|
on Banking |
| By: | Ashok Vir Bhatia; Tamim Bayoumi |
| Abstract: | This paper questions the view that leverage should have forewarned us of the global financial crisis of 2007-09, pointing to several gearing indicators that were neither useful portents of the onset of the crisis nor of its ferocity. Instead it shows, first, that the use of ill-suited collateral in the secured funding operations of U.S.-based investment banks was the fatal link between the collapse of structured finance and the global malfunction of funding markets that turbocharged the downdraft; and, second, that this insight (and others) can be decrypted from the Flow of Funds Accounts of the United States. |
| Keywords: | Banks , Borrowing , Consumer credit , Credit expansion , Financial crisis , Financial instruments , Financial sector , Loans , Private sector , United States , |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/162&r=ban |
| By: | Roman Horvath; Jakub Seidler; Laurent Weill |
| Abstract: | This paper examines the relation between banks' capital and liquidity creation. This issue is of interest to determine the potential impact of higher capital requirements for banks on their liquidity creation, which may have particular importance with new Basel III reform demanding from banks higher capital. We perform Granger-causality tests in a dynamic GMM panel estimator framework on an exhaustive dataset of Czech banks from 2000 to 2010. We observe a strong expansion of liquidity creation during the full period, which was slowed by the financial crisis, and was mainly driven by large banks. We show that capital is found to negatively Granger-cause liquidity creation but also observe that liquidity creation Granger-causes capital reduction. These findings support the view that Basel III reforms demanding higher capital can reduce liquidity creation, but also that greater liquidity creation can have a detrimental impact by reducing bank solvency. We thus show that there might be a trade-off between the benefits of financial stability induced by stronger capital requirements and those of increased liquidity creation of banking sector. |
| Keywords: | Bank capital, liquidity creation. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2012/05&r=ban |
| By: | Gersbach, Hans; Rochet, Jean-Charles |
| Abstract: | We provide a rationale for imposing counter-cyclical capital ratios on banks. In our simple model, bankers cannot pledge the entire future revenues to investors, which limits borrowing in good and bad times. Complete markets do not sufficiently stabilize credit fluctuations, as banks allocate too much borrowing capacity to good states and too little to bad states. As a consequence, bank credit, output, capital prices or wages are excessively volatile. Imposing a (stricter) capital ratio in good states corrects the misallocation of the borrowing capacity, increases expected output and can be beneficial to all agents in the economy. Although in our economy, all agents are risk-neutral, counter-cyclical capital ratios are an effective stabilization tool. To ensure this effectiveness, capital ratios have to be based on ex ante equity capital, as classical capital ratios can be bypassed. |
| Keywords: | Complete Markets; Credit Fluctuations; Macroprudential Regulation; Misallocation of Borrowing Capacity |
| JEL: | D86 G21 G28 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9077&r=ban |
| By: | Antonio Trujillo-Ponce (Department of Financial Economics and Accounting, Pablo de Olavide University, Seville, Spain); Reyes Samaniego-Medina (Department of Financial Economics and Accounting, Pablo de Olavide University, Seville, Spain); Clara Cardone-Riportella (Department of Business Administration, Universidad Carlos III de Madrid) |
| Abstract: | Using a sample of 2,186 credit default swap (CDS) spreads quoted in the European market during the period 2002-2009, this paper empirically analyzes which model – accounting- or market-based – better explains corporate credit risk. We find that there is little difference in the explanatory power of the two approaches. Our results suggest that both accounting and market data complement one other and thus that a comprehensive model that includes both types of variables appears to be the best option for explaining credit risk. We also show that the explanatory power of accounting- and market-based variables for measuring credit risk is particularly strong during periods of high uncertainty, as experienced in the recent financial crisis, and that it decreases as the CDS contract matures. Finally, the comprehensive model continues to show the best results when using the credit rating as the proxy for credit risk, but accounting variables currently appear to have a more important role than the market variables |
| Keywords: | Bankruptcy; credit default swaps; credit risk; distance-to-default |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:pab:fiecac:12.03&r=ban |
| By: | Robert Kollmann |
| Abstract: | This paper estimates a two-country model with a global bank, using U.S. and Euro area (EA) data, and Bayesian methods. The estimated model matches key U.S. and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for U.S. real activity. During the Great Recession (2007–09), banking shocks accounted for about 20 percent of the fall in U.S. and EA GDP, and for more than half of the fall in EA investment and employment. |
| Keywords: | International finance ; Financial markets |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:120&r=ban |
| By: | H. Evren Damar; Reint Gropp; Adi Mordel |
| Abstract: | In October 2006, Dominion Bond Rating Service (DBRS) introduced new ratings for banks that account for the potential of government support. The rating changes are not a reflection of any changes in the respective banks’ credit fundamentals. We use this natural experiment to evaluate the consequences of bail out expectations for bank behavior using a difference in differences approach. The results suggest a striking difference between the effects of bail out probabilities during calm times (“ex ante”) versus during crisis times (“ex post”). During calm times, higher bail-out probabilities result in higher risk taking, consistent with the moral hazard view and much of the empirical literature. However, in crisis times, we find that banks with higher bail out probabilities tend to increase their risk taking less compared to banks that were ex ante unlikely to be bailed-out. Charter values are one part of the explanation: Supported banks may have a funding advantage relative to non-supported banks during the crisis. However, we cannot rule out that other factors also may be playing a role, including tighter supervision of supported banks in crisis times. |
| Keywords: | Financial Institutions; Financial stability; Financial system regulation and policies |
| JEL: | G21 G28 G32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-22&r=ban |
| By: | Germán López-Espinosa (School of Economics and Business Administration, University of Navarra); Antonio Moreno (School of Economics and Business Administration, University of Navarra); Antonio Rubia (Department of Financial Economics, University of Alicante); Laura Valderrama (International Monetary Fund (IMF)) |
| Abstract: | We use the CoVaR approach to identify the main factors behind systemic risk in a set of large international banks. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find weaker evidence that either size or leverage contributes to systemic risk within the class of large international banks. We also show that asymmetries based on the sign of bank returns play an important role in capturing the sensitivity of system-wide risk to individual bank returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee’s proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk. |
| Keywords: | Systemic importance; liquidity risk; macroprudential regulation |
| JEL: | C30 G01 G20 |
| Date: | 2012–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp0212&r=ban |
| By: | Craig B. Merrill; Taylor D. Nadauld; René M. Stulz; Shane Sherlund |
| Abstract: | Much attention has been paid to the large decreases in value of non-agency residential mortgage-backed securities (RMBS) during the financial crisis. Many observers have argued that the fall in prices was partly driven by decreased liquidity and fire sales. We investigate whether capital requirements and accounting rules at financial institutions contributed to the selling of RMBS at fire sale prices. For financial institutions subject to credit-sensitive capital requirements, capital requirements increase as an asset’s credit becomes impaired. When accounting rules require such an asset’s value to be marked-to-market and the fair value loss to be recognized in earnings, a capital-constrained firm can improve its capital position by selling the credit-impaired asset even if it has to accept a liquidity discount to do so. Using a sample of 5,014 repeat transactions of non-agency RMBS by insurance companies from 2006 to 2009, we show that insurance companies that became more capital-constrained because of operating losses (uncorrelated with RMBS credit quality) and also recognized fair value losses sold comparable RMBS at much lower prices than other insurance companies during the crisis. |
| JEL: | G22 G28 G32 M41 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18270&r=ban |
| By: | Jihad Dagher; Kazim Kazimov |
| Abstract: | We examine the impact of banks’ exposure to market liquidity shocks through wholesale funding on their supply of credit during the financial crisis in the United States. We focus on mortgage lending to minimize the impact of confounding demand factors that could potentially be large when comparing banks’ overall lending across heterogeneous categories of credit. The disaggregated data on mortgage applications that we use allows us to study the time variations in banks’ decisions to grant mortgage loans, while controlling for bank, borrower, and regional characteristics. The wealth of data also allows us to carry out matching exercises that eliminate imbalances in observable applicant characteristics between wholesale and retail banks, as well as various other robustness tests. We find that banks that were more reliant on wholesale funding curtailed their credit significantly more than retail-funded banks during the crisis. The demand for mortgage credit, on the other hand, declined evenly across wholesale and retail banks. To understand the aggregate implications of our findings, we exploit the heterogeneity in mortgage funding across U.S. Metropolitan Statistical Areas (MSAs) and find that wholesale funding was a strong and significant predictor of a sharper decline in overall mortgage credit at the MSA level. |
| Keywords: | Bank credit , Banking sector , Credit demand , Credit risk , Financial crisis , Global Financial Crisis 2008-2009 , Loans , Supply , |
| Date: | 2012–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/155&r=ban |
| By: | Dominique Guegan (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); Wayne Tarrant (Wingate University - Department of Mathematics) |
| Abstract: | Regulation and Risk management in banks depend on underlying risk measures. In general this is the only purpose that is seen for risk measures. In this paper, we suggest that the reporting of risk measures can be used to determine the loss distribution function for a financial entity. We demonstrate that a lack of sufficient information can lead to ambiguous risk situations. We give examples, showing the need for the reporting of multiple risk measures in order to determine a bank's loss distribution. We conclude by suggesting a regulatory requirement of multiple risk measures being reported by banks, giving specific recommendations. |
| Keywords: | Risk measure; Value at Risk; bank capital; Basel II accord |
| Date: | 2012–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00721350&r=ban |
| By: | Dominique Guegan (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); Wayne Tarrant (Wingate University - Department of Mathematics) |
| Abstract: | The banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements. |
| Keywords: | Risk measure; Value at Risk; Bank capital; Basel II Accord |
| Date: | 2012–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00721339&r=ban |
| By: | Michael Brei; Blaise Gadanecz |
| Abstract: | A number of countries' authorities put in place bank rescue packages using public funds in response to the global financial crisis. Were these public recapitalisations followed by a reduction of risk in banks' loan books? To answer this question, in this paper the balance sheets and syndicated loan portfolios of 87 large internationally active banks, approximately half of which were rescued during the crisis, are analysed for the period 2000-10. Evidence is presented that banks that were later rescued took on higher risk in their loan books before the crisis than banks that were not, especially in their home markets. Although the riskiness of loan signings started diminishing across the board in 2009, we do not find consistent evidence that rescued banks reduced their risk relatively more than non rescued banks during the crisis. |
| Keywords: | external support, portfolio choices, home bias, risk, banks, syndicated loans |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:383&r=ban |
| By: | Blakespoor, Elizabeth (Stanford University); Linsmeier, Thomas J. (Financial Accounting Standards Board); Petroni, Kathy (MI State University); Shakespeare, Catherine (University of MI) |
| Abstract: | Many have argued that financial statements created under an accounting model that measures financial instruments at fair value would not fairly represent a bank's business model. In this study we examine whether financial statements using fair values for financial instruments better describe banks' credit risk than less fair-value-based financial statements. Specifically, we assess the extent to which leverage ratios that are derived using financial instruments measured along a fair value continuum are associated with various measures of credit risk. Our leverage ratios include financial instruments measured at 1) fair value; 2) US GAAP mixed-attribute values; and 3) Tier 1 bank capital values. The credit risk measures we consider are bond yield spreads and future bank failure. We find that leverage measured using the fair values of financial instruments explains significantly more variation in bond yield spreads and bank failure than the other less fair-value-based leverage ratios in both univariate and multivariate analyses. We also find that the fair value of loans and secondarily deposits appear to be the primary sources of incremental explanatory power. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:2107&r=ban |
| By: | Fabien Tripier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | In view of the recent proposals on banking reform in the wake of the recent global economic crisis, this paper identifies some efficiency gains associated with narrow banking using an approach based on search theory. It is herein shown that the optimal allocation of resources can be decentralised through competition between narrow banks (which take deposits from households) and finance houses (which make loans to entrepreneurs), whereas such a decentralisation is not feasible for commercial banks (which both take deposits and make loans). When a non-financial agent (such as a household) bargains with a commercial bank, it succeeds in appropriating a share of the value associated with the financial services provided to other non-financial agents (such as entrepreneurs) because commercial banks are affected by search frictions on both the loan and credit markets. This cross-market sharing prevents commercial banks from sharing the value of financial services with non-financial agents efficiently, and can be the origin of credit rationing and multiple equilibria. Because the use of narrow banking suppresses this cross-market sharing, it makes the competitive equilibrium efficient. |
| Keywords: | Banking; Matching; Bargaining; Multiple Equilibria |
| Date: | 2012–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00719386&r=ban |
| By: | Laura Valderrama; Germán López-Espinosa; Antonio Moreno; Antonio Rubia |
| Abstract: | To date, an operational measure of systemic risk capturing non-linear tail comovement between system-wide and individual bank returns has not yet been developed. This paper proposes an extension of the so-called CoVaR measure that captures the asymmetric response of the banking system to positive and negative shocks to the market-valued balance sheets of individual banks. For the median of our sample of U.S. banks, the relative impact on the system of a fall in individual market value is sevenfold that of an increase. Moreover, the downward bias in systemic risk from ignoring this asymmetric pattern increases with bank size. The conditional tail comovement between the banking system and a top decile bank which is losing market value is 5.4 larger than the unconditional tail comovement versus only 2.2 for banks in the bottom decile. The asymmetric model also produces much better estimates and fitting, and thus improves the capacity to monitor systemic risk. Our results suggest that ignoring asymmetries in tail interdependence may lead to a severe underestimation of systemic risk in a downward market. |
| Keywords: | Banking systems , Commercial banks , Economic models , Financial risk , Risk management , |
| Date: | 2012–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/152&r=ban |
| By: | Leo de Haan; Jan Willem van den End |
| Abstract: | We investigate 62 Dutch banks’ liquidity behaviour between January 2004 and March 2010, when these banks were subject to a liquidity regulation that is very similar to Basel III’s Liquidity Coverage Ratio (LCR). We find that most banks hold more liquid assets against their stock of liquid liabilities, such as demand deposits, than strictly required under the regulation. More solvent banks hold fewer liquid assets against their stock of liquid liabilities, suggesting an interaction between capital and liquidity buffers. However, this interaction turns out to be weaker during a crisis. Although not required, some banks consider cash flows scheduled beyond one month ahead when setting liquidity asset holdings, but they seldom look further ahead than one year. |
| Keywords: | Banks; Liquidity; Regulation |
| JEL: | G21 G28 G32 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:346&r=ban |
| By: | Dominique Guegan (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); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, BPCE - BPCE) |
| Abstract: | Following Banking Committee on Banking Supervision, operational risk quantification is based on the Basel matrix which enables sorting incidents. In this paper, we deeply analyze these incidents and propose strategies for carrying out the supervisory guidelines proposed by the regulators. The objectives are as follows. On the first hand, banks need to provide a univariate capital charge for each cell of the Basel matrix. On the other hand, banks need also to provide a global capital charge corresponding to the whole matrix taking into account dependences. This paper proposes several solutions and attracts the regulators and managers attention on two crucial points : the granularity and the risk measures. |
| Keywords: | Operational risks; Loss Distribution Function; risk measures; EVT; Vine copula |
| Date: | 2012–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00722029&r=ban |
| By: | Mohamed Azzim Gulamhussen (University of Lisbon); Carlos Pinheiro (Caixa Geral de Depositos); Alberto Franco Pozzolo (Università degli Studi del Molise, MoFiR, CASMeF and Centro Studi Luca d\'Agliano) |
| 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 – the expected default frequency (EDF), a market-based and forward-looking indicator, and the Z-score, a balance-sheet-based and backward-looking measure – and relate them to their degree of internationalization. We find robust evidence that international diversification increases bank risk. |
| Keywords: | Banks, Risks, Multinational Banking, Economic Integration, Market structure |
| JEL: | G21 G32 F23 F36 L22 |
| Date: | 2012–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:332&r=ban |
| By: | Nicholas Apergis (University of Piraeus); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Effrosyni Alevizopoulou (University of Piraeus) |
| Abstract: | The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results. |
| Keywords: | Monetary policy rules, bank lending channel, European banks, GMM methodology |
| JEL: | G21 E52 C33 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-10&r=ban |
| By: | Tiago Severo |
| Abstract: | I construct a systemic liquidity risk index (SLRI) from data on violations of arbitrage relationships across several asset classes between 2004 and 2010. Then I test whether the equity returns of 53 global banks were exposed to this liquidity risk factor. Results show that the level of bank returns is not directly affected by the SLRI, but their volatility increases when liquidity conditions deteriorate. I do not find a strong association between bank size and exposure to the SLRI - measured as the sensitivity of volatility to the index. Surprisingly, exposure to systemic liquidity risk is positively associated with the Net Stable Funding Ratio (NSFR). The link between equity volatility and the SLRI allows me to calculate the cost that would be borne by public authorities for providing liquidity support to the financial sector. I use this information to estimate a liquidity insurance premium that could be paid by individual banks in order to cover for that social cost. |
| Date: | 2012–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/194&r=ban |
| By: | Kasper Lund-Jensen |
| Abstract: | Successful implementation of macroprudential policy is contingent on the ability to identify and estimate systemic risk in real time. In this paper, systemic risk is defined as the conditional probability of a systemic banking crisis and this conditional probability is modeled in a fixed effect binary response model framework. The model structure is dynamic and is designed for monitoring as the systemic risk forecasts only depend on data that are available in real time. Several risk factors are identified and it is hereby shown that the level of systemic risk contains a predictable component which varies through time. Furthermore, it is shown how the systemic risk forecasts map into crisis signals and how policy thresholds are derived in this framework. Finally, in an out-of-sample exercise, it is shown that the systemic risk estimates provided reliable early warning signals ahead of the recent financial crisis for several economies. |
| Keywords: | Banking crisis , Banking sector , Economic models , Financial risk , |
| Date: | 2012–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/159&r=ban |
| By: | Naoki Wakamori; Angelika Welte |
| Abstract: | Recent studies find that cash remains a dominant payment choice for small-value transactions despite the prevalence of alternative means of payment such as debit and credit cards. For policy makers an important question is whether consumers truly prefer using cash or merchants restrict card usage. Using the Bank of Canada’s 2009 Method of Payment Survey, we estimate a generalized multinomial logit model of payment choices to extract individual heterogeneity (demand-side factors) while controlling for merchants’ acceptance of cards (supply-side factors). Based on a counterfactual exercise where we assume universal card acceptance among merchants, we find that some consumers would decrease their cash usage but the magnitude of this decrease is small. Our results imply that the use of cash in small-value transactions is driven mainly by consumers’ preferences. |
| Keywords: | Bank notes; Econometric and statistical methods; Financial services |
| JEL: | G2 D1 C2 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-24&r=ban |
| By: | Jochen M. Schmittmann; Estelle X. Liu; Jorge A. Chan-Lau |
| Abstract: | This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk and to a lesser extent, by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, better capitalized and less leveraged banks have outperformed their peers, a finding that supports policymakers’ efforts to strengthen bank capitalization. |
| Keywords: | Banking sector , Credit risk , Economic recession , Europe , Financial crisis , Profit margins , Sovereign debt , |
| Date: | 2012–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/174&r=ban |
| By: | Gustavo Adler |
| Abstract: | Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis. |
| Keywords: | Banks , Financial crisis , Fiscal risk , Public debt , Sovereign debt , |
| Date: | 2012–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/178&r=ban |
| By: | Beck, T.H.L.; Behr, P.; Madestam, A. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: We exploit the quasi-random assignment of borrowers to loan officers using data from a large Albanian lender to show that own-gender preferences affect both credit supply and demand. Borrowers matched to officers of the opposite gender are less likely to return for a second loan. The effect is larger when officers have little prior exposure to borrowers of the other gender and when they have more discretion to act on their gender beliefs, as proxied by financial market competition and branch size. We examine one channel of influence, loan conditionality. Borrowers assigned to opposite-sex officers pay higher interest rates and receive lower loan amounts, but do not experience higher arrears. Together our results imply that own-gender preferences in the credit market can have substantial welfare effects. |
| Keywords: | Group identity;gender;credit supply;credit demand;loan officers. |
| JEL: | G21 G32 J16 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012062&r=ban |
| By: | Masagus M. Ridhwan (VU University Amsterdam); Henri L.F. de Groot (VU University Amsterdam); Piet Rietveld (VU University Amsterdam); Peter Nijkamp (VU University Amsterdam) |
| Abstract: | This paper explores the determinants of regional differences in interest rates based on a simple theoretical model of loan pricing. The model demonstrates how risks, costs, market concentration and scale economies jointly determine the bank's interest rates. Using recent data of the Indonesian local credit markets, we find that regional interest rate variations are positive and significantly affected by the banks' risk factor, the operating costs, and market concentration. Scale economies negatively affect the interest rates. These findings help to explain geographical segmentation in loan markets. |
| Keywords: | regional capital mobility; loan pricing; interest rates; Indonesia |
| JEL: | R51 E43 C33 |
| Date: | 2012–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120073&r=ban |
| By: | Veysov, Alexander |
| Abstract: | This draft working paper is to summarize theoretical contributions in the field of measuring systemic risk and contagion of financial systems. Broad theoretical framework is analyzed and empiric approach to a macroeconomic model of global banking system systemic risk and contagion is offered. The model is to use BIS locational statistics as well as national consolidated balance sheets of banking systems to provide some insight into the vulnerability of modern banking system. As to theoretical contributions, three branches of literature are analyzed: correlation-based measures, network-based measures and various systemic risk measures. |
| Keywords: | financial contagion; systemic risk; banking system; modeling |
| JEL: | E21 |
| Date: | 2012–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40612&r=ban |
| By: | Iman van Lelyveld; Daan in 't Veld |
| Abstract: | This paper investigates the network structure of interbank markets, which has proved to be important for financial stability during the crisis. First, we describe and map the interbank network in the Netherlands, an exception in the literature because of its small and open banking environment. Secondly, we follow recent analyses of interbank markets of Germany and Italy in estimating the Core Periphery model, using data for the Netherlands instead. We find a significant Core Periphery structure and discuss model selection. The overall analysis opens up new opportunities for systemic risk assessments of the interbank market, especially as more granular data is becoming available for the eurozone. |
| Keywords: | Interbank networks; Core-periphery; loan intermediation |
| JEL: | G10 G21 L14 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:348&r=ban |
| By: | MEREUTA, Cezar (Centrul Român de Modelare Economica, Bucuresti, România); CAPRARU, Bogdan (Universitatea „Al. I. Cuza”, Iasi, România) |
| Abstract: | In this work, we evaluate the competition in the Romanian banking system as regards the distortions in terms of market shares and the origin of capital, for the period 2000-2010, using the methodology of the structural analysis of the markets promoted by Mereuta (2012). Thus, we firstly check the features of structural distributions of the market shares in the case of the Romanian banking system, in the period 2000–2010; then we apply the Mereuta universal concentration matrix (2012) where we analyse the competition on the Romanian banking market, using two indicators: the M index and the degree of the structural dominance of the market leader (Gdl), and finally we conclude a "nodal" analysis of the Romanian banking system. Our approach demonstrates that all the structural peculiarities of the distributions of macro-experiment are confirmed in the Romanian banking system during the period 2000 - 2010 and that, in the period under review, the competition has continuously grown on the Romanian banking market, in particular due to the phenomenon of penetration of foreign capital. The distortions of competition in the light of the origin of the capital show that the penetration of foreign capital also increased its vulnerability and the risk of contagion. As regards policy recommendations for regulatory and supervisory authority, we suggest a very careful monitoring of soundness of all foreign banks, not only those from nodal countries; a close collaboration of National Bank of Romania (NBR) with the regulatory and supervisory authorities in the countries of origin of foreign banks branches; as well as a higher emphasis on the conduct of business of the banks and consumer protection. As for the banks management, we recommend that the stability of banks should be the main concern, rather than the preservation or increase in market shares. |
| Keywords: | competition, banks, structural approach, Romania |
| JEL: | G21 L11 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ror:seince:120722&r=ban |
| By: | Luiz A. Pereira da Silva; Adriana Soares Sales; Wagner Piazza Gaglianone |
| Abstract: | This paper proposes a working definition for “financial stability” related to systemic risk. Systemic risk is then measured as the probability of disruption of financial services taking into account its time and cross-sectional dimensions and several risk factors. The paper discusses the implications of this definition for Brazil in the aftermath of the recent global financial crisis. A comparison with the United States and the Euro zone is provided. In addition, systemic risk in the Brazilian credit market is investigated given its crucial role as main financial stability driver. Finally, synthetic indicators of systemic risk are used to monitor financial stability. The link between systemic risk and synthetic indicators and/or well-correlated proxies (e.g., a credit-to-GDP gap) allows the calculation of the probability of disruption of the financial system across its time dimension. Therefore, if a Financial Stability Committee and/or the prudential regulator define its tolerance level for “financial stability” as a threshold measured by this probability of disruption, it might have the capability of determining the precise moment when it should strengthen its set of adequate macroprudential responses and policies. |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:289&r=ban |
| By: | Love, Inessa; Peria, Maria Soledad Martinez |
| Abstract: | Combining multi-year, firm-level surveys with country-level panel data for 53 countries, the authors explore the impact of bank competition on firms'access to finance. They find that low competition, as measured by high values of the Lerner index, diminishes firms'access to finance, while commonly-used bank concentration measures are not robust predictors of firms'access to finance. In addition, they find that the impact of competition on access to finance depends on the environment that banks operate in. Some features of the environment, such as greater financial development and better credit information, can mitigate the damaging impact of low competition. But other characteristics, such as high government bank ownership, can exacerbate the negative effect. |
| Keywords: | Access to Finance,Banks&Banking Reform,Debt Markets,Economic Theory&Research,Environmental Economics&Policies |
| Date: | 2012–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6163&r=ban |
| By: | Piu Banerjee; José J. Canals-Cerdá |
| Abstract: | We develop an empirical framework for the credit risk analysis of a generic portfolio of revolving credit accounts and apply it to analyze a representative panel data set of credit card accounts from a credit bureau. These data cover the period of the most recent deep recession and provide the opportunity to analyze the performance of such a portfolio under significant economic stress conditions. We consider a traditional framework for the analysis of credit risk where the probability of default (PD), loss given default (LGD), and exposure at default (EAD) are explicitly considered. The unsecure and revolving nature of credit card lending is naturally modeled in this framework. Our results indicate that unemployment, and in particular the level and change in unemployment, plays a significant role in the probability of transition across delinquency states in general and the probability of default in particular. The effect is heterogeneous and proportionally has a more significant impact for high credit score and for high-utilization accounts. Our results also indicate that unemployment and a downturn in economic conditions play a quantitatively small, or even irrelevant, role in the changes in account balance associated with changes in an account’s delinquency status, and in the exposure at default specifically. The impact of a downturn in economic conditions and, in particular, changes in unemployment on the recovery rate and loss given default is found to be large. These findings are of particular relevance for the analysis of credit risk regulatory capital under the IRB |
| Keywords: | Credit ; Unemployment |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:12-18&r=ban |
| By: | Tim J. Brereton; Dirk P. Kroese; Joshua C. Chan |
| Abstract: | The financial crisis of 2007 – 2009 began with a major failure in credit markets. The causes of this failure stretch far beyond inadequate mathematical modeling (see Donnelly and Embrechts [2010] and Brigo et al. [2009] for detailed discussions from a mathematical finance perspective). Nevertheless, it is clear that some of the more popular models of credit risk were shown to be flawed. Many of these models were and are popular because they are mathematically tractable, allowing easy computation of various risk measures. More realistic (and complex) models come at a significant computational cost, often requiring Monte Carlo methods to estimate quantities of interest. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2012-579&r=ban |
| By: | Marco Bardoscia |
| Abstract: | Operational risk is the risk relative to monetary losses caused by failures of bank internal processes due to heterogeneous causes. A dynamical model including both spontaneous generation of losses and generation via interactions between different processes is presented; the efforts made by the bank to avoid the occurrence of losses is also taken into account. Under certain hypotheses, the model can be exactly solved and, in principle, the solution can be exploited to estimate most of the model parameters from real data. The forecasting power of the model is also investigated and proved to be surprisingly remarkable. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1207.6186&r=ban |