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on Banking |
| By: | Chao Gu; Randall Wright |
| Abstract: | We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies. |
| JEL: | E32 E44 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17510&r=ban |
| By: | Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill |
| Abstract: | We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset's resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing. |
| JEL: | E41 E44 E5 E58 G1 G12 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17500&r=ban |
| By: | Eijffinger, Sylvester C W; Nijskens, Rob |
| Abstract: | During the recent financial crisis, central banks have provided liquidity and governments have set up rescue programmes to restore confidence and stability, often against the LLR principle advocated by Bagehot. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity and monitors too little. A central bank can alleviate the liquidity problem, but induces moral hazard. Therefore, we introduce an additional authority that is able to bail out the bank either by injecting capital at a fixed return or by receiving an equity claim. This authority faces a trade-off: demanding a fixed premium increases investment but worsens moral hazard. Request for an equity claim by the fiscal authority reduces excessive risk taking at the expense of investment. This resembles the current situation on financial markets, in which banks take less risk but also provide less credit to the economy |
| Keywords: | Bailout; Bank Regulation; Capital; Lender of Last Resort; Liquidity |
| JEL: | E58 G21 G28 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8603&r=ban |
| By: | Jürgen Eichberger (University of Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften); Klaus Rheinberger; Martin Summer |
| Abstract: | Credit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery rate. In reality these parameters are the result of the interaction of many market participants: They are endogenous. The authors develop a general equilibrium model with endogenous credit risk that can be viewed as an extension of the capital asset pricing model. They analyze equilibrium prices of securities as well as equilibrium allocations in the presence of credit risk. The authors use the model to discuss the conceptual underpinnings of the approach to risk weight calibration for credit risk taken by the Basel Committee. JEL classification: G32, G33, G01, D52 |
| Keywords: | Credit Risk, Endogenous Risk, Systemic Risk, Banking Regulation |
| Date: | 2011–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:172&r=ban |
| By: | Li, Han Hao; Miller, Marcus; Zhang, Lei |
| Abstract: | The traditional theory of commercial banking explains maturity transformation and liquidity provision assuming no asymmetric information and no excess profits. It captures the possibility of bank runs and business cycle risk; but it ignores the moral hazard problems connected with risk-taking by large banks counting on state bail outs. In this paper market concentration and risk-shifting is incorporated in an analytically tractable fashion; and the modified framework is used to consider measures to restore competition and stability--including, in particular, those recommended for the UK by the Independent Commission on Banking (2011), chaired by Sir John Vickers. |
| Keywords: | bailouts; money and banking; regulation; risk-taking; seigniorage |
| JEL: | E41 E58 G21 G28 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8602&r=ban |
| By: | Delis, Manthos D; Hasan, Iftekhar; Mylonidis, Nikolaos |
| Abstract: | There is a growing consensus that a prolonged period of low interest rates can exert a negative impact on financial stability through the risk-taking incentives of banks. Using micro-level datasets from the US banking sector, this paper finds evidence of a highly significant negative relationship between monetary policy rates and bank-risk taking. This finding remains robust across various specifications, sub-periods and subsamples, thereby confirming the presence of an active risk-taking channel of monetary policy since the 1990s. The results, therefore, support the new responsibilities of the Fed on macro-prudential supervision to monitor systemic risks. |
| Keywords: | Bank risk; monetary policy; US commercial banks; Total loans; New loans |
| JEL: | E43 E52 G21 |
| Date: | 2011–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34084&r=ban |
| By: | Daniel C. Hardy (International Monetary Fund); María J. Nieto (Banco de España) |
| Abstract: | We study the optimal joint design of prudential supervision and deposit guarantee regulations in a multi-country, integrated banking market, where policy-makers have preferences regarding profitability and stability of the banking sector. Non-coordinated policies will tend to yield too little supervision and too much deposit insurance. The paper concludes with recommendations on policy priorities in this area. |
| Keywords: | Deposit guarantees, bank supervision, cross-border coordination, EU |
| JEL: | F36 F59 G28 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1126&r=ban |
| By: | Guntram B. Wolff |
| Abstract: | Ahead of the European Council meeting on 23 October, the author outlines how EU Heads of States should focus on restoring confidence in euro-area policymakersâ?? ability and determination to put the euro area on a sound footing and restore market credibility. Stress in the interbank market has increased dramatically since July and bank stock market valuation has fallen by 22 percent on average for 60 of the most important banks tested in the EBA stress tests. I find evidence that bank stock valuation is significantly and economically meaningfully affected by the bankâ??s exposure to Greek debt. Greek banks are particularly affected. Holdings of debt of the other four periphery countries does not however appear to be a strong determinant of stock price movements. Policy announcements of 21 July of no haircut on any sovereign but Greece appear to be perceived as credible. The exposure to Greece cannot explain the general and large decline in euro area banksâ?? market cap. Instead, a general confidence crisis of the euro area banking system, or more deeply the euro area construction, might be driving the fall in stock prices. The summit of 23 October should focus on restoring confidence in euro-area policymakersâ?? ability and determination to put the euro area on a sound footing. Recapitalisation of banks can only be only one aspect. A credible solution to Greece and a way forward for the larger institutional set-up, including a federal fiscal back-stop of the banking system, are of at least equal importance. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:622&r=ban |
| By: | Jonathan Chiu; Cesaire Meh; Randall Wright |
| Abstract: | The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including search, bargaining, and commitment problems, impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence, suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations. |
| JEL: | O12 O16 O3 O31 O33 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17512&r=ban |
| By: | Ann Börestam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Heiko Schmiedel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main) |
| Abstract: | The present paper explores issues surrounding multilateral interchange fees (MIFs) in payment card markets from various angles. The Eurosystem’s public stance on interchange fees is neutral. However, the Eurosystem takes a keen interest in facilitating a constructive dialogue among the stakeholders involved in this debate. Transparency and clarity with respect to the real costs and benefi ts of different payment instruments are indispensable for a modern and harmonised European retail payments market. Interchange fees (if any) should be set at a reasonable level so as to promote overall economic efficiency in compliance with competition rules. JEL Classification: G21, D43, L13 |
| Keywords: | Trade credit and debit cards, retail payment systems, two-sided markets, interchange fees |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20110131&r=ban |
| By: | John Y. Campbell; João F. Cocco |
| Abstract: | This paper solves a dynamic model of a household's decision to default on its mortgage, taking into account labor income, house price, inflation, and interest rate risk. Mortgage default is triggered by negative home equity, which results from declining house prices in a low inflation environment with large mortgage balances outstanding. Not all households with negative home equity default, however. The level of negative home equity that triggers default depends on the extent to which households are borrowing constrained. High loan-to-value ratios at mortgage origination increase the probability of negative home equity. High loan-to-income ratios also increase the probability of default by tightening borrowing constraints. Comparing mortgage types, adjustable-rate mortgage defaults occur when nominal interest rates increase and are substantially affected by idiosyncratic shocks to labor income. Fixed-rate mortgages default when interest rates and inflation are low, and create a higher probability of a default wave with a large number of defaults. Interest-only mortgages trade off an increased probability of negative home equity against a relaxation of borrowing constraints, but overall have the highest probability of a default wave. |
| JEL: | E21 G21 G33 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17516&r=ban |
| By: | Todd A. Gormley; Simon Johnson; Changyong Rhee |
| Abstract: | Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997-99 crisis, suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups (chaebol) – facing severe financial and governance problems – could still borrow heavily from households through issuing bonds at prices implying very low expected default risk. The evidence suggests “too big to fail” beliefs were not eliminated by government promises, presumably because investors believed that this policy was not time consistent. Subsequent government handling of potential and actual defaults by Daewoo and Hyundai confirmed the market view that creditors would be protected. |
| JEL: | E44 G18 G21 G3 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17518&r=ban |
| By: | Vilsmeier, Johannes |
| Abstract: | In this paper we ‘update’ the option implied probability of default (option iPoD) approach recently suggested in the literature. First, a numerically more stable objective function for the estimation of the risk neutral density is derived whose integrals can be solved analytically. Second, it is reasoned that the originally proposed approach for the estimation of the PoD has some serious drawbacks and hence an alternative procedure is suggested that is based on the Lagrange multipliers. Carrying out numerical evaluations and a practical application we find that the framework provides very promising results. |
| Keywords: | Option Implied Probability of Default; Risk Neutral Density; Cross Entropy |
| Date: | 2011–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:22326&r=ban |
| By: | Masood, Omar; Fry, J. M. |
| Abstract: | This paper addresses an important contemporary issue; namely the implementation of the Basel Accord worldwide. The Basel Accord provides a series of measures to improve the stability of the world’s financial system but its implementation poses a number of challenges for both developing and emerging economies. Pakistan faces a number of unique challenges in this regard due to its recent economic expansion and the fact that the rate at which the Basel Accord is being adopted lags behind that of other countries. This paper throws light on this and a number of related issues due to a combination of the novelty of the survey data from risk managers coupled with a rigorous statistical analysis. Results reflect that the Basel Accord is generally well regarded due to its underlying aims of improved capital standards and a scientific treatment of risk. However, operational risk emerges as a key barrier to implementation in Pakistan. A number of further obstacles are highlighted, which, do seem to have been addressed although only with a partial degree of success. Privately owned banks appear to be more technically competent and more favourably disposed towards implementation than publicly owned banks. |
| Keywords: | Risk Management; Basel Accord; Banking; Financial Regulation; Emerging Markets |
| JEL: | C10 O53 G21 |
| Date: | 2011–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34163&r=ban |
| By: | Fedorova, Elena (BOFIT) |
| Abstract: | With the rise of interconnected global financial systems, there is an increased risk that a financial crisis in one country may spread to others. The contagion effects of the 2008 global financial crisis hit advanced economies fast and hard while sparing less developed and less integrated financial systems. The present study focuses on the contagion effects at Eastern European stock markets and changes in their interconnections after EU accession in 2004. Specifically, we investigate the relationship among the stock market sectors of Poland, Hungary and the Czech Republic during 19982009 and their exposure to on-shored financial risk. The evidence suggests direct linkages between different stock market sectors with respect to returns and volatilities with increased equity-shock transmission between markets after EU accession in 2004. Of particular note is the intra-industry contagion in emerging Europe. Our findings have implications for asset pricing and portfolio selection for international financial institutions and financial managers. |
| Keywords: | GARCH-BEKK; international risk transfer; emerging Eastern Europe; spillovers; intra- and inter-industry contagion |
| JEL: | C32 F36 G12 G15 |
| Date: | 2011–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_024&r=ban |
| By: | Jessica Schicks |
| Abstract: | In the past, the microfinance industry focused mainly on growth and outreach. Addressing financial exclusion implied a huge supply gap. Recent over-indebtedness crises in several countries have shown that this gap can turn into over-supply. The industry urgently requires research to understand the magnitude and consequences of this shift. This chapter reveals the broad spectrum of consequences over-indebtedness can have on borrowers and other stakeholders, mainly MFIs. It emphasizes that over-indebtedness consequences reach far beyond the risk management concerns that MFIs and investors have on top of their mind. In a second step the chapter reviews the existing empirical research on microfinance over-indebtedness and examines how prevalent over-indebtedness is in microfinance markets today. It highlights the evidence for over-indebtedness in crisis markets and non-crisis markets, especially when markets mature. Only if the extent of the problem is known and its effects are properly understood, can the microfinance industry develop appropriate measures against over-indebtedness and adapt to the challenge of oversupply. |
| Keywords: | Microfinance; Microcredit; Supply Gap; Demand Gap; Over-Indebtedness; Customer Protection |
| JEL: | O16 O50 G21 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/99192&r=ban |
| By: | Elena-Ivona Dumitrescu (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Bertrand Candelon (Economics - Maastricht University); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Franz C. Palm (Maastricht University - univ. Maastricht) |
| Abstract: | The recent financial turmoils in Latin America and Europe have led to a concatenation of several events from currency, banking and sovereign debt crises. This paper proposes a multivariate dynamic probit model that encompasses the three types of crises 'currency, banking and sovereign debt' and allows us to investigate the potential causality between all three crises. To achieve this objective, we propose a methodological novelty consisting of an exact maximum likelihood method to estimate this multivariate dynamic probit model, extending thus Huguenin, Pelgrin and Holly (2009). Using a large sample of data for emerging countries, which experienced financial crises, we find that mutations from banking to currency (and vice-versa) are quite common. More importantly, the trivariate model turns out to be more parsimonious in the case of the two countries which suff ered from the 3 types of crises. These findings are strongly confi rmed by a conditional probability and an impulse-response function analysis, highlighting the interaction between the di fferent types of crises and advocating hence the implementation of trivariate models whenever it is feasible. |
| Keywords: | Financial crisis, Multivariate dynamic probit models, Emerging countries |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00630036&r=ban |