New Economics Papers
on Banking
Issue of 2012‒10‒06
29 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Canadian Bank Balance-Sheet Management: Breakdown by Types of Canadian Financial Institutions By David Xiao Chen; H. Evren Damar; Hani Soubra; Yaz Terajima
  2. Estimation Adjusted VaR By Christian Gouriéroux; Jean-Michel Zakoian
  3. Have Changes in the Financial Structure Affected Bank Profitability? Evidence for Austria By Fabio Rumler; Walter Waschiczek
  4. How important is the credit channel? An empirical study of the US banking crisis By Liu, Chunping; Minford, Patrick
  5. Banking and Trading By Boot, Arnoud W A; Ratnovski, Lev
  6. Efficiency and Bargaining Power in the Interbank Loan Market By Jason Allen; James Chapman; Federico Echenique; Matthew Shum
  7. Benchmarking financial systems around the world By Cihak, Martin; Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
  8. Non-Core Bank Liabilities and Financial Vulnerability By Joon-Ho Hahm; Hyun Song Shin; Kwanho Shin
  9. Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market By Jason Allen; Robert Clark; Jean-François Houde
  10. Liquidity and welfare By Yi Wen
  11. Time-varying Betas of the Banking Sector By Tomáš Adam; Sona Benecká; Ivo Jánský
  12. Lending relationships and credit rationing: the impact of securitization By Carbó Valverde, Santiago; Degryse, Hans; Rodriguez-Fernandez, Francisco
  13. Bankers and bank investors: Reconsidering the economies of scale in banking By Anderson, Ronald W.; Jõeveer, Karin
  14. Too-connected versus too-big-to-fail: banks’ network centrality and overnight interest rates. By Gabrieli, S.
  15. Loan Sales and Screening Incentives By Bester, Helmut; Gehrig, Thomas; Stenbacka, Rune
  16. Bank Competition Through The Credit Cycle: Implications For SME Financing By McCann, Fergal; McIndoe-Calder
  17. Testing the law of one price in retail banking: An analysis for Colombia using a pair-wise approach By Ana María Iregui; Jesús Otero
  18. The impact of the sovereign debt crisis on the activity of Italian banks By Ugo Albertazzi; Tiziano Ropele; Gabriele Sene; Federico M. Signoretti
  19. The Cross-Section of Interbank Rates: A Nonparametric Empirical Investigation By Iori, G.; Kapar, B.; Olmo, J.
  20. Determinants of SME Loan Default: The Importance of Borrower-Level Heterogeneity By McCann, Fergal; McIndoe-Calder, Tara
  21. Determinants of US financial fragility conditions By Fabio C. Bagliano; Claudio Morana
  22. The Irish SME lending market - a snapshot, December 2010 By Lawless, Martina; McCann, Fergal
  23. Irish SME credit supply and demand: comparisons across surveys and countries. By Holton, Sarah; McCann, Fergal
  24. Coordination Incentives in Cross-Border Macroprudential Regulation By Alexis Derviz; Jakub Seidler
  25. Banking, Debt, and Currency Crises: Early Warning Indicators for Developed Countries By Jan Babecký; Tomáš Havránek; Jakub Mateju; Marek Rusnák; Katerina Šmídková; Borek Vašícek
  26. News and Financial Intermediation in Aggregate and Sectoral Fluctuations By Görtz, Christoph; Tsoukalas, John D.
  27. Firm Growth and Efficiency in the Banking Industry: A new test of the efficient structure hypothesis By HOMMA Tetsushi; TSUTSUI Yoshiro; UCHIDA Hirofumi
  28. Capital Controls and Exchange Rate Expectations in Emerging Markets By Gustavo Abarca; Claudia Ramírez; José Gonzalo Rangel
  29. The banking and distribution sectors in a small open economy DSGE Model By Szabolcs Deák; Lionel Fontagné; Marco Maffezzoli; Massimiliano Marcellino

  1. By: David Xiao Chen; H. Evren Damar; Hani Soubra; Yaz Terajima
    Abstract: The authors document leverage, capital and liquidity ratios of banks in Canada. These ratios are important indicators of different types of risk with respect to a bank’s balance-sheet management. Particular attention is given to the observations by different types of banks, including small banks that historically received less attention. In addition, the authors compare leverage and capital ratios for banks in Canada and the United States in the period leading up to the recent crisis. They find that in Canada, most of the risks indicated by these balance-sheet ratios are concentrated among large banks that are more likely able to withstand shocks due to their diversified portfolios. Some smaller banks, however, reveal vulnerability against liquidity risks. Regarding a Canada - U.S. comparison, small U.S. banks show more vulnerability than their larger counterparts, as well as an increasing trend in vulnerability prior to the crisis. In contrast, the ratios for small Canadian banks show increasing resilience.
    Keywords: Financial institutions; Financial stability; Financial system regulation and policies
    JEL: G21 G28
    Date: 2012
  2. By: Christian Gouriéroux (Crest et Université de Toronto); Jean-Michel Zakoian (Canada et University Lille 3)
    Abstract: Standard risk measures, such as the Value-at-Risk (VaR), or the Expected Shortfall, have to be estimated and their estimated counterparts are subject to estimation uncertainty. Replacing, in the theoretical formulas, the true parameter value by an estimator based on n observations of the Profit and Loss variable, induces an asymptotic bias of order 1/n in the coverage probabilities. This paper shows how to correct for this bias by introducing a new estimator of the VaR, called Estimation adjusted VaR (EVaR). This adjustment allows for a joint treatment of theoretical and estimation risks, taking into account for their possible dependence. The estimator is derived for a general parametric dynamic model and is particularized to stochastic drift and volatility models. The finite sample properties of the EVaR estimator are studied by simulation and an empirical study of the S&P Index is proposed
    Keywords: Value-at-Risk,Estimation Risk,Bias Correction, ARCH Model
    Date: 2012–09
  3. By: Fabio Rumler; Walter Waschiczek
    Abstract: We examine the impact of changes in the financial structure of the Austrian banking sector over the past 15 years, such as disintermediation, internationalization and privatization, on the profitability of banks. Several proxies based on bank balance sheet data at the micro level as well as macroeconomic variables are used to capture these changes. The case of Austria is particularly interesting because country-specific developments, such as the opening-up of the banking sector due to EU accession, coincided with the global deregulation of banking activities. Our estimation results, which are based on dynamic panel regression methods, indicate that disintermediation (a lower percentage of loans over total assets) and higher market concentration in the banking sector had a positive effect on bank profitability, while, surprisingly, changes in the ownership structure (privatization and increased foreign ownership) as well as more foreign lending by Austrian banks did not have a clear-cut or significant impact on bank profits. JEL classification: G21, E44, D40, G32, C33
    Keywords: Bank Profitability, Banking Market Structure, Dynamic Panel Estimation
    Date: 2012–09–26
  4. By: Liu, Chunping; Minford, Patrick
    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’s 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: bank crisis; credit channel; financial frictions; indirect inference
    JEL: C12 C52 E12 G01 G1
    Date: 2012–09
  5. By: Boot, Arnoud W A; Ratnovski, Lev
    Abstract: We study the effects of a bank’s engagement in trading. Traditional banking is relationship-based: not scalable, long-term oriented, with high implicit capital, and low risk (thanks to the law of large numbers). Trading is transactions-based: scalable, short-term, capital constrained, and with the ability to generate risk from concentrated positions. When a bank engages in trading, it can use its ‘spare’ capital to profitably expand the scale of trading. However there are two inefficiencies. A bank may allocate too much capital to trading ex-post, compromising the incentives to build relationships ex-ante. And a bank may use trading for risk-shifting. Financial development augments the scalability of trading, which initially benefits conglomeration, but beyond some point inefficiencies dominate. The deepening of financial markets in recent decades leads trading in banks to become increasingly risky, so that problems in managing and regulating trading in banks will persist for the foreseeable future. The analysis has implications for capital regulation, subsidiarization, and scope and scale restrictions in banking.
    Keywords: banking; capital regulation; scale restrictions; trading
    JEL: G21 G24 G28 G32
    Date: 2012–09
  6. By: Jason Allen; James Chapman; Federico Echenique; Matthew Shum
    Abstract: Using detailed loan transactions-level data we examine the efficiency of an overnight interbank lending market, and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no-arbitrage conditions on trades in the market. For Canada we show that while the market is fairly efficient, some degree of inefficiency persists throughout our sample. The level of inefficiency matches distinct phases of both the Bank of Canada’s operations as well as phases of the 2007- 2008 financial crisis, where more liquidity intervention implies more inefficiency. We find that bargaining power tilted sharply towards borrowers as the financial crisis progressed, and towards riskier borrowers. This supports a nuanced version of the Too- Big-To-Fail story, whereby participants continued to lend to riskier banks at favorable rates, not because of explicit support to the riskier banks provided by governmental authorities, but rather due to the collective self-interest of these banks.
    Keywords: Financial Institutions; Payment; clearing; and settlement systems
    JEL: C71 G21 G28 E58
    Date: 2012
  7. By: Cihak, Martin; Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
    Abstract: This paper introduces the Global Financial Development Database, an extensive dataset of financial system characteristics for 205 economies from 1960 to 2010. The database includes measures of (a) size of financial institutions and markets (financial depth), (b) degree to which individuals can and do use financial services (access), (c) efficiency of financial intermediaries and markets in intermediating resources and facilitating financial transactions (efficiency), and (d) stability of financial institutions and markets (stability). The authors document cross-country differences and time series trends.
    Keywords: Debt Markets,Emerging Markets,Access to Finance,Banks&Banking Reform,Economic Theory&Research
    Date: 2012–08–01
  8. By: Joon-Ho Hahm; Hyun Song Shin; Kwanho Shin
    Abstract: A lending boom is reflected in the composition of bank liabilities when traditional retail deposits (core liabilities) cannot keep pace with asset growth and banks turn to other funding sources (non-core liabilities) to finance their lending. We formulate a model of credit supply as the flip side of a credit risk model where a large stock of non-core liabilities serves as an indicator of the erosion of risk premiums and hence of vulnerability to a crisis. We find supporting empirical evidence in a panel probit study of emerging and developing economies.
    JEL: F32 F33 F34
    Date: 2012–09
  9. By: Jason Allen; Robert Clark; Jean-François Houde
    Abstract: This paper measures market power in a decentralized market where contracts are determined through a search and negotiation process. The mortgage industry has many institutional features which suggest competitiveness: homogeneous contracts, negotiable rates, and, for a given consumer, common lending costs across lenders. As a result, even with a small number of lenders, informed borrowers can gather multiple quotes. However, there is important heterogeneity in the ability of consumers to understand the subtleties of financial contracts, in their ability or willingness to search and negotiate for quotes, and also in their degree of loyalty to their main financial institution. We propose and estimate a model to disentangle the different channels through which market power can arise for a given transaction in this environment. There are two main sources of market power. The first is search frictions. We find that over the five year period of the contract the average search cost corresponds to an upfront sunk cost of between $1,047 and $1,590. The second main source of market power is switching costs. We estimate that consumers are willing to pay between $759 and $1,617 upfront to avoid having to switch banks.
    Keywords: Financial institutions; Financial services; Market structure and pricing
    JEL: G21 L22 D4
    Date: 2012
  10. By: Yi Wen
    Abstract: This paper develops an analytically tractable Bewley model of money featuring capital and financial intermediation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 7% ~ 10% (or more) to avoid 10% annual inflation. In other words, raising the U.S. inflation target from 2% to 3% amounts to roughly a 0:5 percentage reduction in aggregate consumption. The astonishingly large welfare costs of inflation arise because inflation tightens liquidity constraints by destroying the buffer-stock value of money, thus raising the volatility of consumption at the household level. Such an inflation-induced increase in the idiosyncratic consumption-volatility at the micro level cannot be captured by representative- agent models or the Bailey triangle. Although the development of a credit and banking system can reduce the welfare costs of inflation by alleviating liquidity constraints, with realistic credit limits the cost of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our finding not only provides a justification for adopting a low inflation target by central banks, but also offers a plausible explanation for the robust positive relationship between inflation and social unrest in developing countries where money is the major form of household financial wealth.
    Keywords: Liquidity (Economics) ; Welfare
    Date: 2012
  11. By: Tomáš Adam (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Sona Benecká (Czech National Bank); Ivo Jánský (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper analyses the evolution of systematic risk of banking industries in eight advanced countries using weekly data from 1990 to 2012. The estimation of time-varying betas is done by means of a Bayesian state space model with stochastic volatility, whose results are contrasted with those of the standard M-GARCH and rolling-regression models. We show that both country specific and global events affect the perceived systematic risk, while the impact of the latter differs largely across countries. Finally, our results do not support the previous findings that systematic risk of the banking sector was underestimated before the last financial crisis.
    Keywords: CAPM, Time-varying Beta, Multivariate GARCH, Bayesian State Space Models, Stochastic Volatility
    JEL: C11 G12 G21
    Date: 2012–07
  12. By: Carbó Valverde, Santiago; Degryse, Hans; Rodriguez-Fernandez, Francisco
    Abstract: Banks have been heavily involved in securitization. We study whether the involvedness of a firm’s main bank into different types of securitization activity -- asset backed securities (ABS) and covered bonds -- influences credit supply before and during the 2007-8 financial crisis. Both types of securitization allow the bank to generate liquidity. To the extent that ABS activity lowers lending standards in normal times, banks with more ABS activity may reduce their lending more in crisis times as an ex-post effect of a previously higher risk adoption. Employing a disequilibrium model to identify credit rationing, we find that a longer relationship with a firm’s main bank considerable improve credit supply. In general, we find that a relationship with a bank that is more involved in securitization activities relaxes credit constraints in normal periods. In contrast, while a relationship with a firm’s main bank that issues covered bonds reduces credit rationing during crisis periods, the issuance of asset backed securities by a firm’s main bank aggravates these firm’s credit rationing in crisis periods.
    Keywords: financial crisis; lending relationships; securitization
    JEL: G21
    Date: 2012–09
  13. By: Anderson, Ronald W.; Jõeveer, Karin
    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.
    Keywords: agency; banking; compensation policy; scale economies
    JEL: G20 G21
    Date: 2012–09
  14. By: Gabrieli, S.
    Abstract: What influences banks’ borrowing costs in the unsecured money market? The objective of this paper is to test whether measures of centrality, quantifying network effects due to interactions among banks in the market, can help explain heterogeneous patterns in the interest rates paid to borrow unsecured funds once bank size and other bank and market factors that affect the overnight segment are controlled for. Preliminary evidence shows that large banks borrow on average at better rates compared to smaller institutions, both before and after the start of the financial crisis. Nonetheless, controlling for size, centrality measures can capture part of the cross-sectional variation in overnight rates. More specifically: (1) Before the start of the crisis all the banks, independently of their size, profit from different forms of interconnectedness, but the economic size of the effect is small. Bank reputation and perceived credit riskiness are the most relevant factors to reduce average daily interest rates. Foreign banks borrow at a discount over Italian ones. (2) After August 2007 the impact of banks’ interconnectedness becomes larger but changes sign: the “reward” stemming from a higher centrality becomes a “punishment”, which possibly reflects market discipline. Bank reputation becomes even more important. (3) After Lehman’s bankruptcy the effect of centrality on the spread maintains the same sign as after August 2007, but the magnitude increases remarkably. Foreign banks borrow at a relevant premium over Italian ones; reputation becomes outstandingly more important than in normal times.
    Keywords: Network centrality; Interbank market; Financial crisis; Money market integration; Macro-prudential analysis.
    JEL: C23 D85 G01 G21 G28
    Date: 2012
  15. By: Bester, Helmut; Gehrig, Thomas; Stenbacka, Rune
    Abstract: We analyze the effect of loan sales on the intensity of costly screening. Loan sales strengthen screening incentives when screening primarily improves the bank’s ability to identify profitable loans and when banks retain most of those profitable loans. However, loan sales dampen screening incentives when the benefit of screening primarily helps to weed out unprofitable projects. Moreover, alternative institutions of information production and the institutional market framework affect the relative benefits and costs of loan sales, and screening respectively. Accordingly, the potential regulation of loan sales has to take into account the whole impact on societal information production, both in markets and non-market institutions.
    Keywords: loan sales; screening; securitization
    JEL: D83 G21 G32 L15
    Date: 2012–09
  16. By: McCann, Fergal (Central Bank of Ireland); McIndoe-Calder (Central Bank of Ireland)
    Abstract: In this letter a series of stylized facts are presented on competition in Irish private sector lending markets across periods of both significant economic expansion and decline. Firstly, concentration of lending to the private sector is shown to have fallen during the boom period of 2004-2008, and to have steadily risen since the onset of the crisis. Secondly, we document that the lending market for Small and Medium Enterprises (SMEs) is significantly more concentrated than that for the private sector in total. Thirdly, we observe a degree of heterogeneity in the concentration of lending to different sectors of economic activity. Fourthly, concentration of new lending flows to SMEs in 2010 and 2011 is shown to be significantly higher than concentration of the stock of credit across all sectors, suggesting that the trend is towards even higher concentration in the SME market. Finally, it is apparent that the share of foreign banks in private sector credit stock reached its peak just as the crisis began, and has been falling since, indicating that in times of crisis foreign market participants react by more aggressively reducing exposure than domestic banks. The likely effect on Irish firms’ access to finance is discussed by placing these findings in the context of the literature on the link between banking competition and credit conditions. Our results suggest that firms, and particularly SMEs, will experience increasingly difficult credit conditions as a result of increased concentration in the lending market. In this light, policy measures aimed at alleviating credit constraints are of particular importance.
    Keywords: Competition, Herfindahl Index, Private Sector Credit, SMEs, Foreign Banks, Access to Finance, Financial Stability
    Date: 2012–04
  17. 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.
    Date: 2012–09–17
  18. By: Ugo Albertazzi (Banca d'Italia); Tiziano Ropele (Banca d'Italia); Gabriele Sene (Banca d'Italia); Federico M. Signoretti (Banca d'Italia)
    Abstract: We assess the effects of the sovereign debt crisis on Italian banksÂ’ activity using aggregate data on funding and loan rates, lending quantities and income statements for the period 1991-2011. We augment standard reduced-form equations for the variables of interest with the spread on 10-year sovereign bonds as an additional explanatory variable. We find that, even when controlling for the standard economic variables that influence bank activity, a rise in the spread is followed by an increase in the cost of wholesale and of certain forms of retail funding for banks and in the cost of credit to firms and households; the impact tends to be larger during periods of financial turmoil. An increase in the spread also has a direct negative effect on lending growth, beyond that implied by the rise in lending rates. Finally, we document a negative impact of the spread on banksÂ’ profitability, stronger for larger intermediaries.
    Keywords: sovereign spread, bank loan rates, bank lending
    JEL: E44 E51 G21
    Date: 2012–09
  19. By: Iori, G.; Kapar, B.; Olmo, J.
    Abstract: This paper analyzes the distribution of lending and borrowing credit spreads in the European interbank market conditional on main features of banks such as their size, operating currency and nationality. This is done by means of nonparametric kernel estimation methods for the cross-sectional density of interbank funding rates over a large sample of European banks trading in the e-MID market. The analysis is repeated over consecutive non-overlapping periods in order to assess and compare the effect of the factors during crisis and non-crisis periods. We find evidence of important differences between the borrowing and lending segment of the interbank market that are augmented during crises periods. Our results strongly support the existence of a size effect in the borrowing market. Largest banks enjoy the highest lending rates and the lowest borrowing rates. The collapse of Lehman Brothers accentuates the differences in funding conditions. In both borrowing and lending segments, crises are corresponded by high volatilities in daily funding costs. Banks using the Euro currency and in countries not affected by sovereign debt crises are benefited by lower funding costs. Our nonparametric analysis of densities conditional on banks' nationality suggests that distress in the interbank market can serve as an early warning indicator of sovereign risk.
    Keywords: e-MID Interbank Market; Financial Crisis; Nonparametric kernel estimation; Sovereign risk; Systemic Risk
    Date: 2012
  20. By: McCann, Fergal (Central Bank of Ireland); McIndoe-Calder, Tara (Central Bank of Ireland)
    Abstract: Using unique borrower-level balance sheet information for a cross-section of 6,000 Irish SME loans, this paper tests the determinants of default at the micro level. Typical financial ratios, such as the ratio of the loan to total assets, the current ratio, leverage ratio, liquidity ratio and profitability ratio, are found to be significant predictors of default. Further, the length of time the borrowing firm’s owner has been with the firm mitigates the likelihood of default. Conditional on the above, significant sector-level effects remain. The paper moves beyond average effects of the above-mentioned variables by repeating the analysis across seven sectors of economic activity, and across the quintiles of firm size, exposure and credit quality. The share of defaults is shown to fall as firms get larger, and to rise as loans get larger relative to assets. The results suggest that different warning signals can be identified, particularly for borrowers of different sizes and with small versus large loans. These results contribute to the literature on “fundamentals-based” modelling of corporate default risk, and represent one of very few sets of results on the determinants of default in SME lending in particular.
    Date: 2012–09
  21. By: Fabio C. Bagliano (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Claudio Morana (Department of Economics, University of Milan-Bicocca)
    Abstract: The recent financial crisis has highlighted the fragility of the US (and other countries') financial system under several respects. In this paper, the properties of a summary index of financial fragility, obtained by combining information conveyed by the "Agency", "Ted" and "BAA-AAA" spreads, timely capturing changes in credit and liquidity risk, distress in the mortgage market, and corporate default risk, are investigated over the 1986-2010 period. The empirical results show that observed fluctuations in the financial fragility index can be attributed to identified (global and domestic) macroeconomic (20%) and financial disturbances (40% to 50%), over both short- and long-term horizons, as well as to oil-supply shocks in the long-term (25%). The investigation of specific episodes of financial distress, occurred in 1987, 1998 and 2000, and, more recently, over the 2007-2009 period, shows that sizable fluctuations in the index are largely determined by financial shocks, while macroeconomic disturbances have generally had a stabilizing effect.
    Keywords: financial fragility, US, macro-?nance interface, international business cycle, factor vector autoregressive models, ?financial crisis, Great Recession
    JEL: C22 E32 G12
    Date: 2012–09
  22. By: Lawless, Martina (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland)
    Abstract: The Prudential Capital Assessment Review (PCAR) 2011 uncovered significant potential losses in the Irish banking sector, leading to a considerable recapitalisation. This letter uses a large sample of the loan level data provided for PCAR 2011 to present descriptive statistics on the SME lending market in Ireland as of December 2010. These data allow us to document the geographic and sectoral allocation of loans, exposure sizes and the performance of those loans. We find that there are significant losses, both incurred and potential, across all sectors of activity. These losses are most severe in the hotels and restaurants, construction and wholesale and retail sectors. In almost all sectors, a striking pattern in which large exposure buckets are associated with larger shares of non-performing loans, points to a higher-than-normal risk of large SME loans leading to significant losses. The contribution of property speculation to these losses is unobserved in these data but of huge policy interest.
    Date: 2012–02
  23. By: Holton, Sarah (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland)
    Abstract: This letter provides a consistent picture of Irish SME credit supply and demand up to March 2012 across two data sources: the European Commission and European Central Bank Survey of Access to Finance of Small and Medium Enterprises (SAFE) and the Mazars SME lending demand survey, commissioned by the Department of Finance. The data report that the Irish rejection rate for credit applications is the second highest in the euro area, while Irish SMEs are among the most likely to have faced increased collateral requirements, increased interest rates, or lower loan quantities. On the demand side, the data depict Irish credit demand, as measured by changes in firms’ reported need for external financing, to be at or close to the euro area average, while application rates for credit are slightly lower than average. The difference between Ireland’s ranking on demand and application rates is partly explained by a share of discouraged borrowers, who have demand for credit but do not apply for credit, that is double the euro area average.
    Date: 2012–08
  24. By: Alexis Derviz (Czech National Bank); Jakub Seidler (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We discuss (dis)incentives for fair cooperation related to delegating macroprudential policy decisions to a supranational body, as well as their welfare implications. The question is studied by means of a signaling game of imperfect information between two national regulators. The model concentrates on informational frictions in an environment with otherwise fully aligned preferences. We show that even in the absence of evident conflicting goals, the non-transferrable nature of some regulatory information creates misreporting incentives. However, the major problem is not the reporting accuracy but the institutional arrangement focused on maximal multilateral satisfaction to the detriment of credible enforcement of rules. The main application is meant to be systemic risk management by the relevant EU institutions.
    Keywords: macroprudential regulation, integration, autonomy, information, reporting
    JEL: F55 H77 D02 C72 D83
    Date: 2012–07
  25. By: Jan Babecký (Czech National Bank); Tomáš Havránek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jakub Mateju (CERGE-EI); Marek Rusnák (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Katerina Šmídková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Borek Vašícek (Czech National Bank)
    Abstract: We construct and explore a new quarterly dataset covering crisis episodes in 40 developed countries over 1970–2010. First, we examine stylized facts of banking, debt, and currency crises. Using panel vector autoregression, we confirm that currency and debt crises are typically preceded by banking crises, but not vice versa. Banking crises are also the most costly in terms of the overall output loss, and output takes about six years to recover. Second, we try to identify early warning indicators of crises specific to developed economies, accounting for model uncertainty by means of Bayesian model averaging. Our results suggest that onsets of banking and currency crises tend to be preceded by booms in economic activity. In particular, we find that growth of domestic private credit, increasing FDI inflows, rising money market rates as well as increasing world GDP and inflation were common leading indicators of banking crises. Currency crisis onsets were typically preceded by rising money market rates, but also by worsening government balances and falling central bank reserves. Early warning indicators of debt crises are difficult to uncover due to the low occurrence of such episodes in our dataset. Finally, employing a signaling approach we show that using a composite early warning index significantly increases the usefulness of the model when compared to using the best single indicator (domestic private credit).
    Keywords: Early warning indicators, Bayesian model averaging, macro-prudential policies
    JEL: C33 E44 E58 F47 G01
    Date: 2012–07
  26. By: Görtz, Christoph; Tsoukalas, John D.
    Abstract: We estimate a two-sector DSGE model with financial intermediaries—a-la Gertler and Karadi (2011) and Gertler and Kiyotaki (2010)—and quantify the importance of news shocks in accounting for aggregate and sectoral fluctuations. Our results indicate a significant role of financial market news as a predictive force behind fluctuations. Specifically, news about the value of assets held by financial intermediaries, reflected one to two years in advance in corporate bond markets, generate countercyclical corporate bond spreads, affect the supply of credit, and are estimated to be a significant source of aggregate fluctuations, accounting for approximately 31% of output, 22% of investment and 31% of hours worked variation in cyclical frequencies. Importantly, asset value news shocks generate both aggregate and sectoral co-movement with a standard preference specification. Financial intermediation is key for the importance and propagation of asset value news shocks.
    Keywords: news; financial intermediation; business cycles; DSGE; Bayesian estimation
    JEL: E2 E3
    Date: 2012–09
  27. By: HOMMA Tetsushi; TSUTSUI Yoshiro; UCHIDA Hirofumi
    Abstract: This paper proposes a new test of the efficient structure hypothesis by directly examining the relation between firm efficiency and firm growth. This is also a test of the so-called quiet-life hypothesis. Applying this test to large banks in Japan, we find that more efficient banks become larger, which is consistent with the efficient structure hypothesis. We also find that market concentration reduces banks' cost efficiency, which is consistent with the quiet-life hypothesis. These findings imply that there is an intriguing growth-efficiency dynamic throughout the life cycle of banks, although yet another finding suggests that the economic impact of the quiet-life hypothesis is less significant than that of the efficient structure hypothesis.
    Date: 2012–09
  28. By: Gustavo Abarca; Claudia Ramírez; José Gonzalo Rangel
    Abstract: This article examines changes in the exchange rate expectations associated with capital controls and banking regulations in a group of emerging countries that implemented these measures to control the adverse effects of sudden capital flows on their currencies. The evidence suggests that for most countries the effects of this type of policies are limited. Moreover, in some cases they appear to have an opposite effect from the one intended. In particular, for some currencies our results suggest there were changes in the extremes of their exchange rate distributions, which make their tails heavier and signal that the market allocates a greater probability to extreme movements. In the same way, evidence is found that this type of measures increases the levels of currency risk premium.
    Keywords: Capital controls, banking regulation, exchange rate expectations, emerging economies, generalized extreme value.
    JEL: C14 E44 E58 F31 G15
    Date: 2012–09
  29. By: Szabolcs Deák; Lionel Fontagné; Marco Maffezzoli; Massimiliano Marcellino
    Abstract: The recent crisis has emphasized the role of financial - macroeconomic interactions, and international trade in goods and services, in the transmission of the shocks. Both phenomena, closely related to the higher degree of globalization, are very relevant for small open economies, and particularly so when a large share of the economy relies on financial and distribution services. Hence, in this paper we propose to incorporate the banking and distribution sectors into a medium scale DSGE model of a small open economy. As an illustration, the resulting model is then calibrated to match the specific characteristics of the Luxembourg economy, where the financial sector plays a key role. We believe that the results are also of more general interest for studying the reaction of small open economies to real and financial shocks. JEL Codes: E13; E32; Keywords: DSGE model, Small open economy, Banking, International trade, Luxembourg, Segmented labor market; Trade union
    Date: 2012

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