New Economics Papers
on Banking
Issue of 2011‒10‒15
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms By Francis X. Diebold; Kamil Yılmaz
  2. Measuring Systemic Importance of Financial Institutions: An Extreme Value Theory Approach By Toni Gravelle; Fuchun Li
  3. Analyzing Default Risk and Liquidity Demand during a Financial Crisis: The Case of Canada By Jason Allen; Ali Hortaçsu; Jakub Kastl
  4. Local versus aggregate lending channels: the effects of securitization on corporate credit supply By Gabriel Jiménez; Atif Mian; José-Luis Peydró; Jesús Saurina
  5. Systemic Risks in Global Banking: What Available Data can tell us and What More Data are Needed? By Stijn Claessens; Eugenio Cerutti; Patrick McGuire
  6. Business Cycle Effects of Credit and Technology Shocks in a DSGE Model with Firm Defaults By Pesaran, M. H.; Xu, T.
  7. Bank Loans for Private and Public Firms in a Credit Crunch By Jason Allen; Teodora Paligorova
  8. CoVaR By Tobias Adrian; Markus K. Brunnermeier
  9. What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis By Jihad Dagher; Ning Fu
  10. Relationship-based and arms-length financial systems -- a European perspective By Wolf, Holger
  11. Balancing flexibility and discipline in microfinance: Innovative financial products that benefit clients and service providers By Michael Hamp; Carolina Laureti
  12. The role of neighborhood characteristics in mortgage default risk: evidence from New York City By Chan, Sewin; Gedal, Michael; Been, Vicki; Haughwout, Andrew
  13. Basel 3, Pillar 2: the role of banks’ internal governance and control function By Elisabetta Gualandri
  14. Macro-prudential regulation of credit booms and busts -- the case of Poland By Kruszka, Michal; Kowalczyk, Michal
  15. Bad banks choking good banks: simulating balance sheet contagion By Saed Khalil; Stephen Kinsella
  16. Differentiated Use of Small Business Credit Scoring by Relationship Lenders and Transactional Lenders: Evidence from firm-bank matched data in Japan By HASUMI Ryo; HIRATA Hideaki; ONO Arito
  17. Macroprudential stress testing of credit risk: A practical approach for policy makers By Buncic, Daniel; Martin, Melecky
  18. Home high above and home deep down below -- lending in Hungary By Banai, Adam; Kiraly, Julia; Nagy, Marton
  19. How do banks' funding costs affect interest margins? By Arvid Raknerud, Bjørn Helge Vatne and Ketil Rakkestad
  20. Regulation of ATM fees in a model of spatial competition By Karen Kaiser; Carlos Lever Guzmán
  21. The role of macro-prudential policies in the boom and adjustment phase of the credit cycle in Estonia By Sutt, Andres; Korju, Helen; Siibak, Kadri
  22. Credit Markets with Ethical Banks and Motivated Borrowers By F. Barigozzi; P. Tedeschi
  23. Countercyclical financial regulation By Ren, Haocong
  24. The bank lending channel in Turkey: Has it changed after the low inflation regime? By Catik, A. Nazif; Karaçuka, Mehmet

  1. By: Francis X. Diebold (Department of Economics, University of Pennsylvania); Kamil Yılmaz (Department of Economics, Koç University)
    Abstract: We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. We also show that variance decompositions define weighted, directed networks, so that our connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, we track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008.
    Keywords: Risk measurement, risk management, portfolio allocation, market risk, credit risk, systemic risk, asset markets, degree distribution
    JEL: C3 G2
    Date: 2011–09–30
  2. By: Toni Gravelle; Fuchun Li
    Abstract: In this paper, we define a financial institution’s contribution to financial systemic risk as the increase in financial systemic risk conditional on the crash of the financial institution. The higher the contribution is, the more systemically important is the institution for the system. Based on relevant but different measurements of systemic risk, we propose a set of market-based measures on the systemic importance of financial institutions, each designed to capture certain aspects of systemic risk. Multivariate extreme value theory approach is used to estimate these measures. Using six big Canadian banks as the proxy for Canadian banking sector, we apply these measures to identify systemically important banks in Canadian banking sector and major risk contributors from international financial institutions to Canadian banking sector. The empirical evidence reveals that (i) the top three banks, RBC Financial Group, TD Bank Financial Group, and Scotiabank are more systemically important than other banks, although with different order from different measures, while we also find that the size of a financial institution should not be considered as a proxy of systemic importance; (ii) compared to the European and Asian banks, the crashes of U.S. banks, on average, are the most damaging to the Canadian banking sector, while the risk contribution to the Canadian banking sector from Asian banks is quite lower than that from banks in U.S. and euro area; (iii) the risk contribution to the Canadian banking sector exhibits “ home bias ”, that is, cross-country risk contribution tends to be smaller than domestic risk contribution.
    Keywords: Financial stability; Financial system regulation and policies; Financial institutions; Econometric and statistical methods
    JEL: C14 G21 G32
    Date: 2011
  3. By: Jason Allen; Ali Hortaçsu; Jakub Kastl
    Abstract: This paper explores the reliability of using prices of credit default swap contracts (CDS) as indicators of default probabilities during the 2007/2008 financial crisis. We use data from the Canadian financial system to show that these publicly available risk measures, while indicative of initial problems of the financial system as a whole, do not seem to correspond to risks implied by the cross-sectional heterogeneity in bank behavior in short-term lending markets. Strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank seem to be more important additional indicators of distress of individual banks, or lack thereof than the CDSs. It therefore seems that central banks should utilize high-frequency data on liquidity demand to obtain a better picture of financial health of individual participants of the financial system.
    Keywords: Financial Institutions; Financial markets; Payment, clearing, and settlement systems
    JEL: G28 E42 E58
    Date: 2011
  4. By: Gabriel Jiménez (Banco de España); Atif Mian (University of California Berkeley); José-Luis Peydró (ECB and UPF and Barcelona GSE); Jesús Saurina (Banco de España)
    Abstract: While banks may change their credit supply due to bank balance-sheet shocks (the local lending channel), firms can react by adjusting their sources of financing in equilibrium (the aggregate lending channel). We provide a methodology to identify the aggregate (firm-level) effects of the lending channel and estimate the impact of banks’ ability to securitize realestate assets on credit supply for non real-estate firms in Spain over 2000-2010. We show that firm-level equilibrium dynamics nullify the strong local (bank-level) lending channel of securitization on credit quantity for firms with multiple banking relationships. Credit terms however become softer, but there are no real effects. Securitization implies a credit expansion on the extensive margin towards first-time bank clients, which are more likely to default. Finally, the 2008 securitization collapse reverses the local lending channel.
    Keywords: Bank lending channel, credit supply, credit demand, macroprudential, real economy effects of finance, securitization
    JEL: G21 G28 G30 E44 E50
    Date: 2011–10
  5. By: Stijn Claessens; Eugenio Cerutti; Patrick McGuire
    Abstract: The recent financial crisis has shown how interconnected the financial world has become. Shocks in one location or asset class can have a sizable impact on the stability of institutions and markets around the world. But systemic risk analysis is severely hampered by the lack of consistent data that capture the international dimensions of finance. While currently available data can be used more effectively, supervisors and other agencies need more and better data to construct even rudimentary measures of risks in the international financial system. Similarly, market participants need better information on aggregate positions and linkages to appropriately monitor and price risks. Ongoing initiatives that will help in closing data gaps include the G20 Data Gaps Initiative, which recommends the collection of consistent bank-level data for joint analyses and enhancements to existing sets of aggregate statistics, and the enhancement to the BIS international banking statistics.
    Keywords: Bank credit , Banking systems , Credit risk , Data collection , Financial risk , International banking , International financial system ,
    Date: 2011–09–23
  6. By: Pesaran, M. H.; Xu, T.
    Abstract: This paper proposes a theoretical framework to analyze the impacts of credit and technology shocks on business cycle dynamics, where firms rely on banks and households for capital financing. Firms are identical ex ante but differ ex post due to different realizations of firm specific technology shocks, possibly leading to default by some firms. The paper advances a new modelling approach for the analysis of financial intermediation and firm defaults that takes account of the financial implications of such defaults for both households and banks. Results from a calibrated version of the model highlights the role of financial institutions in the transmission of credit and technology shocks to the real economy. A positive credit shock, defined as a rise in the loan to deposit ratio, increases output, consumption, hours and productivity, and reduces the spread between loan and deposit rates. The effects of the credit shock tend to be highly persistent even without price rigidities and habit persistence in consumption behaviour.
    JEL: E32 E44 G21
    Date: 2011–10–07
  7. By: Jason Allen; Teodora Paligorova
    Abstract: Banks reliance on short-term funding has increased over time. While an effective source of financing in good times, the 2007 financial crisis has exposed the vulnerability of banks and ultimately firms to such a liability structure. The authors show that banks that relied most on wholesale funding were the ones to contract its lending the most during the crisis. Their results suggest that banks propagate liquidity shocks by reducing credit only to a certain type of borrower. Importantly, in the financial crisis banks passed the liquidity shock only to public firms. Furthermore, long-term relationships between firms and banks played an important role during the crisis. Public firms with weak banking relationships pre-crisis experienced a greater credit crunch than other public borrowers.
    Keywords: Financial institutions
    JEL: G20
    Date: 2011
  8. By: Tobias Adrian; Markus K. Brunnermeier
    Abstract: We propose a measure for systemic risk: CoVaR, the value at risk (VaR) of the financial system conditional on institutions being under distress. We define an institution's contribution to systemic risk as the difference between CoVaR conditional on the institution being under distress and the CoVaR in the median state of the institution. From our estimates of CoVaR for the universe of publicly traded financial institutions, we quantify the extent to which characteristics such as leverage, size, and maturity mismatch predict systemic risk contribution. We also provide out of sample forecasts of a countercyclical, forward looking measure of systemic risk and show that the 2006Q4 value of this measure would have predicted more than half of realized covariances during the financial crisis.
    JEL: G21 G22
    Date: 2011–10
  9. By: Jihad Dagher; Ning Fu
    Abstract: We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle. Using comprehensive data on mortgage originations, which we aggregate at the county level, we first establish that the market share of these independent non-bank lenders increased in virtually all US counties during the boom. We then exploit the heterogeneity in the market share of independent lenders across counties as of 2005 and show that higher market participation by these lenders is associated with increased foreclosure filing rates at the onset of the housing downturn. We carefully control for counties’ economic, demographic, and housing market characteristics using both parametric and semi-nonparametric methods. We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states. The macroeconomic consequences of our findings are significant: we show that the market share of these lenders as of 2005 is also a strong predictor of the severity of the housing downturn and subsequent rise in unemployment. Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode.
    Keywords: Bank regulations , Banks , Business cycles , Credit demand , Housing prices , Nonbank financial sector , United States ,
    Date: 2011–09–14
  10. By: Wolf, Holger
    Abstract: This paper surveys the debate on arms-length and relationship-based financial systems with a special focus on the Eastern Europe and Central Asia region. The paper argues that while the initial dominance of relationship-based systems in the region is consistent with the implications of the theoretical literature, the subsequent improvements in supporting institutions coupled with structural changes suggests a greater scope for arms-length elements going forward.
    Keywords: Debt Markets,Banks&Banking Reform,Access to Finance,Emerging Markets,Financial Intermediation
    Date: 2011–10–01
  11. By: Michael Hamp; Carolina Laureti
    Abstract: Product innovation in microfinance is aimed at responding to the variety of poor clients’ needs, i.e. to develop and sustain the offer of a range of client-led products. The paper describes innovative market-oriented products that combine flexibility features with financial discipline. Those are microsavings, microcredit and microinsurance products and come from microfinance institutions worldwide. This review shows that service providers are introducing various types of flexibility into financial contracts; and that flexibility combined with appropriate enforcement mechanisms may enhance clients’ discipline. We notice, however, that flexibility may require information-intensive lending technologies, raising the MFIs’ costs of screening and monitoring clients, and have a limited outreach.
    Keywords: product flexibility; discipline; commitments; microfinance
    JEL: D30 D82 G21 O12
    Date: 2011–10
  12. By: Chan, Sewin; Gedal, Michael; Been, Vicki; Haughwout, Andrew
    Abstract: Using a rich database of non-prime mortgages from New York City, we find that census tract level neighborhood characteristics are important predictors of default behavior, even after controlling for an extensive set of controls for loan and borrower characteristics. First, default rates increase with the rate of foreclosure notices and the number of lender-owned properties (REOs) in the tract. Second, default rates on home purchase mortgages are higher in census tracts with larger shares of black residents, regardless of the borrower’s own race. We explore possible explanations for this second finding and conclude that it likely reflects differential treatment of black neighborhoods by the mortgage industry in ways that are unobserved in our data.
    Keywords: mortgage; default; neighborhoods; race
    JEL: G2 R1
    Date: 2011
  13. By: Elisabetta Gualandri
    Abstract: The analysis of the financial crisis has revealed not only major market and regulatory failures, but also shortcomings in supervisory approaches and in banks’ systems of internal and external controls. These failures and shortcomings played a significant role in the origin and evolution of the crisis. In some important cases, the crisis revealed that banks’ internal governance, and their internal control functions in particular, were ineffective or even unsuitable when faced with the demands of overseeing the growing levels of risk undertaken by intermediaries, and especially the interrelations between these exposures. So what are the implications of the crisis, the regulatory innovations now being implemented, and the changes in supervisory policies and practices, for banks’ internal control systems? Given the role of internal control functions in risk-based supervision, what is the exact relationship between supervisor and supervised as defined by Basel 3, Pillar 2, with regard to ICAAP and SREP? One important lesson to emerge from recent experience is the need to encourage a new culture amongst banks, ensuring that they appreciate the key role of internal controls as a tool for managing and monitoring risk.
    JEL: G21 G28 G32
    Date: 2011–10
  14. By: Kruszka, Michal; Kowalczyk, Michal
    Abstract: The last several years before the global downturn of 2008-2009 saw rapid credit growth in Poland. The credit-to-gross domestic product ratio rose from about 25 percent in 2004 to close to 50 percent in 2009. Such an expansion itself might potentially be a source of risks to financial stability, but it was also coupled with relatively new phenomena, such as massive foreign currency lending. Thanks to the pro-active attitude of the Polish authorities and sound economic fundamentals, the risks largely have not materialized. Since 2006 the financial supervisor has addressed in its recommendations for banks the problem of foreign exchange lending, which contributed to the high quality of the portfolio. Before the economy slowed down, the Polish Financial Supervisory Authority persuaded banks to accumulate an additional capital buffer that helped protect them from the negative consequences of the downturn. Some regulatory concepts that had been put into place in Poland in the previous years, including quantitative liquidity requirements, are now being implemented globally. The Polish Financial Supervisory Authority participates in international debates on a new regulatory regime for the financial system. The major message the authority intends to convey is that all new regulations must be tailored carefully. Regulators should make an effort to ensure that the benefits of enhanced quality of the capital base or the countercyclical buffer are not compromised by international overregulation that could undermine national authorities'ability to pursue effective country-specific policies.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Emerging Markets
    Date: 2011–10–01
  15. By: Saed Khalil (Palestine Monetary Authority & Birzeit University); Stephen Kinsella (Kemmy Business School, University of Limerick)
    Abstract: We investigate the propogation of contagion through banks' balance sheets in a two-country model. We simulate an increase in non-performing loans in one bank, and study the effects on other banks and the macro economy of each country. We show that credit crunches destabilize each economy in the short run and in the long run reduce potential output. We quantify this loss.
    Keywords: credit crunch, contagion, stock flow consistent models
    JEL: E32 E37 E51 G33
    Date: 2011–10–06
  16. By: HASUMI Ryo; HIRATA Hideaki; ONO Arito
    Abstract: This paper examines the ex-post performance of small and medium-sized enterprises (SMEs) that obtained small business credit scoring (SBCS) loans. Using a unique Japanese firm-bank matched dataset, we identify whether an SME has obtained an SBCS loan and, if so, from which type of bank: a relationship lender or a transactional lender. We find that the ex-post probability of default after the SBCS loan was provided significantly increased for SMEs that obtained an SBCS loan from a transactional lender. We also find that the lending attitude of relationship lenders in the midst of the recent global financial crisis became much more severe if a transactional lender had extended an SBCS loan to a firm. These findings suggest that SBCS loans by a transactional lender are detrimental to a relationship lender's incentive to monitor SMEs and maintain relationships. In contrast, we do not find such detrimental effects for SBCS loans extended by a relationship lender.
    Date: 2011–10
  17. By: Buncic, Daniel; Martin, Melecky
    Abstract: Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materialising credit risk. We apply the proposed approach to a set of Eastern European banks and discuss the results.
    Keywords: Macroprudential Supervision; Stress Test; Individual Bank Data; Eastern Europe
    JEL: E58 G28 G21
    Date: 2011–09–28
  18. By: Banai, Adam; Kiraly, Julia; Nagy, Marton
    Abstract: In Hungary in the pre-crisis period, the bank sector-initiated private credit boom significantly contributed to the accumulation of economic imbalances. Nevertheless, before the 2008 crisis no special regulatory measure was taken to mitigate the foreign exchange lending to unhedged borrowers, which was a main moving force of the credit boom. Depreciation of forint-denominated subsidized housing loans and the increased risk premium significantly deteriorated customers'positions and resulted in rocketing nonperforming loans. A recession, deteriorating portfolios, and lack of efficient workout. The introduction of strict regulation froze banking activity and the danger of recovery without lending emerged. This paper compares the pre- and post-crisis lending activity and analyzes the lack of regulation in the pre-crisis period and the inefficient regulation in the post-crisis period.
    Keywords: Debt Markets,Banks&Banking Reform,Currencies and Exchange Rates,Bankruptcy and Resolution of Financial Distress,Emerging Markets
    Date: 2011–10–01
  19. By: Arvid Raknerud, Bjørn Helge Vatne and Ketil Rakkestad (Statistics Norway)
    Abstract: We use a dynamic factor model and a detailed panel data set with quarterly accounts data on all Norwegian banks to study the effects of banks' funding costs on their retail rates. Banks' funds are categorized into two groups: customer deposits and long-term wholesale funding (market funding from private and institutional investors including other banks). The cost of market funding is represented in the model by the three-month Norwegian Inter Bank Offered Rate (NIBOR) and the spread of unsecured senior bonds issued by Norwegian banks. Our estimates show clear evidence of incomplete pass-through: a unit increase in NIBOR leads to an approximately 0.8 increase in bank rates. On the other hand, the difference between banks' loan and deposit rates is independent of NIBOR. Our findings are consistent with the view that banks face a downward-sloping demand curve for loans and an upward-sloping supply curve for customer deposits.
    Keywords: interest rates; NIBOR; pass-through; funding costs; bank panel data; dynamic factor model
    JEL: C13 C22 C51 G10
    Date: 2011–09
  20. By: Karen Kaiser; Carlos Lever Guzmán
    Abstract: Following the Hotelling model of spatial competition used by Massoud and Bernhardt (2002) to analyze competition in ATM fees, in this paper we analyze the effects of banning fees on the usage of ATMs by account holders. We find that the prohibition also reduces the fees charged to non-account holders but increases fixed fees. This latter increase is on average smaller than the decrease of the former two, which leads total consumer welfare to increase. We also find that the prohibition decreases total surplus but that this decrease is absorbed by the banks' profits. The model does not consider the decision of banks to open or close down ATMs, which we leave for future research.
    Keywords: Banking competition, ATM fees, bank regulation, retail banking.
    JEL: G21 L51 D40
    Date: 2011–09
  21. By: Sutt, Andres; Korju, Helen; Siibak, Kadri
    Abstract: The Estonian economy experienced an unusually long business and credit cycle during the first decade of the 21st century. The magnitude of the cycle tested what can be achieved by traditional policy tools and the limits of macro-prudential policies. The country's financial sector, almost fully consisting of foreign banks, displayed the complexities of cross-border regulation and supervision. Capital and liquidity requirements that were stricter than international minimums, as well as the build-up of fiscal buffers, were instrumental to engineering an orderly adjustment. Openness and integration, including well-advanced cross-border cooperation, were equally important in maintaining financial stability throughout the global financial crisis.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Emerging Markets,Bankruptcy and Resolution of Financial Distress
    Date: 2011–10–01
  22. By: F. Barigozzi; P. Tedeschi
    Abstract: This paper investigates banks’ corporate social responsibility. Two different competitive credit markets do exist: one for standard projects and one for ethical ones. Ethical projects have also a social profitability, but a lower (positive) expected revenue with respect to standard ones. Ethical projects are financed by ethical banks and undertaken by motivated borrowers. These borrowers obtain additional benefit (a social responsibility premium) from accomplishing ethical projects when trading with ethical banks. If the expected profitability of ethical project is sufficiently close to that of standard ones and/or the social responsibility premium of motivated borrowers is sufficiently high, the market for ethical projects is active and the credit market is fully segmented. This result holds true irrespective of the information structure: only moral hazard on the borrower side, moral hazard and screening on the borrower side, moral hazard on the borrower side and screening on the lender side. The optimal contract in our set-up is always a debt contract. However, its precise form and welfare properties depend on the information structure.
    JEL: D86 G21 G30
    Date: 2011–09
  23. By: Ren, Haocong
    Abstract: The global financial crisis has focused much attention on procyclicality, particularly in the context of a macroprudential framework. This paper reviews a set of prudential measures that can be adopted by national authorities to deal with procyclicality and discusses issues in designing and implementing such measures. For developing countries, in addition to some general considerations on policy design and implementation, a range of issues may warrant special attention. These include the balance between financial stability and financial development objectives, selection and calibration of policy instruments according to national circumstances and taking into account data limitations and capacity constraints as well as other practical challenges, and continued efforts to improve supervisory independence, supervisory powers and analytical capacity and to ensure adequate resources in order to perform the required tasks. Given the limited practical experience with countercyclical prudential measures, developing countries (as well as developed countries) will have to ascend a learning curve and experiment with select instruments while carefully monitoring and evaluating their effectiveness over time before a framework matures.
    Keywords: Banks&Banking Reform,Debt Markets,Emerging Markets,Bankruptcy and Resolution of Financial Distress,Currencies and Exchange Rates
    Date: 2011–10–01
  24. By: Catik, A. Nazif; Karaçuka, Mehmet
    Abstract: In this paper we aim to analyze the role of credit channel in the monetary transmission mechanism under different inflationary environments in Turkey covering the period 1986:1 - 2009:10. Our results suggest that traditional interest rate channel is only valid for the postinflation targeting period. This variable is also more effective monetary policy tool in terms of its impacts on economic activity in the both regimes. Credit shocks itself have significant power on economic activity and prices. However, the effect of monetary shocks on credit volume is very limited especially in the low inflation regime. --
    Date: 2011

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