGA’ probability of failing to pay is less than 1%, if the system used by the financial entity to calculate its regulatory capital is based on the Internal Risk Based Approach (IRB). In the case of the bank applying the standard approach, the limit is placed in 2.5% approximately.
    Keywords: Financiación bancaria de las PYME; Capital regulatorio; Basilea II; Sociedad de Garantía Recíproca; Prima de riesgo; Banking Finance of SMEs; Regulatory Capital; Basel II Accord; Loan Guarantee Association; Premium Risk;
  12. By: Paolo Tasca; Stefano Battiston
    Abstract: The recent credit crisis of 2007/08 has raised a debate about the so-called knife-edge properties of financial markets. The paper contributes to the debate shedding light on the controversial relation between risk-diversification and financial stability. We model a financial network where assets held by borrowers to meet their obligations, include claims against other borrowers and securities exogenous to the network. The balance-sheet approach is conjugated with a stochastic setting and by a mean-field approximation the law of motion of the system's fragility is derived. We show that diversification has an ambiguous effect and beyond a certain levels elicits financial instability. Moreover, we find that risk-sharing restrictions create a socially preferable outcome. Our findings have significant implications for future policy recommendation.
    Keywords: Systemic Risk, Financial Crisis, Diversification, Default Probability
  13. By: Saoussen Ben Gamra (CEPN); Dominique Plihon (CEPN)
    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.
    Date: 2011–07
  14. By: Daniel Roesch (Leibniz University of Hannover); Harald Scheule (Hong Kong Institute for Monetary Research and University of Melbourne)
    Abstract: This paper provides an empirical study, which assesses the historical performance of credit rating agency (CRA) ratings for securitizations before and during the financial crisis. The paper finds that CRAs do not sufficiently address the systematic risk of the underlying collateral pools as well as characteristics of the deal and tranche structure in their ratings. The paper also finds that impairment risk is understated during origination years and years with high securitization volumes when CRA fee revenue is high. The mismatch between credit ratings of securitizations and their underlying risks has been suggested as one source of the Global Financial Crisis, which resulted in the criticism of models and techniques applied by CRAs and misaligned incentives due to the fees paid by originators.
    Keywords: Asset-backed Security, Credit Rating Agency, Collateralized Debt Obligation, Economic Downturn, Fee Revenue, Forecasting, Global Financial Crisis, Home Equity Loans, Impairment, Mortgage-backed Security, Rating, Securitization
    JEL: G20 G28 C51
    Date: 2011–06
  15. By: John F. Chant (Simon Fraser University)
    Abstract: Bank failures around the world during the recent financial crisis put taxpayers on the hook for trillions of dollars in government backstopping. In future, requiring banks to issue contingent capital, which would convert from debt to equity when banks run into trouble, is one way to help avoid that happening again, and limit taxpayer costs if it does, according to this paper. The author makes the case for contingent capital, critiques the current federal proposal, and makes recommendations for design that would help stave off disaster for banks, not hasten their demise.
    Keywords: Financial Services, bank failures, contingent capital, Office of the Superintendent of Financial Institutions (OSFT)
    Date: 2011–05
  16. By: Athanasoglou, Panayiotis P.; Asimakopoulos, Ioannis
    Abstract: The study examines the value creation of Merger and Acquisition (M&A) deals in European Banking from 1990-2004. This is performed, first, by examining the stock price reaction of banks to the announcement of M&A deals and, second, by analysing the determinants of this reaction. The findings provide evidence of value creation in European banks as the shareholders of the targets have benefited from positive and (statistically) significant abnormal returns while those of the acquirers earn small negative but non-significant abnormal returns. In the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is unlisted. Shareholders of the targets earn in all cases positive abnormal returns. Finally, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income are more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.
    Keywords: Bank mergers; mergers and acquisitions; abnormal returns;
    JEL: G1 G14 G2 G34 G3 G0 G21
    Date: 2009–08
  17. By: Brown, Martin; Serra-Garcia, Marta
    Abstract: We examine how third-party debt enforcement affects the emergence and performance of relational contracts in credit markets. We implement an experiment with finitely repeated credit relationships in which borrowers can default. In our weak enforcement treatment defaulting borrowers can keep their funds invested. In our strong enforcement treatment defaulting borrowers have to liquidate their investment. Under weak enforcement fewer relationships emerge in which loans are extended and repaid. When such relationships do emerge they exhibit a lower credit volume than under strong enforcement. These findings suggest that relational contracting in credit markets requires a minimum standard of thirdparty debt enforcement.
    Keywords: Relational contracts; Debt enforcement; Creditor rights; Banking
    JEL: C73 G21 O16 F21 F34
    Date: 2011–06
  18. By: Caterina Giannetti (Jena Graduate School Human Behaviour in Social and Economic Change); Nicola Jentzsch (DIW Berlin)
    Abstract: Credit reporting systems are an important ingredient for financial markets. These systems are based upon the unique identification of borrowers, which is enabled if a compulsory identification system exists in a country. We present evidence derived from difference-in-difference analyses on the impact of the interplay of credit reporting and identification systems on financial access and intermediation in 172 countries during years of 2000 to 2008. Our results suggest that the introduction of an identification system has a positive effect on financial intermediation (bank credit to deposits) and financial access (private credit to GDP), especially in countries where there is also a credit reporting system. This effect exists net of other country characteristics.
    Keywords: Credit markets, information asymmetries, identification
    JEL: G21 O12 O16
    Date: 2011–06–30
  19. By: William A. Allen; Richhild Moessner
    Abstract: We examine the international propagation of the financial crisis of 2008, and compare it with that of the crisis of 1931. We argue that the collateral squeeze in the United States, which became intense after the failure of Lehman Brothers created doubts about the stability of other financial companies, was an important propagator in 2008. We identify some common features in the propagation of the two crises, the most important being the flight to liquidity and safety. In both crises, deposit outflows were not the only important sources of liquidity pressure on banks: in 1931, the central European acceptances of the London merchant banks were a serious problem, as, in 2008, were the liquidity commitments that commercial banks had provided to shadow banks. And in both crises, the behaviour of creditors towards debtors, and the valuation of assets by creditors, were very important. However, there was a very important difference between the two crises in the range and nature of assets that were regarded as liquid and safe. Central banks in 2008, with no gold standard constraint, could liquefy illiquid assets on a much greater scale.
    Keywords: financial crisis, liquidity, international monetary system, Great Depression
    Date: 2011–07
  20. By: Tom Coupe (Kyiv School of Economics, Kyiv Economic Institute)
    Abstract: This paper adds to the growing literature that studies whether trust affects the financial decisions of people. More specifically, we investigate whether lack of trust in banks can explain why people save their savings in cash, ‘under the mattress’, rather than deposit their savings at the bank. We find a significant effect of lack of trust on the likelihood that a person saves money in cash but also that lack of trust can only provide part of the explanation for the ‘money under the mattress’ phenomenon. Other factors that matter are the financial awareness and access to bank services.
    Keywords: trust, bank deposits, cash savings, financial awareness
    JEL: G21 O16
    Date: 2011–06
  21. By: Nabi, Mahmoud Sami; Ben Souissi, Souraya
    Abstract: Could a credit bureau incite banks to report correct information about their borrowers? We show that banks will choose the incorrect information sharing in the last period to increase their profits. Interestingly, however, it is shown that this strategy is optimal at the second period only if the proportion of successful projects is superior to 50%. In that case the Credit Bureau should enforce a sufficiently high penalty in order to incite banks to share information honestly. The penalty threshold that conditions the efficiency of the credit bureau’s role is endogenously derived.
    Keywords: Information sharing; penalty; incitation mechanism; credit bureau.
    JEL: L14 D82 G21
    Date: 2011–05
  22. By: Chen, C.W.S.; Gerlach, R.; Hwang, B.B.K.; McAleer, M.J.
    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 propose 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 affects the performance of risk models via forecasting VaR. Empirical analysis is conducted on five Asia-Pacific Economic Cooperation stock market indices and two exchange rates????. We examine violation rates, back-testing criteria, market risk charges and quantile loss function to measure the forecasting performance of a variety of risk models. The proposed threshold CAViaR model, incorporating range information, is shown to forecast VaR more efficiently than other models, which should be useful for financial practitioners.
    Keywords: Value-at-Risk;CAViaR model;Skewed-Laplace distribution;intra-day range;backtesting;Markov chain Monte Carlo
    Date: 2011–06–30
  23. By: Constanza Martínez; Manuel Ramírez
    Abstract: The separation between ownership and the control of capital in banks generates differences in the preferences for risk among shareholders and the manager. These differences could imply a corporate governance problem in banks with a dispersed ownership, since owners fail to exert control in the allocation of capital. In this paper we examine the relationship between the ownership structure and risk for Colombian banks. Our results suggest that a high ownership concentration leads to higher levels of risk.
    Date: 2011–01–31
  24. By: Cukierman, Alex; Izhakian, Yehuda
    Abstract: This paper develops a micro-founded general equilibrium model of the financial system composed of ultimate borrowers, ultimate lenders and financial intermediaries. The model is used to investigate the impact of uncertainty about the likelihood of governmental bailouts on leverage, interest rates, the volume of defaults and the real economy. The distinction between risk and uncertainty is implemented by applying the Gilboa-Schmeidler maxmin with multiple priors framework to lenders' beliefs about the probability of bailout. Events like Lehman's collapse are conceived of as 'black swan' events that led lenders to put a positive mass on bailout probabilities that were previously assigned zero mass. Results of the analysis include: (i) An unanticipated increase in bailout uncertainty raises interest rates, the volume of defaults in both the real and financial sectors and may lead to a total drying up of credit markets. (ii) Lower exante bailout uncertainty is conducive to higher leverage - which raises moral hazard and makes the economy more vulnerable to expost increases in bailout uncertainty. (iii) Bailout uncertainty raises the likelihood of bubbles, the amplitude of booms and busts as well as the banking and the credit spreads. (iv) Bailout uncertainty is associated with higher returns’ variability in diversified portfolios and systemic risks, (v) Expansionary monetary policy reinforces those effects by inducing higher aggregate leverage levels.
    Keywords: Ambiguity Aversion; Bailouts; Duration mismatches; Financial intermediaries; Lehman's Collapse; Leverage; Risk; Uncertainty
    JEL: D81 D83 E3 E4 E5 E6 G11 G18 G2
    Date: 2011–06
  25. By: Nicole Jonker
    Abstract: The payment cards market is a two-sided market. Cost sensitivity of both consumers and merchants for card services influences total demand. Survey data of Dutch merchants shows that costs, and competition affect acceptance as well as surcharging decisions. Merchants who find payment cards expensive are less likely to accept them and more likely to surcharge their customers for using them. Merchants who face any competition accept debit card payments relatively more often than merchants with monopoly power, and they are less likely to surcharge their customers for debit card usage. Intense competition leads to higher credit card acceptance.
    Keywords: retail payments; merchants; costs; two-sided markets; competition; pricing; surcharging
    JEL: D23 D40 E41 G20
    Date: 2011–05
  26. By: Richard Disney; John Gathergood
    Abstract: We utilise questions concerning individual ‘debt literacy’ incorporated into market research data on households’ unsecured debt positions to examine the association between consumer credit and individual financial literacy. We examine the relationship between individual responses to debt literacy questions and household net worth, consumer credit use and over-indebtedness. We find that financially illiterate households have lower net worth, use higher cost credit and are more likely to report credit arrears or difficulty paying their debts. However, financially literate households are more likely to co-hold liquid savings and revolving consumer credit, suggesting that the co-holding might arise as a result of rational financial behaviour. We consider the potential endogeneity of financial literacy.
    Abstract: In 2007, the sub-prime mortgage crisis in the US spread to Europe and to the rest of the world leading to a global financial crisis without precedent since the 1930s. Banks stopped trusting each other, pushing the world’s economy into the deepest recession of the post-war era. After the collapse of the Lehman Brothers bank and Northern Rock in the UK, mid-September 2008, the Fortis group was the first major European bank and insurance company to fail in mainland Europe as a result of the financial crisis.<br> Fortis was the leading Benelux financial group, with worldwide activities and one of the top five financial institutions in the EU. Until then, Fortis had been a success story of successive mergers of bank and insurance companies. Its leadership in corporate social responsibility (CSR), stood as a model for international cooperation, with Belgian and Dutch roots. The acquisition of a major part of the important Dutch financial conglomerate ABN AMRO, was a further step to bring Fortis in the top financial groups in Europe, with market leadership in Benelux. However, one year after this acquisition, as a result of the crisis in the financial markets, trust disappeared in the sector, leading to the collapse of the Fortis group. This fall has been one of the key events in the history of the Belgian and Dutch economy, with tremendous impacts and important consequences for all stakeholders and for the Belgian economy.<br> The purpose of this article is to use the collapse process of Fortis’s during 2008 - 2009 as a basis for reflective considerations from strategy perspectives, stakeholder, ethical and corporate governance perspectives. The case analysis of the fall of Fortis based on those perspectives is relevant since Fortis group was internationally recognized as an example of good and leading practice in the field of CSR. Additionally most literature on causes of irresponsibility is in the fields of economics, and specifically the economics of market failure. The business ethics literature tends “not to address explanatory questions about the causes of CSR breaches” (Mackenzie 2007: 936).
    Date: 2011–06
  28. By: Dag Henning Jacobsen (Norges Bank (Central Bank of Norway)); Bjørn Helge Vatne (Norges Bank (Central Bank of Norway))
    Abstract: We analyze the effect of house price changes on debt secured on dwellings in Norway. To this end, we use both macro time series and micro panel data. With the intention of being both a cross-check and motivation for the micro analysis, we estimate a structural vector auto regression using macro variables. A key result of the macro analysis is that positive house price innovations have positive and persistent effects on households debt secured on dwellings. Results from the micro data analysis suggest that the effect of house price changes on the borrowing decision differs from the effect on the instalment decision among existing home owners. These results are further investigated trough a two stage model where we control for income, collateral value and age. The model predicts that the size of both loans and instalments increase with income. Loan sizes increase and the instalments fall with increasing collateral value. The results support the existence of a wealth channel but do not provide support for a collateral channel.
    Keywords: VAR, house prices, mortgage equity withdrawal, logit model, micro panel data
    JEL: C25 C32 D12 D14 E21
    Date: 2011–07–05
  29. By: Cardone Riportella, Clara
    Abstract: The purpose of this paper is to discuss and analyse the different aspects of the deposit insurance schemes in the EU and their harmonisation and compatibility with other Community regulations at the light of the start up of the third stage of the European Monetary System (EMS).
    Keywords: Supervision; Deposit insurance; Efficient financial markets; Financial harmonisation in the EU; Competitive restrictions;
  30. By: Karel Janda
    Abstract: Credit contracting between a lender with monopoly market power and a small start-up entrepreneur may lead to the rejection of projects whose expected benefits are higher than their total costs. This inefficiency may be eliminated by government support in the form of credit guarantees or interest rate subsidies. This paper compares different forms of government support and concludes that credit guarantees and interest rate subsidies have a nonambiguous positive effect on social efficiency since they enable the financing of socially efficient projects which would not be financed otherwise. The comparison of government budget costs for these two types of government interventions depends on the institutional details and parametrization of the credit problem.
    Keywords: credit; subsidy; guarantee;
    JEL: D82 G18 H25
    Date: 2011–04
  31. By: Carin van der Cruijsen; Jakob de Haan; Franka Liedorp; Robert Mosch
    Abstract: Following Eijffinger and Geraats (2006), we construct an index of transparency of banking supervisors that takes political, economic, procedural, policy and operational transparency into account. Based on a survey, we construct the index for 24 banking supervisors. There are large differences among transparency of supervisors. The average total score is 9.2 points (out of 15), whereas the minimum is 6.25 points and the maximum 12.75 points. The average of economic transparency is the highest, while the average score for policy transparency is the lowest. Our analysis suggests that it is very hard to identify factors that can explain these differences.
    Keywords: G28
    Date: 2011–05
  32. By: Cardone Riportella, Clara; Cazorla Papis, Leonardo
    Abstract: Attempts to shed light on strategies and international entry modes of financial services firms, providing a framework of the internationalisation process in one specific industry. This is based upon the analysis of four case studies of Spanish banks entering the Latin American markets at two different stages – before and after the 1990s – to see how internationalisation strategies of financial services have evolved over time. Shows that, in accordance with the perceived market risk and the commitment of resources involved, firms may opt to enter a foreign market in a gradual (lineal) process or in a more opportunistic (contingent) way. The foreign direct investment decision vis-à-vis the resources and risks involved in the operation has been evolving through time, industry and country of destination.
    Keywords: Banks; Financial services; Globalization; Market entry; Spain;

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