New Economics Papers
on Banking
Issue of 2012‒10‒20
29 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Regime switches in the volatility and correlation of financial institutions By Kris Boudt; Jon Danielsson; Siem Jan Koopman; Andre Lucas
  2. A macroeconomic model with a financial sector By Markus K. Brunnermeier; Yuliy Sannikov
  3. Who Ran on Repo? By Gary B. Gorton; Andrew Metrick
  4. When Credit Bites Back: Leverage, Business Cycles and Crises By Oscar Jorda; Moritz Schularick; Alan Taylor
  5. Liquidity Coinsurance and Bank Capital By Castiglionesi, Fabio; Feriozzi, Fabio; Lóránth, Gyöngyi; Pelizzon, Loriana
  6. Competition for internal funds within multinational banks: Foreign affiliate lending in the crisis By Düwel, Cornelia; Frey, Rainer
  7. Relationship lending in the interbank market and the price of liquidity By Bräuning, Falk; Fecht, Falko
  8. Measuring and testing for the systemically important financial institutions By Carlos Castro; Stijn Ferrari
  9. Banks’ balance sheets and the macroeconomy in the Bank of Italy Quarterly Model By Claudia Miani; Giulio Nicoletti; Alessandro Notarpietro; Massimiliano Pisani
  10. A macroeconomic framework for quantifying systemic risk By Zhiguo He; Arvind Krishnamurthy
  11. Fiscal policy, banks and the financial crisis By Robert Kollmann; Marco Ratto; Werner Roeger; Jan in't Veld
  12. Credit Shocks Harm the Unprepared - Financing Constraints and the Financial Crisis By Hetland, Ove Rein; Mjøs, Aksel
  13. Endogenous risk in a DSGE model with capital-constrained financial intermediaries By Hans Dewachter; Raf Wouters
  14. Dynamic Hedging of Portfolio Credit Risk in a Markov Copula Model (Previous title: Dynamic Modeling of Portfolio Credit Risk with Common Shocks) By Bielecki, Tomasz R.; Cousin, Areski; Crépey, Stéphane; Herbertsson, Alexander
  15. Financial intermediation, investment dynamics and business cycle fluctuations By Andrea Ajello
  16. Market microstructure, bank's behaviour and interbank spreads By Gabbi, G.; Germano, G.; Hatzopoulos, V.; Iori, G.; Politi, M.
  17. Bank ratings: What determines their quality? By Hau, Harald; Langfield, Sam; Marqués Ibañez, David
  18. Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments By Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
  19. Bank/sovereign risk spillovers in the European debt crisis By Valerie De Bruyckere; Maria Gerhardt; Glenn Schepens; Rudi Vander Vennet
  20. Sovereign Defaults and Banking Crises By Cesar Sosa-Padilla
  21. Consumer Expertise or Credit Risk? An empirical analysis of mortgage pricing By Barrutia Legarreta, José María; Espinosa Alejos, María Paz
  22. How Should We Bank With Foreigners?—An Empirical Assessment of Lending Behavior of International Banks to Six East Asian Economies By Pontines, Victor; Siregar, Reza Y.
  23. The safety and soundness effects of bank M&As in the EU: does prudential regulation have any impact? By Jens Hagendorff; María J. Nieto; Larry D. Wall
  24. Supervisor ratings and the contraction of bank lending to small businesses By Elizabeth K. Kiser; Robin A. Prager; Jason R. Scott
  25. The impact of house prices on consumer credit: evidence from an internet bank By Rodney Ramcharan; Christopher Crowe
  26. Contagion in CDS, Banking and Equity Markets. By Rodrigo César de Castro Miranda; Benjamin Miranda Tabak; Mauricio Medeiros Junior
  27. Market Structure and Borrower Welfare in Microfinance By de Quidt, Jonathan; Fetzer, Thiemo; Ghatak, Maitreesh
  28. Bank strategies in catastrophe settings: empirical evidence and policy suggestions By Leonardo Becchetti; Stefano Castriota; Pierluigi Conzo
  29. Fiscal deficits, financial fragility, and the effectiveness of government policies By Kirchner, Markus; van Wijnbergen, Sweder

  1. By: Kris Boudt (KU Leuven; Lessius; V.U. University Amsterdam); Jon Danielsson (London School of Economics); Siem Jan Koopman (V.U. University Amsterdam; Tinbergen Institute); Andre Lucas (V.U. University Amsterdam; Tinbergen Institute)
    Abstract: We propose a parsimonious regime switching model to characterize the dynamics in the volatilities and correlations of US deposit banks' stock returns over 1994-2011. A first innovative feature of the model is that the within-regime dynamics in the volatilities and correlation depend on the shape of the Student t innovations. Secondly, the across-regime dynamics in the transition probabilities of both volatilities and correlations are driven by macro-financial indicators such as the Saint Louis Financial Stability index, VIX or TED spread. We find strong evidence of time-variation in the regime switching probabilities and the within-regime volatility of most banks. The within-regime dynamics of the equicorrelation seem to be constant over the period.
    Date: 2012–10
  2. By: Markus K. Brunnermeier (Department of Economics, Princeton University); Yuliy Sannikov (Department of Economics, Princeton University)
    Abstract: This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplification effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in down turns. In an environment of low exogenous risk experts assume higher leverage making the system more prone to systemic volatility spikes - a volatility paradox. Securitization and derivatives contracts leads to better sharing of exogenous risk but to higher endogenous systemic risk. Financial experts may impose a negative externality on each other and the economy by not maintaining adequate capital cushion.
    Date: 2012–10
  3. By: Gary B. Gorton; Andrew Metrick
    Abstract: The sale and repurchase (repo) market played a central role in the recent financial crisis. From the second quarter of 2007 to the first quarter of 2009, net repo financing provided to U.S. banks and broker-dealers fell by about $1.3 trillion – more than half of its pre-crisis total. Significant details of this “run on repo” remain shrouded, however, because many of the providers of repo finance are lightly regulated or unregulated cash pools. In this paper we supplement the best available official data sources with a unique market survey to provide an updated picture of the dynamics of the repo run. We provide evidence that the run was predominantly driven by the flight of foreign financial institutions, domestic and offshore hedge funds, and other unregulated cash pools. Our analysis highlights the danger of relying exclusively on data from regulated institutions, which would miss the most important parts of the run.
    JEL: G01 G23
    Date: 2012–10
  4. By: Oscar Jorda; Moritz Schularick; Alan Taylor (Department of Economics, University of California Davis)
    Abstract: This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In additional to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
    Keywords: leverage, booms, recessions, financial crises, business cycles, local projections.
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2012–10–05
  5. By: Castiglionesi, Fabio; Feriozzi, Fabio; Lóránth, Gyöngyi; Pelizzon, Loriana
    Abstract: Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in the interbank market (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We study how the access to an interbank market affects banks' incentive to hold capital. A general insight is that from a risk-sharing perspective it is optimal to postpone payouts to capital investors when a bank is hit by a liquidity shock that it cannot coinsure on the interbank market. This mechanism produces a negative relationship between interbank activity and bank capital. We provide empirical support for this prediction in a large sample of U.S. commercial banks, as well as in a sample of European and Japanese commercial banks.
    Keywords: Bank Capital; Interbank Markets; Liquidity Coinsurance.
    JEL: G21
    Date: 2012–10
  6. By: Düwel, Cornelia; Frey, Rainer
    Abstract: We investigate how the lending activities of a multinational bank's affiliates located abroad are affected by funding difficulties in view of the financial crisis. For this, we consider transaction-induced changes in long-term lending to the private sector of 40 countries by the affiliates of the 68 largest German banks. We find that affiliates' local deposits and profitability have been stabilizing loan supply. By contrast, relying on short-term wholesale funding has increasingly proven to be a disadvantage in the crisis, as inter-bank and capital markets froze. Besides, the more an affiliate abroad takes recourse to intra-bank funding in the crisis, the more it becomes dependent on a stable deposit and long-term wholesale funding position of its parent bank. We furthermore detect competition for intra-bank funding across the affiliates abroad as well as an increasing focus on the parent bank's home market activities. --
    Keywords: funding structure,multinational banks,internal capital market,intra-bank lending,wholesale funding,financial crisis
    JEL: G21 F23 F34 E44
    Date: 2012
  7. By: Bräuning, Falk; Fecht, Falko
    Abstract: This paper empirically investigates the effect of interbank relationship lending on banks' access to liquidity. Our analysis is based on German interbank payment data which we use to create a panel of unsecured overnight loans between 1079 distinct borrower-lender pairs. The data shows that banks rely on repeated interactions with the same counterparties to trade liquidity. For the price of liquidity, we find that in the run-up to the recent financial crisis of 2007/08 relationship lenders charged already higher interest rates to their borrowers after controlling for other bank specific characteristics and general market conditions. By contrast, during the crisis borrowers paid on average lower rates to their relationship lenders compared to spot lenders. The observed interest rate differences are statistically and economically significant and in line with theory that relationship lenders have private information about the creditworthiness of their close borrowers. --
    Keywords: Interbank Market,Relationship Lending,Liquidity Crisis,Central Counterpart,Financial Contagion
    JEL: D61 E44 G10 G21
    Date: 2012
  8. By: Carlos Castro (Faculty of Economics, Universidad del Rosario, Colombia); Stijn Ferrari (National Bank of Belgium)
    Abstract: This paper analyses Delta CoVaR proposed by Adrian and Brunnermeier (2008) as a tool for identifying/ranking systemically important institutions and assessing interconnectedness. We develop a test of significance of Delta CoVaR that allows determining whether or not a financial institution can be classified as being systemically important on the basis of the estimated systemic risk contribution, as well as a test of dominance aimed at testing whether or not, according to Delta CoVaR, one financial institution is more systemically important than another. We provide two applications on a sample of 26 large European banks to show the importance of statistical testing when using Delta CoVaR, and more generally also other market-based systemic risk measures, in this context.
    Keywords: Systemic risk, SIFIs, interconnectedness, quantile regression, stochastic dominance test
    JEL: C21 C58 G32
    Date: 2012–10
  9. By: Claudia Miani (Banca d'Italia); Giulio Nicoletti (Banca d'Italia); Alessandro Notarpietro (Banca d'Italia); Massimiliano Pisani (Banca d'Italia)
    Abstract: We investigate the relationship between macroeconomic conditions and banks' balance sheets by referring to a modified version of the Bank of Italy Quarterly Model (BIQM), regularly used for forecasting and policy analysis. In particular, we examine how regulatory bank capital and private sector default probabilities affect interest rates on loans and, ultimately, economic activity. To this end, we build an enriched version of the model to include a number of banking variables. The changes introduced in the model result in an amplification of the responses of macroeconomic variables to monetary policy and world demand shocks, although, in normal times, the effect is not large.
    Keywords: bank regulatory capital, loan interest rates, Italian economy.
    JEL: E17 E27 E51 G21
    Date: 2012–09
  10. By: Zhiguo He (University of Chicago, Booth School of Business; NBER); Arvind Krishnamurthy (Northwestern University,Kellogg School of Management; NBER)
    Abstract: Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a Fed “stress test” linking a stress scenario to the probability of systemic risk states.
    Keywords: Liquidity, Delegation, Financial Intermediation, Crises, Financial Friction, Constraints
    JEL: G12 G2 E44
    Date: 2012–10
  11. By: Robert Kollmann (ECARES, Université Libre de Bruxelles; Université Paris-Est; CEPR); Marco Ratto (Joint Research Centre, European Commission); Werner Roeger (DG-ECFIN, European Commission); Jan in't Veld (DG-ECFIN, European Commission)
    Abstract: This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macro literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.
    Keywords: financial crisis, bank rescue measures, fiscal policy
    JEL: E62 E32 G21 H63 F41
    Date: 2012–10
  12. By: Hetland, Ove Rein (Ernst & Young Transaction Advisory Services, Stavanger, and Institute for Research in Economics and Business Administration (SNF)); Mjøs, Aksel (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: We show that the investments of ex ante financially unconstrained firms are more profoundly affected by changes in credit supply than the investments of financially constrained firms. We employ a survey of Norwegian private firms concerning the impact of the financial crisis of 2008-9, linked to firm-level financial and bank accounts. Adverse changes in credit availability reduce investments after controlling for output demand, and this effect is largest for the least financially constrained firms. This is consistent with a model where financially constrained firms hedge against cash flow shortfalls whilst ex ante unconstrained firms rely on access to external funds.
    Keywords: Credit Shocks; Financing Constraints; Financial Crisis
    JEL: G00
    Date: 2012–09–28
  13. By: Hans Dewachter (National Bank of Belgium, Research Department; University of Leuven); Raf Wouters (National Bank of Belgium, Research Department)
    Abstract: This paper proposes a perturbation-based approach to implement the idea of endogenous financial risk in a standard DSGE macro-model. Recent papers, such as Mendoza (2010), Brunnermeier and Sannikov (2012) and He and Krishnamurthy (2012), that have stimulated the research field on endogenous risk in a macroeconomic context, are based on sophisticated solution methods that are not easily applicable in larger models. We propose an approximation method that allows us to capture some of the basic insights of this literature in a standard macro-model. We are able to identify an important risk-channel that derives from the risk aversion of constrained intermediaries and that contributes significantly to the overall financial and macro volatility. With this procedure, we obtain a consistent and computationally-efficient modelling device that can be used for integrating financial stability concerns within the traditional monetary policy analysis.
    Date: 2012–10
  14. By: Bielecki, Tomasz R. (Illinois Institute of Technology and Université Lyon 1); Cousin, Areski (Université d'Évry Val d'Essonne); Crépey, Stéphane (Université d'Évry Val d'Essonne); Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We consider a bottom-up Markovian copula model of portfolio credit risk where dependence among credit names mainly stems from the possibility of simultaneous defaults. Due to the Markovian copula nature of the model, calibration of marginals and dependence parameters can be performed separately using a two-steps procedure, much like in a standard static copula set-up. In addition, the model admits a common shocks interpretation, which is a very important feature as, thanks to it, efficient convolution recursion procedures are available for pricing and hedging CDO tranches, conditionally on any given state of the underlying multivariate Markov process. As a result this model allows us to dynamically hedge CDO tranches using single-name CDSs in a theoretically sound and practically convenient way. To illustrate this we calibrate the model against market data on CDO tranches and the underlying single-name CDSs. We then study the loss distributions as well as the min-variance hedging strategies in the calibrated portfolios.<p>
    Keywords: Portfolio Credit Risk; Basket Credit Derivatives; Dynamic Min-Variance Hedging; Common Shocks; Markov Copula Model;
    JEL: G11
    Date: 2011–05–18
  15. By: Andrea Ajello
    Abstract: I use micro data to quantify key features of U.S. firm financing. In particular, I establish that a substantial 35% of firms' investment is funded using financial markets. I then construct a dynamic equilibrium model that matches these features and fit the model to business cycle data using Bayesian methods. In the model, stylized banks enable trades of financial assets, directing funds towards investment opportunities, and charge an intermediation spread to cover their costs. According to the model estimation, exogenous shocks to the intermediation spread explain 35% of GDP and 60% of investment volatility.
    Date: 2012
  16. By: Gabbi, G.; Germano, G.; Hatzopoulos, V.; Iori, G.; Politi, M.
    Abstract: We present an empirical analysis of the European electronic interbank market of overnight lending (e-MID) during the years 1999–2009. The main goal of the paper is to explain the observed changes of the cross-sectional dispersion of lending/borrowing conditions before, during and after the 2007–2008 subprime crisis. Unlike previous contributions, that focused on banks’ dependent and macro information as explanatory variables, we address the role of banks’ behaviour and market microstructure as determinants of the credit spreads.
    Keywords: interbank lending; market microstructure; subprime crisis; credit spreads; liquidity management
    Date: 2012
  17. By: Hau, Harald; Langfield, Sam; Marqués Ibañez, David
    Abstract: This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and help perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities.
    Keywords: conflicts of interest; credit ratings; prudential regulation; rating agencies; sovereign risk
    JEL: E44 G21 G23 G28
    Date: 2012–10
  18. By: Gabriel Jiménez (Banco de España); Steven Ongena (CentER - Tilburg University; CEPR); José-Luis Peydró (Universitat Pompeu Fabra, Barcelona; Barcelona Graduate School of Economics); Jesús Saurina (Banco de España)
    Abstract: We analyze the impact of the countercyclical capital buffers held by banks on the supply of credit to firms and their subsequent performance. Countercyclical ‘dynamic’ provisioning unrelated to specific loan losses was introduced in Spain in 2000, and modified in 2005 and 2008. The resultant bank-specific shocks to capital buffers, combined with the financial crisis that shocked banks according to their available pre-crisis buffers, underpin our identification strategy. Our estimates from comprehensive bank-, firm-, loan-, and loan application-level data suggest that countercyclical capital buffers help smooth credit supply cycles and in bad times uphold firm credit availability and performance.
    Keywords: bank capital, dynamic provisioning, credit availability, financial crisis
    JEL: E51 E58 E60 G21 G28
    Date: 2012–10
  19. By: Valerie De Bruyckere (Ghent University, Department of Financial Economics); Maria Gerhardt (Ghent University, Department of Financial Economics); Glenn Schepens (Ghent University, Department of Financial Economics); Rudi Vander Vennet (Ghent University, Department of Financial Economics)
    Abstract: This paper investigates contagion between bank risk and sovereign risk in Europe over the period 2006-2011. Since this period covers various stages of the banking and sovereign crisis, it offers a fertile ground to analyze bank/sovereign risk spillovers. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. We provide empirical evidence that various contagion channels are at work, including a strong home bias in bank bond portfolios, using the EBA’s disclosure of sovereign exposures of banks. We find that banks with a weak capital and/or funding position are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion.
    Keywords: Contagion, bank risk, sovereign risk, bank business models, bank regulation, sovereign debt crisis
    JEL: G01 G21 G28 H6
    Date: 2012–10
  20. By: Cesar Sosa-Padilla
    Abstract: Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. This paper provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers that lend to both the government and the corporate sector. When these bankers are highly exposed to government debt a default triggers a banking crisis which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to Argentina's 2001 default episode the model produces default on equilibrium with a frequency in line with actual default frequencies, and when it happens credit experiences a sharp contraction which generates an output drop similar in magnitude to the one observed in the data. Moreover, the model also matches several moments of the cyclical dynamics of macroeconomic aggregates.
    Keywords: sovereign default, banking crisis, credit crunch, optimal fiscal policy, Markov perfect equilibrium, endogenous cost of default, domestic Debt.
    JEL: F34 E62
    Date: 2012–09
  21. By: Barrutia Legarreta, José María; Espinosa Alejos, María Paz
    Abstract: Loan mortgage interest rates are usually the result of a bank-customer negotiation process. Credit risk, consumer cross-buying potential, bundling, financial market competition and other features affecting the bargaining power of the parties could affect price. We argue that, since mortgage loan is a complex product, consumer expertise could be a relevant factor for mortgage pricing. Using data on mortgage loan prices for a sample of 1055 households for the year 2005 (Bank of Spain Survey of Household Finances, EFF-2005), and including credit risk, costs, potential capacity of the consumer to generate future business and bank competition variables, the regression results indicate that consumer expertise-related metrics are highly significant as predictors of mortgage loan prices. Other factors such as credit risk and consumer cross-buying potential do not have such a significant impact on mortgage prices. Our empirical results are affected by the credit conditions prior to the financial crisis and could shed some light on this issue.
    Keywords: credit risk, interest rates dispersion, mortgage loan pricing, consumer expertise, knowledge
    Date: 2012
  22. By: Pontines, Victor (Asian Development Bank Institute); Siregar, Reza Y. (Asian Development Bank Institute)
    Abstract: The authors construct macro-and micro-panel data on international bank lending to six Asian economies—Indonesia, the Republic of Korea, Malaysia, Philippines, Singapore, and Thailand—to analyze a number of objectives. The paper first examines the influence of critical determinants not only to overall international bank lending but also to cross-border bank lending, and next examines the differences between subsidiaries and branches of international banks in terms of their ability to shield themselves from the financial difficulties of their global parent banks and thus their ability to continue lending in destination markets.
    Keywords: international bank lending; cross-border lending; international bank exposure; asian economies
    JEL: C23 F34 F36 G15 N25
    Date: 2012–10–09
  23. By: Jens Hagendorff (University of Edinburgh); María J. Nieto (Banco de España); Larry D. Wall (Federal Reserve Bank of Atlanta)
    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, profi tability 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 crosssectional regressions are that stronger supervision and tougher deposit insurance funding regimes tend to result in positive post-merger changes in liquidity and performance
    Keywords: banks, mergers, Europe
    JEL: G21 G34 G28
    Date: 2012–10
  24. By: Elizabeth K. Kiser; Robin A. Prager; Jason R. Scott
    Abstract: Bank lending to small firms in the U.S. fell substantially during the recent financial crisis and the ensuing recession. Because small firms account for a disproportionate share of new job creation, lending to these firms could have important implications for the pace of economic recovery. A number of factors may have contributed to the decline in small business lending over this period. This paper examines the extent to which changes in banks' supervisory ratings are associated with changes in the rate of growth of their lending to small businesses. Limiting our sample to small banks (those with total assets of $5 billion or less), we estimate the relationship between changes in supervisory CAMELS ratings and changes in small commercial and industrial (C&I) or small commercial real estate (CRE) loans to businesses, between 2007 and 2010. Controlling for other relevant factors, including several balance sheet measures of bank health, we find that small banks that experienced ratings downgrades during 2007-2010 exhibited significantly lower rates of growth in small C&I loans and small CRE loans outstanding compared with banks that maintained their ratings at healthy levels during the same period. We also find evidence suggesting that the slower growth in small business lending at downgraded banks is attributable primarily to aspects of the banks' financial health that were not fully reflected in balance sheet data, rather than to the ratings downgrades themselves or the supervisory process surrounding the downgrades.
    Date: 2012
  25. By: Rodney Ramcharan; Christopher Crowe
    Abstract: This paper shows that house price fluctuations can have a significant impact on credit markets well beyond the mortgage segment. Using new data from, a peer to peer lending site that matches borrowers and lenders to provide unsecured consumer loans, we find evidence that home owners in states with declining house prices face higher interest rates and greater rationing of credit, while also becoming delinquent faster. Investigating the mechanism, we find separate supply and demand effects, and especially large effects for those subprime borrowers whose balance sheets are likely to be most exposed to asset price declines. This evidence suggests that asset price fluctuations can play an important part in determining credit conditions and are thus a potentially significant mechanism for propagating macroeconomic shocks.
    Date: 2012
  26. By: Rodrigo César de Castro Miranda; Benjamin Miranda Tabak; Mauricio Medeiros Junior
    Abstract: We developed an endogenous testing strategy for finding contagion within stock markets indices, Credit Default Swaps spreads and banking sector indices. We present evidence of strong contagion in specific cases and markets and show an analysis of contagion to Brazil. Our results are important for the development of macroprudential policies.
    Date: 2012–10
  27. By: de Quidt, Jonathan; Fetzer, Thiemo; Ghatak, Maitreesh
    Abstract: Motivated by recent controversies surrounding the role of commercial lenders in microfinance, we analyze borrower welfare under different market structures, considering a benevolent non-profit lender, a for-profit monopolist, and a competitive credit market. To understand the magnitude of the effects analyzed, we simulate the model with parameters estimated from the MIX Market database. Our results suggest that market power can have severe implications for borrower welfare, while despite possible information frictions competition typically delivers similar borrower welfare to non-profit lending. In addition, for-profit lenders are less likely to use joint liability than non-profits.
    Keywords: for-profit; market power; microfinance; social capital
    JEL: D4 D82 G21 L4 O12
    Date: 2012–10
  28. By: Leonardo Becchetti (Faculty of Economics, University of Rome "Tor Vergata"); Stefano Castriota (Faculty of Economics, University of Rome "Tor Vergata"); Pierluigi Conzo (University of Naples "Federico II" & CSEF)
    Abstract: The poor in developing countries are the most exposed to natural catastrophes and microfinance organizations may potentially ease their economic recovery. Yet, no evidence on MFIs strategies after natural disasters exists. We aim to fill this gap with a database which merges bank records of loans, issued before and after the 2004 Tsunami by a Sri Lankan MFI recapitalized by Western donors, with detailed survey data on the corresponding borrowers. Evidence of effective post-calamity intervention is supported since the defaults in the post-Tsunami years (2004-2006) do not imply smaller loans in the period following the recovery (2007-2011) while Tsunami damages increase their size. Furthermore, a cross-subsidization mechanism is in place: clients with a long successful credit history (and also those not damaged by the calamity) pay higher interest rates. All these features helped damaged people to recover and repay both new and previous loans. However, we also document an abnormal and significant increase in default rates of non victims suggesting the existence of contagion and/or strategic default problems. For this reason we suggest reconversion of donor aid into financial support to compulsory microinsurance schemes for borrowers.
    Keywords: Tsunami, disaster recovery, microfinance, strategic default, contagion, microinsurance
    JEL: G21 G32 G33
    Date: 2012–10–08
  29. By: Kirchner, Markus; van Wijnbergen, Sweder
    Abstract: Recent macro developments in the euro area have highlighted the interactions between fiscal policy, sovereign debt, and financial fragility. We take a structural macroeconomic model with frictions in the financial intermediation process, in line with recent research, but introduce asset choice and sovereign debt holdings in the portfolio of banks. Using this model, we emphasize a new crowding-out mechanism that works through reduced private access to credit when banks accumulate sovereign debt under a leverage constraint. Our results show that, when banks invest a substantial fraction of their assets in sovereign debt, the effectiveness of fiscal stimulus policies may be impaired because deficit-financed fiscal expansions may tighten financial conditions to such an extent that private demand is crowded out. We also analyze the macroeconomic effectiveness of liquidity support to commercial banks through recapitalizations or loans by the government and the impact of different ways of financing those policies. --
    Keywords: financial intermediation,fiscal policy,sovereign debt
    JEL: E44 E62 H30
    Date: 2012

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