New Economics Papers
on Banking
Issue of 2011‒08‒09
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Coordinating Bank Failure Costs and Financial Stability By Iman van Lelyveld; Marco Spaltro
  2. Home bias in interbank lending and banks’ resolution regimes By Michele Manna
  3. Bank Risk within and across Equilibria By Itai Agur
  4. An unexpected crisis? Looking at pricing effectiveness of different banks By Valerio Vacca
  5. Capital ratios and bank lending: a matched bank approach By Mark Carlson; Hui Shan; Missaka Warusawitharana
  6. The value of repeat lending By Blaise Gadanecz; Alper Kara; Philip Molyneux
  7. Mobile banking and financial inclusion: The regulatory lessons By Klein, Michael; Mayer, Colin
  8. Risk and Regulation: The Efficiency of Italian Cooperative Banks By Cristian Barra; Sergio Destefanis; Giuseppe Lubrano Lavadera
  9. The impact of the financial crisis on inter-bank funding: evidence from Italian balance sheet data By Giuseppe Cappelletti; Antonio De Socio; Giovanni Guazzarotti; Enrico Mallucci
  10. Determinants of credit to households in a life-cycle model By Michal Rubaszek; Dobromil Serwa
  11. Financial inclusion - G20 initiatives and the role of the Bank of Italy By Giorgio Gomel; Fabio Bernasconi; Margherita Laura Cartechini; Veronica Fucile; Riccardo Settimo; Roberto Staiano
  12. Risk and the role of collateral in debt renegotiation By Neus, Werner; Stadler, Manfred
  13. L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise. By Eleni Iliopulos; Thepthida Sopraseuth
  14. Capital Structure and the Redeployability of Tangible Assets By Murillo Campello; Erasmo Giambona
  15. Enriching Information to Prevent Bank Runs By Cavalcanti, Ricardo; Monteiro, Paulo Klinger
  16. U.S. domestic and international financial reform policy: Are G20 commitments and the Dodd-Frank Act in sync? By Daniel E. Nolle
  17. Sailing through this Storm? Capital Flows in Asia during the Crisis By Cˆmdric TILLE
  18. Extreme value theory for finance: a survey By Marco Rocco
  19. A note on convergence of Peck-Shell and Green-Lin mechanisms in the Diamond-Dybvig model By Cavalcanti, Ricardo; Bertolai, Jeferson; Monteiro, Paulo Klinger

  1. By: Iman van Lelyveld; Marco Spaltro
    Abstract: Banking groups have become increasingly multinational but the institutional infrastructure to deal with solvency or liquidity problems is still largely national. This might lead to financial instability if national authorities do not internalise externalities abroad. Recently ex-ante burden sharing agreements have been established (e.g. EFSF), but little empirical work has been done on potential costs and benefits of such agreements. We estimate the costs and benefits of financial stability support for large, internationally active banks under several proposed agreements. We show costs according to the ‘national solution’, where only home authorities inject capital, as our benchmark. ‘Specific’ sharing agreements would be redistributive at the expense of smaller and East European countries (not home to large cross-border banking groups). The ‘general fund’ mechanism will smooth costs across countries but may lead to unequal redistribution of costs. We also show that coordinating bank failure costs may bring about financial stability benefits.
    Keywords: Burden sharing; crisis resolution; cross-border banks
    JEL: G18 G21
    Date: 2011–08
  2. By: Michele Manna (Bank of Italy)
    Abstract: In recent years, banks have become increasingly aware of the credit risk borne in lending in the interbank market and they select their counterparties accordingly. They may also fear that if they come across a bad borrower, rescue plans will be skewed towards domestic creditors; moreover, lenders may prefer to defend their rights in their own regulatory and legal jurisdiction. Using 2004-09 data, this paper argues that these elements, the “resolution edge” of the domestic creditor, contributed to the increase in the home bias of interbank lending by euro-area banks from mid-2007 on, while a more consistent downward pattern emerges in the home bias of banks from five non-euro-area countries (including the US and the UK). The intuition is that when the crisis broke out, euro-area banks reckoned that within-the-area cross-border interbank loans carried a distinct risk compared with domestic loans. By contrast, a large Swiss bank, for example, did not need to wait until 2007 to gauge that its business in New York was a very different matter from a deal in Zürich.
    Keywords: home bias, interbank market, euro area, banks resolution procedures
    JEL: C33 G11 G15 G21 K20
    Date: 2011–07
  3. By: Itai Agur
    Abstract: This paper models a financial sector in which there is a feedback between individual bank risk and aggregate funding market problems. Greater individual risk taking worsens adverse selection problems on the market. But adverse selection premia on that market push up bank risk taking, leading to multiple equilibria. The model identifies shifts among equilibria as a function of parameter shocks. Measures that reduce individual bank default risk within an equilibrium can actually make the system as whole more sensitive to shocks. Risks may thus seem small and market risk premia low precisely when the system as whole is most fragile.
    Keywords: Bank risk; Wholesale funding; Adverse selection; Financial crisis; Liquidity
    JEL: G21
    Date: 2011–07
  4. By: Valerio Vacca (Bank of Italy)
    Abstract: This paper shows how credit quality transition matrices of loans to Italian firms changed during a cyclical downturn (2008-09), compared with a previous time of growth (2006-07). Once transition matrices were linked to interest rates, banks appear to have been remarkably able at calibrating required risk premiums to actual idiosyncratic risk, both during expansion and recession. However, the uncertainty generated by the crisis accentuated the unexpected component of credit worsening, thus lowering pricing effectiveness. The main finding is that larger banking groups were more affected by the sudden deterioration of credit quality than smaller ones, as far as ability to price risk is concerned. The bank-size effect can be tackled through an efficient use of hard or soft information: both rating users and decentralized banks showed an above-average ability in calibrating rates to risk during the crisis; banks with a stronger relationship with borrowers smoothed the risk-price curve in normal times.
    Keywords: banking, crisis, credit migration, credit risk pricing
    JEL: G21 E43 E32
    Date: 2011–07
  5. By: Mark Carlson; Hui Shan; Missaka Warusawitharana
    Abstract: This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2009, that the relationship between capital ratios and bank lending is insignificant until the recent financial crisis. We also find that the effect of capital ratios on loan growth varies by type of loan, with some of the strongest effects in recent years being for commercial real estate loans. Finally, we show that the elasticity of bank lending with respect to capital ratios is higher when capital ratios are relatively low, suggesting that the effect of capital ratio on bank lending is nonlinear.
    Date: 2011
  6. By: Blaise Gadanecz; Alper Kara; Philip Molyneux
    Abstract: The unique structure of syndicated lending results in information asymmetries within the lending syndicate between banks of varying degrees of seniority. While previous studies have attempted to use indirect proxy measures to capture the effects of such information asymmetries, in this paper we propose a more direct measure. This offers new insights into how junior and senior banks rely on their own and each other's information sets in lending syndicates. In particular, we look at the previous number of borrowing/lending relationships between individual borrowers and lenders and the duration of these interactions. Using this new, direct and explicit measure on a sample of 5,842 syndicated loan transactions between 1993 and 2006, we find that when participant banks have information inferiority in the syndicate they require higher loan spreads to compensate for this asymmetry. This is amplified when the borrowers are more opaque. We thus show how junior participant banks with repeat relationships with the same borrower graduate from uniformed to informed lenders (the spread goes down as asymmetry diminishes) and how they rely both on the arranger's reputation and their own repeat experience with the borrower.
    Keywords: syndicated loans, repetitive lending, arranger opportunistic behaviour, arranger reputation, opaque borrowers
    Date: 2011–07
  7. By: Klein, Michael; Mayer, Colin
    Abstract: Mobile banking is growing at a remarkable speed around the world. In the process it is creating considerable uncertainty about the appropriate regulatory response to this newly emerging service. This paper sets out a framework for considering the design of regulation of mobile banking. Since it lies at the interface between financial services and telecoms, mobile banking also raises competition policy and interoperability issues that are discussed in the paper. Finally, by unbundling payments services into its component parts, mobile banking provides important lessons for the design of financial regulation more generally in developed as well as developing economies. --
    Keywords: Banking,Regulation,Microfinance,Payments System,Mobile Money
    JEL: G21 G28
    Date: 2011
  8. By: Cristian Barra (Università di Salerno); Sergio Destefanis (Università di Salerno, CELPE and CSEF); Giuseppe Lubrano Lavadera (Università di Salerno)
    Abstract: In this paper we analyse the determination of cost efficiency in a sample of Italian small banks located in different geographical areas and including two great institutional categories: cooperative banks (CB’s) and other banks. We highlight the effect of environmental factors (asset quality, local GDP per capita) on banks’ performance, and provide novel evidence in favour of the “bad luck” hypothesis suggested by Berger and De Young (Journal of Banking and Finance, 1997). Local GDP per capita strongly affects the territorial differentials for technical efficiency, especially for CB’s. This can be easily rationalised, as current regulations hamper CB’s vis-à-vis other banks in their capability to diversify territorially. Our estimates provide us with a tentative quantitative measure of the costs of missing diversification, ranging between 2 and 7 percentage points. Correspondingly, our evidence suggests that there is potentially strong endogeneity in some currently available bank performance indicators.
    Keywords: Cooperative banks, Cost efficiency, Local shocks, Territorial diversification
    JEL: D24 G21 L89
    Date: 2011–07–28
  9. By: Giuseppe Cappelletti (Bank of Italy); Antonio De Socio (Bank of Italy); Giovanni Guazzarotti (Bank of Italy); Enrico Mallucci (London School of Economics)
    Abstract: We analyze the impact of the financial crisis on the structure and the dynamics of the Italian inter-bank market, focusing on monthly banks’ assets and liabilities data between January 2007 and December 2010. The analysis is developed using an ad hoc dataset based on supervisory reports. The data contain nominative information, which allow us to identify different reporting entities and counterparts. We distinguish between intra-group and extra-group transactions, domestic and foreign counterparties, secured and unsecured positions, and short and long-term loans. We also analyse the relationships between big, medium and small groups and characterize the direction of funds between the group parent companies and the other banks of the group.
    Keywords: interbank market, financial crisis
    JEL: G21 C23 C24
    Date: 2011–07
  10. By: Michal Rubaszek (National Bank of Poland, Economic Institute; Warsaw School of Economics); Dobromil Serwa (Narodowy Bank Polski; Warsaw School of Economics)
    Abstract: This paper applies a life-cycle model with individual income uncertainty to investigate the determinants of credit to households. We show that the value of household credit to GDP ratio depends on (i) the lending-deposit interest rate spread, (ii) individual income uncertainty, (iii) individual productivity persistence, and (iv) the generosity of the pension system. Subsequently, we provide empirical evidence for the predictions of the theoretical model on the basis of data for OECD and EU countries.
    Keywords: Household credit; life cycle economies; banking sector
    JEL: E21 E43 E51
    Date: 2011
  11. By: Giorgio Gomel (Banca d'Italia); Fabio Bernasconi (Banca d'Italia); Margherita Laura Cartechini (Banca d'Italia); Veronica Fucile (Banca d'Italia); Riccardo Settimo (Banca d'Italia); Roberto Staiano (Banca d'Italia)
    Abstract: Financial exclusion concerns 2.5 billion individuals and more than 450 million enterprises. The G20 countries are committed to the reduction of this phenomenon. The Bank of Italy has a fundamental role in the field of financial inclusion, both on a national and an international scale through financial education, banking, markets and payment system supervision, and technical cooperation with other central banks. The Bank has been one of the first institutions to draw public attention to the importance of economic and financial literacy in order to enable consumers to take informed decisions. It has helped the institutions of developing countries to facilitate the financial inclusion of disadvantaged individuals through the development of small intermediaries. Innovative payment instruments can improve financial inclusion. Thanks to a recently introduced reform, the Italian retail payments market can now be accessed by intermediaries combining the provision of payment services and business activities. Mobile-phone operators can now access widely used payment systems by telephone to break into the micro-payment sector which is today dominated by cash transactions. A key role is also played by pre-paid cards.
    Keywords: G20, financial inclusion, technical assistance, mutual banks, microfinance, banking supervision, payment systems, financial literacy, consumer protection, school
    JEL: G1 G2 G29 I22 O1 O16 P13 P34
    Date: 2011–07
  12. By: Neus, Werner; Stadler, Manfred
    Abstract: In his basic model of debt renegotiation, BESTER [1994] argues that collateral is more effective if high risk projects are financed. This result, however, crucially depends on the definition of risk. Using the second-order stochastic dominance criterion introduced by ROTHSCHILD AND STIGLITZ [1970], we show that it is not a project's high risk, induced by a high probability of default, that makes collateral more effective. Instead it turns out that, given the expected return, the probability of default has no impact on the collateral's effectiveness. Moreover, a higher risk of the project caused by a higher loss given default makes the use of collateral even less effective. --
    Keywords: Debt renegotiation,Collateral,Risk,Stochastic dominance
    JEL: D81 D82 G21 G32
    Date: 2011
  13. By: Eleni Iliopulos (Centre d'Economie de la Sorbonne - Paris School of Economics et CEPREMAP); Thepthida Sopraseuth (GAINS-TEPP - Université du Maine et CEPREMAP)
    Abstract: In this paper, we review the macroeconomic literature on financial frictions and banking in a dynamic general equilibrium framework. Our work focuses first on the pioneer articles that have analyzed the amplification effects associated to the financial accelerator. We then shift our attention towards the recent literature that flourished in the aftermath of the financial crisis. Indeed, the crisis has challenged several assumptions and modeling tools that were commonly used in the DSGE literature. We thus review the main recent contributions that have tried to overcome the limits of old models.
    Keywords: Financial frictions, banking, monetary policy, business cycle.
    JEL: E3 E4 E5 G21
    Date: 2011–07
  14. By: Murillo Campello (University of Illinois and NBER); Erasmo Giambona (University of Amsterdam and Duisenberg school of finance)
    Abstract: We characterize the relation between corporate asset structure and capital structure by exploiting variation in the salability of tangible assets. Theory suggests that tangibility increases borrowing capacity because it allows creditors to more easily repossess a firm’’s assets. Tangible assets, however, are often illiquid. We show that the redeployability of tangible assets is a main determinant of corporate leverage. To establish this link, our analysis uses an instrumental variables approach that incorporates measures of supply and demand for various types of tangible assets (e.g., machines, land, and buildings). Consistent with a credit supply-side view of capital structure, we find that asset redeployability is a particularly important driver of leverage for firms that are likely to face credit frictions (small, unrated firms). Our tests also show that asset redeployability facilitates borrowing the most during periods of tight credit. Our work contributes new evidence to capital structure models that are based on contract incompleteness and limited enforceability. It does so characterizing a well-defined channel through which credit frictions affect firm financial decisions.
    Keywords: Asset tangibility; redeployability; capital structure; credit frictions; instrumental variables; asset demand
    JEL: G32
    Date: 2011–07–07
  15. By: Cavalcanti, Ricardo; Monteiro, Paulo Klinger
    Abstract: Sequential service in the banking sector, as modeled by Diamondand Dybvig (1983), is a barrier to full insurance and potential source offinancial fragility against which deposit insurance is infeasible (Wallace,1988). In this paper, we pursue a different perspective, viewingthe sequence of contacts as opportunities to extract informationthrough a larger message space with commitment to richer promises.As we show, if preferences satisfy a separating property then the desiredelimination of dominated strategies (Green and Lin, 2003) occurseven when shocks are correlated. In this manner the sequential servicepromotes stability.
    Date: 2011–07–27
  16. By: Daniel E. Nolle
    Abstract: The Dodd-Frank Act of 2010 is the keystone policy response directed at reforming U.S. financial system activities and oversight in the wake of the 2007-2009 financial crisis. The United States also has financial system reform policy commitments in the international arena, including in particular by virtue of its membership in the G20. This analysis considers U.S. policy initiatives related to a core dimension of financial system reform: risks posed by systemically important financial institutions ("SIFIs"). It provides a comparison of SIFI policy initiatives and timetables under both the Dodd-Frank Act and the G20 agenda, as reflected in the ongoing work plan of the Financial Stability Board (FSB), and poses the question "Are U.S. domestic and international financial system reform commitments in sync?" While finding that, fundamentally, the answer is "yes," the detailed comparison yields two caveats with potential policy implications. First, the two agendas differ in their relative emphasis on the coverage of both banks and nonbanks. The G20/FSB focus, at least over the near-term, is bank-centric compared with the Dodd-Frank Act, which consistently addresses both bank and nonbank financial firms. Second, implementation of Dodd-Frank Act provisions is subject to long-established U.S. law mandating that there be sufficient opportunity for public input into the rulemaking process, whereas the G20/FSB process has been less systematic and transparent on public consultation and feedback. The lesser emphasis on transparency and public input characterizing the G20/FSB policy development process may be attributable in part to the somewhat more rapid pace of the G20/FSB agenda relative to corresponding Dodd-Frank Act timelines. These observations may be relevant to the current debate over the speed and scope of Dodd-Frank Act implementation measures, and to the discussion about the future international competitiveness of U.S. banks and nonbank financial firms.
    Date: 2011
  17. By: Cˆmdric TILLE (Graduate Institute of International and Development Studies and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research)
    Abstract: The current crisis has led to an unprecedented collapse in international capital flows, with substantial heterogeneity across regions. Asian economies were relatively unaffected, despite having been the center of the storm in the crisis of the late 1990s. The contraction in capital flows for Asian countries was limited to the most acute phase of the crisis following the collapse of Lehman Brothers, after which capital flows rebounded. We find that the stronger performance of Asia primarily reflects its more limited reliance on international banking compared to Europe and the United States. We find little evidence that the drivers of capital flows had a differentiated impact in Asia. Finally, we show that while higher initial levels of foreign reserves did not insulate countries from a turnaround in private capital flows, a larger use of reserves at the height of the crisis limited the contraction in gross private outflows.
    Keywords: International Capital Flows, Banking Integration, Crisis
    Date: 2011–07
  18. By: Marco Rocco (Banca d'Italia)
    Abstract: Extreme value theory is concerned with the study of the asymptotical distribution of extreme events, that is to say events which are rare in frequency and huge with respect to the majority of observations. Statistical methods derived from this theory have been increasingly employed in finance, especially in the context of risk measurement. The aim of the present study is twofold. The first part delivers a critical review of the theoretical underpinnings of extreme value theory. The second part provides a survey of some major applications of extreme value theory to finance, namely its use to test different distributional assumptions for the data, Value-at-Risk and Expected Shortfall calculations, asset allocation under safety-first type constraints and the study of contagion and dependence across markets under stress conditions.
    Keywords: extreme value theory, risk management, fat-tailed distributions, Value-at-Risk, systemic risk, asset allocation
    JEL: C10 C16 G10 G20 G21
    Date: 2011–07
  19. By: Cavalcanti, Ricardo; Bertolai, Jeferson; Monteiro, Paulo Klinger
    Abstract: We study the e¤ects of population size in the Peck-Shell analysis ofbank runs. We nd that a contract featuring equal-treatment for al-most all depositors of the same type approximates the optimum. Becausethe approximation also satis es Green-Lin incentive constraints, when theplanner discloses positions in the queue, welfare in these alternative spec-i cations are sandwiched. Disclosure, however, is not needed since ourapproximating contract is not subject to runs.keywords: bank fragility, role of population size, role of aggregate uncer-tainty
    Date: 2011–07–27

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