New Economics Papers
on Banking
Issue of 2012‒06‒05
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments By Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
  2. Understanding Liquidity and Credit Risks in the Financial Crisis By Gefang, Deborah; Koop, Gary; Potter, Simon M.
  3. The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe? By Maria J. Nieto; Gillian G. Garcia
  4. Do Better Capitalized Banks Lend Less? Long-Run Panel Evidence from Germany By Claudia M. Buch; Estaban Prieto
  5. Regulatory Arbitrage and International Bank Flows By Joel F. Houston; Chen Lin; Yue Ma
  6. Securitized Banking, Asymmetric Information, and Financial Crisis: Regulating Systemic Risk Away By Sudipto Bhattacharya; Georgy Chabakauri; Kjell G. Nyborg
  7. Fiscal policy and lending relationships By Giovanni MELINA; Stefania VILLA
  8. Collateralized CVA Valuation with Rating Triggers and Credit Migrations By Tomasz R. Bielecki; Igor Cialenco; Ismail Iyigunler
  9. Two Models of Stochastic Loss Given Default By Simone Farinelli; Mykhaylo Shkolnikov
  10. What should regulation do in the field of micro-finance? By Renuka Sane; Susan Thomas
  11. Determining marginal contributions of the economic capital of credit risk portfolio: an analytical approach By Morone, Marco; Cornaglia, Anna; Mignola, Giulio
  12. Changes at the top in Chinese Banking By Cousin, Violaine
  13. Mandatory pension savings, private savings, homeownership, and financial stability By Asgeir Danielsson
  14. A note on macro-financial implications of mobile money schemes By Mas, Ignacio; Klein, Michael
  15. Estimating the Demand for Settlement Balances in the Canadian Large Value Transfer System By Nellie Zhang
  16. Commitment-Flexibility Trade-Off and Withdrawal Penalties By Attila Ambrus; Georgy Egorov
  17. Individual social capital and access to formal credit in Thailand By Dufhues, Thomas; Buchenrieder, Gertrud; Munkung, Nuchanata

  1. By: Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
    Abstract: We analyze the impact of the countercyclical capital buffers held by banks on the supply of credit to firms and their subsequent performance. Countercyclical ‘‘dynamic’’ provisioning that is unrelated to specific loan losses was introduced in Spain in 2000, and modified in 2005 and 2008. These policy experiments which entailed bank-specific shocks to capital buffers, combined with the financial crisis that shocked banks according to their available pre-crisis buffers, underpin our identification strategy. Our estimates from comprehensive bank-, firm-, loan-, and loan application-level data suggest that countercyclical capital buffers help smooth credit supply cycles and in bad times have positive effects on firm credit availability, assets, employment and survival. Our findings therefore hold important implications for theory and macroprudential policy.
    Keywords: bank capital, dynamic provisioning, credit availability, financial crisis
    JEL: E51 E58 E60 G21 G28
    Date: 2012–05
  2. By: Gefang, Deborah; Koop, Gary; Potter, Simon M.
    Abstract: This paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reflect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 fi nancial crisis were largely driven by liquidity risk. However, credit risk played a more signifi cant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.
    Date: 2011
  3. By: Maria J. Nieto; Gillian G. Garcia
    Abstract: This paper analyzes the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union’s (EU) decentralized safety net. As compared to pure micro and macro prudential regulation, BRRF’s objective is to limit losses given financial institutions´ default while allowing for a balanced share of costs between private investors and tax payers. Most important, BRRFs contribute to shifting the government’s tradeoff between bailing out and restructuring in favor of restructuring, to the extent that there is also an effective bank resolution legal framework. In turn, banks´ contributions to BRRFs aim at discouraging their excess systemic risk creation particularly through financial system leverage. The paper makes some reflections on the governance aspects of BRRFs that would require minimum harmonization in the EU, emphasizing that BRRFs are only one institutional component of financial institutions´ effective and credible resolution regime. This paper focuses on depository institutions, but the rationale of BRRFs could be extended to other credit institutions.
    Date: 2012–05
  4. By: Claudia M. Buch; Estaban Prieto
    Abstract: Insufficient capital buffers of banks have been identified as one main cause for the large systemic effects of the recent financial crisis. Although higher capital is no panacea, it yet features prominently in proposals for regulatory reform. But how do increased capital requirements affect business loans? While there is widespread belief that the real costs of increased bank capital in terms of reduced loans could be substantial, there are good reasons to believe that the negative real sector implications need not be severe. In this paper, we take a long-run perspective by analyzing the link between the capitalization of the banking sector and bank loans using panel cointegration models. We study the evolution of the German economy for the past 60 years. We find no evidence for a negative impact of bank capital on business loans.
    Keywords: Bank capital, business loans, cointegration
    JEL: G2 E5 C33
    Date: 2012–05
  5. By: Joel F. Houston (University of Florida); Chen Lin (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research); Yue Ma (Lingnan University and Hong Kong Institute for Monetary Research)
    Abstract: We study whether cross-country differences in regulations have affected international bank flows. We find strong evidence that banks have transferred funds to markets with fewer regulations. This form of regulatory arbitrage suggests there may be a destructive "race to the bottom" in global regulations which restricts domestic regulators' ability to limit bank risk-taking. However, we also find that the links between regulation differences and bank flows are significantly stronger if the recipient country is a developed country with strong property rights and creditor rights. This suggests that while differences in regulations have important influences, that without a strong institutional environment, lax regulations are not enough to encourage massive capital flows.
    Date: 2012–05
  6. By: Sudipto Bhattacharya; Georgy Chabakauri; Kjell G. Nyborg
    Abstract: We develop a model of securitized (Originate, then Distribute) lending, in which both publicly observed aggregate shocks to values of securitized loan portfolios, and later some asymmetrically observed discernment of varying qualities of subsets thereof, play crucial roles. We nd that originators and potential buyers of such assets may dier in their preferences over their timing of trades, leading to a reduction in the aggregate surplus accruing from securitization. In addition, heterogeneity in sellers' selected timing of trades { arising from dierences in their ex ante beliefs { coupled with initial leverage choices based on pre-shock prices, may lead to nancial crises, implying uncoordinated asset liquidations inconsistent with any inter-temporal market equilibrium. We consider and contrast two mitigating regulatory interventions: leverage restrictions, and ex ante specied resale price guarantees on securitized asset portfolios. We show that the latter tool performs strictly better than the former, by ensuring not only bank survival, but also enhanced social surplus arising from securitized lending. It does so by inducing a more coordinated market equilibrium, that does not lead to interim leverage buildup to support a \cherry picking" seller trading strategy.
    Date: 2012–05
  7. By: Giovanni MELINA; Stefania VILLA
    Abstract: This paper studies how fiscal policy affects loan market conditions. First, it conducts a Structural Vector-Autoregression analysis showing that the bank spread responds negatively to an expansionary government spending shock, while lending increases. Second, it illustrates that these results are mimicked by a Real Business Cycle model where the bank spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it shows that lending relationships represent a friction that generates a financial accelerator effect in the transmission of the fiscal shock.
    Date: 2012–05
  8. By: Tomasz R. Bielecki; Igor Cialenco; Ismail Iyigunler
    Abstract: In this paper we discuss the issue of computation of the bilateral credit valuation adjustment (CVA) under rating triggers, and in presence of ratings-linked margin agreements. Specifically, we consider collateralized OTC contracts, that are subject to rating triggers, between two parties -- an investor and a counterparty. Moreover, we model the margin process as a functional of the credit ratings of the counterparty and the investor. We employ a Markovian approach for modeling of the rating transitions of the two parties to the contract. In this framework, we derive the representation for bilateral CVA. We also introduce a new component in the decomposition of the counterparty risky price: namely the rating valuation adjustment (RVA) that accounts for the rating triggers. We give two examples of dynamic collateralization schemes where the margin thresholds are linked to the credit ratings of the parties. We account for the rehypothecation risk in the presence of independent amounts. Our results are illustrated via computation of various counterparty risk adjustments for a CDS contract and for an IRS contract.
    Date: 2012–05
  9. By: Simone Farinelli; Mykhaylo Shkolnikov
    Abstract: We propose two structural models for stochastic losses given default which allow to model the credit losses of a portfolio of defaultable financial instruments. The credit losses are integrated into a structural model of default events accounting for correlations between the default events and the associated losses. We show how the models can be calibrated and analyze the impact of correlations between the occurrences of defaults and recoveries by testing our models for a representative sample portfolio.
    Date: 2012–05
  10. By: Renuka Sane (Indira Gandhi Institute of Development Research); Susan Thomas (Indira Gandhi Institute of Development ResearchInstitute of Economic Growth)
    Abstract: Recent events in India have brought a fresh focus on the appropriate regulatory stance towards micro-finance. In this paper, we review facts and recent experience about Indian microfinance. We analyse the puzzles of financial regulation in this field from first principles, and argue that the mainstream mechanisms of consumer protection and micro-prudential regulation need to be modified owing to joint-liability groups. From this perspective, we suggest regulatory strategies that need to be adopted for dealing with micro-credit and financial distribution that focuses on the poor. This analysis and conceptual framework also helps analyse the two policy responses till date, the Malegam report and the draft Microfinance Bill, 2011.
    Keywords: Micro-finance, micro-credit, joint-liability-groups, India, consumer protection, regulation
    JEL: G20 G21 G28
    Date: 2012–03
  11. By: Morone, Marco; Cornaglia, Anna; Mignola, Giulio
    Abstract: We address the problem of decomposing the risk of a multi-factor credit portfolio into marginal contributions through a fast analytical approach: it is based on Taylor polynomial expansion of the overall risk and on the subsequent partial derivatives with respect to the single exposures, exploiting the Euler principle. The proposed approximation, which also accommodates for an efficient treatment of obligors with similar risk profile, is suitable for large and complex bank portfolios; furthermore, it proves to perform quite well if tested against numerical techniques, among which we chose the Harrel-Davis estimator. The latter, aside from representing a benchmark measure, should however be applied in the case of very small and concentrated portfolios. In addition, a comparison with the most usual variance-covariance approach is drawn, emphasising its drawbacks in the correct representation of risk allocation.
    Keywords: Credit VaR; Portfolio credit risk; Economic capital; Analytical VaR contributions; Euler allocation; Harrel-Davis estimator;
    JEL: C15 G32
    Date: 2012–06
  12. By: Cousin, Violaine
    Abstract: At the end of October 2011, the heads of the three financial sector regulators were rotated. It is time to ask what are the rules behind the scenes for the process of “revolving doors” in China, how far the Party interference reaches and what the future holds for the Chinese financial sector.
    Keywords: bank; china; regulatory agencies; personnel
    JEL: G38 G28
    Date: 2012–01–25
  13. By: Asgeir Danielsson
    Abstract: This paper contributes to the discussion of effects of mandatory pension savings and house price risk on aggregate household savings, homeownership, and risks in lending to homeowners. The analysis is theoretical and based on the life-cycle hypothesis. It is shown that mandatory pension savings based on defined benefits will increase risk in lending to homeowners. Households that remain homeowners will increase their personal savings while those that prefer renting will decrease their savings as renters take on less risk from house price volatility than homeowners. The relative size of the two effects on savings depends on households‘ preferences over homeownership and renting. The assets of the mandatory pension funds in Iceland are among the highest in the world. This country also scores very high in homeownership with around 80% of households living in own homes. For these reasons data on the Icelandic pension system and on homeownership in this country provide a convenient background for discussion of the theoretical issues.
    Date: 2012–05
  14. By: Mas, Ignacio; Klein, Michael
    Abstract: Across the world mobile money schemes are being launched. In such schemes financial service providers interact with clients via mobile phones or other mobile devices such as tablets. Service offerings include payments and saving as well as basic insurance products and sometimes credit based on scoring methods that use information about the client’s payment history. The world of mobile money is still in the experimental stage. Some schemes like M-PESA in Kenya have, at least initially, been run-away successes. Some three quarters of all adults in Kenya signed up within little over four years after M-PESA was launched. Other schemes in Kenya and elsewhere have produced more modest results. Yet the promise of mobile financial services is sufficiently strong for currently over 200 mobile deployments counting just the cellphone based ones. Much experimentation is still needed to find the best business models. Hence room for such experimentation is desirable. At the same time policymakers and regulators need to be clear about possible ramifications of the mobile revolution for the design of financial regulation and its implementation. This note discusses several systemic issues that arise from mobile payment schemes: The impact of “e-money” on money supply, problems posed by financial distress of mobile money schemes, and the impact of mobile money schemes on money-laundering and illicit finance --
    JEL: G21 G28
    Date: 2012
  15. By: Nellie Zhang
    Abstract: This paper applies a static model of an interest rate corridor to the Canadian data, and estimates the aggregate demand for central-bank settlement balances in the Large Value Transfer System (LVTS). The empirical specification controls for various calendar effects that have been shown to cause fluctuations in LVTS payment flows. The analysis takes into account the downward divergence of the overnight interest rate from the target rate, which has been persistent since 2005. The results suggest that a target of $3 billion for LVTS settlement balances does not seem excessive during the time period when Canadian monetary policy was operating at the effective lower bound (ELB). Specifically, the model projects that, if the consistent downward divergence of overnight interest rate is taken into account, then on average $2.405 billion of LVTS settlement balances would probably have been sufficient to achieve the goal of keeping the overnight interest rate at or very close to the lower bound of the corridor. However, by targeting a slightly higher level, the Bank of Canada could be 95% certain that the overnight interest rate would on average not exceed its policy rate at the lower bound of the corridor. In addition, the estimation shows that the point elasticity of overnight interest rate is around 0.17 when the daily level of settlement balances is targeted at $3 billion under the ELB framework.
    Keywords: Interest rates; Monetary policy implementation; Payment, clearing, and settlement systems
    JEL: G01 E40 E50 C36
    Date: 2012
  16. By: Attila Ambrus; Georgy Egorov
    Abstract: Withdrawal penalties are common features of time deposit contracts offered by commercial banks, as well as individual retirement accounts and employer-sponsored plans. Moreover, there is a significant amount of early withdrawals from these accounts, despite the associated penalties, and empirical evidence shows that liquidity shocks of depositors are a major driving force of this. Using the consumption-savings model proposed by Amador, Werning and Angeletos in their 2006 Econometrica paper (henceforth AWA), in which individuals face the trade-off between flexibility and commitment, we show that withdrawal penalties can be part of the optimal contract, despite involving money-burning from an ex ante perspective. For the case of two states (which we interpret as “normal times” and a “negative liquidity shock”), we provide a full characterization of the optimal contract, and show that within the parameter region where the first best is unattainable, the likelihood that withdrawal penalties are part of the optimal contract is decreasing in the probability of a negative liquidity shock, increasing in the severity of the shock, and it is nonmonotonic in the magnitude of present bias. We also show that contracts with the same qualitative feature (withdrawal penalties for high types) arise in continuous state spaces, too. Our conclusions differ from AWA because the analysis in the latter implicitly assumes that the optimal contract is interior (the amount withdrawn from the savings account is strictly positive in each period in every state). We show that for any utility function consistent with their framework there is an open set of parameter values for which the optimal contract is a corner solution, inducing money burning in some states.
    Keywords: Commitment, flexibility, self-control, money-burning
    JEL: D23 D82 D86
    Date: 2012
  17. By: Dufhues, Thomas; Buchenrieder, Gertrud; Munkung, Nuchanata
    Abstract: This study shows how different forms of individual social capital affect access to formal credit in rural Thailand. In the context of agriculture economics, an innovative data collection approach is used that originates from the field of sociology (personal network survey). We measure social capital according to: 1. the tie strength between the respondent and the personal network member (bonding/bridging); and 2. the social distance between the respondent and the personal network member (linking). Strong ties (bonding) in combination with access to socially distant network members (linking) reduce the chances of being access-constrained.
    Keywords: Thailand, access to credit, social capital, personal networks, Agricultural Finance, Research Methods/ Statistical Methods,
    Date: 2012

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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