New Economics Papers
on Banking
Issue of 2012‒05‒02
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Evolving Importance of Banks and Securities Markets By Asli Demirguc-Kunt; Erik Feyen; Ross Levine
  2. Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies By Jagjit S. Chadhay; Luisa Corrado; Jack Meaning
  3. Money, credit, monetary policy and the business cycle in the euro area By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  4. Evaluating the impact of fair value accounting on financial institutions: implications for accounting standards setting and bank supervision By Sanders Shaffer
  5. Securitization and the dark side of diversification By Maarten van Oordt
  6. Bank diversification, market structure and bank risk taking: theory and evidence from U.S. commercial banks By Martin Goetz
  7. Transmission of distress in a bank credit network By Yoshiharu Maeno; Satoshi Morinaga; Hirokazu Matsushima; Kenichi Amagai
  8. Systemic risk on different interbank network topologies By Simone LENZU; Gabriele TEDESCHI
  9. Problems with the Measurement of Banking Services in a National Accounting Framework. By Erwin Diewert; Dennis Fixler; Kimberly Zieschang
  10. Estimating financial institutions’ intraday liquidity risk: a Monte Carlo simulation approach By Carlos Léon
  11. The Effects of a Megabank Merger on Firm-Bank Relationships and Borrowing Costs By UCHINO Taisuke; UESUGI Iichiro
  12. Effects of credit scores on consumer payment choice By Fumiko Hayashi; Joanna Stavins
  13. 2012-13 Determinants of bank credit in small open economies: The case of six Pacific Island Countries By Parmendra Sharma, Neelesh Gounder
  14. The Effect of Mortgage Broker Licensing On Loan Origination Standards and Defaults: Evidence from U.S. Mortgage Market 2000-2007 By Lan Shi
  15. How consumers pay: adoption and use of payments By Scott Schuh; Joanna Stavins
  16. Alternative Modeling for Long Term Risk. By Dominique Guegan; Xin Zhao
  17. Modelling macroeconomic effects and expert judgements in operational risk : a Bayesian approach By Holger Capa Santos; Marie Kratz; Franklin Mosquera Munoz
  18. Using Merton model: an empirical assessment of alternatives By Zvika Afik; Ohad Arad; Koresh Galil
  19. Determinants of household access to formal credit in the rural areas of the Mekong Delta, Vietnam By Vuong Quoc, Duy
  20. Inside Liquidity in Competitive Markets By Michiel Bijlsma; Andrei Dubovik; Gijsbert Zwart

  1. By: Asli Demirguc-Kunt; Erik Feyen; Ross Levine
    Abstract: This paper examines the evolving importance of banks and securities markets during the process of economic development. We find that as countries develop economically, (1) the size of both banks and securities markets increases relative to the size of the economy, (2) the association between an increase in economic output and an increase in bank development becomes smaller, and (3) the association between an increase in economic output and an increase in securities market development becomes larger. The results are consistent with theories predicting that as economies develop, the services provided by securities markets become more important for economic activity, while those provided by banks become less important.
    JEL: F3 G1 G2 O16
    Date: 2012–04
  2. By: Jagjit S. Chadhay (School of Economics, Keynes College, University of Kent); Luisa Corrado (Faculty of Economics, University of Rome "Tor Vergata"); Jack Meaning (School of Economics, Keynes College, University of Kent)
    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 o¤setting 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 ?scal 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 financial spreads to move less violently over the cycle to compensate.
    Keywords: non-conventional monetary interest on reserves, monetary and ?scal policy instruments, Basel III.
    JEL: E31 E40 E51
    Date: 2012–04–18
  3. By: Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
    Abstract: This paper uses a data-set including time series data on macroeconomic variables, loans, deposits and interest rates for the euro area in order to study the features of financial intermediation over the business cycle. We find that stylized facts for aggregate monetary and real variables are remarkably similar to what has been found for the US by many studies while we uncover new facts on disaggregated loans and deposits. During the crisis the cyclical behavior of short term interest rates, loans and deposits remain stable but we identify unusual dynamics of longer term loans, deposits and longer term interest rates.
    Keywords: euro area; loans; monetary policy; Money; non-financial corporations
    JEL: C32 C51 E32 E51 E52
    Date: 2012–04
  4. By: Sanders Shaffer
    Abstract: Recent standard-setting activity related to fair value accounting has injected new life into questions of whether fair value provides information useful for decision-making, and whether there might be unintended consequences on financial stability. This discussion paper provides insight into these questions by performing a holistic evaluation of fair value accounting’s usefulness, the potential impacts it may have on financial institutions and any broader macroeconomic effects. Materials reviewed as part of this analysis include public bank regulatory filings, financial statements, and fair value research. The bank supervisory rating approach referred to as CAMELS is used as an organizing principle for the paper. CAMELS serves as a convenient way to both categorize potential impacts of fair value on financial institutions, as well as provide a bank supervisory perspective alongside the more traditional investor’s views on decision usefulness. ; The overall conclusion based on the evidence presented is that implementing fair value accounting more broadly may not necessarily provide financial statement users with more transparent and useful reporting. Additionally, financial stability may be negatively impacted by fair value accounting due to the interconnectedness of financial institutions, markets and the broader economy. The analysis suggests that the current direction in which accounting standard setters and bank regulators are moving may represent a possible solution to address these concerns. U.S. accounting standard setters have recently proposed that fair value, along with enhanced disclosures, be applied in a more targeted manner. Bank regulators are developing new supervisory tools and approaches which may alleviate some of the potential negative impact of fair value on financial stability. Additional policy implications and areas for future study are suggested.
    Keywords: Financial stability ; Accounting ; Bank supervision ; Fair value
    Date: 2012
  5. By: Maarten van Oordt
    Abstract: Diversification by banks affects the systemic risk of the sector. Importantly, Wagner (2010) shows that linear diversification increases systemic risk. We consider the case of securitization, whereby loan portfolios are sliced into tranches with different seniority levels. We show that tranching offers nonlinear diversification strategies, which can reduce the failure risk of individual institutions beyond the minimum level attainable by linear diversification, without increasing systemic risk.
    Keywords: Securitization; Diversification; Systemic risk; Risk management; Tranching
    JEL: G11 G21
    Date: 2012–03
  6. By: Martin Goetz
    Abstract: This paper studies how a bank’s diversification affects its own risk taking behavior and the risk taking of competing, nondiversified banks. By combining theories of bank organization, market structure and risk taking, I show that greater geographic diversification of banks changes a bank’s lending behavior and market interest rates, which also has ramifications for nondiversified competitors due to interactions in the banking market. Empirical results obtained from the U.S. commercial banking sector support this relationship as they indicate that a bank’s risk taking is lower when its competitors have a more diversified branch network. By utilizing the state-specific timing of a removal of intrastate branching restrictions in two identification strategies, I further pin down a causal relationship between the diversification of competitors and a bank’s risk taking behavior. These findings indicate that a bank’s diversification also impacts the risk taking of competitors, even if these banks are not diversifying their activities.
    Keywords: Risk ; Banks and banking ; Bank competition
    Date: 2012
  7. By: Yoshiharu Maeno; Satoshi Morinaga; Hirokazu Matsushima; Kenichi Amagai
    Abstract: The European sovereign debt crisis has impaired many European banks. The distress on the European banks may transmit worldwide, and result in a large-scale knock-on default of financial institutions. This study presents a computer simulation model to analyze the risk of insolvency of banks and defaults in a bank credit network. Simulation experiments reproduce the knock-on default, and quantify the impact which is imposed on the number of bank defaults by heterogeneity of the bank credit network, the equity capital ratio of banks, and the capital surcharge on big banks.
    Date: 2012–04
  8. By: Simone LENZU (Kellogg Business School, Northwestern University, Evanston Illinois); Gabriele TEDESCHI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)
    Abstract: In this paper we develop an interbank market with heterogeneous financial institutions that enter into lending agreements on different network structures. Credit relationships (links) evolves endogenously via a fitness mechanism based on agents performance. By changing the agent's trust on its neighbor's performance, interbank linkages self-organize themselves into very different network architectures, ranging from random to scale-free topologies. We study which network architecture can make the financial system more resilient to random attacks and how systemic risk spreads over the network. To perturb the system, we generate a random attack via a liquidity shock. The hit bank is not automatically eliminated, but its failure is endogenously driven by its incapacity to raise liquidity in the interbank network. Our analysis shows that a random financial network can be more resilient than a scale free one in case of agents' heterogeneity.
    Keywords: Interbank market, dynamic network, heterogeneity., network resilience
    Date: 2012–04
  9. By: Erwin Diewert (University of British Columbia and School of Economics, The University of New South Wales); Dennis Fixler (Bureau of Economic Analysis); Kimberly Zieschang (International Monetary Fund.)
    Abstract: The paper considers some of the problems associated with the indirectly measured components of financial service outputs in the System of National Accounts (SNA), termed FISIM (Financial Intermediation Services Indirectly Measured). The paper utilizes a user cost and supplier benefit approach to the determination of the value of various financial services in the banking sector. The present paper also attempts to integrate the balance sheet accounts in the SNA with the usual flow accounts. An empirical example of various nominal output concepts that could be applied to the U.S. commercial banking sector is presented.
    Keywords: User costs, banking services, deposit services, loan services, production accounts, System of National Accounts, FISIM, Financial Intermediation Services Indirectly Measured.
    JEL: C43 C67 C82 D24 D57 E22 E41
    Date: 2012–04
  10. By: Carlos Léon
    Abstract: The most recent financial crisis unveiled that liquidity risk is far more important and intricate than regulation have conceived. The shift from bank-based to market-based financial systems and from Deferred Net Systems to liquidity-demanding Real-Time Gross Settlement of payments explains some of the shortcomings of traditional liquidity risk management. Although liquidity regulations do exist, they still are in an early stage of development and discussion. Moreover, no all connotations of liquidity are equally addressed. Unlike market and funding liquidity, intraday liquidity has been absent from financial regulation, and has appeared only recently, after the crisis. This paper addresses the measurement of Large-Value Payment System’s intraday liquidity risk. Based on the generation of bivariate Poisson random numbers for simulating the minute-by-minute arrival of received and executed payments, each financial institution’s intraday payments time-varying volume and degree of synchrony (i.e. timing) is modeled. To model intraday payments’ uncertainty allows for (i) overseeing participants’ intraday behavior; (ii) assessing their ability to fulfill intraday payments at a certain confidence level; (iii) identifying participants non-resilient to changes in payments’ timing mismatches; (iv) estimating intraday liquidity buffers. Vis-à-vis the increasing importance of liquidity risk as a source of systemic risk, and the recent regulatory amendments, results are useful for financial authorities and institutions.
    Date: 2012–04–11
  11. By: UCHINO Taisuke; UESUGI Iichiro
    Abstract: Using a unique dataset of non-listed firms that identifies the banks with which firms transact, we examine the effects of the largest-ever bank merger in Japan—that between Bank of Tokyo-Mitsubishi (BTM) and UFJ Bank (UFJ) in 2005. We focus on how the merger affected firms through their firm-bank relationships. Specifically, we examine whether there are any differences in how the availability of loans evolved over time for firms that, prior to the merger, either transacted with both of the merged banks, with one of them, or with none. We find the following: (1) Firms that had transacted with both BTM and UFJ saw their borrowing costs increase by 40bp relative to those that had transacted with neither. (2) Firms that transacted with one of the two banks saw their borrowing costs increase by a smaller but still significant margin of 20bp relative to those that had transacted with neither. And (3) we do not find a significant difference in the extent that borrowing costs increased between firms that transacted with the acquiring bank (BTM) and those that transacted with the acquired bank (UFJ). These results suggest that the bank merger increased firms' borrowing costs partly through an exogenous decrease in the number of firm-bank relationships and partly through changes in the organizational structure of the merged bank, including a consolidation of the branch network.
    Date: 2012–04
  12. By: Fumiko Hayashi; Joanna Stavins
    Abstract: Anecdotally, a negative relationship between the use of debit cards and credit scores has been reported: Consumers with lower credit scores use debit cards more intensively than those with higher credit scores. However, it is not clear whether credit scores have real effects on consumer payment choice or whether the negative relationship is caused by other factors, such as education or income. ; If credit scores have real effects, a negative relationship between debit card use and credit scores could imply supply-side effects, demand-side effects, or a combination of both. If credit scores significantly influence consumer access to credit cards, credit limit, or the cost of credit cards, then the negative relationship likely results from supply-side constraints. If a lower credit score is associated with differences in underlying consumer tastes and preferences for payment methods, then the negative relationship is likely due to demand-side effects. ; In this paper, we investigate the effects of credit scores on consumer payment behavior, especially on debit and credit card use. Because we find that credit scores have real effects, we investigate what credit scores imply. Preliminary evidence strongly suggests that supply-side factors play an important role in the cost of credit and in access to credit.
    Date: 2012
  13. By: Parmendra Sharma, Neelesh Gounder
    Keywords: Bank private sector credit, South Pacific, cross-country analysis
    JEL: E51 G21 C23 E44
  14. By: Lan Shi
    Abstract: We study the U.S. origination-to-distribution mortgage financing market from the mid 1990s to the late 2000s. Mortgage loan brokers originated close to two thirds of the mortgage loans in this period. We examine whether stricter licensing requirements of loan brokers raise lending standards by i) admitting only higher quality brokers who benefit more from a long-term career and thus have greater incentives to protect borrowers and lenders' long-term interests, ii) raising entry costs and thus generating higher future rents that reduce brokers' incentives to chase short-term profits, e.g., by lowering loan origination standards, that jeopardize their likelihood of winning future business from borrowers and lenders. We exploit the cross-state and over time variations in licensing requirements and find that originated loans in states with more stringent requirements had higher standards: FICO score were higher, and LTV and DTI were lower and there were fewer negative amortization, interest only, balloon, ARM, Low Doc, and subprime loans. The requirements on surety bonds and net worth, education, and office in state have the greatest impact on loan origination standards. The education (and exam) requirements for employees are more effective than those for licensees. The effect of licensing on loan origination standards is greater for neighborhoods with greater minority percentages and lower income, and for lenders that specialize in sub-prime lending. Corroborating findings on loan origination standards, states with more stringent licensing requirements had lower default rates: Moving from the 25th to the 75th percentile in licensing requirements is associated with close to 20 percent reduction from the mean of the 90 days or more delinquency rate. These findings point to the value of broker licensing when lenders' incentives to screen are compromised with the securitization of mortgages. Key words: Mortgage; brokers; securitization; information asymmetry; moral hazard; incentives; occupational licensing JEL codes: D82; G21; G28; J44; L1
    Date: 2012–04
  15. By: Scott Schuh; Joanna Stavins
    Abstract: Using data from a nationally representative survey on consumer payment behavior, we estimate Heckman two-stage regressions on the adoption and use of seven different payment instruments. We find that the characteristics of payments are important in determining consumer payment behavior, even when controlling for demographic and financial attributes: setup and record keeping are especially important in explaining adoption, while security is important in explaining which methods consumers use for transactions. For the first time, we estimate the number of payment methods adopted by consumers conditional on having access to a bank account, as the unbanked consumers' payment choices are much more limited than those of consumers with bank accounts. This paper follows the analysis in Schuh and Stavins (2010), but with improved data, allowing us to estimate a better model of payment behavior. As in the previous study, cost is found to significantly affect payment use, indicating that the recent increase in the cost of debit cards issued by some banks may lead to a reduction in U.S. consumers' reliance on debit cards for transactions.
    Keywords: Payment systems
    Date: 2012
  16. By: Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Xin Zhao (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we propose an alternative approach to estimate long-term risk. Instead of using the static square root method, we use a dynamic approach based on volatility forecasting by non-linear models. We explore the possibility of improving the estimations by different models and distributions. By comparing the estimations of two risk measures, value at risk and expected shortfall, with different models and innovations at short, median and long-term horizon, we find out that the best model varies with the forecasting horizon and the generalized Pareto distribution gives the most conservative estimations with all the models at all the horizons. The empirical results show that the square root method underestimates risk at long horizon and our approach is more competitive for risk estimation at long term.
    Keywords: Long memory, Value at Risk, expect shortfall, extreme value distribution.
    JEL: G32 G17 C58
    Date: 2012–03
  17. By: Holger Capa Santos (Escuela Politecnica Nacional - Facultad de Geologia); Marie Kratz (MAP5 - Mathématiques appliquées Paris 5 - CNRS : UMR8145 - Université Paris V - Paris Descartes, SID - Information Systems / Decision Sciences Department - ESSEC Business School); Franklin Mosquera Munoz (Escuela Politecnica Nacional - Facultad de Geologia)
    Abstract: This work presents a contribution on operational risk under a general Bayesian context incorporating information on market risk pro le, experts and operational losses, taking into account the general macroeconomic environment as well. It aims at estimating a characteristic parameter of the distributions of the sources, market risk pro le, experts and operational losses, chosen here at a location parameter. It generalizes under more realistic conditions a study realized by Lambrigger, Shevchenko and Wuthrich, and analyses macroeconomic e ects on operational risk. It appears that severities of operational losses are more related to the macroeconomics environment than usually assumed.
    Keywords: Basel II ; Bayesian inference ; Loss distribution approach ; Macroeconomics dependence ; Operational Risk ; Quantitative Risk Management ; Solvency 2
    Date: 2012–01–01
  18. By: Zvika Afik (Guilford Glazer faculty of Business and Management, Ben- Gurion University of the Negev, Israel); Ohad Arad (Ben Gurion University of the Negev, Beer-Sheva, Israel); Koresh Galil (Ben Gurion University of the Negev, Beer-Sheva, Israel)
    Abstract: Merton (1974) suggested a structural model for default prediction which allows using timely information from the equity market. The literature describes several specifications to the application of the model, including methods presumably used by practitioners. However, recent studies demonstrate that these methods result in inferior estimates compared to simpler substitutes. We empirically examine various specification alternatives and find that the prediction goodness is only slightly sensitive to different choices of default barrier, whereas the choice of assets expected return and assets volatility is significant. Equity historical return and historical volatility produce underbiased estimates for assets expected return and assets volatility, especially for defaulting firms. Acknowledging these characteristics we suggest specifications that improve the model accuracy.
    Keywords: Credit risk; Default prediction; Merton model; Bankruptcy prediction, Default barrier; Assets volatility
    Date: 2012
  19. By: Vuong Quoc, Duy
    Abstract: This paper investigates the factors affecting the access of rural individual and group-based households to formal credit in the Mekong Delta (MD), Vietnam. Poverty levels in the Mekong Delta have declined significantly over the last decades, but in the rural areas they remain significant. If it is assumed that access to credit is a suitable vehicle for poverty alleviation, it is necessary to assess the way households decide on borrowing. This paper identifies the determinants of the decision to borrow and of the amount that is borrowed by using the double hurdle model and the Heckman selection model. Data used in this paper were obtained from a survey of 325 rural households, conducted between May and October 2009. The results indicate that household capital endowments, marital status, family size, distance to the market centre, and location affect both the probability and the amount of asking for credit.
    Keywords: Formal credit; Double hurdle model; individual and group-based lending; rural households
    JEL: G2 O2 E5
    Date: 2012–03–25
  20. By: Michiel Bijlsma; Andrei Dubovik; Gijsbert Zwart
    Abstract: <p>In CPB Discussion Paper 209 we study incentives of financial intermediaries to reserve liquidity given that they can rely on the interbank market for their liquidity needs. Intermediaries can partially pledge their assets to each other, but not to the rest of the economy. Therefore liquidity provision is endogenous. </p><p>We show that if the probability of a crisis is large or if assets are slightly pledgeable, then all intermediaries reserve liquidity. However, if the probability of a crisis is small or if assets are highly pledgeable, then intermediaries segregate ex ante: some reserve no liquidity, others reserve to the maximum and become liquidity providers. This segregation arises, because in the latter case the crisis short-term rate exceeds the returns on long-term investments, while at the same time higher liquidity holdings also increase survival probability. Together, these two effects result in increasing marginal returns to liquidity in the crisis state, and, consequently, segregation ex ante. In either equilibrium, aggregate liquidity is too small if assets are not fully pledgeable. Minimum liquidity requirements only improve welfare in the symmetric equilibrium. Marginally lowering the interest rate causes a marginal crowding-out of private liquidity with public liquidity in the symmetric equilibrium, but a full crowding-out in the asymmetric equilibrium.</p>
    JEL: E43 G20 G33
    Date: 2012–04

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