New Economics Papers
on Banking
Issue of 2012‒09‒30
28 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How important is the credit channel? An empirical study of the US banking crisis By Liu, Chunping; Minford, Patrick
  2. Loan supply shocks and the business cycle By Luca Gambetti; Alberto Musso
  3. Intermediary leverage cycles and financial stability By Tobias Adrian; Nina Boyarchenko
  4. The Elusive Promise of Independent Central Banking By Marvin Goodfriend
  5. How Do Regulators Influence Mortgage Risk? Evidence from an Emerging Market By Campbell, John Y; Ramadorai, Tarun; Ranish, Benjamin
  6. Endogenous Credit Limits with Small Default Costs By Costas Azariadis; Leo Kaas
  7. Shadow banking in the Euro area: an overview By Klára Bakk-Simon; Stefano Borgioli; Celestino Giron; Hannah Sabine Hempell; Angela Maddaloni; Fabio Recine; Simonetta Rosati
  8. Did Capital Requirements and Fair Value Accounting Spark Fire Sales in Distressed Mortgage-Backed Securities? By Merrill, Craig B.; Nadauld, Taylor; Stulz, Rene M.; Sherlund, Shane M.
  9. The Macroeconomic Effects of Interest on Reserves By Peter N. Ireland
  10. A Macroeconomic Model of Endogenous Systemic Risk Taking By Martinez-Miera, David; Suarez, Javier
  11. Bankers and bank investors: Reconsidering the economies of scale in banking By Ronald W. Anderson; Karin Joeveer
  12. Knightian uncertainty and interbank lending By Matthew Pritsker
  13. Syndicated Loan Spreads and the Composition of the Syndicate By Lim, Jongha; Minton, Bernadette A.; Weisbach, Michael S.
  14. Banking in the Lagos-Wright Monetary Economy By KOBAYASHI Keiichiro
  15. Grameen bank lending : does group liability matter ? By Khandker, Shahidur R.
  16. Testing the law of one price in retail banking: An analysis for Colombia using a pair-wise approach By Ana María Iregui; Jesús Otero
  17. The safety and soundness effects of bank M&A in the EU By Jens Hagendorff; Maria J. Nieto; Larry D. Wall
  18. A new look at second liens By Donghoon Lee; Christopher Mayer; Joseph Tracy
  19. A Continuous Time Structural Model for Insolvency, Recovery, and Rollover Risks By Gechun Liang; Eva L\"utkebohmert; Wei Wei
  20. Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility By Ho-Chuan Huang; WenShwo Fang; Stephen M. Miller
  21. When is a housing market overheated enough to threaten stability? By John Muellbauer
  22. Federal Reserve liquidity provision during the financial crisis of 2007-2009 By Michael J. Fleming
  23. The Impact of the Microchip on the Card Frauds By Ardizzi, Guerino
  24. Credit sales and advance payments: substitutes or complements? By Simona Mateut; Piercarlo zanchettin
  25. Do Social Networks Prevent Bank Runs? By Hubert Janos Kiss; Ismael Rodriguez-Lara; Alfonso Rosa-Garcia
  26. Access to credit for Italian firms: new evidence from the ISTAT confidence business surveys By Costa , Stefano; Malgarini, Marco; Margani , Patrizia
  27. Sparsifying Defaults: Optimal Bailout Policies for Financial Networks in Distress By Zhang Li; Ilya Pollak
  28. Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates By Goodman, Joshua; Levitin, Adam

  1. By: Liu, Chunping; Minford, Patrick (Cardiff Business School)
    Abstract: We examine whether by adding a credit channel to the standard New Keynesian model we can account better for the behaviour of US macroeconomic data up to and including the banking crisis. We use the method of indirect inference which evaluates statistically how far a model is simulated behaviour mimics the behaviour of the data. We find that the model with credit dominates the standard model by a substantial margin. The credit channel is the main contributor to the variation in the output gap during the crisis.
    Keywords: financial frictions; credit channel; bank crisis; indirect inference
    JEL: C12 C52 E12 G01 G1
    Date: 2012–08
  2. By: Luca Gambetti (Universitat Autonoma de Barcelona, B3.1130 Departament d’Economia i Historia Economica, Edifici B, Bellaterra 08193, Barcelona, Spain.); Alberto Musso (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides empirical evidence on the role played by loan supply shocks over the business cycle in the Euro Area, the United Kingdom and the United States from 1980 to 2010 by applying a time-varying parameters VAR model with stochastic volatility and identifying these shocks with sign restrictions. The evidence suggests that loan supply shocks appear to have a significant effect on economic activity and credit market variables, but to some extent also inflation, in all three economic areas. Moreover, we report evidence that the short-term impact of these shocks on real GDP and loan volumes appears to have increased in all three economic areas over the past few years. The results of the analysis also suggest that the impact of loan supply shocks seems to be particularly important during slowdowns in economic activity. As regards to the most recent recession, we find that the contribution of these shocks can explain about one half of the decline in annual real GDP growth during 2008 and 2009 in the Euro Area and the United States and possibly about three fourths of that observed in the United Kingdom. Finally, the contribution of loan supply shocks to the decline in the annual growth rate of loans observed from the peaks of 2007 to the troughs of 2009/2010 was slightly less than half of the total decline in the Euro Area and the United States and somewhat more than half of that in the United Kingdom. JEL Classification: C32, E32, E51
    Keywords: Loan supply, business cycle, Euro area, UK, US, time-varying VAR, sign restrictions
    Date: 2012–09
  3. By: Tobias Adrian; Nina Boyarchenko
    Abstract: We develop a theory of financial intermediary leverage cycles in the context of a dynamic model of the macroeconomy. The interaction between a production sector, a financial intermediation sector, and a household sector gives rise to amplification of fundamental shocks that affect real economic activity. The model features two state variables that represent the dynamics of the economy: the net worth and the leverage of financial intermediaries. The leverage of the intermediaries is procyclical, owing to risk-sensitive funding constraints. Relative to an economy with constant leverage, financial intermediaries generate higher output and consumption growth and lower consumption volatility in normal times, but at the cost of systemic solvency and liquidity risks. We show that tightening intermediaries’ risk constraints affects the systemic risk-return trade-off by lowering the likelihood of systemic crises at the cost of higher pricing of risk. Our model thus represents a conceptual framework for cyclical macroprudential policies within a dynamic stochastic general equilibrium model.
    Keywords: Intermediation (Finance) ; Financial leverage ; Systemic risk ; Liquidity (Economics)
    Date: 2012
  4. By: Marvin Goodfriend (Professor of Economics, Tepper School of Business, Carnegie Mellon University (E-mail:
    Abstract: Independent central banking is reviewed as it emerged first under the gold standard and later with an inconvertible paper money. Monetary and credit policy are compared and contrasted as practiced by the 19th century Bank of England and the Federal Reserve. The lesson is that wide operational and financial independence given to monetary and credit policy in the public interest subjects the central bank to incentives detrimental for macroeconomic and financial stability. An independent central bank needs the double discipline of a priority for price stability and bounds on expansive credit initiatives to secure its promise for stabilization policy.
    Keywords: Bank of England, central bank independence, credit turmoil of 2007-8, Federal Reserve, Great Inflation, lender of last resort, monetary policy
    JEL: E3 E4 E5 E6
    Date: 2012–09
  5. By: Campbell, John Y; Ramadorai, Tarun; Ranish, Benjamin
    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.
    Keywords: delinquencies; emerging markets; India; mortgage finance; regulation
    JEL: G21 G28 R21 R31
    Date: 2012–09
  6. By: Costas Azariadis (Washington University, Department of Economics, USA); Leo Kaas (University of Konstanz, Department Economics, Germany)
    Abstract: We analyze an exchange economy of unsecured credit where borrowers have the option to declare bankruptcy in which case they are temporarily excluded from financial markets. Endogenous credit limits are imposed that are just tight enough to prevent default. Economies with temporary exclusion differ from their permanent exclusion counterparts in two important properties. If households are extremely patient, then the first–best allocation is an equilibrium in the latter economies but not necessarily in the former. In addition, temporary exclusion permits multiple stationary equilibria, with both complete and with incomplete consumption smoothing.
    Keywords: Bankruptcy; Endogenous solvency constraints
    JEL: D51 D91 G33
    Date: 2012–09–20
  7. By: Klára Bakk-Simon (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Stefano Borgioli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Celestino Giron (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Hannah Sabine Hempell (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Angela Maddaloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Fabio Recine (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Simonetta Rosati (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: Shadow banking, as one of the main sources of financial stability concerns, is the subject of much international debate. In broad terms, shadow banking refers to activities related to credit intermediation and liquidity and maturity transformation that take place outside the regulated banking system. This paper presents a first investigation of the size and the structure of shadow banking within the euro area, using the statistical data sources available to the ECB/Eurosystem. Although overall shadow banking activity in the euro area is smaller than in the United States, it is significant, at least in some euro area countries. This is also broadly true for some of the components of shadow banking, particularly securitisation activity, money market funds and the repo markets. This paper also addresses the interconnection between the regulated and the non-bank-regulated segments of the financial sector. Over the recent past, this interconnection has increased, likely resulting in a higher risk of contagion across sectors and countries. Euro area banks now rely more on funding from the financial sector than in the past, in particular from other financial intermediaries (OFIs), which cover shadow banking entities, including securitisation vehicles. This source of funding is mainly shortterm and therefore more susceptible to runs and to the drying-up of liquidity. This finding confirms that macro-prudential authorities and supervisors should carefully monitor the growing interlinkages between the regulated banking sector and the shadow banking system. However, an in-depth assessment of the activities of shadow banking and of the interconnection with the regulated banking system would require further improvements in the availability of data and other sources of information. JEL Classification: G01, G15, G21, G28
    Keywords: Shadow banking, bank regulation, repo markets, securitisation
    Date: 2012–04
  8. By: Merrill, Craig B. (Brigham Young University); Nadauld, Taylor (Brigham Young University); Stulz, Rene M. (OH State University and European Corporate Governance Institute); Sherlund, Shane M. (Federal Reserve Board)
    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: 2012–07
  9. By: Peter N. Ireland
    Abstract: This paper uses a New Keynesian model with banks and deposits to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require major adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish in the short run. In the long run, however, the additional degree of freedom the monetary authority acquires by paying interest on reserves is best described as affecting the real quantity of reserves: policy actions that change prices must still change the nominal quantity of reserves proportionally.
    JEL: E31 E32 E51 E52 E58
    Date: 2012–09
  10. By: Martinez-Miera, David; Suarez, Javier
    Abstract: We analyze banks' systemic risk taking in a simple dynamic general equilibrium model. Banks collect funds from savers and make loans to firms. Banks are owned by risk-neutral bankers who provide the equity needed to comply with capital requirements. Bankers decide their (unobservable) exposure to systemic shocks by trading off risk-shifting gains with the value of preserving their capital after a systemic shock. Capital requirements reduce credit and output in
    Keywords: Capital requirements; Credit cycles; Financial crises; Macroprudential policies; Risk shifting; Systemic risk
    JEL: E44 G21 G28
    Date: 2012–09
  11. By: Ronald W. Anderson; Karin Joeveer
    Abstract: We study economies of scale in banking by viewing banks as combinations of financial and human capital that create rents which accrue to investors and bankers. Applying this approach to annual data of US bank holding companies since 1990, we find much stronger evidence of economies of scale in returns to bankers as compared to returns to investors. The scale economies appear to be particularly strong in the top size decile of banks measured by total assets. We find that rents accruing to bankers are particularly strong in banks with a relatively large share of non-interest income and that for the largest banks a reduction of net interest margin is associated with an increase in bankers’ rents. We find incorporating observable proxies for funding efficiency and presence in wholesale banking activities greatly reduces the pure size effect.
    Date: 2012–09
  12. By: Matthew Pritsker
    Abstract: The bursting of the housing price bubble during 2007 and 2008 was accompanied by high interbank spreads, and a partial breakdown of interbank lending. This paper theoretically models how Knightian uncertainty over banks risk exposures may have contributed to the breakdown. The paper shows: 1) the two-tier structure of the U.S. Fed Funds market makes it robust to uncertainty, but the market may nevertheless collapse — and private incentives to restart it may be insufficient. 2) In some circumstances government bank audits and information releases about exposures that resemble a stress test can restart markets and improve welfare by internalizing an externality associated with economy-wide uncertainty reduction. 3) Collapses due to uncertainty are less likely ex-ante and less costly to fix ex-post when there is better publicly available information on core banks aggregate risk exposures. Based on 2) and 3), ex-ante and ex-post “transparency initiatives” are proposed. Their success depends on the financial architecture of bank interlinkages.
    Keywords: Risk ; Banks and banking ; Interbank market ; Federal funds market (United States)
    Date: 2012
  13. By: Lim, Jongha (University of MO); Minton, Bernadette A. (OH State University); Weisbach, Michael S. (OH State University)
    Abstract: The past decade has seen significant changes in the structure of the corporate lending market, with non-bank institutional investors playing larger roles than they historically have played. These non-bank institutional lenders typically have higher required rates of return than banks, but invest in the same loan facilities. We hypothesize that non-bank institutional lenders invest in loan facilities that would not otherwise be filled by banks, so that the arranger has to offer a higher spread to attract the non-bank institution. In a sample of 20,031 leveraged loan facilities originated between 1997 and 2007, we find that, loan facilities including a non-bank institution in their syndicates have higher spreads than otherwise identical bank-only facilities. Contrary to risk-based explanations of this finding, non-bank facilities are priced with premiums relative to bank-only facilities of the same loan package. These premiums for non-bank facilities are substantially larger when a hedge or private equity fund is one of the syndicate members. Consistent with the notion that firms are willing to pay spread premiums when loan facilities are particularly important to the firm, we find that firms spend the capital raised by loan facilities priced at a premium faster than other loan facilities, especially when the premium is associated with a non-bank institutional investor.
    JEL: G21 G23 G32
    Date: 2012–08
  14. By: KOBAYASHI Keiichiro
    Abstract: We introduce banks in a monetary economy and analyze the effect of monetary friction on the banking sector. The basic model is a cash-in-advance economy which is a simplified version of Lagos and Wright's (2005) model. We introduce the banks using Diamond and Rajan (2001) in this economy: Bankers can produce goods more efficiently than depositors but cannot pre-commit to the use of human capital on behalf of the latter. Demand deposit contracts work as a commitment device for bankers, while leaving banks susceptible to bank runs. We show that as the inflation rate increases, the size of the banking sector expands, and the probability of bank runs occurring rises.
    Date: 2012–09
  15. By: Khandker, Shahidur R.
    Abstract: Competing theories increasingly support the positive role of social capital in small loan default costs of group lending; at the same time, potential group collusion may increase loan delinquencies. Findings from the available literature are mixed on the role of the various attributes of group lending. But past studies suffer from estimation bias due to the unobserved sorting behavior of group members and their other attributes. This paper attempts to resolve that estimation bias by utilizing longitudinal data from 297 Grameen Bank groups since their inceptions. A dynamic lagged dependent model with correction for time-varying heterogeneity of group and individual behavior is applied to estimate the effect of group liability in the Grameen Bank. The results suggest that group liability matters in both loan disbursement and repayment, with women less of a credit risk than men and women's groups more homogeneous than men's. Finally, the benefits of social capital outweigh the costs of group collusion, especially for women's groups, thereby reducing overall default rates. The risk-pooling behavior of diverse men's groups increases men's repayment behavior. Overall, group lending as practiced by Grameen Bank appears to increase repayment rates.
    Keywords: Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Economic Theory&Research,Microfinance
    Date: 2012–09–01
  16. By: Ana María Iregui; Jesús Otero
    Abstract: We apply a pair-wise approach to test the law of one price for deposit (lending) rates in Colombia. We find that when banks are of different size deposit rates adjust quickly, suggesting a competitive environment. By contrast, lending rates adjust rapidly when banks are of similar size, supporting market segmentation.
    Keywords: Law of one price; retail interest rates; Colombia. Classification JEL: G21.
    Date: 2012–09
  17. By: Jens Hagendorff; Maria J. Nieto; Larry D. Wall
    Abstract: This paper studies the impact of European bank mergers and acquisitions on changes in key safety and soundness measures of both acquirers and targets. We find that capitalization, profitability, and liquidity show signs of statistically and economically significant mean reversion for acquirers. Also, acquirers in cross-border deals tended to perform better when their home country prudential supervisors and deposit insurance funding systems were stricter than the target's. For target banks, the most consistent findings from the cross-sectional regressions are that stronger supervision and tougher deposit insurance funding regimes tend to result in positive postmerger changes in liquidity and performance.
    Date: 2012
  18. By: Donghoon Lee; Christopher Mayer; Joseph Tracy
    Abstract: We use data from credit reports and deed records to better understand the extent to which second liens contributed to the housing crisis by allowing buyers to purchase homes with small down-payments. At the top of the housing market, second liens were quite prevalent: As many as 45 percent of home purchases in coastal markets and bubble locations involved a piggyback second lien. Owner-occupants were more likely to use piggyback second liens than were investors. Second liens in the form of home equity lines of credit (HELOCs) were originated to relatively high-quality borrowers, and originations were declining near the peak of the housing boom. By contrast, characteristics of closed-end second liens (CES) were worse on all these dimensions. Default rates of second liens are generally similar to that of the first lien on the same home, although HELOCs perform better than CES. About 20 to 30 percent of borrowers will continue to pay their second lien for more than a year while remaining seriously delinquent on their first mortgage. By comparison, about 40 percent of credit card borrowers and 70 percent of auto loan borrowers will continue making payments a year after defaulting on their first mortgage. Finally, we show that delinquency rates on second liens, especially HELOCs, have not declined as quickly as those on most other types of credit, raising a potential concern for lenders with large portfolios of second liens on their balance sheets.
    Keywords: Secondary mortgage market ; Home equity loans ; Mortgages ; Housing - Finance ; Financial crises
    Date: 2012
  19. By: Gechun Liang; Eva L\"utkebohmert; Wei Wei
    Abstract: We propose a unified structural credit risk model incorporating insolvency, recovery and rollover risks. The firm finances itself mainly by issuing short- and long-term debt. Short-term debt can have either a discrete or a more realistic staggered tenor structure. We show that a unique threshold strategy (i.e., a bank run barrier) exists for short-term creditors to decide when to withdraw their funding, and this strategy is closely related to the solution of a non-standard optimal stopping time problem with control constraints. We decompose the total credit risk into an insolvency component and an illiquidity component based on such an endogenous bank run barrier together with an exogenous insolvency barrier.
    Date: 2012–09
  20. By: Ho-Chuan Huang (Tamkang University); WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: While the existing literature acknowledges the effect of banking structure on industrial growth as well as the effect of financial development on industrial growth and its volatility, we examine whether banking structure, given bank (financial) development, exerts any nontrivial effect on industrial growth volatility. We show that bank concentration magnifies industrial growth volatility, but reduces the volatility in sectors with higher external liquidity needs. The reduction in industrial growth volatility mostly reflects the smoothing in the variance of real value added per firm growth. Finally a variety of sensitivity checks show that our findings remain for different model specifications, banking market structure measures, liquidity needs indicators, and omitted variables. JEL Classification: G2, O16, E32 Key words: Bank Concentration, External Liquidity, Bank Development, Industrial Growth Volatility
    Date: 2012–09
  21. By: John Muellbauer
    Abstract: In many countries, house prices are subject to boom/bust cycles and in some these are linked to severe economic and financial instability. Overheating can have both a price and a quantity dimension, but it is likely that they are linked by common drivers. However, much depends on the land-use planning regime which profoundly affects the supply response. It is helpful to make the distinction between overshooting of house prices due to extrapolative expectations and ‘frenzy’, given fundamentals, and shifts in possibly fragile fundamentals. The contribution of careful econometric modelling to estimating the effects of the former is demonstrated: central banks or other policy makers should institute quarterly surveys of house price expectations of potential housing market participants to help assess the first type of overshooting. Assessing the fragility or otherwise of the economic fundamentals is more complex. Credit supply conditions in the mortgage market are the ‘elephant in the room’. Without taking a credit conditions measure into account, one simply cannot understand the behaviour of house prices, housing debt and consumption in countries such as Australia, the UK, the US, South Africa or France or understand vulnerability of some economies to high levels of household debt. Other financial and economic indicators of vulnerability are discussed, including high bank leverage ratios, high ratios of loans to deposits, debt, deficit and current account of ratios. Models of early warning of financial and economic crises estimated on large country panels need to be quite complex, for example, including some important interaction effects since shock transmission is very institution dependent.
    Keywords: Financial crisis, Financial accelerator, House price determination, Credit boom, Credit standards, Subprime mortgages, User cost, Risk premia, Construction boom
    JEL: R21 R31 G18 G21 E21 E51 C51 C52
    Date: 2012
  22. By: Michael J. Fleming
    Abstract: This paper examines the Federal Reserve's unprecedented liquidity provision during the financial crisis of 2007-2009. It first reviews how the Fed provides liquidity in normal times. It then explains how the Fed's new and expanded liquidity facilities were intended to enable the central bank to fulfill its traditional lender-of-last-resort role during the crisis while mitigating stigma, broadening the set of institutions with access to liquidity, and increasing the flexibility with which institutions could tap such liquidity. The paper then assesses the growing empirical literature on the effectiveness of the facilities and provides insights as to where further research is warranted.
    Keywords: Financial crises ; Bank liquidity ; Troubled Asset Relief Program ; Liquidity (Economics) ; Lenders of last resort
    Date: 2012
  23. By: Ardizzi, Guerino
    Abstract: The issue of frauds through payment cards has received a great deal of attention from authorities. A large share of card frauds can be ascribed to the phenomenon of counterfeiting of debit cards, widely used payment instrument in “face-to-face” transactions. With the advent of the Single Euro Payment Area, the European banking community has shared and almost reached the ambitious goal of replacing all the cards (and accepting terminals) with chip compatible ones, which are supposed to be harder to clone than the magnetic stripe card. Using a bi-annual balanced panel data of over one hundred Italian banks, in this paper we estimate for the first time the real impact on card frauds caused by the chip card migration. The results confirm the positive effects of the new technology: the ratio between fraud and ATM-POS transactions (card fraud loss rate) is reduced significantly if the chip card is present.
    Keywords: fraud; debit card; payment instrument; security; chip; technology; prevention; EMV; SEPA
    JEL: D12 E42 C23 E21
    Date: 2012–07–20
  24. By: Simona Mateut; Piercarlo zanchettin
    Abstract: We investigate the interaction between two terms of payment, supplier credit sales and customer advance payment. We find evidence that advance payments may signal customer creditworthiness and increase trade credit extension when we control for vendor size in international transactions or for the traded goods characteristics.
    Keywords: trade credit; advance payment; signalling
    JEL: G31 G32
    Date: 2012–06
  25. By: Hubert Janos Kiss (Eötvös Loránd University, Department of Economics); Ismael Rodriguez-Lara (ERI-CES); Alfonso Rosa-Garcia (Universidad de Murcia, Dpt. Analisis Economico)
    Abstract: We report experimental evidence on the effect of observability of actions on bank runs. We model depositors' decision-making in a sequential framework, with three depositors located at the nodes of a network. Depositors observe the other depositors' actions only if connected by the network. A sufficient condition to prevent bank runs is that the second depositor to act is able to observe the first one's action (no matter what is observed). Experimentally, we find that observability of actions affects the likelihood of bank runs, but depositors' choice is highly influenced by the particular action that is being observed. This finding suggests a new source for the ocurrence of bank runs. Observability of actions can provoke runs that cannot be explained neither by coordination nor by fundamental problems, the two main culprits identified by the literature.
    Keywords: bank runs, social networks, coordination failures, experimental evidence
    JEL: C70 C91 D80 D85 G21
    Date: 2012–06
  26. By: Costa , Stefano; Malgarini, Marco; Margani , Patrizia
    Abstract: The paper aims at investigating on the credit conditions experienced by Italian firms during the recent business cycle. In doing so, we use a novel dataset on firms’ opinions derived from the ISTAT Business Confidence surveys. The dataset allows us to add to existing literature in three different ways: first of all, the availability of a very rich set of information on firms' perceptions enables us to study a number of factors possibly influencing credit conditions at the firm level; secondly, the analysis may be extended beyond the Manufacturing sector, considering also the Construction, Retail and Services sectors; thirdly, the high frequency of the data helps in shedding light into the most recent period following the sovereign debt crisis, for which available evidence is still scarce. Starting from these considerations, three different panel data model are estimated, relating the probability of being credit constrained to various individual characteristics of the firms and of the sector in which they operate. Obtaining credit for Italian firms results to be easier in the North and being a Medium-Large firm. Moreover, access to credit is also found to crucially depend on individual credit worthiness; in Manufacturing, productive internationalization is found to have a negative effect on access to credit. Over time, credit conditions are particularly negative during the financial crisis, progressively recovering in 2009-2010. A new deterioration has been perceived by Italian firms since mid-2011, with the emerging of the sovereign debt crisis; this assessment is progressively translating into an effective credit rationing towards the end of last year and in the first months of 2012.
    Keywords: panel data; business surveys; credit crunch
    JEL: E51 C23 E44 G21
    Date: 2012–09
  27. By: Zhang Li; Ilya Pollak
    Abstract: The events of the last few years revealed an acute need for tools to systematically model and analyze large financial networks. Many applications of such tools include the forecasting of systemic failures and analyzing probable effects of economic policy decisions. We consider optimizing the amount and structure of a bailout in a borrower-lender network: Given a fixed amount of cash to be injected into the system, how should it be distributed among the nodes in order to achieve the smallest overall amount of unpaid liabilities or the smallest number of nodes in default? We develop an exact algorithm for the problem of minimizing the amount of unpaid liabilities, by showing that it is equivalent to a linear program. For the problem of minimizing the number of defaults, we develop an approximate algorithm using a reweighted l1 minimization approach. We illustrate this algorithm using an example with synthetic data for which the optimal solution can be calculated exactly, and show through numerical simulation that the solutions calculated by our algorithm are close to optimal.
    Date: 2012–09
  28. By: Goodman, Joshua (Harvard University); Levitin, Adam (Harvard University)
    Abstract: Recent proposals to address housing market troubles through principal modification raise the possibility that such policies could increase the cost of credit in the mortgage market. We explore this using historical variation in federal judicial rulings regarding whether Chapter 13 bankruptcy filers could reduce the principal owed on a home loan to the home's market value. The practice, known as cramdown, was definitively prohibited by the Supreme Court in 1993. We find evidence that home loans closed during the time when cramdown was allowed had interest rates 10-20 basis points higher than loans closed in the same state when cramdown was not allowed, which translates to a roughly 1-2 percent increase in monthly payments. Consistent with the theory that lenders are pricing in the risk of principal modification, interest rate increases are higher for the riskiest borrowers and zero for the least risky, as well as higher in states where Chapter 13 filing is more common.
    Date: 2012–08

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.