New Economics Papers
on Banking
Issue of 2013‒02‒16
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financial development and long-run volatility trends By Pengfei Wang; Yi Wen
  2. Do Banks Price Discriminate Spatially? Evidence from Small Business Lending in Local Credit Markets By Andrea Bellucci; Alexander V. Borisov; Alberto Zazzaro
  3. Impact of Foreign Banks By Stijn Claessens; Neeltje van Horen
  4. CDS spreads and systemic risk: A spatial econometric approach By Keiler, Sebastian; Eder, Armin
  5. Equilibrium credit : the reference point for macroprudential supervisors By Buncic, Daniel; Melecky, Martin
  6. Early-warning signals of topological collapse in interbank networks By Tiziano Squartini; Iman van Lelyveld; Diego Garlaschelli
  7. "Endogenous Bank Credit and Its Link to Housing in OECD Countries" By Philip Arestis; Ana Rosa Gonzalez
  8. Does renegotiation of financial contracts matter for shareholders? Empirical evidence from Europe By Christophe Godlewski
  9. Applying Input Distance Function to Measure Pre-Recession Efficiencies of Surviving and Critically Insolvent Banks of the Late 2000s Financial Crisis By Li, Xiaofei; Yu, Yingzhuo; Escalante, Cesar L.; Deng, Xiaohui; Epperson, James E.
  10. Macroprudential policy and imbalances in the euro area By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  11. Credit risk predictions with Bayesian model averaging By Silvia Figini; Paolo Giudici
  12. The Impact of Credit Constraints on Housing Demand: Assessed with Endogenous Price and Expenditure By Li, Yarui; Leatham, David J.
  13. Forecasting High-Yield Bond Spreads Using the Loan Market as Leading Indicator By Banu Simmons-Süer
  14. Authority Centrality and Hub Centrality as metrics of systemic importance of financial market infrastructures By Carlos Eduardo León Rincón; Jhonatan Pérez Villalobos
  15. Risk Management in Agricultural Banks: An Application of Endogenous Switching Model By Shen, Xuan; Hartarska, Valentina M.
  16. Stock Return Comovement and Systemic Risk in the Turkish Banking System By Mahir Binici; Bulent Koksal; Cuneyt Orman

  1. By: Pengfei Wang; Yi Wen
    Abstract: Countries with more developed financial markets (as measured by the private debt- to-GDP ratio) tend to have significantly lower aggregate volatility. This relationship is also highly non-linear starting from a low level of financial development the reduction in aggregate volatility by financial deepening is far more significant than it is when the financial market is more developed. We build a fully-edged neoclassical growth model with an endogenous financial market of credit arrangements and private debt to rationalize these stylized facts. We show how financial development that promotes better credit allocations under more relaxed borrowing constraints can reduce the impact of non-financial shocks (such as TFP shocks, government spending shocks, preference shocks) on aggregate out- put and investment, and why this volatility-reducing effect diminishes with continuing financial development. Our simple model also sheds light on a number of other important issues, such as the "Great Moderation" and the simultaneously rising trends of dispersions in sales growth and stock returns for publicly traded firms.
    Keywords: Financial markets
    Date: 2013
  2. By: Andrea Bellucci (Universit… di Urbino); Alexander V. Borisov (Indiana University); Alberto Zazzaro (Universit… Politecnica delle Marche, MoFiR)
    Abstract: In this paper we explore the effects of bank-borrower physical proximity on price and non-price aspects of small business lending in local credit markets. Along the price dimension, our analysis reveals that interest rates increase with bank-borrower distance and decrease with the distance between borrower and other competing banks. Along the quantity dimension, we observe that more distant borrowers are more likely to experience binding credit limits. We also show that the quantity effects of bank-borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.
    Keywords: Bank lending, Credit availability, Distance, Interest rate, Pricing
    JEL: G21 G32 L11
    Date: 2013–02
  3. By: Stijn Claessens; Neeltje van Horen
    Abstract: This paper provides a critical assessment of the costs and benefits of foreign bank ownership. It reviews the extensive literature on the impact of foreign banks and uses a unique database on bank ownership, covering 129 countries, to (re-)examine a number of the issues discussed. It documents (changes in) foreign bank presence between 1995 and 2009, highlighting important differences across host and home countries and strong bilateral patterns. It finds that foreign banks tend to outperform domestic banks in developing countries, countries with weak institutions and where foreign banks do not play a major role. In addition, being from a geographically close home country increases the profitability of foreign banks. In terms of impact, it shows that foreign banks can deter domestic financial sector development in developing countries, countries with weak institutions and where foreign banks play a minor role. Examining the impact of foreign banks on financial stability, it finds that during the global crisis, foreign banks reduced credit more compared to domestic banks in countries where they had a small role, but not when dominant or funded locally. These findings show that, when analyzing the impact of foreign bank presence accounting for heterogeneity, including bilateral ownership, is crucial.
    Keywords: foreign direct investment; international banking; distance
    JEL: F21 F23 G21
    Date: 2013–02
  4. By: Keiler, Sebastian; Eder, Armin
    Abstract: This study applies a novel way of measuring, quantifying and modelling the systemic risk within the financial system. The magnitude of risk spill over effects is gauged by introducing a specific weighting scheme. This approach originally stems from spatial econometrics. The methodology allows for a decomposition of the credit spread into a systemic, systematic and idiosyncratic risk premium. We identify considerable risk spill overs due to the interconnectedness of the financial institutes in the sample. In stress tests, up to one fifth of the CDS spread changes are owing to financial contagion. These results also give an alternative explanation for the nonlinear relationship between a debtor's theoretical probability of default and the observed credit spreads - known as the credit spread puzzle. --
    Keywords: systemic risk,financial contagion,spatial econometrics,CDS spreads,government policy and regulation
    JEL: C21 G12 G18 G21
    Date: 2013
  5. By: Buncic, Daniel; Melecky, Martin
    Abstract: Equilibrium credit is an important concept because it helps identify excessive credit provision. This paper proposes a two-stage approach to determine equilibrium credit. It uses two stages to study changes in the demand for credit due to varying levels of economic, financial and institutional development of a country. Using a panel of high and middle-income countries over the period 1980-2010, this paper provides empirical evidence that the credit-to-GDP ratio is inappropriate to measure equilibrium credit. The reason for this is that such an approach ignores heterogeneity in the parameters that determine equilibrium credit across countries due to different stages of economic development. The main drivers of this heterogeneity are financial depth, access to financial services, use of capital markets, efficiency and funding of domestic banks, central bank independence, the degree of supervisory integration, and experience of a financial crisis. Countries in Europe and Central Asia show a slower adjustment of credit to its long-run equilibrium compared with other regions of the world.
    Keywords: Economic Theory&Research,Access to Finance,Currencies and Exchange Rates,Banks&Banking Reform,Debt Markets
    Date: 2013–02–01
  6. By: Tiziano Squartini; Iman van Lelyveld; Diego Garlaschelli
    Abstract: The financial crisis marked a paradigm shift, from traditional studies of individual risk to recent research on the "systemic risk" generated by whole networks of institutions. However, the reverse effects of realized defaults on network topology are poorly understood. Here we analyze the Dutch interbank network over the period 1998-2008, ending with the global crisis. We find that many topological properties, after controlling for overall density effects, display an abrupt change in 2008, thus providing a clear but unpredictable signature of the crisis. By contrast, if the intrinsic heterogeneity of banks is controlled for, the same properties undergo a slow and continuous transition, gradually connecting the crisis period to a much earlier stationary phase. This early-warning signal begins in 2005, and is preceded by an even earlier period of "risk autocatalysis" characterized by anomalous debt loops. These remarkable precursors are undetectable if the network is reconstructed from partial bank-specific information.
    Date: 2013–02
  7. By: Philip Arestis; Ana Rosa Gonzalez
    Abstract: The relevant economic literature frequently focuses on the impact of credit shocks on housing prices. The doctrine of the "New Consensus Macroeconomics" completely ignores bank credit. The "Great Recession," however, has highlighted the significance of bank credit. The purpose of this contribution is to revisit this important macroeconomic variable. We propose to endogenize the volume of bank credit by paying special attention to those variables that are related to the real estate market, which can be considered key to the evolution of bank credit. Our theoretical hypothesis is tested by means of a sample of 15 Organisation for Economic Co-operation and Development (OECD) economies from 1970 to 2011. We apply the cointegration technique for the latter purpose, which permits the modeling of the long-run equilibrium relationship and the dynamics of the short run, along with an error-correction term.
    Keywords: Bank Credit; Collateral Channel; Housing Market; OECD Countries; Empirical Modeling
    JEL: C22 R31
    Date: 2013–01
  8. By: Christophe Godlewski (LaRGE Research Center, Université de Strasbourg)
    Abstract: Using a large sample of bank loan renegotiations by European firms, I show that renegotiation of financial contracts matters for shareholders and can increase their wealth. I find that amendments to financial covenants and to loan amounts increase borrower’s cumulative abnormal return by 10% to 15%. Early and less frequent renegotiations of bilateral loans with short maturity also imply a positive stock market reaction. Amendments signaling the early accrual of new, valuable and positive information allow increasing shareholders value. The renegotiation of financial contracts bears a certification role as contracts become more efficient over time, to the benefits of the shareholders.
    Keywords: renegotiation, financial contracts, bank loans, shareholders value, event studies, Europe.
    JEL: G14 G20
    Date: 2013
  9. By: Li, Xiaofei; Yu, Yingzhuo; Escalante, Cesar L.; Deng, Xiaohui; Epperson, James E.
    Abstract: Stochastic frontier analysis is used to evaluate the technical and allocative efficiencies for banks classified based on industry specialization (agricultural and non-agricultural banks) and solvency condition (non-critical and critical banks). The analytical framework allows for comparisons of input utilization decisions that could translate to cost savings and enhanced operating efficiencies.
    Keywords: Input Distance Function, Technical Efficiency, Allocative Efficiency, Recession, Agricultural Finance, Q14, R15,
    Date: 2013
  10. By: Michał Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Marcin Kolasa (National Bank of Poland, Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Warsaw School of Economics)
    Abstract: Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region. To this end we build a twoeconomy macrofinancial DSGE model and simulate the effects of macroprudential policies under the assumption of asymmetric shocks hitting the core and the periphery. We find that macroprudential policy is able to partly make up for the loss of independent monetary policy in the periphery. Moreover, LTV policy seems more efficient than regulating capital adequacy ratios. However, for the policies to be effective, they must be set individually for each region. Area-wide policy is almost ineffective in this respect.
    Keywords: euro-area imbalances, macroprudential policy, DSGE with banking sector
    JEL: E32 E44 E58
    Date: 2013
  11. By: Silvia Figini (Department of Economics and Management, University of Pavia); Paolo Giudici (Department of Economics and Management, University of Pavia)
    Abstract: Model uncertainty remains a challenge to researchers in different applications. When many competing models are available for estimation, and without enough guidance from theory, model averaging represents an alternative to model selection. Despite model averaging approaches have been present in statistics for many years, only recently they are starting to receive attention in applications. The Bayesian Model Averaging (BMA) approach sometimes can be difficult in terms of applicability, mainly because of the following reasons: firstly two types of priors need to be elicited and secondly the number of models under consideration in the model space is often huge, so that the computational aspects can be prohibitive. In this paper we show how Bayesian model averaging can be usefully employed to obtain a well calibrated model, in terms of predictive accuracy for credit risk problems. In this paper we shall investigate how BMA performs in comparison with classical and Bayesian (single) selected models using two real credit risk databases.
    Date: 2013–02
  12. By: Li, Yarui; Leatham, David J.
    Abstract: This article assesses the impact of credit constraints on housing demand with price and expenditure treated as endogenous variables. Using AIDS model, we find the model without controlling for endogeneities tends to underestimate the impact of credit constraint on the budget shares and the estimates are less significant.
    Keywords: Credit constraint, housing market, AIDS model, endogeneity, Consumer/Household Economics,
    Date: 2013
  13. By: Banu Simmons-Süer (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper attempts to find an aggregate leading indicator to predict the spreads observed for high-yield (HY) bond indices. Using a vector error correction (VEC) specification for quarterly data, we establish a long-term equilibrium relationship between the HY market spreads and its determinants, which stem from the interaction between the loan market via the banking sector and the HY market. The paper also attempts to explain the dynamic behavior of spreads by approximating the factors behind the credit and liquidity risk components. The out-of-sample forecasting properties of the resultant econometric model are shown to be superior to naïve models.
    Keywords: High Yield Bond Spreads, Vector Error Correction, Loan Market, Leading Indicator
    JEL: G12 G15 G17
    Date: 2013–02
  14. 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.
    Date: 2013–01–31
  15. By: Shen, Xuan; Hartarska, Valentina M.
    Abstract: This paper is prepared for SAEA 2013 conference
    Keywords: Risk management, agricultural bank, community bank, financial derivatives, Agricultural Finance, Risk and Uncertainty,
    Date: 2013
  16. By: Mahir Binici; Bulent Koksal; Cuneyt Orman
    Abstract: This paper investigates the evolution of systemic risk in the Turkish banking sector over the past two decades using comovement of banks’ stock returns as a systemic risk indicator. In addition, we explore possible determinants of systemic risk, the knowledge of which can be a useful input into effective macroprudential policymaking. Results show that the correlations between bank stock returns almost doubled in 2000s in comparison to 1990s. The correlations decreased somewhat after 2002 and increased again after the 2007-2009 financial crisis. Main determinants of systemic risk appear to be the market share of bank pairs, the amount of nonperforming loans, herding behavior of banks, and volatilities of macro variables including the exchange rate, U.S. T-bills, EMBI+, VIX, and MSCI emerging markets index.
    Keywords: Stock Returns, Comovement, Systemic Risk, Turkish Banking System
    JEL: C22 C58 G21 G32
    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.
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