New Economics Papers
on Banking
Issue of 2011‒10‒01
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The evolving importance of banks and securities markets By Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
  2. Costly Contracts and Consumer Credit By Igor Livshits; James MacGee; Michèle Tertilt
  3. Collateral Crises By Gary Gorton; Guillermo Ordonez
  4. Is small beautiful ? financial structure, size and access to finance By Beck, Thorsten; Demirguc-Kunt, Asli; Singer, Dorothe
  5. The Role of Default in Macroeconomics By Charles A. E. Goodhart; Dimitrios P. Tsomocos
  6. Analysing Risk Management in Banks: Evidence of Bank Efficiency and Macroeconomic Impact By Awojobi, Omotola; Amel, Roya; Norouzi, Safoura
  7. Do Phoenix miracles exist ? firm-level evidence from financial crises By Ayyagari, Meghana; Demirguc-Kunt, Asli; Maksimovic, Vojislav
  8. Bubbles, Banks, and Financial Stability By Kosuke Aoki; Kalin Nikolov
  9. Financial Frictions, Bubbles, and Macroprudential Policies By Alexis Derviz
  10. Informal Sector and Economic Growth: The Supply of Credit Channel By Massenot, Baptiste; Straub, Stéphane
  11. Politicians “on board”! Do political connections affect banking activities in Italy? By Carretta, Alessandro; Farina, Vincenzo; Gon, Abhishek; Parisi, Antonio
  12. Mapping the state of financial stability By Peter Sarlin; Tuomas A. Peltonen
  13. Asymmetric Information and the Foreign-Exchange Trades of Global Custody Banks By Carol Osler; Thang Nguyen; Tanseli Savaser
  14. Endogenous Credit Cycles By Chao Gu; Joseph Haslag
  15. Analytical Solution for the Loss Distribution of a Collateralized Loan under a Quadratic Gaussian Default Intensity Process By Satoshi Yamashita; Toshinao Yoshiba
  16. A Semiparametric Time Trend Varying Coefficients Model: With An Application to Evaluate Credit Rationing in U.S. Credit Market By Qi Gao; Jingping Gu; Paula Hernandez-Verme
  17. Queuing theory applied to the optimal management of bank excess reserves By Taufemback, Cleiton; Da Silva, Sergio

  1. By: Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
    Abstract: This paper examines the evolving importance of banks and securities markets during the process of economic development. As economies develop, they increase their demand for the services provided by securities markets relative to those provided by banks, such that securities markets become increasingly important for future economic development. Some exploratory evidence further suggests that deviations of a country’s actual financial structure -- the mixture of banks and markets operating in an economy -- from the estimated optimal structure are associated with lower levels of economic activity.
    Keywords: Debt Markets,Economic Theory&Research,Banks&Banking Reform,Markets and Market Access,Access to Finance
    Date: 2011–09–01
  2. By: Igor Livshits; James MacGee; Michèle Tertilt
    Abstract: Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers’ risk of default and a fixed cost to create each contract offered by lenders. Innovations which reduce the fixed cost or ameliorate asymmetric information have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, as well as increased dispersion of interest rates. Using the Survey of Consumer Finance and interest rate data collected by the Board of Governors, we find evidence supporting these predictions, as the dispersion of credit card interest rates nearly tripled, and the share of credit card debt of lower income households nearly doubled.
    JEL: E21 E49 G18 K35
    Date: 2011–09
  3. By: Gary Gorton (Yale University and NBER (e-mail:; Guillermo Ordonez (Yale University (e-mail:
    Abstract: How can a small shock sometimes cause a large crisis when it does not at other times? Financial fragility builds up over time because it is not optimal to always produce costly information about counterparties. Short-term, collateralized, debt (e.g., demand deposits, money market instruments) -private money- is efficient if agents are willing to lend without producing costly information about the value of the collateral backing the debt. But, when the economy relies on this informationally-insensitive debt, information is not renewed over time, generating a credit boom during which firms with low quality collateral start borrowing. During the credit boom output and consumption go up, but there is increased fragility. A small shock can trigger a large change in the information environment; agents suddenly produce information about all collateral and find that much of the collateral is low quality, leading to a decline in output and consumption. A social planner would produce more information than private agents, but would not always want to eliminate fragility.
    Date: 2011–09
  4. By: Beck, Thorsten; Demirguc-Kunt, Asli; Singer, Dorothe
    Abstract: Combining two unique data sets, this paper explores the relationship between the relative importance of different financial institutions and their average size and firms'access to financial services. Specifically, the authors explore the relationship between the share in total financial assets and average asset size of banks, low-end financial institutions, and specialized lenders, on the one hand, and firms'access to and use of deposit and lending services, on the other hand. Two findings stand out. First, the dominance of banks in most developing and emerging markets is associated with lower use of financial services by firms of all sizes. Low-end financial institutions and specialized lenders seem particularly suited to ease access to finance in low-income countries. Second, there is no evidence that smaller institutions are better in providing access to finance. To the contrary, larger specialized lenders and larger banks might actually ease small firms'financing constraints, but only at low levels of gross domestic product per capita.
    Keywords: Access to Finance,Banks&Banking Reform,Debt Markets,Microfinance,Non Bank Financial Institutions
    Date: 2011–09–01
  5. By: Charles A. E. Goodhart (Norman Sosnow Professor of Banking and Finance, London School of Economics (email:; Dimitrios P. Tsomocos (Said Business School, University of Oxford (email:
    Abstract: What is the main limitation of much modern macro-economic theory, among the failings pointed out by William R. White at the 2010 Mayekawa Lecture? We argue that the main deficiency is a failure to incorporate the possibility of default, including that of banks, into the core of the analysis. With default assumed away, there can be no role for financial intermediaries, for financial disturbances, or even for money. Models incorporating defaults are, however, harder to construct, in part because the representative agent fiction must be abandoned. Moreover, financial crises are hard to predict and to resolve. All of the previously available alternatives for handling failing systemically important financial institutions (SIFIs) are problematical. We end by discussing a variety of current proposals for improving the resolution of failed SIFIs.
    Keywords: Default, Transversality, Money, Bankruptcy cost, Asset bubbles, Resolution mechanisms
    JEL: B40 E12 E30 E40 E44 G18 G20 G28 P10
    Date: 2011–09
  6. By: Awojobi, Omotola; Amel, Roya; Norouzi, Safoura
    Abstract: The recent Global Economic meltdown triggered by the subprime mortgage crisis of United States in 2007 and its adverse effect on financial markets and participants in the financial industry worldwide have resulted in a capital management crisis in most financial institutions especially banks. This study is a case for the Nigerian banking industry, focusing on factors affecting risk management efficiency in banks. For empirical investigation, we employed Panel regression analysis taking a stratum of time series data and cross-sectional variants of macro and bank-specific factors for period covering 2003 to 2009. Result for panel regression indicates that risk management efficiency in Nigerian banks is not just affected by bank-specific factors but also by macroeconomic variables. This describes the pro-cyclicality of bank performance in the Nigerian banking sector. As it stands, the sufficiency of Basel principles for risk management is doubtful because asset quality varies with business cycles.
    Keywords: Risk management; Nigerian banks; capital adequacy; Basel; cyclicality
    JEL: E31 G31 G21
    Date: 2011–04–06
  7. By: Ayyagari, Meghana; Demirguc-Kunt, Asli; Maksimovic, Vojislav
    Abstract: This paper provides empirical evidence on firm recoveries from financial system collapses in developing countries (systemic sudden stops episodes), and compares them with the experience in the United States in the 2008 financial crisis. Prior research found that economies recover from systemic sudden stop episodes before the financial sector. These recoveries are called Phoenix miracles, and the research questioned the role of the financial system in recovery. Although an average of the macro data across a sample of systemic sudden stop episodes over the 1990s appears consistent with the notion of Phoenix recoveries, closer inspection reveals heterogeneity of responses across the countries, with only a few countries fitting the pattern. Micro data show that across countries, only a small fraction (less than 31 percent) of firms follow a pattern of recovery in sales without a recovery in external credit, and even these firms have access to external sources of cash. The experience of firms in the United States during the 2008 financial crisis also suggests no evidence of credit-less recoveries. An examination of the dynamics of firms'financing, investment and payout policies during recovery periods shows that far from being constrained, the firms in the sample are able to access long-term financing, issue equity, and significantly expand their cash holdings.
    Keywords: Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Emerging Markets,Economic Theory&Research
    Date: 2011–09–01
  8. By: Kosuke Aoki (University of Tokyo (email:; Kalin Nikolov (European Central Bank(email:
    Abstract: This paper asks two main questions: (1) What makes some asset price bubbles more costly for the real economy than others? and (2)When do costly bubbles occur? We construct a model of rational bubbles under credit frictions and show that when bubbles held by banks burst this is followed by a costly financial crisis. In contrast, bubbles held by ordinary savers have relatively muted effects. Banks tend to invest in bubbles when financial liberalisation decreases their profitability.
    Keywords: Rational bubbles, Financial Frictions, Financial Stability
    JEL: E32 E44
    Date: 2011–09
  9. By: Alexis Derviz
    Abstract: We explore the ability of a macroprudential policy instrument to dampen the consequences of equity mispricing (a bubble) and the correction thereof (the bubble bursting), as well as the consequences for real activity in a production economy. In our model, producers are financed by both bank debt and equity, and face a mix of systemic and idiosyncratic uncertainty. Positive/negative bubbles arise when prior public beliefs about the aggregate productivity of producers (business sentiment) become biased upwards/downwards. Economic activity in equilibrium is influenced by the bubble size in conjunction with agency problems caused by delegation of lending to relationship bankers. The presence of macroprudential policy is manifested in a convex dependence of bank capital requirements on the quantity of uncollateralized credit. We find that this kind of policy is more successful in suppressing equity price swings than moderating output fluctuations. At the same time, economic activity recoils substantially with the introduction of a macroprudential instrument, so that its presence is likely to entail tangible welfare costs. In this regard, fine-tuning capital charges as a function of corporate governance on the borrower side (specifically, by discouraging limited liability of borrowing firm managers) would be less costly than placing the full burden of prudential regulation on the lender side.
    Keywords: Asset price, bank, bubble, credit, macroprudential policy.
    JEL: G21 G12 E22 D82
    Date: 2011–09
  10. By: Massenot, Baptiste; Straub, Stéphane
    Abstract: A standard view holds that removing barriers to entry and improving judicial enforcement would reduce informality and boost investment and growth. We show, however, that this conclusion may not hold in countries with a concentrated bank- ing sector or with low financial openness. When the formal sector becomes larger in those countries, more entrepreneurs become creditworthy and the higher pres- sure in the credit market increases the interest rate. This reduces future capital accumulation. We show some empirical evidence consistent with these predictions.
    Date: 2011–09
  11. By: Carretta, Alessandro; Farina, Vincenzo; Gon, Abhishek; Parisi, Antonio
    Abstract: This paper analyzes the effects of political presence in the boards of directors of cooperative banks. We refer our analysis to all politicians (almost 160.000) belonging to a political body in Italy. Overall, our dataset contains 1.858 board members referring to 127 cooperative banks. Results show that politically connected banks, in which politicians have executive roles in the board of directors, display higher net interest revenues, lower quality of the loans portfolio and lower efficiency relative to a control group of non-connected counterparts. Therefore, in the current debate on the reform of the statutes of the Italian cooperative banks, we argue that the problem is not for politicians to be in the boards but for them to hold executive positions.
    Keywords: Cooperative Banks; Politics; Corporate Governance
    JEL: G34 G21
    Date: 2011–06–30
  12. By: Peter Sarlin (Åbo Akademi University, Turku Centre for Computer Science, Joukahaisenkatu 3–5, 20520 Turku, Finland.); Tuomas A. Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.)
    Abstract: The paper uses the Self-Organizing Map for mapping the state of financial stability and visualizing the sources of systemic risks as well as for predicting systemic financial crises. The Self-Organizing Financial Stability Map (SOFSM) enables a two-dimensional representation of a multidimensional financial stability space that allows disentangling the individual sources impacting on systemic risks. The SOFSM can be used to monitor macro-financial vulnerabilities by locating a country in the financial stability cycle: being it either in the pre-crisis, crisis, post-crisis or tranquil state. In addition, the SOFSM performs better than or equally well as a logit model in classifying in-sample data and predicting out-of-sample the global financial crisis that started in 2007. Model robustness is tested by varying the thresholds of the models, the policymaker’s preferences, and the forecasting horizons. JEL Classification: E44, E58, F01, F37, G01.
    Keywords: Systemic financial crisis, systemic risk, Self-Organizing Map (SOM), visualization, prediction, macroprudential supervision.
    Date: 2011–09
  13. By: Carol Osler (Brandeis International Business School); Thang Nguyen (Brandeis International Business School); Tanseli Savaser (Williams College)
    Abstract: This paper provides the first rigorous empirical analysis of markups on custodial foreign exchange trades. It finds that they substantially exceed relevant benchmarks such as interbank half-spreads. We trace this to an information asymmetry -- custodial bank dealers know more about their prices and bid-ask spreads than their client funds. We also examine the asset managers’ continued heavy reliance on this high-cost approach to trading when alternatives are available with lower markups. We provide evidence that this choice does not reflect ignorance of the cost differential. Analysis relies on the complete foreign exchange trading record of a mid-sized global custody bank during calendar year 2006.
    Date: 2011–06
  14. By: Chao Gu (Department of Economics, University of Missouri-Columbia); Joseph Haslag (Department of Economics, University of Missouri-Columbia)
    Abstract: We build a model in which verifiability of private debts, timing mismatch in debt settlements and borrowing leverage lead to liquidity crisis in the financial market. Central bank can respond to the liquidity crisis by adopting an unconventional monetary policy that resembles repurchase agreements between the central bank and the lenders. This policy is effective if the timing mismatch is nominal (i.e., a settlement participation risk). It is ineffective if the timing mismatch is driven by a real shock (i.e., preference shock).
    Keywords: liquidity problem, timing mismatch, leveraging, liquidity shock, settlement risk, repurchase agreement, consumption shock
    JEL: E44 E52
    Date: 2011–09–22
  15. By: Satoshi Yamashita (Professor, The Institute of Statistical Mathematics (E-mail:; Toshinao Yoshiba (Director and Senior Economist, Institute for Monetary and Economic Studies, (currently Financial System and Bank Examination Department), Bank of Japan (E-mail:
    Abstract: In this study, we derive an analytical solution for expected loss and the higher moment of the discounted loss distribution for a collateralized loan. To ensure nonnegative values for intensity and interest rate, we assume a quadratic Gaussian process for default intensity and discount interest rate. Correlations among default intensity, discount interest rate, and collateral value are represented by correlations among Brownian motions driving the movement of the Gaussian state variables. Given these assumptions, the expected loss or the m-th moment of the loss distribution is obtained by a time integral of an exponential quadratic form of the state variables. The coefficients of the form are derived by solving ordinary differential equations. In particular, with no correlation between default intensity and discount interest rate, the coefficients have explicit closed form solutions. We show numerical examples to analyze the effects of the correlation between default intensity and collateral value on expected loss and the standard deviation of the loss distribution.
    Keywords: default intensity, stochastic recovery, quadratic Gaussian, expected loss, measure change
    JEL: G21 G32 G33
    Date: 2011–09
  16. By: Qi Gao (The school of Public Finance and Taxation, Southwestern University of Finance and Economics); Jingping Gu (Department of Economics, University of Arkansas); Paula Hernandez-Verme (Department of Economics & Finance, University of Guanajuato, UCEA-Campus Marfil)
    Abstract: In this paper, we propose a new semiparametric varying coefficient model which extends the existing semi-parametric varying coefficient models to allow for a time trend regressor with smooth coefficient function. We propose to use the local linear method to estimate the coefficient functions and we provide the asymptotic theory to describe the asymptotic distribution of the local linear estimator. We present an application to evaluate credit rationing in the U.S. credit market. Using U.S. monthly data (1952.1-2008.1) and using inflation as the underlying state variable, we find that credit is not rationed for levels of inflation that are either very low or very high; and for the remaining values of inflation, we find that credit is rationed and the Mundell-Tobin effect holds.
    Keywords: non-stationarity, semi-parametric smooth coefficients, nonlinearity, credit rationing
    JEL: C14 C22 E44
    Date: 2011
  17. By: Taufemback, Cleiton; Da Silva, Sergio
    Abstract: Although the economic literature on the optimal management of bank excess reserves is age-old and large, here we suggest a fresh, more practical approach based on queuing theory.
    Keywords: bank reserves; queuing theory
    JEL: G21
    Date: 2011
  18. By: Frédéric Planchet (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Pierre-Emanuel Thérond (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: This paper investigates the robustness of the Solvency Capital Requirement (SCR) when a log-normal reference model is slightly disturbed by the heaviness of its tail distribution. It is shown that situations with "almost" lognormal data and a rather important variation between the "disturbed" SCR and the reference SCR can be built. The consequences of the estimation errors on the level of the SCR are studied too.
    Keywords: Solvency; extreme values
    Date: 2011–07–04

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