New Economics Papers
on Banking
Issue of 2012‒06‒25
thirty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. What assets should banks be allowed to hold? By V.V. Chari; Christopher Phelan
  2. Cyclical Adjustment of Capital Requirements: A Simple Framework By Repullo, Rafael
  3. Characterising the financial cycle: don't lose sight of the medium term! By Mathias Drehmann; Claudio Borio; Kostas Tsatsaronis
  4. The procyclicality of Basel III leverage: Elasticity-based indicators and the Kalman filter By Christian Calmès; Raymond Théoret
  5. Bank leverage cycles By Galo Nuño; Carlos Thomas
  6. Money, Financial Stability and Efficiency By ALLEN, Franklin; CARLETTI, Elena; GALE, Douglas
  7. Bank systemic risk and the business cycle: Canadian and U.S. evidence By Christian Calmès; Raymond Théoret
  8. Credit Market Competition and Liquidity Crises By CARLETTI, Elena; LEONELLO, Agnese
  9. Why do UK banks securitize? By Cerrato, Mario; Choudhry, Moorad; Crosby, John; Olukuru, John
  10. Financial inclusion in Africa : an overview By Demirguc-Kunt, Asli; Klapper, Leora
  11. Measuring systemic funding liquidity risk in the Russian banking system By Andrievskaya, Irina
  12. A Precautionary Tale of Uncertain Tail Fattening By Martin L. Weitzman
  13. Shadow banking in China By Li, Jianjun; Hsu, Sara
  14. Efficiency of Indian Commercial Banks: The Post-Reform Experience from Mergers & Acquisitions By Bhattacharyya, Surajit; Chatri, Ankit
  15. Real Options, Taxes and Financial Leverage By Stewart C. Myers; James A. Read, Jr.
  16. Collateral requirements for mandatory central clearing of over-the-counter derivatives By Daniel Heller; Nicholas Vause
  17. Households’ position in the financial crisis in Iceland. Analysis based on a nationwide household-level database By Thorvardur Tjörvi Ólafsson; Karen Áslaug Vignisdóttir
  18. Measuring complementarity in financial systems. By Adeline Saillard; Thomas Url
  19. A structural approach to pricing credit default swaps with credit and debt value adjustments By Alexander Lipton; Ioana Savescu
  20. Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy By Caterina Mendicino
  21. The role of complementarity and the financial liberalization in the financial crisis. By Adeline Saillard
  22. A Positive Analysis of Deposit Insurance Provision: Regulatory Competition Among European Union Countries By Merwan Engineer; Paul Schure; Mark Gillis
  23. Asset pricing with a bank risk factor By João Pedro Pereira; António Rua
  24. A Network model of systemic risk: identifying the sources of dependence across institutions By Carlos Castro; Juan Sebastian Ordoñez
  25. Bank deleveraging : causes, channels, and consequences for emerging market and developing countries By Feyen, Erik; Kibuuka, Katie; Otker-Robe, Inci
  26. Payment changes and default risk: theimpact of refinancing on expected credit losses By Joseph Tracy; Joshua Wright
  27. Universal banking, competition and risk in a macro model By Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
  28. Technical Efficiency and the Probability of Bank Failure among Agricultural and Non-Agricultural Banks By Li, Xiaofei; Escalante, Cesar L.; Epperson, James E.; Gunter, Lewell F.
  29. Were multinational banks taking excessive risks before the recent financial crisis? By Luis Mohamed Azzim Gulamhussen; Carlos Pinheiro; Alberto Franco Pozzolo
  30. How to create indices for bank branch financial performance measurement using MCDA techniques: an illustrative example By Fernando A. F. Ferreira; Paulo M.M. Rodrigues; Sérgio P. Santos; Ronald W. Spahr
  31. Asset Prices, Credit and the Business Cycle By Chen, Xiaoshan; Kontonikas, Alexandros; Montagnoli, Alberto
  32. Forecasting Value-at-Risk with Time-Varying Variance, Skewness and Kurtosis in an Exponential Weighted Moving Average Framework By Alexandros Gabrielsen; Paolo Zagaglia; Axel Kirchner; Zhuoshi Liu

  1. By: V.V. Chari; Christopher Phelan
    Abstract: Banks are vulnerable to self-fulfilling panics because their liabilities (such as demand deposits and certificates of deposit) are short term and unconditional, and their assets (such as mortgages and business loans) are long term and illiquid. To prevent wider financial fallout from such panics, governments have strong incentive to bail out bank debtholders. Paradoxically, expectations of such bailouts can lead financial systems to rely excessively—from a societal perspective—on short-term debt to fund long-term assets. Fragile banking systems thus impose external costs, and regulation may therefore be socially desirable. ; In light of this fragility and cost, we examine two of the major theoretical benefits from the reliance of the banking system on short-term debt: (1) maturity transformation and (2) efficient monitoring of bank managers. We argue that while both justifications may be compelling, they point us to financial regulations very different from the ones currently in place. These theoretical justifications suggest that the assets funded by banks should not have close substitutes in publicly traded markets, as is currently the case.
    Date: 2012
  2. By: Repullo, Rafael
    Abstract: We present a simple model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements.
    Keywords: Banking regulation; Basel II; Capital requirements; Procyclicality
    JEL: E44 G21 G28
    Date: 2012–06
  3. By: Mathias Drehmann; Claudio Borio; Kostas Tsatsaronis
    Abstract: We characterise empirically the financial cycle using two approaches: analysis of turning points and frequency-based filters. We identify the financial cycle with the medium-term component in the joint fluctuations of credit and property prices; equity prices do not fit this picture well. We show that financial cycle peaks are very closely associated with financial crises and that the length and amplitude of the financial cycle have increased markedly since the mid-1980s. We argue that this reflects, in particular, financial liberalisation and changes in monetary policy frameworks. So defined, the financial cycle is much longer than the traditional business cycle. Business cycle recessions are much deeper when they coincide with the contraction phase of the financial cycle. We also draw attention to the "unfinished recession" phenomenon: policy responses that fail to take into account the length of the financial cycle may help contain recessions in the short run but at the expense of larger recessions down the road.
    Keywords: financial cycle, business cycle, credit, asset prices, financial crises, medium-term
    Date: 2012–06
  4. By: Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais))
    Abstract: Traditional leverage ratios assume that bank equity captures all changes in asset values. However, in the context of market-oriented banking, capital can be funded by additional debt or asset sales without directly influencing equity. Given the new sources of liquidity generated by off-balance-sheet (OBS), time-varying indicators of leverage are better suited to capture the dynamics of aggregate leverage. In this paper, we introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up in bank risk years before what the traditional assets to equity ratio predicts. Most elasticity measures appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that OBS banking exerts a stronger influence on leverage during expansion periods.
    Keywords: Basel III; Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty.
    JEL: C32 G20 G21
    Date: 2012–01–27
  5. By: Galo Nuño (Banco de España); Carlos Thomas (Banco de España)
    Abstract: We study the cyclical fl uctuations of leverage and assets of fi nancial intermediaries and GDP in the United States. Leverage and assets are several times more volatile than GDP, and experience larger fl uctuations for unregulated (‘shadow’) intermediaries than for regulated ones. While the leverage of regulated intermediaries is rather acyclical with respect to their assets and to GDP, the leverage of unregulated intermediaries is strongly procyclical in relation to their assets, and mildly procyclical in relation to GDP. We then build a general equilibrium model with both regulated and unregulated fi nancial intermediaries. The latter borrow from investors in the form of short-term collateralized risky debt, and are subject to endogenous leverage constraints. We fi nd that volatility shocks are key to generating fl uctuations and comovements similar to those found in the data. Also, in a scenario with lower cross-sectional volatility, output is higher on average but more volatile, due to higher leverage of unregulated banks.
    Keywords: fi nancial intermediaries, short-term collateralized debt, limited liability, call option, put option, moral hazard, leverage
    JEL: E20 G10 G21
    Date: 2012–06
  6. By: ALLEN, Franklin; CARLETTI, Elena; GALE, Douglas
    Abstract: Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone; real transfers are needed.
    Date: 2012
  7. By: Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais))
    Abstract: This paper investigates how banks, as a group, react to macroeconomic risk and uncertainty, and more specifically the way banks systemic risk evolves over the business cycle. Adopting the methodology of Beaudry et al. (2001), our results clearly suggest that the dispersion across banks traditional portfolios has increased through time. We introduce an estimation procedure based on EGARCH and refine Baum et al. (2002, 2004, 2009) and Quagliariello (2007, 2009) framework to analyze the question in the new industry context, i.e. shadow banking. Consistent with finance theory, we first confirm that banks tend to behave homogeneously vis-à-vis macroeconomic uncertainty. In particular, we find that the cross-sectional dispersions of loans to assets and non-traditional activities shrink essentially during downturns, when the resilience of the banking system is at its lowest. More importantly, our results also suggest that the cross-sectional dispersion of market-oriented activities is both more volatile and sensitive to the business cycle than the dispersion of the traditional activities.
    Keywords: Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty; Markov switching regime; EGARCH.
    JEL: C32 G20 G21
    Date: 2012–04–27
  8. By: CARLETTI, Elena; LEONELLO, Agnese
    Abstract: We develop a two-period model where banks invest in reserves and loans, and are subject to aggregate liquidity shocks. When banks face a a shortage of liquidity, they can sell loans on the interbank market. Two types of equilibria emerge. In the no default equilibrium, banks keep enough reserves and remain solvent. In the mixed equilibrium, some banks default with positive probability. The former equilibrium exists when credit market competition is intense, while the latter emerges when banks exercise market power. Thus, competition is beneficial to financial stability. The effect of default on welfare depends on the exogenous risk of the economy as represented by the probability of the good state of nature.
    Keywords: Interbank market; default; price volatility
    JEL: G01 G21
    Date: 2012
  9. By: Cerrato, Mario; Choudhry, Moorad; Crosby, John; Olukuru, John
    Abstract: The eight years from 2000 to 2008 saw a rapid growth in the use of securitization by UK banks. We aim to identify the reasons that contributed to this rapid growth. The time period (2000 to 2010) covered by our study is noteworthy as it covers the pre- financial crisis credit-boom, the peak of the fi nancial crisis and its aftermath. In the wake of the financial crisis, many governments, regulators and political commentators have pointed an accusing finger at the securitization market - even in the absence of a detailed statistical and economic analysis. We contribute to the extant literature by performing such an analysis on UK banks, focussing principally on whether it is the need for liquidity (i.e. the funding of their balance sheets), or the desire to engage in regulatory capital arbitrage or the need for credit risk transfer that has led to UK banks securitizing their assets. We show that securitization has been signi ficantly driven by liquidity reasons. In addition, we observe a positive link between securitization and banks credit risk. We interpret these latter findings as evidence that UK banks which engaged in securitization did so, in part, to transfer credit risk and that, in comparison to UK banks which did not use securitization, they had more credit risk to transfer in the sense that they originated lower quality loans and held lower quality assets. We show that banks which issued more asset-backed securities before the financial crisis suffered more defaults after the financial crisis.
    Date: 2012
  10. By: Demirguc-Kunt, Asli; Klapper, Leora
    Abstract: This paper summarizes financial inclusion across Africa. First, it provides a brief overview of the African financial sector landscape. Second, it uses the Global Financial Inclusion Indicators (Global Findex) database to characterize adults in Africa that use formal and informal financial services and identify the barriers to formal account ownership. Next, it uses World Bank Enterprise Survey data to examine how the use of financial services by small and medium enterprises in Africa compares with small and medium enterprises in other developing regions in terms of account ownership and availability of lines of credit. The authors find that less than a quarter of adults in Africa have an account with a formal financial institution and that many adults in Africa use informal methods to save and borrow. Similarly, the majority of small and medium enterprises in Africa are unbanked and access to finance is a major obstacle. Compared with other developing economies, high-growth small and medium enterprises in Africa are less likely to use formal financing, which suggests formal financial systems are not serving the needs of enterprises with growth opportunities.
    Keywords: Access to Finance,Banks&Banking Reform,Emerging Markets,Debt Markets,E-Business
    Date: 2012–06–01
  11. By: Andrievskaya, Irina (BOFIT)
    Abstract: The 2007-2009 global financial crisis demonstrated the need for effective systemic risk measurement and regulation. This paper proposes a straightforward approach for estimating the systemic funding liquidity risk in a banking system and identifying systemically critical banks. Focusing on the surplus of highly liquid assets above due payments, we find systemic funding liquidity risk can be expressed as the distance of the aggregate liquidity surplus from its current level to its critical value. Calculations are performed using simulated distribution of the aggregate liquidity surplus determined using Independent Component Analysis. The systemic importance of banks is then assessed based on their contribution to variation of the liquidity surplus in the system. We apply this methodology to the case of Russia, an emerging economy, to identify the current level of systemic funding liquidity risk and rank banks based on their systemic relevance.
    Keywords: systemic risk; liquidity surplus; banking; Russia
    JEL: G21 G28 P29
    Date: 2012–06–18
  12. By: Martin L. Weitzman
    Abstract: Suppose that there is a probability density function for how bad things might get, but that the overall rate at which this probability density function slims down to approach zero in the tail is uncertain. The paper shows how a basic precautionary principle of tail fattening could then apply. The worse is the contemplated damage, the more should a decision maker consider the bad tail to be among the relatively fatter-tailed possibilities. A rough numerical example is applied to the uncertain tail distribution of climate sensitivity.
    JEL: Q5 Q54
    Date: 2012–06
  13. By: Li, Jianjun; Hsu, Sara
    Abstract: This is an English summary of a 300-page report produced by Jianjun Li, Sara Hsu and Guangning Tian, “The Annual Report of China Shadow Banking System,” Project Sponsored by the National Natural Science Foundation of China, Project Number 71173246,
    Keywords: Shadow Banking; China; Financial System; Informal Finance
    JEL: G2
    Date: 2012–06–05
  14. By: Bhattacharyya, Surajit; Chatri, Ankit
    Abstract: This paper explores the impact of M&A on technical efficiency of Indian commercial banks during the second decade of reforms. We use DEA to compute the relative technical efficiency of banks that participated in M&A activities. The technical efficiency is computed under both 'common' and 'separate' frontier with the assumption of 'constant' as well as 'variable' returns to scale. We also compare the post-amalgamation efficiency scores of the participating banks with that of a control group comprising of such banks that did not undergo any consolidation since 1991. Our results indicate evidence of efficiency gains for the merging and/or acquiring banks. At the same time there are banks that have experienced deterioration in their post-M&A average efficiency levels.
    Keywords: Commercial Banking; DEA; Technical Efficiency; Control Group
    JEL: C61 G21
    Date: 2012–06–05
  15. By: Stewart C. Myers; James A. Read, Jr.
    Abstract: We show how the value of a real option depends on corporate income taxes and the option’s “debt capacity,” defined as the amount of debt supported or displaced by the option. The value of the underlying asset must be an adjusted present value (APV). The risk-free rate of interest must be after-tax. Debt capacity depends on the APV and target debt ratio for the underlying asset, on the option delta and on the amount of risk-free borrowing or lending that would be needed for replication. The target debt ratio for a real call option is almost always negative. Observed debt ratios for growth firms that follow the tradeoff theory of capital structure will be lower than target ratios for assets in place. Our results can rationalize some empirical financing patterns that seem inconsistent with the tradeoff theory, but rigorous tests of the theory for growth firms seem nearly impossible.
    JEL: G31 G32
    Date: 2012–06
  16. By: Daniel Heller; Nicholas Vause
    Abstract: By the end of 2012, all standardised over-the-counter (OTC) derivatives must be cleared with central counterparties (CCPs). In this paper, we estimate the amount of collateral that CCPs should demand to clear safely all interest rate swap and credit default swap positions of the major derivatives dealers. Our estimates are based on potential losses on a set of hypothetical dealer portfolios that replicate several aspects of the way that derivatives positions are distributed within and across dealer portfolios in practice. Our results suggest that major dealers already have sufficient unencumbered assets to meet initial margin requirements, but that some of them may need to increase their cash holdings to meet variation margin calls. We also find that default funds worth only a small fraction of dealers' equity appear sufficient to protect CCPs against almost all possible losses that could arise from the default of one or more dealers, especially if initial margin requirements take into account the tail risks and time variation in risk of cleared portfolios. Finally, we find that concentrating clearing of OTC derivatives in a single CCP could economise on collateral requirements without undermining the robustness of central clearing.
    Keywords: central counterparties, clearing, collateral, derivatives, default funds, initial margins, variation margins
    Date: 2012–03
  17. By: Thorvardur Tjörvi Ólafsson; Karen Áslaug Vignisdóttir
    Abstract: We utilise a unique nationwide household-level database to analyse how households’ financial position evolved in the run-up to and aftermath of the financial crisis in Iceland. The main focus of our analysis is to assess how the share of indebted households in financial distress evolved and how it was affected by debt restructuring measures and court decisions. We also analyse the share of indebted homeowners in negative housing equity and those in the highly vulnerable situation of being in distress and negative housing equity simultaneously. The analysis suggests that the share of indebted households in distress grew from 12½ per cent in early 2007 to 23½ per cent on the eve of the banking collapse in the autumn of 2008, when the lion’s share of the balance sheet shocks had already taken place. The extent of acute distress nearly quadrupled over the same period. Forbearance efforts provided temporary breathing space, but the share in distress is estimated to have peaked at 27½ per cent in autumn 2009, before declining to 20 per cent at yearend 2010 due to policy and legal interventions. Financial distress is found to be inversely related to income and age, as well as being higher among families with children and those with foreigndenominated debt than among childless couples and those with ISK-denominated loans only. Parents of every fifth child in Iceland were in distress at year-end 2010. The incidence of negative housing equity increased dramatically, from roughly 6 to 37 per cent of indebted homeowners, over the four-year period. Negative housing equity is more widespread among high-income than low-income households. The share of homeowners simultaneously in distress and negative equity rose from roughly 1 to 14 per cent but declined to 10 per cent by the end of the period. Middleincome families with children, most of which had foreign-denominated loans, and low-income singles seem especially vulnerable. Some of the seeds of households’ financial difficulties were sown by imprudent lending in 2007 and 2008, when 16 per cent of the total amount of new loans was granted to households already in distress. Up to 34 per cent of households in distress at yearend 2010 were granted loans in 2007-2008, when they were already financially distressed.
    Date: 2012–06
  18. By: Adeline Saillard (Centre d'Economie de la Sorbonne - Paris School of Economics); Thomas Url (WIFO - Austrian Institute of Economic Research)
    Abstract: The distinction between bank and market based economies has a long tradition in applied macroeconomics. The two types differ not only in the level of financial activity channeled through the stock market and private banking, but also in their institutional frameworks. We challenge this traditional distinction between the two types of financial architecture. We develop an index that accounts for complementarity between financial markets and banking systems that has been hypothesized by Sylla (1998) and Song and Thakor (2010). The theoretical foundation of our empirical approach is the general equilibrium framework by Freixas and Rochet (1997). We validate the proposed index and the underlying theory of complementary using a random coefficient and a Generalized estimating equations (GEE).
    Keywords: Bank-based, market-based, complementarity, efficiency, financial structure.
    JEL: E42 G20
    Date: 2012–06
  19. By: Alexander Lipton; Ioana Savescu
    Abstract: A multi-dimensional extension of the structural default model with firms' values driven by diffusion processes with Marshall-Olkin-inspired correlation structure is presented. Semi-analytical methods for solving the forward calibration problem and backward pricing problem in three dimensions are developed. The model is used to analyze bilateral counterparty risk for credit default swaps and evaluate the corresponding credit and debt value adjustments.
    Date: 2012–06
  20. By: Caterina Mendicino
    Abstract: What are the macroeconomic implications of higher leveraged borrowing? To address this question, we develop a business cycle model with credit frictions in which firms reallocate capital among themselves through the credit market. We find that looser collateral requirements moderate the sensitivity of investment and output to changes in productivity but sharpen the response to shocks originated in the credit market. This result poses a challenge to the design of a macro-prudential policy framework that aims to mitigate pro-cyclicality in the financial market and improve macroeconomic stability. We document that, contrary to discretionary lower caps on loan-to-value ratios, time-varying caps that counter-cyclically respond to indicators of financial imbalances are successful in smoothing credit-cycles without increasing the sensitivity of the economy to real shocks. Further, countercyclical loan-to-value ratios also dampen macroeconomic volatility without reducing the size of the economy.  
    JEL: E21 E22 E44 G20
    Date: 2012
  21. By: Adeline Saillard (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This study provides evidence of the role played by the financial structure and the liberalization in the crisis for low, middle and high income countries classified by geographic region. The traditional view of the financial structure-bank vs market based economies is challenged by using the concept of complementarity. We find, as measured by the index proposed in Saillard and Url (2011) the complementary systems to be less vulnerable to financial crises and countries with a low level of liberalization in the financial markets and the banking sectors.
    Keywords: Bank-based, market-based, complementarity, crisis, financial structure.
    JEL: G10 G18 E44
    Date: 2012–06
  22. By: Merwan Engineer (University of Victoria, Canada); Paul Schure (University of Victoria, Canada); Mark Gillis (Commonwealth Bank of Australia, Australia)
    Abstract: We consider the provision of deposit insurance as the outcome of a non-cooperative policy game between nations. Nations compete for deposits in order to protect their banking systems from the destabilizing impact of potential capital flight. Policies are chosen to attract depositors who optimally respond to the expected return to deposits, which depends on both stability and deposit insurance levels. We identify both defensive and beggar-thy-neighbour policies. The model sheds light on the European banking crisis of 2008 in which individual nations ratcheted up their deposit insurance levels.
    Date: 2012–06
  23. By: João Pedro Pereira; António Rua
    Abstract: This paper studies how the state of the banking sector influences stock returns of nonfinancial firms. We consider a two-factor pricing model, where the first factor is the traditional market excess return and the second factor is the change in the average distance to default of the banking sector. We find that this bank factor is priced in the cross section of U.S. nonfinancial firms. Controlling for market beta, the expected excess return for a stock in the top quintile of bank risk exposure is on average 2.67% higher than for a stock in the bottom quintile.
    JEL: G12 G21
    Date: 2012
  24. By: Carlos Castro; Juan Sebastian Ordoñez
    Abstract: Abstract: We design a financial network model that explicitly incorporates linkages across institutions through a direct contagion channel, as well as an indirect common exposure channel. In particular, common exposure is setup so as to link the financial to the real sector. The model is calibrated to balance sheet data on the colombian financial sector. Results indicate that commercial banks are the most systemically important financial institutions in the system. Whereas government owned institutions are the most vulnerable institutions in the system.
    Date: 2012–06–12
  25. By: Feyen, Erik; Kibuuka, Katie; Otker-Robe, Inci
    Abstract: Just before the 2008-09 global financial crisis, policymakers were concerned about the rapid growth of bank credit, particularly in Europe; now worry centers on a potential global credit crunch led by European banking institutions. Overall, credit conditions across Europe deteriorated markedly in late 2011. Spillover effects are being felt around the globe and imply significant channels through which deleveraging could have disruptive consequences for credit conditions in emerging markets, particularly in emerging Europe. Significant liquidity support provided by the European Central Bank was a"game changer,"at least in the short term, as it helped revive markets and limited the risk of disorderly deleveraging. However, the extent, speed, and impact of European bank deleveraging remain highly dependent on the evolution of economic growth and market conditions, which in turn are guided by the ultimate impact of European Central Bank liquidity support, resolution of the sovereign debt crisis within the Euro Area, and the ability of the European rescue fund to provide an effective firewall against contagion.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Financial Intermediation,Bankruptcy and Resolution of Financial Distress
    Date: 2012–06–01
  26. By: Joseph Tracy; Joshua Wright
    Abstract: This paper analyzes the relationship between changes in borrowers' monthly mortgage payments and future credit performance. This relationship is important for the design of an internal refinance program such as the Home Affordable Refinance Program (HARP). We use a competing risk model to estimate the sensitivity of default risk to downward adjustments of borrowers' monthly mortgage payments for a large sample of prime adjustable-rate mortgages. Applying a 26 percent average monthly payment reduction that we estimate would result from refinancing under HARP, we find that the cumulative five-year default rate on prime conforming adjustable-rate mortgages with loan-to-value ratios above 80 percent declines by 3.8 percentage points. If we assume an average loss given default of 35.2 percent, this lower default risk implies reduced credit losses of 134 basis points per dollar of balance for mortgages that refinance under HARP.
    Keywords: Adjustable rate mortgages ; Mortgages ; Default (Finance) ; Risk ; Credit
    Date: 2012
  27. By: Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
    Abstract: A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.
    Keywords: Risk in DSGE models, investment banking, financial intermediation, separating commercial and investment banking, competition and risk, moral hazard in banking, prudential regulation, systematic vs. idiosyncratic risks.,
    Date: 2012
  28. By: Li, Xiaofei; Escalante, Cesar L.; Epperson, James E.; Gunter, Lewell F.
    Abstract: This study is designed to analyze bank failures from the technical efficiency standpoint under a stochastic cost frontier framework and evaluate the reliability of the technical efficiency measure as a determinant of the financial health of banks and probability to succeed or fail at the height of the current recessionary period. Results of this analysis confirm that successful agricultural banks have been operating more efficiently than surviving nonagricultural banks. This result helps to refute the contention that farm loans are at a relatively higher level of riskiness.
    Keywords: Agricultural Banking, Stochastic Frontier Analysis, Technical Efficiency, Agricultural Finance, G01, G21, G33,
    Date: 2012
  29. By: Luis Mohamed Azzim Gulamhussen (University Institute of Lisbon); Carlos Pinheiro (Caixa General de Dep˜sitos); Alberto Franco Pozzolo (Universita' degli Studi del Molise)
    Abstract: The recent financial crisis has clearly shown that the relationship between bank internationalization and risk is complex. Multinational banks can benefit from portfolio diversification, reducing their overall riskiness, but this effect can be offset by incentives going in the opposite direction, leading them to take on excessive risks. Since both effects are grounded on solid theoretical arguments, the answer of what is the actual relationship between bank internationalization and risk is left to the empirical analysis. In this paper, we study such relationship in the period leading to the financial crisis of 2007-2008. For a sample of 384 listed banks from 56 countries, we calculate two measures of risk for the period from 2001 to 2007 Ð the expected default frequency (EDF), a market-based and forward-looking indicator, and the Z-score, a balance-sheet-based and backward-looking measure Ð and relate them to their degree of internationalization. We find robust evidence that international diversification increases bank risk.
    Keywords: Banks, Risk, Multinational banking, Economic integration, Market structure.
    JEL: G21 G32 F23 F36 L22
    Date: 2012
  30. By: Fernando A. F. Ferreira; Paulo M.M. Rodrigues; Sérgio P. Santos; Ronald W. Spahr
    Abstract: Most banks have been negatively affected by the recent economic recession, which has forced them to evaluate their operating performance including the financial performance of bank branches. Approaches that have been applied to address the financial performance evaluation of bank branches include: optimization techniques, simulations, stochastic tools, fuzzy logics and decision support systems. Although recent improvements have been made in assessing financial performance, the potential for significant further improvement remains since the recent World economic crisis is adding pressure on business margins. The purpose of this paper is to construct an exemplificative evaluation index for bank branch financial performance by integrating cognitive maps with measuring attractiveness by a categorical based evaluation technique. We aim to apply this methodology constructively to serve as a learning mechanism and introduce transparency in the decision making process. Practical applications, strengths and weaknesses of the proposed evaluation index are also discussed.
    JEL: A12 E44 G20
    Date: 2012
  31. By: Chen, Xiaoshan; Kontonikas, Alexandros; Montagnoli, Alberto
    Abstract: This paper uses the multivariate unobserved components model with phase shifts to analyse the interaction of interest rates, output, asset prices and credit in the US. We find close linkages amongst cyclical fluctuations in the variables.
    Keywords: Asset Prices; Credit; Business Cycles; Multivariate Unobserved Components Models
    Date: 2012–04
  32. By: Alexandros Gabrielsen (Sumitomo Mitsui Banking Corporation, UK); Paolo Zagaglia (Department of Economics, University of Bologna, Italy); Axel Kirchner (Deutsche Bank, UK); Zhuoshi Liu (Bank of England, UK)
    Abstract: This paper provides an insight to the time-varying dynamics of the shape of the distribution of financial return series by proposing an exponential weighted moving average model that jointly estimates volatility, skewness and kurtosis over time using a modified form of the Gram-Charlier density in which skewness and kurtosis appear directly in the functional form of this density. In this setting VaR can be described as a function of the time-varying higher moments by applying the Cornish-Fisher expansion series of the first four moments. An evaluation of the predictive performance of the proposed model in the estimation of 1-day and 10-day VaR forecasts is performed in comparison with the historical simulation, filtered historical simulation and GARCH model. The adequacy of the VaR forecasts is evaluated under the unconditional, independence and conditional likelihood ratio tests as well as Basel II regulatory tests. The results presented have significant implications for risk management, trading and hedging activities as well as in the pricing of equity derivatives.
    Keywords: exponential weighted moving average, time-varying higher moments, Cornish-Fisher expansion, Gram-Charlier density, risk management, Value-at-Risk
    JEL: C51 C52 C53 G15
    Date: 2012–06

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