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on Banking |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:12-21&r=ban |
| By: | Victoria Ivashina; David S. Scharfstein; Jeremy C. Stein |
| Abstract: | A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing the funding provided to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending. |
| JEL: | F36 F44 G01 G21 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18528&r=ban |
| By: | Ekin Ayse Ozsuca (Department of Economics, Cankaya University); Elif Akbostanci (Department of Economics, METU) |
| Abstract: | This paper studies the role of banking sector in monetary policy transmission in Turkey covering the period 1988-2009. Specifically, we investigate the impact of monetary policy changes on banks’ lending behavior. Given the changes in the policy stance and developments in the financial system following the implementation of structural reforms in the aftermath of the 2000-01 crisis, the analysis is further conducted for the two sub-periods: 1988-2001 and 2002-2009, to examine whether there is a change in the functioning of the credit channel. Based on bank-level data, empirical evidence suggests cross sectional heterogeneity in banks’ response to monetary policy changes during 1988-2009. Regarding the results of the pre-crisis and post-crisis periods, we find that an operative bank lending channel existed in 1988-2001, however its impact became much stronger thereafter. Furthermore, there are significant differences in the distributional effects due to bank specific characteristics in the impact of monetary policy on credit supply between the two sub-periods. While the results indicate an operative bank lending channel due to earnings capability and asset quality in the first period, size, liquidity, capitalization, asset quality and managerial efficiency seem to make a difference in the lending responses of banks to monetary policy in 2002-2009. |
| Keywords: | Monetary policy; Transmission Mechanisms; Bank lending channel; Turkey; Panel Data |
| JEL: | C23 E44 E51 E52 G21 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1205&r=ban |
| By: | Bams, Dennis; Pisa, Magdalena; Wolff, Christian C |
| Abstract: | This paper generalizes the existing asymptotic single-factor model to address issues related to industry heterogeneity, default clustering and parameter uncertainty of capital requirement in US retail loan portfolios. We argue that the Basel II capital requirement overstates the riskiness of small businesses even with prudential adjustments. Moreover, our estimates show that both location and spread of loss distribution bare uncertainty. Their shifts over the course of the recent crisis have important risk management implications. The results are based on a unique representative dataset of US small businesses from 2005 to 2011 and give fundamental insights into the US economy. |
| Keywords: | Credit risk |
| JEL: | G2 G3 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9205&r=ban |
| By: | Harry Huizinga; Johannes Voget; Wolf Wagner |
| Abstract: | This paper examines empirically how international taxation affects the volume and pricing of cross-border banking activities for a sample of banks in 38 countries over the 1998-2008 period. International double taxation of foreign-source bank income is found to reduce banking-sector FDI. Furthermore, such taxation is almost fully passed on into higher interest margins charged abroad. These results imply that international double taxation distorts the activities of international banks, and that the incidence of international double taxation of banks is on bank customers in the foreign subsidiary country. Our analysis informs the debate about additional taxation of the financial sector that has emerged in the wake of the recent financial crisis. |
| JEL: | F23 G21 H25 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18483&r=ban |
| By: | Eugenio Cerutti; Stijn Claessens; Patrick McGuire |
| Abstract: | The recent financial crisis has shown how interconnected the financial world has become. Shocks in one location or asset class can have a sizable impact on the stability of institutions and markets around the world. But systemic risk analysis is severely hampered by the lack of consistent data that capture the international dimensions of finance. While currently available data can be used more effectively, supervisors and other agencies need more and better data to construct even rudimentary measures of risks in the international financial system. Similarly, market participants need better information on aggregate positions and linkages to appropriately monitor and price risks. Ongoing initiatives that will help in closing data gaps include the G20 Data Gaps Initiative, which recommends the collection of consistent bank-level data for joint analyses and enhancements to existing sets of aggregate statistics, and the enhancement to the BIS international banking statistics. |
| JEL: | F21 F34 G15 G18 Y1 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18531&r=ban |
| By: | Dasgupta, Basab (World Bank); Zimmermann, Christian (Federal Reserve Bank of St. Louis) |
| Abstract: | We study the impact of loan regulation in rural India on child labor with an overlapping-generations model of formal and informal lending, human capital accumulation, adverse selection, and differentiated risk types. Specifically, we build a model economy that replicates the current outcome with a loan rate cap and no lender discrimination by risk using a survey of rural lenders. Households borrow primarily from informal moneylenders and use child labor. Removing the rate cap and allowing lender discrimination markedly increases capital use, eliminates child labor, and improves welfare of all household types. |
| Keywords: | child labor, India, informal lending, lending discrimination, interest rate caps |
| JEL: | O16 O17 E26 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6979&r=ban |
| By: | Tobias Adrian; Adam B. Ashcraft |
| Abstract: | We provide an overview of the rapidly evolving literature on shadow credit intermediation. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Much of shadow banking activities is intertwined with the operations of core regulated institutions such as bank holding companies and insurance companies, thus creating a source of systemic risk for the financial system at large. We review fundamental reasons for the existence of shadow banking, explain the functioning of shadow banking institutions and activities, discuss why shadow banks need to be regulated, and review the impact of recent reform efforts on shadow banking credit intermediation. |
| Keywords: | Intermediation (Finance) ; Systemic risk ; Financial risk management ; Financial institutions ; Financial market regulatory reform |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:580&r=ban |
| By: | Kartik Anand; James Chapman; Prasanna Gai; |
| Abstract: | We examine the financial stability implications of covered bonds. Banks issue covered bonds by encumbering assets on their balance sheet and placing them within a dynamic ring fence. As more assets are encumbered, jittery unsecured creditors may run, leading to a banking crisis. We provide conditions for such a crisis to occur. We examine how different over-the-counter market network structures influence the liquidity of secured funding markets and crisis dynamics. We draw on the framework to consider several policy measures aimed at mitigating systemic risk, including caps on asset encumbrance, global legal entity identifiers, and swaps of good for bad collateral by central banks. |
| Keywords: | covered bonds, over-the-counter markets, systemic risk, asset encumbrance, legal entity identifiers, velocity of collateral |
| JEL: | G01 G18 G21 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2012-065&r=ban |
| By: | Mardi Dungey (School of Economics and Finance, University of Tasmania; CFAP University of Cambridge, CAMA ANU); Matteo Luciani (ECARES, Solvay Brussels School of Economics and Management, Université libre de Bruxelles; F.R.S.-FNRS); David Veredas (ECARES, Solvay Brussels School of Economics and Management, and Duisenberg school of finance) |
| Abstract: | We propose a simple network–based methodology for ranking systemically important financial institutions. We view the risks of firms –including both the financial sector and the real economy– as a network with nodes representing the volatility shocks. The metric for the connections of the nodes is the correlation between these shocks. Daily dynamic centrality measures allow us to rank firms in terms of risk connectedness and firm characteristics. We present a general systemic risk index for the financial sector. Results from 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 throughout the sample. Citigroup and Lehman Brothers also were consistently in the top 10 up to late 2008. At the end of the sample, insurance firms emerge as systemic. Second, the systemic 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 about European debt markets saw the systemic risk begin to rise again from April 2010. We further 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, in line with the burst of the housing price bubble, while the former continued to climb up to the rescue of AIG. |
| Keywords: | Systemic risk; ranking; financial institutions; Lehman |
| JEL: | G01 G10 G18 G20 G28 G32 G38 |
| Date: | 2012–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120115&r=ban |
| By: | Varvara Isyuk (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | The U.S. Federal Reserve responded to liquidity shortage through compulsory loan guarantee scheme and bank recapitalisations mainly under Capital Purchase Program (CPP) for commercial banks. The bailout packages provided under CPP seem to be efficient in responding to the liquidity crisis subject to large banks that contributed the most to systemic risk. However, smaller banks that were actually exposed to the mortgage market and non-performing loans were denied the financial aid or received CPP funds of a relatively smaller size. Such CPP funds allocation was efficient from the point of view of taxpayer as the probability of bailout non-repayments was minimised. However, it did not support real estate loan recapitalisations that could become a reason of large welfare loses for the homeowners. |
| Keywords: | Bailouts, bank recapitalisation, CPP funds, systemic risk. |
| JEL: | E52 E58 G21 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12072&r=ban |
| By: | Masciantonio, Sergio; Tiseno, Andrea |
| Abstract: | We document the development of the major international banks since the late nineties, analysing balance sheet data for 27 large and complex financial institutions. We argue that balance sheet expansion and business line diversification paved the way to the rise of the universal banking model. This model, apparently sound and efficient in the run-up to the crisis, showed all its shortcomings when the crisis erupted. European banks highlighted greater fragilities in their business models. Moreover the changed financial and regulatory landscape that followed has challenged this model further. Many proposed remedies to the global financial crisis appear to push for a return of a narrower model for banking activity. The first evidence we detected through a set of panel regressions shows that the proposed remedies are likely to change the profitability and riskiness profile of the banking industry, pushing towards a safer, although less profitable, business model. Moreover, the contemporaneous effort by banks to move in this direction is likely to strengthen this shift. |
| Keywords: | banks; banking crises; financial crises; balance sheets |
| JEL: | G21 G01 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42494&r=ban |
| By: | Giorgio Calcagnini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Elisa Lenti (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo") |
| Abstract: | Traditionally female entrepreneurs report difficulties or higher costs in accessing bank credit. These difficulties can be either the result of supply side discrimination, or the lower profitability of female-owned firms than male-owned ones. This paper aims at analyzing gender differences in bank loan access by means of a large dataset on firms’ lines of credit provided by four Italian banks over the period 2005-2008. Estimates show that, after controlling for loan, firm and bank characteristics, female-owned firms: (a) experience a higher probability of having to pledge guarantees than male-owned firms; (b) have a lower probability of access to credit. |
| Keywords: | Gender discrimination, Bank loan, Guarantees. |
| JEL: | E43 G21 D82 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:12_12&r=ban |
| By: | M. Fort; F. Manaresi; S. Trucchi |
| Abstract: | We investigate the causal effect of financial literacy on financial assets, exploiting banks information policies for identification. In Italy, banks who belong to the PattiChiari consortium have implemented policies aimed at increasing transparency and procedural simplification. These policies may affect individuals' financial literacy without involving any direct cost for clients in terms of time, effort or resources, as we show in the paper. We exploit confidential information on whether individuals have their main bank account in one bank in the PattiChiari consortium to instrument their financial literacy level. We show that these policies have a positive and significant effect on both knowledge of financial instruments and household financial assets. Our results suggest that banks information policies have the potential to be an effective tool to increase individuals' financial literacy and that the relationship between financial literacy and wealth is largely underestimated by standard regression models. |
| JEL: | D14 G11 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp852&r=ban |