New Economics Papers
on Banking
Issue of 2012‒11‒24
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. VAR for VaR: Measuring Tail Dependence Using Multivariate Regression Quantiles By Habert white; Tae-Hwan Kim; Simone Manganelli
  2. Excessive credit growth and countercyclical capital buffers in basel III: an empirical evidence from central and east european countries By Seidler, Jakub; Gersl, Adam
  3. The liquidity consequences of the euro area sovereign debt crisis By William A Allen; Richhild Moessner
  4. The recent trends in long-term bank funding By Andrea Cardillo; Andre Zaghini
  5. Endogeneous Risk in Monopolistic Competition By Vladislav Damjanovic
  6. Inside the labyrinth of Basel risk-weighted assets: how not to get lost By Francesco cannata; Simone Casellina; Gregorio Guidi
  7. Bank Capital Regulation with Asymmetric Countries By Damien S.Eldridge; Heajin H.Ryoo; Axel Wieneke
  8. Atuação de Bancos Estrangeiros no Brasil: mercado de crédito e de derivativos de 2005 a 2011. By Raquel de Freitas Oliveira; Rafael Felipe Schiozer; Sérgio Leão
  9. Local Market Structure and Bank Competition: evidence from the Brazilian auto loan market. By Bruno Martins
  10. A structural model for the housing and credit markets in Italy By Andrea Nobili; Francesco Zollino
  11. Banks Information Policies, Financial Literacy and Household Wealth By Fort, Margherita; Manaresi, Francesco; Trucchi, Serena
  12. Conectividade e Risco Sistêmico no Sistema de Pagamentos Brasileiro. By Benjamin Miranda Tabak; Rodrigo César de Castro Miranda; Sergio Rubens Stancato de Souza
  13. Variable Mortgage Rate Pricing in Ireland By Goggin, Jean; Holton, Sarah; Kelly, Jane; Lydon, Reamonn; McQuinn, Kieran

  1. By: Habert white; Tae-Hwan Kim (School of Economics, Yonsei University); Simone Manganelli (European Central Bank, DG-Research)
    Abstract: This paper proposes methods for estimation and inference in multivariate, multi-quantile models. The theory can simultaneously accommodate models with multiple random variables, multiple confidence levels, and multiple lags of the associated quantiles. The proposed framework can be conveniently thought of as a vector autoregressive (VAR) extension to quantile models. We estimate a simple version of the model using market equity returns data to analyse spillovers in the values at risk (VaR) between a market index and financial institutions. We construct impulse-response functions for the quantiles of a sample of 230 financial institutions around the world and study how financial institution-specific and system-wide shocks are absorbed by the system. We show how our methodology can successfully identify both in-sample and out-of-sample the set of financial institutions whose risk is most sentitive to market wide shocks in situations of financial distress, and can prove a valuable addition to the traditional toolkit of policy makers and supervisors.
    Keywords: Quantile impulse-responses, spillover, codependence,CAViaR
    JEL: C13 C14 C32
    Date: 2012–08
  2. By: Seidler, Jakub; Gersl, Adam
    Abstract: Excessive credit growth is often considered to be an indicator of future problems in the financial sector. This paper examines the issue of how best to determine whether the observed level of private sector credit is excessive in the context of the “countercyclical capital buffer”, a macroprudential tool proposed in the new regulatory framework of Basel II by the Basel Committee on Banking Supervision. An empirical analysis of selected Central and Eastern European countries, including the Czech Republic, provides alternative estimates of excessive private credit and shows that the HP filter calculation proposed by the Basel Committee is not necessarily a suitable indicator of excessive credit growth for converging countries.
    Keywords: credit growth; financial crisis; countercyclical capital buffer; Basel II
    JEL: G18 G01 G21
    Date: 2012
  3. By: William A Allen; Richhild Moessner
    Abstract: We examine the liquidity effects of the euro area sovereign debt crisis, including its effects on euro area banks as a group, on intra-euro area financial flows, on the supply of and demand for collateral, and on international liquidity. The lending capacity of the euro area banking system has been much weakened, despite the remarkable growth of the operations of the Eurosystem, including its greatly increased lending, its intermediation between national central banks in surplus and deficit countries and its collateral policy. The euro crisis has also created international liquidity stresses. We find that central bank swap lines have only had limited effectiveness in alleviating the stresses, probably owing to some stigma being attached to their use.
    Keywords: Financial crisis, liquidity, foreign exchange swaps, central bank swap lines
    Date: 2012–11
  4. By: Andrea Cardillo (Banca d'Italia); Andre Zaghini (Banca d'Italia)
    Abstract: We assess the long-term funding conditions for banks in the US, the euro area and the UK and, separately, for the group of global systemically important financial institutions (G-SIFIs), over the period 1997-2011. After the outbreak of the subprime crisis there was a considerable reshuffling of the relative weight of banks’ funding sources, also due to non-conventional monetary policy interventions, government support measures and a significant increase in wholesale funding costs. By looking at 6,400 bank bonds we find that both implicit and explicit guarantees by the sovereign have a substantial role in shaping the wholesale cost of bond issuance with significant differences between AAA-rated and lower-rated countries. However, when a bank CDS exists the role of the government is significantly reduced with the market giving more weight to the soundness and creditworthiness of the issuing institution.
    Keywords: long-term funding, bank balance sheet, financial crisis, G-SIFIs
    JEL: G21 G01 G18
    Date: 2012–10
  5. By: Vladislav Damjanovic
    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: 2012–10–24
  6. By: Francesco cannata (Bank of Italy); Simone Casellina (Bank of Italy); Gregorio Guidi (Bank of Italy)
    Abstract: Many studies have questioned the reliability of banks’ calculations of risk-weighted assets (RWA) for prudential purposes. The significant divergences found at international level are taken as indicating excessive subjectivity in the current rules governing banks’ risk measurement and capital requirement calculations. This paper emphasises the need for appropriate metrics to compare banks’ riskiness under a risk-sensitive framework (either Basel 2 or Basel 3). The ratio of RWA to total assets – which is widely used for peer analyses – is a valuable starting point, but when analysis becomes more detailed it needs to be supplemented by other indicators. Focusing on credit risk, we propose an analytical methodology to disentangle the major factors in RWA differences and, using data from Italian banks (given the inadequate degree of detail of Pillar 3 reports), we show that a large part of the interbank dispersion is explained by the business mix of individual institutions as well as the use of different prudential approaches (standardised and IRB). In conclusion we propose a simple data template that international banks could use to apply the framework suggested.
    Keywords: Basel Accord, risk-weighted assets, banking supervision, credit risk
    JEL: G18 G21 G28
    Date: 2012–09
  7. By: Damien S.Eldridge (School Economics, La Trobe University); Heajin H.Ryoo (School of Economics, La Trobe University); Axel Wieneke (School of Economics, La Trobe University)
    Abstract: Financial markets are increasingly globalized, so that the impacts of na- tional banking regulations extend beyond national borders. Strict regulation reduces global loan supply and thus widens interest rate spreads. This is an externality insofar as it affects foreign banks profitability and stability. The sovereigns' motivation to join an internationally coordinated regulatory regime, such as the Basel Accords, has been discussed in the literature. How- ever, regulatory enforcement remains a domestic responsibility. In combina- tion with asymmetric information, this gives national authorities room to deviate in the form of lax regulation. We show that each regulator's en- forcement choice is affected by the relative country size. Lax enforcement improves the profitability of home banks, but diminishes the global interest rate spreads. An authority regulating a small market has only a small effect on global interest rates. As such, it may choose lax regulation to improve domestic bank profitability without significantly diminishing global spreads. In contrast, an authority regulating a large market will have a significant im- pact on global spreads. Therefore, small country regulators have a stronger incentive to deviate from strict international regulatory standards.
    Keywords: Bank regulation, Market integration, Regulatory competition. EDIRC Provider-Institution: RePEc:edi:sblatau
    JEL: G21 G18 F36
    Date: 2012
  8. By: Raquel de Freitas Oliveira; Rafael Felipe Schiozer; Sérgio Leão
    Abstract: This study investigates the role of the group of foreign banks in Brazil between 2005 and 2011. It focuses on their involvement on foreign exchange derivatives and credit markets, especially during the financial crisis in 2008/2009. Foreign banks account for almost a quarter of the supply of non-directed credit. The financial crisis negatively affected the supply of loans by foreign banks, even more intensively and longer than domestic private banks. Nevertheless, in the post-crisis period, namely from the third quarter of 2010 until the end of 2011, the growth rate of foreign banks’ lending was larger than those of other banks. The interest rates that foreign banks charge in some types of loans are, on average, lower than those charged by domestic banks. In the currency derivatives market, foreign banks play an important role in providing such instruments, especially for the non-financial sector and for institutional investors. The results show that, during the crisis and especially in the post-crisis period, domestic private banks reduced their share in such markets. In addition, we show that this market is less concentrated than the credit market.
    Date: 2012–11
  9. By: Bruno Martins
    Abstract: Asymmetric information and transportation costs incurred by borrowers may raise spatial price discrimination in bank lending. This paper exploits the large geographic dispersion in the market structure of the Brazilian banking sector to investigate the relationship between market concentration and bank competition. Local markets are also distinguished by the degree of barrier to entry in order to assess its effect on bank competitive behavior. The findings indicate a negative correlation between market concentration and bank competition and an even stronger effect in locations where the barriers to entry are higher. The paper also highlights the importance of evaluating the geographic impact of mergers and acquisitions for the analysis of the effect of market concentration on bank competition.
    Date: 2012–11
  10. By: Andrea Nobili (Bank of Italy); Francesco Zollino (Bank of Italy)
    Abstract: We estimate a fully-fledged structural system for the housing market in Italy, taking into account the multi-fold link with bank lending to both households and construction firms. The model allows the house supply to vary in the short run and the banking sector to affect the equilibrium in the housing market, through its effect on housing supply and demand. We show that house prices react mostly to standard drivers such as disposable income, expected inflation and demographic pressures. Lending conditions also have a significant impact, especially through their effects on mortgage loans, and consequently on housing demand. Allowing short-run adjustment in house supply implies a weaker response of house prices to a change in the monetary stance or in banks’ deleveraging process. Finally, we find that since the mid-eighties house price developments in Italy have been broadly in line with the fundamentals; during the recent financial crisis, the worsening in credit supply conditions dampened house price dynamics, partly offsetting the positive stimulus provided by the easing of the monetary policy stance.
    Keywords: house prices, credit, system of simultaneous equations
    JEL: E51 E52 G21
    Date: 2012–10
  11. By: Fort, Margherita (University of Bologna); Manaresi, Francesco (Bank of Italy); Trucchi, Serena (University of Bologna)
    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.
    Keywords: instrumental variables, wealth, financial literacy
    JEL: D14 G11
    Date: 2012–11
  12. By: Benjamin Miranda Tabak; Rodrigo César de Castro Miranda; Sergio Rubens Stancato de Souza
    Abstract: This paper presents measures for the mitigation of systemic risk adopted in the Brazilian Payment System, and payments processed by this system are analyzed in order to identify potential sources of systemic risk. Measures for the mitigation of systemic risk within the Brazilian Payment System are meant to reduce possible financial contagion from spreading through this system in the event of defaults. In the case of clearinghouses, we find that the measures taken have reduced impacts of defaults, and in other cases we find that any possible contagion has its impact reduced. We also analyze a network derived from the payments using concepts from network theory, and from this analysis we obtain information about the interconnection of systemically important financial institutions and their possible fragility, which can help prevent systemic events.
    Date: 2012–11
  13. By: Goggin, Jean (Central Bank of Ireland); Holton, Sarah (Central Bank of Ireland); Kelly, Jane (Central Bank of Ireland); Lydon, Reamonn (Central Bank of Ireland); McQuinn, Kieran (Central Bank of Ireland)
    Abstract: This Letter examines movements in the interest rates charged on variable rate mortgages. The results indicate that variable rates for all lenders closely followed changes in the ECB's policy rate, short-term wholesale rates and tracker rate mortgages until the end of 2008. Thereafter, the relationship breaks down, in part due to banks' increased market funding costs. It appears that some lenders with higher mortgage arrears rates and a greater proportion of tracker rate loans on their books exhibit higher variable rates. After controlling for these additional factors, most of the divergence between banks variable rates is explained, but there are some exceptions. There is also some evidence of asymmetric adjustment in rate setting behaviour: that is, rates tend to adjust slowly when they are above the long-run predicted level but more quickly when they are below this level. This asymmetric adjustment behaviour appears to increase in the post-2008 period.
    Date: 2012–01

This issue is ©2012 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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