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on Banking |
| By: | Florian Heider (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roman Inderst (Johann Wolfgang Goethe University Frankfurt, Institute for Monetary and Financial Stability, Grüneburgplatz 1, 60629 Frankfurt am Main, Germany and Imperial College London, UK) |
| Abstract: | We o¤er a theoretical framework to analyze corporate lending when loan o¢ cers must be incentivized to prospect for loans and to transmit the soft information they obtain in that process. We explore how this multi-task agency problem shapes loan o¢ cerscompensation, banksuse of soft information in credit approval, and their lending standards. When competition intensi es, prospecting for loans becomes more important and banksinternal agency problem worsens. In response to more competition, banks lower lending standards, may choose to disregard soft and use only hard information in their credit approval, and in that case reduce loan o¢ cers to salespeople with steep, volume-based compensation. Our model generates excessive lendingas banksoptimal response to an internal agency problem. JEL Classification: D82, G21, L13. |
| Keywords: | Banking; Soft information; Loan o¢ cers; Multi-task Moral-hazard; Competition. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121439&r=ban |
| By: | Xavier Freixas; Jean-Charles Rochet |
| Abstract: | We model a Systemically Important Financial Institution (SIFI) that is too big (or too interconnected) to fail. Without credible regulation and strong supervision, the shareholders of this institution might deliberately let its managers take excessive risk. We propose a solution to this problem, showing how insurance against systemic shocks can be provided without generating moral hazard. The solution involves levying a systemic tax needed to cover the costs of future crises and more importantly establishing a Systemic Risk Authority endowed with special resolution powers, including the control of bankers' compensation packages during crisis periods. |
| Keywords: | SIFI, dynamic moral hazard, risk taking |
| JEL: | G21 G32 G34 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1328&r=ban |
| By: | Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry |
| Abstract: | This paper finds that lending by state banks is less procyclical than lending by private banks, especially in countries with good governance. Lending by state banks in high-income countries is even countercyclical. On the liability side, state banks expand potentially unstable non-deposit liabilities relatively little during booms, especially in countries with good governance. Public banks also report loan non-performance more evenly over the business cycle. Overall the results of the analysis suggest that state banks can play a useful role in stabilizing credit over the business cycle as well as during periods of financial instability. However, the track record of state banks in credit allocation remains quite poor, questioning the wisdom of using state banks as a short-term countercyclical tool. |
| Keywords: | Banks&Banking Reform,Debt Markets,Bankruptcy and Resolution of Financial Distress,Access to Finance,Economic Theory&Research |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6110&r=ban |
| By: | Falko Fecht (EBS Business School, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany.); Hans Peter Grüner (Universität Mannheim, Schloss, 68131 Mannheim, Germany and CEPR, London, UK.); Philipp Hartmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits. JEL Classification: D61, E44, G21. |
| Keywords: | Financial integration, specialization, interbank market, financial contagion. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121425&r=ban |
| By: | Kapadia, Sujit (Bank of England); Drehmann, Mathias (Bank for International Settlements); Elliott, John (Bank of England); Sterne, Gabriel (Exotix) |
| Abstract: | The endogenous evolution of liquidity risk is a key driver of financial crises. This paper models liquidity feedbacks in a quantitative model of systemic risk. The model incorporates a number of channels important in the current financial crisis. As banks lose access to longer-term funding markets, their liabilities become increasingly short term, further undermining confidence. Stressed banks’ defensive actions include liquidity hoarding and asset fire sales. This behaviour can trigger funding problems at other banks and may ultimately cause them to fail. In presenting results, we analyse scenarios in which these channels of contagion operate, and conduct illustrative simulations to show how liquidity feedbacks may markedly amplify distress. |
| Keywords: | Systemic risk; funding liquidity risk; contagion; stress testing |
| JEL: | G01 G21 G32 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0456&r=ban |
| By: | Mimir, Yasin |
| Abstract: | This paper conducts a quantitative analysis of the role of financial shocks and credit frictions affecting the banking sector in driving U.S. business cycles. I first document three key business cycle stylized facts of aggregate financial variables in the U.S. banking sector: (i) Bank credit, deposits and loan spread are less volatile than output, while net worth and leverage ratio are more volatile, (ii) bank credit and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical, and (iii) financial variables lead the output fluctuations by one to three quarters. I then present an equilibrium business cycle model with a financial sector, featuring a moral hazard problem between banks and its depositors, which leads to endogenous capital constraints for banks in obtaining funds from households. The model incorporates empirically-disciplined shocks to bank net worth (i.e. "financial shocks") that alter the ability of banks to borrow and to extend credit to non-financial businesses. I show that the benchmark model is able to deliver most of the above stylized facts. Financial shocks and credit frictions in banking sector are important not only for explaining the dynamics of financial variables but also for the dynamics of standard macroeconomic variables. Financial shocks play a major role in driving real fluctuations due to their impact on the tightness of bank capital constraint and the credit spread. |
| Keywords: | Banks; Financial Fluctuations; Credit Frictions; Bank Equity; Real Fluctuations |
| JEL: | E32 E44 E10 E20 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39648&r=ban |
| By: | Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. JEL Classification: E44, E52, G21. |
| Keywords: | Risk-taking channel, monetary policy, credit crisis, bank characteristics. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121427&r=ban |
| By: | Alexander Pivovarsky; Elena Loukoianova; Ralph De Haas; Yevgeniya Korniyenko |
| Abstract: | We use data on 1,294 banks in Central and Eastern Europe to analyze how bank ownership and creditor coordination in the form of the Vienna Initiative affected credit growth during the 2008–09 crisis. As part of the Vienna Initiative western European banks signed country-specific commitment letters in which they pledged to maintain exposures and to support their subsidiaries in Central and Eastern Europe. We show that both domestic and foreign banks sharply curtailed credit during the crisis, but that foreign banks that participated in the Vienna Initiative were relatively stable lenders. We find no evidence of negative spillovers from countries where banks signed commitment letters to countries where they did not. |
| Keywords: | Bank supervision , Banks , Credit expansion , Eastern Europe , Global Financial Crisis 2008-2009 , |
| Date: | 2012–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/117&r=ban |
| By: | Buch, Claudia M.; Prieto, Esteban |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:37&r=ban |
| By: | Mercedes Garcia-Escribano; Camilo Ernesto Tovar Mora; Mercedes Vera Martin |
| Abstract: | Over the past decade policy makers in Latin America have adopted a number of macroprudential instruments to manage the procyclicality of bank credit dynamics to the private sector and contain systemic risk. Reserve requirements, in particular, have been actively employed. Despite their widespread use, little is known about their effectiveness and how they interact with monetary policy. In this paper, we examine the role of reserve requirements and other macroprudential instruments and report new cross-country evidence on how they influence real private bank credit growth. Our results show that these instruments have a moderate and transitory effect and play a complementary role to monetary policy. |
| Keywords: | Banking systems , Central bank policy , Credit expansion , Latin America , Macroprudential policy , Reserve requirements , |
| Date: | 2012–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/142&r=ban |
| By: | Beatrice Weder; Kenichi Ueda |
| Abstract: | Claimants to SIFIs receive transfers when governments are forced into bailouts. Ex ante, the bailout expectation lowers daily funding costs. This funding cost differential reflects both the structural level of the government support and the time-varying market valuation for such a support. With large worldwide sample of banks, we estimate the structural subsidy values by exploiting expectations of state support embedded in credit ratings and by using long-run average value of rating bonus. It was already sizable, 60 basis points, as of the end-2007, before the crisis. It increased to 80 basis points by the end-2009. |
| Keywords: | Banks , Cross country analysis , Financial institutions , Subsidies , |
| Date: | 2012–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/128&r=ban |
| By: | Meilin Yan (School of Business and Economics, Loughborough University, UK); Maximilian J. B. Hall (School of Business and Economics, Loughborough University, UK); Paul Turner (School of Business and Economics, Loughborough University, UK) |
| Abstract: | This paper uses a relatively new quantitative model for estimating UK banks' liquidity risk. The model is called the Exposure-Based Cash-Flow-at-Risk (CFaR) model, which not only measures a bank's liquidity risk tolerance, but also helps to improve liquidity risk management through the provision of additional risk exposure information. Using data for the period 1997-2010, we provide evidence that there is variable funding pressure across the UK banking industry, which is forecasted to be slightly illiquid with a small amount of expected cash outflow (i.e. £0.06 billion) in 2011. In our sample of the six biggest UK banks, only the HSBC maintains positive CFaR with 95% confidence, which means that there is only a 5% chance that HSBC's cash flow will drop below £0.67 billion by the end of 2011. RBS is expected to face the largest liquidity risk with a 5% chance that the bank will face a cash outflow that year in excess of £40.29 billion. Our estimates also suggest Lloyds TSB's cash flow is the most volatile of the six biggest UK banks, because it has the biggest deviation between its downside cash flow (i.e. CFaR) and expected cash flow. |
| Keywords: | UK Balance Sheet Analysis, Liquidity Coverage, Net Cash Capital. |
| JEL: | G01 G21 G28 G32 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2012_08&r=ban |
| By: | Tigran Poghosyan |
| Abstract: | We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EMs) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization, and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs. |
| Date: | 2012–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/140&r=ban |
| By: | Dániel Holló (Magyar Nemzeti Bank, 1054 Szabadság tér 8/9, 1850 Budapest, Hungary.); Manfred Kremer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. JEL Classification: G01, G10, G20, E44. |
| Keywords: | Financial system, financial stability, systemic risk, financial stress index, macro-financial linkages. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121426&r=ban |
| By: | Markus Kinateder (Dpto. Economía); Hubert Janos Kiss (Universidad Autónoma de Madrid) |
| Abstract: | We study the Diamond-Dybvig model of financial intermediation (JPE, 1983) under theassumption that depositors have information about previous decisions. Depositors decidesequentially whether to withdraw their funds or continue holding them in the bank. If depositorsobserve the history of all previous decisions, we show that there are no bank runs in equilibriumindependently of whether the realized type vector selected by nature is of perfect or imperfectinformation.JEL classification numbers: |
| Keywords: | Bank Run, Imperfect Information, Perfect Bayesian Equilibrium |
| JEL: | C72 D82 G21 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2012-16&r=ban |
| By: | Carrera, Cesar (Banco Central de Reserva del Perú); Vega, Hugo (Banco Central de Reserva del Perú; London School of Economics) |
| Abstract: | The interbank market helps regulate liquidity in the banking sector. Banks with outstanding resources usually lend to banks that are in needs of liquidity. Regulating the interbank market may actually benefit the policy stance of monetary policy. Introducing an interbank market in a general equilibrium model may allow better identification of the final effects of non-conventional policy tools such as reserve requirements. We introduce an interbank market in which there are two types of private banks and a central bank that has the ability to issue money into a DSGE model. Then, we use the model to analyse the effects of changes to reserve requirements (a macroprudential tool), while the central bank follows a Taylor rule to set the policy interest rate. We find that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate (that could have an undesired effect on private expectations) or a zero bound (i.e. liquidity trap scenarios). |
| Keywords: | reserve requirements, collateral, banks, interbank market, DSGE |
| JEL: | E31 O42 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2012-014&r=ban |
| By: | Sherrill Shaffer |
| Abstract: | Motivated by the debate over similarities between the current and previous financial crises, logit estimates reveal significantly changed linkages between observable financial ratios and probabilities of subsequent bank failure using U.S. data from the 1980s and 2008. |
| JEL: | G21 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-23&r=ban |
| By: | Sherrill Shaffer |
| Abstract: | Even after controlling for other observable factors, reciprocal deposits are associated with higher bank risk as measured by the probability of failure and the Zscore. These results are consistent with the moral hazard hypothesis and reject the risk substitution hypothesis. |
| JEL: | G21 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-22&r=ban |
| By: | Segendorf, Björn (Financial Stability Department, Central Bank of Sweden); Jansson, Thomas (Financial Stability Department, Central Bank of Sweden) |
| Abstract: | We estimate the social and private costs of consumer-to-business payments in Sweden in 2009. The combined social cost for these payments was 0.68 per cent of GDP. At the point of sale, cash is socially less costly than debit cards for payments below EUR 1.88 (SEK 20) and credit cards below EUR 42.37 (SEK 450). The corresponding thresholds for the individual consumer are higher for debit cards and much lower for credit cards. Using unique survey data we show that consumers’ payment behaviour is not consistent with what is socially optimal. |
| Keywords: | Cash payments; Card payments; Credit transfers; Direct debits; Social costs; Private costs |
| JEL: | D12 D23 D24 |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0262&r=ban |