New Economics Papers
on Banking
Issue of 2012‒04‒23
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Securitization and Optimal Retention under Moral Hazard By Sara Malekan; Georges Dionne
  2. Measuring financial inclusion : the Global Findex Database By Demirguc-Kunt, Asli; Klapper, Leora
  3. Bank Risk and Non-Interest Income Activities in the Indonesian Banking Industry By Wahyu Yuwana Hidayat; Makoto Kakinaka; Hiroaki Miyamoto
  4. Rapid credit growth and international credit: Challenges for Asia By Stefan Avdjiev; Robert McCauley; Patrick McGuire
  5. International banking standards in emerging markets: testing the adaptation thesis in the European Union By Zdenìk Kudrna; Juraj Medzihorsky
  6. Reserves, Liquidity and Money: An Assessment of Balance sheet Policies By Jagjit S. Chadha; Luisa Corrado; Jack Meaning
  7. Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking By Gianni De Nicoló; Marcella Lucchetta; Andrea Gamba
  8. Revisiting Risk-Weighted Assets By Vanessa Le Leslé; Sofiya Avramova
  9. Bank Stress Tests as an Information Device for Emerging Markets: The Case of Russia By Zuzana Fungáèová; Petr Jakubík
  10. The impact of network inhomogeneities on contagion and system stability By Hübsch, Arnd; Walther, Ursula
  11. Bank Efficiency and Client Firms' Export Behavior: Evidence from firm-bank match-level data By INUI Tomohiko; MIYAKAWA Daisuke; SHOJI Keishi
  12. Going forward financially: credit unions as an alternative to commercial banks By Klinedinst, Mark
  13. Banking crises and sudden stops: What could IMF do to assist? By Chang, Chia-Ying

  1. By: Sara Malekan; Georges Dionne
    Abstract: Securitization is one of the most important innovations in financial markets. It is a process of converting illiquid loans that cannot be sold readily to third-party investors into liquid securities and selling them to dispersed investors. As a result, securitization improves liquidity in capital markets by allowing originators to remove the issued loans from its balance sheet and use the proceeds for other purposes or even to originate new loans. In spite of all its advantages, securitization is often suspected of being one of the main reasons for the recent financial crisis. One concern that is frequently raised in the literature is that securitization leads to moral hazard in lender screening and monitoring. By selling loans to investors and removing them from their books, banks have a lesser incentive to carefully evaluate and monitor borrowers’ credit quality to ensure that they can repay the loans, because the risk of delinquencies falls on investors rather than lenders. One problem in the literature is that the analysis of securitization is very general and suffers from a lack a specific security design analysis under asymmetric information. We address the moral hazard problem using a principal-agent model where the investor is the principal and the lender is the agent. We show that the optimal contract must contain a retention clause in the presence of moral hazard.
    Keywords: Securitization, optimal retention, moral hazard, principal-agent model, default, screening monitoring
    JEL: D81 D82 D86 G24
    Date: 2012
  2. By: Demirguc-Kunt, Asli; Klapper, Leora
    Abstract: This paper provides the first analysis of the Global Financial Inclusion (Global Findex) Database, a new set of indicators that measure how adults in 148 economies save, borrow, make payments, and manage risk. The data show that 50 percent of adults worldwide have an account at a formal financial institution, though account penetration varies widely across regions, income groups and individual characteristics. In addition, 22 percent of adults report having saved at a formal financial institution in the past 12 months, and 9 percent report having taken out a new loan from a bank, credit union or microfinance institution in the past year. Although half of adults around the world remain unbanked, at least 35 percent of them report barriers to account use that might be addressed by public policy. Among the most commonly reported barriers are high cost, physical distance, and lack of proper documentation, though there are significant differences across regions and individual characteristics.
    Keywords: Access to Finance,Emerging Markets,Banks&Banking Reform,Economic Theory&Research,E-Business
    Date: 2012–04–01
  3. By: Wahyu Yuwana Hidayat (Bank Indonesia); Makoto Kakinaka (International University of Japan); Hiroaki Miyamoto (International University of Japan)
    Abstract: The recent trend of product diversification in the Indonesian banking industry underscores the importance of non-interest income activities. This study examines the relationship between product diversification and bank risk over the period of 2002-2008. Our analysis shows clear evidence that the effect of product diversification on bank risk depends highly on the bankfs asset size. Specifically, the degree of product diversification is negatively associated with bank risk for small-sized banks. Conversely, the degree of product diversification is positively related to bank risk for large-sized banks. This finding suggests that deregulation encouraging banks to become more involved in non-traditional activities may have an adverse effect on the overall banking system where large-sized banks are playing a significant role in Indonesia.
    Keywords: Bank risk, Product diversification, Non-interest income activities
    Date: 2012–04
  4. By: Stefan Avdjiev; Robert McCauley; Patrick McGuire
    Abstract: Very low interest rates in major currencies have raised concerns over international credit flows to robustly growing economies in Asia. This paper examines three components of international credit and highlights several of the policy challenges that arise in constraining such credit. Our empirical findings suggest that international credit enables domestic credit booms in emerging markets. Furthermore, we demonstrate that higher levels of international credit on the eve of a crisis are associated with larger subsequent contractions in overall credit and real output. In Asia today, international credit generally is small in relation to overall credit - as was not the case before the Asian crisis. So even though dollar credit is growing very rapidly in some Asian economies, its contribution to overall credit growth has been modest outside the more dollarised economies of Asia.
    Keywords: international credit, credit booms, cross-border lending, emerging markets
    Date: 2012–04
  5. By: Zdenìk Kudrna (Austrian Academy of Sciences, Vienna); Juraj Medzihorsky (Central European University, Budapest)
    Abstract: This paper compares the bank regulatory regimes in the enlarged European Union in order to test the thesis claiming that international banking standards need to be adapted to emerging market circumstances. On the basis of World Bank surveys, we compile structural indices for the 10 post-communist EU members (emerging markets) as well as 17 advanced EU economies and compare them using Bayesian statistical procedures. Our findings show that there were systematic and significant differences, two-thirds of which can be explained by 8 of the 52 structural characteristics. The new member states regulatory regimes are more rule-based and leave less discretion for authorities, which is consistent with the thesis that the emerging market regulatory regimes — including those within the EU — needed to compensate for limited regulatory resources and higher political and economic volatility. Hence, the new generation of international banking standards should recognize these limitations.
    Keywords: banking, emerging markets, European Union, international standards, regulation
    JEL: G21 K23 P51
    Date: 2012–03
  6. By: Jagjit S. Chadha; Luisa Corrado; Jack Meaning
    Abstract: The financial crisis and its aftermath has stimulated a vigorous debate on the use of macro-prudential instruments for both regulating the banking system and for providing additional tools for monetary policy makers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for offsetting the lower zero bound. Central banks have thus been reminded as to the effectiveness of extended open market operations as a supplementary tool of monetary policy. These tools are essentially fiscal instruments, as they issue central bank liabilities backed by fiscal transfers. And so having written these tools into the fiscal budget constraint, we can examine the consequences of these operations within the context of a micro-founded macroeconomic model of banking and money. We can mimic the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role of reserves for bond and capital swaps in stabilising the economy and also the impact of changing the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilise the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity and hence allows other .nancial spreads to move less violently over the cycle to compensate.
    Keywords: non-conventional monetary interest on reserves; monetary and fiscal policy instruments; Basel III
    JEL: E31 E40 E51
    Date: 2012–04
  7. By: Gianni De Nicoló; Marcella Lucchetta; Andrea Gamba
    Abstract: This paper studies the impact of bank regulation and taxation in a dynamic model with banks exposed to credit and liquidity risk. We find an inverted U-shaped relationship between capital requirements and bank lending, efficiency, and welfare, with their benefits turning into costs beyond a certain requirement threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. The costs of high capital and liquidity requirements represent a lower bound on the benefits of these regulations in abating systemic risks. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities. 
    Keywords: Bank regulations , Banking , Capital , Credit risk , Economic models , Liquidity , Taxation ,
    Date: 2012–03–08
  8. By: Vanessa Le Leslé; Sofiya Avramova
    Abstract: In this paper, we provide an overview of the concerns surrounding the variations in the calculation of risk-weighted assets (RWAs) across banks and jurisdictions and how this might undermine the Basel III capital adequacy framework. We discuss the key drivers behind the differences in these calculations, drawing upon a sample of systemically important banks from Europe, North America, and Asia Pacific. We then discuss a range of policy options that could be explored to fix the actual and perceived problems with RWAs, and improve the use of risk-sensitive capital ratios.
    Keywords: Asia and Pacific , Bank regulations , Bank supervision , Banking sector , Capital , Credit risk , Cross country analysis , Europe , North America , Risk management ,
    Date: 2012–03–28
  9. By: Zuzana Fungáèová (Bank of Finland, Institute for Economies in Transition (BOFIT)); Petr Jakubík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    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: G28 P34 G21
    Date: 2012–02
  10. By: Hübsch, Arnd; Walther, Ursula
    Abstract: This work extends the contagion model introduced by Nier et al. (2007) to inhomogeneous networks. We preserve the convenient description of a financial system by a sparsely parameterized random graph but add several relevant inhomogeneities, namely well-connected banks, financial institutions with disproportionately large interbank assets, and big banks focusing on wholesale and retail customers. These extensions significantly enhance the model's generality as they reflect inhomogeneities as found in reality with a potentially decisive impact on system stability. Whereas well-connected banks and big retail banks have only a surprisingly modest impact, we find a significantly enhanced contagion risk in networks containing institutions with disproportionately large interbank assets. Moreover, we show that these effects can be partly compensated by a suitable regulatory response which demands additional net worth buffers for banks with above average volume of interbank assets. The stabilising effect is most notably achieved by a pure redistribution of equity capital without increasing its total amount. --
    Keywords: capital buffers,contagion,contagious defaults,inhomogeneities,network models,financial system stability
    JEL: C63 G21 G28
    Date: 2012
  11. By: INUI Tomohiko; MIYAKAWA Daisuke; SHOJI Keishi
    Abstract: This paper empirically studies the impact of banks' efficiency on their client firms' export behavior. Our empirical analysis shows that the marginal impact of the total factor productivity (TFP) of cash-flow constrained firms to the extensive margin of exports increases as the efficiency of top lender banks improves. This channel is important for initiating exports but is neither for sustaining the export status nor the intensive margin. It implies that the main role of banks is to help prominent firms cover the fixed cost associated with the start-up of exports. These results also imply that it is necessary to relate various firm dynamics to the detailed characteristics of the banks having relationships with the firms.
    Date: 2012–04
  12. By: Klinedinst, Mark
    Abstract: The global financial meltdown brought to light a number of weaknesses in the U.S. financial system. Not all financial institution types will be taking large sums of taxpayer money to address their crippling decisions. Credit unions in the U.S. represent a type of financial cooperative that will probably not take any taxpayer money directly due to their structure and prudential oversight. Commercial banks, especially the megabanks, are likely to see even more bailouts in the future unless structural weaknesses are addressed in the clarifications as part of the enforcement of the Dodd-Frank Act. Using a unique panel data set on U.S. commercial banks, thrifts and credit unions from 1994 through 2010 (over 300,000 observations) performance metrics on a number of dimensions point to strengths and weaknesses of the various financial institutional forms. Credit unions also have had far fewer adjustable rate mortgages and mortgage backed securities as a percent of their portfolio. Robust estimators to correct for potential endogeneity are used to analyze the ROA differentials between different institutional forms and portfolios. When controlling for size, region and portfolios credit unions are often estimated to have a better ROA. Institutions of under 50 million dollars, about 50 percent of the total sample, show credit unions having higher efficiency in that they control more assets per dollar spent on salaries than commercial and savings banks.
    Keywords: credit unions; banks; cooperative; defaults; net charge-offs; return on assets
    JEL: G14 P13 L21 P00 G21
    Date: 2012–04–13
  13. By: Chang, Chia-Ying
    Abstract: Along the studies suggesting IMF to promote private capital flows, this paper sheds light on the links of banking crisis and sudden stops and provides suggestions which are flexible and more specific for countries in various situations of sudden stops. In this overlapping generation framework in an open economy with international credit markets, both the default risks of firms’ loan repayment, and the possibilities of bank runs are considered. As a result, there are good and bad equilibriums, depending on whether bank runs would occur in the lifetime. In the four bad equilibrium discussed in the paper, sudden stops may be unnecessary or unavoidable coinside with the expectation of bank runs, which may or may not occur as expected. There are bad equilibriums in which sudden stops are unnecessary. These are the cases when IMF’s assistance could prevent sudden stops, and the repayment to IMF’s short-term lending facilities can be guaranteed. In the bad equilibriums when bank runs are unavoidable and when sudden stops cannot be prevented and may last for a long period of time, it could be very costly to assist countries in such equilibrium without certain policies becoming effective. Assisting several countries under this circumstances all together could jeopardize IMF’s situation. These findings are consistent with those in [Eichengreen, Guptam and Mody (2006)], and the suggestions for countries in various situations are more specific.
    Keywords: bank runs, international capital flows, credit markets, sudden stops, IMF,
    Date: 2012–03–16

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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