New Economics Papers
on Banking
Issue of 2012‒11‒11
27 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Business cycles and financial crises: the roles of credit supply and demand shocks By James M Nason; Ellis Tallman
  2. Challenges in Identifying and Measuring Systemic Risk By Lars Peter Hansen
  3. Determinants of the interest rate pass-through of banks: Evidence from German loan products By Schlüter, Tobias; Busch, Ramona; Hartmann-Wendels, Thomas; Sievers, Sönke
  4. Diversification and determinants of international credit portfolios: Evidence from German banks By Böninghausen, Benjamin; Köhler, Matthias
  5. Bailouts, Contagion, and Bank Risk-Taking By LEV RATNOVSKI; Giovanni Dell'Ariccia
  6. Bank Competition and Stability: Cross-country Heterogeneity (Revised version of CentER DP 2011-080) By Beck, T.H.L.; De Jonghe, O.G.; Schepens, G.
  7. Endogenous credit limits with small default costs By Costas Azariadis; Leo Kaas
  8. Self-fulfilling credit cycles By Costas Azariadis; Leo Kaas
  9. Bankruptcy and delinquency in a model of unsecured debt By Kartik Athreya; Juan M. Sánchez; Xuan S. Tam; Eric R. Young
  10. Has the Basel Accord Improved Risk Management During the Global Financial Crisis? By Michael McAleer; Juan-Angel Jimenez-Martin; Teodosio Perez-Amaral
  11. Bank ratings: what determines their quality? By Harald Hau; Sam Langfield; David Marqués-Ibáñez
  12. Banking across borders By Friederike Niepmann
  13. Early warning indicators for the German banking system: A macroprudential analysis By Jahn, Nadya; Kick, Thomas
  14. A Theoretical and Empirical Comparison of Systemic Risk Measures By Sylvain Benoit; Gilbert Colletaz; Christophe Hurlin; Christophe Pérignon
  15. Credit risk in general equilibrium By Jürgen Eichberger; Klaus Rheinberger; Martin Summer
  16. Endogeneous Risk in Monopolistic Competition By Vladislav Damjanovic
  17. The Risk Map: A New Tool for Validating Risk Models By Gilbert Colletaz; Christophe Hurlin; Christophe Pérignon
  18. Who needs credit and who gets credit in Eastern Europe? By Martin Brown; Steven Ongena; Alexander Popov; Pinar Yesin
  19. Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective By Ulrich Bindseil; Adalbert Winkler
  20. The Determinants of Vulnerability to the Global Financial Crisis 2008 to 2009: Credit Growth and Other Sources of Risk By Feldkircher, Martin
  21. On bounding credit event risk premia By Jennie Bai; Pierre Collin-Dufresne; Robert S. Goldstein; Jean Helwege
  22. Information Acquisition in Rumor Based Bank Runs By Zhiguo He; Asaf Manela
  23. Banking, debt and currency crises: early warning indicators for developed countries By Jan Babecký; Tomáš Havránek; Jakub Matějů; Marek Rusnák; Kateřina Šmídková; Bořek Vašíček
  24. The Outreach and Sustainability of Microfinance: Is There a Tradeoff? By Bengtsson, Niklas; Pettersson, Jan
  25. Determinants of Margin in Microfinance Institutions By Beatriz Cuéllar Fernández; Yolanda Fuertes-Callén; Carlos Serrano-Cinca; Begoña Gutiérrez-Nieto
  26. Choosing the type of income-contingent loan: risk-sharing versus risk-pooling By Maria Racionero; Elena Del Rey
  27. The Italian banking system: Facts and interpretations By De Bonis, Riccardo; Pozzolo, Alberto Franco; Stacchini, Massimiliano

  1. By: James M Nason; Ellis Tallman
    Abstract: This paper explores the hypothesis that the sources of economic and financial crises differ from noncrisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and noncrisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations.
    Keywords: Business cycles ; Forecasting ; Financial markets ; Economic history
    Date: 2012
  2. By: Lars Peter Hansen
    Abstract: Sparked by the recent “great recession” and the role of financial markets, considerable interest exists among researchers within both the academic community and the public sector in modeling and measuring systemic risk. In this essay I draw on experiences with other measurement agendas to place in perspective the challenge of quantifying systemic risk, or more generally, of providing empirical constructs that can enhance our understanding of linkages between financial markets and the macroeconomy.
    JEL: E44
    Date: 2012–11
  3. By: Schlüter, Tobias; Busch, Ramona; Hartmann-Wendels, Thomas; Sievers, Sönke
    Abstract: This article examines the loan rate-setting behavior of German banks for a large variety of retail and corporate loan products. We find that a bank's operational efficiency is priced in bank loan rates and alters interest-setting behavior. Specifically, we establish that a higher degree of operational efficiency leads to lower loan markups, which involve more competitive prices, and smoothed interest rate-setting. This study contributes to prior literature that has been suggesting this relationship but has produced mixed findings. For the German market this relationship is unexplored. By employing stochastic frontier analysis to comprehensively capture cost efficiency, we take the bank customers' perspective and demonstrate the extent to which borrowers benefit from cost efficient banking. --
    Keywords: interest rate pass-through models,error correction models,bank efficiency,cost efficiency,stochastic frontier analysis
    JEL: G21 G28
    Date: 2012
  4. By: Böninghausen, Benjamin; Köhler, Matthias
    Abstract: This paper examines the international credit portfolios of German banks. We construct a bank-country panel from a unique dataset for a representative set of countries and ask why banks leave diversification opportunities unexploited in some countries. Controlling for bank heterogeneity, we analyse the deviations of actual portfolios from a mean-variance based benchmark and their country-level determinants. Our results show that banking regulations are important determinants of the credit allocation of German banks. We present robust evidence that countries with stricter capital adequacy and entry requirements tend to be overweighted, primarily due to excess profits resulting from a lower level of banking market competition. German banks also overweight countries with larger and more developed banking markets. Moreover, we find support that German banks follow their domestic customers abroad to maintain existing lending relationships. Geographical factors, in contrast, do not seem to matter. Our findings suggest that changes in and convergence of banking regulations as well as financial deepening of banking sectors around the world may, in the long term, result in banks holding more diversified international credit portfolios. --
    Keywords: international banking,international financial integration,portfolio choice
    JEL: G21 G11 F36 F21
    Date: 2012
  5. By: LEV RATNOVSKI (International Monetary Fund); Giovanni Dell'Ariccia (IMF)
    Abstract: We revisit the link between bailouts and bank risk taking. The expectation of government support to failing banks (bailout) creates moral hazard and encourages risk-taking. However, when a bank's success depends on both its idiosyncratic risk and the overall stability of the banking system, a government's commitment to shield banks from contagion may increase their incentives to invest prudently. We explore these issues in a simple model of financial intermediation where a bank's survival depends on another bank's success. We show that the positive effect from systemic insurance dominates the classical moral hazard effect when the risk of contagion is high.
    Date: 2012
  6. By: Beck, T.H.L.; De Jonghe, O.G.; Schepens, G. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper documents large cross-country variation in the relationship between bank competition and bank stability and explores market, regulatory and institutional features that can explain this variation. We show that an increase in competition will have a larger impact on banks’ fragility in countries with stricter activity restrictions, lower systemic fragility, better developed stock exchanges, more generous deposit insurance and more effective systems of credit information sharing. The effects are economically large and thus have important repercussions for the current regulatory reform debate.
    Keywords: Competition;Stability;Banking;Herding;Deposit Insurance;Information Sharing;Risk Shifting.
    JEL: G21 G28 L51
    Date: 2012
  7. By: Costas Azariadis; Leo Kaas
    Abstract: We analyze an exchange economy of unsecured credit where borrowers have the option to declare bankruptcy in which case they are temporarily excluded from financial markets. Endogenous credit limits are imposed that are just tight enough to prevent default. Economies with temporary exclusion differ from their permanent exclusion counterparts in two important properties. If households are extremely patient, then the first–best allocation is an equilibrium in the latter economies but not necessarily in the former. In addition, temporary exclusion permits multiple stationary equilibria, with both complete and with incomplete consumption smoothing.
    Keywords: Bankruptcy ; Credit
    Date: 2012
  8. By: Costas Azariadis; Leo Kaas
    Abstract: This paper argues that self-fulfilling beliefs in credit conditions can generate endoge- nously persistent business cycle dynamics. We develop a tractable dynamic general equi- librium model in which heterogeneous firms face idiosyncratic productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complemen- tarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals.
    Keywords: Credit ; Business cycles
    Date: 2012
  9. By: Kartik Athreya; Juan M. Sánchez; Xuan S. Tam; Eric R. Young
    Abstract: Limited commitment for the repayment of consumer debt originates from two places: (i) formal bankruptcy laws granting a partial or complete legal removal of debts under certain circumstances, and (ii) informal default and renegotiation, “delinquency.” In the US, both channels are used routinely. The usefulness of each of these routes as a way out of debt depends on the costs and benefits available through the other: delinquency exposes a household to collections processes initiated by lenders, while formal bankruptcy appears to carry more visible consequences for future transactions, including restrictions to even secured forms of credit. This paper introduces a model of unsecured consumer credit markets in the presence of both bankruptcy and delinquency. A key feature of our model is to allow lenders to deal with debtors in delinquency by choosing the (implicit) interest rate on debt owed by delinquent borrowers to maximize the market value of these obligations. We show that these two options to default on unsecured debt indeed interact in important ways. We first show that households with a large amount of debt who have received negative income shocks prefer delinquency. As long as their income does not improve, they remain there. This behavior occurs as lenders’ optimal behavior is to offer write-offs to households in delinquency, but only when they have very low incomes. As income improves, lenders can extract more from the households that stay delinquent, so the households look to reorganize their financial situation by either repaying the debt or filing for bankruptcy. We also show that stricter control of delinquency, defined by a relatively high ability to garnish wages, increases the risk of bankruptcy and lowers equilibrium credit use, in line with cross-state comparisons in the U.S. From a normative perspective, such policies lower welfare, in part because they encourage excessive use of bankruptcy.
    Keywords: Debt ; Bankruptcy ; Finance, Personal
    Date: 2012
  10. By: Michael McAleer (Econometric Institute Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute The Netherlands and Institute of Economic Research Kyoto University and Department of Quantitative Economics Complutense University of Madrid); Juan-Angel Jimenez-Martin (Department of Quantitative Economics Complutense University of Madrid); Teodosio Perez-Amaral (Department of Quantitative Economics Complutense University of Madrid)
    Abstract: The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008- 09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index.
    Keywords: Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel Accord, global financial crisis.
    JEL: G32 G11 G17 C53 C22
    Date: 2012–11
  11. By: Harald Hau (University of Geneva); Sam Langfield (European Systemic Risk Board Secretariat; UK Financial Services Authority); David Marqués-Ibáñez (European Central Bank)
    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 contribute to 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. JEL Classification: G21, G23, G28
    Keywords: Rating agencies, credit ratings, conflicts of interest, prudential regulation
    Date: 2012–10
  12. By: Friederike Niepmann
    Abstract: This paper develops and tests a theoretical model that allows for the endogenous decision of banks to engage in international and global banking. International banking, where banks raise capital in the home market and lend it abroad, is driven by differences in factor endowments across countries. In contrast, global banking, where banks intermediate capital locally in the foreign market, arises from differences in country-level bank efficiency. Together, these two driving forces determine the foreign assets and liabilities of a banking sector. The model provides a rationale for the observed rise in global banking relative to international banking. Its key predictions regarding the cross-country pattern of foreign bank asset and liability holdings are strongly supported by the data.
    Keywords: Banks and banking, International ; Globalization ; Banks and banking, Foreign ; Loans, Foreign ; Capital movements
    Date: 2012
  13. By: Jahn, Nadya; Kick, Thomas
    Abstract: Over the past two decades, Germany experienced several periods of banking system instability rather than full-blown banking system crises. In this paper we introduce a continuous and forward-looking stability indicator for the banking system based on information on all financial institutions in Germany between 1995 and 2010. Explaining this measure by means of panel regression techniques, we identify significant macroprudential early warning indicators (such as asset price indicators, leading indicators for the business cycle and monetary indicators) and spillover effects. Whereas international spillovers play a significant role across all banking sectors, regional spillovers and the credit-to-GDP ratio are more important for cooperative banks and less relevant for commercial banks. --
    Keywords: Early Warning Indicators,Banking System Stability,Regional Spillover Effects,Panel Regression Techniques
    JEL: C23 E44 G01 G21
    Date: 2012
  14. By: Sylvain Benoit (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Gilbert Colletaz (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Pérignon (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: We propose a theoretical and empirical comparison of the most popular systemic risk measures. To do so, we derive the systemic risk measures in a common framework and show that they can be expressed as linear transformations of firms' market risk (e.g., beta). We also derive conditions under which the different measures lead similar rankings of systemically important financial institutions (SIFIs). In an empirical analysis of US financial institutions, we show that (1) different systemic risk measures identify different SIFIs and that (2) firm rankings based on systemic risk estimates mirror rankings obtained by sorting firms on market risk or liabilities. One-factor linear models explain between 83% and 100% of the variability of the systemic risk estimates, which indicates that standard systemic risk measures fall short in capturing the multiple facets of systemic risk.
    Keywords: Banking Regulation; Systemically Important Financial Firms; Marginal Expected; Shortfall; SRISK; CoVaR; Systemic vs. Systematic Risk.
    Date: 2012–10–28
  15. By: Jürgen Eichberger (University of Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften); Klaus Rheinberger (University of Applied Sciences Vorarlberg, Research Center Process and Product Engineering); Martin Summer (Oesterreichische Nationalbank)
    Abstract: Credit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery rate. In reality these parameters are the result of the interaction of many market participants: They are endogenous. We develop a general equilibrium model with endogenous credit risk that can be viewed as an extension of the capital asset pricing model. We analyze equilibrium prices of securities as well as equilibrium allocations in the presence of credit risk. We use the model to discuss the conceptual underpinnings of the approach to risk weight calibration for credit risk taken by the Basel Committee. JEL Classification: G32, G33, G01, D52.
    Keywords: Credit Risk, Endogenous Risk, Systemic Risk, Banking Regulation.
    Date: 2012–06
  16. By: Vladislav Damjanovic (Department of Economics, University of Exeter)
    Abstract: We consider a model of financial intermediation with a monopolistic competition market structure. A non-monotonic relationship between the risk measured as a probability of default and the degree of competition is established.
    Keywords: Competition and Risk, Risk in DSGE models, Bank competition; Bank failure, Default correlation, Risk-shifting effect, Margin effect.
    JEL: G21 G24 D43 E13 E43
    Date: 2012
  17. By: Gilbert Colletaz (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Pérignon (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: This paper presents a new method to validate risk models: the Risk Map. This method jointly accounts for the number and the magnitude of extreme losses and graphically summarizes all information about the performance of a risk model. It relies on the concept of a super exception, which is de.ned as a situation in which the loss exceeds both the standard Value-at-Risk (VaR) and a VaR de.ned at an extremely low coverage probability. We then formally test whether the sequences of exceptions and super exceptions are rejected by standard model validation tests. We show that the Risk Map can be used to validate market, credit, operational, or systemic risk estimates (VaR, stressed VaR, expected shortfall, and CoVaR) or to assess the performance of the margin system of a clearing house.
    Keywords: Financial Risk Management; Tail Risk; Basel III
    Date: 2012–10–28
  18. By: Martin Brown (Swiss National Bank; Tilburg University); Steven Ongena (Tilburg University; CEPR - Centre for Economic Policy Research); Alexander Popov (European Central Bank); Pinar Yesin (Swiss National Bank)
    Abstract: Based on survey data covering 8,387 firms in 20 countries we compare credit demand and credit supply for firms in Eastern Europe to those for firms in selected Western European countries. We find that firms in Eastern Europe have a higher need for credit than firms in Western Europe, and that a higher share of firms is discouraged from applying for a loan. The higher rate of discouraged firms in Eastern Europe is driven more by the presence of foreign banks than by the macroeconomic environment or the lack of creditor protection. We find no evidence that foreign bank presence leads to stricter loan approval decisions. Finally, credit constraints do have a real cost in that firms which are denied credit or discouraged from applying are less likely to invest in R&D and introduce new products. JEL Classification: G21, G30, F34.
    Keywords: Credit constraints, banking sector, transition economies.
    Date: 2012–02
  19. By: Ulrich Bindseil (European Central Bank); Adalbert Winkler (Frankfurt School of Finance & Management)
    Abstract: This paper contributes to the literature on liquidity crises and central banks acting as lenders of last resort by capturing the mechanics of dual liquidity crises, i.e. funding crises which encompass both the private and the public sector, within a closed system of financial accounts. We analyze how the elasticity of liquidity provision by a central bank depends on the international monetary regime in which the relevant country operates and on specific central bank policies like collateral policies, monetary financing prohibitions and quantitative borrowing limits imposed on banks. Thus, it provides a firm basis for a comparative analysis of the ability of central banks to absorb shocks. Our main results are as follows: (1) A central bank that operates under a paper standard with a flexible exchange rate and without a monetary financing prohibition and other limits of borrowings placed on the banking sector is most flexible in containing a dual liquidity crisis. (2) Within any international monetary system characterized by some sort of a fixed exchange rate, including the gold standard, the availability of inter-central bank credit determines the elasticity of a crisis country’s central bank in providing liquidity to banks and financial markets. (3) A central bank of a euro area type monetary union has a similar capacity in managing dual liquidity crises as a country central bank operating under a paper standard with a flexible exchange rate as long as the integrity of the monetary union is beyond any doubt. JEL Classification: E50, E58
    Keywords: Liquidity crisis, bank run, sovereign debt crisis, central bank co-operation, gold standard
    Date: 2012–10
  20. By: Feldkircher, Martin (BOFIT)
    Abstract: In this paper, we identify initial macroeconomic and financial market conditions that help explain the distinct response of the real economy of a particular country to the recent global financial crisis. Using four measures of crisis severity, we examine a data set with over 90 potential explanatory factors employing techniques that are robust to model uncertainty. Four findings are of particular note. First, we find empirical evidence for the pivotal role of pre-crisis credit growth in shaping the real economy's response to the crisis. Specifically, a 1% increase in pre-crisis lending translates into a 0.2% increase in the cumulative loss in real output. Moreover, the combination of pronounced growth in lending ahead of the crisis and the country's exposure to external funding from advanced economies is shown to intensify the real downturn. Economies with booming real activity before the crisis are found to be less resilient to the global shock. Buoyant growth in real GDP in parallel with strong growth of credit particularly exacerbated the effects of the recent crisis on the real economy. Finally, we provide empirical evidence on the importance of holding international reserves in explaining the response of the real economy to the crisis. The effect of international reserves accumulation as a shelter to the global shock rises in credit provided by the domestic banking sector. The results are shown to be robust to several estimation techniques, including those allowing for cross-country spillovers.
    Keywords: financial crisis; credit boom; international shock transmission; Bayesian model averaging; cross-country analysis; non-linear effects
    JEL: C11 C15 E01 O47
    Date: 2012–10–31
  21. By: Jennie Bai; Pierre Collin-Dufresne; Robert S. Goldstein; Jean Helwege
    Abstract: Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced--namely, a “contagious” response of the market portfolio during the credit event. When this channel is introduced within a general equilibrium framework for an economy comprised of a large number of firms, credit event risk premia have an upper bound of just a few basis points and are dwarfed by the contagion premium. We provide empirical evidence supporting the view that credit event risk premia are minuscule.
    Keywords: Default (Finance) ; Credit ; Risk ; Financial crises
    Date: 2012
  22. By: Zhiguo He; Asaf Manela
    Abstract: We study information acquisition and withdrawal decisions when a liquidity event triggers a spreading rumor and exposes a solvent bank to a run. Uncertainty about the bank's liquidity and potential failure motivates agents who hear the rumor to acquire additional signals. Depositors with unfavorable signals may wait and thus gradually run on the bank, leading to an endogenous aggregate withdrawal speed. A bank run equilibrium exists when agents aggressively acquire information. We study threshold parameters (e.g. liquidity reserve and deposit insurance) that eliminate runs. Public provision of solvency information can eliminate runs by indirectly crowding-out individual depositors' effort to acquire liquidity information. However, providing too much information that slightly differentiates competing solvent-but-illiquid banks can result in inefficient runs
    JEL: E61 G01 G21
    Date: 2012–11
  23. By: Jan Babecký (Czech National Bank); Tomáš Havránek (Czech National Bank; Charles University, Institute of Economic Studies); Jakub Matějů (Czech National Bank; Center for Economic Research and Graduate Education - Economics Institue (CERGE-EI)); Marek Rusnák (Czech National Bank; Charles University, Institute of Economic Studies); Kateřina Šmídková (Czech National Bank; Charles University, Institute of Economic Studies); Bořek Vašíček (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. Banking turmoil was most frequent in developed economies. 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 crisis 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 increases the usefulness of the model when compared to using the best single indicator (domestic private credit). JEL Classification: C33, E44, E58, F47, G01
    Keywords: Early warning indicators, Bayesian model averaging, macro-prudential policies
    Date: 2012–10
  24. By: Bengtsson, Niklas (Uppsala Center for Labor Studies); Pettersson, Jan (Swedish Ministry of Finance)
    Abstract: Both practitioners and academics posit that microfinance organizations face a tradeoff between financial performance and outreach. We designed a randomized controlled trial of a transitory interest rate subsidy to investigate this tradeoff. We find that subsidized credit substantially increases demand, although a non-trivial fraction of members abstain from borrowing even when credit is virtually free. Among those who borrow, we find no effect on default rates. Whereas the intervention is initially unpro table due to lost interest rate revenues, profits eventually catch up because subsidized clients are more likely to apply for new loans (with interest) after the subsidy is lifted. In addition, because loan-taking clients more often deposit savings in the bank, the subsidy decreases the bank's dependence on external funding. We conclude that transitory interest rate subsidies that are unpro table in the short run may improve outreach without undermining sustainability in the long run. However, outreach ultimately appears constrained by low returns to capital and weak market integration among the poor.
    Keywords: Microfinanance; Collateral; Demand for credit; Interest rate changes; Experimental methods; Randomized controlled trial; RTC
    JEL: C93 O12 O16
    Date: 2012–10–30
  25. By: Beatriz Cuéllar Fernández; Yolanda Fuertes-Callén; Carlos Serrano-Cinca; Begoña Gutiérrez-Nieto
    Abstract: Microfinance institutions (MFIs) lend to the poor, fostering these individuals’ financial inclusion. However, microfinance clients suffer from high interest rates, a type of poverty penalty. Reducing margins and lowering interest rates should be a target for MFIs with a strong social commitment. This paper analyzes the determinants of margin in MFIs. A banking model has been adapted to the case of MFIs. This model has been empirically tested using 9-year panel data. Some factors explaining bank margin also explain MFI margin, with operating expenses being the most important factor. Specific microfinance factors are donations and legal status, as regulated MFIs can collect deposits. It has also been found that MFIs operating in countries with a high level of financial inclusion have low margins.
    Keywords: Microfinance institutions; banking; net interest income; outreach; financial inclusion
    JEL: G21 C23 R51
    Date: 2012–10–30
  26. By: Maria Racionero; Elena Del Rey
    Abstract: We study the relative preference for risk-sharing or risk-pooling income-contingent loans for higher education of risk-averse individuals who differ in their ability to benefit from education and inherited wealth. We then analyse the outcome of a majority vote between the two income-contingent schemes. We provide examples where the risk-pooling income-contingent loan is preferred by a majority. The implementation of risk-pooling schemes may however face adverse selection problems, which may be particularly relevant in the presence of student mobility. We explore the implications of allowing students to choose whether to have their loan insured in a risk-pooling fashion or not insured. We show that access to risk-pooling income-contingent loans can sometimes be guaranteed without resorting to coercion.
    Keywords: voting, higher education finance, income-contingent loans
    JEL: H52 I22 D72
    Date: 2012–11
  27. By: De Bonis, Riccardo; Pozzolo, Alberto Franco; Stacchini, Massimiliano
    Abstract: The paper compares the essential features of the Italian banking system with those of the other large euro-area countries. The analysis focuses on banks’ size, ownership and competitiveness, their role in financing firms, the composition of their balance sheets and their degree of internationalization, profitability and terms for customers. Within this overall framework the paper examines the banking system’s response to the financial crisis of 2007-09 and subsequent developments. The progress made in decades past is recalled and further necessary steps set out.
    Keywords: Banking, Financial systems, Italy
    JEL: G2
    Date: 2012–03

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