New Economics Papers
on Banking
Issue of 2013‒02‒08
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Optimal Monetary and Prudential Policies By Fabrice Collard; Harris Dellas; Behzad Diba; Olivier Loisel
  2. Incentives through the cycle: microfounded macroprudential regulation By Giovanni di Iasio; Mario Quagliariello
  3. Banks’ Capital Buffer, Risk and Performance in the Canadian Banking System: Impact of Business Cycles and Regulatory Changes By Guidara, Alaa; Lai, Van Son; Soumaré, Issouf; Tchana Tchana, Fulbert
  4. Uncertainty as Commitment By Jaromir Nosal; Guillermo Ordoñez
  5. The ECB Unconventional Monetary Policies: Have They Lowered Market Borrowing Costs for Banks and Governments? By Urszula Szczerbowicz
  6. The fading stock market response to announcements of bank bailouts By Michele Fratianni; Francesco Marchionne
  7. Forecasting systemic impact in financial networks By Nikolaus Hautsch; Julia Schaumburg; Melanie Schienle;
  8. Financial Systemic Stability: Challenging Aspects of Central Banks By Wanvimol Sawangngoenyuang; Sukrita Sa-nguanpan; Worawut Sabborriboon
  9. Financial Development and the Volatility of Income By Tiago Pinheiro; Francisco Rivadeneyra; Marc Teignier
  10. Authority Centrality and Hub Centrality as metrics of systemic importance of financial market infrastructures By Carlos Eduardo León Rincón; Jhonatan Pérez Villalobos
  11. Finance and Economic Development in a Model with Credit Rationing By Jean-Louis Arcand, Enrico Berkes, Ugo Panizza
  12. Stress Testing Liquidity Risk: The Case of the Brazilian Banking System. By Benjamin M. Tabak; Solange M. Guerra; Rodrigo C. Miranda; Sergio Rubens S. de Souza
  13. Banking penetration in Uruguay By Santiago Fernandez de Lis; Adriana Haring; Gloria Sorensen; David Tuesta; Alfonso Ugarte
  14. Expanding Credit and Savings in Peru By Hugo Perea; David Tuesta; Alfonso Ugarte

  1. By: Fabrice Collard (University of Bern); Harris Dellas (University of Bern); Behzad Diba (Georgetown University); Olivier Loisel (CREST(ENSAE))
    Abstract: The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability and has raised the question of whether and how to combine the corresponding main policy instruments (interest rate and bank-capital requirements). This paper offers a characterization of the jointly optimal setting of monetary and prudential policies and discusses its implications for the business cycle. The source of financial fragility is the socially excessive risk-taking by banks due to limited liability and deposit insurance. We characterize the conditions under which locally optimal (Ramsey) policy dedicates the prudential instrument to preventing inefficient risk-taking by banks; and the monetary instrument to dealing with the business cycle, with the two instruments co-varying negatively. Our analysis thus identifies circumstances that can validate the prevailing view among central bankers that standard interest-rate policy cannot serve as the first line of defense against financial instability. In addition, we also provide conditions under which the two instruments might optimally co-move positively and countercyclically.
    Keywords: Prudential policy, Capital requirements, Monetary policy, Ramsey-optimal policies
    JEL: E32 E44 E52
    Date: 2012–12
  2. By: Giovanni di Iasio (Bank of Italy); Mario Quagliariello (European Banking Authority)
    Abstract: We provide a micro-based rationale for macroprudential capital regulation by developing a model in which bankers can privately undertake a costly effort and reduce the probability of adverse shocks to their asset holdings that force liquidation (deterioration risk). Low fundamental risk of assets guarantees benevolent funding conditions and banks are able to expand their balance sheets. The high continuation value would, in principle, improve incentives. However, the rise in asset demand and prices may jeopardize bankers' efforts whenever the liquidation price is high enough. This imposes socially inefficient liquidation which can be corrected with a capital requirement that aligns bankers' incentives. We show that a microprudential regulatory regime that disregards the equilibrium effect of asset prices on incentives performs poorly as low fundamental risk may induce high deterioration risk. Overall, the model suggests a theoretical foundation for the countercyclical capital buffer of Basel III, since it prescribes a macroprudential regulatory regime in which the equilibrium feedback effect is fully taken into account.
    Keywords: macroprudential regulation, incentives, financial stability, Basel III, Value-at-Risk, market-based financial intermediaries, financial crises
    JEL: E44 D86 G18
    Date: 2013–01
  3. By: Guidara, Alaa; Lai, Van Son; Soumaré, Issouf; Tchana Tchana, Fulbert
    Abstract: Using quarterly financial statements and stock market data from 1982 to 2010 for the six largest Canadian chartered banks, this paper documents positive co-movement between Canadian banks’ capital buffer and business cycles. The adoption of Basel Accords and the balance sheet leverage cap imposed by Canadian banking regulations did not change this cyclical behaviour of Canadian bank capital. We find Canadian banks to be well-capitalized and that they hold a larger capital buffer in expansion than in recession, which may explain how they weathered the recent subprime financial crisis so well. This evidence that Canadian banks ride the business and regulatory periods underscores the appropriateness of a both micro- and a macro-prudential “through-the-cycle” approach to capital adequacy as advocated in the proposed Basel III framework to strengthen the resilience of the banking sector.
    Keywords: Capital Buffer; Risk; Performance; Basel Accords; Regulation; Business Cycles; Canadian Banks
    JEL: G28 G21
    Date: 2013–01–31
  4. By: Jaromir Nosal; Guillermo Ordoñez
    Abstract: Time-inconsistency of no-bailout policies can create incentives for banks to take excessive risks and generate endogenous crises when the government cannot commit. However, at the outbreak of financial problems, usually the government is uncertain about their nature, and hence it may delay intervention to learn more about them. We show that intervention delay leads to strategic restraint banks endogenously restrict the riskiness of their portfolio relative to their peers in order to avoid being the worst performers and bearing the cost of such delay. These novel forces help to avoid endogenous crises even when the government cannot commit. We analyze the effect of government policies from the perspective of this new result.
    JEL: D53 D8 D81 D83 E44 E58 G21 G33 G34
    Date: 2013–02
  5. By: Urszula Szczerbowicz
    Abstract: This paper evaluates the impact of all ECB unconventional monetary policies implemented between 2007 and 2012 on bank and government borrowing costs. We employ event-based regressions to measure the effect of each policy. The borrowing conditions for banks are represented by money market spreads and covered bond spreads while the sovereign bond spreads reflect government borrowing costs. The results show that sovereign bond purchasing programs (SMP, OMT) proved to be the most effective in lowering longer-term borrowing costs for both banks and governments with the largest impact in periphery euroarea countries. The strong impact in the euro-area periphery suggests that the central bank intervention in sovereign market is particularly effective when the sovereign risk is important. Furthermore, both covered bond purchase programs and 3-year loans to banks reduced bank refinancing costs.
    Keywords: unconventional monetary policy;quantitative easing;credit easing;sovereign bond spreads;covered bond spreads;Euribor-OIS spread
    JEL: E43 E44 E52 E58
    Date: 2012–12
  6. By: Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR); Francesco Marchionne (Nottingham Trent University, Division of Economics)
    Abstract: We analyze the effects on bank valuation of government policies aimed at shoring up banks' financial conditions during the 2008-2009 financial crisis. Governments injected into troubled institutions massive amounts of fresh capital and/or guaranteed bank assets and liabilities. We employ event study methodology to estimate the impact of government-intervention announcements on bank valuation. Using traditional approaches, announcements directed at the banking system as a whole were associated with positive cumulative abnormal returns, whereas announcements directed at specific banks with negative ones. Findings are consistent with the hypothesis that individual institutions were reluctant to seek public assistance. However, when we correct standard errors for bank-and-time effects, virtually all announcement impacts vanish in Europe, whereas they weaken in the United States. The policy implication is that the large public commitments were either not credible or deemed inadequate relative to the underlying financial difficulties of banks.
    Keywords: announcement, bank, event study, financial crisis, rescue plan
    JEL: G01 G21 N20
    Date: 2013–01
  7. By: Nikolaus Hautsch; Julia Schaumburg; Melanie Schienle;
    Abstract: We propose a methodology for forecasting the systemic impact of financial institutions in interconnected systems. Utilizing a five-year sample including the 2008/9 financial crisis, we demonstrate how the approach can be used for timely systemic risk monitoring of large European banks and insurance companies. We predict firms’ systemic relevance as the marginal impact of individual downside risks on systemic distress. The so-called systemic risk betas account for a company’s position within the network of financial interdependencies in addition to its balance sheet characteristics and its exposure towards general market conditions. Relying only on publicly available daily market data, we determine time-varying systemic risk networks, and forecast systemic relevance on a quarterly basis. Our empirical findings reveal time-varying risk channels and firms’ specific roles as risk transmitters and/or risk recipients.
    Keywords: Forecasting systemic risk contributions, time-varying systemic risk network, model selection with regularization in quantiles
    JEL: G01 G18 G32 G38 C21 C51 C63
    Date: 2013–01
  8. By: Wanvimol Sawangngoenyuang (Bank of Thailand); Sukrita Sa-nguanpan (Bank of Thailand); Worawut Sabborriboon (Bank of Thailand)
    Abstract: Since 2007 global financial crisis, many central banks have tended to focus on financial stability much more than ever. Lessons learned from recent crises witness that in a period of sustained economic growth with low and stable inflation, financial imbalances could adversely affect financial system and real economy, which eventually leads to financial crises. In addition, the cost of crises becomes increasingly expensive over time because crises themselves have been more systemic. Risk from one financial institution can easily transfer to others and then to the whole financial market. Thus, current crises highlight the importance of financial stability role of central banks in two main aspects, crisis prevention and crisis management. The paper indicates that in recent financial crises, many central banks have stepped beyond their traditional roles in order to ensure financial system stability. Some instruments and measures that central banks have implemented can be considered as unconventional ones. Looking forward, these practices then lead to new challenges for central banks in three main aspects: risk identification, risk mitigation, and policy issuance process. Eventually, this paper also provides policy implications to Bank of Thailand, based on international experiences and lessons learned from recent crises.
    Keywords: Financial Systemic Stability
    Date: 2012–10–21
  9. By: Tiago Pinheiro; Francisco Rivadeneyra; Marc Teignier
    Abstract: This paper presents a general equilibrium model with endogenous collateral constraints to study the relationship between financial development and business cycle fluctuations in a cross-section of economies with different sizes of their financial sector. The financial sector can amplify or dampen the volatility of income by increasing or reducing the business cycle effects of technological shocks. We find a non-monotonic relationship between the volatility of income and financial development measured by total borrowing and lending. A more developed financial system unambiguously increases the income level however the volatility can rise or fall depending on the degree of financial development.
    Keywords: Credit and credit aggregates; Financial stability
    JEL: E32 E60
    Date: 2013
  10. By: Carlos Eduardo León Rincón; Jhonatan Pérez Villalobos
    Abstract: Network analysis has been applied to identify systemically important financial institutions after the 2008 financial crisis. Such applications have stressed the importance of centrality within the too-connected-to-fail concept. Yet, despite their well-known importance for financial stability, financial market infrastructures’ centrality has not been equally covered by literature. Some particularities of strictly hierarchical (i.e. directed and acyclic) networks may explain the inconvenience arising from using basic metrics of centrality, and may explain why assessing centrality has been limited to financial institutions’ case. This paper addresses the assessment of systemic importance for Colombian financial infrastructures by means of the estimation of authority centrality and hub centrality. Their particular advantage consists of assessing importance as the mutually reinforcing centrality arising from nodes pointing to other nodes (i.e. hubs) and from nodes being pointed-to by other nodes (i.e. authorities), even in the case of directed and acyclic networks. Results are valuable since they quantitatively support financial authorities’ efforts to (i) identify systemically important financial infrastructures under the too-connected-to-fail concept; (ii) focus the intensity of oversight, supervision and regulation where the infrastructure-related systemic impact is the greatest; and (iii) enhance their policy and decision-making capabilities.
    Keywords: Financial market infrastructures, systemic risk, authority, hub, centrality, HITS algorithm, too-connected-to-fail. Classification JEL:D85, E42, G2
    Date: 2013–02
  11. By: Jean-Louis Arcand, Enrico Berkes, Ugo Panizza (Graduate Institute of International Studies)
    Abstract: This paper develops a simple model with credit rationing and endogenous default risk in which the expectation of a bailout may lead to a financial sector which is too large with respect to the the social optimum. The paper concludes with a short discussion of how this model could be used as a building block for models aimed at endogenizing the probability of a bailout, and discussing the relationship between the size of the finanancial sector and economic growth in the presence of default risk.
    Date: 2013–02–01
  12. By: Benjamin M. Tabak; Solange M. Guerra; Rodrigo C. Miranda; Sergio Rubens S. de Souza
    Abstract: This paper discusses the effects of the recent financial crisis on the Brazilian banking system. It discusses how liquidity risks have risen during the crisis and preventive measures that were taken in order to cope with these risks. It presents the liquidity stress testing approach that is under use in the Central Bank of Brazil and results from a survey on liquidity stress testing that has been applied to banks that operate in the Brazilian banking system.
    Date: 2012–12
  13. By: Santiago Fernandez de Lis; Adriana Haring; Gloria Sorensen; David Tuesta; Alfonso Ugarte
    Abstract: In recent years, financial depth ratios in Uruguay have trended upwards, although without reaching the levels seen prior to the crisis at the start of the century. The ratio of credit to GDP in 2010 was near 18%, while the ratio of deposits exceeded 33%. However, Uruguay is still lagging behind the regional average, above all in the ratio of credit to GDP, and it is even behind a number of countries with lower levels of per capita income. By segments, credit for household consumption in Uruguay falls far short of the levels observed in more developed countries like Chile (11% of GDP) and Brazil (15% of GDP), as such credit amounts to only 3% of GDP. The segment of mortgage loans is a bit more developed - although still at low levels - at 7% of GDP. A more significant lag can be seen in corporate credit, which amounts to only 12% of GDP, whereas in countries like Chile or Brazil, it amounts to 52% and 26% of GDP, respectively. Moreover, although access to financial services in Uruguay stands at approximately the regional average, banking infrastructure - particularly in terms of ATMs and POS - is below the average of Latin America, as is the use of electronic means of payment. The underlying thesis of this study is that banking institutions must assume the role of leading a serious process of increasing banking penetration in the country. From a broad technical perspective, an understanding exists of the role played by certain non-bank financial institutions, such as savings banks, mutual societies, cooperatives and non-governmental organisations, in reaching specific population segments. However, such non-bank institutions face a number of structural limitations in becoming agents for change in a banking penetration process, such as the financing capacity and cost, economies of scale, development in risk management, professional staffing and broad supervision by regulatory bodies, among others. Our report discusses cases such as those of China, Bangladesh and India, where significant efforts have been made to develop non-bank institutions to deepen the coverage of financial services, but which ultimately face a number of obstacles. Nor should we forget the financial failures of such non-bank institutions in Latin America. Even recent experiences in Europe (such as Spain and its savings banks) show that the risks of such institutions always make themselves felt when they become too large. Hence, this analysis has sought to provide recommendations for driving deepening banking in Uruguay, focusing on both institutional factors and those inherent to the banking sector that condition the development of savings and credit markets. With regard to the institutional environment, two measures are identified that would benefit the banking penetration process of the country: strengthening the scope of information to which risk centres have access and reducing the time and cost of registering properties and guarantees. Development of the institutional pillar is essential for assuring creditors that borrowers will repay loans. Factors intrinsic to the banking sector include measures to boost access of lower income segments to financial products and services. Options are considered to enable individuals to deepen their use of the banking system to meet their transactional needs, such as making it mandatory for employers to pay wages through the financial system or implementing "low cost automatic enrolment accounts". Both measures would be strengthened by proposals for tax incentives for payments made with debit cards through VAT discounts, and by promotion of the banking correspondent model. Given the wide margin for expanding corporate credit, it is important to incentivise the penetration of loans to MSMEs, as the vast majority of the 114,000 enterprises in Uruguay are small and medium-sized and nearly a third of them do not use banking services. Bank financing could enhance enterprises' productive capacity and help grow their business and profitability, thus incentivising greater formalisation. One way of beginning to provide financing to these enterprises might be factoring, as financing through discounts on trade invoices is commonly known.One important item to be discussed as part of a comprehensive reform is the high costs borne by the banking sector in Uruguay, as the consequence of regulations that directly affect it. Several studies - particularly, a recent one by the International Monetary Fund (2011) - indicate that labour costs have the largest impact on the banking sector's financial results. The same report points out that this factor has limited the potential for growth of the banking sector in Uruguay and incentivised the appearance of non-bank financial intermediaries that are subject to less stringent regulation than the banking sector. Thus, it is important for the country's lawmakers to bear in mind these problems and be aware of the risk that such "extra costs" will limit the capacity of the banking sector to expand its services to broader segments of the population.According to the estimates of BBVA Research based on a statistical model of credit growth and potential economic growth, if Uruguay makes no reforms, the level of credit would increase from 18% of GDP in 2010 to 32.5% of GDP in 2020, owing to the demand generated by growth of the economy and to factors of convergence in financial development. The recommendations set forth in this study are conceived to be implemented jointly. It is estimated that in a conservative scenario, implementation of the proposals will lead to banking penetration, measured as the credit-to-GDP ratio, of 53.9% of GDP in the next ten years, whereas in a more optimistic scenario, it could exceed 68.4%. The foregoing is without taking into account the impact of other measures that could contribute to reducing informality in Uruguay. Hence, the impact could surpass 76% in a best-case scenario.
    Keywords: banking penetration, financial inclusion, banking coverage
    JEL: B26 G2 G21 G28 G32
    Date: 2012–12
  14. By: Hugo Perea; David Tuesta; Alfonso Ugarte
    Abstract: This study identifies a set of elements that determine the development of banking penetration, emphasizing macroeconomic, structural and institutional factors. The study also offers some recommendations aimed at promoting credit and savings in Peru. Specifically, the study identifies how to improve the coverage of information available to credit reporting bureaus, the formalization of property ownership and the system of guarantees, thus introducing a simpler and less costly registry, efficient use of guarantees and greater transparency in judicial auctions. With regards to factors inherent to the banking industry, developing products and services that are accessible to lower income populations will in some cases require state support. Firstly, it is essential that companies be required to pay salaries via the financial system. Likewise, "low cost default accounts" are recommended, in addition to increased investment in point-of-sale terminals for use with credit or debit cards (POS), tax incentives for payments made with cards and optimizing the correspondent ATM system (simplifying legalities). Bank lending should also be promoted in sectors such as the micro and small enterprises sector by use of commercial invoices as a means of funding, thus generating liquidity via other assets at micro and small enterprises and cutting their costs. To this end the regulations covering such financial operations must be clear and precise, with no gaps that might lead to uncertainty or make their use more expensive. The recommendations laid out in this study have been designed to be put into practice jointly. It is estimated that in a conservative scenario, implementing the proposals would increase banking penetration (measured by bank placements) by more than 65% over the next ten years.
    Keywords: banking penetration, financial inclusion, financial depth
    JEL: B26 G2 G21 G28 G32
    Date: 2012–12

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.