New Economics Papers
on Banking
Issue of 2012‒12‒15
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Equity Investment Regulation and Bank Risk: Evidence from Japanese Commercial Banks By Konishi, Masaru
  2. Bank Ownership and Credit Cycle: the lower sensitivity of public bank lending to the business cycle. By Duprey, T.
  3. Fiscal Consolidations and Banking Stability By Jacopo Cimadomo; Sebastian Hauptmeier; Tom Zimmermann
  4. A Frontier Measure of U.S. Banking Competition By Wilko Bolt; David Humphrey
  5. The Regulator's Trade-off: Bank Supervision vs. Minimum Capital By Florian Buck; Eva Schliephake
  6. European States and Financial Systems: A Biased Relationship By Nathalie Rey
  7. Can European Bank Bailouts work? By Dirk Schoenmaker; Arjen Siegmann
  8. Did the Community Reinvestment Act (CRA) Lead to Risky Lending? By Sumit Agarwal; Efraim Benmelech; Nittai Bergman; Amit Seru
  9. Non-bank financial institutions: assessment of their impact on the stability of the financial system By Patrice Muller; Graham Bishop; Shaan Devnani; Mark Lewis; Rohit Ladher
  10. Large excess reserves in the U.S.: a view from the cross-section of banks By Huberto M. Ennis; Alexander L. Wolman
  11. The Role of Credit in International Business Cycles By TengTeng Xu
  12. Signaling Credit-Worthiness: Land Titles, Banking Practices and Formal Credit in Indonesia By Paul Castãneda Dower; Elizabeth Potamites
  13. Convertible Bonds and Bank Risk-Taking By Natalya Martynova; Enrico Perotti
  14. Optimal Fiscal Policy and the Banking Sector By Matthew Schurin
  15. Efficient Bailouts? By Javier Bianchi
  16. Should defaults be forgotten? By Marieke Bos; Leonard Nakamura
  17. Value Relevance of the Fair Value Hierarchy of IFRS 7 in Europe - How reliable are mark-to-model Fair Values ? By Bosch, Patrick
  18. Land Bank 2.0: an empirical evaluation By Stephan Whitaker; Thomas J. Fitzpatrick IV
  19. Development of the Banking Sector in Russia in 2011 By Mikhail Khromov; Alexey Vedev
  20. Macroprudential policy: its effects and relationship to monetary policy By Hyunduk Suh
  21. Credit risk and disaster Risk By Francois Gourio

  1. By: Konishi, Masaru
    Abstract: Using data from Japanese banks, this paper empirically investigates the relation between equity investment and bank risk during the period of banking crisis. Empirical evidence suggests that bank risk is positively associated with the ratio of shareholding to equity capital, suggesting that limiting shareholding can reduce commercial banks’ exposure to market risk. However, regulators should not expect that restricting banks from shareholding automatically leads to less bank failures in a financial system. This is because unhealthy banks voluntarily refrain from holding a large amount of firms’ shares relative to their equity capital, and bank risk is less sensitive to shareholding at unhealthy banks than at healthy banks.
    Keywords: Bank risk, Bank shareholding, Separation of banking and commerce
    JEL: G21 G28 G30
    Date: 2012–10
  2. By: Duprey, T.
    Abstract: Overall lending cyclicality increased in the years 2000s, but public bank lending remains significantly less cyclical than their private counterparts. This stylized fact is showed to hold empirically on a dataset of 140 countries over 1989-2009 covering 464 public banks and 72 privatizations while accounting for the unbalanced feature of the panel. Using a dataset on banking crisis and records about bank privatizations, I can control for nationalizations during crisis as well as the evolution of ownership status overtime. Nevertheless the cyclical properties remain heterogeneous depending (i) on the area considered --still procyclical in OECD countries, acyclical in Europe, while countercyclical for developing countries, or on (ii) the phase of the business cycle itself --with lower reactions to economic fluctuations in periods of recession, even in Europe, where credit expansion by public banks is then acyclical. As a robustness check, I indeed observe that newly privatized banks engage in more procyclical lending. In addition, most liability item, like short/long term liabilities or customer deposits, pattern the same reduced cyclicality, especially during economic downturns. Last, I do not find evidences that this cyclical pattern is encompassed by forced loans to the government nor institutional features.
    Keywords: lending cycle, procyclicality, public banking, privatizations.
    JEL: G21 G28 G32 H44
    Date: 2012
  3. By: Jacopo Cimadomo; Sebastian Hauptmeier; Tom Zimmermann
    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 G21 H30
    Date: 2012–11
  4. By: Wilko Bolt; David Humphrey
    Abstract: The three main measures of competition (HHI, Lerner Index, and H-Statistic) are uncorrelated for U.S. banks. We investigate why this occurs, propose a frontier measure of competition, and apply it to five major bank service lines using data only available since 2008. Fee-based banking services comprise 35% of bank revenues so assessing competition by service line is preferred to using a single measure for traditional activities extended to the entire bank. Academic-based competition measures explain only 1% of HHI variation. HHI merger/acquisition guidelines could be raised since current banking concentration seems unrelated to competition.
    Keywords: Competition; banks; frontier analysis
    JEL: L11 G21 C21
    Date: 2012–12
  5. By: Florian Buck; Eva Schliephake
    Abstract: We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks’ profitability, while strict supervision reduces the scope of intermediation and is costly for taxpayers. We show that the expected costs of a banking crisis are minimised with a mix of both instruments. Once we allow for cross-border banking, the optimal policy is not feasible. If domestic supervisory effort is not observable, our model predicts a race to the bottom in banking regulation. Therefore, countries are better off by harmonising regulation on an international standard.
    Keywords: bank regulation, regulatory competition, supervision and capital requirements
    JEL: F36 G18 K23 L51
    Date: 2012
  6. By: Nathalie Rey (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)
    Abstract: Public intervention in the banking sector takes three main forms: prudential regulation, especially with the Basel II ratio for adequacy of a bank's own funds for their exposure to risk ; insuring deposits, the goal of which is to ensure a minimum level of protection for depositors and savers in order to avoid a run on banks ; and control and supervision of banks by public authorities, which ensures that the rules are applied properly. Intervention by central banks, through their monetary policy and as lenders of last resort, constitutes the fourth means of regulating the banking system, and the main form of intervention in financial markets. Central banks intervene in order to ensure the stability of financial systems. The financial crisis has shown that traditional modes of public intervention in the financial system are ineffective and insufficient. Before analyzing the principles and limits of these forms of public intervention, we examine cases of exceptional intervention and support to banks by public powers during the crisis. Then, in conclusion, we compare these forms of public intervention with the current state of financial systems.
    Keywords: Financial systems; Financial crisis; States; Public intervention; Prudential regulation
    Date: 2012–10–02
  7. By: Dirk Schoenmaker (Duisenberg School of Finance, VU University Amsterdam); Arjen Siegmann (VU University Amsterdam)
    Abstract: Cross‐border banking needs cross‐border recapitalisation mechanisms. Each mechanism, however, suffers from the financial trilemma, which is that cross‐border banking, national financial autonomy and financial stability are incompatible. In this paper, we study the efficiency of different burdensharing agreements for the recapitalisation of the 30 largest banks in Europe. We consider bank bailouts for these banks in a simulation framework with stochastic country‐specific bailout benefits. Among the burden sharing rules, we find that the majority and qualified‐majority voting rules come close to the efficiency of a bailout mechanism with a supranational authority. Even a unanimous voting rule works better than home‐country bailouts, which are very inefficient.
    Keywords: Financial Stability; Public Good; International Monetary Arrangements; International
    JEL: F33 G28 H41
    Date: 2012–10–24
  8. By: Sumit Agarwal; Efraim Benmelech; Nittai Bergman; Amit Seru
    Abstract: Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.
    JEL: G01 G21 G38 H24 H31
    Date: 2012–12
  9. By: Patrice Muller; Graham Bishop; Shaan Devnani; Mark Lewis; Rohit Ladher
    Abstract: The study paper examines how non-bank financial institutions (in particular money market funds, private equity firms, hedge funds, pension funds and insurance undertakings, central counterparties, and UCITS and ETFs) have performed over the last decade and during the financial crisis. The report addresses the risks run by each of this type of institutions (credit, counterparty, liquidity, redemption, and fire sales risk), and highlights also the risks arising from a number of activities frequently undertaken by these institutions, in particular securitisation (a.o. agency risk), securities lending (a.o. counterparty risk) and repos (a.o. liquidity risk). The report finally provides a selected overview of approaches for the measurement of financial instability and financial distress.
    JEL: G23
    Date: 2012–11
  10. By: Huberto M. Ennis; Alexander L. Wolman
    Abstract: Bank reserves in the United States increased dramatically at the end of 2008. Subsequent asset purchase programs in 2009 and 2011 more than doubled the quantity of reserves outstanding. These events required major adjustments in banks' balance sheets. We study the evolution of reserve holdings across banks from the fall of 2008 until the middle of 2011 and document how banks' balance sheets changed concurrently. Motivated by the potential implications for monetary policy of operating with a high level of reserves, we focus particular attention on those banks which accumulated large quantities of reserves.
    Keywords: Interest ; Financial markets ; Inflation (Finance) ; Monetary policy
    Date: 2012
  11. By: TengTeng Xu
    Abstract: This paper examines the role of bank credit in modeling and forecasting business cycle fluctuations, and investigates the international transmission of US credit shocks, using a global vector autoregressive (GVAR) framework and associated country-specific error correction models. The paper constructs and compiles a dataset on bank credit for 33 advanced and emerging market economies from 1979Q1 to 2009Q4. The empirical results suggest that the incorporation of credit provides significant improvement in modeling and forecasting output growth, changes in inflation and long run interest rates, for countries with developed banking sector. Impulse response analysis provide strong evidence of the international spillover of US credit shocks to the UK, the Euro area, Japan and other industrialized economies, and the propagation to the real economy.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; Econometric and statistical methods; International financial markets
    JEL: C32 G21 E44 E32
    Date: 2012
  12. By: Paul Castãneda Dower (New Economic School and the Center for Economic and Financial Research); Elizabeth Potamites
    Abstract: Many land titling programs have produced lackluster results in terms of achieving access to credit for the poor. This may re ect insufficient emphasis on local banking practices. Bankers commonly use methods other than collateral to ensure repayment, such as targeting borrower characteristics that, on average, improve repayment rates. Formal land titles can signal to the bank these important characteristics. Using a household survey from Indonesia, we provide evidence that formal land titles do have a positive and significant effect on access to credit and at least part of this effect is best interpreted as an improvement in information ows. This result stands in contrast to the prevailing notion that land titles only function as collateral. Analysts who neglect local banking practices may misinterpret the observed effect of systematic land titling programs on credit access because these programs tend to dampen the signaling value of formal land titles.
    Date: 2012–09
  13. By: Natalya Martynova (University of Amsterdam); Enrico Perotti (University of Amsterdam)
    Abstract: We study the effect of going-concern contingent capital on bank risk choice. The possibility of debt for equity conversion forces deleveraging in highly levered states, when risk incentives are worse. The additional equity reduces endogenous risk shifting by diluting returns in high states. An optimally designed trigger and convertible debt amount trades off this risk reduction against its debt dilution effect. Interestingly, contingent capital may be less risky in equilibrium than traditional debt, as its lower priority is compensated by reduced endogenous risk. Its effectiveness in risk reduction depends critically on the informativeness of the trigger. Adopting a noisy market trigger produces excess conversion (type II error), while an accounting trigger converts too infrequently (type I error) because of regulatory forbearance.
    Keywords: Risk shifting; Financial Leverage; Contingent Capital
    JEL: G13 G21 G28
    Date: 2012–10–09
  14. By: Matthew Schurin (University of Connecticut)
    Abstract: What should the government’s fiscal policy be when banks hold significant amounts of public debt and the government can default on its debt obligations? This question is addressed using a dynamic general equilibrium model where banks face constraints on their leverage ratios and adjust lending to satisfy regulatory requirements. In response to adverse real shocks, the government subsidizes banks and accelerates bond repayments to sustain private sector lending. When government consumption exogenously increases, however, the government optimally taxes banks and partially defaults on its debt. Debt issuance is procyclical to ensure equilibrium in the deposit market. With an opening of the economy, the government uses less aggressive tax and default policies. JEL Classification: E32, E62, F41, H21, H63 Key words: Business Fluctuations, Debt, Fiscal Policy, Government Bonds, Ramsey Equilibrium, Optimal Taxation
    Date: 2012–11
  15. By: Javier Bianchi
    Abstract: This paper develops a non-linear DSGE model to assess the interaction between ex-post interventions in credit markets and the build-up of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. The optimal policy requires, in general, a mix of ex-post intervention and ex-ante prudential policy. We also analyze the effects of bailouts on financial stability and welfare in the absence of ex-ante prudential policy. Our results show that the moral hazard effects of bailouts are significantly mitigated by making bailouts contingent on the occurrence of a systemic financial crisis.
    JEL: E2 E20 E3 E32 E44 E6 F40
    Date: 2012–12
  16. By: Marieke Bos; Leonard Nakamura
    Abstract: Swedish law mandates the removal of information about past credit arrears from the individuals’ credit reports after three years. By exploiting a quasi-experimental variation in retention times caused by a change in the credit bureau’s timing of arrear removal, we are able to examine the causal effect of increased retention time on consumers' short- to medium-run credit scores, loan applications, credit access, and future defaults. ; We find that a prolonged retention time increases the need for and access to credit relative to shorter retention times. Additionally, prolonged retention times seem to reduce the likelihood to default again two years after removal. We also find that in both regimes only a minority of the individuals (less than 27 percent) receive a new arrear within two years after removal, suggesting that only a minority of the individuals who received an arrear may be inherently high risk. ; Alternatively, our results may be interpreted as suggesting that removal of credit arrears may induce borrowers to exert greater effort along the lines of Vercammen (1995) and Elul and Gottardi (2007). Either interpretation opens the possibility that credit arrear removal is welfare enhancing.
    Keywords: Households - Finance ; Consumer credit ; Credit scoring systems
    Date: 2012
  17. By: Bosch, Patrick
    Abstract: According to IFRS 7, banks have to disclose the inputs used in measuring the fair value of financial instruments. For this purpose the standard defines a three-level measurement hierarchy. The reliability of fair values is expected to decrease with decreasing hierarchy level due to the lower quality of the input factors. Using a value relevance research setting, I find that investors perceive the reliability of level 3 fair values as significantly lower than the reliability of level 1 fair values. However, in contrast to expectations, level 2 fair values are not perceived as less reliable. Thus, investors only doubt the reliability of fair values whose inputs are based on discretionary assumptions. Additionally, this paper analyses the impact of the reclassification of financial assets and of the regulatory capital ratio on the reliability of fair values. While I find a weakly significant impact of the regulatory capital ratio, the reclassification has in general no influence on the reliability of reported fair values.
    Keywords: Fair Value Hierarchy; Reclassification; Reliability; Value Relevance
    JEL: C23 G14 G21 M41
    Date: 2012–12–03
  18. By: Stephan Whitaker; Thomas J. Fitzpatrick IV
    Abstract: Cuyahoga County created a land bank in 2009 explicitly intended to acquire low-value properties, mitigate blighted housing, help stabilize neighborhoods, and slow the decline of property values. This paper evaluates the effectiveness of the land bank by estimating spatially-corrected hedonic price models using sales near the land bank homes. Homes that sold within 500 feet of a property that would be acquired by the land bank in the next six months show a 3 to 5 percent discount versus observationally similar homes. Homes that sold within 500 feet of a land bank owned home sold at prices approximately 5 percent higher than similar homes. A land bank demolition appears to have a positive externality, which adds 9 percent to the value of a nearby home sale. These results are consistent through a wide variety of specifications, but they are not measured precisely enough to be statistically significant.
    Keywords: Housing policy ; Housing
    Date: 2012
  19. By: Mikhail Khromov (Gaidar Institute for Economic Policy); Alexey Vedev (Gaidar Institute for Economic Policy)
    Abstract: The financial sphere of Russia was the first sector of the national economy which was affected by the global economic crisis of 2008. Financial markets were hit first and then the banking sector experienced the liquidity problem to be followed by a full-scale economic crisis in Russia. Early in 2011, all the factors pointed to the fact that the banking sector overcame the crisis, and it seemed the upward development began. The banking sector had at its disposal huge available resources for expansion of lending to the non-financial sector.
    Keywords: Banking sector, Russian economy
    JEL: E43 E44 E51 E58 G15 G21 G24
    Date: 2012
  20. By: Hyunduk Suh
    Abstract: This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital. Second, monetary policy is sub-optimal for credit stabilization. The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers.
    Keywords: Ratio analysis
    Date: 2012
  21. By: Francois Gourio
    Abstract: Credit spreads are large, volatile and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while safe in ordinary recessions, is exposed to economic depressions, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, exogenously time-varying risk of economic disaster. The model replicates the level, volatility and cyclicality of credit spreads, and variation in the corporate bond risk premium amplifies macroeconomic fluctuations in investment, employment and GDP.
    Keywords: Risk - Mathematical models ; Credit ; Debt
    Date: 2012

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