New Economics Papers
on Banking
Issue of 2012‒02‒27
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Macroprudential policies in an agent-based artificial economy By Marco Raberto; Andrea Teglio; Silvano Cincotti
  2. Comparing Centralized and Decentralized Banking: A Study of the Risk-Return Profiles of Banks By Holmberg, Ulf; Sjögren, Tomas; Hellström, Jörgen
  3. Bank stress tests as an information device for emerging markets: The case of Russia By Fungácová, Zuzana; Jakubík, Petr
  4. Securitization in Turkish banking system By Aysan, Ahmet Faruk; Rengifo, Erick William; Ozsoz, Emre
  5. The Credit Market and the Determinants of Credit Crunches: An Agent Based Modeling Approach By Holmberg, Ulf
  6. Credit Markets with Ethical Banks and Motivated Borrowers By Barigozzi, Francesca; Tedeschi, Piero
  7. Are bank loans still “special” (especially during a crisis)? Empirical evidence from a European country By Christophe Godlewski
  8. Bank pricing under oligopsony-oligopoly: Evidence from 103 developing countries By Marrouch, Walid; Turk-Ariss, Rima
  9. Assessing the Resilience of ASEAN Banking Systems: The Case of the Philippines By Albert, Jose Ramon; Ng, Thiam Hee
  10. Legal Aspects of Bank Bail-Ins By Simon Gleeson
  11. Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measure By Robert Kollmann; Werner Roeger; Jan in'tVeld
  12. Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province By Pascaline Dupas; Sarah Green; Anthony Keats; Jonathan Robinson
  13. Competition, loan rates and information dispersion in microcredit markets By Guillermo Baquero; Malika Hamadi; Andréas Heinen
  14. Crisis in the Irish Banking System By Blánaid Clarke; Niamh Hardiman
  15. Corporate Governance and Prudential Regulation of Banks: Is There Any Connection? By Lawrence J. White
  16. The Risk-Taking Channel in Colombia Revisited By Martha López; Fernando Tenjo; Héctor Zárate
  17. Access to Capital, Investment, and the Financial Crisis By Kahle, Kathleen M.; Stulz, Rene M.
  18. Financial Performance of Microfinance Institutions-A Macroeconomic and Institutional Perspective By Katsushi S. Imai; Raghav Gaiha; Ganesh Thapa; Samuel Kobina Annim; Aditi Gupta
  19. Active margin system for margin loans and its application in Chinese market: using cash and randomly selected stock as collateral By Guanghu Huang; Wenting Xin; Weiqing Gu
  20. Financing businesses in Africa : the role of microfinance By Aggarwal, Shilpa; Klapper, Leora; Singer, Dorothe
  21. Transforming financial OTC Markets. Struggles around categories By Isabelle Huault; Hélène Rainelli-Weiss
  22. Minsky’s Financial Instability Hypothesis and the Leverage Cycle By Sudipto Bhattacharya; Charles Goodhart; Dimitrios Tsomocos; Alexandros Vardoulakis

  1. By: Marco Raberto (University of Genova (Genova, Italy)); Andrea Teglio (Department of Economics, Universitat Jaume I (Castellón, Spain)); Silvano Cincotti (University of Genova (Genova, Italy))
    Abstract: Basel III is a recently-agreed regulatory standard for bank capital adequacy with focus on the macroprudential dimension of banking regulation, i.e., the system-wide implications of banks' lending and risk. An important Basel III provision is to reduce procyclicality of present banking regulation and promote countercyclical capital buffers for banks. The Eurace agent-based macroeconomic model and simulator has been recently showed to be able to reproduce a credit-fueled boom-bust dynamics where excessive bank leverages, while benefitting in the short term, have destabilizing effects in the medium-long. In this paper. we employ the Eurace model to test regulatory policies providing time varying capital requirements for banks, based on mechanisms that enforce banks to build up or release capital buffers, according to the overall conditions of the economy. As conditioning variables for these dynamic policies, both the unemployment rate and the aggregate credit growth have been considered. Results show that the dynamic regulation of capital requirements is generally more successful than fixed tight capital requirements in stabilizing the economy and improving the macroeconomic performance.
    Keywords: Basel III, macroprudential regulation, agent-based models and simulation
    Date: 2012
  2. By: Holmberg, Ulf (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University); Hellström, Jörgen (Department of Business Administration)
    Abstract: This paper studies the risk-return profile of centralized and decentralized banks. We address the conditions that favor a particular lending regime while acknowledging the effects on lending and returns caused by the course of the business cycle. To analyze these issues, we develop a model which incorporates two stylized facts; (i) banks in which lending decisions are decentralized tend to have a lower cost associated with screening potential borrowers and (ii) decentralized decision-making may generate inefficient outcomes because of lack of coordination. Simulations are used to compare the two banking regimes. Among the results, it is found that asymmetric markets (in terms of the proportion of high ability entrepreneurs) tend to favor centralized banking while decentralized banks seem better at lending in the wake of an economic downturn (high probability of a recession). In addition, we find that even though a bank group where decisions are decentralized may end up with a portfolio of loans which is (relatively) poorly diversified between regions, the ability to effectively screen potential borrowers may nevertheless give a decentralized bank a lower overall risk in the lending portfolio than when decisions are centralized.
    Keywords: lending; screening; business cycle; portfolio diversification; risk; organization; simulations
    JEL: C63 E30 G01 G11 G21 G32
    Date: 2012–02–17
  3. By: Fungácová, Zuzana (BOFIT); Jakubík, Petr (BOFIT)
    Abstract: The recent financial crisis emphasised the need for effective financial stability analyses and tools for detecting systemic risk. This paper looks at assessment of banking sector resilience through stress testing. We argue such analyses are valuable even in emerging economies that suffer from limited data availability, short time series and structural breaks. We propose a top-down stress test methodology that employs relatively limited information to overcome this data problem. Moreover, as credit growth in emerging economies tends to be rather volatile, we rely on dynamic approach projecting key balance sheet items. Application of our proposed stress test framework to the Russian banking sector reveals a high sensitivity of the capital adequacy ratio to the economic cycle that shows up in both of the two-year macroeconomic scenarios considered: a baseline and an adverse one. Both scenarios indicate the need for capital increase in the Russian banking sector. Furthermore, given that Russia’s banking sector is small and fragmented relative to advanced economies, the loss of external financing can cause profound economic stress, especially for medium-sized and small enterprises. The Russian state has a low public debt-to-GDP ratio and plays decisive role in the banking sector. These factors allow sufficient fiscal space for recapitalisation of problematic banks under both of our proposed baseline and adverse scenarios.
    Keywords: stress testing; bank; Russia
    JEL: G21 G28 P34
    Date: 2012–02–23
  4. By: Aysan, Ahmet Faruk; Rengifo, Erick William; Ozsoz, Emre
    Abstract: By using data from 8 depository institutions in Turkey we evaluate the drivers of securitization between 2004 and 2009. Our analysis shows that previous period securitization as well as bank equity, level of profits and asset size are important factors in a bank’s decision to securitize its loan portfolio. Banks’ on-balance sheet liquidity on the other hand is not a significant factor. We also use a binary probit model and predict with good certainty the timing of a bank’s securitization in capital markets. Again, bank size, profitability and equity are also explanatory variables in making these accurate predictions.
    Keywords: securitization; Turkey; banking
    JEL: G32 F31 G21
    Date: 2012–02
  5. By: Holmberg, Ulf (Department of Economics, Umeå University)
    Abstract: This paper presents a credit market model and finds, using an agent based modeling approach, that credit crunches have a tendency to occur; even when credit markets are almost entirely transparent in the absence of external shocks. We find evidence supporting the asset deterioration hypothesis and results that emphasize the importance of accurate firm quality estimates. In addition, we find that an increase in the debt’s time to maturity, homogenous expected default rates and a conservative lending approach, reduces the probability of a credit crunch. Thus, our results suggest some up till now partially overlooked components contributing to the financial stability of an economy.
    Keywords: financial stability; banking; lending; screening; truncation
    JEL: C63 E51 G21
    Date: 2012–02–17
  6. By: Barigozzi, Francesca (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Tedeschi, Piero (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)
    Abstract: This paper investigates banks’ corporate social responsibility. Two different competitive credit markets do exist: one for standard projects and one for ethical ones. Ethical projects have also a social profitability, but a lower (positive) expected revenue with respect to standard ones. Ethical projects are financed by ethical banks and undertaken by motivated borrowers. These borrowers obtain additional benefit (a social responsibility premium) from accomplishing ethical projects when trading with ethical banks. If the expected profitability of ethical project is sufficiently close to that of standard ones and/or the social responsibility premium of motivated borrowers is sufficiently high, the market for ethical projects is active and the credit market is fully segmented. This result holds true irrespective of the information structure: only moral hazard on the borrower side, moral hazard and screening on the borrower side, moral hazard on the borrower side and screening on the lender side. The optimal contract in our set-up is always a debt contract. However, its precise form and welfare properties depend on the information structure.
    Keywords: corporate social responsibility; ethical banks; motivated borrowers; microfinance
    JEL: D86 G21 G30
    Date: 2012–01–16
  7. By: Christophe Godlewski (LaRGE Research Center, Université de Strasbourg)
    Abstract: We investigate bank loans’ specialness with a particular focus on the recent boom and bust cycle. We perform an empirical analysis using event study methodology on a sample of 253 large loan announcements for French borrowers between January 2000 and December 2009. We find a significant and negative reaction to bank loan announcements which is mostly driven by loan provided during the crisis period. We also document significant changes in bank behavior over the boom and bust cycle, with important contractual and organizational modifications reflecting a potential “wake-up call” of banks during the crisis.
    Keywords: Bank loans, boom and bust, crisis, event study, Europe.
    JEL: G14 G20
    Date: 2012
  8. By: Marrouch, Walid (BOFIT); Turk-Ariss, Rima (BOFIT)
    Abstract: We propose a generic oligopsony-oligopoly model to study bank behavior under uncertainty in developing countries. We derive a pricing structure that acknowledges market power in both the deposit and loan markets and identify two theoretical components to the loan rate: a rent extraction component resulting from the interaction between the choke price of loans and prevailing banking structures, and a markup on deposit funding costs that captures the transformation efficiency of financial intermediation. We then test our structural specification with longitudinal data for 103 non-OECD countries and find that both the market structure under uncertainty and the deposit rate matter significantly in pricing. However, the role played by the rent-extraction share in pricing, on average, dominates funding costs in developing countries, and so underscores the importance of market structure in banks’ pricing power.
    Keywords: intermediation; bank pricing; market structure; uncertainty; developing countries
    JEL: C33 G21 L13
    Date: 2012–02–23
  9. By: Albert, Jose Ramon (Philippine Institute for Development Studies); Ng, Thiam Hee (Asian Development Bank)
    Abstract: Since the global financial crisis in 2008/09 there has been heightened concern about the resilience of banking systems in Southeast Asia. This paper proposes a methodology that uses a macroprudential perspective to assess the resilience of banking systems in member countries of the Association of Southeast Asian Nations. It then proceeds to apply this methodology to examine the resilience of the Philippine banking system. Data on financial soundness in the Philippine banking system are utilized in a vector autoregression model to study the dynamic relationships that exist among financial and macroeconomic indicators. Using impulse response functions, a simulation of financial ratios in the banking system is conducted by assuming unlikely but plausible stress scenarios to determine whether banking system credit and capital could withstand the impact of such circumstances. In the stress scenarios, the estimated impact of macroeconomic shocks on nonperforming loan and capital adequacy ratios is generally minimal. The results, however, do suggest that the Philippine banking system has some vulnerability to interest rate and stock market shocks. The results of such stress testing provide a better understanding of the level of preparedness required for managing risks in the financial system, especially in the wake of continuing global economic uncertainty.
    Keywords: Banking System; Macroprudential; Stress Testing; Philippines; Panel VAR
    JEL: C33 E44 G21
    Date: 2012–02–01
  10. By: Simon Gleeson
    Abstract: The aim of the bail-in proposal is that governments should have an alternative option to taxpayer-funded rescues of systemic banks.
    Date: 2012–02
  11. By: Robert Kollmann; Werner Roeger; Jan in'tVeld
    Abstract: A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment.
    Keywords: state support for banks; financial crisis; financial stimulus; real activity
    JEL: E62 E63 G21 G28 H25
    Date: 2012–02
  12. By: Pascaline Dupas; Sarah Green; Anthony Keats; Jonathan Robinson
    Abstract: Most people in rural Africa do not have bank accounts. In this paper, we combine experimental and survey evidence from Western Kenya to document some of the supply and demand factors behind such low levels of financial inclusion. Our experiment had two parts. In the first part, we waived the fixed cost of opening a basic savings account at a local bank for a random subset of individuals who were initially unbanked. While 63% of people opened an account, only 18% actively used it. Survey evidence suggests that the main reasons people did not begin saving in their bank accounts are that: (1) they do not trust the bank, (2) service is unreliable, and (3) withdrawal fees are prohibitively expensive. In the second part of the experiment, we provided information on local credit options and lowered the eligibility requirements for an initial small loan. Within the following 6 months, only 3% of people initiated the loan application process. Survey evidence suggests that people do not borrow because they do not want to risk losing their collateral. These results suggest that, while simply expanding access to banking services (for instance by lowering account opening fees) will benefit a minority, broader success may be unobtainable unless the quality of services is simultaneously improved. There are also challenges on the demand side, however. More work needs to be done to understand what savings and credit products are best suited for the majority of rural households.
    JEL: D14 G21 O16
    Date: 2012–02
  13. By: Guillermo Baquero (ESMT European School of Management and Technology); Malika Hamadi (Luxembourg School of Finance (LSF)); Andréas Heinen (THEMA, Université de Cergy-Pontoise)
    Abstract: Length: 57 pages
    Keywords: bank competition, microfinance, microcredit, microbank, loan rates, information dispersion, PAR, portfolio quality
    JEL: D4 G21 L1 O1
    Date: 2012–02–16
  14. By: Blánaid Clarke (School of Law, University College Dublin); Niamh Hardiman (School of Politics and International Relations, University College Dublin)
    Abstract: Ireland has had one of the most catastrophic experiences of financial crisis in the developed world, in the wake of the global financial crisis of 2008. Unlike the US or Britain though, Ireland’s enormous banking exposure was almost entirely related to property speculation and to the unchecked domestic housing bubble of the preceding ten years. This paper analyses the conditions that led to the crisis, taking account of patterns of corporate governance, regulatory institutions and practices, and the linkages between the banking sector and the political system.
    Date: 2012–02–17
  15. By: Lawrence J. White
    Date: 2011
  16. By: Martha López; Fernando Tenjo; Héctor Zárate
    Abstract: Levels of interest rates below historical norms may have enhanced financial instability in developed and developing economies during the 2000's. The risk taking channel of monetary policy transmission is a recent theory that explains the interaction between risk perceptions of the financial system and monetary policy. This paper presents empirical evidence of the risk taking channel of monetary policy using detailed information on consumer and commercial loans from the Colombian banking system. Using probit and duration models we find that the banking system takes on more risk when the level of interest rates are too low. We also find that the response to interest rates is higher in the case of commercial loans.
    Date: 2012–02–07
  17. By: Kahle, Kathleen M. (University of AZ); Stulz, Rene M. (OH State University and European Corporate Governance Institute)
    Abstract: During the recent financial crisis, the impact of an impaired supply of bank credit on non-financial firms is minor compared to the impact of leverage-related financial fragility and a general flight to quality. Although banks were sharply affected by the credit crisis in the fall of 2007, the crisis did not negatively affect capital expenditures or net debt issuance of publicly held non-financial firms during its first year. This is true even for small and unrated firms, which are generally viewed as more dependent on bank financing. After September 2008, capital expenditures and net debt issuance fell sharply and firms hoarded cash. Capital expenditures did not fall more for more bank-dependent firms, but they decreased more for firms that were highly levered before the crisis, regardless of whether these firms had previously accessed public debt markets. In contrast to the response expected from a contraction in bank credit per se, the decrease in net equity issuance for small and unrated firms is greater than the decrease in net debt issuance during the crisis.
    Date: 2012–01
  18. By: Katsushi S. Imai (Economics, School of Social Sciences, University of Manchester, UK & Research Institute for Economics and Business Administration, Kobe University, Japan); Raghav Gaiha (Faculty of Management Studies, University of Delhi, India); Ganesh Thapa (International Fund for Agricultural Development, Italy); Samuel Kobina Annim (ELancashire Business School, University of Central Lancashire, UK & Department of Economics, University of Cape Coast, Ghana); Aditi Gupta (Yes Bank, Mumbai)
    Abstract: This study investigates the effect of both institutional factors and the macro economy on the financial performance of MFIs. Drawing upon the Microfinance Information Exchange data and cross-country data on macro economy, finance and institutions, we use three stage least squares and Hausman-Taylor to take account of endogeneity. We find that institutional factors affect MFIs’ financial performance, in particular, profitability, operating expense, and portfolio quality. Also, GDP and share of domestic credit to GDP have positive impacts on MFIs’ financial performance. Hence policies to raise country-level institutional qualities are required for making the activities of MFIs sustainable.
    Keywords: Microfinance, Financial Performance, Macro economy and Institutions
    Date: 2012–02
  19. By: Guanghu Huang; Wenting Xin; Weiqing Gu
    Abstract: An active margin system for margin loans is proposed for Chinese margin lending market, which uses cash and randomly selected stock as collateral. The conditional probability of negative return(CPNR) after a forced sale of securities from under-margined account in a falling market is used to measure the risk faced by the brokers, and the margin system is chosen under the constraint of the risk measure. In order to calculate CPNR, a recursive algorithm is proposed under a Markov chain model, which is constructed by sample learning method. The resulted margin system is an active system, which is able to adjust actively with respect to the changes of stock prices and the changes of different collateral. The resulted margin system is applied to 30,000 margin loans of 150 stocks listed on Shanghai Stock Exchange. The empirical results show the number of margin calls and the average costs of the loans under the proposed margin system are less than their counterparts under the system required by SSE and SZSE.
    Date: 2012–02
  20. By: Aggarwal, Shilpa; Klapper, Leora; Singer, Dorothe
    Abstract: This paper evaluates how microfinance performed in providing business financing in 27 Sub-Saharan African countries. It uses data from the 2009 and 2010 Gallup World Poll, a nationally-representative survey of at least 1,000 individuals per country, conducted in up to 157 countries per year. The data, supported by rigorous statistical evidence in related literature on the use of microcredit around the world, demonstrate that economic gains from microcredit have been more modest than what was once believed. On the other hand, the analysis suggests that the poor save in order to start new businesses and that the introduction of formal products for small savings can be a key financial innovation. The authors also analyze the challenges the poor face in setting money aside to save, and discuss what policymakers can do to promote savings.
    Keywords: Access to Finance,Banks&Banking Reform,Debt Markets,Financial Intermediation,Emerging Markets
    Date: 2012–02–01
  21. By: Isabelle Huault (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine); Hélène Rainelli-Weiss (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine, GREGOR - Groupe de Recherche en Gestion des Organisations - Institut d'Administration des Entreprises (IAE) - Paris - Université Paris I - Panthéon Sorbonne)
    Abstract: Regulating financial OTC markets.
    Keywords: regulation, OTC markets, categories
    Date: 2011
  22. By: Sudipto Bhattacharya; Charles Goodhart; Dimitrios Tsomocos; Alexandros Vardoulakis
    Abstract: Busts after periods of prolonged prosperity have been found to be catastrophic. Financial institutions increase their leverage and shift their portfolios towards projects that were previously considered too risky. This results from institutions rationally updating their expectations and becoming more optimistic about the future prospects of the economy. Default is inevitably harsher when a bad shock occurs after periods of good news. Commonly used measures to forecast risk in the system, such as VIX, fail to capture this phenomenon, as they are also biased by optimistic expectations. Competition among financial institutions for better relative performance exacerbates the boom-bust cycle. We explore the relative advantages of alternative regulations in reducing financial fragility, and suggest a novel criterion for improvement of aggregate welfare.
    Date: 2011–09

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.