New Economics Papers
on Banking
Issue of 2011‒09‒05
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Directed Clustering Coefficient as a Measure of Systemic Risk in Complex Banking Networks By Benjamin M. Tabak; Marcelo Yoshio Takami; J. M. C. Rocha; Daniel O. Cajueiro
  2. The 2007 subprime market crisis through the lens of European Central Bank auctions for short-term funds By Nuno Cassola; Ali Hortacsu; Jakub Kastl
  3. Operational–risk Dependencies and the Determination of Risk Capital By Stefan Mittnik; Sandra Paterlini; Tina Yener
  4. Conflicts of interest on corporate boards: The effect of creditor-directors on acquisitions By Jens Hilscher; Elif Sisli-Ciamarra
  5. Financial Instability - a Result of Excess Liquidity or Credit Cycles? By Christian Heebøll-Christensen
  6. Bank Relationships, Business Cycles, and Financial Crises By Galina Hale
  7. Substitution between net and gross settlement systems: A concern for financial stability? By Craig, Ben; Fecht, Falko
  8. Sovereign and Bank Credit Risk during the Global Financial Crisis By Irina Stanga
  9. Crises, rescues, and policy transmission through international banks By Buch, Claudia M.; Koch, Cathérine Tahmee; Koetter, Michael
  10. Default Predictors in Retail Credit Scoring: Evidence from Czech Banking Data By Evzen Kocenda; Martin Vojtek
  11. The Economic Perspective of Bank Bankruptcy Law By Matej Marinc; Razvan Vlahu
  12. Articulations entre banques commerciales et institutions de microfinance en Afrique subsaharienne: cas du Cameroun By Moulin, Bertrand; Teuwa N., Hugues M.
  13. Which Households Use Banks? Evidence from the Transition Economies By Thorsten Beck; Martin Brown
  14. Efficiency and Its Impact on the Performance of European Commercial Banks By Mohsen Afsharian; Anna Kryvko; Peter Reichling
  15. Liquidity management of U.S. global banks: Internal capital markets in the great recession By Nicola Cetorelli; Linda S. Goldberg
  16. Mapping change in the federal funds market By Morten L. Bech; Carl T. Bergstrom; Rodney J. Garratt; Martin Rosvall
  17. Managing Capital Inflows: The Role of Capital Controls and Prudential Policies By Mahvash S. Qureshi; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon

  1. By: Benjamin M. Tabak; Marcelo Yoshio Takami; J. M. C. Rocha; Daniel O. Cajueiro
    Abstract: Recent literature has focused on the study of systemic risk in complex networks. It is clear now, after the crisis of 2008, that the aggregate behavior of the interaction among agents is not straightforward and it is very difficult to predict. Contributing to this debate, this paper shows that the directed clustering coefficient may be used as a measure of systemic risk in complex networks. Furthermore, using data from the Brazilian bank interbank network, we show that the directed clustering coefficient is negatively correlated with domestic interest rates.
    Date: 2011–08
  2. By: Nuno Cassola (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ali Hortacsu (The University of Chicago, Department of Economics, 1126 E. 59th Street, Chicago, IL 60637, USA.); Jakub Kastl (Stanford University, Department of Economics, Landau Economics Building, 579 Serra Mall, USA.)
    Abstract: We study European banks’ demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank’s auctions for one-week loans, their main channel of monetary policy implementation. Our analysis provides a high-frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks’ bids reflect their cost of obtaining short-term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a naïve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short-term funding, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short-term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country-of-origin. Estimated funding costs of banks are also predictive of market- and accounting-based measures of bank performance, suggesting the external validity of our findings. JEL Classification: D44, E58, G01.
    Keywords: Multiunit auctions, primary market, structural estimation, subprime market, liquidity crisis.
    Date: 2011–08
  3. By: Stefan Mittnik; Sandra Paterlini; Tina Yener
    Abstract: With the advent of Basel II, risk–capital provisions need to also account for operational risk. The specification of dependence structures and the assessment of their effects on aggregate risk–capital are still open issues in modeling operational risk. In this paper, we investigate the potential consequences of adopting the restrictive Basel’s Loss Distribution Approach (LDA), as compared to strategies that take dependencies explicitly into account. Drawing on a real–world database, we fit alternative dependence structures, using parametric copulas and nonparametric tail–dependence coefficients, and discuss the implications on the estimation of aggregate risk capital. We find that risk–capital estimates may increase relative to that derived for the LDA when accounting explicitly for the presence of dependencies. This phenomenon is not only be due to the (fitted) characteristics of the data, but also arise from the specific Monte Carlo setup in simulation–based risk–capital analysis.
    Keywords: Copula, Nonparametric Tail Dependence, Basel II, Loss Distribution Approach, Value–at–Risk, Subadditivity
    JEL: C14 C15 G10 G21
    Date: 2011–08
  4. By: Jens Hilscher (International Business School, Brandeis University); Elif Sisli-Ciamarra (International Business School, Brandeis University)
    Abstract: This paper investigates the effects on acquisitions of creditor-director presence on corporate boards. Using a hand-collected dataset for boards of large U.S. corporations, we find that companies with creditor-directors are more likely to engage in acquisitions with attributes that are unfavorable to shareholders and favorable to creditors (more diversifying and fewer cash-financed acquisitions). Consistent with these patterns, acquisition announcements are associated with lower shareholder value, higher creditor value, and lower overall firm value when a creditor is present. These results support the hypothesis that conflicts of interest between shareholders and creditors result in value-destroying acquisitions. In addition, commercial bankers with no lending relationship are not affected by conflicts of interest. Where appropriate, our estimation strategy takes into account that there may be self selection of bankers onto corporate boards.
    Keywords: Shareholder-Creditor Conflicts, Acquisitions, Board of Directors, Bankers on Boards, Corporate Governance, Credit Market Reaction
    JEL: G21 G34
    Date: 2011–08
  5. By: Christian Heebøll-Christensen (Department of Economics, University of Copenhagen)
    Abstract: This paper compares the financial destabilizing effects of excess liquidity versus credit growth, in relation to house price bubbles and real economic booms. The analysis uses a cointegrated VAR model based on US data from 1987 to 2010, with a particulary focus on the period preceding the global financial crisis. Consistent with monetarist theory, the results suggest a stable money supply-demand relation in the period in question. However, the implied excess liquidity only resulted in financial destabilizing effect after year 2000. Meanwhile, the results also point to persistent cycles of real house prices and leverage, which appear to have been driven by real credit shocks, in accordance with post-Keynesian theories on financial instability. Importantly, however, these mechanisms of credit growth and excess liquidity are found to be closely related. In regards to the global financial crisis, a prolonged credit cycle starting in the mid-1990s - and possibly initiated subprime mortgage innovations - appears to have created a long-run housing bubble. Further fuelled by expansionary monetary policy and excess liquidity, the bubble accelerated in period following the dot-com crash, until it finally burst in 2007.
    Keywords: financial instability; housing bubbles; credit view; money view; cointegrated VAR model; impulse response analysis
    JEL: C32 E51 E44 G21
    Date: 2011–08
  6. By: Galina Hale
    Abstract: The importance of information asymmetries in the capital markets is commonly accepted as one of the main reasons for home bias in investment. We posit that effects of such asymmetries may be reduced through relationships between banks established through bank-to-bank lending and provide evidence to support this claim. To analyze dynamics of formation of such relationships during 1980-2009 time period, we construct a global banking network of 7938 banking institutions from 141 countries. We find that recessions and banking crises tend to have negative effects on the formation of new connections and that these effects are not the same for all countries or all banks. We also find that the global financial crisis of 2008-09 had a large negative impact on the formation of new relationships in the global banking network, especially by large banks that have been previously immune to effects of banking crises and recessions.
    JEL: F34 F36
    Date: 2011–08
  7. By: Craig, Ben; Fecht, Falko
    Abstract: While net settlement systems make more efficient use of liquidity than gross settlement systems, they are known to generate systemic risk. What does that tendency imply for the stability of the payments [or financial] system when the two settlement systems coexist? Do liquidity shortages induce banks to settle more transactions in net settlement system, thereby increasing systemic risk? Or do banks require their counterparties to send payments through gross settlement system when default risks are high, increasing the need for liquidity and the money market rate but reducing overall systemic risk? This paper studies the factors that drive the relative importance of net and gross settlement systems over the short run, using daily data on transaction volumes from the large-volume payment systems of all euro area countries that have had both a net and a gross settlement system at the same time. Applying a large portfolio of different econometric techniques, we find that it is actually the transactions volumes in gross settlement systems that affect the daily price of liquidity and the credit risk spread in money markets. --
    Keywords: Payment System,financial stability,interbank market,financial contagion
    JEL: E44 G21
    Date: 2011
  8. By: Irina Stanga
    Abstract: This paper investigates the interaction of market views on the sustainability of sovereign debt and the perceived credit risk of banks. This interaction came into spotlight during the recent financial crisis, as government interventions in support of the financial sector were associated with increases in fiscal burden. I analyze and quantify the effect of government interventions in the domestic financial system on the default risks of the banking sector and sovereign borrowers. The paper focuses on the cases of Ireland and Spain, which experienced large public interventions in the domestic banking system and at a later stage highly volatile bond markets. For each country, I estimate a Vector Autoregression model to trace the interaction among sovereign CDS spreads, bank CDS spreads, and a measure of the business cycle over the sample period 2007-2011. I identify shocks by imposing sign restrictions on the impulse response functions. The results point towards a risk transfer from the financial to the sovereign sector, which generates an increase in the credit risk of the latter but only a temporary drop in that of banks.
    Keywords: Financial Crises; Sovereign Debt; VAR; Sign Restrictions
    JEL: C32 E44 H63
    Date: 2011–08
  9. By: Buch, Claudia M.; Koch, Cathérine Tahmee; Koetter, Michael
    Abstract: The World Financial Crisis has shaken the fundamentals of international banking and triggered a downward spiral of asset prices. To prevent a further meltdown of markets, governments have intervened massively through rescues measures aimed at recapitalizing banks and through liquidity support. We use a detailed, banklevel dataset for German banks to analyze how the lending and borrowing of their foreign affiliates has responded to domestic (German) and to US crisis support schemes. We analyze how these policy interventions have spilled over into foreign markets. We identify loan supply shocks by exploiting that not all banks have received policy support and that the timing of receiving support measures has differed across banks. We find that banks covered by rescue measures of the German government have increased their foreign activities after these policy interventions, but they have not expanded relative to banks not receiving support. Banks claiming liquidity support under the Term Auction Facility (TAF) program have withdrawn from foreign markets outside the US, but they have expanded relative to affiliates of other German banks. --
    Keywords: Cross-border banking,financial crisis,government support,Term Auction Facility
    JEL: F34 G21
    Date: 2011
  10. By: Evzen Kocenda; Martin Vojtek
    Abstract: Credit to the private sector has risen rapidly in European emerging markets but its risk evaluation has been largely neglected. Using retail-loan banking data from the Czech Republic we construct two credit risk models based on logistic regression and Classification and Regression Trees. Both methods are comparably efficient and detect similar financial and socio-economic variables as the key determinants of default behavior. We also construct a model without the most important financial variable (amount of resources) that performs very well. This way we confirm significance of socio-demographic variables and link our results with specific issues characteristic to new EU members.
    Keywords: credit scoring, discrimination analysis, banking sector, pattern recognition, retail loans, CART, European Union
    JEL: B41 C14 D81 G21 P43
    Date: 2011–04–01
  11. By: Matej Marinc; Razvan Vlahu
    Abstract: This paper argues that a special bank bankruptcy regime is desirable for the efficient restructuring and/or liquidation of distressed banks. We first explore the principal features of corporate bankruptcy law. Next, we examine the specific characteristics that distinguish banks from other corporations, and argue that these features are largely neglected in corporate bankruptcy law. Finally, we make recommendations for optimal closure and reorganization policies, which should allow regulators to better mitigate disruptions in the financial system and minimize the social costs of bank distress. We compare the U.S., UK, and German bank bankruptcy frameworks and describe the EU framework for cross-border bank bankruptcy. We support our recommendations with a discussion of the Lehman Brothers and Fortis bank failures.
    Keywords: bank bankruptcy law; corporate bankruptcy law; bankruptcy regimes; bank failures; optimal resolution
    JEL: G21 G28 G33
    Date: 2011–08
  12. By: Moulin, Bertrand; Teuwa N., Hugues M.
    Abstract: In this article, we evaluate, from the point of view of banks, the potential of articulations between commercial banks and microfinance institutions (MFIs) in Cameroun in terms of financing of the rural and the micro, small and medium enterprises (MSMEs). Furthermore, we seek to define the best form of partnership between the two types of institutions. The results obtained suggest that the articulations between banks and MFIs can potentially be beneficial to all stakeholders (banks, MFIs but also recipients). This study also highlights the fact that these articulations can be even more beneficial if national commercial banks, under the Cameroonian law in our case, participate rather than branches of foreign banking groups. Indeed, our research reveals that through these partnerships, from their cultural proximity and their propensity to take more risks, national commercial banks will more likely offer either directly or indirectly (through MFIs) more adapted financial products and services to both the rural and the MSMEs’ segments. The question of knowing if a better form of partnership between commercial banks and MFIs exists, results suggest that there is no better form of partnership as such; that the best form depends on the MFI’s development stage and that in any case this partnership should privilege a national commercial bank rather than a branch of a foreign bank. Even if the foreign banks’ contest might be necessary at a given stage of the process, the results make it also possible to consider a new model of interactions implying Microfinance investment vehicles and national commercial banks. This model would have the advantage to help mitigate risks that those vehicles perceive when deciding to directly invest in MFIs.
    Keywords: Banks; Microfinance institutions; Microfinance investment vehicles; Sub-Saharan Africa; Cameroon
    JEL: G2
    Date: 2011–02
  13. By: Thorsten Beck; Martin Brown
    Abstract: This paper uses survey data for 29,000 households from 29 transition economies to explore how the use of banking services is related to household characteristics, bank ownership structure and the development of the financial infrastructure. At the household level we find that the holding of a bank account or bank card increases with income, wealth and education in most countries and also find evidence for an urban-rural gap, as well as for a role of religion and social integration. Our results show that foreign bank ownership is associated with more bank accounts among high-wealth, high-income, and educated households. State ownership, on the other hand, does not induce financial inclusion of rural and poorer households. We find that higher deposit insurance coverage, better payment systems and creditor protection encourage the holding of bank accounts in particular by highincome and high-wealth households. All in all, our findings shed doubt on the ability of policy levers to broaden the financial system to disadvantaged groups.
    Keywords: Access to finance, Bank-ownership, Deposit insurance, Payment system, Creditor protection.
    JEL: C32 E52 F41
    Date: 2011–02
  14. By: Mohsen Afsharian (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Anna Kryvko (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Peter Reichling (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: The paper empirically analyzes the impact of the degree of efficiency on key performance fig-ures of publicly traded European banks in the period from 2005 to 2009. Efficiency is meas-ured by constructing non-parametric frontiers using the technique of data envelopment analysis on the cost, revenue, and profit sides. Decomposition of overall efficiency provides a detailed insight into effective risk and performance drivers in the banking industry. The results of our paper suggest that an increase in pure technical efficiency is related to more volatile assets, which is reflected in lower market values. Allocative and scale efficiency, however, boost capi-tal market performance.
    Keywords: Data Envelopment Analysis (DEA), Efficiency, European Banks, Bank Performance
    JEL: C33 C61 D24 G21
    Date: 2011–08
  15. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: The recent crisis highlighted the importance of globally active banks in linking markets. One channel for this linkage is through how these banks manage liquidity across their entire banking organization. We document that funds regularly flow between parent banks and their affiliates in diverse foreign markets. We use the Great Recession as an opportunity to identify the balance sheet shocks to parent banks in the United States, and then explore which foreign affiliate features are associated with those businesses being protected, for example their status as important locations in sourcing funding or as destinations for foreign investment activity. We show that distance from the parent organization lays a significant role in this allocation, where distance is bank-affiliate specific and depends on the ex ante relative importance of such locations as local funding pools and in their overall foreign investment strategies. These flows are a form of global interdependence previously unexplored in the literature on international shock transmission.
    JEL: F3 G15 G21
    Date: 2011–08
  16. By: Morten L. Bech; Carl T. Bergstrom; Rodney J. Garratt; Martin Rosvall
    Abstract: We use an information-theoretic approach to describe changes in lending relationships between federal funds market participants around the time of the Lehman Brothers failure. Unlike previous work that conducts maximum-likelihood estimation on undirected networks, our analysis distinguishes between borrowers and lenders and looks for broader lending relationships (multibank lending cycles) that extend beyond the immediate counterparties. We find that significant changes in lending patterns emerge following implementation of the Interest on Reserves policy by the Federal Reserve on October 9, 2008.
    Keywords: Federal funds market (United States) ; Federal Reserve System ; Bank loans ; Financial crises
    Date: 2011
  17. By: Mahvash S. Qureshi; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon
    Abstract: We examine whether macroprudential policies and capital controls can contribute to enhancing financial stability in the face of large capital inflows. We construct new indices of foreign currency (FX)-related prudential measures, domestic prudential measures, and financial-sector capital controls for 51 emerging market economies over the period 1995–2008. Our results indicate that both capital controls and FX-related prudential measures are associated with a lower proportion of FX lending in total domestic bank credit and a lower proportion of portfolio debt in total external liabilities. Other prudential policies appear to help restrain the intensity of aggregate credit booms. Experience from the global financial crisis suggests that prudential and capital control policies in place during the boom seem to have enhanced economic resilience during the bust.
    JEL: F21 F32
    Date: 2011–08

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