New Economics Papers
on Banking
Issue of 2012‒05‒22
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank regulation and stability: An examination of the Basel market risk framework By Alexander, Gordon J.; Baptista, Alexandre M.; Yan, Shu
  2. Capital regulation, liquidity requirements and taxation in a dynamic model of banking By De Nicolò, Gianni; Gamba, Andrea; Luccetta, Marcella
  3. Credit portfolio modelling and its effect on capital requirements By Bülbül, Dilek; Lambert, Claudia
  4. Changes in bank lending standards and the macroeconomy By William F. Bassett; Mary Beth Chosak; John C. Driscoll; Egon Zakrajsek
  5. Macroprudential banking regulation: Does one size fit all? By Doris Neuberger; Roger Rissi
  6. Do Credit Associations Put Competitive Pressure on Regional Banks in Japanese Regional Lending Markets? By Kondo, Kazumine
  7. Do Firm-Bank ``Odd Couples'' Exacerbate Credit Rationing? By Giovanni Ferri; Pierluigi Murro
  8. Credit contagion between financial systems By Podlich, Natalia; Wedow, Michael
  9. Sudden Floods, Macroprudential Regulation and Stability in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  10. Estimating financial institutions’ intraday liquidity risk: a Monte Carlo simulation approach By Carlos León
  11. The Impact of Retail Payment Innovations on Cash Usage By Ben Fung; Kim Huynh; Leonard Sabetti
  12. Contagion Effects in the Aftermath of Lehman's Collapse: Measuring the Collateral Damage By Nicolas Dumontaux; Adrian Pop
  13. Credit line use and availability in the financial crisis: the importance of hedging By Jose M. Berrospide; Ralf R. Meisenzahl; Briana D. Sullivan
  14. Contagion in the interbank market and its determinants By Memmel, Christoph; Sachs, Angelika
  15. Evaluating the Macroeconomic Effects of Government Support Measures to Financial Institutions in the EU By Jan in 't Veld; Werner Roeger
  16. Examining what best explains corporate credit risk: accounting-based versus market-based models By Antonio Trujillo-Ponce; Reyes Samaniego-Medina; Clara Cardone-Riportella
  17. Informational Contagion and the Production of Informational Remedies By Mathieu Bédard
  18. Interest rate risk and bank equity valuations By William B. English; Skander J. Van den Heuvel; Egon Zakrajsek
  19. Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation By Thomas Philippon
  20. Macro-Prudential Policy in a Fisherian model of Financial Innovation By Javier Bianchi; Emine Boz; Enrique G. Mendoza

  1. By: Alexander, Gordon J.; Baptista, Alexandre M.; Yan, Shu
    Abstract: In attempting to promote bank stability, the Basel Committee on Banking Supervision (2006) provides a framework that seeks to control the amount of tail risk that large banks take in their trading books. However, banks around the world suffered sizeable trading losses during the recent crisis. Due to the size and prevalence of losses, a formal examination of whether the Basel framework allows banks to take substantive tail risk in their trading books without a capital requirement penalty is of particular interest. In this paper, we provide such an examination and show that the Basel framework indeed allows banks to do so. Hence, our paper supports the view that the Basel framework leaves room for considerable improvements regarding the treatment of tail risk. --
    Keywords: Bank regulation,bank stability,Basel framework,crisis,tail risk
    JEL: G11 G21 G28 D81
    Date: 2012
  2. By: De Nicolò, Gianni; Gamba, Andrea; Luccetta, Marcella
    Abstract: This paper studies the impact of bank regulation and taxation in a dynamic model where banks are exposed to credit and liquidity risk and can resolve financial distress in three costly forms: bond issuance, equity issuance or fire sales. 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 threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities. --
    Keywords: Bank Regulation,Taxation,Dynamic Banking Model
    JEL: G21 G28 G33
    Date: 2012
  3. By: Bülbül, Dilek; Lambert, Claudia
    Abstract: The subprime crisis revealed that the adoption of suitable systems for the management of credit risk is of utmost concern. The Basel Committee on Banking Supervision (2009) advises banks to use credit portfolio models with caution when assessing the capital adequacy. This paper investigates whether decisions on total risk-based capital ratios are channeled through credit portfolio models. In other words, do credit portfolio models serve as a relevant determinant for banks to adjust their capital allocation? To empirically test the relationship we measure the average treatment effect by conducting a quasi-natural experiment in which we employ a propensity-matching approach to panel data. We find that the adoption of credit portfolio models positively and significantly affects regulatory capital decisions of banks both directly following the introduction as well as over a longer time horizon. By now it is commonly accepted that overreliance on credit portfolio models composes a fundamental cause of the current financial crisis. Our results put the debate about overreliance on quantitative models in a new perspective. This knowledge may prove valuable for regulators who aim to understand bank behaviour and thus advance regulation. --
    Keywords: Risk management,regulation,capital requirement,credit portfolio model,propensity score
    JEL: G21 G28 G32
    Date: 2012
  4. By: William F. Bassett; Mary Beth Chosak; John C. Driscoll; Egon Zakrajsek
    Abstract: Identifying the macroeconomic effects of credit supply disruptions is difficult because many of the same factors that influence the supply of bank loans can also affect the demand for credit. Using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey, we decompose the reported changes in lending standards--a commonly-used indicator of changes in credit supply conditions--into a component that captures the change in banks' lending posture in response to bank-specific and macroeconomic factors that also affect loan demand and a residual component, which provides a cleaner measure of fluctuations in the effective supply of bank-intermediated credit. When included in a standard VAR framework, shocks to our measure of loan supply are associated with substantial declines in output and in the capacity of businesses and households to borrow from the banking sector, as well as with a sharp widening of credit spreads and a significant easing of monetary policy. We corroborate the interpretation of our series as movements in the supply of bank loans using a detailed loan-level data set: A regression of individual loan amounts on the corresponding interest rate spreads--where the latter is instrumented with our bank-level loan-supply shifter--yields the semi-elasticity of loan demand between -1.0 and -1.5.
    Date: 2012
  5. By: Doris Neuberger (University of Rostock); Roger Rissi (Lucerne University of Applied Sciences and Arts)
    Abstract: The macroprudential regulatory framework of Basel III imposes the same capital and liquidity requirements on all banks around the world to ensure global competitiveness of banks. Using an agent-based model of the financial system, we find that this is not a robust framework to achieve (inter)national financial stability, because efficient regulation has to embrace the economic structure and behaviour of financial market participants, which differ from country to country. Market-based financial systems do not profit from capital and liquidity regulations, but from a ban on proprietary trading (Volcker rule). In homogeneous or bank-based financial systems, the most effective regulatory policy to ensure financial stability depends on the stability measure used. Irrespective of financial system architecture, direct restrictions of banks’ investment portfolios are more effective than indirect restrictions through capital, leverage and liquidity regulations.
    Keywords: financial stability, systemic risk, financial system, banking regulation, agent-based model
    JEL: C63 G01 G11 G21 G28
    Date: 2012
  6. By: Kondo, Kazumine
    Abstract: This paper investigates whether credit associations put competitive pressure on regional banks in Japanese regional lending markets. It was found that credit associations pressure regional banks to set lower lending interest rates in regional markets. In addition, the competitive pressure from credit associations in a prefecture whose share of credit associations is more than 20% is much stronger than in a prefecture whose share of credit associations is less than 20%. In particular, regional banks in a prefecture whose share of credit associations is from 25% to 30% experience the strongest pressure.
    Keywords: regional lending markets; regional banks; credit associations; lending interest rates; competitive pressure
    JEL: G21
    Date: 2012–05–13
  7. By: Giovanni Ferri (University of Bari); Pierluigi Murro (LUISS University)
    Abstract: This paper tests the impact of an imperfect bank-firm type match on firms' financial constraints using a dataset of about 4,500 Italian manufacturing firms. We start considering an optimal matching of opaque (transparent) borrowing firms with relational (transactional) lending main banks. Next we contemplate the possibility that firm-bank "odd couples" materialize where opaque (transparent) firms end up matched with transactional (relational) main banks. Our results show that more than 25% of the firms falls into an "odd couple". Moreover, we find that the probability of rationing is larger when firms and banks match in "odd couples". We conjecture the "odd couples" emerge either since the bank's lending technology is not perfectly observable to the firm or because riskier firms - even though opaque - strategically select transactional banks in the hope of being classified as lower risks.
    Keywords: Bank-firm Relationship, Asymmetric Information, Credit Rationing.
    JEL: G21 D82 G30
    Date: 2012
  8. By: Podlich, Natalia; Wedow, Michael
    Abstract: We examine contagion from a number of financial systems to the German financial system using the information content of CDS prices in a GARCH model. After controlling for common factors which may cause comovement in security prices, we find evidence for contagion from the US and European financial systems. Our results additionally confirm that the set up of the financial rescue scheme in Germany partially shielded German banks but not insurance companies from contagion. Overall, our results suggest that contagion from dealer banks have the most prominent effect on the German financial system. While dealer banks impact on German banks and insurance companies in a similar way, a deterioration in the CDS spreads of dealer banks has a particularly pronounced effect on German dealer banks. --
    Keywords: Systemic Risk,CDS Spreads,Contagion,OTC Dealer
    JEL: G14 G21 G28
    Date: 2011
  9. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: We develop a dynamic stochastic model of a middle-income, small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to an endogenous premium. A sudden flood in capital flows generates an expansion in credit and activity, and asset price pressures. Countercyclical regulation, in the form of a Basel III-type rule based on real credit gaps, is effective at promoting macroeconomic stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of the volatility of a composite index of the nominal exchange rate and house prices). However, because the gain in terms of reduced volatility may exhibit diminishing returns, a countercyclical regulatory rule may need to be supplemented by other, more targeted, macroprudential instruments.
    Date: 2012
  10. By: Carlos León
    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.
    Keywords: Payments Systems, Intraday, Liquidity Risk, Bivariate Poisson process, Monte Carlo Simulation, Liquidity Buffer, Oversight. Classification JEL: C15, C63, E47, G17, D81.
    Date: 2012–04
  11. By: Ben Fung; Kim Huynh; Leonard Sabetti
    Abstract: Many predict that innovations in retail payment may render cash obsolete. We investigate this possibility in the context of recent payment innovations such as contactless-credit and stored-value cards. We apply causal inference methods on the 2009 Bank of Canada Method of Payment survey, a representative sample of adult Canadians’ shopping behaviour for retail consumption over a three-day period. We find that using contactless credit cards and stored-value cards lead to a reduction in average cash usage for transactions both in terms of value and volume. Sensitivity analysis is undertaken and our estimates are robust to hidden bias.
    Keywords: Econometric and statistical methods; Financial services; Payment; clearing; and settlement systems
    JEL: E41 C35 C83
    Date: 2012
  12. By: Nicolas Dumontaux (Banque de France - Banque de France); Adrian Pop (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: The spectacular failure of the 150-year old investment bank Lehman Brothers on September 15th, 2008 was a major turning point in the global financial crisis that broke out in the summer 2007. Through the use of stock market data and Credit Default Swap (CDS) spreads, this paper examines the investors' reaction to Lehman's collapse in an attempt to identify a contagion effect on the surviving financial institutions. The empirical analysis indicates that (i) the collateral damages were limited to the largest financial firms; (ii) the most affected institutions were the surviving "non-bank" financial services firms (mortgage and specialty finance, investment services, and diversified financial services firms); (iii) the negative effect was correlated with financial conditions of the surviving institutions. We also detect significant abnormal jumps in the CDS spreads after Lehman's failure that we interpret as evidence of sudden upward revisions in the market assessment of future default probabilities for the surviving financial firms.
    Keywords: systemic risk; financial crisis; bank failures; contagion; bailout; regulation; Credit Default Swap
    Date: 2012–05–09
  13. By: Jose M. Berrospide; Ralf R. Meisenzahl; Briana D. Sullivan
    Abstract: What determined the corporate use of credit lines in the recent financial crisis? To address this question we hand-collect data on credit lines and interest rate hedging for a random sample of 600 COMPUSTAT firms. We document that drawdowns of credit lines had already increased in 2007, earlier than what previous work has found. The surge in drawdowns occurred precisely when disruptions in bank funding markets began. In addition, we distinguish unused and available portions of credit lines, which we then use to disentangle credit supply and credit demand effects. On the supply side, we find covenant-induced reduction of credit supply to be small, and almost no evidence of credit line cancelations. On the demand side, our results confirm that while smaller and lower-rated firms use their credit lines more intensively in general, larger and higher-rated firms were more likely to draw on their credit lines during the crisis. We find that firms that use interest rate swaps to hedge the interest rate risk associated with their credit lines draw down significantly more from those lines than non-hedged firms.
    Date: 2012
  14. By: Memmel, Christoph; Sachs, Angelika
    Abstract: Carrying out interbank contagion simulations for the German banking sector for the period from the first quarter of 2008 to the second quarter of 2011, we obtain the following results: (i) The system becomes less vulnerable to direct interbank contagion over time. (ii) The loss distribution for each point in time can be condensed into one indicator, the expected number of failures, without much loss of information. (iii) Important determinants of this indicator are the banks' capital, their interbank lending in the system, the loss given default and how equal banks spread their claims among other banks. --
    Keywords: Interbank market,contagion,time dimension
    JEL: D53 E47 G21
    Date: 2011
  15. By: Jan in 't Veld; Werner Roeger
    Abstract: This paper analysis the macroeconomic effects of government support measures to the financial sector using a microfounded structural model. We simulate a crisis scenario in which the economy is hit by a severe financial shock and is subject to financial market imperfections. We then look at three types of measures: purchases of toxic assets, bank recapitalisation measures and government loan guarantees. State support to banks are found to help propping up the value of banks and reduce the risk premium that had emerged, so supporting corporate investment which had been particularly badly affected in the crisis.
    JEL: C54 E62 E32 E44 G21 H62
    Date: 2012–04
  16. By: Antonio Trujillo-Ponce (Department of Finance and Accounting, Universidad Pablo de Olavide); Reyes Samaniego-Medina (Department of Finance and Accounting, Universidad Pablo de Olavide); Clara Cardone-Riportella (Department of Business Administration, Universidad Carlos III de Madrid)
    Abstract: Using a sample of 2,186 credit default swap (CDS) spreads quoted in the European market during the period 2002-2009, this paper empirically analyzes which model – accounting- or market-based – better explains corporate credit risk. We find that there is little difference in the explanatory power of the two approaches. Our results suggest that both accounting and market data complement one other and thus that a comprehensive model that includes both types of variables appears to be the best option for explaining credit risk. We also show that the explanatory power of accounting- and market-based variables for measuring credit risk is particularly strong during periods of high uncertainty, as experienced in the recent financial crisis, and that it decreases as the CDS contract matures. Finally, the comprehensive model continues to show the best results when using the credit rating as the proxy for credit risk, but accounting variables currently appear to have a more important role than the market variables
    Keywords: Bankruptcy; credit default swaps; credit risk; distance-to-default
    Date: 2012–05
  17. By: Mathieu Bédard (CERGAM-CAE, Aix-Marseille Université)
    Abstract: This article reassess informational financial contagion theory relevant to systemic risk in banking in the light of a coordination problem approach to economics, and then proceed to analyze and comment some related types of ``Too Big to Fail" policies. Typically, policies to limit or contain informational contagion place too much emphasis on disclosed scientific information search and neglect the conjunctural information, or knowledge surrogates, stemming from the actions taken by managers and investors in face of the bank's adverse situation.
    Keywords: Financial Contagion, Systemic Risk, Too Big to Fail, Bailouts
    JEL: G01 G33
    Date: 2012–02
  18. By: William B. English; Skander J. Van den Heuvel; Egon Zakrajsek
    Abstract: Because they engage in maturity transformation, a steepening of the yield curve should, all else equal, boost bank profitability. We re-examine this conventional wisdom by estimating the reaction of bank intraday stock returns to exogenous fluctuations in interest rates induced by monetary policy announcements. We construct a new measure of the mismatch between the repricing time or maturity of bank assets and liabilities and analyze how the reaction of stock returns varies with the size of this mismatch and other bank characteristics, including the usage of interest rate derivatives. Our results indicate that bank stock prices decline substantially following an unanticipated increase in the level of interest rates or a steepening of the yield curve. A large maturity gap, however, significantly attenuates the negative reaction of returns to a slope surprise, a result consistent with the role of banks as maturity transformers. Share prices of banks that rely heavily on core deposits decline more in response to policy-induced interest rate surprises, a reaction that primarily reflects ensuing deposit disintermediation. Results using income and balance sheet data highlight the importance of adjustments in quantities--as well as interest margins--for understanding the reaction of bank equity values to interest rate surprises.
    Date: 2012
  19. By: Thomas Philippon
    Abstract: I provide a quantitative interpretation of financial intermediation in the U.S. over the past 130 years. Measuring separately the cost of intermediation and the production of financial services, I find that: (i) the quantity of intermediation varies a lot over time; (ii) intermediation is produced under constant returns to scale; (iii) the annual cost of intermediation is around 2% of outstanding assets; (iv) adjustments for borrowers' quality are quantitatively important; and (v) the unit cost of intermediation has increased over the past 30 years.
    JEL: E2 G2 N2
    Date: 2012–05
  20. By: Javier Bianchi; Emine Boz; Enrique G. Mendoza
    Abstract: The interaction between credit frictions, financial innovation, and a switch from optimistic to pessimistic beliefs played a central role in the 2008 financial crisis. This paper develops a quantitative general equilibrium framework in which this interaction drives the financial amplification mechanism to study the effects of macro-prudential policy. Financial innovation enhances the ability of agents to collateralize assets into debt, but the riskiness of this new regime can only be learned over time. Beliefs about transition probabilities across states with high and low ability to borrow change as agents learn from observed realizations of financial conditions. At the same time, the collateral constraint introduces a pecuniary externality, because agents fail to internalize the effect of their borrowing decisions on asset prices. Quantitative analysis shows that the effectiveness of macro-prudential policy in this environment depends on the government's information set, the tightness of credit constraints and the pace at which optimism surges in the early stages of financial innovation. The policy is least effective when the government is as uninformed as private agents, credit constraints are tight, and optimism builds quickly.
    JEL: D62 D82 E32 E44 F32 F41
    Date: 2012–05

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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