New Economics Papers
on Banking
Issue of 2011‒11‒07
25 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Is there a role for funding in explaining recent US bank failures? By Pierluigi Bologna
  2. Counterparty credit risk management in industrial corporates By Langkamp, Christian
  3. Market- and Book-Based Models of Probability of Default for Developing Macroprudential Policy Tools By Xisong Jin; Francisco Nadal de Simone
  4. Financial Network Systemic Risk Contributions By Nikolaus Hautsch; Julia Schaumburg; Melanie Schienle
  5. How do joint supervisors examine financial institutions? the case of state banks By Marcelo Rezende
  6. Market discipline by depositors : impact of deposit insurance on the Indonesian banking sector By Hamada, Miki
  7. How Do You Pay? The Role of Incentives at the Point-of-Sale By Carlos Arango; Kim Huynh; Leonard Sabetti
  8. When are multinational banks getting a bang for their buck on their subsidiaries abroad? By Oskar Kowalewski
  9. The impact of banks’ capital adequacy regulation on the economic system: an agent-based approach By Andrea Teglio; Marco Raberto; Silvano Cincotti
  10. Expectations versus fundamentals: does the cause of banking panics matter for prudential policy? By Todd Keister; Vijay Narasiman
  11. The Greek public debt misery: the right cure should follow the right diagnosis By Zsolt Darvas
  12. Price and income elasticity of Australian retail finance: An autoregressive distributed lag (ARDL) approach By Helen Higgs; Andrew C Worthington
  13. Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities By Dungey, Mardi; Dwyer, Gerald P.; Flavin, Thomas
  14. Mutual Guarantee Institutions (MGIs) and small business credit during the crisis By Paolo Emilio Mistrulli; Valerio Vacca; Gennaro Corbisiero; Silvia del Prete; Luciano Esposito; Marco Gallo; Mariano Graziano; Maurizio Lozzi; Vincenzo Maffione; Daniele Marangoni; Andrea Migliardi; Alessandro Tosoni
  15. Cost and profit efficiency of french commercial banks By Béjaoui Rouissi, Raoudha
  16. Do we know what we owe? A comparison of borrower- and lender-reported consumer debt By Meta Brown; Andrew Haughwout; Donghoon Lee; Wilbert van der Klaauw
  17. Rate expectations: What can and cannot be done about rating agencies By Nicolas Véron
  18. Liquidity and the threat of fraudulent assets By Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill
  19. To Surcharge or Not To Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule By Nicholas Economides; David Henriques
  20. Debt Financing of High-growth Startups By Timo Fischer; Gaétan de Rassenfosse
  21. The great escape? A quantitative evaluation of the Fed’s liquidity facilities By Marco Del Negro; Gauti Eggertsson; Andrea Ferrero; Nobuhiro Kiyotaki
  22. Seasonal migration and micro-credit in the lean period : evidence from northwest Bangladesh By Shonchoy, Abu S
  24. Vulnerability of Microfinance to Strategic Default and Covariate Shocks:Evidence from Pakistan By Kurosaki, Takashi; Khan, Hidayat Ullah
  25. Is your money safe? What Italians know about deposit insurance By Laura Bartiloro

  1. By: Pierluigi Bologna (Banca d'Italia)
    Abstract: This paper tests the role of different banks’ liquidity funding structures in explaining the bank failures that occurred in the United States between 2007 and 2009. The results highlight that funding is indeed a significant factor in explaining banks’ probability of default. By confirming the role of funding as a driver of banking crisis, the paper also recognizes that the new liquidity framework proposed by the Basel Committee on Banking Supervision appears to have the features needed to strengthen banks’ liquidity conditions and improve financial stability. Its correct implementation, together with closer supervision of banks’ liquidity and funding conditions, appear decisive, however, if such improvements are to be achieved.
    Keywords: banks, default, crises, liquidity, funding, brokered deposits, liquidity regulation, deposit insurance, United States
    JEL: G20 G21 G28
    Date: 2011–10
  2. By: Langkamp, Christian
    Abstract: Ever since the financial crisis of the banking system of 2008 - 2010 the paradigm that deposits or other exposures towards major banks are safe has been fundamentally questioned. This put industrial corporates, who to support their business usually need to manage significant cash holdings or incur counterparty credit risk via derivatives, in the situation to develop or extend their resources for counterparty credit risk management. This paper provides a comprehensive overview over the practical issues into the subject benefitting largely from the findings of an interview series conducted with the respective heads of counterparty and customer credit risk management in the time period April - September 2011 of 25 large european enterprises with a large subset being members of the German DAX Index.
    Keywords: Financial Risk Management; Credit Risk; Counterparty Credit Risk; CCR Management; Organisation; Financial Controlling; Financial Institutions; Banks
    JEL: G32 G24 G21 L60
    Date: 2011–10–27
  3. By: Xisong Jin; Francisco Nadal de Simone
    Abstract: The recent financial crisis raised awareness of the need for a framework for conducting macroprudential policy. Identifying as early as possible and addressing the buildup of endogenous imbalances, exogenous shocks, and contagion from financial markets, market infrastructures, and financial institutions are key elements of a sound macroprudential framework. This paper contributes to this literature by estimating several models of default probability, two of which relax two key assumptions of the Merton model: the assumption of constant asset volatility and the assumption of a single debt maturity. The study uses market and banks? balance sheet data. It finds that systemic risk in Luxembourg banks, while mildly correlated with that of European banking groups, did not increase as dramatically as it did for the European banking groups during the heights of the financial crisis. In addition, it finds that systemic risk has declined during the second half of 2010, both for the banking groups as well as for the Luxembourg banks. Finally, this study illustrates how models of default probability can be used for event-study purposes, for simulation exercises, and for ranking default probabilities during a period of distress according to banks? business lines. As such, this study is a stepping stone toward developing an operational framework to produce quantitative judgments on systemic risk and financial stability in Luxembourg.
    Keywords: financial stability; credit risk; structured products; default probability, GARCH
    JEL: C30 E44 G1
    Date: 2011–10
  4. By: Nikolaus Hautsch; Julia Schaumburg; Melanie Schienle
    Abstract: We propose the systemic risk beta as a measure for financial companies’ contribution to systemic risk given network interdependence between firms’ tail risk exposures. Conditional on statistically pre-identified network spillover effects and market and balance sheet information, we define the systemic risk beta as the time-varying marginal effect of a firm’s Value-at-risk (VaR) on the system’s VaR. Suitable statistical inference reveals a multitude of relevant risk spillover channels and determines companies’ systemic importance in the U.S. financial system. Our approach can be used to monitor companies’ systemic importance allowing for a transparent macroprudential regulation.
    Keywords: Systemic risk contribution, systemic risk network, Value at Risk, network topology, two-step quantile regression, time-varying parameters
    JEL: G18 G32 G38 C21 C51 C63
    Date: 2011–10
  5. By: Marcelo Rezende
    Abstract: This paper studies what determines whether federal and state supervisors examine state banks independently or together. The results suggest that supervisors coordinate examinations in order to support states with lower budgets and capabilities and more banks to supervise. I find that states with larger budgets examine more banks independently, that they accommodate changes in the number of banks mostly through the number of examinations with a federal supervisor and that, when examining banks together, state banking departments that have earned quality accreditation are more likely to write conclusion reports separately from federal supervisors. The results also indicate that regulation impacts supervision by changing the characteristics of banks. Independent examinations decrease with branch deregulation, which is consistent with the facts that this reform consolidated banks within fewer independent firms and that state and federal supervisors are more likely to examine large and complex institutions together.
    Keywords: Bank examination - United States ; Bank supervision - United States
    Date: 2011
  6. By: Hamada, Miki
    Abstract: This paper investigates market discipline by depositors in the Indonesian banking sector. Does depositor discipline fulfill its role in Indonesia? Does deposit insurance affect depositor behavior thereby imposing discipline on banks? These questions are empirically examined using panel data on Indonesian commercial banks from 1998 to 2009. In Indonesia deposit insurance was introduced in 2005. Depositor discipline is examined by two measures: change in the amount of deposits and interest rate. The empirical results show that depositors pay attention to bank soundness and riskiness and select banks based on the bank's condition with particular attention paid to equity ratio. It is found that depositors impose discipline on banks, but it varies according to regulatory and economic circumstances.
    Keywords: Indonesia, Banks, Insurance, Deposit insurance, Market discipline, Depositor discipline
    JEL: G21 G28 G30
    Date: 2011–03
  7. By: Carlos Arango; Kim Huynh; Leonard Sabetti
    Abstract: This paper uses discrete-choice models to quantify the role of consumer socioeconomic characteristics, payment instrument attributes, and transaction features on the probability of using cash, debit card, or credit card at the point-of-sale. We use the Bank of Canada 2009 Method of Payment Survey, a two-part survey among adult Canadians containing a detailed questionnaire and a three-day shopping diary. We find that cash is still used intensively at low value transactions due to speed, merchant acceptance, and low costs. Debit and credit cards are used more frequently for higher transaction values where safety, record keeping, the ability to delay payment and credit card rewards gain prominence. We present estimates of the elasticity of using a credit card with respect to credit card rewards. Reward elasticities are a key element in understanding the impact of retail payment pricing regulation on consumer payment instrument usage and welfare.
    Keywords: Bank notes; Econometric and statistical methods; Financial services
    JEL: E41 C35
    Date: 2011
  8. By: Oskar Kowalewski (Warsaw School of Economics, World Economy Research Institute)
    Abstract: This paper investigates whether foreign subsidiaries outperform their parent banks in terms of profitability and what determines this outcome. Using a large sample of multinational banks and their subsidiaries in a large number of countries, this study shows that, on average, foreign subsidiaries are less profitable than their parent banks are. At the same time, however, foreign subsidiaries have higher net interest margins but also higher overhead costs relative to their parent banks. One explanation for the results is that parent banks transfer income banks using overhead costs, what may explain the existing results. Moreover, the results show that foreign subsidiaries tend to perform better than their parent banks if the latter are underperforming in the home market. Finally, the results show that the determinants of the profitability of the subsidiary in relation to its parent bank are strongly determined by the origins of the parent bank and, to a lesser extent, by the host market’s characteristics as well as the distance to the home country of the multinational bank.
    Keywords: international banking, foreign banks, subsidiary, performance
    JEL: F21 F23 G21
    Date: 2011
  9. By: Andrea Teglio (Department of Economics, Universitat Jaume I (Castellón, Spain)); Marco Raberto (University of Genova (Genova, Italy)); Silvano Cincotti (University of Genova (Genova, Italy))
    Abstract: Since the start of the ?nancial crisis in 2007, the debate on the proper level leverage of ?nancial institutions has been ?ourishing. The paper addresses such crucial issue within the Eurace arti?cial economy, by considering the effects that different choices of capital adequacy ratios for banks have on main economic indicators. The study also gives us the opportunity to examine the outcomes of the Eurace model so to discuss the nature of endogenous money, giving a contribution to a debate that has grown stronger over the last two decades. A set of 40 years long simulations have been performed and examined in the short (?rst 5 years), medium (the following 15 years) and long (the last 20 years) run. Results point out a non-trivial dependence of real economic variables such as the Gross Domestic Product (GDP), the unemployment rate and the aggregate capital stock on banks’ capital adequacy ratios; this dependence is in place due to the credit channel and varies signi?cantly according to the chosen evaluation horizon. In general, while boosting the economy in the short run, regulations allowing for a high leverage of the banking system tend to be depressing in the medium and long run. Results also point out that the stock of money is driven by the demand for loans, therefore supporting the theory of endogenous nature of credit money.
    Keywords: Agent-based models, banking regulation
    JEL: G2
    Date: 2011
  10. By: Todd Keister; Vijay Narasiman
    Abstract: There is a longstanding debate about whether banking panics and other financial crises always have fundamental causes or are sometimes the result of self-fulfilling beliefs. Disagreement on this point would seem to present a serious obstacle to designing policies that promote financial stability. However, we show that the appropriate choice of policy is invariant to the underlying cause of banking panics in some situations. In our model, the anticipation of being bailed out in the event of a crisis distorts the incentives of financial institutions and their investors. Two policies that aim to correct this distortion are compared: restricting policymakers from engaging in bailouts, and allowing bailouts but taxing the short-term liabilities of financial institutions. We find that the latter policy yields higher equilibrium welfare regardless of whether panics are sometimes caused by self-fulfilling beliefs.
    Keywords: Financial crises ; Financial stability ; Monetary policy ; Economic policy
    Date: 2011
  11. By: Zsolt Darvas
    Abstract: In sharp contrast to the cautiously positive tone of the 11 October official press release about the fifth review of the Greek programme, the leaked confidential debt sustainability analysis by the troika of the European Commission, European Central Bank and International Monetary Fund (dated 21 October) was devastating, projecting Greek public debt (net of collateral required for private sector involvement) to peak at 186 percent of GDP in 2013 and to stay above 150 percent even in 2020. Market access is unlikely to be restored before 2021. Therefore, without a more sizeable reduction in privately-held debt, official financing would reach â?¬ 362 billion by 2020. And this is the baseline. Lower growth, primary budget surplus or privatisation revenues could make debt dynamics even worse. In essence, the troika's confidential analysis has endorsed the view that there are two ways out of the Greek public debt trap: debt socialisation, ie official lending at a very low interest rate for decades, or a sizeable reduction in privately-held debt (continued official funding is also needed in the second case, but just for a few years and to a much lesser degree). This is a major change compared to the fourth review, which ended on 2 June. The diagnosis has become more honest and hence itâ??s time to find the correct cure. Current discussions suggest that there is little, if any, appetite for socialising Greek debt much further, so the real question is when and how to organise the reduction of privately-held debt. The urgency has increased, because the bank run has accelerated. Deposits in Greece are guaranteed by the Greek government and depositors are right to question this guarantee when the government is on the brink of default. But the bank run could leave the banking sector hamstrung and thereby lead to an even deeper economic crisis. This calls for a prompt and, finally, a credible solution to shore up Greek banks and achieve a sustainable public debt trajectory under reasonable assumptions. The big question is how. Most policymakers seem to insist that debt reduction should be â??voluntaryâ??, because three major fears are associated with forced reduction: (1) it would constitute a credit event, thereby triggering credit defaults swaps (CDS), (2) it would set a precedent that other euro-area countries might wish to follow, and (3) it could lead to severe contagion throughout the euro area. However, we should not fool ourselves that a debt reduction that is labelled â??voluntaryâ?? would save us from these concerns. As for the first, when the haircut is as high as discussed, ie 50-60 percent, and the agreement results from the threat of default, credit rating agencies and the International Swaps and Derivatives Association (ISDA, which decides about triggering CDS) may be right to conclude that it was not purely voluntary. After all, the net open CDS positions on the Greek sovereign amount to a mere â?¬ 3 billion â?? not an amount that by itself would lead to the collapse of several financial intermediaries. Also, at such a high level of haircut, the risk of free-riding increases, jeopardising the success of the agreement. As for the second fear, there are objective reasons behind the Greek haircut: public debt is way too high and, without significant debt reduction, there is no hope for market access for at least a decade. Greece has reached this situation after great suffering and after the sovereignty of its government has been curtailed in many ways. Even after default, the country would face numerous difficulties. There is no other country in the euro area with similar objective restructuring needs, and it is not very likely that other countries would wish to follow this bumpy route. The most serious fear is the third one â?? but once again, whether a, say, 60 percent debt reduction would be reached â??voluntarilyâ?? or as the result of coercion is not a big difference: either way, investors in Greek sovereign bonds will have suffered a massive loss. Therefore, policymakers should not invest too much time in designing â??voluntaryâ?? schemes. It would certainly be worth a try, such as reverse auction-based debt buy-backs, but there are more pressing issues: (1) finding the proper rate of debt reduction, (2) stopping the bank run and safeguarding Greek banks, and (3) limiting contagion. The first issue should be delegated to technical level experts, and not to high level policymakers, because the task is closer to being an art than a science and it would be better to carry it out as objectively as possible. The rate of debt reduction should be a once-and-for-all rate and should not be revisited later. The rate should be of course as small as possible, but high enough to ensure that market access will be restored in a few years. The second issue could be tackled by giving a kind of euro-area guarantee for Greek bank deposits â?? in the short term the European Financial Stability Facility (EFSF) could be used for this purpose. It might bring about later a unified euro-area wide deposit guarantee system, which is badly needed anyway. Bank runs could also be reduced by a more forceful denial of an eventual Greek exit from the euro-area: an exit would make Greece much worse off than a default inside the euro-area. The capital of most Greek banks would be wiped out by the haircut and therefore these banks will need a lot of new capital that the Greek government cannot provide. Again, in the current urgent situation the EFSF should be used through a new earmarked loan to the Greek government. In effect, this will lead to the nationalisation of banks. Bank losses may go beyond current bank capital, especially if bank balance sheets deteriorate because of private sector losses, as a result of the deeper recession. Therefore, these banks should be restructured and the involvement of junior bondholders may be needed, for which help from the European Banking Authority, or better, a specialised euro area-wide bank resolution mechanism, would be needed. The restructured banks should be sold off later â?? preferably to major European banking groups. And liquidity should be provided to banks possibly through a special exceptional liquidity assistance facility. Limiting contagion is perhaps the most difficult task. While, for example, the Italian fiscal situation is sustainable even at current borrowing rates, but it may not be sustainable at a much higher rate. Investors, knowing that such an unfavourable situation could emerge, might shun Italian debt if they see that Greece eventually defaulted despite the uncountable number of promises that it would not during the past two years. The risk of such a contagion will be higher if the upcoming EU summit(s) do not find adequate solutions for strengthening the euro-areaâ??s banking system and making the financial backstop for sovereigns more sizeable and effective. The first lines of defence, of course, should be the adoption and implementation of more credible structural and fiscal reforms in Italy and the design of credible bank stress tests throughout euro area â?? even if proper execution will take more time than what seems to be available to solve the Greek debt misery. Therefore, the other elements of the package currently under discussion are also crucial. It is indeed time to design a package that is comprehensive not just in name. Zsolt Darvas is research fellow at the Bruegel think-tank and the author of the report â??Debt restructuring in the euro area: A necessary but manageable evil?â??
    Date: 2011–10
  12. By: Helen Higgs; Andrew C Worthington
    Keywords: Retail finance demand, housing loans, term loans, credit card loans, margin loans
    JEL: C22 D14
    Date: 2011
  13. By: Dungey, Mardi; Dwyer, Gerald P.; Flavin, Thomas (School of Economics and Finance, University of Tasmania)
    Abstract: The misevaluation of risk in securitized ?nancial products is central to understand- ing the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors a¤ecting collateralized debt obligations (CDOs) based on subprime mortgages. A key feature of subprime-mortgage backed indices is that they are distinct in their vintage of issuance. Using a latent factor framework that incorporates this vintage e¤ect, we show the increasing importance of a common factor on more senior tranches during the crisis. We examine this common factor and its relationship with spreads. We estimate the e¤ects on the common factor of the ?nancial crisis.
    Keywords: Consumer Economics: Theory, Consumer Economics: Empirical Analysis, Demographic Economics
    Date: 2011–08
  14. By: Paolo Emilio Mistrulli (Banca d'Italia); Valerio Vacca (Banca d'Italia); Gennaro Corbisiero (Banca d'Italia); Silvia del Prete (Banca d'Italia); Luciano Esposito (Banca d'Italia); Marco Gallo (Banca d'Italia); Mariano Graziano (Banca d'Italia); Maurizio Lozzi (Banca d'Italia); Vincenzo Maffione (Banca d'Italia); Daniele Marangoni (Banca d'Italia); Andrea Migliardi (Banca d'Italia); Alessandro Tosoni (Banca d'Italia)
    Abstract: The recent economic and financial crisis has drawn attention to how mutual guarantee institutions (MGIs) facilitate small and medium enterprises in accessing bank financing. The aim of this paper is twofold. First, we describe the structural features of the Italian market for mutual guarantees and its significance for small business credit. To this end, we use extensive databases (the Central Credit Register and the Central Balance Sheet Register) as well as specific surveys, which allow us to fill information gaps about this industry and to quantify regional diversity. Second, we investigate whether MGIs’ support to small firms continued to be effective in 2008-09, when credit constraints to Italian firms peaked. We find that MGIs played a role in avoiding a break-up in credit flows to affiliated firms, which also benefited from a lower cost of credit. However, this came at the cost of a deterioration in credit quality, which was more intense for customers with guarantees from MGIs.
    Keywords: microfinance, peer monitoring, small business finance
    JEL: D82 G21 G30
    Date: 2011–10
  15. By: Béjaoui Rouissi, Raoudha
    Abstract: The purpose is to investigate the efficiency levels of commercial domestic versus foreign banks in France by comparing the use of basic accounting ratios and the stochastic cost and profit frontier analysis (SFA). We analyze the profit and cost efficiency of domestic and foreign banks operating in France using unbalanced sample, including 62 domestic and 40 foreign banks over the period 2000-2007. We show that foreign banks exhibit higher cost and profit efficiency than domestic banks. This finding goes against previous empirical literature, concluding on advantage of cost efficiency for domestic banks in developed countries such as France (Berger et al. (2000)). However, the comparison between the cost efficiency and the profit efficiency scores, suggests that foreign banks are better managed in terms of profit efficiency mainly due to higher cost efficiency. On the other side, profit efficiency of domestic banks, was due to higher revenue efficiency. This suggests that French domestic banks operate with excessive margins.
    Keywords: efficiency; domestic banks; foreign banks
    JEL: C23 D24 G21
    Date: 2011–10–27
  16. By: Meta Brown; Andrew Haughwout; Donghoon Lee; Wilbert van der Klaauw
    Abstract: Household surveys are the source of some of the most widely studied data on consumer balance sheets, with the Survey of Consumer Finances (SCF) generally cited as the leading source of wealth data for the United States. At the same time, recent research questions survey respondents’ propensity and ability to report debt characteristics accurately. We compare household debt as reported by borrowers to the SCF with household debt as reported by lenders to Equifax using the new FRBNY Consumer Credit Panel (CCP). Moments of the borrower and lender debt distributions are compared by year, age of household head, household size, and region of the country, in total and across five standard debt categories. The debt reports are strikingly similar, with one noteworthy exception: the aggregate credit card debt implied by SCF borrowers’ reports is less than 50 percent of the aggregate credit card debt implied by CCP lenders’ reports. Adjustments for sample representativeness and for small business and convenience uses of credit cards raise SCF credit card debt to somewhere between 52 and 66 percent of the CCP figure. Despite the credit card debt mismatch, bankruptcy history is reported comparably in the borrower and lender sources, indicating that not all stigmatized consumer behaviors are underreported.
    Keywords: Households ; Consumer surveys ; Debt
    Date: 2011
  17. By: Nicolas Véron
    Abstract: Credit rating agencies have been under the spotlight since the beginning of the current financial crisis. They failed in their assessment of US residential mortgage- based securities in the mid-2000s. Nevertheless, investors generally consider credit ratings useful to help form their views on credit risks. The global market for credit ratings is very concentrated, ostensibly as a consequence of high natural barriers to entry. All three leading rating agencies have headquarter functions in the US, but there is no compelling evidence that this has created an analytical bias. Tighter regulation of rating agencies can be envisaged but is unlikely to have a material positive effect on ratings quality. Better standardised public disclosures on risk factors by issuers are the most promising avenue for future improvements in credit risk assessments. This Policy Contribution is based on a briefing note for the Polish Presidency of the Council of the European Union.
    Date: 2011–10
  18. 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.
    Keywords: Liquidity (Economics) ; Fraud ; Asset pricing
    Date: 2011
  19. By: Nicholas Economides (Stern School of Business, New York University); David Henriques (Nova School of Business and Economics)
    Abstract: In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires that merchants charge the same final good price regardless of the means of payment chosen by the customer. In this paper, we analyze a three-party model (consumers, merchants, and proprietary EPNs) to assess the impact of a NSR on the electronic payments system, in particular, on competition among EPNs, network pricing to merchants and consumers, EPNs’ profits, and social welfare. We show that imposing a NSR has a number of effects. First, it softens competition among EPNs and rebalances the fee structure in favor of cardholders and to the detriment of merchants. Second, we show that the NSR is a profitable strategy for EPNs if and only if the network effect from merchants to cardholders is sufficiently weak. Third, the NSR is socially (un)desirable if the network externalities from merchants to cardholders are sufficiently weak (strong) and the merchants’ market power in the goods market is sufficiently high (low). Our policy advice is that regulators should decide on whether the NSR is appropriate on a market-by-market basis instead of imposing a uniform regulation for all markets.
    Keywords: Electronic Payment System, Market Power, Network Externalities, No-Surcharge Rule, Regulation, Two-sided Markets, MasterCard, Visa, American Express, Discover.
    JEL: L13 L42 L80
    Date: 2011–08
  20. By: Timo Fischer; Gaétan de Rassenfosse
    Abstract: We study the business model of venture debt firms, specialized institutions that provide loans to high-growth startups. Venture debt represents an apparent contradiction with traditional debt theory since startups have negative cash flows and lack tangible assets to secure the loan. Yet, we estimate that the U.S. venture debt industry provides at least one venture debt dollar for every seven venture capital dollars invested. We aim to provide the first empirical evidence on the determinants of the lending decision. Building on existing field interviews and case studies, we design a choice experiment of the lending decision and conduct experiments with 55 senior venture lenders. We find support for the hypothesis that backing by venture capital firms substitutes for startups’ cash flow. Furthermore, we illustrate the signaling effect of patents and their role as collateral to facilitate the lending decision.
    Keywords: Venture capital; startups; patents
    JEL: G24 O31
    Date: 2011
  21. By: Marco Del Negro; Gauti Eggertsson; Andrea Ferrero; Nobuhiro Kiyotaki
    Abstract: We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities, explicitly incorporating the zero bound on the short-term nominal interest rate. Within this framework, we ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 U.S. financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government exchanges liquid government assets for illiquid private paper? We find that the effects of the liquidity shock can be large, and we show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-09.
    Keywords: Federal Reserve System ; Interest rates ; Liquidity (Economics) ; Private equity
    Date: 2011
  22. By: Shonchoy, Abu S
    Abstract: This paper investigates the relationship between access to micro-credit and temporary seasonal migration, an issue which is largely ignored in the standard rural-urban migration literature. Seasonal migration due to agricultural downturns is a common phenomenon in developing countries. Using primary data from a cross-sectional household survey from the northwest part of Bangladesh, this study quantifies the factors that influence such migration decisions. Among other results, we find that network effects play a significant role in influencing the migration decision, with the presence of kinsmen at the place of destination having considerable impact. Seasonal migration is a natural choice for individual suffering periodic hardship; however the strict weekly loan repayment rules of Micro-credit Institutes can have an adverse effect on this process, reducing the ability of borrowers to react to a shock. Our result suggests that poor individuals prefer the option of not accessing the micro-credit and opt for temporal seasonal migration during the lean period. The results have numerous potential policy implications, including the design of typical micro-credit schemes.
    Keywords: Bangladesh, Microfinance, Population movement, Lean period, Seasonal migration, Micro-credit
    JEL: J62 J64 J65 O15 O18 R23 G21
    Date: 2011–03
    Date: 2011
  24. By: Kurosaki, Takashi; Khan, Hidayat Ullah
    Abstract: This paper investigates the repayment behavior of microfinance borrowers in Pakistan using a unique dataset of about 45,000 installments/repayments covering 2,945 microfinance borrower households over the period 1998-2007. In early 2005, the microfinance institution for these borrowers adopted a new system with strict enforcement of punishment against repayment delays/defaults. This reform led to a healthy situation with almost zero default rates, overcoming the previous problem of frequent defaults. We hypothesize that strategic default under the joint liability mechanism-if one group member is hit by a negative shock and faces difficulty in repayment, the other members who are able to repay may decide to default as well, instead of helping the unlucky member-was encouraged by weak enforcement of dynamic incentives and responsible for the pre-reform failure. As evidence for this interpretation, we show that a borrower’s delay in installment repayment was correlated with other group members’ repayment delays, beyond the level explained by possible correlation of project failures due to locally covariate shocks during the pre-reform period. The post-reform period is divided into two sub-periods by an earthquake in October 2005. Analysis of repayment behavior in the post-reform period yields the results that suggest that (1) the relative success under the new system was because of the suppression of strategic behavior among group members, thereby allowing joint liability schemes to function as individual lending schemes de facto and (2) the earthquake only marginally affected the new system in terms of repayment delays.
    Keywords: group lending, joint liability, contingent renewal, strategic default, covariate shocks
    JEL: O16 G29 D82
    Date: 2011–03
  25. By: Laura Bartiloro (Banca d'Italia)
    Abstract: The recent financial crisis has revived the debate on deposit insurance. Public awareness of its existence is essential in order to prevent a bank run. Analysing the results of three questions on this topic introduced in the last Survey on Household Income and Wealth, this paper investigates knowledge of the existence of the Italian deposit insurance scheme and its main characteristics among a sample of households. Evidence shows that knowledge of deposit insurance is poor: 70 per cent of the households in the sample are completely unaware of its existence, 23 per cent possess only basic knowledge, and just 7 per cent have detailed information. The available data allow us to outline possible determinants of deposit insurance awareness: the results highlight the importance of the Internet and of income and education, as expected; in addition, men seem to be better informed than women.
    Keywords: deposit insurance, public awareness
    JEL: G28 G21
    Date: 2011–10

This issue is ©2011 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.