New Economics Papers
on Banking
Issue of 2011‒11‒14
thirty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank governance and regulation. By Laeven, L.
  2. Macroprudential Regulation and the Monetary Transmission Mechanism By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  3. Credit Derivative Pricing with Stochastic Volatility Models By Carl Chiarella; Samuel Chege Maina; Christina Nikitopoulos-Sklibosios
  4. Counterparty Risk FAQ: Credit VaR, PFE, CVA, DVA, Closeout, Netting, Collateral, Re-hypothecation, WWR, Basel, Funding, CCDS and Margin Lending By Damiano Brigo
  5. Bank Efficiency and Default in Brazil: Causality Tests By Benjamin M. Tabak; Giovana L. Craveiro; Daniel O. Cajueiro
  6. Consumer credit and payment cards By Wilko Bolt; Elizabeth Foote; Heiko Schmiedel
  7. Viewing risk measures as information. By Dominique Guegan; Wayne Tarrant
  8. Bank risk during the financial crisis: do business models matter? By Yener Altunbas; Simone Manganelli; David Marques-Ibanez
  9. Credit scoring and loan default By Geetesh Bhardwaj; Rajdeep Sengupta
  10. Foreign banks and the stability of foreign and domestic credit in CEECs By Sophie Brana; Delphine Lahet
  11. Predicting failure in the commercial banking industry By Tatom, John
  12. Operational risk : a Basel II++ step before Basel III. By Dominique Guegan; Bertrand K. Hassani
  13. Subordinated debt, market discipline, and bank risk By Chen , Yehning; Hasan, Iftekhar
  14. SAFE: An early warning system for systemic banking risk By Mikhail V. Oet; Ryan Eiben; Timothy Bianco; Dieter Gramlich; Stephen J. Ong; Jing Wang
  15. How do banks’ funding costs affect interest margins? By Arvid Raknerud; Bjørn Helge Vatne; Ketil Rakkestad
  16. Business Cycle and Bank Capital Regulation: Basel II Procyclicality By Guangling (Dave) Liu; Nkhahle Seeiso
  17. Loose monetary policy and excessive credit and liquidity risk-taking by banks. By Ongena, S.; Peydro, J.L.
  18. Breadth and depth of french microfinance outreach : an evaluation By Sophie Brana; Yves Jégourel
  19. The impact of CFO gender on bank loan contracting By Francis, Bill; Hasan, Iftekhar; Wu, Qiang
  20. A mathematical resurgence of risk management : an extreme modeling of expert opinions. By Dominique Guegan; Bertrand K. Hassani
  21. Cross border banking supervision : incentive conflicts in supervisory information sharing between home and host supervisors By D'Hulster, Katia
  22. How do you pay? The role of incentives at the point-of-sale By Carlos Arango; Kim P. Huynh; Leonard Sabetti
  23. How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment By Idier, J.; Lamé, G.; Mésonnier, J S.
  24. Housing and Banking in a Small Open Economy DSGE Model By Viktors Ajevskis; Kristine Vitola
  25. Does Taxation on Banks Tax Bank Borrowers? Evidence from the Tokyo Bank Tax Experiment By Peter Hull; Masami Imai
  26. A Transparency Standard for Derivatives By Viral V. Acharya
  27. Banks in Space: Does Distance Really Affect Cross-Border Banking? By Katja Neugebauer
  28. Episodes of Large Capital Inflows and the Likelihood of Banking and Currency Crises and Sudden Stops By Davide Furceri; Stéphanie Guichard; Elena Rusticelli
  29. Fraud, Investments and Liability Regimes in Payment Platforms By Anna Creti; Marianne Verdier
  30. A multivariate extension of Value-at-Risk and Conditional-Tail-Expectation By Areski Cousin; Elena Di Bernadino

  1. By: Laeven, L. (Universiteit van Tilburg)
    Date: 2011
  2. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: This paper presents a simple dynamic macroeconomic model of a bank-dominated financial system that captures some of the key credit market imperfections commonly found in middle-income countries. The model is used to analyze the interactions between monetary and macroprudential policies, involving, in the latter case, changes in reserve requirements and the imposition of an upper limit on banks’ leverage ratio. Policy implications are also discussed, in the context of the post-crisis debate on the use of macroprudential tools. The analysis shows that understanding how these tools operate is essential because they may alter, possibly in substantial ways, the monetary transmission mechanism.
    Date: 2011–11
  3. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Samuel Chege Maina (School of Finance and Economics, University of Technology, Sydney); Christina Nikitopoulos-Sklibosios (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper proposes a framework for pricing credit derivatives within the defaultable Markovian HJM framework featuring unspanned stochastic volatility. Motivated by empirical evidence, hump-shaped level dependent stochastic volatility specifications are proposed, such that the model admits finite dimensional Markovian structures. The model also accommodates a correlation structure between the stochastic volatility, default-free interest rates and credit spreads. Default free and defaultable bonds are explicitly priced and an approach for pricing credit default swaps and swaptions is presented where the credit swap rates can be approximated by defaultable bond prices with varying maturities. A sensitivity analysis capturing the impact of the model parameters including correlations and stochastic volatility, on the credit swap rate and the value of the credit swaption is also presented.
    Keywords: stochastic volatility; Heath-Jarrow-Morton framework; defaultable bond prices; credit spreads; CDS rates
    Date: 2011–07–01
  4. By: Damiano Brigo
    Abstract: We present a dialogue on Counterparty Credit Risk touching on Credit Value at Risk (Credit VaR), Potential Future Exposure (PFE), Expected Exposure (EE), Expected Positive Exposure (EPE), Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), DVA Hedging, Closeout conventions, Netting clauses, Collateral modeling, Gap Risk, Re-hypothecation, Wrong Way Risk, Basel III, inclusion of Funding costs, First to Default risk, Contingent Credit Default Swaps (CCDS) and CVA restructuring possibilities through margin lending. The dialogue is in the form of a Q&A between a CVA expert and a newly hired colleague.
    Date: 2011–11
  5. By: Benjamin M. Tabak; Giovana L. Craveiro; Daniel O. Cajueiro
    Abstract: Periods of Financial Stability are associated to low bank efficiency and high non-performing loans in credit portfolios. Therefore, this paper studies the relationship between bank efficiency and non-performing loans. To evaluate the bank efficiency, we employ a Data Envelopment Analysis. We employ the Arelano-Bond dynamic panel approach and a panel-VAR to test whether non-performing loans Granger cause bank efficiency (bad luck hypothesis) or whether bank efficiency affects loan quality (management with risk aversion). Empirical results for the Brazilian case corroborate the second hypothesis.
    Date: 2011–10
  6. By: Wilko Bolt (De Nederlandsche Bank, Postbus 98, 1000 AB Amsterdam, Netherlands.); Elizabeth Foote (London School of Economics, Houghton Street, London, WC2A 2AE, UK.); Heiko Schmiedel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.)
    Abstract: We consider debit and credit card networks. Our contribution is to introduce the role of consumer credit into these payment networks, and to assess the way this affects competition and equilibrium fees. We analyze a situation in which overdrafts are associated with current accounts and debit cards, and larger credit lines with ‘grace’ periods are associated with credit cards. If we just introduce credit cards, we find their merchant fees depend not only on the networks’ cost of funds and the probability of default, but also on the interest rates of overdrafts. Whilst debit card merchant fees do not depend on funding costs or default risk in a debit-card only world, this changes when they start to compete with credit cards. First, debit merchant acceptance increases with the default probability, even though merchant fees increase. Second, an increase in funding costs causes a surprising increase in debit merchant fees. Effectively, the bank offering the debit card benefits from consumers maintaining a positive current account balance, when they use their credit instead of their debit card. As a result, this complementarity may lead to relatively high debit card merchant fees as the bank discourages debit card acceptance at the margin. JEL Classification: L11, G21, D53.
    Keywords: Payment pricing, card competition, consumer credit, complementarity.
    Date: 2011–10
  7. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Wayne Tarrant (Department of Mathematics - Wingate University)
    Abstract: Regulation and Risk management in banks depend on underlying risk measures. In general this is the only purpose that is seen for risk measures. In this paper, we suggest that the reporting of risk measures can be used to determine the loss distribution function for a financial entity. We demonstrate that a lack of sufficient information can lead to ambiguous risk situations. We give examples, showing the need for the reporting of multiple risk measures in order to determine a bank's loss distribution. We conclude by suggesting a regulatory requirement of multiple risk measures being reported by banks, giving specific recommendations.
    Keywords: Risk measure, Value at Risk, Bank capital.
    JEL: C16 G18 E52
    Date: 2011–08
  8. By: Yener Altunbas (Centre for Banking and Finance, University of Wales, Bangor, Gwynedd, LL57 2DG, UK.); Simone Manganelli (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.)
    Abstract: We exploit the 2007-2009 financial crisis to analyze how risk relates to bank business models. Institutions with higher risk exposure had less capital, larger size, greater reliance on short-term market funding, and aggressive credit growth. Business models related to significantly reduced bank risk were characterized by a strong deposit base and greater income diversification. The effect of business models is non-linear: it has a different impact on riskier banks. Finally, it is difficult to establish in real time whether greater stock market capitalization involves real value creation or the accumulation of latent risk. JEL Classification: G21, G15, E58, G32.
    Keywords: Bank risk, business models, bank regulation, financial crisis, Basle III.
    Date: 2011–11
  9. By: Geetesh Bhardwaj; Rajdeep Sengupta
    Abstract: This paper introduces a measure of credit score performance that abstracts from the influence of “situational factors.” Using this measure, we study the role and effectiveness of credit scoring that underlied subprime securities during the mortgage boom of 2000-2006. Parametric and nonparametric measures of credit score performance reveal different trends, especially on originations with low credit scores. The paper demonstrates an increasing trend of reliance on credit scoring not only as a measure of credit risk but also as a means to offset other riskier attributes of the origination. This reliance led to deterioration in loan performance even though average credit quality—as measured in terms of credit scores— actually improved over the years.
    Keywords: Credit scoring systems ; Mortgage loans
    Date: 2011
  10. By: Sophie Brana (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Delphine Lahet (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954)
    Abstract: The huge presence of foreign banks in CEECs leads to a strong dependence to banking foreign claims. They may be cross-border claims or claims of foreign subsidiaries located in the host country. Are foreign banks a factor that attracts foreign claims in the host country? Does their presence stabilize banking foreign flows and in fine the domestic credit supply? Using a Push&Pull framework, we adopt a macroeconomic point of view by using balance of payments data concerning banking foreign financing on all sectors in CEECs. Tests with panel data show that the presence of foreign banks is a substitute for banking foreign loans and is not a factor of their stability. Nevertheless, it has a stabilizing role on the domestic credit.
    Date: 2011–02–02
  11. By: Tatom, John
    Abstract: The ability to predict bank failure has become much more important since the mortgage foreclosure crisis began in 2007. The model proposed in this study uses proxies for the regulatory standards embodied in the so-called CAMELS rating system, as well as several local or national economic variables to produce a model that is robust enough to forecast bank failure for the entire commercial bank industry in the United States. This model is able to predict failure (survival) accurately for commercial banks during both the Savings and Loan crisis and the mortgage foreclosure crisis. Other important results include the insignificance of several factors proposed in the literature, including total assets, real price of energy, currency ratio and the interest rate spread.
    Keywords: bank failure; banking crises; CAMELS ratings
    JEL: G18 G33 G21
    Date: 2011–08–05
  12. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K. Hassani (BPCE et Centre d'Economie de la Sorbonne)
    Abstract: Following Banking Committee on Banking Supervision, operational risk quantification is based on the Basel matrix which enables sorting incidents. In this paper, we deeply analyze these incidents and propose strategies for carrying out the supervisory guidelines proposed by the regulators. The objectives are numerous. On the first hand, banks need to provide a univariate capital charge for each cell of the Basel matrix. On the other hand, banks need also to provide a global capital charge corresponding to the whole matrix taking into account dependences. We provide a solution to do so. Finally, we draw regulators and managers attention on two crucial points : the granularity and the risk measure.
    Keywords: Basel II, operational risks, EVT, Copula.
    Date: 2011–09
  13. By: Chen , Yehning (National Taiwan University); Hasan, Iftekhar (Lally School of Management, Rensselaer Polytechnic Institute, and Bank of Finland)
    Abstract: This paper demonstrates that subordinated debt (‘subdebt’ thereafter) regulation can be an effective mechanism for disciplining banks. Under our proposal, investors buy the subdebt of a bank only if they receive favourable information about the bank, and the bank is subject to a regulatory examination if it fails to issue subdebt. By forcing banks to be examined when they are likely weak, subdebt regulation not only reduces the chance that managers of distressed banks can take value-destroying actions to benefit themselves, but may also encourage banks to lower asset risk. It shows that subdebt regulation and bank capital requirements can be complements for alleviating the banks’ moral hazard problems. It also suggests that to make subdebt regulation effective, regulators may need impose ceilings on the interest rates of subdebt, prohibit collusion between banks and subdebt investors, and require the subdebt to convert into the issuing bank’s equity when the government takes over or provides open assistance to the bank.
    Keywords: subordinated debt regulation; bank capital regulation; market discipline; moral hazard; contingent capital certificate
    JEL: G21 G28
    Date: 2011–10–06
  14. By: Mikhail V. Oet; Ryan Eiben; Timothy Bianco; Dieter Gramlich; Stephen J. Ong; Jing Wang
    Abstract: This paper builds on existing microprudential and macroprudential early warning systems (EWSs) to develop a new, hybrid class of models for systemic risk, incorporating the structural characteristics of the fi nancial system and a feedback amplification mechanism. The models explain fi nancial stress using both public and proprietary supervisory data from systemically important institutions, regressing institutional imbalances using an optimal lag method. The Systemic Assessment of Financial Environment (SAFE) EWS monitors microprudential information from the largest bank holding companies to anticipate the buildup of macroeconomic stresses in the financial markets. To mitigate inherent uncertainty, SAFE develops a set of medium-term forecasting specifi cations that gives policymakers enough time to take ex-ante policy action and a set of short-term forecasting specifications for verification and adjustment of supervisory actions. This paper highlights the application of these models to stress testing, scenario analysis, and policy.
    Keywords: Systemic risk ; Liquidity (Economics)
    Date: 2011
  15. By: Arvid Raknerud (Statistisk sentralbyrå (Statistics Norway)); Bjørn Helge Vatne (Norges Bank (Central Bank of Norway)); Ketil Rakkestad (Norges Bank (Central Bank of Norway))
    Abstract: We use a dynamic factor model and a detailed panel data set with quarterly accounts data on all Norwegian banks to study the effects of banks’ funding costs on their retail rates. Banks’ funds are categorized into two groups: customer deposits and long-term wholesale funding (market funding from private and institutional investors including other banks). The cost of market funding is represented in the model by the three-month Norwegian Inter Bank Offered Rate (NIBOR) and the spread of unsecured senior bonds issued by Norwegian banks. Our estimates show clear evidence of incomplete pass-through: a unit increase in NIBOR leads to an approximately 0.8 increase in bank rates. On the other hand, the difference between banks’ loan and deposit rates is independent of NIBOR. Our findings are consistent with the view that banks face a downward-sloping demand curve for loans and an upward-sloping supply curve for customer deposits.
    Keywords: Interest rates, NIBOR, Pass-through, Funding costs, Bank panel data, Dynamic factor model
    JEL: E43 E27 C33
    Date: 2011–07–06
  16. By: Guangling (Dave) Liu (Department of Economics, University of Stellenbosch); Nkhahle Seeiso (Department of Economics, University of Stellenbosch)
    Abstract: This paper studies the impact of bank capital regulation on business cycle fluctuations. In particular, we study the procyclical nature of Basel II claimed in the literature. To do so, we adopt the Bernanke et al. (1999) ``financial accelerator" model (BGG), to which we augment a banking sector. We first study the impact of a negative shock to entrepreneurs' net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impact of a negative net worth shock on business cycle fluctuations when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further amplifies the financial accelerator effect through the external finance premium channel, which, in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which, in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable.
    Keywords: Business cycle fluctuations, financial accelerator, bank capital requirement, monetary policy
    JEL: E32 E44 G28 E50
    Date: 2011
  17. By: Ongena, S. (Universiteit van Tilburg); Peydro, J.L.
    Date: 2011
  18. By: Sophie Brana (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Yves Jégourel (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954)
    Abstract: French but also European economies are driven by micro, small and medium enterprises. However, evidence shows that micro-enterprises, representing 99 per cent of all newly created businesses, suffer from a lack of external resources, especially those created by socially excluded persons. Traditional commercial banks are indeed often reluctant to satisfy the demand for credit by poor people who cannot guarantee financial collateral and stable revenues. Microfinance institutions (MFIs), dedicated to persons partially or totally excluded from the banking sector, have therefore developed special lending scheme such as progressive lending or group lending and hence demonstrated that poor people could surprisingly be creditworthy. Although many studies do exist on developing countries' MFIs, few have been done to evaluate the social performance of microfinance programmes in industrialized countries. Considering this, we have developed in this paper an in-depth analysis of French institutions of microfinance and an econometric analysis on the personal and social characteristics of their clients, as a measure of MFIs social performance. We demonstrate that two types of microfinance client may be identified: the first type, mainly unemployed, uses microcredit as additional financing resources to complete a relatively important business plan, whereas the second type, mainly monthly guaranteed benefit income recipients totally excluded from the banking system, more vulnerable, uses microcredit as the only external financial resource available to start up a professional activity.. One of our key results is that being either poor, socially excluded or deprived from banking resources is not a sine qua non condition for accessing microfinance services. We also underline that the probability of default is much higher in the first group of borrowers and is positively
    Keywords: Microfinance, banking, poverty, self-employment
    Date: 2011–09–07
  19. By: Francis, Bill (Lally School of Management, Rensselaer Polytechnic Institute); Hasan, Iftekhar (Lally School of Management, Rensselaer Polytechnic Institute, and Bank of Finland); Wu, Qiang (Lally School of Management, Rensselaer Polytechnic Institute)
    Abstract: Motivated by recent studies that show female CFOs are more risk averse than male CFOs when making various corporate decisions, we examine whether banks take into consideration the gender of CFOs when pricing bank loans. We find that in our sample, firms under the control of female CFOs on average enjoy about 11% lower bank loan price than firms under the control of male CFOs. In addition, loans given to female CFO-led companies have longer maturities and are less likely to be required to provide collateral than loans given to male CFO led companies. Our results are robust to a series of robustness tests, such as a firm and year-fixed effect regression, a Heckman two-stage self selection model, a propensity score match method and a differences-in-differences approach. Overall, our results suggest that banks tend to recognize the role of female CFOs in providing more reliable accounting information ex ante and reducing default risk ex post, and grant firms with female CFOs lower loan price and more favourable contract terms.
    Keywords: CFOs; gender; accounting information; bank loans
    JEL: G21 J16 M41
    Date: 2011–10–04
  20. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K. Hassani (BPCE et Centre d'Economie de la Sorbonne)
    Abstract: The Operational Risk Advanced Measurement Approach requires financial institutions to use scenarios to model these risks and to evaluate the pertaining capital charges. Considering that a banking group is composed of numerous entities (branches and subsidiaries), and that each one of them is represented by an Operational Risk Manager (ORM), we propose a novel scenario approach based on ORM expertise to collect information and create new data sets focusing on large losses, and the use of the Extreme Value Theory (EVT) to evaluate the corresponding capital allocation. In this paper, we highlight the importance to consider an a priori knowledge of the experts associated to a a posteriori backtesting based on collected incidents.
    Keywords: Basel II, operational risks, EVT, AMA, expert, Value-at-Risk, excepted shortfall.
    Date: 2011–09
  21. By: D'Hulster, Katia
    Abstract: The global financial crisis has uncovered a number of weaknesses in the supervision and regulation of cross border banks. One such weakness was the lack of effective cooperation among banking supervisors. Since then, international bodies, such as the G-20, the Financial Stability Board and the Basel Committee have actively promoted the use of supervisory colleges. The objective of this paper is to explore the obstacles to effective cross border supervisory information sharing. More specifically, a schematic presentation illustrating the misalignments in incentives for information sharing between home and host supervisors under the current supervisory task-sharing anchored in the Basel Concordat is developed. This paper finds that in the absence of an ex ante agreed upon resolution and burden-sharing mechanism and deteriorating health of the bank, incentive conflicts escalate and supervisory cooperation breaks down. The promotion of good practices for cooperation in supervisory colleges is thus not sufficient to address the existing incentive conflicts. What is needed is a rigorous analysis and review of the supervisory task-sharing framework, so that the right incentives are secured during all stages of the supervisory process. For this purpose, it is essential that policy makers integrate and harmonize the current debates on crisis management, resolution policy and good supervisory practices for cross border banking supervision.
    Keywords: Banks&Banking Reform,Emerging Markets,Labor Policies,Financial Intermediation,Debt Markets
    Date: 2011–11–01
  22. By: Carlos Arango (Bank of Canada, 234 Wellington St., Ottawa, ON K1A 0G9, Canada.); Kim P. Huynh (Bank of Canada, 234 Wellington St., Ottawa, ON K1A 0G9, Canada.); Leonard Sabetti (Bank of Canada, 234 Wellington St., Ottawa, ON K1A 0G9, Canada.)
    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. JEL Classification: E41, C35, C83.
    Keywords: Retail payments, credit card rewards, discrete-choice models.
    Date: 2011–10
  23. By: Idier, J.; Lamé, G.; Mésonnier, J S.
    Abstract: We explore the practical relevance from a supervisor's viewpoint of a recent but already popular market-based indicator of the systemic importance of financial institutions, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We compute the dynamic MES developed by Brownlees and Engle (2010) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be partly rationalized in terms of standard balance sheet indicators of bank health and systemic importance, but also that these relationships changed widely over time. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able to predict equity losses conditional to a true crisis.
    Keywords: MES, systemic risk, tail correlation, balance sheet ratios, panel.
    JEL: C5 E44 G2
    Date: 2011
  24. By: Viktors Ajevskis; Kristine Vitola
    Abstract: The severe repercussions of the latest financial crisis highlighted the crucial role of the financial sector in the propagation of economic and financial shocks. In this paper we analyse the role of financial market frictions in business cycle fluctuations and in the transmission of monetary policy in a small open economy pursuing fixed exchange rate strategy. To this end, we develop and estimate a DSGE model for Latvia with financially constrained households and firms, embedding monopolistically competitive banking sector facing capital constraints. This general equilibrium framework is useful to study the potential of macro-prudential tools and their interaction with other macroeconomic and monetary policy instruments. Our findings suggest that the banking sector mutes the response of bank retail rates to an increase in the foreign policy rate and thus attenuates the drop in real aggregates. A permanent bank capital contraction subdues output, consumption, investment, domestic lending and foreign borrowing in the long run. Under a temporary shock to bank capital, asset prices and housing investment are first to recover, for loans it takes several years, while output, consumption and capital investment rebound at a slower pace. In the long run, a tighter capital requirement leads to higher output, capital investment and domestic lending while reducing household deposits and foreign liabilities of banks.
    Keywords: DSGE, DSGE models, Bayesian estimation, banks, financial frictions, macro-financial linkages, small open economy
    JEL: C11 E32 E43 E44 F41 R21
    Date: 2011–11–03
  25. By: Peter Hull (Federal Reserve Bank of New York); Masami Imai (Department of Economics, Wesleyan University)
    Abstract: We investigate the economic impacts of bank taxation on the value of banks and that of borrowing firms, exploiting the surprise announcement of a tax by the Tokyo metropolitan government as a natural experiment. We find that the tax announcement had broad effects on the share prices of banks, although the effects are stronger for a subset of soon-to-be taxed banks. However, the adverse effects of the tax on bank borrowers, although statistically significant, turn out to be quantitatively small (a half of the effects on bank share prices). These results suggest that the adverse economic consequence of bank taxation is felt primarily on banks themselves.
    Date: 2011–10
  26. By: Viral V. Acharya
    Abstract: Derivatives exposures across large financial institutions often contribute to – if not necessarily create – systemic risk. Current reporting standards for derivatives exposures are nevertheless inadequate for assessing these systemic risk contributions. In this paper, I explain how a transparency standard, in contrast to the current standard, would facilitate such risk analysis. I also demonstrate that such a standard is implementable by providing examples of existing disclosures from large dealer firms in their quarterly filings. These disclosures often contain useful firm-level data on derivatives, but due to a lack of standardization, they cannot be aggregated to assess the risk to the system. I highlight the important contribution that reporting the “margin coverage ratio” (MCR), namely the ratio of a derivatives dealer’s cash (or liquidity, more broadly) to its contingent collateral or margin calls in case of a significant downgrade of its credit quality, could make toward assessing systemic risk contributions.
    JEL: G13 G18 G28
    Date: 2011–11
  27. By: Katja Neugebauer
    Abstract: During the last years, gravity equations have leapt from the trade literature over into the literature on financial markets. Martin and Rey (2004) were the first to provide a theoretical model for cross-border asset trade, yielding a structural gravity equation that could be tested empirically. In this paper, I use a gravity model to evaluate factors that affect cross-border banking. Furthermore, I extend the baseline model to allow for third-country effects, which have been shown to matter for international trade, using spatial econometric techniques. I try to answer the following question: First, is there a spatial dimension in cross-border banking? Second, if so, has it changed over time, and third, what happens if this spatial dimension is ignored? I use bilateral data on cross-border banking assets for 15 countries, and I estimate cross-section regressions for each year. I find strong evidence for a spatial dimension in cross-border banking. Furthermore, the direct effect of distance decreases significantly when applying spatial econometric techniques.
    Date: 2011–09
  28. By: Davide Furceri; Stéphanie Guichard; Elena Rusticelli
    Abstract: This paper provides an empirical investigation of the relationship between surges in capital inflows and the probability of subsequent banking, currency and balance-of-payment crises. Using a panel of developed and emerging economies from 1970 to 2007, it is shown that a large capital inflow episode increases substantially the probability of having a banking or a currency crisis in the two following years. The effect is especially large for the case of balance-of-payment crises. The paper also finds that the effect of large capital inflows is different depending on the type of flows characterising the episode. In particular, large capital inflows that are debt-driven significantly increase the probability of banking, currency and balance of payment crises, whereas if inflows are driven by equity portfolio investment or FDI there is a negligible effect. This means that structural reforms that modify the composition of capital flows towards a lower share of debt are likely to reduce the financial vulnerabilities to large capital inflows. At the same time, however, structural reforms may also increase the overall size of capital flows.<P>Épisodes d'entrées massive de capitaux et risqué de crises bancaires et de changes et d'arrêt brutal du financement extérieur<BR>Ce document presente une etude empirique de la relation entre les fortes entrees de capitaux et la probabilite de crises bancaires, financiere ou de balance des paiements ulterieures. Les resultats obtenus sur un panel d'economies developpees et emergentes de 1970 a 2007 suggerent que les episodes de fortes entrees de capitaux ou ¡ìmannes¡í augmentent fortement la probabilite d'avoir une crise bancaire ou une crise de change dans les deux annees suivantes. L'effet est particulierement grand pour les crises de balance des paiements. Le document montre egalement que l'effet des mannes de capitaux est different selon le type de flux de capitaux qui les caracterisent. En particulier les mannes de dette augmentent de maniere tres significative la probabilite de crise bancaire, de change et de balance des paiements, alors que les mannes d.investissements de portefeuille en actions et de l'IDE ont un effet negligeable. Cela signifie que les reformes structurelles qui modifient la composition des flux de capitaux vers une plus faible part de la dette sont susceptibles de reduire la vulnerabilite financiere associee aux larges entrees de capitaux. Toutefois, les reformes structurelles risquent aussi d.augmenter le montant total the flux de capitaux.
    Keywords: capital flows, financial crisis, banking crisis, sudden stops, flux de capitaux, crise financière, crise bancaire, arrêt brutal des entrées de capitaux
    JEL: E44 E51 F1 F34
    Date: 2011–05–18
  29. By: Anna Creti; Marianne Verdier
    Abstract: In this paper, we discuss how fraud liability regimes impact the price structure that is chosen by a monopolistic payment platform, in a setting where merchants can invest in fraud detection technologies. We show that liability allocation rules distort the price structure charged by platforms or banks to consumers and merchants with respect to a case where such a responsibility regime is not implemented. We determine the allocation of fraud losses between the payment platform and the merchants that maximises the platform's profit and we compare it to the allocation that maximises social welfare.
    Keywords: payment card systems, interchange fees, two-sided markets, fraud, liability
    JEL: G21 L31 L42
    Date: 2011
  30. By: Areski Cousin (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Elena Di Bernadino (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: In this paper, we introduce a multivariate extension of the classical univariate Value-at-Risk (VaR). This extension may be useful to understand how solvency capital requirement computed for a given financial institution may be affected by the presence of additional risks. We also generalize the bivariate Conditional-Tail-Expectation (CTE), previously introduced by Di Bernardino et al. (2011), in a multivariate setting and we study its behavior. Several properties have been derived. In particular, we show that these two risk measures both satisfy the positive homogeneity and the translation invariance property. Comparison between univariate risk measures and components of multivariate VaR and CTE are provided. We also analyze how they are impacted by a change in marginal distributions, by a change in dependence structure and by a change in risk level. Interestingly, these results turn to be consistent with existing properties on univariate risk measures. Illustrations are given in the class of Archimedean copulas.
    Keywords: Multivariate Risk Measures; Level Sets; Kendall distribution, Copula
    Date: 2011–11–04

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