New Economics Papers
on Banking
Issue of 2012‒03‒14
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Relationship lending in a financial turmoil By Giorgio Gobbi; Enrico Sette
  2. How do banks respond to increased funding uncertainty? By Ritz, R. A.
  3. Fiscal sustainability in the presence of systemic banks: the case of EU countries By Agnès Bénassy-Quéré; Guillaume Roussellet
  4. The Home Bias and the Credit Crunch: A Regional Perspective By Andrea Filippo Presbitero; Gregory F. Udell; Alberto Zazzaro
  5. Credit at Times of Stress: Latin American Lessons from the Global Financial Crisis - Working Paper 289 By Liliana Rojas-Suarez and Carlos Montoro
  6. Macro-Prudential Approaches to Banking Regulation : Perspectives of Selected Asian Central Banks By Reza Siregar
  7. Credit Crunches, Asset Prices and Technological Change By Luis Araujo; Raoul Minetti
  8. ELA, Promissory Notes and All That: The Fiscal Costs of Anglo Irish Bank By Karl Whelan
  9. Improving Classifier Performance Assessment of Credit Scoring Models By Raffaella Calabrese
  10. Equity-Holding Institutional Lenders: Do They Receive Better Terms? By Lim, Jongha; Minton, Bernadette A.; Weisbach, Michael S.
  11. The financial crisis and the pricing of interest rates in the Irish mortgage market: 2003-2011 By Goggin, Jean; Holton, Sarah; Kelly, Jane; Lydon, Reamonn; McQuinn, Kieran
  12. Forecasting Value-at-Risk Using Block Structure Multivariate Stochastic Volatility Models By Manabu Asai; Massimiliano Caporin; Michael McAleer

  1. By: Giorgio Gobbi (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: This paper sheds new light on the value of relationship lending by studying whether, after Lehman's default, banks provided a steadier flow of credit and charged lower interest rates, to those firms they established a closer relation with. By exploiting the presence of multiple banking relationships, we are able to control for firms' and banks' unobserved characteristics. Results show that credit growth has been higher if: i) the lending relation was longer; ii) the distance between the bank and the firm shorter; iii) the bank held a larger share of total credit. Similarly, banks increased the cost of credit less to firms they had a longer relation with and they were closer to. We also explore whether the eÏect of relationship lending depended upon bank or firm characteristics, or on the concentration of the local credit market. Finally, we test whether the eÏect of relationship lending changed during the crisis with respect to a pre-crisis period.
    Keywords: cost of credit, credit supply, financial crisis, relationship lending
    Date: 2012–03
  2. By: Ritz, R. A.
    Abstract: This paper presents a simple model of risk-averse banks that face uncertainty over funding conditions in the money market. It shows that increased funding uncertainty: (i) creates risk-based loan-deposit synergies, (ii) often causes banks' lending volumes and their profitability to decline, (iii) can explain more intense competition for retail deposits (including deposits turning into a "loss leader"), and (iv) typically dampens the rate of pass-through from changes in the central bank's policy rate to market interest rates. These results can explain some elements of commercial banks' behaviour and the reduced effectiveness of monetary policy during the 2007/9 financial crisis.
    Keywords: Bank lending, interbank market, interest rate pass-through, loan-to-deposit ratio, loan-deposit synergies, loss leader, monetary policy
    JEL: D40 E43 G21
    Date: 2012–03–07
  3. By: Agnès Bénassy-Quéré; Guillaume Roussellet
    Keywords: Fiscal sustainability, systemic banking risk, off-balance sheet liabilities
    JEL: H21 H23 J41 A A A A
    Date: 2012–03
  4. By: Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Gregory F. Udell (Kelly School of Business, Indiana University); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: A major policy issue is whether troubles in the banking system re ected in the bankruptcy of Lehman Brothers in September 2008 have spurred a credit crunch and, if so, how and why its severity has been different across markets and firms. In this paper, we tackle this issue by looking at the Italian case. We take advantage of a dataset on a large sample of manufacturing firms, observed quarterly between January 2008 and September 2009. Thanks to detailed information about loan applications and lending decisions, we are able to identify the occurrence of a credit crunch in Italy which has been found to be harsher in provinces with a large share of branches owned by distantly-managed banks. Inconsistent with the flight to quality hypothesis, however, we do not find evidence that economically weaker and smaller firms suffered more during the crisis period than during tranquil periods. By contrast, we find that large and healthy firms, the segment of borrowers which, according to theoretical predictions, are cream-skimmed by distantly-headquartered banks, were more intensely hit by the credit tightening in functionally distant credit markets than in the ones populated by less distant banks. This last result is consistent with the hypothesis of a home bias on the part of nationwide banks.
    Keywords: Banking, Credit crunch, Distance, Flight to quality, Home bias
    JEL: F33 F34 F35 O11
    Date: 2012–03
  5. By: Liliana Rojas-Suarez and Carlos Montoro
    Abstract: The financial systems in emerging market economies during the 2008–09 global financial crisis performed much better than in previous crisis episodes, albeit with significant differences across regions. For example, real credit growth in Asia and Latin America was less affected than in Central and Eastern Europe. This paper identifies the factors at both the country and the bank levels that contributed to the behavior of real credit growth in Latin America during the global financial crisis. The resilience of real credit during the crisis was highly related to policies, measures and reforms implemented in the pre-crisis period. In particular, we find that the best explanatory variables were those that gauged the economy’s capacity to withstand an external financial shock. Key were balance sheet measures such as the economy’s overall currency mismatches and external debt ratios (measuring either total debt or short-term debt). The quality of pre-crisis credit growth mattered as much as its rate of expansion. Credit expansions that preserved healthy balance sheet measures (the “quality” dimension) proved to be more sustainable. Variables signalling the capacity to set countercyclical monetary and fiscal policies during the crisis were also important determinants. Moreover, financial soundness characteristics of Latin American banks, such as capitalization, liquidity and bank efficiency, also played a role in explaining the dynamics of real credit during the crisis. We also found that foreign banks and banks which had expanded credit growth more before the crisis were also those that cut credit most. The methodology used in this paper includes the construction of indicators of resilience of real credit growth to adverse external shocks in a large number of emerging markets, not just in Latin America. As additional data become available, these indicators could be part of a set of analytical tools to assess how emerging market economies are preparing themselves to cope with the adverse effects of global financial turbulence on real credit growth.
    Keywords: Latin America, credit growth, global financial crisis, emerging markets, financial resilience, vulnerability indicators
    JEL: E65 G2
    Date: 2012–02
  6. By: Reza Siregar (Asian Development Bank Institute (ADBI))
    Abstract: New lessons, challenges, and debates have emerged from the subprime crisis in the United States. While the macroeconomic orientation is not new and has always been among the classic toolkits of central banks for ensuring financial stability, the current explicit articulation and specification of such a tool as a global standard is new. The objective of this study is to review and analyze the steps taken by the central banks and monetary authorities of select Asian countries to strengthen their prudential regulations, mainly the macro-prudential component of such regulations.
    Keywords: Banking Regulation, Macro-prudential approache, prudential regulations, Financial Stability, central banks, Asia
    JEL: E52 E58 G28
    Date: 2011–11
  7. By: Luis Araujo (Michigan State University and SÆo Paulo School of EconomicsV); Raoul Minetti (Michigan State University)
    Abstract: We investigate the effects of a credit crunch in an economy where firms can operate a mature technology or restructure their activity and adopt a new technology. We show that firms' collateral and credit relationships ease firms' access to credit and investment but can also inhibit firms' restructuring. When this occurs, negative collateral or productivity shocks and the resulting drop in the price of collateral assets squeeze collateral-poor firms out of the credit market but foster the restructuring of collateral-rich firms. We characterize conditions under which such an increase in firms' restructuring occurs within existing credit relationships or through their breakdown. The analysis reveals that the credit and asset market policies adopted during the recent credit crunch can promote investment but might also slow down a process of Shumpeterian restructuring in the credit market.
    Keywords: Aggregate Restructuring, Collateral, Credit Crunch, Credit Relationships
    JEL: E44
    Date: 2012–03
  8. By: Karl Whelan (University College Dublin)
    Abstract: This is a briefing paper the author distributed to the Irish parliamentary committee responsible for finance and public expenditure. It describes the balance sheet of Irish Bank Resolution Corporation, the organisation that was formed by combining Anglo Irish Bank and Irish Nationwide Buildings Society. The nature of the long-run cost to the Irish state of taking over the liabilities of these institutions is outlined and suggestions are made for reducing these costs.
    Keywords: Banking Crises, Anglo Irish Bank, Emergency Liquidity Assistance, European Central Bank
    Date: 2012–02–28
  9. By: Raffaella Calabrese (Dynamics Lab, Geary Institute, University College Dublin)
    Abstract: In evaluating credit scoring predictive power it is common to use the Re-ceiver Operating Characteristics (ROC) curve, the Area Under the Curve(AUC) and the minimum probability-weighted loss. The main weakness of the rst two assessments is not to take the costs of misclassication errors into account and the last one depends on the number of defaults in the credit portfolio. The main purposes of this paper are to provide a curve, called curve of Misclassication Error Loss (MEL), and a classier performance measure that overcome the above-mentioned drawbacks. We prove that the ROC dominance is equivalent to the MEL dominance. Furthermore, we derive the probability distribution of the proposed predictive power measure and we analyse its performance by Monte Carlo simulations. Finally, we apply the suggested methodologies to empirical data on Italian Small and Medium Enterprisers.
    Keywords: Performance Assessment, Credit Scoring Modules, Monte Carlo simulations, Italian Enterprisers
    Date: 2012–02–20
  10. By: Lim, Jongha (University of MO); Minton, Bernadette A. (OH State University); Weisbach, Michael S. (OH State University)
    Abstract: The past decade has seen significant changes in the structure of the corporate lending market, with non-commercial bank institutional investors playing larger roles than they historically have played. In addition, non-commercial bank institutional lenders are often equity holders in their borrowing firms. In our sample of 11,137 tranches of institutional "leveraged" loans, 2,008 (18%) have a non-commercial bank institution that also owns at least 0.1% of the firm's equity. Such "dual holder" loan tranches have higher spreads than otherwise similar loan tranches without equity holder participation. The dual holder premium is present for both revolver and term loans, and exists within all non-investment grade credit rating classes. Contrary to risk-based explanations of this finding, dual holder tranches are priced with premiums relative to other tranches of the same loan package. Dual holding premiums are higher when the equity-holder's stake is larger, when the dual-holder's share in the loan is larger, and when the equity holder is a hedge fund or a private equity fund. These premiums likely represent additional compensation to dual holders for providing capital to firms when the firms are having difficulty raising capital otherwise.
    JEL: G21 G30 G32
    Date: 2012–02
  11. By: Goggin, Jean (Central Bank of Ireland); Holton, Sarah (Central Bank of Ireland); Kelly, Jane (Central Bank of Ireland); Lydon, Reamonn (Central Bank of Ireland); McQuinn, Kieran (Central Bank of Ireland)
    Abstract: This paper examines the changing manner in which Irish financial institutions set their variable interest rates over the period 2003 - 2011. In particular, the onset of the financial crisis clearly results in a break in the pass-through relationship between market rates and variable rates at the end of 2008 in the Irish mortgage market. Until the end of 2008 variable rates for all lenders closely followed changes in the ECB’s policy rates, short-term wholesale rates and tracker rate mortgages. Thereafter, the relationship breaks down, in part due to banks’ increased market funding costs. It appears that some lenders with higher mortgage arrears rates and a greater proportion of tracker rate loans on their books exhibit higher variable rates. After controlling for these factors and additional funding costs, most of the divergence between banks’ variable rates is explained, but there are some exceptions. There is also some evidence of asymmetric adjustment in rate setting behaviour: that is, rates tend to adjust slowly when they are above the long-run predicted level but more quickly when they are below this level. This asymmetric adjustment behaviour appears to increase in the post-2008 period.
    Date: 2012–03
  12. By: Manabu Asai; Massimiliano Caporin; Michael McAleer (University of Canterbury)
    Abstract: Most multivariate variance or volatility models suffer from a common problem, the “curse of dimensionality”. For this reason, most are fitted under strong parametric restrictions that reduce the interpretation and flexibility of the models. Recently, the literature has focused on multivariate models with milder restrictions, whose purpose was to combine the need for interpretability and efficiency faced by model users with the computational problems that may emerge when the number of assets is quite large. We contribute to this strand of the literature proposing a block-type parameterization for multivariate stochastic volatility models. The empirical analysis on stock returns on US market shows that 1% and 5 % Value-at-Risk thresholds based on one-step-ahead forecasts of covariances by the new specification are satisfactory for the period includes the global financial crisis.
    Keywords: block structures; multivariate stochastic volatility; curse of dimensionality; leverage effects; multi-factors; heavy-tailed distribution
    JEL: C32 C51 C10
    Date: 2012–03–01

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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