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on Banking |
| By: | Torben G. Andersen (Northwestern University and CREATES); Tim Bollerslev (Duke University and CREATES); Peter F. Christoffersen (University of Toronto and CREATES); Francis X. Diebold (University of Pennsylvania) |
| Abstract: | Current practice largely follows restrictive approaches to market risk measurement, such as historical simulation or RiskMetrics. In contrast, we propose exible methods that exploit recent developments in nancial econometrics and are likely to produce more accurate risk assessments, treating both portfoliolevel and asset-level analysis. Asset-level analysis is particularly challenging because the demands of real-world risk management in nancial institutions - in particular, real-time risk tracking in very high-dimensional situations - impose strict limits on model complexity. Hence we stress powerful yet parsimonious models that are easily estimated. In addition, we emphasize the need for deeper understanding of the links between market risk and macroeconomic fundamentals, focusing primarily on links among equity return volatilities, real growth, and real growth volatilities. Throughout, we strive not only to deepen our scientic understanding of market risk, but also cross-fertilize the academic and practitioner communities, promoting improved market risk measurement technologies that draw on the best of both. |
| Keywords: | Risk measurement, risk management, volatility, conditionality, dimensionality reduction, high-frequency data, macro fundamentals |
| JEL: | C22 C32 G32 |
| Date: | 2011–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2011-37&r=ban |
| By: | Veronica Guerrieri; Guido Lorenzoni |
| Abstract: | We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers’ borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger. |
| JEL: | E2 E4 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17583&r=ban |
| By: | Marie-Noëlle Calès (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Dominique Chabert (Université de Lyon, Lyon F-69007, France); Walid Hichri (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Nadège Marchand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | The European Central Bank (ECB) will offer to banks in 2013 an european shared platform for securities settlement, named TARGET 2 Securities (T2S), in order to open the national financial markets. The financial crisis did not change the ECB agenda. This paper develops a spatial competition model to understand the impact of this new organisation on european post-trading services. We analyse the incentives of the Central Securities Depositaries (CSD) to move to T2S when they become competitors in the market for settlement services and remain in a monopoly position for depository services. Settlement and depository services are complementary goods, because banks have to pay for these two services to buy or sell a security. We show that such a reform should induce a decrease in the settlement price and more generally in post-trading prices, but that prices depend strongly on market organisation. Under certain conditions, partial adhesion would make prices increase. This configuration appears as a Nash equilibrium. As CSDs are free to adhere to T2S, the ECB might be forced to regulate. |
| Keywords: | Post-trading organisation, securities settlement, depositary services, compatibility |
| JEL: | D43 G15 G20 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1129&r=ban |
| By: | Mathias Drehmann; Claudio Borio; Kostas Tsatsaronis |
| Abstract: | We investigate the performance of different variables as anchors for setting the level of the countercyclical regulatory capital buffer requirements for banks. The gap between the ratio of credit-to-GDP and its long-term backward-looking trend performs best as an indicator for the accumulation of capital as this variable captures the build-up of system-wide vulnerabilities that typically lead to banking crises. Other indicators, such as credit spreads, are better in indicating the release phase as they are contemporaneous signals of banking sector distress that can precede a credit crunch. |
| Keywords: | countercyclical capital buffers, financial stability, procyclicality |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:355&r=ban |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, BPCE - BPCE) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00639484&r=ban |
| By: | Mikhail V. Oet; Ryan Eiben; Timothy Bianco; Dieter Gramlich; Stephen J. Ong |
| Abstract: | This paper develops a financial stress index for the United States, the Cleveland Financial Stress Index (CFSI), which provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The index is based on daily public-market data collected from four sectors of the fi nancial markets—the credit, foreign exchange, equity, and interbank markets. A dynamic weighting method is employed to capture changes in the relative importance of these four sectors as they occur. In addition, the design of the index allows the origin of the stress to be identified. We compare the CFSI to alternative indexes, using a detailed benchmarking methodology, and show how the CFSI can be applied to systemic stress monitoring and early warning system design. To that end, we investigate alternative stress-signaling thresholds and frequency regimes and then establish optimal frequencies for filtering out market noise and idiosyncratic episodes. Finally, we quantify a powerful CFSI-based rating system that assigns a probability of systemic stress to ranges of CFSI outcomes. |
| Keywords: | Systemic risk ; Risk assessment |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1130&r=ban |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Wayne Tarrant (Wingate University - Department of Mathematics) |
| 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, Basel II accord. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00639489&r=ban |
| By: | Leonardo Gambacorta; Paolo Emilio Mistrulli |
| Abstract: | A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economy-wide crisis, when banks may find it difficult to perform the role of shock absorbers. We investigate how bank-specific characteristics (size, liquidity, capitalization, funding structure) and the bank-firm relationship have influenced interest rate setting since the collapse of Lehman Brothers. Unlike the existing literature, which has focused chiefly on the amount of credit granted during the crisis, we look at its cost. The data on a large sample of loans from Italian banks to non-financial firms suggest that close lending relationships kept firms more insulated from the financial crisis. Further, spreads increased by less for the customers of well-capitalized, liquid banks and those engaged mainly in traditional lending business. |
| Keywords: | bank interest rate setting, lending relationship, bank lending channel, financial crisis |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:359&r=ban |
| By: | Delis, Manthos D; Tsionas, Efthymios |
| Abstract: | In this paper we reconsider the formal estimation of the risk of financial intermediaries. Risk is modeled as the variability of the profit function of a representative intermediary, here bank, as formally considered in finance theory. In turn, banking theory suggests that risk is determined simultaneously with profits and other bank- and industry-level characteristics that cannot be considered predetermined when profit maximizing decisions of financial institutions are to be made. Thus, risk is endogenous. We estimate the model on a panel of US banks, spanning the period 1985q1-2010q2. The findings suggest that risk was fairly stable up to 2001 and accelerated quickly thereafter and up to 2007. Indices of bank risk commonly used in the literature do not capture this trend and/or the scale of the increase. |
| Keywords: | Risk of financial intermediaries; Endogenous risk; Full information maximum likelihood; Profit function; Duality |
| JEL: | C51 C33 G21 |
| Date: | 2011–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34735&r=ban |
| By: | Michael Brei; Leonardo Gambacorta; Goetz von Peter |
| Abstract: | This paper examines whether the rescue measures adopted during the global financial crisis helped to sustain the supply of bank lending. The analysis proposes a setup that allows testing for structural shifts in the bank lending equation, and employs a novel dataset covering large international banks headquartered in 14 major advanced economies for the period 1995-2010. While stronger capitalisation sustains loan growth in normal times, banks during a crisis can turn additional capital into greater lending only once their capitalisation exceeds a critical threshold. This suggests that recapitalisations may not translate into greater credit supply until bank balance sheets are sufficiently strengthened. |
| Keywords: | bank lending channel, monetary policy, financial crisis, rescue packages, recapitalisation |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:357&r=ban |
| By: | Antonio De Socio (Bank of Italy) |
| Abstract: | After August 2007 the plumbing system that supplied banks with wholesale funding, the interbank market, failed because toxic assets obstructed the pipes. Banks were forced to squeeze liquidity in a “lemons market” or to ask for liquidity “on tap” from central banks. This paper disentangles the two components of the three-month Euribor-Eonia swap spread, credit and liquidity risk and then evaluates the decomposition. The main finding is that credit risk increased before the key events of the crisis, while liquidity risk was mainly responsible for the subsequent increases in the Euribor spread and then reacted to the systemic responses of the central banks, especially in October 2008. Moreover, the level of the spread between May 2009 and February 2010 was influenced mainly by credit risk, suggesting that European banks were still in a “lemons market” and relied on liquidity “on tap”. |
| Keywords: | interbank markets, credit risk, liquidity risk, financial crisis, Euribor spread. |
| JEL: | E43 E44 E58 G21 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_819_11&r=ban |
| By: | Massimiliano Affinito (Banca d'Italia) |
| Abstract: | Using 11 years of monthly Italian bank-by-bank data, this paper correlates the bilateral amounts and the identity of each interbank borrower and lender with a long list of explanatory variables. The results show that interbank customer relationships, i.e. stable and strong relationships between pairs of borrowing and lending banks, do exist in Italy, that they persist over time, and that they functioned well during the crisis, enabling the healthier banks to provide and the troubled ones to receive funds. |
| Keywords: | interbank market, lending relationship, financial crisis |
| JEL: | G21 G28 C23 C24 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_826_11&r=ban |
| By: | Piluso, Fabio; De Bonis, Leonardo |
| Abstract: | This paper investigates the adequacy of solvency in the credit cooperative banks (BCC) which operate in the Italian market in view of the application of the new rules of Basel 3. The study analyses the solvency of BCC and immediately applies the rules of Basel 3. Moreover, it activates a stress testing on the sample in order to understand BCC financial strength in the case of a new financial crisis. The research shows that the credit cooperative banks are more solid than the other banks in the Italian market and leads the lawmaker to reflect about the opportunity to fix the same rules both for small and large banks (more oriented to the investment banking model) which operate in Italy. |
| Keywords: | Basilea 3; Credito Cooperativo; Stress Testing; Solvibilità |
| JEL: | G21 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34577&r=ban |
| By: | Horvath, B.L.; Huizinga, H.P. (Tilburg University, Center for Economic Research) |
| Abstract: | On May 9, 2010 euro zone countries announced the creation of the European Financial Stability Facility as a response to the sovereign debt crisis. This paper investigates the impact of this announcement on bank share prices, bank CDS spreads and sovereign CDS spreads. The main private beneficiaries were bank creditors, especially of banks heavily exposed to southern Europe and Ireland and located in countries characterized by weak public finances. Furthermore, countries with weak public finances and banking systems heavily exposed to southern Europe and Ireland benefited, as evidenced by lower sovereign CDS spreads. The combined gains of bank debt holders and shareholders exceed the increase in the value of their sovereign debt exposures, suggesting that banks saw their contingent claim on the financial safety net increase in value. |
| Keywords: | Bailout;Banking;CDS spreads;Sovereign debt. |
| JEL: | G21 G28 H63 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011118&r=ban |
| By: | Daley, Jenifer; Matthews, Kent (Cardiff Business School) |
| Abstract: | This paper presents an empirical assessment of the degree of competition within the Jamaican banking sector during the period 1998 to 2009. We employ a dynamic version of the Panzar-Rosse Model to estimate market power among the sample of banks that constitute over 90 percent of the banking market. Using the conventional statistical tests, we are unable to reject monopoly/perfect collusion for the merchant banking sector in Jamaica but find competitive conditions in the commercial banking sector. This contrasts with earlier findings using alternative estimators that find monopolistic competition in the market as a whole. |
| Keywords: | Competition; banking; Rosse-Panzar H statistic; dynamic panel estimation; Jamaica |
| JEL: | G21 G28 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/28&r=ban |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, BPCE - BPCE) |
| 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, expected shortfall. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00639666&r=ban |
| By: | Sheri Markose; Amadeo Alentorn; Stephen Millard; Jing Yang |
| Abstract: | The purpose of this paper is to show how agent-based simulations of payment systems can be used to aid central bankers and payment system operators in thinking about the appropriate design of payment settlement systems to minimise risk and increase their efficiency. Banks, which we model as the ‘agents’, are capable of a degree of autonomy with which to respond to payment system rules and adopt a strategy that determines how much collateral to post with the central bank at the start of the day (equivalently how much liquidity to borrow intraday from the central bank) and when to send payment orders to the central processor. An interbank payment system with costly liquidity requires banks to solve an intraday cash management problem, minimising their liquidity and delay costs subject to their beliefs about what the other banks are doing. Some preliminary results are given on how banks learn to endogenously determine how much liquidity to post in the interbank liquidity management game. |
| Date: | 2011–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:700&r=ban |
| By: | Laine, Tatu (Bank of Finland); Nummelin, Tuomas (Bank of Finland); Snellman, Heli (Bank of Finland) |
| Abstract: | This study utilises payment system data to analyse market participants’ liquidity usage and to trace interest rates paid on overnight loans. Our aim is to examine how liquidity usage has changed during the years 2006–2/2011 and to combine this information with data on overnight lending rates between market participants. It turns out that the Furfine algorithm used in the analysis produces overnight interest rates that correlate very closely with the EONIA curve. Based on Finnish payment system data, we identify four separate time periods: normal, start of turmoil, acute crisis and stabilizing period. The results show that, during the acute crisis period, TARGET2 participants holding an account with the Bank of Finland paid, on average, lower overnight interest rates than other banks in the euro area. However, the results reveal there has been some lack of confidence between Finnish participants since the onset of the financial crisis. A new indicator – the Grid – which we present here shows this very clearly. We suggest that this new indicator could be a highly useful tool for overseers in supporting financial stability analysis. |
| Keywords: | liquidity; interest rates; overnight loans; payment systems; indicators |
| JEL: | C81 E42 E43 E58 |
| Date: | 2011–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2011_023&r=ban |
| By: | Choong Young Ahn (KEIP - Korea Institute of International Economic Policy); Doo Yong Yang |
| Abstract: | E-finance in Korea has evolved since the late 1980s, when developments in information and telecommunication technology started to be applied to the financial industry. Since the 1990s, e-finance has led a paradigm shift in the financial industry as financial transactions in computer-based tools began increasing. There are several factors that contributed to e-finance development. Korea possess the basic requisite conditions to foster thriving e-finance, including an advanced IT infrastructure, several government e-commerce initiatives and financial restructuring resulting from the financial crisis. In fact, all of these factors have eliminated possible impediments to the development of e-finance in developing countries. This paper shows that the decision for the introduction of internet banking depends on the profit level for the bank rather than the asset size and/or operation costs. Intuitively, large banks are early takers in providing Internet banking de to a huge amount of initial investment costs to establish an Internet banking network. At the same time, cost inefficient banks are inclined to consider the introduction of Internet banking earlier to reduce inefficiency caused by replacing cost-inefficient infrastructure. However, Korea shows an interesting case such that the asset size and operation costs were irrelevant to the establishment of Internet banking networks. On the other hand, profitability was relevant to the introduction of Internet banking. This may imply that relatively profitable banks at the onset of the crisis were able to jump into e-finance earlier than non-profitable banks. Furthermore, this paper shows that the adoption of internet banking has a positive effect of bank profit. |
| Keywords: | e-fianance development in Korea, Internet Banking, Financial Industry |
| JEL: | G21 L86 C33 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:21750&r=ban |
| By: | Zhao, Tianshu; Matthews, Kent (Cardiff Business School); Murinde, Victor |
| Abstract: | This paper attempts to evaluate the competitiveness of British banking in the presence of cross-selling and switching costs during 1993-2008. It presents estimates of a model of banking behaviour that encompasses switching costs as well as cross-selling of loans and off-balance sheet transactions. The evidence from panel estimation of the model lends support to our theoretical priors on the cross-selling behaviour of British banks, which helps explain the rapid growth of non-interest income during the last two decades. We also find that the consumer faced high switching costs in the loan market in the latter part of the sample period, as a result of lower competitiveness. |
| JEL: | G21 L13 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/29&r=ban |
| By: | Tom Roberts |
| Abstract: | The author uses a quantitative network analysis approach to assess how participants in the Large Value Transfer System (LVTS) respond to partial outages at other banks. Despite the limited number of operational events, benchmarks can be established. For example, the effect of a partial outage at a big six bank that has a net payment balance of $1 billion is estimated to correspond to a decline in connectivity of about 6 or 7 per cent, due to other participants not sending payments to the problem participant. This suggests that participants tend to perceive a partial outage at a counterparty as inconvenient enough to warrant a delaying of payments, at least to the problem participant. There is no strong evidence of systemic effects, whereby participants also delay payments to non-problem counterparties, in an effort to maintain a reasonable liquidity position. Notable events mostly occurred in 2004 or 2005, and the incidence of operational events did not increase over the sample period. The improvement of contingency measures, such as the use of the LVTS Direct Network, possibly contributed in this regard. |
| Keywords: | Payment; clearing; and settlement systems |
| JEL: | C49 G14 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:11-7&r=ban |
| By: | Clodoaldo Aparecido Annibal; Sérgio Mikio Koyama |
| Abstract: | This paper aims to compare the interest rates charged by credit unions and banks (commercial and multiple) in order to check whether there are differences between the rates charged for loans without personal assignment and the effects of this difference in interest rates charged by banks in similar operations. The results show that although the rates charged by credit unions are significantly lower there is no evidence that competition from credit unions make sufficient pressure to reduce the rates charged by banks on the personal assignment credit lines. We also found results that show that credit unions tend to be installed in rural areas with lower homicide rates, lower population density, high quality of the judiciary system and a great number of households with income between half and three minimum wages per capita, i.e., places where there are signs of high social capital. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:257&r=ban |