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on Banking |
| By: | Hart, Oliver; Zingales, Luigi |
| Abstract: | We study an economy where the lack of a simultaneous double coincidence of wants creates the need for a relatively safe asset (money). We show that, even in the absence of asymmetric information or an agency problem, the private provision of liquidity is inefficient. The reason is that liquidity affects prices and the welfare of others, and creators do not internalize this. This distortion is present even if we introduce lending and government money. To eliminate the inefficiency the government must restrict the creation of liquidity by the private sector. |
| Keywords: | banking; liquidity; money |
| JEL: | E41 E51 G21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8525&r=ban |
| By: | Enrico Perotti; Lev Ratnovski; Razvan Vlahu |
| Abstract: | The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation. |
| Keywords: | Banking; Capital regulation; Risk-taking; Tail risk; Systemic risk |
| JEL: | G21 G28 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:307&r=ban |
| By: | Guangling (Dave) Liu; Nkhahle E. Seeiso |
| Abstract: | This paper studies the impacts of bank capital regulation on business cycle fluctuations. To do so, we adopt the Bernanke et al. (1999) "financial accelerator" model (BGG), to which we augment a banking sector to study the procyclical nature of Basel II claimed in the literature. We first study the impacts of a negative shock to entrepreneur's net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impacts of a negative shock to the entrepreneurs' net worth when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further ampliflies the financial accelerator effect through the external finance premium channel, which in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable. |
| Keywords: | Business cycle fluctuations, Financial accelerator, Bank capital requirement, Monetary policy |
| JEL: | E32 E44 G28 E50 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:221&r=ban |
| By: | Kartik Anand; Prasanna Gai; Sujit Kapadia; Simon Brennan; Matthew Willison |
| Abstract: | We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents – domestic banks, international financial institutions, and firms. Calibrating the model to advanced country banking sector data, we obtain sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyze how our results are influenced by firesale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices. |
| Keywords: | Contagion, Financial crises, Network models, Systemic risk |
| JEL: | C63 G21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-051&r=ban |
| By: | Ross Levine; Alexey Levkov; Yona Rubinstein |
| Abstract: | We provide the first assessment of whether an intensification of product market competition reduces the racial wage gap exactly where taste-based theories predict that competition will reduce labor market discrimination. in economies where employers have strong racial prejudices. We use bank deregulation across the U.S. states to identify an intensification of competition among banks, which in turn lowered entry barriers facing nonfinancial firms, especially firms that depend heavily on bank credit. Consistent with taste-based theories, we find that competition boosted blacks' relative residual wages within the banking industry and bank-dependent industries, but only in states with strong tastes for discrimination. |
| Keywords: | Discrimination, imperfect competition, banks, regulation |
| JEL: | J7 J31 D43 D3 G21 G28 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1069&r=ban |
| By: | Martin Cihák; Ryan Scuzzarella; Sònia Muñoz |
| Abstract: | When a country’s banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using model simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between financial stability of a country’s banking sector and its interconnectedness. In particular, for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear. |
| Date: | 2011–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/186&r=ban |
| By: | Gregorio Impavido; Ahmed I Al-Darwish; Michael Hafeman; Malcolm Kemp; Padraic O'Malley |
| Abstract: | In today’s financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should improve the stability of these connections, but could have unintended consequences for cost of capital, funding patterns, interconnectedness, and risk migration. |
| Date: | 2011–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/187&r=ban |
| By: | Darrell Duffie |
| Abstract: | Here, I present and discuss a “10-by-10-by-10” network-based approach to monitoring systemic financial risk. Under this approach, a regulator would analyze the exposures of a core group of systemically important financial firms to a list of stressful scenarios, say 10 in number. For each scenario, about 10 such designated firms would report their gains or losses. Each reporting firm would also provide the identities of the 10, say, counterparties with whom the gain or loss for that scenario is the greatest in magnitude relative to all counterparties. The gains or losses with each of those 10 counterparties would also be reported, scenario by scenario. Gains and losses would be measured in terms of market value and also in terms of cash flow, allowing regulators to assess risk magnitudes in terms of stresses to both economic values and also liquidity. Exposures would be measured before and after collateralization. One of the scenarios would be the failure of a counterparty. The “top ten” counterparties for this scenario would therefore be those whose defaults cause the greatest losses to the reporting firm. In eventual practice, the number of reporting firms, the number of stress scenarios, and the number of major counterparties could all exceed 10, but it is reasonable to start with a small reporting system until the approach is better understood and agreed upon internationally. |
| JEL: | G28 G32 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17281&r=ban |
| By: | Enrique Alberola (Banco de España); Carlos Trucharte (Banco de España); Juan Luis Vega (Banco de España) |
| Abstract: | The view that central banks must play a greater role in preserving financial stability has gained considerable ground in the aftermath of the crisis and macroprudential policy has become a central pillar to deal with financial stability. The policy frame of macroprudential policy, its toolbox and interactions with other policies is not completely established yet, though. In this context, Spain’s ten-year experience with its dynamic provision is a key reference. The analysis shows that, during the current financial crisis, dynamic provisions have proved useful to mitigate —to a limited extent— the build-up of risks and, above all, to provide substantial loss absorbency capacity to the financial institutions, suggesting that it could be an important tool for other banking systems. However, it is not the macro-prudential panacea: it needs to be complemented and be consistent with the rest of policies, either within the macro-prudential or in the broader context of macroeconomic management, including monetary policy. While there is a higher awareness of the contribution of monetary policy to financial stability, its role is in practice limited. The case of the euro area is particularly telling in this respect: macro-financial imbalances developed in sectors where financial integration was low and the effects hence were confined to the domestic economies. The asymmetry between a supranational monetary policy plus macroprudential surveillance and domestic implementation of macroprudential policies raises a set of issues which are worth exploring. |
| Keywords: | Macroprudential policy, Dynamic provision, Central banks |
| JEL: | E52 E58 G28 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1105&r=ban |
| By: | Canestraro, Davide; Dacorogna, Michel |
| Abstract: | (Re)insurance companies need to model their liabilities' portfolio to compute the risk-adjusted capital (RAC) needed to support their business. The RAC depends on both the distribution and the dependence functions that are applied among the risks in a portfolio. We investigate the impact of those assumptions on an important concept for (re)insurance industries: the diversification gain. Several copulas are considered in order to focus on the role of dependencies. To be consistent with the frameworks of both Solvency II and the Swiss Solvency Test, we deal with two risk measures: the Value-at-Risk and the expected shortfall. We highlight the behavior of different capital allocation principles according to the dependence assumptions and the choice of the risk measure. |
| Keywords: | Capital Allocation; Copula; Dependence; Diversification Gain; Model Uncertainty; Monte Carlo Methods; Risk-Adjusted Capital; Risk Measure |
| JEL: | C10 G11 C15 |
| Date: | 2010–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32831&r=ban |
| By: | Pierluigi Bologna |
| Abstract: | This paper tests the role of different banks’ liquidity funding structures in explaining the banks’ failures, which occurred in the United States between 2007 and 2009. The results highlight that funding is indeed a significant factor in explaining banks’ probability of default. By confirming the role of funding as the driver of banking crisis, the paper also recognizes that the new liquidity framework proposed by the Basel Committee on Banking Supervision appears to have the features to strenghten banks’ liquidity conditions and improve financial stability. Its correct implementation together with closer supervision of banks’ liquidity and funding conditions appear, however, the determinant for such improvements to be achieved. |
| Keywords: | Banking crisis , Bank supervision , Basel Core Principles , Deposit insurance , Liquidity , |
| Date: | 2011–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/180&r=ban |
| By: | Kartik Anand; Prasanna Gai; Matteo Marsili |
| Abstract: | The breakdown of short-term funding markets was a key feature of the global financial crisis of 2007/8. Combining insights from the literature on global games and network growth, we develop a simple model that sheds light on how network topology interacts with the funding structure of financial institutions to determine system-wide crises. We show how the arrival of bad news about a financial institution leads others to lose confidence in it and how this, in turn, spreads across the entire interbank network. The rate of system-wide bank failure is rendered endogenous, depending crucially on both the rate at which bad news arrives and on the maturity of debt contracts. The conditions under which the financial system makes a sharp transition from a dense network of credit relations to a sparse network where credit freezes readily occur are characterized. Our results also emphasize the role of hysteresis – once broken, credit relations take a long time to re-establish as a result of common knowledge of the equilibrium. Our findings shed light on the nature of public policy responses both during and after the crisis. |
| Keywords: | interbank networks, credit crisis, liquidity freeze |
| JEL: | C72 G21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-052&r=ban |
| By: | Joseph P. Hughes; Loretta J. Mester |
| Abstract: | Earlier studies found little evidence of scale economies at large banks; later studies using data from the 1990s uncovered such evidence, providing a rationale for very large banks seen worldwide. Using more recent data, the authors estimate scale economies using two production models. The standard risk-neutral model finds little evidence of scale economies. The model using more general risk preferences and endogenous risk-taking finds large scale economies. The authors show that these economies are not driven by too-big-to-fail considerations. They evaluate the cost implications of breaking up the largest banks into banks of smaller size. |
| Keywords: | Production (Economic theory) ; Risk ; Systemic risk ; Banks and banking |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-27&r=ban |
| By: | Mercedes Garcia-Escribano; Man-Keung Tang; Carlos I. Medeiros; W. Christopher Walker; Carlos Fernandez Valdovinos; Camilo E Tovar Mora; Mercedes Vera-Martin; Jorge A. Chan Lau; G. Terrier; Rodrigo O. Valdés |
| Abstract: | This paper reviews policy tools that have been used and/or are available for policy makers in the region to lean against the wind and review relevant country experiences using them. The instruments examined include: (i) capital requirements, dynamic provisioning, and leverage ratios; (ii) liquidity requirements; (iii) debt-to-income ratios; (iv) loan-to-value ratios; (v) reserve requirements on bank liabilities (deposits and nondeposits); (vi) instruments to manage and limit systemic foreign exchange risk; and, finally, (vii) reserve requirements or taxes on capital inflows. Although the instruments analyzed are mainly microprudential in nature, appropriately calibrated over the financial cycle they may serve for macroprudential purposes. |
| Keywords: | Banking sector , Capital controls , Capital flows , Credit risk , Cross country analysis , Fiscal policy , Foreign exchange , Latin America , Liquidity , Monetary policy , Risk management , |
| Date: | 2011–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/159&r=ban |
| By: | Gabriel Di Bella |
| Abstract: | The global financial crisis affected microfinance institutions (MFIs) as lending growth was constrained by scarcer borrowing opportunities, while the economic slowdown negatively impacted asset quality and profitability. It also brought to the fore the relatively high interest rates that MFIs charge to their (low-income) customers. This paper revisits the issue of systemic risk of MFIs, and finds that contrary to the evidence before the crisis, MFI performance is correlated not only to domestic economic conditions but also to changes in international capital markets. It also presents an empirical analysis of lending rates with the purpose of informing policy decisions, and finds that loan sizes, productivity, and MFI age contribute to explain differences in lending rate levels. This suggest that regulation (and policies) promoting MFI competition, and innovation in lending technologies have a better chance to result in decreased lending rates. |
| Keywords: | Global Financial Crisis 2008-2009 , Economic conditions , International capital markets , Interest rates on loans , Credit risk , Microfinance , |
| Date: | 2011–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/175&r=ban |
| By: | Larry Cordell; Yilin Huang; Meredith Williams |
| Abstract: | This paper conducts an in-depth analysis of structured finance asset-backed securities collateralized debt obligations (SF ABS CDOs), the subset of CDOs that traded on the ABS CDO desks at the major investment banks and were a major contributor to the global financial panic of August 2007. Despite their importance, we have yet to determine the exact size and composition of the SF ABS CDO market or get a good sense of the write-downs these CDOs will generate. In this paper the authors identify these SF ABS CDOs with data from Intex©, the source data and valuation software for the universe of publicly traded ABS/MBS securities and SF ABS CDOs. They estimate that 727 publicly traded SF ABS CDOs were issued between 1999 and 2007, totaling $641 billion. Once identified, they describe how and why multisector structured finance CDOs became subprime CDOs, and show why they were so susceptible to catastrophic losses. The authors then track the flows of subprime bonds into CDOs to document the enormous cross-referencing of subprime securities into CDOs. They calculate that $201 billion of the underlying collateral of these CDOs was referenced by synthetic credit default swaps (CDSs) and show how some 5,500 BBB-rated subprime bonds were placed or referenced into these CDOs some 37,000 times, transforming $64 billion of BBB subprime bonds into $140 billion of CDO assets. For the valuation exercise, the authors estimate that total write-downs on SF ABS CDOs will be $420 billion, 65 percent of original issuance balance, with over 70 percent of these losses having already been incurred. They then extend the work of Barnett-Hart (2009) to analyze the determinants of expected losses on the deals and AAA bonds and examine the performance of the dealers, collateral managers, and rating agencies. Finally, the authors discuss the implications of their findings for the “subprime CDO crisis” and discuss the many areas for future work. |
| Keywords: | Debt ; Securities ; Asset-backed financing ; Banks and banking |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-30&r=ban |
| By: | Nikoloz Gigineishvili |
| Abstract: | Numerous empirical studies have found that the strength of the interest rate pass-through varies markedly across countries and markets. The causes of such heterogeneity have attracted considerably less attention so far. Unlike other studies that mainly focus on small groups of mostly developed and emerging markets in the same region, this paper expands the cross-sectional coverage to 70 countries from all regions, including low income, emerging and developed countries. It uses a wide range of macroeconomic and financial market structure variables to uncover structural determinants of pass-through. The paper finds that per capita GDP and inflation have positive effects on pass-through, while market volatility has a negative effect. Among financial market variables exchange rate flexibility, credit quality, overhead costs, and banking competition were found to strengthen pass-through, whereas excess banking liquidity to impede it. |
| Date: | 2011–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/176&r=ban |
| By: | Hong, Hao (Cardiff Business School) |
| Abstract: | This paper examines the effectiveness of monetary aggregates through various nominal interest rates by integrating the financial sector into the Cash-in-Advance (CIA) economy. The model assumes that there are two types of representative agents in the financial sector, which are: productive banks and financial intermediates. The productive banks supply a financial service, which is an exchange technology service to households and financial intermediates receive savings fund from savers and offer loans to borrowers. The monetary expansions are increased banking costs through the rate of inflation. It leads households to use more exchange credit relative to cash at the goods market. Since the number of savings funds is equal to the number of exchange credits used at the goods market, money injections are lower the nominal interest rate on saving as the saving fund increases with exchange credit. By assuming that firms are the only borrowers at the capital market from Fuerst (1992), a lower nominal interest rate on the saving fund reduces the marginal cost of labour and increases labour demand. Meanwhile, the increasing marginal cost of money through the expected inflation effect has a negative effect on labour supply. With labour demand dominating labour supply effects, both output and employment increase with monetary expansion. The paper is able to generate a decreasing nominal interest rate with an increasing money supply with an absence of limited participation monetary shocks from Lucas (1990); and by allowing firms to borrow wage bills payment from financial intermediates, it examines the positive response of aggregate output subject to monetary expansion under flexible price framework. |
| Keywords: | monetary transmission; business cycles; banking sector; interest rates |
| JEL: | E10 E44 E51 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/18&r=ban |
| By: | Asha Sundaram |
| Abstract: | This paper looks at the impact of trade liberalization on output, factor intensity and labor productivity of micro enterprises with differential access to banks. It uses Indian data on micro enterprises employing fewer than ten workers in the manufacturing sector and finds that trade liberalization, measured by a fall in the tariff, is associated with higher enterprise output, capital-labor ratios and labor productivity in districts with a larger number of bank branches per capita. Evidence is consistent with strong complementarities between trade liberalization effects and better access to credit and greater economic dynamism due to greater bank presence in the enterprise’s location. In addition, the research points to greater likelihood of outsourcing of production activity to micro enterprises in more open industries. The study highlights the role of credit market institutions, labor regulation and linkages between micro enterprises and large firms in determining the effects of trade liberalization on developing country manufacturing. |
| Keywords: | Trade Reform, Banks, Manufacturing, Informal Firms, Productivity, Outsourcing |
| JEL: | F16 J32 L24 O14 O17 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:225&r=ban |
| By: | Mwanza Nkusu |
| Abstract: | We analyze the link between nonperforming loans (NPL) and macroeconomic performance using two complementary approaches. First, we investigate the macroeconomic determinants of NPL in panel regressions and confirm that adverse macroeconomic developments are associated with rising NPL. Second, we investigate the feedback between NPL and its macroeconomic determinants in a panel vector autoregressive (PVAR) model. The impulse response functions (IRFs) attribute to NPL a central role in the linkages between credit market frictions and macrofinancial vulnerability. They suggest that a sharp increase in NPL triggers long-lived tailwinds that cripple macroeconomic performance from several fronts. |
| Keywords: | Banks , Business cycles , Credit risk , Developed countries , Economic models , Loans , |
| Date: | 2011–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/161&r=ban |
| By: | Vittas, Dimitri |
| Abstract: | This paper discusses the mechanics and regulation of participating and unit-linked variable payout annuities. These annuities offer benefits that are not fixed in either nominal or real terms but depend on the performance of the fund or funds in which the underlying reserve assets are invested, their profit sharing features, and the treatment of longevity risk. The paper focuses on the treatment of investment and longevity risks by different types of these annuities and underscores the challenge of establishing a robust and effective framework of regulation and supervision for these products. The paper also addresses the exposure of annuitants to integrity risk and places special emphasis on the need for a high level of meaningful transparency. |
| Keywords: | Debt Markets,Insurance&Risk Mitigation,Investment and Investment Climate,Pensions&Retirement Systems,Non Bank Financial Institutions |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5762&r=ban |
| By: | Philip Keitel |
| Abstract: | On April 8-9, 2010, the Payment Cards Center of the Federal Reserve Bank of Philadelphia hosted a conference that brought together leaders in the prepaid card industry, regulators, consumer groups, law enforcement agents, and industry researchers to discuss the economics of prepaid cards and the benefits and costs of their regulation from the standpoint of several different product categories. In particular, the conference examined ways in which prepaid card products can differ, how the industry has developed over time, ongoing industry dynamics, ways in which the usefulness of prepaid products to criminals might be limited, whether consumers who use prepaid cards are adequately protected, and the challenges facing regulators. This paper summarizes the highlights from the presentations given at the conference and the discussions that ensued. |
| Keywords: | Point-of-sale-systems ; Consumer credit |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpdp:11-03&r=ban |
| By: | Satyajit Chatterjee; Burcu Eyigungor |
| Abstract: | The authors construct a quantitative equilibrium model of the housing sector that accounts for the homeownership rate, the average foreclosure rate, and the distribution of home-equity ratios across homeowners prior to the recent boom and bust in the housing market. They analyze the key mechanisms that account for these facts, including the preferential tax treatment of housing and in ation. The authors then use the model to gain a deeper understanding of the recent housing and mortgage crisis by studying the consequence of an unanticipated increase in the supply of housing (overbuilding shock). They show that the model can account for the observed decline in house prices and much of the increase in the foreclosure rate if two additional forces are taken into account: (i) the lengthening of the time to complete a foreclosure (during which a defaulter can stay rent-free in his house) and (ii) the tightening of credit constraints in the market for new mortgages. |
| Keywords: | Foreclosure ; Global financial crisis ; Mortgage loans |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-26&r=ban |
| By: | Armen Hovakimian; Ayla Kayhan; Sheridan Titman |
| Abstract: | Default probability plays a central role in the static tradeoff theory of capital structure. We directly test this theory by regressing the probability of default on proxies for costs and benefits of debt. Contrary to predictions of the theory, firms with higher bankruptcy costs, i.e., smaller firms and firms with lower asset tangibility, choose capital structures with higher bankruptcy risk. Further analysis suggests that the capital structures of smaller firms with lower asset tangibility, which tend to have less access to capital markets, are more sensitive to negative profitability and equity value shocks, making them more susceptible to bankruptcy risk. |
| JEL: | G3 G33 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17290&r=ban |