New Economics Papers
on Banking
Issue of 2013‒01‒19
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Incentive audits : a new approach to financial regulation By Cihak, Martin; Demirguc-Kunt, Asli; Johnston, R. Barry
  2. Why Did Holdings of Highly-Rated Securitization Tranches Differ So Much across Banks? By Erel, Isil; Nadauld, Taylor; Stulz, Rene M.
  3. Has the Basel Accord Improved Risk Management During the Global Financial Crisis? By Michael McAleer; Juan-Ángel Jiménez-Martín; Teodosio Pérez-Amaral
  4. Shadow Banking: An Exploratory Study for the Netherlands By Menno Broos; Krit Carlier; Jan Kakes; Eric Klaaijsen
  5. Risk Shocks By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  6. Financial stress index: a lens for supervising the financial system By Timothy Bianco; Dieter Gramlich; Mikhail V. Oet; Stephen J. Ong
  7. Leverage Restrictions in a Business Cycle Model By Lawrence Christiano; Daisuke Ikeda
  8. The Impact of the LCR on the Interbank Money Market By Clemens Bonner; Sylvester Eijffinger
  9. Contagious Bank Runs: Experimental Evidence By Martin Brown; Stefan Trautmann; Razvan Vlahu
  10. Globalized Banking Sectors: Features and Policy Implications amidst Global Uncertainties By Siregar, Reza
  11. Market Discipline during Crisis: Evidence from Bank Depositors in Transition Countries By Hasan, Iftekhar; Jackowicz, Krzysztof; Kowalewski, Oskar; Kozłowski, Łukasz
  12. Sovereign Default, Domestic Banks, and Financial Institutions By Nicola Gennaioli; Alberto Martin; Stefano Rossi
  13. Take the money and run: making profits by paying borrowers to stay home By G. Coco; D. De Meza; G. Pignataro; F. Reito
  14. News and Financial Intermediation in Aggregate and Sectoral Fluctuations By Christoph Gortz; John D Tsoukalas
  15. The Mexican Experience in How the Settlement of Large Payments is Performed in the Presence of a High Volume of Small Payments By Biliana Alexandrova-Kabadjova; Francisco Solís-Robleda
  16. House Prices, Consumption and the Role of Non-Mortgage Debt By Katya Kartashova; Ben Tomlin

  1. By: Cihak, Martin; Demirguc-Kunt, Asli; Johnston, R. Barry
    Abstract: A large body of evidence points to misaligned incentives as having a key role in the run-up to the global financial crisis. These include bank managers'incentives to boost short-term profits and create banks that are"too big to fail,"regulators'incentives to forebear and withhold information from other regulators in stressful times, and credit rating agencies'incentives to keep issuing high ratings for subprime assets. As part of the response to the crisis, policymakers and regulators also attempted to address some incentive issues, but various outside observers have criticized the response for being insufficient. This paper proposes a pragmatic approach to re-orienting financial regulation to have at its core the objective of addressing incentives on an ongoing basis. Specifically, the paper proposes"incentive audits"as a tool that could help in identifying incentive misalignments in the financial sector. The paper illustrates how such audits could be implemented in practice, and what the implications would be for the design of policies and frameworks to mitigate systemic risks.
    Keywords: Banks&Banking Reform,Debt Markets,Emerging Markets,Labor Policies,Insurance&Risk Mitigation
    Date: 2013–01–01
  2. By: Erel, Isil (OH State University); Nadauld, Taylor (Brigham Young University); Stulz, Rene M. (OH State University and European Corporate Governance Institute)
    Abstract: We provide estimates of holdings of highly-rated securitization tranches of American bank holding companies ahead of the credit crisis and evaluate hypotheses that have been advanced to explain these holdings. Our broadest estimates include CDOs as well as holdings in off-balance-sheet conduits. While holdings exceeded Tier 1 capital for some large banks, they were economically trivial for the typical U.S. bank. The banks with high holdings were not riskier before the crisis using conventional measures, but their performance was poorer during the crisis. We find that holdings of highly-rated tranches are explained by a bank's securitization activity. Theories of highly-rated tranches that are unrelated to a bank's securitization activity, such as "bad incentives," "bad governance," or "bad risk management" theories, have no support in the data.
    JEL: G01 G21
    Date: 2012–12
  3. By: Michael McAleer (Erasmus University Rotterdam); Juan-Ángel Jiménez-Martín (Complutense University of Madrid); Teodosio Pérez-Amaral (Complutense University of Madrid)
    Abstract: The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index.
    Keywords: Value-at-Risk (VaR); daily capital charges; violation penalties; optimizing strategy; risk forecasts; aggressive or conservative risk management strategies; Basel Accord; global financial crisis
    JEL: G32 G11 G17 C53 C22
    Date: 2013–01–08
  4. By: Menno Broos; Krit Carlier; Jan Kakes; Eric Klaaijsen
    Abstract: When the financial crisis erupted in 2007, it quickly became clear that many vulnerabilities had built up in the system, unnoticed by the financial authorities. Assets that had been considered safe proved to be risky and illiquid, the level and spread of risks were unclear and many market parties suddenly became aware of the enormous leverage within the system. When these vulnerabilities emerged, they proved difficult to control using the available crisis management tools. Much of the credit intermediation process had shifted to non-bank entities and had become fragmented across different jurisdictions. While this ‘shadow banking system’ was not the immediate cause of the crisis, it underpinned the build-up of vulnerabilities and reduced the scope for effective intervention.
    Date: 2012–11
  5. By: Lawrence Christiano; Roberto Motto; Massimo Rostagno
    Abstract: We augment a standard monetary DSGE model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate over time. We refer to this measure of volatility as 'risk'. We find that fluctuations in risk are the most important shock driving the business cycle.
    JEL: E2 E3 E44
    Date: 2013–01
  6. By: Timothy Bianco; Dieter Gramlich; Mikhail V. Oet; Stephen J. Ong
    Abstract: This paper develops a new financial stress measure (Cleveland Financial Stress Index, CFSI) that considers the supervisory objective of identifying risks to the stability of the financial system. The index provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The construction methodology uses daily public market data collected from different sectors of financial markets. A unique feature of the index is that it employs a dynamic weighting method that captures the changing relative importance of the different sectors of the financial system. This study shows how the index can be applied to monitoring and analyzing financial system conditions.
    Keywords: Financial markets ; Time-series analysis ; Interest rates ; Business cycles ; Econometric models
    Date: 2012
  7. By: Lawrence Christiano; Daisuke Ikeda
    Abstract: We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic effects of placing leverage restrictions on financial intermediaries. The financial intermediaries ('bankers') in the model must exert effort in order to earn high returns for their creditors. An agency problem arises because banker effort is not observable to creditors. The consequence of this agency problem is that leverage restrictions on banks generate a very substantial welfare gain in steady state. We discuss the economics of this gain. As a way of testing the model, we explore its implications for the dynamic effects of shocks.
    JEL: E44 E5 E52
    Date: 2013–01
  8. By: Clemens Bonner; Sylvester Eijffinger
    Abstract: This paper analyzes the impact of a liquidity requirement similar to the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets of Dutch banks from 2005 to 2011, we show that banks which are just above/below their short-term regulatory liquidity requirement pay and charge higher interest rates for unsecured interbank loans. The effect is larger for maturities longer than the liquidity requirement’s 30 day horizon. Being close to the minimum liquidity requirement induces banks to increase borrowing volumes in general while it only decreases lending volumes for maturities longer than 30 days. These results also hold when controlling for an institution’s riskiness, the solvency of its counterparts, relationship-lending and period-specific effects.
    Keywords: Monetary Policy; Liquidity; Interbank Market; Basel 3
    JEL: G18 G21 E42
    Date: 2012–12
  9. By: Martin Brown; Stefan Trautmann; Razvan Vlahu
    Abstract: We conduct a laboratory experiment to examine under which circumstances a depositor-run at one bank may lead to a depositor-run at another bank. We implement two-person coordination games which capture the essence of the Diamond-Dybvig (1983) bank-run model. Subjects in the roles of followers observe the deposit withdrawal decisions of leaders before they make their own deposit withdrawal decisions. In one treatment followers know that there are no economic linkages between the leaders’ and the followers’ banks. In a second treatment followers know that there are economic linkages between the leaders’ and the followers’ banks. Our results suggest that deposit withdrawals are strongly contagious across banks only when depositors know that there are economic linkages between banks. The contagion of withdrawals is by a change in beliefs about bank asset quality and in beliefs about the behavior of other depositors, with the latter channel being more pronounced. Our results reconcile panic-based and information-based explanations of bank runs.
    Keywords: Contagion; Bank runs; Systemic risk
    JEL: D81 G21 G28
    Date: 2012–12
  10. By: Siregar, Reza
    Abstract: Amidst the global financial uncertainties since 2007, the East and Southeast Asian economies continued to attract a significant bulk of the global banks’ loans to emerging markets, albeit at a decelerating rate. The alleged advantages of these lending are wellknown. Yet the recent interruption to this spectacular rise in international bank lending during the 2007/2008 global financial crisis serves as a stark reminder that international bank lending can rapidly transmit adverse shocks from developed markets to emerging markets. The objective of this study is to identify key features and characteristics of foreign banks’ activities in East and Southeast Asian economies, particularly during the post 2007 global financial crisis period, and to weigh their implications on the local economies, including policy challenges for the central banks and banking supervisors in the region.
    Keywords: Foreign Banks; Interconnectedness; Financial Stability; Branch; Subsidiary; Financial Crisis
    JEL: F34 G15 C23 N25 F36
    Date: 2013–01–10
  11. By: Hasan, Iftekhar; Jackowicz, Krzysztof; Kowalewski, Oskar; Kozłowski, Łukasz
    Abstract: The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in worse financial conditions than their subsidiaries. This situation created a unique opportunity to study new aspects of depositor discipline. In this article, we investigate whether depositors flexibly accommodated to the changing sources of risk. We also analyse the informational foundations of depositors’ decisions. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were much more strongly influenced by press rumours concerning parent companies than by fundamentals, and that the impact of rumours on deposit growth rates was highly economically significant. Additionally, we document that public aid announcements were interpreted by depositors primarily as a confirmation of a parent company’s financial distress. Our results have important policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies.
    Keywords: depositor behaviour; market discipline; crisis; emerging markets
    JEL: G28 G21
    Date: 2012–07–13
  12. By: Nicola Gennaioli; Alberto Martin; Stefano Rossi
    Abstract: We present a model of sovereign debt in which, contrary to conventional wisdom, government defaults are costly because they destroy the balance sheets of domestic banks. In our model, better financial institutions allow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults. Our predictions: government defaults should lead to declines in private credit, and these declines should be larger in countries where financial institutions are more developed and banks hold more government bonds. In these same countries, government defaults should be less likely. Using a large panel of countries, we find evidence consistent with these predictions. JEL classification: F34, F36, G15, H63. Keywords: Sovereign Risk, Capital Flows, Institutions, Financial Liberalization, Sudden Stops
    Date: 2012
  13. By: G. Coco; D. De Meza; G. Pignataro; F. Reito
    Abstract: Can a bank increase its profit by subsidizing inactivity? This paper suggests this may occur, due to the presence of hidden information, in a monopolistic credit market. Rather than offering credit in a pooling contract, a monopolist bank can sort borrowers through an appropriate subsidy to inactivity. Under some conditions, sorting may avoid the collapse of the market and increases the welfare of everybody. The bank increases its profits, good borrowers benefit from lower interest rates and bad potential borrowers from the subsidy. The subsidy policy however implies a cross subsidy between contracts and this is possible only under monopoly.
    JEL: D60 D82 H71
    Date: 2013–01
  14. By: Christoph Gortz; John D Tsoukalas
    Abstract: We estimate a two-sector DSGE model with financial intermediaries - a-la Gertler and Karadi (2011) and Gertler and Kiyotaki (2010) - and quantify the importance of news shocks in accounting for aggregate and sectoral fluctuations. Our results indicate a significant role of financial market news as a predictive force behind fluctuations. Specifically, news about the value of assets held by financial intermediaries, reflected one to two years in advance in corporate bond markets, generate countercyclical corporate bonds spreads, affect the supply of credit, and are estimated to be a significant source of aggregate fluctuations, accounting for approximately 31% of output, 22% of investment and 31% of hours worked variation in cyclical frequencies. Importantly, asset value news shocks generate both aggregate and sectoral co-movement with a standard preference specification. Financial intermediation is key for importance and propagation of asset value news shocks.
    Keywords: News, Financial intermediation, Business Cycles, DSGE, Bayesian estimation
    JEL: E2 E3
    Date: 2012–07
  15. By: Biliana Alexandrova-Kabadjova; Francisco Solís-Robleda
    Abstract: Payment systems play a key role in the financial infrastructure of all modern economies. Participants of payment systems need access to intraday liquidity to fulfill their payment obligations. They do that either using their own funds, which are costly, or recycling incoming payment. In order to rely on incoming payments, banks could delay the settlement of their own payment obligations. From the regulators’ point of view it is important to know to what degree participants rely on the payments they receive from others. In Mexico, this is among the first studies that analyze from this perspective the intraday liquidity management of the Real Time Settlement Payment System, SPEI. We examine a data set of transactions from April 7 to May 7, 2010 in order to get insights of the participants’ behavior regarding the delay of sending payment orders.
    Keywords: Payment systems, intraday liquidity management, simulation.
    JEL: C63 G20 G28
    Date: 2012–12
  16. By: Katya Kartashova; Ben Tomlin
    Abstract: This paper examines the relationship between house prices and consumption, through the use of debt. Using unique Canadian household-level data that reports the uses of debt, we begin by looking at the relationship between house prices and debt. Using quantile regression, we find a positive and significant relationship between regional house prices and total household debt all along the conditional debt distribution. This suggests that the household-level relationship between house prices and debt goes beyond the purchase of real estate. We then find a positive relationship between house prices and non-mortgage debt (the sum of secured lines of credit, unsecured lines of credit, leases and other consumer loans, except for credit cards) for homeowners. Combining these results with the reported uses of non-mortgage debt allows us to connect house prices and nonhousing consumption - this connection is new to the literature on house prices and consumption. We conclude that the increases in house prices over the 1999-2007 period were, indeed, associated with an increase in non-mortgage debt and non-housing consumption. Our results can be thought of as the establishment of a conservative lower bound for the overall relationship between house prices and aggregate consumption.
    Keywords: Credit and credit aggregates; Domestic demand and components
    JEL: E21 D10 D14 D31
    Date: 2013

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.