New Economics Papers
on Banking
Issue of 2012‒01‒18
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Macroprudential stress testing of credit risk : a practical approach for policy makers By Buncic, Daniel; Melecky, Martin
  2. An Empirical Study on Liquidity and Bank Lending By Koray Alper; Timur Hulagu; Gursu Keles
  3. The Nonbank-Bank Nexus and the Shadow Banking System By Zoltan Pozsar; Manmohan Singh
  4. Bank competition and stability: cross-country heterogeneity By T. BECK; O. DE JONGHE; G. SCHEPENS
  5. Spatial Competition. Empirical Evidence from Small-scale Banking By Franz R. Hahn
  6. Inconsistent Regulators: Evidence From Banking By Sumit Agarwal; David Lucca; Amit Seru; Francesco Trebbi
  7. Corporate governance, opaque bank activities, and risk/return efficiency: Pre- and post-crisis evidence from Turkey By O. DE JONGHE; M. DISLI; K. SCHOORS
  8. Bank Competition and Financial Stability: A General Equilibrium Exposition By Gianni De Nicoló; Marcella Lucchetta
  9. Procyclicality in the banking industry: causes, consequences and response By Panayiotis P. Athanasoglou; Ioannis Daniilidis
  10. Information sharing and information acquisition: Ownership and coverage By Artashes Karapetyan; Bogdan Stacescu
  11. Derivative Pricing under Asymmetric and Imperfect Collateralization and CVA By Masaaki Fujii; Akihiko Takahashi
  12. The role of credit in international business cycles By Xu, T.T.
  13. Developments in Financial Supervision and the Use of Macroprudential Measures in Central America By Fernando L Delgado; Mynor Meza
  14. Do bankers prefer married couples? By Marion Leturcq
  15. Intended and Unintended Results of the Proposed Volcker Rule By Skold, Alida S.
  16. Culture, Geography and Institutions. Empirical Evidence from Small-scale Banking By Franz R. Hahn
  17. The Andhra Pradesh microfinance crisis in India: manifestation, causal analysis, and regulatory response By Anurag Priyadarshee; Asad K. Ghalib
  18. Consumer reaction on tumbling funds - Evidence from retail fund outflows during the financial crisis 2007/2008 By Daniel Schmidt; Frank Schmielewski

  1. By: Buncic, Daniel; Melecky, Martin
    Abstract: Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materializing credit risk. The authors apply the proposed approach to a set of Eastern European banks and discuss the results.
    Keywords: Banks&Banking Reform,Debt Markets,Currencies and Exchange Rates,Economic Theory&Research,Bankruptcy and Resolution of Financial Distress
    Date: 2012–01–01
  2. By: Koray Alper; Timur Hulagu; Gursu Keles
    Abstract: In this study, by using a panel data of Turkish banks, we empirically analyze whether monetary policies that are able to manipulate liquidity positions of banks can affect bank lending. Our results suggest that bank specific liquidity is important in credit supply. Moreover, in determining their lending, banks consider not only their individual liquidity position but also the systemic liquidity. Hence, any monetary policy which can alter liquidity is potentially effective on credit supply.
    Keywords: Bank lending channel, Systemic liquidity, Panel data
    JEL: C23 E44 E58 G21
    Date: 2012
  3. By: Zoltan Pozsar; Manmohan Singh
    Abstract: The present way of thinking about financial intermediation does not fully incorporate the rise of asset managers as a major source of funding for banks through the shadow banking system. Asset managers are dominant sources of demand for non-M2 types of money and serve as source collateral ‘mines’ for the shadow banking system. Banks receive funding through the re-use of pledged collateral ‘mined’ from asset managers. Accounting for this, the size of the shadow banking system in the U.S. may be up to $25 trillion at year-end 2007 and $18 trillion at year-end 2010, higher than earlier estimates. In terms of policy, regulators will need to consider the re-use of pledged collateral when defining bank leverage ratios. Also, given asset managers’ demand for non-M2 types of money, monitoring the shadow banking system will warrant closer attention well beyond the regulatory perimeter.
    Keywords: Asset management , Banking systems , Capital markets , Financial intermediation , Nonbank financial sector ,
    Date: 2011–12–07
    Abstract: This paper documents a large cross-country variation in the relationship between bank competition and stability and explores market, regulatory and institutional features that can explain this heterogeneity. Combining insights from the competition-stability and regulation-stability literatures, we develop a unied framework to assess how regulation, supervision and other institutional factors may make it more likely that the data favor the charter-value paradigm or the risk-shifting paradigm. We show that an increase in competition will have a larger impact on banks’ risk taking incentives in countries with stricter activity restrictions, more homogenous market structures, more generous deposit insurance and more effective systems of credit information sharing.
    Keywords: Competition, Stability, Banking, Herding, Deposit Insurance, Information Sharing, Risk Shifting
    JEL: G21 G28 L51
    Date: 2011–08
  5. By: Franz R. Hahn (WIFO)
    Abstract: Stylised facts suggest that there is some "spatial structure" in the dynamics of cross-border lending of Austrian regional banks that seems to be closely related to the eastward enlargement of the European Union. This short paper provides evidence that a stark space-related dependency of competition has been at work governing the cross-border lending behaviour of the Austrian regional banks since 1995.
    Keywords: spatial econometric analysis, cross-border bank lending, institutions
    Date: 2012–01–10
  6. By: Sumit Agarwal; David Lucca; Amit Seru; Francesco Trebbi
    Abstract: US state chartered commercial banks are supervised alternately by state and federal regulators. Each regulator supervises a given bank for a fixed time period according to a predetermined rotation schedule. We examine differences between federal and state regulators for these banks. Federal regulators are significantly less lenient, downgrading supervisory ratings about twice as frequently as state supervisors. Under federal regulators, banks report higher nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower ROA. There is a higher frequency of bank failures and problem-bank rates in states with more lenient supervision relative to the federal benchmark. Some states are more lenient than others. Regulatory capture by industry constituents and supervisory staff characteristics can explain some of these differences. These findings suggest that inconsistent oversight can hamper the effectiveness of regulation by delaying corrective actions and by inducing costly variability in operations of regulated entities.
    JEL: G21 G28
    Date: 2012–01
    Abstract: Does better corporate governance unambiguously improve the risk/return efficiency of banks? Or does either a re-orientation of banks' revenue mix towards more opaque products, an economic downturn, or tighter supervision create off-setting or reinforcing effects? The authors relate bank efficiency to shortfalls from a stochastic risk/return frontier. They analyze how internal governance mechanisms (CEO duality, board experience, political connections, and education profile) and external governance mechanisms (discipline exerted by shareholders, depositors, or skilled employees) determine efficiency in a sample of Turkish banks. The 2000 financial crisis was a wakeup call for bank efficiency and corporate governance. As a result, better corporate governance mechanisms have been able to improve risk/return efficiency when the economic, regulatory, and supervisory environments are more stable and bank products are more complex.
    Keywords: corporate governance, bank risk, noninterest income, crisis, frontier
    Date: 2011–07
  8. By: Gianni De Nicoló; Marcella Lucchetta
    Abstract: We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.
    Keywords: Banks , Competition , Economic models , Financial stability ,
    Date: 2011–12–16
  9. By: Panayiotis P. Athanasoglou (Bank of Greece); Ioannis Daniilidis (Bank of Greece)
    Abstract: Procyclicality is an inherent feature of the real and especially the financial sector of an economy, which has been highlighted by the recent crisis. Due to procyclicality, banks are transformed from mitigation mechanisms to amplifiers of changes in economic activity potentially affecting financial stability. The causes of procyclicality can be attributed to market imperfections and deviations from the efficient market hypothesis, while other factors -including Basel II and accounting standards- may have exacerbated it. To attenuate procyclicality, a number of suggestions have been made in the form of rules and discretion and are presented according to the factors they aim to alleviate. Some of the suggestions have been adopted under the Basel III framework, including the countercyclical capital buffer. Although these Basel III proposals seem able to address the procyclicality issue, they will lead to higher minimum capital adequacy ratios, which are expected to increase lending costs and the provision of loans by banks, and reduce economic activity. However, the cost of the new proposals is expected to be lower than the estimated cost of financial crisis.
    Keywords: Banking; procyclicality; demand and supply of loans; capital requirements; BasII and III
    JEL: C33 G21 G28
    Date: 2011–10
  10. By: Artashes Karapetyan (Norges Bank (Central Bank of Norway)); Bogdan Stacescu (Norweian School of Business)
    Abstract: We examine the conditions required for the existence of private credit bureaus, their ownership and coverage. Our model implies that bank consortia will most likely be preferred by banks, but that they will lead to restricted coverage. Independent credit bureaus have higher coverage, but they require good institutions. This implies an important role for public credit registers in developing countries with weak institutions. Our empirical findings largely support the implications of our model.
    Keywords: Information sharing, Credit markets, Default, Adverse selection
    JEL: G20 D82 L12
    Date: 2012–01–12
  11. By: Masaaki Fujii (Faculty of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: The importance of collateralization through the change of funding cost is now well recognized among practitioners. In this article, we have extended the previous studies of collateralized derivative pricing to more generic situation, that is asymmetric and imperfect collateralization with the associated counter party credit risk. By introducing the collateral coverage ratio, our framework can handle these issues in an unified manner. Although the resultant pricing formula becomes non-linear FBSDE and cannot be solve exactly, the fist order approximation is provided using Gateaux derivative. We have shown that it allows us to decompose the price of generic contract into three parts: market benchmark, bilateral credit value adjustment (CVA), and the collateral cost adjustment (CCA) independent from the credit risk. We have studied each term closely, and demonstrated the significant impact of asymmetric collateralization through CCA using the numerical examples.
    Date: 2011–12
  12. By: Xu, T.T.
    Abstract: The recent financial crisis raises important issues about the role of credit in international business cycles and the transmission of financial shocks across country borders. This paper investigates the international spillover of US credit shocks and the importance of credit in explaining business cycle fluctuations using a global vector autoregressive (GVAR) model with credit, estimated over the period 1979Q2 to 2006Q4 for 26 major advanced and emerging economies. Results from the country-specific models reveal the importance of bank credit in explaining output growth, changes in inflation and long term interest rates in countries with developed banking sector. The generalized impulse response function (GIRF) for a one standard error negative shock to US real credit provides strong evidence of the spillover of US credit shock to the UK, the Euro area, Japan and other industrialized economies.
    JEL: C32 G21 E44 E32
    Date: 2012–01–05
  13. By: Fernando L Delgado; Mynor Meza
    Abstract: Improvements in financial regulation and supervision in the Central American region (CAPDR) have strengthened financial stability. Prudential instruments with potential macroeconomic effects have been introduced. Nonetheless, compared with the larger Latin American and selected industrial countries, there is still important scope for CAPDR to enhance financial supervision and regulation. Based on two surveys, and the analysis of the Basel Core Principles, the paper determines that some weaknesses exist in risk-based supervision, and that macroprudential measures have scarcely been deployed.
    Keywords: Bank regulations , Bank supervision , Banking sector , Basel Core Principles , Central America , Costa Rica , Dominican Republic , El Salvador , Financial stability , Guatemala , Panama ,
    Date: 2011–12–20
  14. By: Marion Leturcq (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Are married couples more credit constrained than unmarried households? If the cost of separation increases the risk of default, banks might be willing to lend to stable couples. In presence of incomplete information, marriage could be used as a signal of the quality of the match. This paper investigates the link between marriage and credit constraints. I use matching methods to evaluate the impact of marriage on credit constraints. I find that married couples are more likely to be approved for their loan, but they bear higher costs of credit. The differences between married and unmarried couples can be attributed to selection in the marriage rather than to discrimination against unmarried couples.
    Keywords: marriage, credit constraints, signal, matching estimator
    Date: 2011–04
  15. By: Skold, Alida S.
    Abstract: The intention of regulation is to protect the vulnerable. However, unintended results of regulation can cause the opposite occur. In its present form, the proposed Volcker Rule prohibits proprietary trading and has the potential of continuing the liquidity crisis that aided in the degradation of the housing market into decreased liquidity in the capital markets. The rule also prohibits the owning, sponsoring, or having certain relationships with hedge funds beyond three percent by the covered banking entities. Risk is transferring to less regulated financial institutions as new hedge funds are opened. The risk can have a profound impact on the retirement community through underfunded pension funds searching for absolute returns. Another unintended result of the proposed Volcker Rule is banks conducting business in the United States or with United States “residents” will be at a competitive disadvantage due to lost revenues and the high cost of compliance. The rule has the potential to cause United States companies to be at a competitive disadvantage in global markets.
    Keywords: Volcker Rule; Regulation; Prop Trading; Market Making; Hedge Fund; Risk; Banking Regulation
    JEL: E02 D02 L50 G24 G2 G38 E5 D78
    Date: 2011–11–12
  16. By: Franz R. Hahn (WIFO)
    Abstract: The fast adoption of Western-style democracy and market economy principles as established by EU standards by many of the Eastern European "transformation countries" since the early 1990s should have raised cross-border lending by banks based in "old" EU member countries to clients resident in new Eastern European EU member countries. This should particularly apply to Austria since it shares a long-lasting common history and, hence, common culture with these countries. To account for common culture we propose a new gauge aimed at measuring "cultural proximity" by making out onomastic similarities between common surnames of Austrian residents and common surnames of residents in the Czech Republic, Slovak Republic, in Hungary and Slovenia, respectively. By exploring, with panel econometric techniques, cross-border lending activities of Austria's small-sized to medium-sized regional banks, located close to its eastern border, over the period from 1996 to 2008 this paper provides evidence that is supportive of the presumption that cultural closeness matters for making basic laws of economics work.
    Keywords: panel econometric analysis, cross-border bank lending, geography, common culture, institutions
    Date: 2012–01–10
  17. By: Anurag Priyadarshee; Asad K. Ghalib
    Abstract: The microfinance sector in India’s state of Andhra Pradesh was recently marred by a series of mishaps that occurred due to extensive lending, which resulted in over-indebtedness and ultimately, defaults. Lending institutions resorted to coercive measures for loan recovery that led to suicides amongst borrowers. In this paper, we explore the reasons that led to such circumstances. We will consider how the widespread operations and omnipresent Self-Help Groups, together with their linkages with banks, attracted private microfinance providers. This, coupled with the absence of adequate regulatory mechanisms, resulted in over-lending to the poor. The paper discusses policy implications of the various regulatory measures that the Government subsequently took to harness and regulate micro-lending practices in the state. It is argued that the regulatory measures initiated to address the issue do not focus on the social structures, i.e., the unequal distribution of the community institutional infrastructure base for delivery of microfinance among different states, and the singular focus of privatesector MFIs on maximizing profits in an inefficiently regulated environment, that gave rise to the current circumstances.
    Date: 2011
  18. By: Daniel Schmidt (Leuphana University of Lüneburg, Germany); Frank Schmielewski (Leuphana University of Lüneburg, Germany)
    Abstract: Within this study we propose different measures to prove the influence of prior retail fund performance on fund flows. In contrast to previous literature, our work indicates that investors behave directly and in a selective manner by redeeming their shares of poor performing funds. By using a large data set of 1672 retail funds in Germany from March 2008 to April 2010 we are able to underscore that in general, both the prior performance of funds and the prior net redemptions have a statistically significant influence on outflows of funds. Moreover, it seems likely that investors react faster to market signals by withdrawing their shares in crisis situations than in previous decades that might be due to lower cost of information. Our findings can serve as a warning signal for policy-makers, regulatory authorities and the fund industry to establish a strong regulatory framework to prevent liquidity shortages of retail funds.
    Keywords: Liquidity risk, financial fragility, bank run, mutual funds, fund flows, net redemptions of fund shares, fund performance, fund industry, risk sharing
    JEL: G01 G23 G14 G28 D53
    Date: 2012–01

This issue is ©2012 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.
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