New Economics Papers
on Banking
Issue of 2011‒08‒15
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Capital Structure, Credit Risk, and Macroeconomic Conditions By Dirk Hackbarth; Jianjun Miao; Erwan Morellec
  2. Stories of the Twentieth Century for the Twenty-First By Gourinchas, Pierre-Olivier; Obstfeld, Maurice
  3. Weathering the financial crisis: good policy or good luck? By Stephen Cecchetti; Michael R King; James Yetman
  4. Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches? By Isil Erel; Taylor D. Nadauld; René M. Stulz
  5. International factor mobility, informal interest rate and capital market imperfection: a general equilibrium analysis By Chaudhuri, Sarbajit; Gupta, Manash Ranjan
  6. L'intermédiation financière dans l'analyse macroéconomique : Le défi de la crise By Eleni Iliopulos; Thepthida Sopraseuth
  7. Constituencies and Legislation: The Fight over the McFadden Act of 1927 By Raghuram G. Rajan; Rodney Ramcharan
  8. The impact of sovereign credit risk on bank funding conditions By Panetta, Fabio; Correa, Ricardo; Davies, Michael; Di Cesare, Antonio; Marques, José-Manuel; Nadal de Simone, Francisco; Signoretti, Federico; Vespro, Cristina; Vildo, Siret; Wieland, Martin; Zaghini, Andrea
  9. Entry deterrence in banking: the role of cost asymmetry and adverse selection By Mallick, Indrajit
  10. Identification of credit supply shocks in a Bayesian SVAR model of the Hungarian economy By Bálint Tamási; Balázs Világi
  11. "Financial-Sector Shocks in a Credit-View Model" By Burton A. Abrams
  13. Households' Time Allocation to Micro Credit By Akhimienmhonan, Douglas; Fulton, Murray E.
  14. The Current State of Financial and Regulatory Frameworks in Asian Economies: The Case of India By Gupta, Abhijit Sen
  15. Structural equation modeling of eBankQual scale: a study of E-Banking in India By Kumbhar, Vijay
  16. Awareness and use of m-banking services in agriculture: The case of smallholder farmers in Kenya By Kirui, Oliver K.; Okello, Julius Juma; Nyikal, Rose Adhiambo
  18. An artificial neural network approach for assigning rating judgements to Italian Small Firms By Falavigna Greta

  1. By: Dirk Hackbarth; Jianjun Miao; Erwan Morellec
    Abstract: This paper develops a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing policies to the position of the economy in the business cycle phase. We then demonstrate that this simple observation has a wide range of empirical implications for corporations. Notably, we show that our model can replicate observed debt levels and the countercyclicality of leverage ratios. We also demonstrate that it can reproduce the observed term structure of credit spreads and generate strictly positive credit spreads for debt contracts with very short maturities. Finally, we characterize the impact of macroeconomic conditions on the pace and size of capital structure changes, and debt capacity.
    Keywords: Dynamic capital structure, Credit spreads, Macroeconomic conditions
    JEL: G12 G32 G33
    Date: 2010–11
  2. By: Gourinchas, Pierre-Olivier; Obstfeld, Maurice
    Abstract: A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century’s first global crisis. A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and significant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis.
    Keywords: banking crisis; Credit boom; currency crisis; emerging markets; leverage; sovereign default
    JEL: E44 F32 F34 G15 G21 N10
    Date: 2011–08
  3. By: Stephen Cecchetti; Michael R King; James Yetman
    Abstract: The macroeconomic performance of individual countries varied markedly during the 2007-09 global financial crisis. While China's growth never dipped below 6% and Australia's worst quarter was no growth, the economies of Japan, Mexico and the United Kingdom suffered annualised GDP contractions of 5-10% per quarter for five to seven quarters in a row. We exploit this cross-country variation to examine whether a country's macroeconomic performance over this period was the result of pre-crisis policy decisions or just good luck. The answer is a bit of both. Better-performing economies featured a better-capitalised banking sector, lower loan-to-deposit ratios, a current account surplus, high foreign exchange reserves and low levels and growth rates of private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.
    Keywords: financial crisis, principal components
    Date: 2011–08
  4. By: Isil Erel; Taylor D. Nadauld; René M. Stulz
    Abstract: We estimate holdings of highly-rated tranches of mortgage securitizations of American deposit-taking banks ahead of the credit crisis and evaluate hypotheses that have been advanced to explain these holdings. We find that holdings of highly-rated tranches were economically trivial for the typical bank, but banks with greater holdings performed more poorly during the crisis. Though univariate comparisons show that banks with large trading books had greater holdings, the holdings of highly-rated tranches are not higher for banks with large trading books in regressions that control for bank size. The ratio of highly-rated tranches holdings to assets increases with bank assets, but not for banks with more than $50 billion of assets. This evidence is inconsistent with explanations for holdings of highly-rated tranches that emphasize the incentives of banks deemed “too-big-to-fail”. Further, the evidence does not provide support for “bad incentives” theories of holdings of highly-rated tranches. We find, however, that banks active in securitization held more highly-rated tranches. Such a result can be consistent with regulatory arbitrage as well as with securitizing banks holding highly-rated tranches to convince investors of the quality of these securities. Our evidence supports the latter hypothesis.
    JEL: G21
    Date: 2011–08
  5. By: Chaudhuri, Sarbajit; Gupta, Manash Ranjan
    Abstract: This paper makes a pioneering attempt to provide a theory of determination of interest rate in the informal credit market in a small open economy in terms of a three-sector general equilibrium model. There are two informal sectors which obtain production loans from a monopolistic moneylender and employ labour from the informal labour market. On the other hand, the formal sector employs labour at an institutionally fixed wage rate and takes loans from the competitive formal credit market. We show that an inflow of foreign capital and/or an emigration of labour raises (lowers) the informal (formal) interest rate while lowers the competitive wage rate in the informal labour market when the informal manufacturing sector is more capital-intensive vis-à-vis the agricultural informal sector. International factor mobility, therefore, increases the degrees of distortions in both the factor markets in this case.
    Keywords: Informal credit; formal credit; moneylender; foreign capital; emigration; general equilibrium
    JEL: F22 O17 F21 D42
    Date: 2011–08–08
  6. By: Eleni Iliopulos (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPREMAP - Centre pour la recherche économique et ses applications); Thepthida Sopraseuth (CEPREMAP - Centre pour la recherche économique et ses applications, GAINS-TEPP - Université du Maine)
    Abstract: Dans cet article, nous proposons une revue de la littérature sur les frictions financières dans les modèles d'équilibre général intertemporels et stochastiques. Nous présentons en premier lieu les contributions pionnières qui ont analysé les effets d'amplification associés à l'accélérateur financier. Nous procédons ensuite à un examen de la littérature foisonnante apparue à la suite de la crise financière. Les contributions récentes visent à dépasser les limites des modèles fondateurs en proposant des modélisations plus fine de l'activité des intermédiaires financiers et de leur impact macroéconomique.
    Keywords: Frictions financières, intermédiaire financier, politique monétaire, fluctuations.
    Date: 2011–07
  7. By: Raghuram G. Rajan; Rodney Ramcharan
    Abstract: The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching. Congressional votes for the act therefore could reflect the strength of various interests in the district for expanded banking competition. We find congressmen in districts in which landholdings were concentrated (suggesting a landed elite), and where the cost of bank credit was high and its availability limited (suggesting limited banking competition and high potential rents), were significantly more likely to oppose the act. The evidence suggests that while the law and the overall regulatory structure can shape the financial system far into the future, they themselves are likely to be shaped by well-organized elites, even in countries with benign political institutions.
    JEL: G21 K2 N22
    Date: 2011–08
  8. By: Panetta, Fabio; Correa, Ricardo; Davies, Michael; Di Cesare, Antonio; Marques, José-Manuel; Nadal de Simone, Francisco; Signoretti, Federico; Vespro, Cristina; Vildo, Siret; Wieland, Martin; Zaghini, Andrea
    Abstract: The financial crisis and the ensuing recession have caused a sharp deterioration in public finances across advanced economies, raising investor concerns about sovereign risk. The concerns have so far mainly affected the euro area, where some countries have seen their credit ratings downgraded during 2009−11 and their funding costs rise sharply. Other countries have also been affected, but to a much lesser extent. Greater sovereign risk is already having adverse effects on banks and financial markets. Looking forward, sovereign risk concerns may affect a broad range of countries. In advanced economies, government debt levels are expected to rise over coming years, due to high fiscal deficits and rising pension and health care costs. In emerging economies, vulnerability to external shocks and political instability may have periodic adverse effects on sovereign risk. Overall, risk premia on government debt will likely be higher and more volatile than in the past. In some countries, sovereign debt has already lost its risk-free status; in others, it may do so in the future. The challenge for authorities is to minimise the negative consequences for bank funding and the flow-on effects on the real economy. This report outlines the impact of sovereign risk concerns on the cost and availability of bank funding over recent years. It then describes the channels through which sovereign risk affects bank funding. The last section summarises the main conclusions and discusses some implications for banks and the official sector. Two caveats are necessary before discussing the main findings. First, the analysis focuses on causality going from sovereigns to banks, as is already the case in some countries, and, looking forward, is a possible scenario for other economies. But causality may clearly also go from banks to sovereigns. However, even in this second case, sovereign risk eventually acquires its own dynamics and compounds the problems of the banking sector. Second, the report examines the link between sovereign risk and bank funding in general terms, based on recent experience and research. It does not assess actual sovereign risk and its impact on bank stability in individual countries at the present juncture.
    Keywords: Sovereign debt; banks; financial turmoil
    JEL: G21
    Date: 2011–04
  9. By: Mallick, Indrajit
    Abstract: Abstract In this paper, we review and explore the strategic mechanisms that deter entry in banking. The literature relies on externality between banks to generate entry deterrence. Typically, the externality generated is caused by differential adverse selection faced by incumbents and entrants. In this paper it is shown that adverse selection problem between a bank and its borrowers is neither a necessary nor a sufficient condition for entry deterrence. We show that cost asymmetry between different types of incumbents and private information about costs can generate conditional entry deterrence. This source of externality can cause entry deterrence just as other types of externalities created by differential adverse selection. Forward contracts can act as signaling device for incumbent costs. Incorporating adverse selection problem in the credit market in fact relaxes entry conditions: entry can take place even if the incumbent is of strong type and can signal credibly.
    Keywords: Key Words: Entry Deterrence; Cost Asymmetry; Adverse Selection; Signaling
    JEL: C70 G21
    Date: 2011–07–08
  10. By: Bálint Tamási (Magyar Nemzeti Bank (central bank of Hungary)); Balázs Világi (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: Using Hungarian macroeconomic and financial data, we estimate a Bayesian structural VAR model suitable for macroprudential simulations. We identify standard macroeconomic and credit supply shocks by sign and zero restrictions. In contrast to the previous literature, different types of credit shocks are distinguished in our paper: a risk assessment and a policy shock. Our main findings are the following. First, we demonstrate that both credit supply and macroeconomic shocks explain the variance of endogenous variables at roughly similar order of magnitude. Second, it is shown that credit supply shocks do not have a dominant role in the decline of the Hungarian economy over the crisis period that started in 2008, although their contribution was non-negligible. Third, the importance of unidentified shocks increased in the crisis period.
    Keywords: Bayesian SVAR, zero and sign restrictions, credit supply shocks
    JEL: C11 C32 E32 E44
    Date: 2011
  11. By: Burton A. Abrams (Department of Economics,University of Delaware)
    Abstract: A variation of the Bernanke-Blinder credit-view model reveals that holding constant the money supply following various financial-sector shocks, including an autonomous drop in the money multiplier, is insufficient to prevent aggregate demand from decreasing.
    Keywords: credit-view model, monetary policy, money-supply model
    JEL: F41 E51
    Date: 2011
  12. By: Guivanna Aguilar (Departamento de Economía - Pontificia Universidad Católica del Perú)
    Abstract: The objective of this study is to make a quantitative evaluation of the impact that the expansion of the microcredit has had on the growth of the economic activity in the Peruvian regions. Having as a theoretical framework the developed theory to analyze the relationship between economic growth and financial development and with annual information for 24 regions of the country in period 2001 - 2008, a panel data model is estimated with per capita GDP growth like dependent variable and the loans provided by various types of microfinance institutions, the loans of the commercial banks and other variables that affect the economic growth like explanatory variables. The found evidence suggests that the microfinancial expansion has a positive impact in the growth of the economic activity of the regions unlike which it happens with the expansion of the banking intermediation. A comparative static exercise show that if the loans of CMAC, CRAC and specialized banks get to rich 10% of the GDP in each region, the rate of growth of the GDP per capita would rise in at least 4 percentage points. In the regions with greater poverty increase is more impressive and significant.
    Keywords: Microfinanzas, intermediarios financieros, cajas municipales, cajas rurales, crecimiento regional.
    JEL: C32 E32 E43 E52
    Date: 2011
  13. By: Akhimienmhonan, Douglas; Fulton, Murray E.
    Abstract: This paper presents two models in explaining time allocation to micro credit (MC) by households in North America. The single-period model explains the optimal allocation of time to a microenterprise in any given period, conditional on the household having self-selected into the MC program. A householdâs time allocation is negatively affected by its wage in paid employment, its degree of risk aversion, and its relative preference for leisure. The multi-period model explains the householdâs decision to self-select into the MC program. This decision is anchored on the sequential lending attribute of most MC programs. Sequential lending means that a householdâs current use of MC gives it access to greater funds in the future. The likelihood of self-selecting into the program is positively influenced by the size of the micro credit loan, the future streams of loans anticipated from current participation, the rate of appreciation of the investment over time as well as the householdâs discount factor. This likelihood is negatively influenced by the householdsâ wage rate in paid employment and the costs of borrowing. Under certain conditions, the household â in a bid to access a future loan â would borrow money in the short run and repay it without having invested it in a microenterprise. Implications for the demand for MC in North America are discussed.
    Keywords: Microenterprise, Sequential lending, Time allocation, Micro credit, Discount factor, Consumer/Household Economics, Food Security and Poverty, Labor and Human Capital,
    Date: 2011
  14. By: Gupta, Abhijit Sen (Asian Development Bank Institute)
    Abstract: Despite having a low exposure to the toxic assets involved in the sub-prime crisis and a gradualist approach towards liberalization of the financial sector, certain parts of the Indian financial sector were significantly affected by the global financial crisis. Though Indian policymakers reacted in a proactive manner and introduced a host of measures to counter the adverse effects of the financial crisis, the recovery has not been uniform; several markets and sectors are still reeling from the crisis’ aftershocks. The proposed Basel III norms are going to have a significant impact on the Indian financial sector.
    Keywords: india global financial crisis; indian financial sector; basel iii norms
    JEL: F41 G15 O11
    Date: 2011–08–04
  15. By: Kumbhar, Vijay
    Abstract: This study assesses the relationship between perceived quality, brand perception and perceived value with satisfaction. For the data analysis structural equation modeling (SEM) method and path analysis method were used. A result indicates that, eBankQual model is fit to assess relationship between service quality, brand perception and perceived value with overall customers’ satisfaction in e-banking service. Result of regression SEM indicates that, all 14 variables found significant and good predictors of overall satisfaction in e-banking services. However, result of SEM analysis indicates that, data supports to eBankQual model and dimensions Compensation, Convenience, Contact Facilities, Easy to Use, Responsiveness, Cost Effectiveness and System Availability including brand perception and perceived value were found more significant factors in the eBankQual model.
    Keywords: Structural Equation Modeling; Service quality; Brand perception; Perceived value; Satisfaction
    JEL: G2
    Date: 2011–05–04
  16. By: Kirui, Oliver K.; Okello, Julius Juma; Nyikal, Rose Adhiambo
    Abstract: Smallholder farmer access to agricultural finance has been a major constraint to agricultural commercialization in developing countries. The ICT revolution in Africa has however brought an opportunity to ease this constraint. The mobile phone-based banking services that started in Kenya urban centers have spread to rural areas and even other countries. Using these services farmers could receive funds invest in agriculture finance transactions. This study examines the awareness and use of m-banking services among rural farmers in Kenya. It also assesses the factors conditioning the use of such services. The study finds high awareness of m-banking services among the smallholder farmers. It also finds that education, distance to a commercial bank, membership to farmer organizations, distance to the m-banking agents, and endowment with physical and financial assets affect the use of m-banking services. It discusses the implications of these findings for policy and practice.
    Keywords: Mobile phones, m-banking services, awareness and use, smallholder farmers, Kenya, Financial Economics,
    Date: 2010–09
  17. By: S. S. RAJAN (Sri Sathya Sai Institute of Higher Learning,Prasanthinilayam Campus,Anantapur District, (A.P.)); K. L. N. REDDY (Sri Sathya Sai Institute of Higher Learning,Prasanthinilayam Campus,Anantapur District, (A.P.)); V. N. PANDIT (Sri Sathya Sai Institute of Higher Learning,Prasanthinilayam Campus,Anantapur District, (A.P.))
    Abstract: This paper attempts to examine technical efficiency and productivity performance of Indian scheduled commercial banks, for the period 1979-2008. We model a multiple output/multiple input technology production frontier using semiparametric estimation methods. The endogenity of multiple outputs is addressed by semi parametric estimates in part by introducing multivariate kernel estimators for the joint distribution of the multiple outputs and correlated random effects. Output is measured as the rupee value of total loans and total investments at the end of the year. The estimates provide robust inferences of the productivity and efficiency gains due to economic reforms.
    Keywords: Banking, Frontier efficiency, Productivity
    JEL: E23 G21 D24
    Date: 2011–07
  18. By: Falavigna Greta (Ceris - Institute for Economic Research on Firms and Growth, Moncalieri (TO), Italy)
    Abstract: Based on new regulations of Basel II Accord in 2004, banks and financial nstitutions have now the possibility to develop internal rating systems with the aim of correctly udging financial health status of firms. This study analyses the situation of Italian small firms that are difficult to judge because their economic and financial data are often not available. The intend of this work is to propose a simulation framework to give a rating judgements to firms presenting poor financial information. The model assigns a rating judgement that is a simulated counterpart of that done by Bureau van Dijk-K Finance (BvD). Assigning rating score to small firms with problem of poor availability of financial data is really problematic. Nevertheless, in Italy the majority of firms are small and there is not a law that requires to firms to deposit balance-sheet in a detailed form. For this reason the model proposed in this work is a three-layer framework that allows us to assign ating judgements to small enterprises using simple balance-sheet data.
    Keywords: rating judgements, artificial neural networks, feature selection
    JEL: C15 C45 G24
    Date: 2011–06

This issue is ©2011 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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