New Economics Papers
on Banking
Issue of 2012‒09‒22
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The impact of the LCR on the interbank money market By Bonner, Clemens; Eijffinger, Sylvester C W
  2. Bubbles, Financial Crises, and Systemic Risk By Markus K. Brunnermeier; Martin Oehmke
  3. Some Reflections on the Recent Financial Crisis By Gary B. Gorton
  4. Liquidity risk and interest rate risk on banks: are they related? By Baldan, Cinzia; Zen, Francesco; Rebonato, Tobia
  5. Required Reserves as a Credit Policy Tool By Yasin Mimir; Enes Sunel; Temel Taskin
  6. Systematic Risk, Debt Maturity and the Term Structure of Credit Spreads By Hui Chen; Yu Xu; Jun Yang
  7. An Anatomy of Credit Booms and their Demise By Enrique G. Mendoza; Marco E. Terrones
  8. The Manipulation of Basel Risk-Weights. Evidence from 2007-10 By Mike Mariathasan; Ouarda Merrouche
  9. Bank ownership and lending patterns during the 2008-2009 financial crisis : evidence from Latin America and Eastern Europe By Cull, Robert; Peria, Maria Soledad Martinez
  10. How Do Regulators Influence Mortgage Risk: Evidence from an Emerging Market By John Y. Campbell; Tarun Ramadorai; Benjamin Ranish
  11. The fiscal implications of a banking union By Jean Pisani-Ferry; Guntram B. Wolff
  12. World Bank, Inter-American Development Bank, and Subregional Development Banks in Latin America: Dynamics of a System of Multilateral Development Banks By Prada, Fernando

  1. By: Bonner, Clemens; Eijffinger, Sylvester C W
    Abstract: This paper analyses the impact of the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets, we show that banks which are just above/below their short-term regulatory liquidity requirement charge higher interest rates for unsecured interbank loans. The effect is larger for longer maturities and increases after the failure of Lehman Brothers. During a crisis, being close to the minimum liquidity requirement induces a negative impact on lending volumes. Given the high importance of a well-functioning interbank money market, our results suggest that the current design of the LCR is likely to dampen the effectiveness of monetary policy.
    Keywords: Basel 3; Interbank Market; Interest Rate
    JEL: E42 E43 G21
    Date: 2012–09
  2. By: Markus K. Brunnermeier; Martin Oehmke
    Abstract: This chapter surveys the literature on bubbles, financial crises, and systemic risk. The first part of the chapter provides a brief historical account of bubbles and financial crisis. The second part of the chapter gives a structured overview of the literature on financial bubbles. The third part of the chapter discusses the literatures on financial crises and systemic risk, with particular emphasis on amplification and propagation mechanisms during financial crises, and the measurement of systemic risk. Finally, we point toward some questions for future research.
    JEL: G00 G01 G20
    Date: 2012–09
  3. By: Gary B. Gorton
    Abstract: Economic growth involves metamorphosis of the financial system. Forms of banks and bank money change. These changes, if not addressed, leave the banking system vulnerable to crisis. There is no greater challenge in economics than to understand and prevent financial crises. The financial crisis of 2007-2008 provides the opportunity to reassess our understanding of crises. All financial crises are at root bank runs, because bank debt—of all forms—is vulnerable to sudden exit by bank debt holders. The current crisis raises issues for crisis theory. And, empirically, studying crises is challenging because of small samples and incomplete data.
    JEL: E02 E3 E30 E32 E44 G01 G1 G2 G21
    Date: 2012–09
  4. By: Baldan, Cinzia; Zen, Francesco; Rebonato, Tobia
    Abstract: The present study aims at ascertaining whether a relationship exists between the liquidity risk and the interest rate risk of credit institutions. By analysing the balance sheet of a small Italian bank during the years 2009 and 2010, we outlined its liquidity profile, the variables that influenced its dynamics and their effects on the bank’s global management, with particular attention to the interest margin and the interest rate risk in the banking book. We would like to fill a gap identified in the literature, shedding light on how a set of decisions designed mainly to reduce the liquidity risk and comply with the new parameters established by the Basel III Framework enables a more effective management of the regulatory capital and helps the bank to achieve a solid balance between profitability and solvency. Our main findings demonstrate that the bank succeeded in modifying its liquidity profile in order to comply with the incoming constraints imposed by the Basel III framework; the actions taken to reduce the liquidity risk also lowered its interest margin, but also enabled the bank to reduce the amount of capital absorbed by the interest rate risk, giving rise to a globally positive effect.
    Keywords: Asset and Liability Management; Basel III Framework; Integration of Liquidity Risk and Interest Rate Risk; Risk Management
    JEL: G2
    Date: 2012
  5. By: Yasin Mimir; Enes Sunel; Temel Taskin
    Abstract: This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability.
    Keywords: Banking sector, time-varying reserve requirements, macroeconomic and financial shocks
    JEL: E44 E51 G21 G28
    Date: 2012
  6. By: Hui Chen; Yu Xu; Jun Yang
    Abstract: We build a dynamic capital structure model to study the link between systematic risk exposure and debt maturity, as well as their joint impact on the term structure of credit spreads. Our model allows for time variation and lumpiness in the maturity structure. Relative to short-term debt, long-term debt is less prone to rollover risks, but its illiquidity raises the costs of financing. The risk premium embedded in the bankruptcy costs causes firms with high systematic risk to favour longer debt maturity, as well as a more stable maturity structure over the business cycle. Pro-cyclical debt maturity amplifies the impact of aggregate shocks on the term structure of credit spreads, especially for firms with high leverage or high beta, and for firms with a large amount of long-term debt maturing when the aggregate shock arrives. However, endogenous maturity choice can also reduce and even reverse the effect of rollover risk on credit spreads. We provide empirical evidence for the model predictions on both debt maturity and credit spreads.
    Keywords: Asset Pricing; Debt Management
    JEL: G32 G33
    Date: 2012
  7. By: Enrique G. Mendoza; Marco E. Terrones
    Abstract: What are the stylized facts that characterize the dynamics of credit booms and the associated fluctuations in macro-economic aggregates? This paper answers this question by applying a method proposed in our earlier work for measuring and identifying credit booms to data for 61 emerging and industrial countries over the 1960-2010 period. We identify 70 credit boom events, half of them in each group of countries. Event analysis shows a systematic relationship between credit booms and a boom-bust cycle in production and absorption, asset prices, real exchange rates, capital inflows, and external deficits. Credit booms are synchronized internationally and show three striking similarities in industrial and emerging economies: (1) credit booms are similar in duration and magnitude, normalized by the cyclical variability of credit; (2) banking crises, currency crises or Sudden Stops often follow credit booms, and they do so at similar frequencies in industrial and emerging economies; and (3) credit booms often follow surges in capital inflows, TFP gains, and financial reforms, and are far more common with managed than flexible exchange rates.
    JEL: E32 E44 E51 G21
    Date: 2012–09
  8. By: Mike Mariathasan; Ouarda Merrouche
    Abstract: In this paper, we analyse a novel panel data set to compare the relevance of alternative measures of capitalisation for bank failure during the 2007-10 crisis, and to search for evidence of manipulated Basel risk-weights. Compared with the unweighted leverage ratio, we find the risk-weighted asset ratio to be a superior predictor of bank failure when banks operate under the Basel II regime, provided that the risk of a crisis is low. When the risk of a crisis is high, the unweighted leverage ratio is the more reliable predictor. However, when banks do not operate under Basel II rules, both ratios perform comparably, independent of the risk of a crisis. Furthermore, we find a strong decline in the risk-weighted asset ratio leading up to the crisis. Several empirical findings indicate that this decline is driven by the strategic use of internal risk models under the Basel II advanced approaches. Evidence of manipulation is stronger in less competitive banking systems, in banks with low initial levels of Tier 1 capital and in banks that adopted Basel II rules early. We find tangible common equity and Tier 1 ratios to be better predictors of bank distress than broader measures of capital, and identify market-based measures of capitalisation as poor indicators. We find no relationship between the probability of a bank being selected into a public recapitalisation plan and regulatory measures of capital.
    Keywords: Banks, Basel risk-weights, Capital, Regulation
    JEL: G20 G21 G28
    Date: 2012
  9. By: Cull, Robert; Peria, Maria Soledad Martinez
    Abstract: This paper examines the impact of bank ownership on credit growth in developing countries before and during the 2008-2009 crisis. Using bank-level data for countries in Eastern Europe and Latin America, it analyzes the growth of banks'total gross loans as well as the growth of corporate, consumer, and residential mortgage loans. Although domestic private banks in Eastern Europe and Latin America contracted their loan growth rates during the crisis, there are differences in foreign and government-owned bank credit growth across regions. In Eastern Europe, foreign bank total lending fell by more than domestic private bank credit. These results are primarily driven by reductions in corporate loans. Furthermore, government-owned banks in Eastern Europe did not act counter-cyclically. The opposite was true in Latin America, where the growth of government-owned banks'corporate and consumer loans during the crisis exceeded that of domestic and foreign banks. Contrary to the case of foreign banks in Eastern Europe, those in Latin America did not fuel loan growth prior to the crisis and did not contract lending at a faster pace than domestic banks during the crisis.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Public Sector Corruption&Anticorruption Measures,Bankruptcy and Resolution of Financial Distress
    Date: 2012–09–01
  10. By: John Y. Campbell; Tarun Ramadorai; Benjamin Ranish
    Abstract: To understand the effects of regulation on mortgage risk, it is instructive to track the history of regulatory changes in a country rather than to rely entirely on cross-country evidence that can be contaminated by unobserved heterogeneity. However, in developed countries with fairly stable systems of financial regulation, it is difficult to track these effects. We employ loan-level data on over a million loans disbursed in India over the 1995 to 2010 period to understand how fast-changing regulation impacted mortgage lending and risk. We find evidence that regulation has important effects on mortgage rates and delinquencies in both the time-series and the cross-section.
    JEL: G21
    Date: 2012–09
  11. By: Jean Pisani-Ferry; Guntram B. Wolff
    Abstract: Systemic banking crises are a threat to all countries whatever their development level. They can entail major fiscal costs that can undermine the sustainability of public finances. More than anywhere else, however, a number of euro-area countries have been affected by a lethal negative feedback loop between banking and sovereign risk, followed by disintegration of the financial system, real economic fragmentation and the exposure of the European Central Bank. Recognising the systemic dimension of the problem, the Euro-Area Summit of June 2012 called for the creation of a banking union with common supervision and the possibility for the European Stability Mechanism to recapitalise banks directly. The findings of this paper were presented at the Informal ECOFIN in Nicosia on 14 September 2012.
    Date: 2012–09
  12. By: Prada, Fernando (Asian Development Bank Institute)
    Abstract: Multilateral development banks (MDBs) are an innovative institutional model to channel financing and knowledge to developing countries. In Latin America, the balance of forces between competition and collaboration among MDBs and other sources of development finance have formed a system that is decentralized and client-oriented. The author analyzes three types of relationships between MDBs to show areas of strength in their operations and future potential, using a great amount of quantitative data from the annual reports and financial databases of MDBs that the FORO Nacional Internacional research program has been tracking periodically.
    Keywords: development finance; multilateral development banks; world bank; inter-american development bank; subregional development banks; latin america
    JEL: F34 O10 O19
    Date: 2012–09–06

This issue is ©2012 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.