New Economics Papers
on Banking
Issue of 2012‒07‒23
27 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank ownership and credit over the business cycle: Is lending by state banks less procyclical? By Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry
  2. Foreigners vs. Natives: Bank Lending Technologies and Loan Pricing By Beck, T.H.L.; Ioannidou, V.; Schäfer, L.
  3. Crisis and Italian households: a microeconomic analysis of mortgage contracts By Roberto Felici; Elisabetta Manzoli; Raffaella Pico
  4. Microfinance for agricultural firms - What can we learn from bank data? By Weber, Ron; Musshoff, Oliver
  5. Identifying systemically important financial institutions: size and other determinants By Kyle Moore; Chen Zhou
  6. The Impact of Market Power at Bank Level in Risk-taking: the Brazilian case By Benjamin Miranda Tabak; Guilherme Maia Rodrigues Gomes; Maurício da Silva Medeiros Júnior
  7. Financial fragility and growth prospects: credit rationing during the crisis By Giorgio Albareto; Paolo Finaldi Russo
  8. Capital Requirements under Basel III in Latin America: The Cases of Bolivia, Colombia, Ecuador and Peru - Working Paper 296 By Liliana Rojas-Suarez, Arturo J. Galindo, and Marielle del Valle
  9. The Role of Complementarity and the Financial Liberalization in the Financial Crisis By Adeline Saillard
  10. Measuring complementarity in financial systems By Adeline Saillard; Thomas Url
  11. The Commitment Problem of Secured Lending By Daniela Fabbri; Annamaria Menichini
  12. Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises? Cross-Country Evidence on Bonanzas in Capital Inflows and Bonanza-Boom- Bust Cycles By Julian Caballero
  13. Global Banks and Crisis Transmission By Kalemli-Ozcan, Sebnem; Papaioannou, Elias; Perri, Fabrizio
  14. CDS Industrial Sector Indices, credit and liquidity risk By Monica Billio; Massimiliano Caporin; Loriana Pelizzon; Domenico Sartore
  15. Taming SIFIs By Xavier Freixas; Jean-Charles Rochet
  16. What is new in the finance-growth nexus: OTC derivatives, bank assets and growth By Becchetti, Leonardo; Ciampoli, Nicola
  17. An Empirical Analysis of the Role of Relationship Banking ?Can the Relationship Banking Substitute the Role of Policy Finance? By Takeshi Koba; Tsubouchi Shinji
  18. What causes banking crises? An empirical investigation By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  19. Informal Credit and Factor Productivity in Africa: Does Informal Credit Matter? By Owuor, George; Shem, A.O.
  20. The Impact of Bank Credit on Employment Formality in Uruguay By Nestor Gandelman; Alejandro Rasteletti
  21. Cash usage in the Netherlands: How much, where, when, who and whenever one wants? By Nicole Jonker; Anneke Kosse; Lola Hernández
  22. Microfinance efficiency in the West African Economic and Monetary Union: have reforms promoted sustainability or outreach? By KABLAN, Sandrine
  23. Credit rating agencies and unsystematic risk: Is there a linkage? By Pilar Abad Romero; María Dolores Robles Fernández
  24. Network Analysis of the e-MID Overnight Money Market: The Informational Value of Different Aggregation Levels for Intrinsic Dynamic Processes By Karl Finger, Daniel Fricke, Thomas Lux
  25. On dependence consistency of CoVaR and some other systemic risk measures By Georg Mainik; Eric Schaanning
  26. Modeling Multivariate Extreme Events Using Self-Exciting Point Processes By Oliver Grothe; Volodymyr Korniichuk; Hans Manner
  27. Do Low Interest Rates Sow the Seeds of Financial Crises? By Simona E. Cociuba; Malik Shukayev; Alexander Ueberfeldt

  1. 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 our results 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 counter-cyclical tool.
    Keywords: lending; procyclicality; state banks
    JEL: G21 H44
    Date: 2012–07
  2. By: Beck, T.H.L.; Ioannidou, V.; Schäfer, L. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Do domestic and foreign banks differ in their lending techniques and loan pricing models? Are such differences driven by different clienteles? Using a sample of firms that borrow from both domestic and foreign banks in the same month, we show significant differences in lending techniques and loan pricing. Foreign banks charge lower interest rates, but grant loans at a shorter maturity and are more likely to demand collateral than domestic banks. Foreign banks also base their pricing on credit ratings and collateral pledges, while domestic banks price according to length, depth and breadth of the relationship with the borrower. These findings confirm that foreign and domestic banks can cater to the same clientele but with different lending techniques: foreign banks with transaction-based and domestic banks with relationship-based lending techniques.
    Keywords: Bank Financing;Foreign Ownership;Lending Technologies;Loan Pricing.
    JEL: G21 G30
    Date: 2012
  3. By: Roberto Felici (Bank of Italy); Elisabetta Manzoli (Bank of Italy); Raffaella Pico (Bank of Italy)
    Abstract: Using information on about 2 million house purchase loans to households, this paper analyses the effects of the financial crisis on this portion of the credit market. From 2008 to 2011 the total number and value of new mortgages decreased sharply. The results show that young households and non-EU immigrants have been affected more by the decline of new mortgages. The worsening of the economic cycle and the tightening of the lending standards by banks seem to have had a stronger effect on these types of household. Interest rate increases for different groups of household have been fairly similar, albeit greater for smaller mortgages.
    Keywords: mortgages, financial crisis, credit supply and demand, credit risk, interest rates on mortgage loans.
    JEL: D10 E51 G21
    Date: 2012–07
  4. By: Weber, Ron; Musshoff, Oliver
    Abstract: Using a unique dataset of a commercial microfinance institution (MFI) in Tanzania this paper investigates first whether agricultural firms have a different probability to get a loan and whether their loans are differently volume rationed than loans to non-agricultural firms. Second, we analyze whether agricultural firms repay their loans with different delinquencies than non-agricultural firms. Our results reveal that agricultural firms face higher obstacles to get credit but as soon as they have access to credit, their loans are not differently volume rationed than those of non-agricultural firms. Furthermore, agricultural firms are less often delinquent when paying back their loans than non-agricultural firms. Our findings suggest that a higher risk exposition typically attributed to agricultural production must not necessarily lead to higher credit risk. They also show that the investigated MFI overestimates the credit risk of agricultural clients and, hence, should reconsider its risk assessment practice to be able to increase lending to the agricultural sector. In addition, our results might indicate that farmers qualify less often for a loan as they do not fit into the standard microcredit product.
    Keywords: Agricultural Finance, Access to Credit, Loan Repayment, Microfinance Institutions, Agricultural Finance, G21, G32, Q14,
    Date: 2012–08
  5. By: Kyle Moore; Chen Zhou
    Abstract: This paper analyzes the conditions under which a financial institution is systemically important. Measuring the level of systemic importance of financial institutions, we find that size is a leading determinant confirming the usual “Too Big To Fail” argument. Nevertheless, the relation is non-linear during the recent global financial crisis. Moreover, since 2003, other determinants of systemic importance emerge. For example, decisions made by financial institutions on their choice of asset holdings, methods of funding, and sources of income have had a significant effect on the level of systemic importance during the global financial crises starting in 2008. These findings help to identify systemically important financial institutions by examining their relevant banking activities and to further design macro-prudential regulation towards reducing the systemic risk in the financial system.
    JEL: G01 G21 G28
    Date: 2012–07
  6. By: Benjamin Miranda Tabak; Guilherme Maia Rodrigues Gomes; Maurício da Silva Medeiros Júnior
    Abstract: This paper aims to examine the competitive behavior of Brazilian banking industry and through a more individual analysis understand how risk-taking can be affected by banks' market power. Therefore, we compute market power at the bank-level and aggregate this variable in a risk-taking model. Our findings suggest that Brazilian banking industry presents a significant heterogeneity of banks' market power and is characterized as monopolistic competition. Another important result is that market power is positively related to risk-taking. We also verify that banks' capitalization has an important influence in market power, which affects risk-taking. An increase in capital leads banks with higher market power to assume less risk. We verify that an increase in capital makes banks with higher market power behave more conservative. These results are important for the design of proper financial regulation.
    Date: 2012–06
  7. By: Giorgio Albareto (Bank of Italy); Paolo Finaldi Russo (Bank of Italy)
    Abstract: This paper analyzes firms’ difficulties in accessing credit before and during the crisis, by focusing on two of their characteristics: financial fragility and growth prospects. Our econometric analysis indicates that fragile financial conditions were associated with a much higher than average probability of rationing, both before and during the crisis. High rates of growth in sales and investments, in value added per employee and in the propensity to export – indicators presumably linked to growth prospects – favoured access to credit in the period leading up to the financial crisis; during the crisis, instead, credit rationing was more widespread and less related to firms’ potential growth. Lending relationships facilitated access to the credit market, especially for firms with better growth prospects; this result is consistent with the hypothesis that the banks which are more involved in firms’ financing have better information and stronger incentives to use it.
    Keywords: credit rationing, relationship lending, financial fragility, growth prospects
    JEL: E51 G21 G32
    Date: 2012–07
  8. By: Liliana Rojas-Suarez, Arturo J. Galindo, and Marielle del Valle
    Abstract: A number of banks in developed countries argue that the new capital requirements under Basel III are too stringent and that implementing the proposed regulation would require raising large amounts of capital, with adverse consequences on credit and the cost of finance. In contrast, many emerging market economies claim that their systems are adequately capitalized and that they have no problems with implementing the new capital requirements. This paper conducts a detailed calculation of capital held by the banks in four Latin American countries—known as the Andean countries: Bolivia, Colombia, Ecuador and Peru—and assesses the potential effects of full compliance with the capital requirements under Basel III. The conclusions are positive and show that while capital would decline somewhat in these countries after they make adjustments to comply with the new definition of capital under Basel III, they would still meet the Basel III recommendations on capital requirements. More importantly, these countries would hold Tier 1 capital to risk-weighted-asset ratios significantly above the 8.5 percent requirement under Basel III. That is, not only the quantity, but also the quality of capital is adequate in the countries under study. While encouraging, these results should not be taken as a panacea since the new regulations are only effective if coupled with appropriate risk management and supervision mechanisms to control the build-up of excessive risk-taking by banks. Further research into these areas is needed for a complete assessment of the strength of banks in the Andean countries.
    JEL: G21 G28 G32 G38
    Date: 2012–05
  9. By: Adeline Saillard (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    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.
    Date: 2012–06
  10. By: Adeline Saillard (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); 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.
    Date: 2012–06
  11. By: Daniela Fabbri (Cass Business School); Annamaria Menichini (CSEF, Università di Salerno)
    Abstract: The paper investigates optimal financial contracts when investment in pledgeable assets is endogenous and not observable to financiers. In a setting with uncertainty, two inputs with different collateral value and investment unobservability, we show that a firm-bank secured credit contract is time-inconsistent: Once credit has been granted, the entrepreneur has an ex-post incentive to alter the input combination towards the input with low collateral value and higher productivity, thus jeopardizing total bank revenues. Anticipating the entrepreneur's opportunism, the bank offers a non-collateralized credit contract, thereby reducing the surplus of the venture. One way for the firm to commit to the contract terms is to purchase inputs on credit and pledge them to the supplier in case of default. Observing the input investment and having a stake in the bad state, the supplier acts as a guarantor that the input combination specified in the bank contract will be actually purchased and that the entrepreneur will stick to the contract terms. The paper concludes that: (1) Buying inputs on account facilitates the access to collateralized bank financing; (2) Firms using both trade credit and collateralized bank finance invest more in pledgeable assets than firms only using uncollateralized bank credit. Our results are robust to the possibility of collusion between entrepreneur and supplier.
    Keywords: collateral, commitment, trade credit, bank financing
    JEL: G32 G33 K22 L14
    Date: 2012–07–09
  12. By: Julian Caballero
    Abstract: This paper asks whether bonanzas (surges) in net capital inflows increase the probability of banking crises and whether this is necessarily through a lending boom mechanism. A fixed effects regression analysis indicates that a baseline bonanza, identified as a surge of one standard deviation from trend, increases the odds of a banking crisis by three times, even in the absence of a lending boom. Thus, a bonanza raises the likelihood of a crisis from an unconditional probability of 4. 4 percent to 12 percent. Larger windfalls of capital (two-s. d. bonanzas) increase the odds of a crisis by eight times. The joint occurrence of a bonanza and a lending boom raises these odds even more. Decomposing flows into FDI, portfolio-equity and debt indicates that bonanzas in all flows increase the probability of crises when the windfall takes place jointly with a lending boom. Thus, windfalls in all types of flows exacerbate the deleterious effects of credit. However, surges in portfolio-equity flows seem to have an independent effect, even in the absence of a lending boom. Furthermore, emerging economies exhibit greater odds of crises after a windfall of capital.
    JEL: E44 E51 F21 F32 F34 G01
    Date: 2012–05
  13. By: Kalemli-Ozcan, Sebnem; Papaioannou, Elias; Perri, Fabrizio
    Abstract: We study the effect of financial integration on the transmission of international business cycles. In a sample of 20 developed countries between 1978 and 2009 we find that, in periods without financial crises, increases in bilateral financial linkages are associated with more divergent output cycles. This relation is significantly weaker during financial turmoil periods, suggesting that financial crises induce co-movement among more financially integrated countries. We also show that countries with stronger, direct and indirect, financial ties to the U.S. experienced more synchronized cycles with the U.S. during the recent 2007-2009 crisis. We then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity. The model suggests that the change in the relation between integration and synchronization can be driven by changes in the nature of shocks hitting the world economy, and that shocks to global banks played an important role in triggering and spreading the 2007-2009 crisis.
    Keywords: co-movement; crisis; financial integration; international business cycles
    JEL: E32 F15 F36
    Date: 2012–07
  14. By: Monica Billio (Department of Economics, University Of Venice Cà Foscari); Massimiliano Caporin; Loriana Pelizzon (Department of Economics, University Of Venice Cà Foscari); Domenico Sartore (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This paper studies the risk spillover among US Industrial Sectors and focuses on the connection between credit and liquidity risks. The proposed methodology is based on quantile regressions and considers the movements of CDS Industrial Sector Indices depending on common risk factors such as equity risk, risk appetite, term spread and TED spread. We use CDS Industrial indexes and the market risk factor to identify the impact of market liquidity risk and market credit risk in the different US Industries and give evidence of the heterogeneity of this relation. We show that all the sectors are largely exposed to the non investment grade bond spread indicating that credit risk is largely a common factor rather than a sector specific factor. With a lower impact, we also find that market risk and interest rate risk are also common factors, as well as liquidity risk. These results indicate that diversification among sectors might collapse when credit, equity and liquidity events hit the market. The information extracted from CDS market could thus provide relevant information for sector allocation strategies.
    Keywords: Credit Risk, Common factors, liquidity risk
    JEL: F34 G12 G15
    Date: 2012
  15. 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
  16. By: Becchetti, Leonardo (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Ciampoli, Nicola (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)
    Abstract: We investigate the finance-growth nexus before and around the global financial crisis using for the first time OTC derivative data in growth estimates. Beyond the most recent Wacthel and Rousseau (2010) evidence which documents the interruption of the positive finance-growth relationship after 1989, we show that bank assets contribute indeed negatively, while OTC derivative positively or insignificantly with a much smaller effect in magnitude. At the same time the impact of the crisis is captured by a very strong negative effect of year dummies around the event. Our findings and their discussion aim to provide insights for policy measures aimed at tackling the crisis, disentangling positive from negative effects of derivatives and bank activity on the real economy and restoring the traditional positive link between finance and growth.
    Keywords: finance and growth; OTC derivatives; banking; global financial crisis
    JEL: E44 G10 O40
    Date: 2012–06–27
  17. By: Takeshi Koba; Tsubouchi Shinji
    Date: 2012–07
  18. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: We add the Bernanke-Gertler-Gilchrist model to a modified version of the Smets-Wouters model of the US in order to explore the causes of the banking crisis. We test the model against the data on HP-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test on output, inflation and interest rates. We then extract the model’s implied residuals on US unfiltered data since 1984 to replicate how the model predicts the crisis. The main banking shock tracks the unfolding ‘sub-prime’ shock, which appears to have been authored mainly by US government intervention. This shock worsens the banking crisis but ‘traditional’ shocks explain the bulk of the crisis; the non-stationarity of the productivity shock plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample they occur on average once every 40 years and when they occur around half are accompanied by financial crisis. Financial shocks on their own, even when extreme, do not cause crises — provided the government acts swiftly to counteract such a shock as happened in this sample.
    Keywords: DSGE; Banking; Crisis; Bootstrap
    JEL: C32 C52 E1
    Date: 2012–06
  19. By: Owuor, George; Shem, A.O.
    Abstract: It is widely documented that credit is an important instrument among resource poor farmers in developing economies. However, accessing loans from formal credit institutions has proved almost impossible for small and resource poor farmers leading to reliance on the least regulated informal credit sources such as the Grameen type institutions (Micro-Finance Institutions-MFIs) that peg lending to memberships in social networks such as groups. In spite of the growing preference to this type of lending, very little is known on their contribution among farm related productive activities in Kenya. This paper attempts to illuminate the role of lending via groups on economic performance of smallholder farmers via changes in purchased factor use between borrowers and non-borrowers. We employ endogenous switching regime approach (accomplished via heckman selection correction model) on a sample of 401 respondents made up of 180 borrowers and 221 non-borrowers from two districts in Kenya. Results show significant effects of group based lending on production via improved factors such as fertilizer, planting materials and crop chemicals, as well as on investment in non-farm businesses, hired labour, and in renting in more land. However, descriptive results indicate high fungibility of this type of credit, with over 20% use on non-productive activities, which infringe on expected output effects. Supervision and or issuing of credit in form of inputs could generate expected impact.
    Keywords: Informal Micro-Credit, Rural Smallholder Farmers, Productivity, Kenya, Agricultural Finance, International Relations/Trade,
    Date: 2012
  20. By: Nestor Gandelman; Alejandro Rasteletti
    Abstract: This paper examines the effect of bank credit on employment formalization in Uruguay. Using a difference-in-differences methodology proposed by Cata~o, Page´s and Rosales (2011), the paper finds that financial deepening decreases informality, especially in more financially dependent sectors. The effect is additionally found to be greater for women and younger workers. Despite the severe economic crisis and a sharp contraction of bank credit experienced by the economy in the period of analysis, no evidence is found that the effect of bank credit on employment formality has changed over time.
    JEL: E26 G21 O16 O4
    Date: 2012–04
  21. By: Nicole Jonker; Anneke Kosse; Lola Hernández
    Abstract: Having accurate information on cash usage is essential for monitoring the substitution process of cash by cards and for assessing the cost efficiency of the payment system. Moreover, estimates on cash usage reflect the transaction demand for cash. This is useful for central banks which are responsible for producing and issuing banknotes. The latest estimates of the number and value of cash payments made in the Netherlands date from 2007. How has cash usage developed since then? In what branches do consumers use cash and what type of consumers still rely heavily on cash? These questions and others are analysed using a one-day diary survey held in September 2010 in which 7,499 Dutch consumers documented their daily transactions. We find that Dutch consumers made about 5 billion cash payments in 2010. Although the majority of purchases are paid in cash, its role has steadily decreased due to increasing debit card usage. Cash is mainly used for low-value transactions, and especially the elderly and lower educated people still rely heavily on cash. Overall, the Dutch are able to pay the way they want. Only in 3% of transactions they had no choice but to use another means of payment as the one preferred.
    Date: 2012–03
  22. By: KABLAN, Sandrine
    Abstract: This study aims to assess the microfinance institutions’ (MFIs’) efficiency in the West African Economic and Monetary Union (WAEMU) after the reforms that were undertaken in the industry. Given the complementary role between MFIs and banks (where MFIs reach the population that the banks cannot), we ask whether these reforms have promoted sustainability or outreach. For this purpose, we use a data envelopment analysis (DEA) to measure the social efficiency on the one hand and the financial efficiency on the other hand. Our results show that sustainability prevails. Indeed, we observe an increase in financial efficiency at the expense of social and financial efficiency. MFIs that stress outreach tend to be less efficient, when one considers their intermediation role. Moreover, reforms have a negative impact on social efficiency and a positive impact on financial efficiency. Indeed, prudential ratios and accounting standards that were implemented, led MFIs to privilege their intermediation role.
    Keywords: efficiency; microfinance; outreach; reform programs; sustainability; WAEMU
    JEL: O55 C23 O16 C61 C67 G21
    Date: 2012–07–06
  23. By: Pilar Abad Romero (Departamento de Fundamentos del Análisis Económico. Universidad Rey Juan Carlos); María Dolores Robles Fernández (Departamento de Fundamentos y Análisis Económico II. Universidad Complutense de Madrid.)
    Abstract: This study analyzes the effects of six different credit rating announcements on systematic and unsystematic risk in Spanish companies listed on the Electronic Continuous Stock Market from 1988 to 2010. We use an extension of the event study dummy approach that includes direct effects on beta risk and on volatility. We find effects in both kinds of risk, indicating that rating agencies provide information to the market. Rating actions that imply an improvement in credit quality cause lower systematic and unsystematic risk. Conversely, ratings announcements that imply credit quality deterioration cause a rebalance in both types of risk, with higher beta risk being joined with lower diversifiable risk. Although the event characteristics were not important to determine how the two types of risk reacted to rating actions, the 2007 economic and financial crises increase the market’s sensitivity to these characteristics.
    Keywords: Credit rating agencies, Rating changes, Market model, GARCH, Stock Returns, Systematic risk, Unsystematic The information provided by Fitch and Moody’s is appreciated. Any errors are solely the responsibility of the authors. This work has been funded by the Spanish Ministerio de Ciencia y Tecnología (ECO2009-10398/ECON and ECO2011-23959), Junta de Comunidades de Castilla-La Mancha (PCI08-0089) and Banco de Santander (UCM940063).
    JEL: G12 G14 G24 C22
    Date: 2012–07
  24. By: Karl Finger, Daniel Fricke, Thomas Lux
    Abstract: In this paper, we analyze the network properties of the Italian e-MID data based on overnight loans during the period 1999-2010. We show that the networks appear to be random at the daily level, but contain significant non-random structure for longer aggregation periods. In this sense, the daily networks cannot be considered as being representative for the underlying `latent' network. Rather, the development of various network statistics under time aggregation points toward strong non-random determinants of link formation. We also identify the global financial crisis as a significant structural break for many network measures
    Keywords: interbank market, network models, financial crisis
    JEL: G21 G01 E42
    Date: 2012–07
  25. By: Georg Mainik; Eric Schaanning
    Abstract: This paper is dedicated to the consistency of systemic risk measures with respect to stochastic dependence. It compares two alternative notions of Conditional Value-at-Risk (CoVaR) available in the current literature. These notions are both based on the conditional distribution of a random variable Y given a stress event for a random variable X, but they use different types of stress events. We derive representations of these alternative CoVaR notions in terms of copulas, study their general dependence consistency and compare their performance in several stochastic models. Our central finding is that conditioning on X>=VaR_\alpha(X) gives a much better response to dependence between X and Y than conditioning on X=VaR_\alpha(X). The theoretical results relate the dependence consistency of CoVaR using conditioning on X>=VaR_\alpha(X) to well established results on concordance ordering of multivariate distributions or their copulas. These results also apply to some other systemic risk measures. The counterexamples for CoVaR based on the stress event X=VaR_\alpha(X) include inconsistency with respect to correlation in the bivariate Gaussian model.
    Date: 2012–07
  26. By: Oliver Grothe (Department of Economic and Social Statistics, University of Cologne); Volodymyr Korniichuk (CGS, University of Cologne); Hans Manner (Department of Economic and Social Statistics, University of Cologne)
    Abstract: We propose a new model that can capture the typical features of multivariate extreme events observed in financial time series, namely clustering behavior in magnitudes and arrival times of multivariate extreme events, and time-varying dependence. The model is developed in the framework of the peaks-over-threshold approach in extreme value theory and relies on a Poisson process with self-exciting intensity. We discuss the properties of the model, treat its estimation, deal with testing goodness-of-fit, and develop a simulation algorithm. The model is applied to return data of two stock markets and four major European banks.
    Keywords: Time Series, Peaks Over Threshold, Hawkes Processes, Extreme Value Theory
    JEL: C32 C51 C58 G15
    Date: 2012–06–27
  27. By: Simona E. Cociuba (University of Western Ontario); Malik Shukayev (Bank of Canada); Alexander Ueberfeldt (Bank of Canada)
    Abstract: A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model where interest rate policy affects risk taking by changing the amount of safe bonds available as collateral for repo transactions. Given properly priced collateral, lower than optimal interest rates reduce risk taking. However, if intermediaries can augment their collateral by issuing assets whose risk is underestimated by rating agencies, lower than optimal interest rates contribute to excessive risk taking and amplify the severity of recessions.
    Keywords: financial intermediation; risk taking; optimal interest rate policy; capital regulation
    JEL: E44 E52 G28 D53
    Date: 2012

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