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on Banking |
| By: | Pierre-Richard Agenor; Koray Alper; Luiz Pereira da Silva |
| Abstract: | This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic stability is defined in terms of a weighted average of inflation and output gap volatility, whereas financial stability is defined in terms of three alternative indicators (real house prices, the credit-to-GDP ratio, and the loan spread), both individually and in combination. Numerical experiments associated with a housing demand shock show that in a number of cases, even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of policy interest rate smoothing, and the stronger the policymaker’s concern with financial stability, the larger is the sensitivity of the regulatory rule to credit growth gaps. |
| Keywords: | Financial Stability, Credit, Monetary Policy |
| JEL: | E44 E51 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1228&r=ban |
| By: | Paolo Angelini (Banca d’Italia); Stefano Neri (Banca d’Italia); Fabio Panetta (Banca d’Italia) |
| Abstract: | We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability. From a welfare perspective, the results do not yield a uniform ranking of the regimes and, at the same time, highlight important redistributive effects of both supply and financial shocks. JEL Classification: E44, E58, E61 |
| Keywords: | Macroprudential policy, monetary policy, capital requirements |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121449&r=ban |
| By: | Santos, André A. P.; Nogales, F. Javier; Ruiz, Esther; Dijk, Dick van |
| Abstract: | We propose a novel approach to active risk management based on the recent Basel II regulations to obtain optimal portfolios with minimum capital requirements. In order to avoid regulatory penalties due to an excessive number of Value-at-Risk (VaR) violations, capital requirements are minimized subject to a given number of violations over the previous trading year. Capital requirements are based on the recent Basel II amendments to account for the ‘stressed’ VaR, that is, the downside risk of the portfolio under extreme adverse market conditions. An empirical application for two portfolios involving different types of assets and alternative stress scenarios demonstrates that the proposed approach delivers an improved balance between capital requirement levels and the number of VaR exceedances. Furthermore, the riskadjusted performance of the proposed approach is superior to that of minimum-VaR and minimumstressed VaR portfolios. |
| Keywords: | Convex optimization; Multivariate GARCH; Out-of-sample evaluation; Stress testing; |
| JEL: | G11 G32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/15745&r=ban |
| By: | M. Lopreite |
| Abstract: | This paper investigates credit supply endogeneity in the Italian environment from 1999 to 2009. The study aims to shed more light on the relationship between securitization and the Italian monetary transmission mechanism during the two most recent financial crashes: the dot-com bubble burst (1998-1999) and the sub-prime mortgage crisis (2008-2009). Recently many works are focused on how securitization affects the relationship between credit channel and monetary policy. Altunbas et al. (2009) conclude that banks’ securitization increases loans supply insulating banking system from negative shocks of monetary policy. The empirical results show that securitization increases credit supply endogeneity reducing the effect of monetary policy on the Italian banking system. |
| JEL: | E32 E51 E52 G01 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:par:dipeco:2012-ep04&r=ban |
| By: | Marina Balboa (Department of Financial Economics, University of Alicante); Germán López-Espinosa (School of Economics and Business Administration, University of Navarra); Korok Ray (School of Business, George Washington University); Antonio Rubia (Department of Financial Economics, University of Alicante) |
| Abstract: | This paper analyzes whether the excessive overreliance on non-interest income and wholesale funding, which occurred in the banking industry during the last two decades and led to increases in systemic risk, could arise from the desire of bank managers to increase their variable compensation. Using a sample of U.S. bank holding companies during 1995 to 2010, our results show that non-interest income is positively associated to a larger proportion of variable compensation. Also, while exercised options are more sensitive to income trading activities, bonuses tend to be related to the revenues originated from investment banking and venture capital activities. Similarly, a greater reliance on short-term wholesale funding positively associates with higher levels of variable compensation and bonuses. After the financial crisis, variable compensation and bonuses increased with non-interest income, but decreased with the use of short-term wholesale funding. |
| Keywords: | Non-interest income, executive compensation, financial crisis, wholesale funding |
| JEL: | C30 G01 G20 |
| Date: | 2012–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp0412&r=ban |
| By: | Garratt, Rodney (University of California, Santa Barbara); Webber, Lewis (Bank of England); Willison, Matthew (Bank of England) |
| Abstract: | An individual bank can put the whole banking system at risk if its losses in response to shocks push losses for the system as a whole above a critical threshold. We determine the contribution of banks to this systemic risk using a generalisation of the Shapley value; a concept originating in co-operative game theory. An important feature of this approach is that the order in which banks fail in response to a shock depends on the composition of the banks’ asset portfolios and capital buffers. We show how these factors affect banks’ contributions to systemic risk, and the extent to which these contributions depend on the level of the critical threshold. |
| Keywords: | Shapley value; systemic risk; bank regulation |
| JEL: | C71 G01 G21 G28 |
| Date: | 2012–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0468&r=ban |
| By: | Albert, Jose Ramon G.; Schou-Zibell, Lotte; Song, Lei Lei |
| Abstract: | This paper describes concepts and tools behind macroprudential monitoring and the growing importance of macroprudential tools for assessing the stability of financial systems. This paper also employs a macroprudential approach in examining financial soundness and identifying its determinants. Using data from selected developing economies in Asia, South America, and Europe as well as selected economies from the developed world, panel regressions are estimated to quantify the impacts of the major influences on key financial soundness indicators, including capital adequacy, asset quality, and earnings and profitability. |
| Keywords: | early warning system, banking regulation, macroprudential, banks, banking crises, banking supervision, stress testing |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2012-22&r=ban |
| By: | Surajeet Chakravarty (Department of Economics, University of Exeter); Miguel A. Fonseca (Department of Economics, University of Exeter); Todd Kaplan (Department of Economics, University of Exeter) |
| Abstract: | To understand the mechanisms behind bank run contagions, we conduct bank run experiments in a modified Diamond-Dybvig setup with two banks (Left and Right). The banks' liquidity levels are either linked or independent. Left Bank depositors see their bank's liquidity level before deciding. Right Bank depositors only see Left Bank withdrawals before deciding. We find that Left Bank depositors' actions signicantly affect Right Bank depositors' behavior, even when liquidities are independent. Furthermore, a panic may be a one-way street: an increase in Left Bank withdrawals can cause a panic run on the Right Bank, but a decrease cannot calm markets. |
| Keywords: | bank runs, contagion, experiment, multiple equilibria. |
| JEL: | C72 C92 D43 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1206&r=ban |
| By: | V. L. MIGUÉIS; D. F. BENOIT; D. VAN DEN POEL |
| Abstract: | Fierce competition as well as the recent financial crisis in financial and banking industries made credit scoring gain importance. An accurate estimation of credit risk helps organizations to decide whether or not to grant credit to potential customers. Many classification methods have been suggested to handle this problem in the literature. This paper proposes a model for evaluating credit risk based on binary quantile regression, using Bayesian estimation. This paper points out the distinct advantages of the latter approach: that is (i) the method provides accurate predictions of which customers may default in the future, (ii) the approach provides detailed insight into the effects of the explanatory variables on the probability of default, and (iii) the methodology is ideally suited to build a segmentation scheme of the customers in terms of risk of default and the corresponding uncertainty about the prediction. An often studied dataset from a German bank is used to show the applicability of the method proposed. The results demonstrate that the methodology can be an important tool for credit companies that want to take the credit risk of their customer fully into account. |
| Keywords: | Credit Scoring, Quantile regression, Classification, Bayesian estimation, Markov Chain Monte Carlo |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:12/803&r=ban |
| By: | Cimadomo, Jacopo; Hauptmeier, Sebastian; Zimmermann, Tom |
| Abstract: | We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very rich data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks' demand for government securities increases relative to other assets. |
| Keywords: | Fiscal consolidations; bank balance sheets; portfolio re-balancing; banking stability |
| JEL: | E62 G11 H30 G21 |
| Date: | 2012–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42229&r=ban |
| By: | Albert, Jose Ramon G.; Ng, Thiam Hee |
| Abstract: | Since the global financial crisis in 2008/09 there has been heightened concern about the resilience of banking systems in Southeast Asia. This paper proposes a methodology that uses a macroprudential perspective to assess the resilience of banking systems in member countries of the Association of Southeast Asian Nations. It then proceeds to apply this methodology to examine the resilience of the Philippine banking system. Data on financial soundness in the Philippine banking system are utilized in a vector autoregression model to study the dynamic relationships that exist among financial and macroeconomic indicators. Using impulse response functions, a simulation of financial ratios in the banking system is conducted by assuming unlikely but plausible stress scenarios to determine whether banking system credit and capital could withstand the impact of such circumstances. In the stress scenarios, the estimated impact of macroeconomic shocks on nonperforming loan and capital adequacy ratios is generally minimal. The results, however, do suggest that the Philippine banking system has some vulnerability to interest rate and stock market shocks. The results of such stress testing provide a better understanding of the level of preparedness required for managing risks in the financial system, especially in the wake of continuing global economic uncertainty. |
| Keywords: | banking system, Philippines, macroprudential, stress testing, panel VAR |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2012-23&r=ban |
| By: | Raffaella Calabrese (University of Milano-Bicocca) |
| Abstract: | With the implementation of the Basel II accord, the development of accurate loss given default models is becoming increasingly important. The main objective of this paper is to propose a new model to estimate Loss Given Default (LGD) for bank loans by applying generalized additive models. Our proposal allows to represent the high concentration of LGDs at the boundaries. The model is useful in uncovering nonlinear covariate effects and in estimating the mean and the variance of LGDs. The suggested model is applied to a comprehensive survey on loan recovery process of Italian banks. To model LGD in downturn conditions, we include macroeconomic variables in the model. Out-of-time validation shows that our model outperforms popular models like Tobit, decision tree and linear regression models for different time horizons. |
| Keywords: | downturn LGD, generalized additive model, Basel II |
| Date: | 2012–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201224&r=ban |
| By: | Carlos León; Andrés Murcia |
| Abstract: | As a result of the most recent global financial crisis literature has embraced size, connectedness and substitutability as key indicators for financial institutions’ systemic importance. Despite the intuitiveness of these concepts, identifying systemic important institutions remain a non-trivial task that implies two primary challenges. First, designing metrics for connectedness and substitutability may require, as acknowledged by literature, non-standard data sources and techniques. Second, choosing a methodology capable of aggregating the metrics designed for the three aforementioned concepts into a systemic importance index may be intricate. The herein paper addresses the second challenge. The chosen approach is to apply Principal Components Analysis to the metrics designed by León and Machado (2011) for assessing size, connectedness and substitutability, where those metrics rely on a combination of balance sheet data and the application of network theory to large-value payment system’s information. Results (i) demonstrate that the three concepts and their metrics are explanatory and non-redundant for differentiating financial institutions’ relative systemic importance; (ii) allow for constructing a PCA-based Systemic Importance Index, a valuable tool for financial authorities’ policy and decision-making; and (iii) confirm the importance of the too-connected-to-fail criteria and the presence of non-banking firms among the most systemically important financial institutions in the Colombian case. |
| Keywords: | Systemic Importance, Systemic Risk, Principal Components Analysis, Too-connected-to-fail, Too-big-to-fail. Classification JEL: D85, C63, E58, G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:741&r=ban |
| By: | Mardi Dungey; Mattéo Luciani; David Veredas |
| Abstract: | We propose a simple network–based methodology for ranking systemically importantfinancial institutions. We view the risks of firms –including both the financial sectorand the real economy– as a network with nodes representing the volatility shocks. Themetric for the connections of the nodes is the correlation between these shocks. Dailydynamic centrality measures allow us to rank firms in terms of risk connectedness and firmcharacteristics. We present a general systemic risk index for the financial sector. Resultsfrom applying this approach to all firms in the S&P500 for 2003–2011 are twofold. First,Bank of America, JP Morgan and Wells Fargo are consistently in the top 10 throughoutthe sample. Citigroup and Lehman Brothers also were consistently in the top 10 up tolate 2008. At the end of the sample, insurance firms emerge as systemic. Second, thesystemic risk in the financial sector built–up from early 2005, peaked in September 2008,and greatly reduced after the introduction of TARP and the rescue of AIG. Anxiety aboutEuropean debt markets saw the systemic risk begin to rise again from April 2010. Wefurther decompose these results to find that the systemic risk of insurance and deposit–taking institutions differs importantly, the latter experienced a decline from late 2007, inline with the burst of the housing price bubble, while the former continued to climb upto the rescue of AIG |
| Keywords: | systemic risk; ranking; financial institutions; Lehman |
| JEL: | G10 G18 G20 G32 G38 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/130530&r=ban |
| By: | Luciano Fanti |
| Abstract: | We analyse the dynamics of a banking duopoly game with heterogeneous players (as regards the type of expectations’ formation) ,to investigate the effects of the capital requirements introduced by international accords (Basel-I in 1988 and more recently Basel-II and Basel-III), in the context of the Monti-Klein model. This analysis reveals that the policy of introducing a capital requirement may stabilise the market equilibrium. Moreover, we show that when the capital standard is reduced the market stability is lost through a flip bifurcation and subsequently a cascade of flip bifurcations may lead to periodic cycles and chaos. Therefore, although on the one side the capital regulation is harmful for the equilibrium loans’ volume and profit, on the other side it is effective in keeping or restoring the stability of the Cournot-Nash equilibrium in the banking duopoly. |
| Keywords: | Bifurcation; Chaos; Cournot; Oligopoly; Banking; Capital regulation. |
| JEL: | C62 G21 G28 D43 L13 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/151&r=ban |
| By: | Marcos Valli Jorge; Wilfredo Leiva Maldonado |
| Abstract: | We build a model of credit card payments where the retailers are allowed to charge differential prices depending on the instrument of payment chosen by the consumer. We follow the approach in Rochet and Wright (2010) but assume a credit card system without any type of non-surcharge rule. In a Hotelling competition framework at the retailers level, the competitive equilibrium prices are computed assuming that the store credit provided by the retailer is less cost efficient than the one provided by the credit card. In accordance with the literature, we obtain that the interchange fee becomes neutral if we eliminate the no-surcharge rule, when the interchange fee loses its ability to distort the individual consumer’s decisions and displace the aggregate consumers’ welfare from its maximum level. We prove that the average price obtained under price differentiation is smaller than the single retail price under the non-surcharge rule, despite the retailer’s margins being the same in both scenarios. In addition, we introduce menu costs to prove that there is a value for the interchange fee such that there is equilibrium with price differentiation if and only if that fee is above this value. It must be interpreted as an endogenous cap for the interchange fee fixed by the credit card industry. Finally, we also obtain that under price differentiation with menu costs there is a non cooperative Nash equilibrium as in the well known “prisoner’s dilemma” game. |
| JEL: | L11 E42 G18 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2012-592&r=ban |