New Economics Papers
on Banking
Issue of 2012‒04‒03
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Regulation, credit risk transfer with CDS, and bank lending By Pausch, Thilo; Welzel, Peter
  2. Aggregate Risk and the Choice between Cash and Lines of Credit By Acharya, Viral V; Almeida, Heitor; Campello, Murillo
  3. Do bank characteristics influence the effect of monetary policy on bank risk? By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  4. Essays on Credit Markets and Banking By Holmberg, Ulf
  5. The impact of the recent financial crisis on bank loan interest rates and guarantees. By Giorgio Calcagnini; Fabio Farabullini; Germana Giombini
  6. Financial intermediaries in an estimated DSGE model for the United Kingdom By Villa, Stefania; Yang, Jing
  7. Executive board composition and bank risk taking By Berger, Allen N.; Kick, Thomas; Schaeck, Klaus
  8. On the Non-Exclusivity of Loan Contracts: An Empirical Investigation By Degryse, Hans; Ioannidou , Vasso; von Schedvin, Erik
  9. The business cycle implications of banks’ maturity transformation By Andreasen, Martin; Ferman, Marcelo; Zabczyk, Pawel
  10. Stress testing German banks against a global cost-of-capital shock By Duellmann, Klaus; Kick, Thomas
  11. Second-tier Government Banks and Access to Credit: Micro-Evidence from Colombia By Marcela Eslava; Alessandro Maffioli; Marcela Meléndez Arjona
  12. CISS - a composite indicator of systemic stress in the financial system By Dániel Holló; Manfred Kremer; Marco Lo Duca
  13. Maturity shortening and market failure By Thierfelder, Felix
  14. CREDIT CARD DUES By Fennee Chong Author_Email:
  16. Identifying risks in emerging market sovereign and corporate bond spreads By Zinna, Gabriele
  17. The nature of financial and real business cycles: The great moderation and banking sector pro cyclicality By Balázs Égert; Douglas Sutherland
  18. Implicit intraday interest rate in the UK unsecured overnight money market By Jurgilas, Marius; Zikes, Filip
  19. Are banks affected by their holdings of government debt? By Chiara Angeloni; Guntram B. Wolff
  20. Are financial benefits of financial globalization questionable until greater domestic financial development has taken place? By Simplice A, Asongu
  21. Interest rates in community-managed microfinance: How the poorest Africans earn sixty percent return on their savings By Rasmussen, Ole Dahl

  1. By: Pausch, Thilo; Welzel, Peter
    Abstract: We integrate Basel II (and III) regulations into the industrial organization approach to banking and analyze the interaction between capital adequacy regulation and credit risk transfer with credit default swaps (CDS) including its effect on lending behavior and risk sensitivity of a risk-neutral bank. CDS contracts may be used to hedge a bank's credit risk exposure at a certain (potentially distorted) price. Regulation is found to induce the risk-neutral bank to behave in a more risk-sensitive way: Compared to a situation without regulation the optimal volume of loans decreases more as the riskiness of loansincreases. CDS trading is found to interact with the former effect when regulation accepts CDS as an instrument to mitigate credit risk. Under the substitution approach in Basel II (and III) a risk-neutral bank will over-, fully or under-hedge its total exposure to credit risk conditional on the CDS price being downward biased, unbiased or upward biased. However, the substitution approach weakens the tendency to over-hedge or under-hedge when CDS markets are biased. This promotes the intention of the Basel II (and III) regulations to 'strengthen the soundness and stability of banks'. --
    Keywords: Banking,regulation,credit risk
    JEL: G21 G28
    Date: 2012
  2. By: Acharya, Viral V; Almeida, Heitor; Campello, Murillo
    Abstract: We model corporate liquidity policy and show that aggregate risk exposure is a key determinant of how firms choose between cash and bank credit lines. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get credit lines and opt for cash in spite of higher opportunity costs and liquidity premium. Likewise, in times when aggregate risk is high, firms rely more on cash than on credit lines. We verify these predictions empirically. Cross-sectional analyses show that firms with high exposure to systematic risk have a higher ratio of cash to credit lines and face higher spreads on their lines. Time-series analyses show that firms' cash reserves rise in times of high aggregate volatility and in such times credit lines initiations fall, their spreads widen, and maturities shorten. Also consistent with the mechanism in the model, we find that exposure to undrawn credit lines increases bank-specific risks in times of high aggregate volatility.
    Keywords: asset beta; bank lines of credit; cash holdings; liquidity management; loan maturity; loan spreads; systemic risk
    JEL: E22 E5 G21 G31 G32
    Date: 2012–03
  3. By: Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. JEL Classification: E44, E52, G21.
    Keywords: Risk-taking channel, monetary policy, credit crisis, bank characteristics.
    Date: 2012–03
  4. By: Holmberg, Ulf (Department of Economics, Umeå University)
    Abstract: This thesis consists of four self-contained papers related to banking, credit markets and financial stability. Paper [I] 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. Paper [II] derives an econometric disequilibrium model for time series data. This is done by error correcting the supply of some good. The model separates between a continuously clearing market and a clearing market in the long-run such that we are able to obtain a novel test of clearing markets. We apply the model to the Swedish market for short-term business loans, and find that this market is characterized by a long-run nonmarket clearing equilibrium. Paper [III] 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 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. In Paper [IV], we argue that the practice used in the valuation of a portfolio of assets is important for the calculation of the Value at Risk. In particular, a seller seeking to liquidate a large portfolio may not face horizontal demand curves. We propose a partially new approach for incorporating this fact in the Value at Risk and Expected Shortfall measures and in an empirical illustration, we compare it to a competing approach. We find substantial differences.
    Keywords: financial stability; credit market; banking; agent based model; simulations; disequilibrium; clearing market; business cycle; risk; organization
    JEL: C12 C13 C22 C51 C53 C63 D40 D53 E30 E43 E51 G00 G10 G21 G32
    Date: 2012–03–28
  5. By: Giorgio Calcagnini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Fabio Farabullini (Bank of Italy); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")
    Abstract: The paper analyzes the role of guarantees on loan interest rates before and during the recent financial crisis in Italian firm financing. The paper improves on existing literature by distinguishing between real and personal guarantees. Further, the paper investigates the potential different role of guarantees in the bank-borrower relationship during the recent financial crisis. This paper draws from individual Italian bank and firm data taken from the Banks’ Supervisory Reports to the Bank of Italy and the Central Credit Register over the period 2006-2009. Our analysis demonstrates that collateral affects the cost of credit of Italian firms by systematically reducing the interest rate of secured loans, while personal guarantees increase it. These effects are amplified during the crisis. Furthermore, guarantees are a more powerful instrument for ex-ante riskier borrowers than for safer borrowers. Indeed, riskier borrowers obtain significantly lower interest rates on secured loans than interest rate they would be charged on unsecured loans.
    Keywords: Financial crisis, Guarantees, Multilevel model.
    JEL: E43 G21 D82
    Date: 2012
  6. By: Villa, Stefania (Birkbeck College, University of London); Yang, Jing (Bank for International Settlements)
    Abstract: Gertler and Karadi combined financial intermediation and credit policy in a DSGE framework. We estimate their model with UK data using Bayesian techniques. To validate the fit, we evaluate the model’s empirical properties. Then we analyse the transmission mechanism of the shocks, set to produce a downturn. Finally, we examine the empirical importance of nominal, real and financial frictions and of different shocks. We find that banking friction seems to play an important role in explaining the UK business cycle. Moreover, the banking sector shock seems to explain about half of the fall in real GDP in the recent crisis. A credit supply shock seems to account for most of the weakness in bank lending.
    Keywords: Financial friction; DSGE; Bayesian estimation
    JEL: C11 E44
    Date: 2011–07–13
  7. By: Berger, Allen N.; Kick, Thomas; Schaeck, Klaus
    Abstract: Little is known about how socioeconomic characteristics of executive teams affect corporate governance in banking. Exploiting a unique dataset, we show how age, gender, and education composition of executive teams affect risk taking of financial institutions. First, we establish that age, gender, and education jointly affect the variability of bank performance. Second, we use difference-in-difference estimations that focus exclusively on mandatory executive retirements and find that younger executive teams increase risk taking, as do board changes that result in a higher proportion of female executives. In contrast, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines. --
    Keywords: Banks,executives,risk taking,age,gender,education
    JEL: G21 G34 I21 J16
    Date: 2012
  8. By: Degryse, Hans (Department of Finance); Ioannidou , Vasso (Department of Fin); von Schedvin, Erik (Research Department, Central Bank of Sweden)
    Abstract: A string of theoretical papers shows that the non-exclusivity of credit contracts generates important negative contractual externalities. Employing a unique dataset, we identify how these externalities affect the supply of credit. Using internal information on a creditor’s willingness to lend, we find that a creditor reduces its credit supply when a borrower obtains a loan at another creditor (an “outside loan”). Consistent with the theoretical literature, the effect is more pronounced the larger the outside loans and it is muted if the initial creditor’s existing and future loans retain seniority over the outside loans and are secured with valuable collateral.
    Keywords: non-exclusivity; contractual externalities; credit supply; debt seniority
    JEL: G21 G34 L13 L14
    Date: 2012–02–01
  9. By: Andreasen, Martin (Bank of England); Ferman, Marcelo (LSE); Zabczyk, Pawel (Bank of England)
    Abstract: This paper develops a DSGE model in which banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. We show within a real business cycle framework that maturity transformation in the banking sector in general attenuates the output response to a technological shock. Implications of long-term nominal contracts are also examined in a New Keynesian version of the model, where we find that maturity transformation reduces the real effects of a monetary policy shock.
    Keywords: Banks; DSGE model; financial frictions; firm heterogeneity; maturity transformation
    JEL: E22 E32 E44 G21
    Date: 2012–03–19
  10. By: Duellmann, Klaus; Kick, Thomas
    Abstract: This paper introduces a stress test of the corporate credit portfolios of 24 large German banks by a two-stage approach: First, a macro-econometric model is used to forecast the impact of a substantial increase of the user cost of business capital for firms worldwide on three particularly export-oriented industry sectors in Germany. Second, the impact of this economic multi-sector stress on banks' credit portfolios is captured by a state-of-theart CreditMetrics-type portfolio model with sector-dependant unobservable risk factors as drivers of the systematic risk. The German credit register provides us with access to highly granular risk information on loan volumes and banks' internal estimates of default probabilities which is key for an accurate assessment of the impact of the stress scenario. We find that the increase of the capital charge for the unexpected loss needs to be considered together with the increase in banks' expected losses in order to assess the change of banks' capital ratios. We also confirm that highly granular information on the level of borrowerspecific probabilities of default has a significant impact on the outcome of the stress test. --
    Keywords: Asset correlation,portfolio credit risk,macroeconomic stress tests
    JEL: G21 G33 C13 C15
    Date: 2012
  11. By: Marcela Eslava; Alessandro Maffioli; Marcela Meléndez Arjona
    Abstract: Government-owned development banks have often been justified by the need to respond to financial market imperfections that hinder the establishment and growth of promising businesses, and as a result, stifle economic development more generally. However, evidence on the effectiveness of these banks in mitigating financial constraints is still lacking. To fill this gap, this paper analyzes the impact of Bancoldex, Colombia's publicly owned development bank, on access to credit. It uses a unique dataset that contains key characteristics of all loans issued to businesses in Colombia, including the financial intermediary through which the loan was granted and whether the loan was funded with Bancoldex resources. The paper assesses effects on access to credit by comparing Bancoldex loans to loans from other sources and study the impact of receiving credit from Bancoldex on a firm's subsequent credit history. To address concerns about selection bias, it uses a combination of models that control for fixed effects and matching techniques. The findings herein show that credit relationships involving Bancoldex funding are characterized by lower interest rates, larger loans, and loans with longer terms. These characteristics translated into lower average interest rates and larger average loans for firms that used Bancoldex credit. Average loans of Bancoldex' beneficiaries also exhibit longer terms, although this effect can take two years to materialize. Finally, the findings show evidence of a demonstration effect of Bancoldex: beneficiary firms that have access Bancoldex credit are able to significantly expand the number of intermediaries with whom they have credit relationships.
    Keywords: Financial Sector :: Financial Markets, Financial Sector :: Financial Policy, Financial Sector :: Financial Services, Private Sector :: SME, Second-tier development banks, access to credit, impact evaluation, panel data, interest rates, loan size, loan term, demonstration effects
    JEL: C23 G28 H43 O12 O16 O54
    Date: 2012–03
  12. By: Dániel Holló (Magyar Nemzeti Bank, 1054 Szabadság tér 8/9, 1850 Budapest, Hungary.); Manfred Kremer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. JEL Classification: G01, G10, G20, E44.
    Keywords: Financial system, financial stability, systemic risk, financial stress index, macro-financial linkages.
    Date: 2012–03
  13. By: Thierfelder, Felix
    Abstract: Motivated by the financial crisis of 2007-2009 several papers have provided explanations for why liquidity may dry up during market stress. This paper also looks at this issue but focuses on the question as to why the liquidity crunch was not uniform across maturities. As funding pressures were felt particularly severe at longer maturities, central banks saw a high need to provide longer-term liquidity. The paper asks what market failure central banks were addressing by intervening and whether they took on unwarranted credit risk by providing other than ultra-short liquidity. I propose a model in which financial firms' expectations about the availability of longer-term liquidity in the future may affect their investment decisions today, even though they have full access to borrowing at the onset. These investment decisions may in turn impact on the willingness of lenders to provide future long-term liquidity. Central banks, by promising to provide long-term liquidity, can rule out the inefficient rational-expectations equilibrium in which firms choose short-term projects or prefund a future potential liquidity need out of fear of not being able to receive long-term funding in the future. The model shows that firms of high credit quality may be particularly prone to choosing inefficient investment decisions for this very reason. --
    Keywords: Liquidity,Asymmetric Information,Debt maturity
    JEL: D82 G21 G32
    Date: 2012
  14. By: Fennee Chong Author_Email: (Faculty of Business and Management, Universiti Teknologi MARA, Malaysia)
    Keywords: Credit card debt management
    JEL: M0
    Date: 2011–10
  15. By: Debarshi Ghosh Author_Email: (Meghnad Saha Institute of Technology, Kolkata, India); Sukanya Ghosh (Meghnad Saha Institute of Technology, Kolkata, India)
    Keywords: Non-performing assets, Performance indicators, Regulatory compliance, Capital adequacy norms.
    JEL: M0
    Date: 2011–06
  16. By: Zinna, Gabriele (Bank of England)
    Abstract: This study investigates the systematic risk factors driving emerging market (EM) credit risk by jointly modelling sovereign and corporate credit spreads at a global level. We use a multi-regional Bayesian panel VAR model, with time-varying betas and multivariate stochastic volatility. This model allows us to decompose credit spreads and to build indicators of EM risks. We find that indices of EM sovereign and corporate credit spreads differ because of their specific reactions to global risk factors. Following the failure of Lehman Brothers, EM sovereign spreads ‘decoupled’ from the US corporate market. In contrast, EM corporate bond spreads widened in response to higher US corporate default risk. We also find that the response of sovereign bond spreads to the VIX was short-lived. However, both EM sovereign and corporate bond spreads widened in flight-to-liquidity episodes, as proxied by the OIS-Treasury spread. Overall, the model is capable of generating other interesting results about the comovement of sovereign and corporate spreads.
    Keywords: Bayesian econometrics; factor models; emerging markets; credit spreads
    JEL: F31 F34
    Date: 2011–07–13
  17. By: Balázs Égert; Douglas Sutherland
    Abstract: This paper takes a fresh look at the nature of financial and real business cycles in OECD countries using annual data series and shorter quarterly and monthly economic indicators. It first analyses the main characteristics of the cycle, including the length, amplitude, asymmetry and changes of these parameters during expansions and contractions. It then studies the degree of economic and financial cycle synchronisation between OECD countries but also of economic and financial variables within a given country, and gauges the extent to which cycle synchronisation changed over time. Finally, the paper provides some new evidence on the drivers of the great moderation and analyses the banking sector's pro-cyclicality by using aggregate and bank-level data. The main findings show that the amplitude of the real business cycle was becoming smaller during the great moderation, but asset price cycles were becoming more volatile. In part this was linked to developments in the banking sector which tended to accentuate pro-cyclical behaviour.
    Keywords: real business cycles, financial cycles, great moderation, banking system, financial markets
    JEL: E32 E44
    Date: 2012
  18. By: Jurgilas, Marius (Norges Bank); Zikes, Filip (Bank of England)
    Abstract: This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large-value payments system (CHAPS) in 2003-09, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007-09. The key interpretation is that an increase in the implicit intraday interest rate reflects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread.
    Keywords: Interbank money market; intraday liquidity
    JEL: E42 E58 G21
    Date: 2012–03–19
  19. By: Chiara Angeloni; Guntram B. Wolff
    Abstract: The strong relation between sovereign and banking stress is frequently emphasised, especially since the start of the European sovereign debt crisis. This working paper sheds light on the determinants of the link. It studies the stock market performance and the holdings of government debt of the banks stress tested by the European Banking Authority in July and December 2011. A number of results stand out: Banksâ?? holdings of the sovereign bonds of vulnerable countries generally decreased during the period December 2010 to September 2011. The average stock market performance of each countryâ??s banks was very uneven during 2011. The long-term refinancing operation (LTRO) had no material effect on banksâ?? stock market values. Greek debt holdings had an effect on banksâ?? market values in the period July to October 2011 while after October this effect disappeared. Holdings of Italian and Irish debt had a material effect on banksâ?? market value in the period October to December 2011. Holdings of debt of other periphery countries, in particular Spain, were not an issue. The July PSI deal did not substantially affect the risk resulting from holdings of debt other than Greek debt. The location of banks matters for their market value. This highlights the need to form a banking union in the euroarea.
    Date: 2012–03
  20. By: Simplice A, Asongu
    Abstract: Purpose – The issue of which financial initial conditions are necessary to materialize the benefits of financial globalization remains open to debate in the literature. In this paper, we try to put some empirical structure on the concept of financial threshold conditions in order to give policymakers guidance on the Kose et al.(2011) and Henry(2007) hypothesis. Its object is to assess if financial benefits of financial globalization are questionable until greater domestic financial development has taken place in developing countries. Design/methodology/approach – In framing the financial dimension in a more concrete and tractable manner, we probe into the concerns of how domestic financial initial dynamics of depth(economic and financial systems), efficiency(banking and financial systems), activity (banking and financial systems) and size play-out in the financial development benefits of financial globalization. The estimation approach consists of assessing the impact of financial globalization through-out the conditional distributions of domestic financial development dynamics. Findings – The introduction of previously missing financial dimensions into the debate generates a number of important findings. Only financial initial(threshold) conditions in depth and size are necessary to materialize the benefits of financial globalization. Domestic dynamics of efficiency and activity(credit) do not confirm the hypothesis. Practical implications – Depending on the context of sampled countries, the appropriate role of policy has always been either to stem the tide of capital flows or encourage them. Policymakers who have been viewing their challenges exclusively from the later perspective for benefits in growth(finance) might be getting the financial dynamics badly wrong. Originality/value – Blanket financial development policies may not reap the financial benefits of financial globalization until domestic financial dynamics of depth, efficiency, activity and size are critically considered. The introduction of the last three previously missing components in the literature sheds more light on the globalization-development nexus.
    Keywords: Banking; International investment; Financial integration; Development
    JEL: F40 F30 O10 F02 F21
    Date: 2012–03–25
  21. By: Rasmussen, Ole Dahl (Department of Business and Economics)
    Abstract: It is common to see the interest rate on savings in community-managed microfinance being reported as "20-30% annually". Using panel data from 204 groups in Malawi, I show that the right figure is likely to be at least twice this figure. This is due to sector-wide application of non-standard interest rate calculation and unrealistic assumptions about the savings profile in the groups. In the 204 groups, the annual interest rate on savings is 63%. For transparency and accountability donors, politicians and practitioners should change their interest rate calculations. Furthermore, the proposal method will allow practitioners to better monitor group performance.
    Keywords: Microfinance; interest rates; performance monitoring; community-managed microfinance; village savings and loan associations; Malawi; NGO
    JEL: G21 M40 O16 Q13
    Date: 2012–03–29

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