New Economics Papers
on Banking
Issue of 2012‒02‒01
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Are banks passive liquidity backstops? deposit rates and flows during the 2007-2009 crisis By Viral V. Acharya; Nada Mora
  2. Sizing Up Repo By Arvind Krishnamurthy; Stefan Nagel; Dmitry Orlov
  3. Leveraging and risk taking within the German banking system: Evidence from the financial crisis in 2007 and 2008 By Frank Schmielewski
  4. Survival of the fittest: contagion as a determinant of Canadian and Australian bank risk By David E Allen; R.R Boffey; R. J. Powell
  5. When bigger isn’t better: bailouts and bank behaviour By Miller, Marcus; Zhang, Lei; Li, Han Hao
  6. Credit Supply versus Demand: Bank and Firm Balance-Sheet Channels in Good and Crisis Times By Jimenez Porras, G.; Ongena, S.; Peydro, J.L.; Saurina, J.
  7. 中监为体、西监为用 or the specifics of Chinese bank regulation By Cousin, Violaine
  8. 2005-2010 Microfinance Market Trends in Latin America and the Caribbean By Renso Martínez
  9. Loan Defaults in Africa By Svetlana Andrianova; Badi H Baltagi; Panicos O Demetriades
  10. Public Banks and the Productivity of Capital By Svetlana Andrianova
  11. The Safe-Asset Share By Gary B. Gorton; Stefan Lewellen; Andrew Metrick
  12. The Great Recession and bank lending to small businesses By Judit Montoriol-Garriga; J. Christina Wang
  13. Banks and SMES: Raising the Game: 4th Regional Survey in Latin America and the Caribbean By Inter-American Development Bank (IDB)
  14. Which financial frictions? parsing the evidence from the financial crisis of 2007-09 By Tobias Adrian; Paolo Colla; Hyun Song Shin
  15. Policy Implications of Using Audits to Detect Bank Insolvencies By Jaime Hurtubia; Claudio Sardoni
  16. A Quantile Monte Carlo approach to measuring extreme credit risk By David E Allen; R.R Boffey; R. J. Powell
  17. Timing asset market peaks: the role of the liquidity risk cycle of the banking system By Weber, Patrick
  18. Basel Accord and financial intermediation: the impact of policy By Martin Berka; Christian Zimmermann
  19. Getting up to Speed on the Financial Crisis: A One-Weekend-Reader's Guide By Gary B. Gorton; Andrew Metrick
  20. Repo and securities lending By Tobias Adrian; Brian Begalle; Adam Copeland; Antoine Martin
  21. What can financial stability reports tell us about macroprudential supervision? By Jon Christensson; Kenneth Spong; Jim Wilkinson
  22. Essays on Financial Intermediation and Markets. By Farooq, M.

  1. By: Viral V. Acharya; Nada Mora
    Abstract: Can banks maintain their advantage as liquidity providers when they are heavily exposed to a financial crisis? The standard argument - that banks can - hinges on deposit inflows that are seeking a safe haven and provide banks with a natural hedge to fund drawn credit lines and other commitments. We shed new light on this issue by studying the behavior of bank deposit rates and inflows during the 2007-09 crisis. Our results indicate that the role of the banking system as a stabilizing liquidity insurer is not one of the passive recipient, but of an active seeker, of deposits. We find that banks facing a funding squeeze sought to attract deposits by offering higher rates. Banks offering higher rates were also those most exposed to liquidity demand shocks (as measured by their unused commitments, wholesale funding dependence, and limited liquid assets), as well as with fundamentally weak balance-sheets (as measured by their non-performing loans or by subsequent failure). Such rate increases have a competitive effect in that they lead other banks to offer higher rates as well. Overall, the results present a nuanced view of deposit rates and flows to banks in a crisis, one that reflects banks not just as safety havens but also as stressed entities scrambling for deposits.
    Date: 2011
  2. By: Arvind Krishnamurthy; Stefan Nagel; Dmitry Orlov
    Abstract: We measure the repo funding extended by money market funds (MMF) and securities lenders to the shadow banking system, including quantities, haircuts, and repo rates by type of underlying collateral. We find that repo played only a small role in funding private sector assets prior to the crisis, as most repos are backed by Treasury and Agency collateral. Repo with private sector collateral contracts during the crisis, but the magnitude is relatively insignificant compared with the contraction in asset-backed commercial paper (ABCP). While relatively small in aggregate, the contraction in repo particularly affected key dealer banks with large exposures to private sector securities, which then had knock-on effects on security markets, and led these dealer banks to resort to the Fed's emergency lending programs. We also find that haircuts in MMF-to-dealer repo rise less than the dealer-to-dealer or dealer-to-hedge fund repo haircuts reported in earlier papers. This finding suggests that the contraction in repo led dealers to take defensive actions, given their own capital and liquidity problems, raising credit terms to their borrowers. The picture that emerges from these findings looks less like a traditional bank run of depositors and more like a credit crunch among dealer banks.
    JEL: G01 G21 G24
    Date: 2012–01
  3. By: Frank Schmielewski (Leuphana University of Lüneburg, Germany)
    Abstract: The present study is centered primarily on determining whether the German banking system is to be characterized by procyclical behavior from 2000 to 2011 and to what extent specific sectors of the German banking system showed significant balance sheet operations to increase their leverage within years of booming asset prices. First, the results of this study show that the different sectors of the German banking system operate their business more or less procyclically. Second, the study provides some empirical evidence that banks increasing their leverages during periods of extraordinary high returns provided in the financial markets preferred funding their assets by shortterm lending in the interbank market. Third, the study clarified that banks, preferring high leverages, can apparently be characterized by a high volatility of return on assets and low distances to default over the observation period. Finally, the examined regression models provide some empirical evidence that requirements on countercyclical capital buffers should be considered by regulatory authorities in the context of macroeconomic indicators.
    Keywords: Liquidity and leverage; financial crises, asset pricing; information and market efficiency; government policy and regulation, international financial markets, funding policy; financial risk and risk management; capital and ownership structure; countercyclical capital buffers; distance to default
    JEL: G01 G12 G14 G28 G15 G32
    Date: 2012–01
  4. By: David E Allen (School of Accounting Finance & Economics, Edith Cowan University); R.R Boffey (School of Accounting Finance & Economics, Edith Cowan University); R. J. Powell (School of Accounting Finance & Economics, Edith Cowan University)
    Abstract: The relative success of Australian and Canadian banks in weathering the Global Financial Crisis (GFC) has been noted by a number of commentators. Their earnings, capital levels and credit ratings have all been a source of envy for regulators of banks in Europe, America and the United Kingdom. The G-20 and the European Union have tried to identify the features of the Canadian and Australian financial systems which have underpinned this success in order to use them in shaping a revised international regulatory framework. Despite this perceived success, the impaired assets (also known as non-performing loans) of banks in both countries increased several fold over the GFC, and we investigate the determinants of this, using impaired assets as our measure of bank risk. Previous studies in other countries have tended to focus on the impact of bank specific factors, such as size and return on equity, in explaining bank risk. Our approach involves including those traditional variables, plus Distance to Default (DD), and a novel contagion variable, which is the effect of major global bank DD on Australian and Canadian banks. Using panel data regression over the period 1999-2008, we find that various balance sheet and income statement factors are not good explanatory variables for bank risk. In contrast, the contagion variable is significant in explaining Canadian and Australian bank risk, which suggests that prudential regulators should look to specifically allocate a portion of regulatory capital to deal with contagion effects.Classification-JEL:
    Keywords: Bank risk; Distance to default; Impaired assets; Panel regression.
    Date: 2011–11
  5. By: Miller, Marcus (University of Warwick); Zhang, Lei (University of Warwick); Li, Han Hao (University of Warwick)
    Abstract: Lending retail deposits to SMEs and household borrowers may be the traditional role of commercial banks: but banking in Britain has been transformed by increasing consolidation and by the lure of high returns available from wholesale Investment activities. With appropriate changes to the baseline model of commercial banking in Allen and Gale (2007), we show how market power enables banks to collect „seigniorage?; and how „tail risk? investment allows losses to be shifted onto the taxpayer. In principle, the high franchise values associated with market power assist regulatory capital requirements to check risk-taking. But when big banks act strategically, bailout expectations can undermine these disciplining devices: and the taxpayer ends up „on the hook?- as in the recent crisis. That structural change is needed to prevent a repeat seems clear from the Vickers report, which proposes to protect the taxpayer by a „ring fence?separating commercial and investment banking.
    Keywords: Money and banking, Seigniorage, Risk-taking, Bailouts, Regulation
    Date: 2011
  6. By: Jimenez Porras, G.; Ongena, S.; Peydro, J.L.; Saurina, J. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Banking crises involve periods of persistently low credit and economic growth. Banks’ balance sheets are then weak but so are those of non-financial corporate borrowers. Hence, a crucial question is whether credit growth is low due to supply or to demand factors. However convincing identification has been elusive due to a lack of detailed loan application-, bank-, and firm-level data. Access to a dataset of loan applications in Spain that is matched with complete bank and firm balance-sheet data covering the period from 2002 to 2010 allows us to identify bank and firm balancesheet channels. We find robust evidence showing that bank balance-sheet strength determines the success of loan applications and the granting of loans in crisis times. The heterogeneity in firm balance-sheet strength determines loan granting in both good and crisis times, although the potency of this firm balance-sheet channel is the largest in the latter period. Our findings therefore hold important implications for both theory and policy.
    Keywords: bank lending channel;credit supply;business cycle;credit crunch;capital;liquidity.
    JEL: E32 E44 E5 G21 G28
    Date: 2012
  7. By: Cousin, Violaine
    Abstract: The present paper aims to propose an explanation for the rationale behind the current banking regulatory arrangement in China. A now stable and relatively healthy banking system emerged largely unscathed from the financial crisis without relying much on recognised international best practices in bank supervision. China combines a strong regulatory hand together with a capital adequacy requirements stick, without much intervention of foreign or private institutions in the larger sense of the term. After an in-depth review of the Chinese framework we recognise that it is exactly this lip service to private monitoring mechanisms on top of restrictive regulators that allows for stability and growth - at least for now. China uses Chinese supervision as the core and western regulatory instruments as useful add-ons - a manner similar to the catch phrase used over a century ago to rejuvenate China.
    Keywords: regulation; bank; china
    JEL: G28 G21
    Date: 2011–06
  8. By: Renso Martínez
    Abstract: The objective of this report is to present an early update for the performance of the Microfinance Institutions (MFIs) in regional, sub-regional and certain national markets at the close of the 2010 financial year in terms of coverage credit types, finance structure, and risk and profitability.
    Keywords: Private Sector :: Microbusinesses & Microfinance, Financial Sector :: Financial Risk, Financial Sector :: Financial Markets, Financial Sector :: Financial Services, MFI, MIFs, Microfinance Institutions, credit types, finance structure, risk profitability
    Date: 2011–05
  9. By: Svetlana Andrianova; Badi H Baltagi; Panicos O Demetriades
    Abstract: African financial deepening is beset by a high rate of loan defaults, which encourages banks to hold liquid assets instead of lending. We put forward a novel theoretical model that captures the salient features of African credit markets which shows that equilibrium with high loan defaults and low lending can arise when contract enforcement institutions are weak, investment opportunities are relatively scarce and information imperfections abound. We provide evidence using a panel of 110 banks from 29 African countries which corroborates our theoretical predictions.
    Keywords: Financial development; Africa
    JEL: G21 O16
    Date: 2011–08
  10. By: Svetlana Andrianova
    Abstract: Weak institutions are shown to create scope for public banks to play a growth-promoting role, even if such banks are less efficient than private banks.
    Keywords: Economic growth; governance; regulation
    JEL: O16 G18 G28 K42
    Date: 2011–10
  11. By: Gary B. Gorton; Stefan Lewellen; Andrew Metrick
    Abstract: We document that the percentage of all U.S. assets that are “safe” has remained stable at about 33 percent since 1952. This stable ratio is a rare example of calm in a rapidly changing financial world. Over the same time period, the ratio of U.S. assets to GDP has increased by a factor of 2.5, and the main supplier of safe financial debt has shifted from commercial banks to the “shadow banking system.” We analyze this pattern of stylized facts and offer some tentative conclusions about the composition of the safe-asset share and its role within the overall economy.
    JEL: E02 E41 E44 E52 G2 G21
    Date: 2012–01
  12. By: Judit Montoriol-Garriga; J. Christina Wang
    Abstract: This paper investigates whether small firms have experienced worse tightening of credit conditions during the Great Recession than large firms. To structure the empirical analysis, the paper first develops a simple model of bank loan pricing that derives both the interest rates on loans actually made and the marginal condition for loans that would be rationed in the event of an economic downturn. Empirical estimations using loan-level data find evidence that, once we account for the contractual features of business loans made under formal commitments to lend, interest rate spreads on small loans have declined on average relative to spreads on large loans during the Great Recession. Quantile regressions further reveal that the relative decline in average spread is entirely accounted for by loans to the riskier borrowers. These findings are consistent with the pattern of differentially more rationing of credit to small borrowers in recessions as predicted by the model. This suggests that policy measures that counter this effect by encouraging lending to small businesses may be effective in stimulating their recovery and, in turn, job growth.
    Keywords: Recessions ; Small business - Finance ; Bank loans
    Date: 2011
  13. By: Inter-American Development Bank (IDB)
    Abstract: SMEs are positioning themselves as a strategic branch of banking operations in the region, while banks are increasingly pushing for more active policies when it comes to the financing of SMEs. This is one of the highlighted conclusions from a 2011 joint survey conducted by the Inter-American Development Bank Group's entities dealing with the private sector: the Multilateral Investment Fund (FOMIN), the beyondBanking program of the department of Corporate and Structured Financing (SCF), and the Inter-American Investment Corporation, along with the Latin American Banking Federation (FELABAN). This report introduces the general results obtained during the fourth survey encompassing the views and opinions of directors, managers and deputies of the SME division of 109 banks scattered across 22 countries in Latin America and the Caribbean. It also includes an itemized analysis of the answers divided by the banks size and location, as well as their interrelations with other trends in that sector.
    Keywords: Private Sector :: SME, Financial Sector :: Financial Services, Small enterprises, financial institutions, beyondBanking, 4th Regional Survey
    Date: 2011–12
  14. By: Tobias Adrian; Paolo Colla; Hyun Song Shin
    Abstract: We provide an overview of data requirements necessary to monitor repurchase agreements (repos) and securities lending (sec lending) markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets, and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection should include six characteristics of repo and sec lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty.
    Date: 2011
  15. By: Jaime Hurtubia; Claudio Sardoni
    Abstract: We present a model where a regulator has to decide how to tackle the potential insolvency of a bank in a context of asymmetric information. We show that, when it can audit the bank, the regulator is unlikely to choose a policy of bailout to induce the bank to reveal its insolvency. We show that, in some circumstances, the regulator can induce the bank to reveal its insolvency by threatening to randomize its decision to nationalize the bank.
    Date: 2011–12
  16. By: David E Allen (School of Accounting Finance & Economics, Edith Cowan University); R.R Boffey (School of Accounting Finance & Economics, Edith Cowan University); R. J. Powell (School of Accounting Finance & Economics, Edith Cowan University)
    Abstract: We apply a novel Quantile Monte Carlo (QMC) model to measure extreme risk of various European industrial sectors both prior to and during the Global Financial Crisis (GFC). The QMC model involves an application of Monte Carlo Simulation and Quantile Regression techniques to the Merton structural credit model. Two research questions are addressed in this study. The first question is whether there is a significant difference in distance to default (DD) between the 50% and 95% quantiles as measured by the QMC model. A substantial difference in DD between the two quantiles was found. The second research question is whether relative industry risk changes between the pre-GFC and GFC periods at the extreme quantile. Changes were found with the worst deterioration experienced by Energy, Utilities, Consumer Discretionary and Financials; and the strongest improvement shown by Telecommunication, IT and Consumer goods. Overall, we find a significant increase in credit risk for all sectors using this model as compared to the traditional Merton approach. These findings could be important to banks and regulators in measuring and providing for credit risk in extreme circumstances.
    Keywords: Asset Selection, Factor Model, DEA, Quantile Regression
    Date: 2011–02
  17. By: Weber, Patrick
    Abstract: Recent financial crisis showed how the unfolding of liquidity risks of financial intermediaries spilled over to asset markets, contributing to asset price deteriorations and the triggering of liquidity spirals. This paper derives and tests a financial fragility condition for predicting asset price peaks on a real-time basis, by combining the term spread and the aggregate funding liquidity risks of the banking system into a simple binary fragility indicator. The main empirical result of this paper is that the fragility condition predicted all major equity market peaks in Germany during the time period 1973 to 2010, including the subprime crisis of 2007, the New Economy Bubble of 2000, and the 1987 stock market crash. The average lead time of the indicator is 2.9 months. About 80% of the declines were later on associated with significant declines in Industrial Production.
    Keywords: Predicting Financial Markets; Liquidity Spirals; Macrofinancial Linkages; Asset Price Cycle; Liquidity Management of Financial Intermediaries; Early Warning Indicator
    JEL: G2 G12 C53
    Date: 2012–01–16
  18. By: Martin Berka; Christian Zimmermann
    Abstract: This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough. We find that active monetary policy increases loan volume even when the economy is in good shape; introducing active capital requirement policy can be effective as well if it implies tightening of regulation in bad times. This is performed with an heterogeneous agent economy with occupational choice, financial intermediation and aggregate shocks to the distribution of entrepreneurial returns.
    Date: 2011
  19. By: Gary B. Gorton; Andrew Metrick
    Abstract: All economists should be conversant with “what happened?” during the financial crisis of 2007-2009. We select and summarize 16 documents, including academic papers and reports from regulatory and international agencies. This reading list covers the key facts and mechanisms in the build-up of risk, the panics in short-term-debt markets, the policy reactions, and the real effects of the financial crisis.
    JEL: A0 D0 E0 G0
    Date: 2012–01
  20. By: Tobias Adrian; Brian Begalle; Adam Copeland; Antoine Martin
    Abstract: We provide an overview of data requirements necessary to monitor repurchase agreements (repos) and securities lending (sec lending) markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets, and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection should include six characteristics of repo and sec lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty.
    Date: 2012
  21. By: Jon Christensson; Kenneth Spong; Jim Wilkinson
    Abstract: Many countries have suggested macroprudential supervision as a means for earlier identification and better control of the risks that might lead to a financial crisis. Since macroprudential supervision would focus on the financial system in its entirety and on major risks that could threaten financial stability, it shares many of the same goals as the financial stability reports written by most central banks. This article examines the financial stability reports of five central banks to assess how effective they were in identifying the problems that led to the recent financial crisis and what implications they might have for macroprudential supervision. ; The financial stability reports in these five countries were generally successful in foreseeing the risks that contributed to the crisis, but the reports underestimated the severity of the crisis and did not fully anticipate the timing and pattern of important events. While the stress tests in these reports provided insights into the resiliency and capital needs of the banks in these countries, the stresses and scenarios tested often differed from what actually occurred and some of the reports did not consider them to be likely events. One other major challenge for the central banks was in taking the concerns expressed in financial stability reports and linking them to effective and timely supervisory policy. Overall, the reports were a worthwhile exercise in identifying and monitoring key financial trends and emerging risks, but they also indicate the significant challenges macroprudential supervision will have in anticipating and addressing financial market disruptions
    Date: 2011
  22. By: Farooq, M.
    Date: 2011

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