New Economics Papers
on Banking
Issue of 2013‒03‒02
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Hubs and resilience: towards more realistic models of the interbank markets By Mattia Montagna; Thomas Lux
  2. Uncertainty as commitment By Jaromir Nosal; Guillermo Ordoñez
  3. A Banking Union for the Euro Area By Rishi Goyal; Petya Koeva Brooks; Mahmood Pradhan; Thierry Tressel; Giovanni Dell'Ariccia; Ceyla Pazarbasioglu
  4. Securitization, housing market and banking sector behavior in a stock-flow consistent model By Fontana, Olimpia; Godin, Antoine
  5. CoCo Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models By Damiano Brigo; Jo\~ao Garcia; Nicola Pede
  6. On Assortative and Disassortative Mixing Scale-Free Networks: The Case of Interbank Credit Networks By Daniel Fricke; Karl Finger; Thomas Lux
  7. Collateral-Enhanced Default Risk By Chris Kenyon; Andrew Green
  8. Unsubsidized Microfinance Institutions By Bert D'Espallier; Marek Hudon; Ariane Szafarz
  9. IMF Lending and Banking Crises By Luca Papi; Andrea Filippo Presbitero; Alberto Zazzaro
  10. Risk-Sharing and Contagion in Networks By Antonio Cabrales; Piero Gottardo; Fernando Vega-Redondo
  11. Denmark: Selected Issues Paper By International Monetary Fund
  12. Efficiency Gains of a European Banking Union By Dirk Schoenmaker; Arjen Siegmann
  13. Credit Rating Industry: a Helicopter Tour of Stylized Facts and Recent Theories By Jeon, Doh-Shin; Lovo, Stefano
  14. “Beyond Value-at-Risk: GlueVaR Distortion Risk Measures” By Jaume Belles-Sampera; Montserrat Guillén; Miguel Santolino
  15. Russian Federation: Technical Note on Stress Testing of the Banking Sector By International Monetary Fund
  16. India: Financial System Stability Assessment Update By International Monetary Fund
  17. Russian Banking System: Stability Factors In the Wake of 2008-2009 Crisis By Andrey Zubarev

  1. By: Mattia Montagna; Thomas Lux
    Abstract: This paper uses a toy financial system to study systemic risk in scale-free interbank networks. Networks are produced according to a fitness algorithm, combined with a representation of the balance sheets of the banks. Our generating processes for interbank networks are designed in a way to reproduce the frequently documented features of disassortative behavior, power laws in the degree distributions and power laws in the distribution of bank sizes. The results show the presence of a particular shell structure affecting the spread of an endogenous shock
    Keywords: Interbank market, contagion, networks, financial stability
    JEL: G21 G01 E42
    Date: 2013–02
  2. By: Jaromir Nosal (Columbia University); Guillermo Ordoñez (University of Pennsylvania and NBER)
    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.
    Keywords: bailouts, commitment, liquidity, banking, government policy, regulation
    JEL: G21 G28 E61
    Date: 2013
  3. By: Rishi Goyal; Petya Koeva Brooks; Mahmood Pradhan; Thierry Tressel; Giovanni Dell'Ariccia; Ceyla Pazarbasioglu
    Abstract: The SDN elaborates the case for, and the design of, a banking union for the euro area. It discusses the benefits and costs of a banking union, presents a steady state view of the banking union, elaborates difficult transition issues, and briefly discusses broader EU issues. As such, it assesses current plans and provides advice. It is accompanied by three background technical notes that analyze in depth the various elements of the banking union: a single supervisory framework; a single resolution and common safety net; and urgent issues related to repair of weak banks in Europe.
    Keywords: Banking systems;Europe;Euro Area;Bank supervision;Bank regulations;Bank resolution;Deposit insurance;Financial safety nets;Monetary unions;Banking Union; Single Supervisory Mechanism; Direct Recapitalization; European Stabilization Mechanism; Resolution; Deposit Insurance; Common Backstops
    Date: 2013–02–12
  4. By: Fontana, Olimpia; Godin, Antoine
    Abstract: This paper focuses on the different balance sheet management behavior of private banks and worker households, when assets are traded in the market. The authors take into consideration the securitization process, through which mortgage loans to households are converted into tradable securities which are held by investment banks in order to make profits. The demand for deposits by speculative households and realized capital gains on selling of mortgage-backed securities in the secondary market produce an inflation balloon in security markets, even though the authors apply the Basel III agreements to private banking behavior. --
    Keywords: securitization,stock-flow consistent modelling,active banking
    JEL: E12 G11 E44
    Date: 2013
  5. By: Damiano Brigo; Jo\~ao Garcia; Nicola Pede
    Abstract: After the beginning of the credit and liquidity crisis, financial institutions have been considering creating a convertible-bond type contract focusing on Capital. Under the terms of this contract, a bond is converted into equity if the authorities deem the institution to be under-capitalized. This paper discusses this Contingent Capital (or Coco) bond instrument and presents a pricing methodology based on firm value models. The model is calibrated to readily available market data. A stress test of model parameters is illustrated to account for potential model risk. Finally, a brief overview of how the instrument performs is presented.
    Date: 2013–02
  6. By: Daniel Fricke; Karl Finger; Thomas Lux
    Abstract: Networks constructed from credit relationships in the interbank market have been found to exhibit disassortative mixing together with a scale-free degree distribution, in contrast to most social networks that are assortative and not necessarily scale-free. This provokes the question whether generating mechanisms for scale-free networks have enough flexibility to generate both assortative and disassortative structures depending on their parametrization. Using Monte-Carlo simulations, we show that scale-free networks with a small tail exponent tend to be disassortative. However, the simulations indicate also that the level of disassortativity is sensitive to changes in the scaling exponent and the density. A given combination of disassortativity, scaling of the degree distribution, and density in an empirical data set, might be hard or impossible to obtain from any of the known generating mechanisms for scale-free networks
    Keywords: Interbank Market, Network Models, Scale-Free Networks, Powerlaw
    JEL: G21 G01 E42
    Date: 2013–02
  7. By: Chris Kenyon; Andrew Green
    Abstract: Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between Merton-type and Black-Cox-type structural default models. Our framework leads to a single equation that emcompasses the range of possibilities, including collateralization remargining frequency (i.e. discrete observations). We show that increases in collateralization, by exposing entities to daily mark-to-market volatility, enhance default probability. This quantifies the well-known problem with collateral triggers. Furthermore our model can be used to quantify the degree to which central counterparties, whilst removing credit risk transmission, systematically increase default risk.
    Date: 2013–02
  8. By: Bert D'Espallier; Marek Hudon; Ariane Szafarz
    Abstract: This paper starts from the observation that 23% of the world’s microfinance institutions (MFIs) manage without subsidies. We examine how unsubsidized institutions cope with their social mission. Overall, the lack of subsidies worsens social performances. However, our results show that strategies to achieve financial self-sufficiency differ substantially across regions. African and Asian MFIs compensate for non-subsidization by charging higher interest rates. In Eastern Europe and Central Asia, unsubsidized MFIs find it more suitable to target less poor clients. Unsubsidized Latin American MFIs tend to reduce their share of female borrowers.
    Keywords: microfinance; subsidies; mission drift; poverty reduction; average loan size; interest rates
    JEL: F35 G21 G28 O54 O57
    Date: 2013–02–14
  9. By: Luca Papi (Universit… Politecnica delle Marche, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, MoFiR)
    Abstract: In this paper we look at the effect of International Monetary Fund (IMF) lending programs on banking crises in a large sample of developing countries, over the period 1965-2010. The endogeneity of the Fund intervention is addressed by adopting an instrumental variable (IV) strategy, in which the degree of political similarity between IMF borrowers and the G-7 is taken as an instrument for the likelihood of a country signing an IMF lending arrangement. Controlling for the standard determinants of banking crises, the IV estimates suggest that previous IMF borrowers are significantly less likely to experience a banking crisis. We also provide evidence suggesting that compliance with conditionality matters, consistent with the importance of IMF-supported financial reform, and that the positive effect of the Fund intervention on banking sector stability works through a direct liquidity provision effect.
    Keywords: Banking crises, IMF programs, Political economy
    JEL: F33 F34 F35 O11
    Date: 2013–02
  10. By: Antonio Cabrales; Piero Gottardo; Fernando Vega-Redondo
    Abstract: The aim of this paper is to investigate how the capacity of an economic system to absorb shocks depends on the specific pattern of interconnections established among financial firms. The key trade-off at work is between the risk-sharing gains enjoyed by firms when they become more interconnected and the large-scale costs resulting from an increased risk exposure. We focus on two dimensions of the network structure: the size of the (disjoint) components into which the network is divided, and the "relative density" of connections within each component. We find that when the distribution of the shocks displays "fat" tails extreme segmentation is optimal, while minimal segmentation and high density are optimal when the distribution exhibits "thin" tails. For other, less regular distributions intermediate degrees of segmentation and sparser connections are also optimal. We also find that there is typically a conflict between efficiency and pairwise stability, due to a "size externality" that is not internalized by firms who belong to components that have reached an individually optimal size. Finally, optimality requires perfect assortativity for firms in a component.
    Keywords: Firm networks, Contagion, Risk Sharing
    JEL: D85 C72 G21
    Date: 2013
  11. By: International Monetary Fund
    Keywords: Government expenditures;Capital inflows;Global competitiveness;Financial sector;Financial stability;Banks;Bank supervision;Selected issues;Denmark;
    Date: 2013–01–24
  12. By: Dirk Schoenmaker (Duisenberg School of Finance); Arjen Siegmann (VU University Amsterdam)
    Abstract: An anticipated benefit of the prospective European Banking Union is stronger supervision of European banks. Another benefit would be enhanced resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority would follow a supranational approach, under which domestic and cross-border effects within Europe are incorporated. Using a model of recapitalising banks, this paper develops indicators to measure the efficiency improvement of resolution. Next, these efficiency indicators are applied to the hypothetical resolution of the top 25 European banks, which count for the vast majority of cross-border banking in Europe. Our cost-benefit analysis indicates that the UK, Spain, Sweden, and the Netherlands are the main beneficiaries and thus have the largest economic incentives to join Europe’s Banking Union.
    Keywords: F33; G01; G28; H41
    Date: 2013–02–11
  13. By: Jeon, Doh-Shin (TSE); Lovo, Stefano (HEC)
    Abstract: The recent subprime crisis and the ongoing Euro zone crisis have generated an enormous interest in the credit rating industry not only among economists but also among average citizens. As a consequence, we have seen an explosion of the economic literature on the industry. The objective of this survey is to introduce readers to the key stylized facts of the credit rating industry and to the recent theoretical economic literature on this industry.
    Keywords: Credit Rating Agencies, Reputation, Financial Regulations, Conflicts of Interest, Certification
    JEL: D43 D82 G24 L13
    Date: 2013–02–07
  14. By: Jaume Belles-Sampera (Faculty of Economics, University of Barcelona); Montserrat Guillén (Faculty of Economics, University of Barcelona); Miguel Santolino (Faculty of Economics, University of Barcelona)
    Abstract: We propose a new family of risk measures, called GlueVaR, within the class of distortion risk measures. Analytical closed-form expressions are shown for the most frequently used distribution functions in financial and insurance applications. The relationship between Glue-VaR, Value-at-Risk (VaR) and Tail Value-at-Risk (TVaR) is explained. Tail-subadditivity is investigated and it is shown that some GlueVaR risk measures satisfy this property. An inter-pretation in terms of risk attitudes is provided and a discussion is given on the applicability in non-financial problems such as health, safety, environmental or catastrophic risk management.
    Keywords: Risk measures, Distortion, Subadditivity, Tails, Risk appetite JEL classification: C60, C46, D81
    Date: 2013–02
  15. By: International Monetary Fund
    Keywords: Bank supervision;Banking sector;Credit risk;Financial soundness indicators;Risk management;
    Date: 2011–11–29
  16. By: International Monetary Fund
    Keywords: Financial system stability assessment;Commercial banks;Bank soundness;Risk management;Liquidity management;Bank resolution;Deposit insurance;Bank supervision;Capital markets;Securities regulations;Payment systems;Insurance;Reports on the Observance of Standards and Codes;India;
    Date: 2013–01–15
  17. By: Andrey Zubarev (Gaidar Institute for Economic Policy)
    Abstract: This paper discusses different approaches to theoretical and empirical models of bank defaults. Through constructed binary probabilistic models of defaults the paper reveals key factors which have an impact on the viability of Russian banks during the financial crisis of 2008 to 2009. Policy recommendations of the Central Bank of Russia and the banking supervision and regulation aimed at preventing bank defaults in the event of such crises in the future are formulated based on the model results.
    Keywords: bank default, financial crisis, binary models, policy of the Central Bank of Russia.
    JEL: E41 E51 E58 G21 G24 G28
    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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