New Economics Papers
on Banking
Issue of 2011‒11‒01
twenty-six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Better Barking for ABS: Reform Proposals for the Asset-Backed Securities Market By David C. Allan; Philippe Bergevin
  2. Has the global banking system become more fragile over time ? By Anginer, Deniz; Demirguc-Kunt, Asli
  3. Drivers of Systemic Banking Crises: The Role of Bank-Balance-Sheet Contagion and Financial Account Structure By Rudiger Ahrend; Antoine Goujard
  4. On the network topology of variance decompositions: Measuring the connectedness of financial firms By Francis X. Diebold; Kamil Yilmaz
  5. The 2007-2008 financial crisis : Is there evidence of disaster myopia ? By Camille Cornand; Céline Gimet
  6. Large capital infusions, investor reactions, and the return and risk performance of financial institutions over the business cycle and recent finanical crisis By Elyas Elyasiani; Loretta J. Mester; Michael S. Pagano
  7. Costly Contracts and Consumer Credit By Igor Livshits; James MacGee; Michèle Tertilt
  8. Banking crises and recessions: what can leading indicators tell us? By Corder, Matthew; Weale, Martin
  9. Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises By Karsten Jeske; Dirk Krueger; Kurt Mitman
  10. The Leverage Cycle in Luxembourg?s Banking Sector By Gastón Andrés Giordana; Ingmar Schumacher
  11. Regulatory Medicine Against Financial Market Instability: What Helps And What Hurts? By Stefan Kerbl
  12. A framework for analyzing contagion in banking networks By Thomas R. Hurd; James P. Gleeson
  13. Bank branch geographic location patterns in Spain: some implications for financial exclusion By Luisa Alamá Sabater; Emili Tortosa Ausina
  14. Who defaults on their home mortgage? By Doviak, Eric; MacDonald, Sean
  15. Innovation and growth with financial, and other, frictions By Jonathan Chiu; Cesaire Meh; Randall Wright
  16. Business Cycle Effects of Credit and Technology Shocks in a DSGE Model with Firm Defaults By Pesaran, Hashem; Xu, TengTeng
  17. Optimal Bank Capital By Miles, David; Yang, Jing; Marcheggiano, Gilberto
  18. Relationships and the availability of credit to New Small Firms By Colombatto, Enrico; Melnik, Arie; Monticone, Chiara
  19. On Systemic Stability of Banking Networks By Piotr Berman; Bhaskar DasGupta; Lakshmi Kaligounder; Marek Karpinski
  20. Quantity Rationing of Credit By George A. Waters
  21. An MVAR Framework to Capture Extreme Events in Macroprudential Stress Tests By Paolo Guarda; Abdelaziz Rouabah; John Theal
  22. Is foreign-bank efficiency in financial centers driven by homecountry characteristics? By Claudia Curi; Paolo Guarda; Ana Lozano-Vivas; Valentin Zelenyuk
  23. Financial protectionism: the first tests By Rose, Andrew; Wieladek, Tomasz
  24. Endogenous credit cycles By Chao Gu; Randall Wright
  25. Loan guarantees for consumer credit markets By Kartik B. Athreya; Xuan S. Tam; Eric R. Young
  26. To give or to forgive ? aid versus debt relief By Cordella, Tito; Missaley, Alessandro

  1. By: David C. Allan (Tao Group of Companies); Philippe Bergevin (C.D. Howe Institute)
    Abstract: The market for asset-backed securities (ABS) – financial instruments backed by underlying assets such as mortgages – suffered a major setback in 2007, as a cascade of downgrades and defaults brought turmoil to credit markets and the world economy. Authorities in the United States have since proposed sweeping changes to the ABS market. The Canadian Securities Administrators, representing provincial securities commissions, recently released a discussion paper proposing similar reforms, which would require: (i) sharply enhanced transparency in ABS structures, (ii) CEO certification of the adequacy of such structures, and (iii) disclosure of previous asset repurchases by the securities’ sponsor.
    Keywords: Financial Services, asset-backed securities (ABS), credit markets
    JEL: G12 G15 G18
    Date: 2011–09
  2. By: Anginer, Deniz; Demirguc-Kunt, Asli
    Abstract: This paper examines time-series and cross-country variations in default risk co-dependence in the global banking system. The authors construct a default risk measure for all publicly traded banks using the Merton contingent claim model, and examine the evolution of the correlation structure of default risk for more than 1,800 banks in more than 60 countries. They find that there has been a significant increase in default risk co-dependence over the three-year period leading to the financial crisis. They also find that countries that are more integrated, and that have liberalized financial systems and weak banking supervision, have higher co-dependence in their banking sector. The results support an increase in scope for intra-national supervisory co-operation, as well as capital charges for"too-connected-to-fail"institutions that can impose significant externalities.
    Keywords: Banks&Banking Reform,Debt Markets,Financial Intermediation,Emerging Markets,Access to Finance
    Date: 2011–10–01
  3. By: Rudiger Ahrend; Antoine Goujard
    Abstract: This paper examines whether the composition of a country’s external liabilities and assets has an incidence on its risk of suffering financial turmoil. Particular emphasis is put on the role of international financial integration, using newly-constructed measures of contagion shocks. These new measures capture well the contagion observed e.g. in the wake of the Mexican and Asian crises, and confirm that contagion shocks observed in 2009/10 dwarfed those observed during previous financial crises.<p> Using a panel of 184 developed and emerging economies from 1970 to 2009, the empirical analysis finds that the structure of the financial account has an important influence on financial stability. A key result is that a bias in external liabilities towards debt strongly increases the risk of a systemic banking crisis. Moreover, certain forms of international financial integration are found to amplify contagion shocks and increase crisis risk, such as integration through international bank lending, and in particular through short-term bank debt.
    JEL: E44 F34 F36 G32
    Date: 2011–10–26
  4. By: Francis X. Diebold; Kamil Yilmaz
    Abstract: The authors propose several connectedness measures built from pieces of variance decompositions, and they argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. The authors also show that variance decompositions define weighted, directed networks, so that their connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, the authors 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: Portfolio management ; Systemic risk ; Risk management
    Date: 2011
  5. By: Camille Cornand (BETA CNRS and Strasbourg University – 61, avenue de la forêt noire - 67085 Strasbourg cedex France); Céline Gimet (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: The disaster myopia hypothesis is a theoretical argument that may explain why crises are a recurrent event. Under very optimistic circumstances, investors disregard any relevant information concerning the increasing degree of risk. Agents’ propensity to underestimate the probability of adverse outcomes from the distant past increases the longer the period since that event occurred and at some point the subjective probability attached to this event reaches zero. This risky behaviour may contribute to the formation of a bubble that bursts into a crisis. This paper tests whether there is evidence of disaster myopia during the recent episode of financial crisis in the banking sector. Its contribution is twofold. First, it shows that the 2007 financial crisis exhibits disaster myopia in the banking sector. And second, it identifies macro and specific determinant variables in banks’ risk taking since the beginning of the years 2000.
    Keywords: disaster myopia, financial crisis, banks, risk taking dynamics, GMM
    JEL: G21 C23
    Date: 2011
  6. By: Elyas Elyasiani; Loretta J. Mester; Michael S. Pagano
    Abstract: The authors examine investors' reactions to announcements of large seasoned equity offerings (SEOs) by U.S. financial institutions (FIs) from 2000 to 2009. These offerings include market infusions as well as injections of government capital under the Troubled Asset Relief Program (TARP). The sample period covers both business cycle expansions and contractions, and the recent financial crisis. They present evidence on the factors affecting FI decisions to issue capital, the determinants of investor reactions, and post-SEO performance of issuers as well as a sample of matching FIs. The authors find that investors reacted negatively to the news of private market SEOs by FIs, both in the immediate term (e.g., the two days surrounding the announcement) and over the subsequent year, but positively to TARP injections. Reactions differed depending on the characteristics of the FIs, stage of the business cycle, and conditions of financial crisis. Larger institutions were less likely to have raised capital through market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be larger than other issuers. The authors find that while TARP may have allowed FIs to increase their lending (as a share of assets) in the year after the issuance, they took on more credit risk to do so. They find no evidence that banks' capital adequacy increased after the capital injections.
    Keywords: Securities ; Financial services industry ; Banks and banking
    Date: 2011
  7. By: Igor Livshits (University of Western Ontario); James MacGee (University of Western Ontario); Michèle Tertilt (University of Mannheim, Stanford University, NBER and CEPR)
    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.
    Keywords: consumer credit; endogenous financial contracts; bankruptcy
    JEL: E21 E49 G18 K35
    Date: 2011
  8. By: Corder, Matthew (Monetary Policy Committee Unit, Bank of England); Weale, Martin (Monetary Policy Committee Unit, Bank of England)
    Abstract: It is widely suggested that there is some relationship between banking crises and recessions. We assess whether there is evidence for interdependency between recessions and banking crises using both non-parametric tests and unconditional bivariate probit models and find strong evidence for interdependence. We then consider whether leading indicators can help predict banking crises and recessions and if these variables can explain the previously obvserved interdependence. Inclusion of exogenous variables means that the observed interdependence between banking crises and recessions disappears - indicating that the observed interdependence is a result of easily observable common causes rather than unobserved links.
    Keywords: Crises; recessions; interdependency; bivariate probit analysis
    JEL: E37 G21
    Date: 2011–09–01
  9. By: Karsten Jeske (Mellon Capital Management Corporation, San Francisco, CA); Dirk Krueger (Department of Economics, University of Pennsylvania); Kurt Mitman (Department of Economics, University of Pennsylvania)
    Abstract: This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.
    Keywords: Housing, Mortgage Market, Default Risk, Government-Sponsored Enterprises
    JEL: E21 G11 R21
    Date: 2011–10–12
  10. By: Gastón Andrés Giordana; Ingmar Schumacher
    Abstract: In this article we investigate the leverage cycle in Luxembourg?s banking sector using individual bank-level data for the period 2003 Q1 to 2010 Q1. We discuss the mechanics behind the leverage cycle in Luxembourg?s banks and show that these banks predominantly adjust leverage by changing both loans and deposits. One of our findings is that Luxembourg?s banks have a procyclical leverage. This procyclicality is not due to marking-to-market but because Luxembourg?s banks are liquidity providers to the EU banking sector. This also explains the different evolution of leverage compared to the US commercial banks (Adrian and Shin [1]) that, even though their balance sheet structure is similar to that of the Luxembourgish banks, target a constant leverage. To further understand what drives leverage in Luxembourg?s banks we empirically investigate the role of bank characteristics as well as real, financial and expectation variables that proxy for macroeconomic conditions in the pre-crisis and crisis period. We find that off-balance sheet exposures have different effects in the pre-crisis and crisis period, and that the share of liquid assets in the portfolio only affects the amount of security holdings. In terms of macroeconomic variables, we find that the Euribor-OIS spread is a significant driver of the build-up in leverage in the pre-crisis period. The reason is that most banks in Luxembourg are either branches or subsidiaries. This, firstly, makes leverage a less relevant indicator of riskiness for investors. Secondly, it implies that in times of liquidity shortages, mother companies or groups demand further liquidity from their branch or subsidiary. The downturn in leverage during the crisis can be accredited to reductions in expectations, which we proxy by an economic sentiment indicator. It can also be explained by increasing bond prices which induce depositors to shift their funds from bank deposits into bonds. We find no important role for GDP growth.
    Keywords: leverage dynamics, banking sector, GMM estimation, crisis effect
    JEL: E51 E52 E58 G21 G28
    Date: 2011–10
  11. By: Stefan Kerbl
    Abstract: Do we know if a short selling ban or a Tobin Tax result in more stable asset prices? Or do they in fact make things worse? Just like medicine regulatory measures in financial markets aim at improving an already complex system, cause side effects and interplay with other measures. In this paper an agent based stock market model is built that tries to find answers to the questions above. In a stepwise procedure regulatory measures are introduced and their implications on market liquidity and stability examined. Particularly, the effects of (i) a ban on short selling (ii) a mandatory risk limit, i.e. a Value-at-Risk limit, (iii) an introduction of a Tobin Tax, i.e. transaction tax on trading, and (iv) any arbitrary combination of the measures are observed and discussed. The model is set up to incorporate non-linear feedback effects of leverage and liquidity constraints leading to fire sales. In its unregulated version the model outcome is capable of reproducing stylised facts of asset returns like fat tails and clustered volatility. Introducing regulatory measures shows that only a mandatory risk limit is beneficial from every perspective, while a short selling ban – though reducing volatility – increases tail risk. The contrary holds true for a Tobin Tax: it reduces the occurrence of crashes but increases volatility. Furthermore, the interplay of measures is not negligible: measures block each other and a well chosen combination can mitigate unforeseen side effects. Concerning the Tobin Tax the findings indicate that an overdose can do severe harm. JEL classification: E37, G01, G12, G14, G18
    Keywords: Tobin Tax, transaction tax, short selling ban, Value-at-Risk limits, risk management herding, agent based models
    Date: 2011–10–18
  12. By: Thomas R. Hurd; James P. Gleeson
    Abstract: A probabilistic framework is introduced that represents stylized banking networks and aims to predict the size of contagion events. In contrast to previous work on random financial networks, which assumes independent connections between banks, the possibility of disassortative edge probabilities (an above average tendency for small banks to link to large banks) is explicitly incorporated. We give a probabilistic analysis of the default cascade triggered by shocking the network. We find that the cascade can be understood as an explicit iterated mapping on a set of edge probabilities that converges to a fixed point. A cascade condition is derived that characterizes whether or not an infinitesimal shock to the network can grow to a finite size cascade, in analogy to the basic reproduction number $R_0$ in epidemic modeling. It provides an easily computed measure of the systemic risk inherent in a given banking network topology. An analytic formula is given for the frequency of global cascades, derived from percolation theory on the random network. Two simple examples are used to demonstrate that edge-assortativity can have a strong effect on the level of systemic risk as measured by the cascade condition. Although the analytical methods are derived for infinite networks, large-scale Monte Carlo simulations are presented that demonstrate the applicability of the results to finite-sized networks. Finally, we propose a simple graph theoretic quantity, which we call "graph-assortativity", that seems to best capture systemic risk.
    Date: 2011–10
  13. By: Luisa Alamá Sabater (Dpt. Economia); Emili Tortosa Ausina (Universitat Jaume I)
    Date: 2011–10
  14. By: Doviak, Eric; MacDonald, Sean
    Abstract: Since February 2010, detailed information on every home mortgage default and foreclosure in New York State must be filed with the New York State Banking Department (NYSBD). Pairing the NYSBD's data with data on originations from the Home Mortgage Disclosure Act (HMDA) enables us to identify the race and ethnicity of borrowers who defaulted on their home mortgages (in New York State). Like many previous studies, we find strong racial and ethnic disparities in lending practices, but we do not find conclusive evidence that HMDA-measurable forms of discrimination increased a borrower's probability of default. After controlling for other factors, we find that the interest rates charged to black and Latino borrowers tended to be higher than the ones charged to their white and non-Latino counterparts. This may be one reason why blacks and Latinos tend to default at a higher rate, but other factors, such as the tendency of black and Latino borrowers to take out larger loans than their white and non-Latino counterparts, may also have contributed to the higher default rate among black and Latino borrowers.
    Keywords: mortgage; default; foreclosure; discrimination
    JEL: G21 D14
    Date: 2011–09–24
  15. 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.
    Date: 2011
  16. By: Pesaran, Hashem (University of Cambridge); Xu, TengTeng (Bank of Canada)
    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, possible 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 highlight 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.
    Keywords: bank credit, financial intermediation, firm heterogeneity and defaults, interest rate spread, real financial linkages
    JEL: E32 E44 G21
    Date: 2011–10
  17. By: Miles, David (Monetary Policy Committee Unit, Bank of England); Yang, Jing (Monetary Policy Committee Unit, Bank of England); Marcheggiano, Gilberto (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper reports estimates of the long-run costs and benefits of banks funding more of their assets with loss-absorbing capital, or equity. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also rqeuires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks use more equity no estimate of costs - however accurate - can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent year and also higher than targets agreed under the Basel III framework.
    Keywords: Banks; capital regulation; capital structure; cost of equity; leverage; Modigliani-Miller
    JEL: G21 G28
    Date: 2011–04–01
  18. By: Colombatto, Enrico (Faculty of Economics, University of Turin); Melnik, Arie (Department of Economics, University of Haifa); Monticone, Chiara (Faculty of Economics, University of Turin)
    Abstract: We analyze the loans that startup firms obtain from banks by testing our predictions on a set of small, young Italian companies founded during the 1992-2004 period. According to our investigation, the amount of borrowing is determined by (1) the size of the firm, (2), the ability to offer collateral (3) perceived risk. Contrary to expectations, however, the length of the relationship with the lender has a weak influence.
    Date: 2011–10–23
  19. By: Piotr Berman; Bhaskar DasGupta; Lakshmi Kaligounder; Marek Karpinski
    Abstract: Threats on the stability of a financial system may severely affect the functioning of the entire economy, and thus considerable emphasis is placed on the analyzing the cause and effect of such threats. The financial crisis in the current and past decade has shown that one important cause of instability in global markets is the so-called financial contagion, namely the spreading of instabilities or failures of individual components of the network to other, perhaps healthier, components. This leads to a natural question of whether the regulatory authorities could have predicted and perhaps mitigated the current economic crisis by effective computations of some stability measure of the banking networks. Motivated by such observations, we consider the problem of defining and evaluating stabilities of both homogeneous and heterogeneous banking networks against propagation of synchronous idiosyncratic shocks given to a subset of banks. We formalize the homogeneous banking network model of Nier et al. and its corresponding heterogeneous version, formalize the synchronous shock propagation procedures outlined in that paper, define two appropriate stability measures and investigate the computational complexities of evaluating these measures for various network topologies and parameters of interest. Our results and proofs also shed some light on the properties of topologies and parameters of the network that may lead to higher or lower stabilities.
    Date: 2011–10
  20. By: George A. Waters (Department of Economics, Illinois State University)
    Abstract: Quantity rationing of credit, when ?firms are denied loans, has greater potential to explain macroeconomics ?fluctuations than borrowing costs. This paper develops a DSGE model with both types of financial frictions. A deterioration in credit market con?fidence leads to a temporary change in the interest rate, but a persistent change in the fraction of ?firms receiving ?financing, which leads to a persistent fall in real activity. Empirical evidence confi?rms that credit market con?fidence, measured by the survey of loan officers, is a signi?cant leading indicator for capacity utilization and output, while borrowing costs, measured by interest rate spreads, is not.
    Keywords: Quantity Rationing, Credit, VAR
    JEL: E10 E24 E44 E50
    Date: 2011–10
  21. By: Paolo Guarda; Abdelaziz Rouabah; John Theal
    Abstract: The stress testing literature abounds with reduced-form macroeconomic models that are used to forecast the evolution of the macroeconomic environment in the context of a stress testing exercise. These models permit supervisors to estimate counterparty risk under both baseline and adverse scenarios. However, the large majority of these models are founded on the assumption of normality of the innovation series. While this assumption renders the model tractable, it fails to capture the observed frequency of distant tail events that represent the hallmark of systemic financial stress. Consequently, these kinds of macro models tend to underestimate the actual level of credit risk. This also leads to an inaccurate assessment of the degree of systemic risk inherent in the financial sector. Clearly this may have significant implications for macro-prudential policy makers. One possible way to overcome such a limitation is to introduce a mixture of distributions model in order to better capture the potential for extreme events. Based on the methodology developed by Fong, Li, Yau and Wong (2007), we have incorporated a macroeconomic model based on a mixture vector autoregression (MVAR) into the stress testing framework of Rouabah and Theal (2010) that is used at the Banque centrale du Luxembourg. This allows the counterparty credit risk model to better capture extreme tail events in comparison to models based on assuming normality of the distributions underlying the macro models. We believe this approach facilitates a more accurate assessment of credit risk.
    Keywords: financial stability, stress testing, MVAR, mixture of normals, VAR, tier 1 capital ratio, counterparty risk, Luxembourg banking sector
    JEL: C15 E44 G21
    Date: 2011–10
  22. By: Claudia Curi; Paolo Guarda; Ana Lozano-Vivas; Valentin Zelenyuk
    Abstract: This paper investigates the effects of home country banking regulations on the performance of foreign banks in Luxembourg?s financial center. We control for the main regulatory indicators, such as capital requirements, private monitoring, official disciplinary power and restrictions on bank activities, accounting for the regulatory regime applied to foreign banks. We also control for the level of GDP in the home country and its position in the business cycle. The two-stage bootstrap method proposed by Simar and Wilson (2007) is applied to bank panel data covering 1999-2009. The analysis carries policy implications for bank regulators in both home and host countries and provides insight into the choice between establishing a branch or a subsidiary, when developing cross-border activities through financial centers.
    Keywords: Foreign bank efficiency, Home-host country characteristics, Bank regulation, Data Envelopment Analysis, Bootstrap
    JEL: G15 G21 G28 C14
    Date: 2011–10
  23. By: Rose, Andrew (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: We provide the first empirical tests for financial protectionism, defined as a nationalistic change in banks' lending behaviour, as the result of public intervention, which leads domestic banks either to lend less or at higher interest rates to foreigners. We use a bank-level panel data set spanning all British and foreign banks providing loans within the United Kingdom between 1997 Q3 and 2010 Q1. During this time, a number of banks were nationalised, privatised, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the 'loan mix', domestic (British) loans of a bank expressed as a fraction of its total loan activity. We also study effective short-term interset rates, though our data set here is much smaller. We examine the loan mix for both British and foreign banks, both before and after unusual public interventions such as nationalisations and public capital injections. We find strong evidence of financial protectionism. After nationalisations, foreign banks reduced the fraction of loans going to the United Kingdom by around 11 precentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalised British banks did not significantly change either their loan mix or effect interest rates. Succinctly, foreign nationalised banks seem to have engaged in financial protectionism, while British nationalised banks have not.
    Keywords: Bank; nationalisation; privatisation; crisis; loan; domestic; foreign; empirical; panel
    JEL: F36 G21
    Date: 2011–05–01
  24. 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.
    Date: 2011
  25. By: Kartik B. Athreya; Xuan S. Tam; Eric R. Young
    Abstract: Loan guarantees are arguably the most widely used policy intervention in credit markets, especially for consumers. This may be natural, as they have several features that, a priori, suggest that they might be particularly effective in improving allocations. However, despite this, little is actually known about the size of their effects on prices, allocations, and welfare. ; In this paper, we provide a quantitative assessment of loan guarantees, in the context of unsecured consumption loans. Our work is novel as it studies loan guarantees in a rich dynamic model where credit allocation is allowed to be affected by both limited commitment frictions and private information. ; Our findings suggest that consumer loan guarantees may be a powerful tool to alter allocations that, if carefully arranged, can improve welfare, sometimes significantly. Specifically, our key findings are that (i) under both symmetric and asymmetric information, guaranteeing small consumer loans nontrivially alters allocations, and strikingly, yields welfare improvements even after a key form of uncertainty—one's human capital level—has been realized, (ii) larger guarantees change allocations very significantly, but lower welfare, sometimes for all household-types, and (iii) substantial further gains are available when guarantees are restricted to households hit by large expenditure shocks.
    Keywords: Financial markets ; Consumer finance ; Bankruptcy ; Credit ; Loans
    Date: 2011
  26. By: Cordella, Tito; Missaley, Alessandro
    Abstract: Is generalized debt relief an effective development strategy, or should assistance be tailored to countries'characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief. Since offering such a menu is costly, it is preferred by donors only when the cost of assistance is low, and the probability that an indebted country is creditworthy is high enough. For lower probabilities and higher costs of assistance, donors prefer a policy of only debt relief. Very limited aid is the preferred policy only for high costs of assistance, and low probabilities that the government is creditworthy.
    Keywords: Debt Markets,External Debt,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Access to Finance
    Date: 2011–10–01

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