New Economics Papers
on Banking
Issue of 2012‒12‒22
23 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Securitization By Gary Gorton; Andrew Metrick
  2. Credit spreads as predictors of real-time economic activity: a Bayesian Model-Averaging approach By Jon Faust; Simon Gilchrist; Jonathan H. Wright; Egon Zakrajsek
  3. The evolution and impact of bank regulations By Barth, James R.; Caprio, Gerard, Jr.; Levine, Ross
  4. Which banks are more risky? The impact of loan growth and business model on bank risk-taking By Köhler, Matthias
  5. Forecasting Bank Leverage By Gerhard Hambusch; Sherrill Shaffer
  6. Dollar funding and the lending behavior of global banks By Victoria Ivashina; David S. Scharfstein; Jeremy C. Stein
  7. External Imbalances and Financial Crises By Taylor, Alan M.
  8. How does deposit insurance affect bank risk ? evidence from the recent crisis By Anginer, Deniz; Demirguc-Kunt, Asli; Zhu, Min
  9. The foundations of financial inclusion : understanding ownership and use of formal accounts By Allen, Franklin; Demirguc-Kunt, Asli; Klapper, Leora; Peria, Maria Soledad Martinez
  10. The financial cycle and macroeconomics: What have we learnt? By Claudio Borio
  11. The Time-Inconsistency Factor: How Banks Adapt to their Mix of Savers By Carolina Laureti; Ariane Szafarz
  12. Equity Capital, Bankruptcy Risk and the Liquidity Trap By Oren Levintal
  13. Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis By Ricardo Correa; Horacio Sapriza; Andrei Zlate
  14. Externalities in interbank network: results from a dynamic simulation model By Michele Manna; Alessandro Schiavone
  15. Measuring option implied degree of distress in the US financial sector using the entropy principle By Matros, Philipp; Vilsmeier, Johannes
  16. On the Non-Exclusivity of Loan Contracts: An Empirical Investigation By Degryse, Hans; Ioannidou, Vasso; von Schedvin, Erik
  17. Interest Rate Pass-Through in the Euro Area during the Financial Crisis: a Multivariate Regime-Switching Approach By David ARISTEI; Manuela Gallo
  18. Essays on banking, corporate bankruptcy, and corporate finance. By Schedvin, E.L. von
  19. A dynamic default dependence model By Sara Cecchetti; Giovanna Nappo
  20. Estimating endogenous liquidity using transaction and order book information By Durand, Philippe; Gündüz, Yalin; Thomazeau, Isabelle
  21. Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles By Jakob Kapeller; Bernhard Schütz
  22. Persuasion by stress testing: Optimal disclosure of supervisory information in the banking sector By Gick, Wolfgang; Pausch, Thilo
  23. Who gains and who loses from the 2011 debit card interchange fee reform? By Oz Shy

  1. By: Gary Gorton; Andrew Metrick
    Abstract: We survey the literature on securitization and lay out a research program for its open questions. Securitization is the process by which loans, previously held to maturity on the balance sheets of financial intermediaries, are sold in capital markets. Securitization has grown from a small amount in 1990 to a pre-crisis issuance amount that makes it one of the largest capital markets. In 2005 the amount of non-mortgage asset-backed securities issued in U.S. capital markets exceeded the amount of U.S. corporate debt issued, and these securitized bonds – even those unrelated to subprime mortgages -- were at center of the recent financial crisis. Nevertheless, despite the transformative effect of securitization on financial intermediation, the literature is still relatively small and many fundamental questions remain open.
    JEL: E0 G0 G2
    Date: 2012–12
  2. By: Jon Faust; Simon Gilchrist; Jonathan H. Wright; Egon Zakrajsek
    Abstract: Employing a large number of financial indicators, we use Bayesian Model Averaging (BMA) to forecast real-time measures of economic activity. The indicators include credit spreads based on portfolios--constructed directly from the secondary market prices of outstanding bonds--sorted by maturity and credit risk. Relative to an autoregressive benchmark, BMA yields consistent improvements in the prediction of the cyclically-sensitive measures of economic activity at horizons from the current quarter out to four quarters hence. The gains in forecast accuracy are statistically significant and economically important and owe almost exclusively to the inclusion of credit spreads in the set of predictors.
    Date: 2012
  3. By: Barth, James R.; Caprio, Gerard, Jr.; Levine, Ross
    Abstract: This paper reassesses what works in banking regulation based on the new World Bank survey (Survey IV) of bank regulation and supervision around world. The paper briefly presents new and official survey information on bank regulations in more than 125 countries, makes comparisons with earlier surveys since 1999, and assesses the relationship between changes in bank regulations and banking system performance. The data suggest that many countries made capital regulations more stringent and granted greater discretionary power to official supervisory agencies over the past 12 years, but most countries have not enhanced the ability and incentives of private investors to monitor banks rigorously -- and several have weakened such private monitoring incentives. Although it is difficult to draw causal inferences from these data, and while there are material cross-country differences in the evolution of regulatory reforms, existing evidence suggests that many countries are making counterproductive changes to their bank regulations by not enhancing the ability and incentives of private investors to scrutinize banks.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Public Sector Corruption&Anticorruption Measures,Emerging Markets
    Date: 2012–12–01
  4. By: Köhler, Matthias
    Abstract: In this paper, we analyze the impact of loan growth and business model on bank risk in 15 EU countries. In contrast to the literature, we include a large number of unlisted banks in our sample which represent the majority of banks in the EU. We show that banks with high rates of loan growth are more risky. Moreover, we find that banks will become more stable if they increase their non-interest income share due to a better diversification of income sources. The effect, however, decreases with bank size possibly because large banks are more active in volatile trading and off-balance sheet activities such as securitization that allow them to increase their leverage. Our results further indicate that banks become more risky if aggregate credit growth is excessive. This even affects those banks that do not exhibit high rates of individual loan growth compared to their competitors. Overall, our results indicate that differences in the lending activities and business models of banks help to identify risks, which would only materialize in the long-term or in the event of a shock. --
    Keywords: banks,risk-taking,business model,loan growth
    JEL: G20 G21 G28
    Date: 2012
  5. By: Gerhard Hambusch (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Sherrill Shaffer (Department of Economics and Finance, University of Wyoming)
    Abstract: Standard early warning models to predict bank failures cannot be estimated during periods of few or zero failures, precluding any updating of such models during times of good performance. Here we address this problem using an alternative approach, forecasting the simple leverage ratio (equity/assets) as a continuous variable that does not suffer from the small sample problem. Out-of-sample performance shows some promise as a supplement to the standard approach, despite measurable deterioration in prediction accuracy during the crisis years.
    Keywords: bank leverage; forecasts; early warning
    JEL: G21
    Date: 2012–12–01
  6. 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 their funding 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.
    Date: 2012
  7. By: Taylor, Alan M.
    Abstract: In broad perspective, there have been essentially two competing views of the global financial crisis, albeit there are some complementarities among them. One view looks across the border: it mainly blames external imbalances, the large-scale mix of unprecedented pattern current account deficits and surpluses which entailed massive and growing net and gross international financial flows in the last decade. The alternative view looks within the border: it finds more fault in the domestic arena of the afflicted countries, attributing the problems to financial systems where risks originated in excessive credit booms in local banks. This paper uses the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. Of the two, the credit boom explanation stands out as the most plausible predictor of financial crises since the dawn of modern finance capitalism in the late nineteenth century. Historically, we find that global imbalances are not as important as a factor in financial crises as is often perceived, and they have much less correlation with subsequent episodes of financial distress compared to direct indicators like credit drawn from the financial system itself.
    Keywords: credit booms; external imbalances; financial crises
    JEL: E3 E4 E5 F3 F4 N1
    Date: 2012–12
  8. By: Anginer, Deniz; Demirguc-Kunt, Asli; Zhu, Min
    Abstract: Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks, which leads to excessive risk-taking. This paper examines the relation between deposit insurance and bank risk and systemic fragility in the years leading to and during the recent financial crisis. It finds that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. The findings suggest that the"moral hazard effect"of deposit insurance dominates in good times while the"stabilization effect"of deposit insurance dominates in turbulent times. Nevertheless, the overall effect of deposit insurance over the full sample remains negative since the destabilizing effect during normal times is greater in magnitude compared with the stabilizing effect during global turbulence. In addition, the analysis finds that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.
    Keywords: Banks&Banking Reform,Debt Markets,Deposit Insurance,Emerging Markets,Bankruptcy and Resolution of Financial Distress
    Date: 2012–12–01
  9. By: Allen, Franklin; Demirguc-Kunt, Asli; Klapper, Leora; Peria, Maria Soledad Martinez
    Abstract: Financial inclusion -- defined here as the use of formal accounts -- can bring many welfare benefits to individuals. Yet we know very little about the factors underpinning financial inclusion across individuals and countries. Using data for 123 countries and over 124,000 individuals, this paper tries to understand the individual and country characteristics associated with the use of formal accounts and what policies are effective among those most likely to be excluded: the poor and rural residents. The authors find that greater ownership and use of accounts is associated with a better enabling environment for accessing financial services, such as lower account costs and greater proximity to financial intermediaries. Policies targeted to promote inclusion -- such as requiring banks to offer basic or low-fee accounts, exempting some depositors from onerous documentation requirements, allowing correspondent banking, and using bank accounts to make government payments -- are especially effective among those most likely to be excluded. Finally, the authors study the factors associated with perceived barriers to account ownership among those who are financially excluded and find that these individuals report lower barriers in countries with lower costs of accounts and greater penetration of financial service providers. Overall, the results suggest that policies to reduce barriers to financial inclusion may expand the pool of eligible account users and encourage existing account holders to use their accounts to save and with greater frequency.
    Keywords: Access to Finance,Banks&Banking Reform,Emerging Markets,Debt Markets,Economic Theory&Research
    Date: 2012–12–01
  10. By: Claudio Borio
    Abstract: It is high time we rediscovered the role of the financial cycle in macroeconomics. In the environment that has prevailed for at least three decades now, it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle. This calls for a rethink of modelling strategies and for significant adjustments to macroeconomic policies. This essay highlights the stylised empirical features of the financial cycle, conjectures as to what it may take to model it satisfactorily, and considers its policy implications. In the discussion of policy, the essay pays special attention to the bust phase, which is less well explored and raises much more controversial issues.
    Keywords: financial cycle, business cycle, medium term, financial crises, monetary economy, balance sheet recessions, balance sheet repair
    Date: 2012–12
  11. By: Carolina Laureti; Ariane Szafarz
    Abstract: This paper starts from a puzzle. On the one hand, the literature documents that a large proportion of poor people are ready to forgo interest on rigid – or commitment – savings accounts to discipline their future selves. On the other, our stylized facts from Bangladesh show that microfinance institutions pay a premium on commitment savings with respect to flexible savings. To address this puzzle, we build an equilibrium model in which a monopolistic bank offers flexible and commitment savings accounts to both rational and time-inconsistent agents. Two factors concur to explain why the bank may find it optimal to pay a commitment premium even though time-inconsistent savers do not necessarily demand one. First, the bank needs commitment accounts to meet its reserve requirements. Second, it cannot segment its clientele ex ante, and rational savers demand compensation for commitment. Last, we discuss the consequences of our findings from a regulatory perspective.
    Keywords: Savings; banks; microfinance; commitment; flexibility; present-bias; hyperbolic discounting; Bangladesh
    JEL: D82 D91 G21 O12
    Date: 2012–12–06
  12. By: Oren Levintal (Bar-Ilan University)
    Abstract: This paper explains the emergence of liquidity traps in the aftermath of large-scale financial crises, as happened in the US 1930s, Japan 1990s and recently in the US and Europe. The paper introduces a new balance sheet channel that links equity capital to the risk-free interest rate. When equity capital falls, bankruptcy risks rise. Firms become more vulnerable to external shocks, which makes financial disasters more likely to happen. Consequently, demand for safe assets increases, and the interest rate falls to the lower bound. Simulations show that the interest rate may stay at the lower bound for a long time.
    Keywords: liquidity trap, financial crisis, rare disasters, equity capital, leverage, bankruptcy risk.
    JEL: E32 E43 E44 E52 G12 G32
    Date: 2012–05
  13. By: Ricardo Correa; Horacio Sapriza; Andrei Zlate
    Abstract: This paper documents a new type of cross-border bank lending channel. The deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States. In this period, some of the U.S. branches of European banks faced a dollar liquidity shock—due to their perceived risk reflecting the sovereign risk of their countries of origin—which in turn affected the branches’ lending to U.S. entities. We use a novel dataset to analyze the operations of branches of foreign banks in the United States. Our results show that: (1) The U.S. branches of European banks experienced a run on their deposits, mainly from U.S. money market funds. (2) The branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices. (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to U.S. funding, such branches reduced their lending to U.S. entities.
    Date: 2012
  14. By: Michele Manna (Bank of Italy); Alessandro Schiavone (Bank of Italy)
    Abstract: In this paper we conduct a simulation run on a sample of Italian banks where a trigger shock, a one-off event fairly large in size, spreads through the interbank network in a set-up featuring among the actors both commercial banks and the authorities. The banks deleverage to comply with a regulatory capital (leverage) ratio, roll off interbank loans, bid for central bank liquidity, seek help within their own group and dispose of assets. As the shock spreads, borrowers who lack liquid assets may be forced to undertake fire sales, letting their capital position deteriorate. A vicious circle arises in which capital and liquidity risks amplify the crisis. When authorities intervene, unconventional monetary policies smooth the contagion over but these measures become less effective when the shock is very large, when the situation is best addressed by policies aiming at strengthening banksÂ’ capital. In a theoretical scenario, in which authorities do not enact specific measures, a small fraction of the banking system (in terms of total assets) may be in default at the end of the simulation, while a larger share of banks would need to be recapitalized.
    Keywords: banking crises, contagion, leverage, interbank market, central bank operations
    JEL: E58 G01 G21 G28
    Date: 2012–11
  15. By: Matros, Philipp; Vilsmeier, Johannes
    Abstract: We estimate time series of option implied Probabilities of Default (PoDs) for 19 major US financial institutions from 2002 to 2012. These PoDs are estimated as mass points of entropy based risk neutral densities and subsequently corrected for maturity dependence. The obtained time series are evaluated with regard to their consistency and predictive power and their properties are compared to Credit Default Swap Spreads (CDS). Moreover, we also derive an indicator for the systemic risk in the US financial sector. We find that the PoDs are superior to CDS in identifying the high risk banks prior to the Lehman crisis. --
    Keywords: Entropy Principle,Risk Neutral Density,Probability of Default,Financial Stability Indicator,Credit Default Swaps
    JEL: C14 C32 G01 G21
    Date: 2012
  16. By: Degryse, Hans; Ioannidou, Vasso; von Schedvin, Erik
    Abstract: Credit contracts are non-exclusive. A string of theoretical papers shows that nonexclusivity generates important negative contractual externalities. Employing a unique dataset, we identify how the contractual externality stemming from the non-exclusivity of credit contracts affects credit supply. In particular, using internal information on a creditor’s willingness to lend, we find that a creditor reduces its loan supply when a borrower initiates a loan at another creditor. Consistent with the theoretical literature on contractual externalities, the effect is more pronounced the larger the loans from the other creditor. We also find that the initial creditor’s willingness to lend does not change if its existing and future loans retain seniority over the other creditors’ loans and are secured with assets whose value is high and stable over time.
    Keywords: contractual externalities; credit supply; debt seniority; non-exclusivity
    JEL: G21 G34 L13 L14
    Date: 2012–12
  17. By: David ARISTEI; Manuela Gallo
    Abstract: In this paper we use a Markov-switching vector autoregressive model to analyse the interest rate pass-through between interbank and retail bank interest rates in the Euro area. Empirical results, based on monthly data for the period 2003-2011, show that during periods of financial distress bank lending rates to both households and non-financial corporations show a reduction of their degree of pass-through from the interbank rate. Interest rates on loans to non-financial firms are found to be more affected by changes in the interbank rate than loans to households, both in times of high volatility and in normal market conditions.
    Keywords: Interest rate pass-through, financial crisis, interbank interest rate; loans interest rate; Regime-switching vector autoregressive models; Euro area.
    JEL: C32 E43 E58 G01 G21
    Date: 2012–10–08
  18. By: Schedvin, E.L. von (Tilburg University)
    Abstract: Abstract: This thesis consists of four chapters that empirical explore issues related to bank credit supply, corporate bankruptcy risk, and firms’ leverage decisions. The first chapter explores the role of contractual externalities in loan contracts. The second chapter evaluates the extent trade credit chains between corporate firms lead to propagation of corporate failures. The third chapter explores non-linear relationships between firm failure and leverage, earnings, and liquidity. The final chapter studies the importance of credit supply frictions on corporate capital structure.
    Date: 2012
  19. By: Sara Cecchetti (Bank of Italy); Giovanna Nappo (Sapienza, University of Rome)
    Abstract: We develop a dynamic multivariate default model for a portfolio of credit-risky assets in which default times are modelled as random variables with possibly different marginal distributions, and Lévy subordinators are used to model the dependence among default times. In particular, we define a cumulative dynamic hazard process as a Lévy subordinator, which allows for jumps and induces positive probabilities of joint defaults. We allow the main asset classes in the portfolio to have different cumulative default probabilities and corresponding different cumulative hazard processes. Under this heterogeneous assumption we compute the portfolio loss distribution in closed form. Using an approximation of the loss distribution, we calibrate the model to the tranches of the iTraxx Europe. Once the multivariate default distribution has been estimated, we analyse the distress dependence in the portfolio by computing indicators of systemic risk, such as the Stability Index, the Distress Dependence Matrix and the Probability of Cascade Effects.
    Keywords: Lévy subordinators, joint default probability, copula
    JEL: B26 C02 C53
    Date: 2012–11
  20. By: Durand, Philippe; Gündüz, Yalin; Thomazeau, Isabelle
    Abstract: We distinguish exogenous liquidity, which corresponds to the variability of bid-ask spreads for usual-sized transactions, from endogenous liquidity, which we interpret as the impact of liquidity on market prices when liquidating larger positions. Endogenous liquidity measures the risk that the realized price of a transaction may be different from the price before the transaction. We apply an endogenous liquidity-based model to order books and credit default swap (CDS) transactions in order to understand two different phenomena. An order book of equity prices has been utilized so as to reveal any 'not yet realized' endogenous liquidity effects, i.e. any effects that become real if a new order is executed. Our results indicate that measuring the impact of the endogenous liquidity on the valuation of the portfolio is quite realistic. Second, we apply our model to a set of CDS transactions in order to find a 'realized' endogenous liquidity component. We conclude that a realized systemic component is not present in realized CDS transactions, probably due to placing of iceberg orders, simply by slicing the large transactions into several small pieces to avoid liquidity constraints: Traders know perfectly where endogenous liquidity starts when they execute their transactions. --
    Keywords: Endogenous Liquidity,Volume Effect,Credit Default Swaps,Order Book
    JEL: G12
    Date: 2012
  21. By: Jakob Kapeller (University of Linz, Linz, Austria); Bernhard Schütz (Department of Economics, University of Linz, Linz, Austria)
    Abstract: This paper reflects on the development leading to the recent crisis and interprets this development as a series of events within a Minsky-Veblen Cycle. To illustrate this claim we introduce conspicuous consumption concerns, as described by Veblen, into a stock flow consistent Post Keynesian model and demonstrate that, under these conditions, a decrease in income equality leads to a corresponding increase in debt-financed consumption demand. Here Minskyian dynamics come into play: increased credit demand leads to a corresponding rise in credit supply, which, eventually, gives rise to a debt-financed consumption boom. As the solvency of households decreases and interest rates move up, banks reduce lending, triggering household bankruptcies and, finally, a recession. What follows is a stable period of consolidation, where past debts are repaid, financial stability is regained and conspicuous consumption motives may gradually take over again. We illustrate this approach to the current crisis and its explanatory validity by extending our stock-flow consistent model into a dynamic simulation.
    JEL: B52 D11 E12 E20 G01
    Date: 2012–12
  22. By: Gick, Wolfgang; Pausch, Thilo
    Abstract: The game-theoretical analysis of this paper shows that stress tests that cover the entire banking sector (macro stress tests) can be performed by institutional supervisors to improve welfare. In a multi-receiver framework of Bayesian persuasion we show that a banking authority can create value when committing to disclose the stress-testing methodology (signal-generating process) together with the stress test result (signal). Disclosing two pieces of information is a typical procedure used in stress tests. By optimally choosing these two signals, supervisors can deliver superior information to prudent investors and enhance welfare. The paper offers a new theory to explain why stress tests are generally welfare enhancing. We also offer a treatment of the borderline case where the banking sector is hit by a crisis, in which case the supervisor will optimally disclose an uninformative signal. --
    Keywords: Stress Tests,Supervisory Information,Bayesian Persuasion,Multiple Receivers,Disclosure
    JEL: D81 D83 G28
    Date: 2012
  23. By: Oz Shy
    Abstract: In October 2011, new rules governing debit card interchange fees became effective in the United States. These rules limit the maximum permissible interchange fee that an issuer can charge merchants for a debit card transaction. This paper provides simple calculations that identify the transaction values for which merchants pay higher and lower interchange fees under the new rules. The paper then uses new data from the Boston Fed’s 2010 and 2011 Diary of Consumer Payment Choice to identify the types of merchants who are likely to pay higher and lower interchange fees under the new rules.
    Keywords: Interchange fees (Banking) ; Debit cards
    Date: 2012

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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