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on Banking |
| By: | Scopelliti, Alessandro Diego |
| Abstract: | The present paper analyzes two important aspects in the amplification process of the recent financial crisis to the real economy, that is the securitisation of financial assets (and in particular of loans and mortgages) and the growth of bank off-balance sheet activities, for instance through the development of Special Purpose Vehicles, with specific attention to the US context. In particular, this work aims to examine whether and how the increase in off-balance sheet credit exposure to credit derivatives, mainly due to loan securitisation, may have affected the growth rate of loans over the past few years, also by distinguishing different categories of loans. For this purpose, we present the results of a panel fixed-effect estimation and of a panel VAR analysis, using quarterly data from the balance sheets of 39 US commercial banks and for a period between 1998 and 2008. The results show that a rise in off-balance credit exposure may have – after some time lags - a negative impact on the growth rate of bank lending, due to the potential and actual losses related to the off-balance sheet activities. However, the effects on the single categories of loans depend on their maturity: the negative effect due to an increase in off-balance sheet exposure is stronger for long-term loans, like mortgages or real estate loans, while some positive impact on bank lending may arise for short-term loans, such as commercial and industrial loans, because of the liquidity/maturity transformation function associated with securitisation activities. The results of the paper regarding the impact of an increase in off-balance sheet exposures on bank deleveraging process may have some relevant policy implications for the design of financial regulation, particularly in the area of shadow banking, supporting the current policy initiatives for the revision of risk weights in securitisation exposures as well as for the implementation of consolidation regimes concerning bank off-balance sheet activities. |
| Keywords: | Bank Off-balance Sheet Activities; Securitisation; Shadow Banking; Bank Credit Supply; Panel VAR |
| JEL: | G28 G21 G20 |
| Date: | 2013–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43890&r=ban |
| By: | Lucyna Gornicka (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam) |
| Abstract: | We investigate actual capital chosen by banks in presence of capital minimum requirements and ex-post penalties for violating them. The model yields excess capital that is always positive and increases during times of distress in the economy, which is in line with empirical evidence. Next, we show that in presence of ex-post violation penalties the introduction of the conservation buffer under Basel III will not contribute to lowering the pro-cyclicality of capital regulations. The countercyclical buffer proposed under Basel III is then even more desirable as it significantly attenuates fluctuations of actual capital also when the penalties are accounted for. |
| Keywords: | capital requirements; Basel regulatory framework; excess capital; countercyclical buffer; market discipline |
| JEL: | G21 G28 E32 E44 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130013&r=ban |
| By: | Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam.); Juan-Ángel Jiménez-Martín (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid); Teodosio Pérez Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de 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: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1226&r=ban |
| By: | Jose Berrospide |
| Abstract: | I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the recent financial crisis. I find that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures of banks' on-balance sheet risks, in addition to off-balance sheet liquidity risk stemming from unused loan commitments. Furthermore, unrealized securities losses and loan loss reserves seem to better capture the risks stemming from banks' asset management and provide supporting evidence for the precautionary nature of liquidity hoarding. Moreover, I find that more than one-fourth of the reduction in bank lending during the crisis is due to the precautionary motive. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-03&r=ban |
| By: | Tamon Takamura |
| Abstract: | During the recent financial crisis in the U.S., banks reduced new business lending amidst concerns about borrowers’ ability to repay. At the same time, firms facing higher borrowing costs alongside a worsening economic outlook reduced investment. To explain these aggregate business cycle patterns, I develop a model with households, banks and firms. I assume that a bank’s ability to raise deposits is constrained by a limited commitment problem and that, furthermore, loans to firms involve default risk. In this environment, changes in loan rates affect the size of the business sector. I explore how banks influence the behavior of households and firms and find that both productivity and financial shocks lead to counter-cyclical default and interest rate spreads. I examine the implications of a government capital injection designed to mitigate the effect of negative productivity and financial shocks in the spirit of the Troubled Asset Relief Program (TARP). I find that the stabilizing effect of such policy interventions hinges on the source of the shock. In particular, a capital injection is less effective against aggregate productivity shocks because easing banks’ lending stance only weakly stimulates firms’ demand for loans when aggregate productivity falls. In contrast, a capital injection can counteract the adverse effect of financial shocks on the supply of loans. Finally, I measure aggregate productivity and financial shocks to evaluate the role of each in the business cycle. I find that the contribution of aggregate productivity shocks in aggregate output and investment is large until mid-2008. Financial shocks explain 65% of the fall in investment and 55% of the fall in output in the first quarter of 2009. |
| Keywords: | Business fluctuations and cycles; Economic models; Financial stability |
| JEL: | E32 E44 E69 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-3&r=ban |
| By: | Stephen H. Haber; Aldo Musacchio |
| Abstract: | In 1997, the Mexican government reversed long-standing policies and allowed foreign banks to purchase Mexico’s largest commercial banks and relaxed restrictions on the founding of new, foreign-owned banks. The result has been a dramatic shift in the ownership structure of Mexico’s banks. For instance, while in 1991 only one percent of bank assets in Mexico were foreign owned, today they control 74 percent of assets. In no other country in the world has the penetration of foreign banks been as rapid or as far-reaching as in Mexico. In this work we examine some of the important implications of foreign bank entry for social welfare in Mexico. Did liberalization lead to an increase (or decrease) in the supply of credit? Did liberalization lead to an increase (or decrease) in the cost of credit? Did liberalization lead to an increase (or decrease) in the stability of the banking system? In order to answer these questions, we must first ask, "increase (or decrease), measured on what basis?" There are, in fact, two distinct conceptual frameworks through which one can assess the impact of foreign bank entry. One is concerned with measuring the short-run impacts of foreign entry on credit abundance, pricing, and observable stability using reduced form regressions. The other is an institutional economics conception of how to measure performance. It is focused on understanding whether foreign entry gave rise to difficult-to-reverse changes in the political economy of bank regulation, which will affect competition and stability in the long term, outside the period that may be observed empirically. We employ both conceptions in this paper. |
| JEL: | G18 G21 N26 N46 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18713&r=ban |
| By: | Andreas Fuster; James Vickery |
| Abstract: | Fixed-rate mortgages (FRMs) dominate the U.S. mortgage market, with important consequences for household risk management, monetary policy, and systemic risk. In this paper, we show that securitization is a key driver of FRM supply. Our analysis compares the agency and nonagency mortgage-backed-securities (MBS) markets, exploiting the freeze in nonagency MBS liquidity in the third quarter of 2007. Using exogenous variation in access to the agency MBS market, we find that when both market segments are liquid they perform similarly in terms of supporting FRM supply. However, after the nonagency market freezes, the share of FRMs is sharply higher among mortgages eligible to be securitized through the still-liquid agency MBS market. Our interpretation is that securitization is particularly important for FRMs because of the prepayment and interest rate risk embedded in these loans. We highlight policy implications for ongoing reform of the U.S. mortgage finance system. |
| Keywords: | Mortgages ; Mortgage-backed securities ; Liquidity (Economics) ; Risk management |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:594&r=ban |
| By: | Herrera, Santiago; Youssef, Hoda |
| Abstract: | From 2008 to 2011, Egypt was hit by significant shocks, both global and country-specific. This paper assesses the impact of the resulting macroeconomic instability on the banking sector, and examines its role as a shock absorber. The Central Bank of Egypt accommodated the shocks by supplying liquidity to the market. The paper verifies a change in the fiscal regime from one in which the primary fiscal balance was used an instrument to stabilize the public debt ratio to one in which the policy instrument stopped playing that role and affected investors'assessment of the risk of holding public debt. This pattern suggests that fiscal conditions influenced exchange rate and price expectations originating a fiscal dominance situation in which the Central Bank could not control inflation. Hence, the Central Bank lacked functional independence in spite of its de jure independence, which underscores the importance of strengthening institutions that facilitate policy coordination and allow policy to be more predictable. The government also funds itself through non-market mechanisms, in a typical financial repression scheme. The paper estimates the revenue from financial repression at about 2.5 percent of gross domestic product in 2011, which together with the revenues from seignoriage add up to close to 50 percent of the budgeted tax revenues, indicating the need for an in-depth review of the governance of the public banks and the funding of public sector activities. Finally, the paper estimates the impact of shocks to macroeconomic variables on loan portfolio quality and bank capital. |
| Keywords: | Debt Markets,Banks&Banking Reform,Access to Finance,Economic Theory&Research,Currencies and Exchange Rates |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6314&r=ban |
| By: | Wäckerle, Manuel |
| Abstract: | The complexity of credit money is seen as the central issue in the banking-macro nexus, which the author considers as a structural as well as a process component of the evolving economy. This nexus is significant for the stability/fragility of the economic system because it links the monetary domain with the real domain of economic production and consumption. The evolution of credit rules shapes economic networks between households, firms, banks, governments and central banks in space and time. The author discusses the properties and characteristics of this process in three sections. First, he discusses the origins of the theory of money and its role in contemporary monetary economics. Second, he briefly discusses current theoretical foundations of top-down and bottom-up approaches to the banking-macro nexus, such as DSGE or ABM. Third, he suggests an evolutionary framework, building on the generic-rule based approach, to arrive at standards for bottom-up foundations in agent-based models of the banking-macro nexus. -- |
| Keywords: | 20th century origins of the theory of money,Schumpeterian credit-driven innovation,Post-Keynesian endogenous money,top-down versus bottom-up,evolutionary institutional approach to bank lending,generic credit rules as bottom-up foundations |
| JEL: | E41 G21 B52 B25 C63 E51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20135&r=ban |
| By: | Luca Arciero; Ronald Heijmans; Richard Heuver; Marco Massarenti; Cristina Picillo; Francesco Vacirca |
| Abstract: | This paper develops a methodology, based on Furfine (1999), to identify unsecured interbank money market loans from transaction data of the most important euro processing payment system, TARGET2, for maturity ranging from one day (overnight) up to three months. The implementation has been verified with (i) interbank money market transactions executed on the Italian trading platform e-MID and (ii) aggregated reporting by the EONIA panel banks. The Type 2 (false negative) error for the best performing algorithm setup is equal to 0.92%. The results focus on three levels: Eurosystem, core versus (geographical) periphery and countries (Italy and the Netherlands). The different stages of the global financial crisis and of the sovereign debt crises are clearly visible in the interbank money market, characterised by significant drops in the turnover. We find aggregated interest rates very close to the EONIA but we observe high heterogeneity across countries and market participants. |
| Keywords: | euro interbank money market; Furfine; TARGET2; financial stability; EONIA |
| JEL: | E42 E44 E58 G01 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:369&r=ban |
| By: | Janda, Karel; Zetek, Pavel |
| Abstract: | This paper examines the main risk management opportunities and threats, which microfinance institutions (MFIs) are exposed to. Awareness and understanding of these indicators can make the evolution of microfinance more accurate and simultaneously can help to locate the microfinance market in the broader picture of economic development. Growing competition improves the current situation for borrowers, because it leads to acceptable interest rates policy and expansion of existing microfinance services. At the same time, intense competition may represent threats, if the rules of regulation and supervision are not properly set. In this regard, we believe that the future of microfinance will significantly depend on the linkage between MFIs and financial markets, especially in the light of access to an alternative source of funding, the possibility of securitization and other complementary services. |
| Keywords: | Microfinance; Microcredit; MFIs; Financial Crises |
| JEL: | G01 G21 |
| Date: | 2013–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43960&r=ban |