New Economics Papers
on Banking
Issue of 2012‒01‒25
nine papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How do credit supply shocks propagate internationally? A GVAR approach By Eickmeier, Sandra; Ng, Tim
  2. Financial intermediary balance sheet management By Tobias Adrian; Hyun Song Shin
  3. Changing Banking Relationships and Client Firm Performance: Evidence for Japan from the 1990s By Tsuruta, Daisuke
  4. Models for Stress Testing Czech Banks´ Liquidity Risk By Zlatuse Komarkova; Adam Gersl; Lubos Komarek
  5. Is the financial safety net a barrier to cross-border banking ? By Bertay, Ata Can; Demirguc-Kunt Asli; Huizinga, Harry
  6. International Shock Transmission after the Lehman Brothers Collapse. Evidence from Syndicated Lending By de Haas, Ralph; van Horen, Neeltje
  7. Extreme Value at Risk and Expected Shortfall during Financial Crisis By L. Kourouma; D. Dupre; G. Sanfilippo; O. Taramasco
  8. Systemic oversight frameworks in LAC : current practices and reform agenda By Gutierrez, Eva; Caraballo, Patricia
  9. Financial and Regulatory Failure: The Case of Ireland By Kenneth Patrick Vincent O'Sullivan

  1. By: Eickmeier, Sandra; Ng, Tim
    Abstract: We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a flight to quality to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample. --
    Keywords: international business cycles,credit supply shocks,trade and financial integration,Global VAR,sign restrictions
    JEL: F41 F44 F36 F15 C3
    Date: 2011
  2. By: Tobias Adrian; Hyun Song Shin
    Abstract: Conventional discussions of balance sheet management by nonfinancial firms take the set of positive net present value (NPV) projects as given, which in turn determines the size of the firm’s assets. The focus is on the composition of equity and debt in funding such assets. In contrast, the balance sheet management of financial intermediaries reveals that it is equity that behaves like the predetermined variable, and the asset size of the bank or financial intermediary is determined by the degree of leverage that is permitted by market conditions. The relative stickiness of equity reveals possible nonpecuniary benefits to bank owners so that they are reluctant to raise new equity, even during boom periods when raising equity is associated with less stigma and, hence, smaller discounts. We explore the empirical evidence for both market-based financial intermediaries such as the Wall Street investment banks, as well as the commercial bank subsidiaries of the large U.S. bank holding companies. We further explore the aggregate consequences of such behavior by the banking sector for the propagation of the financial cycle and securitization.
    Keywords: Assets (Accounting) ; Intermediation (Finance) ; Equity ; Debt
    Date: 2011
  3. By: Tsuruta, Daisuke
    Abstract: The banking literature concludes that the performance of client firms deteriorates if their distressed main bank reduces the supply of credit. However, these results rely on the assumption that main banks have an information advantage over other banks, such that if a client firm changes its main bank, its access to credit worsens. Using Japanese data from a period including financial shocks, we show that firms change the main banking relationship when their main bank becomes distressed. In addition, the performance of client firms improves after a change in the main bank relationship. This implies that the availability of credit improves for these firms, despite the change in main bank.
    Keywords: Bank--firm relationships; Bank distress; Private information
    JEL: G32 G21 G20
    Date: 2012–01–12
  4. By: Zlatuse Komarkova; Adam Gersl; Lubos Komarek
    Abstract: We provide a macro stress-testing model for banks’ market and funding liquidity risks with a survival period of one and three months. The model takes into account the impact of both bank-specific and market-wide scenarios and considers both the first- and second-round effects of shocks. The testing model has three phases; (i) the formation of a balance-sheet liquidity shortfall, (ii) the reaction by banks, and (iii) the feedback effects of shocks. During each phase we re-count the liquidity buffer and examine whether banks hold a sufficiently large amount of liquid assets to be able to survive the liquidity tension in their balance sheets. An application to Czech banks illustrates which bank business models are sensitive to liquidity tensions. Overall, we confirm that the Czech banking system is resilient to a scenario mimicking the international liquidity crisis of 2008-2009.
    Keywords: Banking, financial stability, liquidity risk, stress testing.
    JEL: G12 G19 G21
    Date: 2011–11
  5. By: Bertay, Ata Can; Demirguc-Kunt Asli; Huizinga, Harry
    Abstract: A bank's interest expenses rise with its degree of internationalization, measured by its share of foreign liabilities in total liabilities or a Herfindahl index of international liability concentration, especially if the bank is performing badly. The results in this paper suggest that an international bank's cost of funds raised through a foreign subsidiary is 1.5-2.4 percent higher than the cost of funds for a purely domestic bank. That is a sizeable difference, given that the overall mean cost of funds is 3.3 percent. These results can be explained by limited incentives for national authorities to bail out an international bank, as well as an inefficient recovery and resolution process for international banks. In any event, a less reliable financial safety net appears to be a barrier to cross-border banking.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Emerging Markets,Economic Theory&Research
    Date: 2012–01–01
  6. By: de Haas, Ralph; van Horen, Neeltje
    Abstract: After Lehman Brothers filed for bankruptcy in September 2008, cross-border bank lending contracted sharply. To explain the severity and variation in this contraction, we analyze detailed data on cross-border syndicated lending by 75 banks to 59 countries. We find that banks that had to write down sub-prime assets, refinance large amounts of long-term debt, and experienced sharp declines in their market-to-book ratio, transmitted these shocks across borders by curtailing their lending abroad. While shocked banks differentiated between countries in much the same way as less constrained banks, they restricted their lending more to small borrowers.
    Keywords: Cross-border lending; bank-funding shocks; crisis transmission
    JEL: E51 F36 G21
    Date: 2012–01–17
  7. By: L. Kourouma (CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II); D. Dupre (CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II, IAE Grenoble - Institut d'Administration des Entreprises - Grenoble - Université Pierre Mendès-France - Grenoble II); G. Sanfilippo (CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II); O. Taramasco (CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II)
    Abstract: This paper investigates Value at Risk and Expected Shortfall for CAC 40, S&P 500, Wheat and Crude Oil indexes during the 2008 financial crisis. We show an underestimation of the risk of loss for the unconditional VaR models as compared with the conditional models. This underestimation is stronger using the historical VaR approach than when using the extreme values theory VaR model. Even in 2008 financial crisis, the conditional EVT model is more accurate and reliable for predicting the asset risk losses. Banks have no interest in using it because the Basel II agreement penalizes banks using accuracy models like the conditional EVT model, and this is the case for the assets being studied in this paper.
    Keywords: Market risk; Value at Risk; EVT; GARCH; Financial crisis; Basel requirements
    Date: 2011
  8. By: Gutierrez, Eva; Caraballo, Patricia
    Abstract: The world financial crisis that started in the US housing market in 2008 brought into evidence deep failures of prudential oversight, linked for the most part to a failure to comprehend and handle systemic risk in a way that could prevent systemic crises. This paper summarizes the responses to the joint World Bank -ASBA survey o the state of systemic oversight in the Latin American and Caribbean financial sectors and reflects on some of the challenges identified by respondents. We found that there is broad consensus among regional financial authorities on the need to enhance the current systemic oversight framework. Improving consolidated supervision to mitigate risk-shifting in conglomerates, adjusting prudential regulations to account for the accumulation of systemic risks, redefining the role of the supervisor to make it more proactive, and improving coordination among local supervisors as well as with foreign supervisors figure preeminently in the regional reform agenda.
    Keywords: Banks&Banking Reform,Debt Markets,Emerging Markets,Access to Finance,Currencies and Exchange Rates
    Date: 2012–01–01
  9. By: Kenneth Patrick Vincent O'Sullivan (University of Limerick)
    Abstract: The paper chronicles the evolution of financial regulation in Ireland, with particular attention given to the roles, responsibilities and actions of those authorities responsible for maintaining financial stability. It examines the role of financial regulation during the property bubble, in particular, the huge increase in propertybacked lending which fuelled its growth during the mid-2000s. We examine the impact of ongoing government support to the banking system and the damage which has been done to public finances since the banking crisis.
    Keywords: 2008 banking crisis, regulatory failure, Ireland, principles based regulation, public debt
    Date: 2011–12–22

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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