New Economics Papers
on Banking
Issue of 2013‒01‒12
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Liquidity risk in banking: is there herding? By Diana Bonfim; Moshe Kim
  2. Systemic Risk Analysis using Forward-Looking Distance-to-Default Series By Martín Saldías
  3. Liquidity Crises, Banking, and the Great Recession By Radde, Sören
  4. Asymmetric Information in Credit Markets, Bank Leverage Cycles and Macroeconomic Dynamics By Rannenberg, Ansgar
  5. Atypical Behavior of Money and Credit: Evidence From Conditional Forecasts By Afanasyeva, Elena
  6. Dual liquidity crises under alternative monetary frameworks By Winkler, Adalbert; Bindseil, Ulrich
  7. Bank size and lending specialization By Diana Bonfim; Qinglei Dai
  8. How can banks effectively stabilize their retail customers saving behavior? The impact of contractual rewards on saving persistence and cash flow volatility By Schlüter, Tobias; Sievers, Sönke; Hartmann-Wendels, Thomas
  9. Enforcement actions and bank behavior By Delis, Manthos D; Staikouras, Panagiotis; Tsoumas, Chris
  10. Abolishing Public Guarantees in the Absence of Market Discipline By Schnabel, Isabel; Körner, Tobias
  11. The causal effect of restrictive bank lending on employment growth: A matching approach By Kleemann, Michael; Wiegand, Manuel
  12. Basel III and CEO compensation: a new regulation attempt after the crisis By Eufinger, Christian; Gill, Andrej
  13. A Mechanism for Booms and Busts in Housing Prices By Hillebrand, Marten; Kikuchi, Tomoo
  14. Political Economy of Banking Regulation By Buck, Florian; Schliephake, Eva
  15. Review of Theories of Financial Crises By Itay Goldstein; Assaf Razin
  16. On Infectious Model for Dependent Defaults By Jia-Wen Gu; Wai-Ki Ching; Tak-Kuen Siu; Harry Zheng

  1. By: Diana Bonfim; Moshe Kim
    Abstract: <div align="left">Banks individually optimize their liquidity risk management, often neglecting the externalities generated by their choices on the overall risk of the financial system. This is the main argument to support the regulation of liquidity risk. However, there may be incentives, related for instance to the role of the lender of last resort, for banks to optimize their choices not strictly at the individual level, but engaging instead in collective risk taking strategies, which may intensify systemic risk. In this paper we look for evidence of such herding behaviors, with an emphasis on the period preceding the global financial crisis. Herding is significant only among the largest banks, after adequately controlling for relevant endogeneity problems associated with the estimation of peer effects. This result suggests that the regulation of systemically important financial institutions may play an important role in mitigating this specific component of liquidity risk.
    JEL: G21 G28
    Date: 2012
  2. By: Martín Saldías
    Abstract: Based on Contingent Claims Analysis, this paper develops a method to monitor systemic risk in the European banking system. Aggregated Distance-to-Default series are generated using option prices information from systemically important banks and the STOXX Europe 600 Banks Index. These indicators provide methodological advantages in monitoring vulnerabilities in the banking system over time: 1) they<br />capture interdependences and joint risk of distress in systemically important banks; 2) their forward-looking feature endow them with early signaling properties compared to traditional approaches in the literature and other market-based indicators; 3) they produce simultaneously smooth and informative long-term signals and quick and clear reaction to market distress and 4) they incorporate additional information through option prices about tail risk and correlation breaks, in line with recent findings in the literature.
    JEL: G01 G12 G21
    Date: 2012
  3. By: Radde, Sören
    Abstract: This paper presents a dynamic stochastic general equilibrium model which studies the business-cycle implications of financial frictions and liquidity risk at the bank-level. Following Holmstr m and Tirole (1998), demand for liquidity reserves arises from the anticipation of idiosyncratic operating expenses during the execution phase of bank-financed investment projects. Banks react to adverse aggregate shocks by hoarding liquidity while being forced to decrease their leverage. Both effects amplify recessionary dynamics, since they crowd out funds available for investment financing. This mechanism is triggered by a market liquidity squeeze modelled as a shock to the collateral value of banks assets. This novel type of aggregate risk induces a credit crunch scenario which shares key features with the Great Recession such as strong output decline, pro-cyclical leverage and counter-cyclical liquidity hoarding. Unconventional credit policy in the form of a wealth transfer from households to credit constrained banks is shown to mitigate the credit crunch. --
    JEL: E22 E32 E44
    Date: 2012
  4. By: Rannenberg, Ansgar
    Abstract: I add a moral hazard problem between banks and depositors as in Gertler and Karadi (2009) to a DSGE model with a costly state verification problem between entrepreneurs and banks as in Bernanke et al. (1999) (BGG). This modification amplifies the response of the external finance premium and the overall economy to monetary policy and productivity shocks. It allows my model to match the volatility and correlation with output of the external finance premium, bank leverage, entrepreneurial leverage and other variables in US data better than a BGG-type model. A reasonably calibrated combination of balance sheet shocks produces a downturn of a magnitude similar to the "Great Recession". --
    JEL: E20 E44 E30
    Date: 2012
  5. By: Afanasyeva, Elena
    Abstract: Great Recession 2007-2008 has revived interest to quantity aggregates (money and credit) and their role as indicators of financial instability for monetary and macroprudential policy. However, many of the previous empirical studies inspecting indicator properties used univariate methods and did not explicitly account for endogenous interactions of variables. We use a multivariate approach (Bayesian VAR) to detect periods of atypical behavior in money and credit in the US and in Euro Area. We find that atypical behavior of these variables is associated with periods of financial distress and (or) banking crises in the US. Moreover, we detect an unsustained credit boom prior to the Great Recession in both Euro Area and in the US. There is a link between this boom and the short-term interest rates in both regions: conditioning on the short-term interest rates substantially reduces the degree of atypical expansionary behavior of money and credit in 2003-2007. --
    JEL: E47 E51 E32
    Date: 2012
  6. By: Winkler, Adalbert; Bindseil, Ulrich
    Abstract: In a dual liquidity crisis, both the government and the banking sector are under severe funding stress. By nature, dual crises have the potential of being particularly disruptive and damaging. Thus, understanding their mechanics, how they unfold and how they can be addressed under various monetary and international financial regimes, is crucial. We capture the logic of a dual crisis through a new, rigorous approach. A closed system of financial accounts allows for a systematic comparative review of underlying liquidity shocks as well as built-in liquidity buffers, including their limits beyond which a credit crunch materializes. Based on this we are able to (i) make precise the otherwise vague interpretations of liquidity flows and policy options; (ii) compare capacities to absorb shocks under alternative international financial systems; (iii) explain how various constraints interact; (iv) draw lessons for achieving higher resilience against self-fulfilling confidence crises. Most importantly, we analyze the role of a number of potential constraints to an elastic central bank liquidity provision, namely the availability of central bank eligible assets, limits deliberately imposed on the central bank`s ability to lend to or purchase assets of banks and governments (including monetary financing prohibitions), and limits in a fixed exchange rate regime relating to the gold or foreign currency reserves of the central bank. --
    JEL: E50 E58 E42
    Date: 2012
  7. By: Diana Bonfim; Qinglei Dai
    Abstract: <div align="left">Using micro-level data on the entire population of business loans of a bank-based economy, we empirically test some of the core predictions of the SME financing literature, examining banks’ lending specializations in firm size and lending technologies. Rejecting the conventional belief that smaller banks focus more on relationship loans than do larger banks, we find that banks of different sizes dedicate similar proportions of loans to relationship lending. However, supporting the SME finance theories on the organizational advantages of small banks, we find that smaller banks provide more access to relationship loans to small firms, though such loans are usually more expensive.
    JEL: G21 G30
    Date: 2012
  8. By: Schlüter, Tobias; Sievers, Sönke; Hartmann-Wendels, Thomas
    Abstract: We examine the saving behavior of banks retail customers. Our unique dataset comprises the contract and cash flow information for approximately 2.2 million individual contracts from 1991 to 2010. We find that contractual rewards, i.e., qualified interest payments, and government subsidies, effectively stabilize saving behavior. The probability of an early contract termination decreases by approximately 40%, and cash flow volatility drops by about 25%. Our findings provide important insights for the newly proposed bank liquidity regulations (Basel III) regarding the stability of deposits and the minimum requirements for risk management (European Commission DIRECTIVE 2006/48/EC; in Germany, translated into the MaRisk). Finally, the results inform bank managers how the price setting via deposit interests influences their funding. --
    JEL: G01 G21 G28
    Date: 2012
  9. By: Delis, Manthos D; Staikouras, Panagiotis; Tsoumas, Chris
    Abstract: Employing a unique data set for the period 2000-2010, this paper examines the impact of enforcement actions (sanctions) on bank capital, risk, and performance. We find that high risk weighted asset ratios tend to attract supervisory intervention. Sanctions whose cause lies at the core of bank safety and soundness curtail the risk-weighted asset ratio, but amplify the risk of insolvency and returns volatility, which implies that these sanctions do not improve the risk profile of the involved banks, possibly because they come too late. Sanctions targeting internal control and risk management weaknesses appear to be well-timed and to restrain further increases in the risk-weighted assets ratio without impairing bank fundamentals. Sanctions against institution-affiliated parties do not seem to affect bank behavior. We suggest that supervisory attention should be placed on the timely uncovering of internal control and risk management deficiencies as this would allow the early tackling of the origins of financial distress.
    Keywords: Enforcement actions; banking supervision; capital; bank risk; bank performance
    JEL: G28 G21 G01
    Date: 2013–01–04
  10. By: Schnabel, Isabel; Körner, Tobias
    Abstract: This paper shows that the abolition of state guarantees to publicly owned banks in Germany resulted in an increase in refinancing costs at German savings banks. Rather than being the result of increased market discipline, the increase in refinancing costs is shown to be driven by spillover effects from German Landesbanken who themselves had suffered from the abolition of guarantees and who spread their own cost increase through the public banking network. Higher refinancing costs and the resulting drop in bank charter values translated into higher risk-taking at German savings banks. --
    JEL: G21 G28 H11
    Date: 2012
  11. By: Kleemann, Michael; Wiegand, Manuel
    Abstract: Does restrictive bank lending cause lower employment growth at the firm-level or does it reflect firm characteristics that drive the deterioration of employment figures? Applying propensity score matching, we estimate the treatment effect of restrictive bank lending on employment growth. Combining balance sheet information and survey data on a firm's current and expected future business situation, we rule out the impact of firm heterogeneity. We find that credit constraints have a significant negative effect on employment growth. Restricted firms also apply for short-time work more often, but this effect is small and not significant in all estimations.
    Keywords: Credit financing; Employment; Financial crisis; Access to credit
    JEL: J63 G31 G21 G01 J23
    Date: 2013–01–02
  12. By: Eufinger, Christian; Gill, Andrej
    Abstract: The paper analyzes the interaction between an endogenous capital structure and investment decision, and the incentive scheme of bank executives. We show that the implementation of capital requirements, which are contingent on compensation schemes, drive a wedge between the interests of the shareholder and the CEO. This non-alignment can mitigate excessive risk taking. In particular, linking the amount of insured debt to the ratio of fixed and performance based salary encourages first-best outcomes. We derive empirical predictions and policy implications. --
    JEL: G28 G32 G21
    Date: 2012
  13. By: Hillebrand, Marten; Kikuchi, Tomoo
    Abstract: We study an exchange economy with overlapping generations of consumers who derive utility from consuming a non-durable commodity and housing. A banking sector offers loans to finance housing. We provide a complete characterization of the equilibrium dynamics which alternates between an expansive regime where housing prices increase and banks expand loans and a contractive regime associated with decreasing housing values and shrinking credit volume. Regime switches occur even under small but persistent income changes giving rise to large booms and busts in housing prices not reflecting changes in fundamentals. --
    JEL: C62 E32 G21
    Date: 2012
  14. By: Buck, Florian; Schliephake, Eva
    Abstract: The paper argues that national regulators can improve the stability of the domestic banking sector via two substitutable policy instruments; minimum capital requirements and effort spend on domestic supervision. Both tools increase the soundness of a national banking system, but they imply different cost burdens between domestic banks and taxpayers. The optimal domestic policy choice is characterised by trading off marginal costs and benefits born by each party. However, the optimal policy choice changes if banks are allowed to be mobile. We show that countries are better off by harmonising capital requirements on an international standard la Basel, since harmonisation counters a regulatory race with other jurisdictions and will increase national utility. --
    JEL: G18 L51 D78
    Date: 2012
  15. By: Itay Goldstein; Assaf Razin
    Abstract: In this paper, we review three branches of theoretical literature on financial crises. The first one deals with banking crises originating from coordination failures among bank creditors. The second one deals with frictions in credit and interbank markets due to problems of moral hazard and adverse selection. The third one deals with currency crises. We discuss the evolutions of these branches of the literature and how they have been integrated recently to explain the turmoil in the world economy. We discuss the relation of the models to the empirical evidence and their ability to guide policies to avoid or mitigate future crises.
    JEL: E61 F3 F33 G01 G1
    Date: 2013–01
  16. By: Jia-Wen Gu; Wai-Ki Ching; Tak-Kuen Siu; Harry Zheng
    Abstract: In this paper, we propose a two-sector Markovian infectious model, which is an extension of Greenwood's model. The central idea of this model is that the causality of defaults of two sectors is in both direction, which enrich dependence dynamics. The Bayesian Information Criterion is adopted to compare the proposed model with the two-sector model in credit literature using the real data. We find that the newly proposed model is statistically better than the model in past literature. We also introduce two measures: CRES and CRVaR to give risk evaluation of our model.
    Date: 2013–01

This issue is ©2013 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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