New Economics Papers
on Banking
Issue of 2011‒07‒21
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Strategic complementarity, fragility, and regulation By Vives, Xavier
  2. Asset Commonality, Debt Maturity and Systemic Risk By Allen, Franklin; Babus, Ana; Carletti, Elena
  3. The Basel III framework for liquidity standards and monetary policy implementation By Ulrich Bindseil; Jeroen Lamoot
  4. Risk Procyclicality and Dynamic Hedge Fund Strategies By Francois-Éric Racicot; Raymond Théoret
  5. GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies By Michael McAleer; Paulo Araújo Santos; Juan-Ángel Jiménez-Martín; Teodosio Pérez Amaral
  6. The Basis of Valuations for Secured Commercial Property Lending in the UK By Neil Crosby; Cathy Hughes
  7. Determinants of credit-less recoveries By Martin Bijsterbosch; Tatjana Dahlhaus
  8. The Availability and Utilization of 401(k) Loans By Beshears, John; Choi, James J.; Laibson, David; Madrian, Brigitte C.
  9. Are Japanese Firms Becoming More Independent from Their Banks?: Evidence from the Firm-Level Data of the "Corporate Enterprise Quarterly Statistics," 1994-2009 By Yoshiro Miwa
  10. House Prices and Credit Constraints: Making Sense of the U.S. Experience By John V. Duca; John Muellbauer; Anthony Murphy
  11. Household Balance Sheets and Economic Crisis By Petr Jakubík
  12. Card acceptance and surcharging: the role of costs and competition By Mark Mink
  13. A credit score system for socially responsible lending By Begoña Gutiérrez-Nieto; Carlos Serrano-Cinca; Juan Camón-Cala
  14. Recent Developments in European Bank Competition By Yu Sun
  15. Use of Banking Services in Emerging Markets--Household-Level Evidence By Beck, Thorsten; Brown, Martin
  16. KISS approach to credit portfolio modeling By Mikhail Voropaev
  17. On the High-Frequency Dynamics of Hedge Fund Risk Exposures By Patton, Andrew J; Ramadorai, Tarun
  18. Credit Guarantees and Subsidies when Lender has a Market Power By Karel Janda
  19. Should Unconventional Balance Sheet Policies be Added to the Central Bank Toolkit? A Review of the Experience So Far By Kotaro Ishi; Kenji Fujita; Mark R. Stone

  1. By: Vives, Xavier (IESE Business School)
    Abstract: The paper analyzes a very stylized model of crises and demonstrates how the degree of strategic complementarity in the actions of investors is a critical determinant of fragility. It is shown how the balance sheet composition of a financial intermediary, parameters of the information structure (precisions of public and private information), and the level of stress indicators in the market impinge on the degree of strategic complementarity. The model distinguishes between solvency and liquidity risk and characterizes them. Both a solvency (leverage) and a liquidity ratio are required to control the probabilities of insolvency and illiquidity. It is found that in a more competitive environment (with higher return on short-term debt) the solvency requirement has to be strengthened, and in an environment where the fire sales penalty is higher and fund managers are more conservative the liquidity requirement has to be strengthened while the solvency one relaxed. Higher disclosure or introducing a derivatives market may backfire, aggravating fragility (in particular when the asset side of a financial intermediary is opaque) and, correspondingly, liquidity requirements should be tightened. The model is applied to interpret the 2007 run on SIV and ABCP conduits.
    Keywords: stress; crises; illiquidity risk; insolvency risk; leverage ratio; liquidity ratio; derivatives market; disclosure;
    Date: 2011–06–05
  2. By: Allen, Franklin; Babus, Ana; Carletti, Elena
    Abstract: We develop a model in which asset commonality and short-term debt of banks interact to generate excessive systemic risk. Banks swap assets to diversify their individual risk. Two asset structures arise. In a clustered structure, groups of banks hold common asset portfolios and default together. In an unclustered structure, defaults are more dispersed. Portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency. When bank debt is short-term, creditors do not roll over in response to adverse signals and all banks are inefficiently liquidated. This information contagion is more likely under clustered asset structures. In contrast, when bank debt is long-term, welfare is the same under both asset structures.
    Keywords: interim information; rollover risk.; Short-term debt
    JEL: D85 G21
    Date: 2011–07
  3. By: Ulrich Bindseil; Jeroen Lamoot
    Abstract: Basel III introduces for the first time an international framework for liquidity risk regulation, reflecting the experience of excessive liquidity risk taking of banks in the run up to the financial crisis that erupted in August 2007, and associated negative externalities. As central banks play a crucial role in the liquidity provision to banks during normal times and in a financial crisis, the treatment of central bank operations in the regulation is obviously important. To ensure internalisation of liquidity risks (i.e. pricing of liquidity risk) and to address excessive reliance ex ante on central bank liquidity support by the banks, the regulation deliberately does not establish a direct close link with the monetary policy operational framework. While this reflects the purpose of the regulation and is also natural outcome of an international rule being applied under a multitude of very different monetary policy operational frameworks, this paper shows that the interaction between the two areas can be substantial, depending on the operational and collateral framework of the central bank. This implies the need for further study and the development of policies at the central bank and regulatory/supervisory side on how to handle these potential interactions in practice.
    Keywords: Basle III, Liquidity Risk, Banking Regulation, monetary policy implementation
    JEL: E58 G21 G28
    Date: 2011–07
  4. By: Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais), LRSP et Chaire d'information financière et organisationnelle); Raymond Théoret (Département de finance, Université du Québec (Montréal), Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle)
    Abstract: It is well-known that traditional financial institutions like banks follow procyclical risk strategies (Rajan 2005, 2009, Shin 2009, Jacques 2010) in the sense that they increase their leverage in economic expansions and reduce it in recessions, which leads to a procyclical behaviour for their betas and other risk and financial performance measures. But it is less known that the spectrum of the returns of many hedge fund strategies displays a high volatility at business cycle frequencies. In this paper, we study this unknown stylized fact resorting to two procedures: conditional modelling and Kalman filtering of Funds alphas and betas. We find that hedge fund betas are usually procyclical. Regarding the alpha, it is often high at the beginning of a market upside cycle but as the demand pressure stems from investors, it eventually fades away, which suggests that the alpha puzzle documented in the financial literature is questionable when cast in a dynamic setting.
    Keywords: risk measures; Aggregate risk; Financial stability; Conditional models; Kalman Filter; Spectral analysis.
    JEL: C13 C19 C49 G12 G23
    Date: 2011–07–01
  5. By: Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, Complutense University of Madrid, and Institute of Economic Research, Kyoto University); Paulo Araújo Santos (Escola Superior de Gestão e Tecnologia de Santarém and Center of Statistics and Applications University of Lisbon); Juan-Ángel Jiménez-Martín (Department of Quantitative Economics Complutense University of Madrid); Teodosio Pérez Amaral (Department of Quantitative Economics Complutense University of Madrid)
    Abstract: In McAleer et al. (2010b), a robust risk management strategy to the Global Financial Crisis (GFC) was proposed under the Basel II Accord by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast was based on the median of the point VaR forecasts of a set of conditional volatility models. In this paper we provide further evidence on the suitability of the median as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.
    Keywords: Value-at-Risk (VaR), DPOT, daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel, global financial crisis.
    JEL: G32 G11 C53 C22
    Date: 2011–07
  6. By: Neil Crosby (School of Real Estate & Planning, Henley Business School, University of Reading); Cathy Hughes (School of Real Estate & Planning, Henley Business School, University of Reading)
    Abstract: In the context of the financial crash and the commercial property market downturn, this paper examines the basis of valuation used in the UK commercial property lending process.  Post-crisis there is discussion of countercyclical measures including the monitoring of asset prices; however there is no consideration of a different approach to property valuation.  This paper questions this omission, given the role that valuations play in the bank regulatory process.  The different bases of valuation available to lenders within International Valuation Standards are identified as Market Value (MV), Mortgage Lending Value (MLV) and Investment Value (IV), with MV being the most used in the UK.  Using the different bases in the period before the financial crisis, the UK property market is modelled at a national office, retail and industrial/warehouse sector level to determine the performance of each alternative valuation basis within the context of counter-cyclical pressures on lending.  Both MLV and IV would have produced lower valuations and could have provided lenders with tools for more informed and prudent lending.  The paper concludes by recognising some of the practical issues involved in adopting the different bases for the bank lending role but recommends a change to IV.
    Keywords: Commercial property valuation, secured lending, Mortgage lending Value, Market Value, Investment Value
    Date: 2011
  7. By: Martin Bijsterbosch (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tatjana Dahlhaus (Universitat Autònoma de Barcelona, Spain.)
    Abstract: This paper aims to shed light on the characteristics and particularly the determinants of credit-less recoveries. After building a dataset and documenting some stylised facts of credit-less recoveries in emerging market economies, this paper uses panel probit models to analyse key determinants of credit-less recoveries. Our main findings are the following. First, our frequency analysis confirms earlier findings that credit-less recoveries are not at all rare events. Moreover, our analysis shows that the frequency of credit-less recoveries doubles after a banking or currency crisis. Second, results from estimated panel probit models suggest that credit-less recoveries are typically preceded by large declines in economic activity and financial stress, in particular if private sector indebtedness is high and the country is reliant on foreign capital inflows. Finally, we find that the predicted probability of a credit-less recovery in central and eastern European EU Member States during the coming years varies across countries, but is relatively high in the Baltic States. JEL Classification: C23, C25, E32, E51, G01.
    Keywords: Credit-less Recoveries, Financial Crises, Panel Probit Models.
    Date: 2011–06
  8. By: Beshears, John (Stanford University); Choi, James J. (Yale University); Laibson, David (Harvard University); Madrian, Brigitte C. (Harvard University)
    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.
    Date: 2011–06
  9. By: Yoshiro Miwa (Faculty of Economics, University of Tokyo)
    Abstract: The Ministry of Finance's "Corporate Enterprise Quarterly Statistics" (Hojin kigyo tokei kiho) is the only statistical source of well-balanced information about the financing behavior of Japanese firms. Indeed, there are few comparable sources available anywhere in the world. Using this firm-level data set from 1994 to 2009, I investigate the financing behavior of Japanese firms with over \10 million in paid-in capital. The conclusions contrast sharply with the conventional wisdom. Much of the research and policy discussions about Japanese finance begin from the premise that banks play a decisive role in firm behavior. This paper shows that firms have maintained a dependence on financial institutions well below the level that the conventional wisdom has claimed. Under the recent gzero-interest-rate, quantity easingh monetary policy, this gindependence of the firms from the banksh has increased further. This tendency is clearest among the smaller firms. In turn, this first conclusion raises doubts about the plausibility of the basic premise of research and policy debate on financial issues, and leads us to question whether observers may not have confused a gcrisis of financial institutionsh with a gfinancial crisish. Investigation into firm financing behavior under the gfinancial crisish from the end of 1997 to the beginning of 1999 does indeed suggest that it was a fiasco caused by the confusion of a gcrisis of financial institutionsh with a gfinancial crisish.
    Date: 2011–07
  10. By: John V. Duca; John Muellbauer; Anthony Murphy
    Abstract: Most US house price models break down in the mid-2000's, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions - the cyclically adjusted loan-to-value ratio for first time buyers - into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.
    Keywords: house prices, credit standards, subprime mortgages
    JEL: R31 G21 E51 C51 C52
    Date: 2011–03
  11. By: Petr Jakubík (European Central Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper studies the economic impact of the current global economic downturn on the household sector. Household budgets can be negatively affected by declines in nominal wages and increases in unemployment. We empirically test this effect for the small open emerging economy. As a result of a lack of individual data on household finances, micro data are simulated. Our analysis clearly shows that there is a significant additional decline in consumption related to an increase in household default rates and unemployment. We find that potential household insolvencies have important implications for the financial system as well as for the macroeconomy.
    Keywords: credit cycle, households’ distress, insolvency, household default, aggregate consumption
    JEL: G28 G32 G33 G38
    Date: 2011–06
  12. By: Mark Mink
    Abstract: We show that through facilitating maturity transformation, the lender of last resort gives banks an incentive to lever, diversify, and lower their lending standards. Bank leverage increases shareholder value because maturity transformation effectively allows banks to borrow against lower interest rates than their shareholders. Bank diversification increases shareholder value by enabling banks to lever more. When the gains from maturity transformation are passed on to bank customers, lending standards deteriorate. This risk-taking intensifies when the term spread is steeper, and is thus procyclically related to the stance of the macro-economy. Regulatory liquidity requirements can reduce all forms of risk-taking examined.
    Keywords: bank risk-taking; procyclicality; lender of last resort; financial regulation
    JEL: G21 G28 G32
    Date: 2011–07
  13. By: Begoña Gutiérrez-Nieto; Carlos Serrano-Cinca; Juan Camón-Cala
    Abstract: Ethical banking, microfinance institutions or certain credit cooperatives, among others, grant socially responsible loans. This paper presents a credit score system for them. The model evaluates both social and financial aspects of the borrower. The financial aspects are evaluated under the conventional banking framework, by analysing accounting statements and financial projections. The social aspects try to quantify the loan impact on the achievement of Millennium Development Goals such as employment, education, environment, health or community impact. The social credit score model should incorporate the lender’s know-how and should also be coherent with its mission. This is done by using the Analytic Hierarchy Process (AHP) technique. The paper illustrates a real case: a loan application by a social enterprise presented to a socially responsible lender. The decision support system not only produces a score, but also reveals strengths and weaknesses of the application.
    Keywords: OR in banking; Credit scoring; AHP; social banking; social impact assessment; financial ratios
    Date: 2011–07
  14. By: Yu Sun
    Abstract: This paper investigates the degree of bank competition in the euro area, the U.S. and U.K. before and after the recent financial crisis, and revisits the issue whether the introduction of EMU and the euro have had any impact on bank competition. The results suggest that the level of bank competition converged across euro area countries in the wake of the EMU. The recent global financial crisis led to a fall in competition in several countries and especially where large credit and housing booms had preceded the crisis..
    Keywords: Banks , Competition , Cross country analysis , Economic models , Euro Area , European Economic and Monetary Union , United Kingdom ,
    Date: 2011–06–24
  15. By: Beck, Thorsten; Brown, Martin
    Abstract: This paper uses survey data for 60,000 households from 29 transition economies in 2006 and 2010 to explore how the use of banking services is related to household characteristics, as well as to bank ownership, deposit insurance and creditor protection. At the household level we find that the holding of a bank account, a bank card, or a mortgage increases with income and education in most countries and find evidence for an urban-rural gap. The use of banking services is also related to the religion and social integration of a household as well as the gender of the household head. Using the within-country variation between 2006 and 2010, we find that the privatization of state-owned banks and an increase in market share of foreign banks are associated with a stronger use of banking services. Foreign bank ownership is also associated with a higher use of bank services among highincome households and households with formal employment. State ownership, by contrast is hardly associated with more outreach to poorer households. More generous deposit insurance and stronger creditor rights also foster the use of banking services among the urban, rich, better educated and formally employed.
    Keywords: access to finance; bank ownership; creditor protection; deposit insurance; household finance
    JEL: G18 G2 O16 P34
    Date: 2011–07
  16. By: Mikhail Voropaev
    Abstract: A simple, yet reasonably accurate, analytical technique is proposed for multi-factor structural credit portfolio models. The accuracy of the technique is demonstrated by benchmarking against Monte Carlo simulations. The approach presented here may be of high interest to practitioners looking for transparent, intuitive, easy to implement and high performance credit portfolio model.
    Date: 2011–07
  17. By: Patton, Andrew J; Ramadorai, Tarun
    Abstract: We propose a new method to model hedge fund risk exposures using relatively high frequency conditioning variables. In a large sample of funds, we find substantial evidence that hedge fund risk exposures vary across and within months, and that capturing within-month variation is more important for hedge funds than for mutual funds. We consider different within-month functional forms, and uncover patterns such as day-of-the-month variation in risk exposures. We also find that changes in portfolio allocations, rather than changes in the risk exposures of the underlying assets, are the main drivers of hedge funds' risk exposure variation.
    Keywords: beta; hedge funds; mutual funds; performance evaluation; time-varying risk; window-dressing
    JEL: C22 G11 G23
    Date: 2011–07
  18. By: Karel Janda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: Provision of credit guarantees or subsidies may remove an adverse selection leading to credit rationing. This paper concentrates on comparison of government budget costs of credit guarantees and subsidies in a monopolistic credit market. Di?erent opportunity costs among entrepreneurs, which re?ect di?erent mixes of general and human speci?c capital, generate di?erent outcomes in the model. As long as the participation costs of low-risk entrepreneurs are su?ciently close to the participation costs of high-risk entrepreneurs, the budget-cost minimizing government should prefer guarantees over interest rate subsidies as an intervention instrument.
    Keywords: credit; subsidies; guarantees
    JEL: D82 G18 H25
    Date: 2011–06
  19. By: Kotaro Ishi; Kenji Fujita; Mark R. Stone
    Abstract: What is the case for adding the unconventional balance sheet policies used by major central banks since 2007 to the standard policy toolkit? The record so far suggests that the new liquidity providing policies in support of financial stability generally warrant inclusion. As the balance sheet policies aimed at macroeconomic stability were used only by a small number of highly credible central banks facing a lower bound constraint on conventional interest rate policy, they are not relevant for most central banks or states of the world. Best practices of these policies are documented in this paper.
    Keywords: Central bank role , Central banks , Financial risk , Financial stability , Liquidity management , Monetary policy , Risk management ,
    Date: 2011–06–22

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