New Economics Papers
on Banking
Issue of 2013‒03‒16
25 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. International Taxation and Cross-Border Banking By Harry Huizinga; Johannes Voget; Wolf Wagner
  2. Tailoring Bank Capital Regulation for Tail Risk By Nataliya Klimenko
  3. A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market By Ono, Arito; Uchida, Hirofumi; Udell, Gregory; Uesugi, Iichiro
  4. The Cascade Bayesian Approach for a controlled integration of internal data, external data and scenarios By Bertrand Hassani; Alexis Renaudin
  5. Understanding Operational Risk Capital Approximations: First and Second Orders By Gareth W. Peters; Rodrigo S. Targino; Pavel V. Shevchenko
  6. Privatized Returns and Socialized Risks: CEO Incentives, Securitization Accounting and the Financial Crisis By Fabrizi, M.; Parbonetti, A.
  7. Can Europe recover without credit? By Zsolt Darvas
  8. Assessing interbank contagion using simulated networks By Grzegorz Hałaj; Christoffer Kok Sørensen
  9. Financial Intermediaries, Credit Shocks and Business Cycles By Yasin Mimir
  10. Shadow Banking and Systemic Risk in Europe and China By Hsu, S.; Li, J.; Qin, Y.
  11. The Interconnections Between the Shadow Banking System and the Regular Banking System. Evidence from the Euro Area By Jeffers, E.; Baicu, C.
  12. A macroprudential approach to address liquidity risk with the Loan-to-Deposit ratio By Jan Willem van den End
  13. Banking consolidation and bank-firm credit relationships: the role of geographical features and relationship characteristics By Enrico Beretta; Silvia Del Prete
  14. Connect them where it hurts. The missing piece of the puzzle By Lorenzo Esposito
  15. Estimating bank default with generalised extreme value models By Raffaella Calabrese; Paolo Giudici
  16. Una nota preliminar sobre el ejercicio de stress testing 2011 del sistema bancario europeo; impacto de la crisis soberana griega By Ruston, Agustina; García Fronti, Javier
  17. The causal effect of credit guarantees for SMEs: evidence from Italy By Alessio D'Ignazio; Carlo Menon
  18. Banking towards development: Evidence from the Spanish banking expansion plan By Pere Arqué-Castells; Elisabet Viladecans-Marsal
  19. Market Power in CEE Banking Sectors and the Impact of the Global Financial Crisis By Georgios Efthyvoulou; Canan Yildirim
  20. Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy By Augustin Landier; David Sraer; David Thesmar
  21. Sizing the European Shadow Banking System: A New Methodology By Tyson, J.; Shabani, M.
  22. Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market By Tomasz Piskorski; Amit Seru; James Witkin
  23. A Dynamic Model of Subprime Mortgage Default: Estimation and Policy Implications By Patrick Bajari; Chenghuan Sean Chu; Denis Nekipelov; Minjung Park
  24. The Real Consequences of Financial Stress By Stefan Mittnik; Willi Semmler; ;
  25. Limited credit records and market outcomes By Margherita Bottero; Giancarlo Spagnolo

  1. By: Harry Huizinga (CentER and EBC, Tilburg University and CEPR); Johannes Voget; Wolf Wagner (CentER and EBC, Tilburg University, Duisenberg School of Finance)
    Abstract: This paper examines empirically how international taxation affects the volume and pricing of cross-border banking activities for a sample of banks in 38 countries over the 1998-2008 period. International double taxation of foreign-source bank income is found to reduce banking-sector FDI. Furthermore, such taxation is almost fully passed on into higher interest margins charged abroad. These results imply that international double taxation distorts the activities of international banks, and that the incidence of international double taxation of banks is on bank customers in the foreign subsidiary country. Our analysis informs the debate about additional taxation of the financial sector that has emerged in the wake of the recent financial crisis.
    Keywords: Cross-border banking, International taxation, Interest margins
    JEL: G21 F23 H25
    Date: 2012
  2. By: Nataliya Klimenko (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))
    Abstract: The experience of the 2007-09 financial crisis has showed that the bank capital regulation in place was inadequate to deal with "manufacturing" tail risk in the financial sector. This paper proposes an incentive-based design of bank capital regulation aimed at efficiently dealing with tail risk engendered by bank top managers. It has two specific features: (i) first, it incorporates information on the optimal incentive contract between bank shareholders and bank managers, thereby dealing with the internal agency problem; (ii) second, it relies on the mechanism of mandatory recapitalization to ensure this contract is adopted by bank shareholders.
    Keywords: capital requirements; tail risk; recapitalization; incentive compensation; moral hazard
    Date: 2013–02
  3. By: Ono, Arito; Uchida, Hirofumi; Udell, Gregory; Uesugi, Iichiro
    Abstract: Using a unique micro dataset compiled from official real estate registries in Japan, we examine the evolution of loan-to-value (LTV) ratios for business loans over the 1975 to 2009 period, the determinants of these ratios, and the ex post performance of the borrowers. We find that the LTV ratio exhibits counter-cyclicality, implying that the increase (decrease) in loan volumes is smaller than the increase (decrease) in land values during booms (busts). Most importantly, the median LTV ratios are at their lowest during the bubble period in the late 1980s and early 1990s. The counter-cyclicality of LTV ratios is robust to controlling for various characteristics of loans, borrowers, and lenders. We also find that borrowers that obtained high-LTV loans performed no worse ex-post than those with low-LTV loans, and performed better during the bubble period. These findings cast doubt on the conventional wisdom that banks adopted more lax lending standards during the bubble period, although we have other evidence in support of that story. We also draw some implications for the ongoing debate on the use of LTV ratio caps as a macroprudential policy measure.
    Keywords: loan-to-value (LTV) ratios, pro-cyclicality, bubble
    JEL: G21 G32 R33
    Date: 2013–02
  4. By: Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, Santander UK - Santander UK); Alexis Renaudin (Aon GRC - Aon Global Risk Consulting -)
    Abstract: According to the last proposals of the Basel Committee on Banking Supervision, banks under the Advanced Measurement Approach (AMA) must use four different sources of information to assess their Operational Risk capital requirement. The fourth including "business environment and internal control factors", i.e. qualitative criteria, the three main quantitative sources available to banks to build the Loss Distribution are Internal Loss Data, External Loss Data, and Scenario Analysis. This paper proposes an innovative methodology to bring together these three different sources in the Loss Distribution Approach (LDA) framework through a Bayesian strategy. The integration of the different elements is performed in two different steps to ensure an internal data driven model is obtained. In a first step, scenarios are used to inform the prior distributions and external data informs the likelihood component of the posterior function. In the second step, the initial posterior function is used as the prior distribution and the internal loss data inform the likelihood component of the second posterior. This latter posterior function enables the estimation of the parameters of the severity distribution selected to represent the Operational Risk event types.
    Keywords: Operational Risk; Loss Distribution Approach; Bayesian inference; Marchov Chain Monte Carlo; Extreme Value Theory; non-parametric statistics; risk measures
    Date: 2013–02
  5. By: Gareth W. Peters; Rodrigo S. Targino; Pavel V. Shevchenko
    Abstract: We set the context for capital approximation within the framework of the Basel II / III regulatory capital accords. This is particularly topical as the Basel III accord is shortly due to take effect. In this regard, we provide a summary of the role of capital adequacy in the new accord, highlighting along the way the significant loss events that have been attributed to the Operational Risk class that was introduced in the Basel II and III accords. Then we provide a semi-tutorial discussion on the modelling aspects of capital estimation under a Loss Distributional Approach (LDA). Our emphasis is to focus on the important loss processes with regard to those that contribute most to capital, the so called high consequence, low frequency loss processes. This leads us to provide a tutorial overview of heavy tailed loss process modelling in OpRisk under Basel III, with discussion on the implications of such tail assumptions for the severity model in an LDA structure. This provides practitioners with a clear understanding of the features that they may wish to consider when developing OpRisk severity models in practice. From this discussion on heavy tailed severity models, we then develop an understanding of the impact such models have on the right tail asymptotics of the compound loss process and we provide detailed presentation of what are known as first and second order tail approximations for the resulting heavy tailed loss process. From this we develop a tutorial on three key families of risk measures and their equivalent second order asymptotic approximations: Value-at-Risk (Basel III industry standard); Expected Shortfall (ES) and the Spectral Risk Measure. These then form the capital approximations.
    Date: 2013–03
  6. By: Fabrizi, M.; Parbonetti, A.
    Abstract: The paper investigates the role of CEO’s equity and risk incentives in boosting securitization in the financial industry and in motivating executives to reduce the perceived risk while betting on it. Using a sample of US financial institutions over the period 2003-2009 we document that CEOs with high equity incentives have systematically engaged in securitization transactions to a larger extent than CEOs with low incentives. We also show that CEOs with high equity and risk-related incentives have engaged in the securitization of risky loans and have used securitization for transferring risks to outside investors. Finally, we show that executives incentivized on risk have provided outside investors with low quality disclosure about losses recorded on securitized loans thus contributing to increase the opacity of securitization transactions undertaken. Overall, we interpret our results as evidence that CEOs have foreseen in securitizations under US GAAP an opportunity for hiding risks while bearing them and generating profits and cash flows because of the risks. Our results are robust to several model specifications as well as to endogeneity concerns.
    Keywords: Executive compensation; CEO incentives; Securitization; Financial Crisis
    Date: 2013
  7. By: Zsolt Darvas
    Abstract: â?¢ Data from 135 countries covering five decades suggests that creditless recoveries, in which the stock of real credit does not return to the pre-crisis level for three years after the GDP trough, are not rare and are characterised by remarkable real GDP growth rates: 4.7 percent per year in middle-income countries and 3.2 percent per year in high-income countries. â?¢ However, the implications of these historical episodes for the current European situation are limited, for two main reasons: â?¢ First, creditless recoveries are much less common in high-income countries, than in low-income countries which are financially undeveloped. European economies heavily depend on bank loans and research suggests that loan supply played a major role in the recent weak credit performance of Europe. There are reasons to believe that, despite various efforts, normal lending has not yet been restored. Limited loan supply could be disruptive for the European economic recovery and there has been only a minor substitution of bank loans with debt securities. â?¢ Second, creditless recoveries were associated with significant real exchange rate depreciation, which has hardly occurred so far in most of Europe. This stylised fact suggests that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return.
    Date: 2013–02
  8. By: Grzegorz Hałaj (European Central Bank); Christoffer Kok Sørensen (European Central Bank)
    Abstract: This paper presents a new approach to randomly generate interbank networks while overcoming shortcomings in the availability of bank-by-bank bilateral exposures. Our model can be used to simulate and assess interbankcontagion effects on banking sector soundness and resilience. We find a strongly non-linear pattern across the distribution of simulated networks, whereby only for a small percentage of networks the impact of interbank contagion will substantially reduce average solvency of the system. In the vast majority of the simulated networks the system-wide contagion effects are largely negligible. The approach furthermore enables to form a view aboutthe most systemic banks in the system in terms of the banks whose failure would have the most detrimental contagion effects on the system as a whole. Finally, as the simulation of the network structures is computationally verycostly, we also propose a simplified measure - a so-called Systemic Probability Index (SPI) - that also captures the likelihood of contagion from the failure of a given bank to honour its interbank payment obligations but at the same time is less costly to compute. We find that the SPI is broadly consistent with the results from the simulated network structures.
    Keywords: Network theory; interbank contagion; systemic risk; banking; stress-testing
    Date: 2013–01
  9. By: Yasin Mimir
    Abstract: I document key business cycle facts of aggregate financial flows in the U.S. banking sector : (i) Bank credit, deposits and loan spread are less volatile than output, while net worth and leverage ratio are more volatile, (ii) bank credit and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical, and (iii) financial variables lead the output fluctuations by one to three quarters. I then present an equilibrium real business cycle model with a financial sector, that is capable of matching these newly documented stylized facts. An agency problem between banks and their depositors induces endogenous capital constraints for banks in obtaining funds from households. Empirically-disciplined shocks to bank net worth alter the ability of banks to borrow and to extend credit to firms. I find that these financial shocks are important not only for explaining the dynamics of financial flows but also for the dynamics of standard macroeconomic aggregates. They play a major role in driving real fluctuations due to their impact on the tightness of bank capital constraint and the credit spread. The tightness measure of credit conditions in the model tracks the index of tightening credit standards constructed by the Federal Reserve Board quite well.
    Keywords: Banks, Financial Fluctuations, Credit Frictions, Bank Equity, Financial Shocks
    JEL: E10 E20 E32 E44
    Date: 2013
  10. By: Hsu, S.; Li, J.; Qin, Y.
    Abstract: We compare the European and Chinese shadow banking systems. While the European shadow banking system is better developed than the Chinese shadow banking system, herd behavior and other factors in European markets create systemic risk, which contributed in part to the financial crisis. Dispersion of risk across the "under-developed" shadow banking system in China has led to some cases of localized, concentrated risk, but not to systemic risk. We discuss proposed European shadow banking regulation and its implications for systemic risk, and discuss what lessons China might glean from such policies. We also discuss what lessons China's diverse and systemically uncoordinated shadow banking sector might provide for Europe.
    Date: 2013
  11. By: Jeffers, E.; Baicu, C.
    Abstract: One of the most important lessons of the global financial crisis has been the deep interconnectedness between the shadow banking system and the regular banking system. These two systems are linked through several channels, of which one of the most important is the financing provided by regular banks to the shadow banking system and vice versa. In addition, regular banks can originate loans that are securitized. Subsequently, part of the securitized instruments may remain on the balance sheet of the originating banks or be found on the balance sheet of other regular banks and shadow banking entities. These links between the two systems can increase contagion and systemic risks, which in turn may affect financial stability. The financial crisis has acutely revealed the negative effects these interconnections can generate. The interconnections are underestimated by the available data because of the difficulties in gathering information on the euro area. Within this context, our paper tries to evaluate and analyze the interconnections between the shadow banking system and the regular banking system within the euro area, both in the pre-crisis period and currently. Finally, some measures to regulate the interconnections between these two systems are raised.
    Keywords: shadow banking; traditional banking; the European banking system
    Date: 2013
  12. By: Jan Willem van den End
    Abstract: This paper maps the empirical features of the Loan-to-Deposit (LTD) ratio with an eye on using it in macroprudential policy to mitigate liquidity risk. We inspect the LTD trends and cycles of 11 euro area countries by filtering methods and analyze the interaction between loans and deposits. We propose that the trend of the LTD ratio is maintained within an upper and lower bound to avoid bad equilibria. To manage the LTD ratio between the boundaries we formulate two macroprudential rules. One that stimulates banks to issue retail deposits in an upturn and one that incentivizes banks to create loanable funds to support lending in a downturn, facilitated by a sufficiently long adjustment period.
    Keywords: Financial stability; Banks; Liquidity; Regulation
    JEL: C15 E44 G21 G32 G28
    Date: 2013–02
  13. By: Enrico Beretta (Bank of Italy); Silvia Del Prete (Bank of Italy)
    Abstract: Using data on single credit relationships, the paper shows that after a merger or an acquisition, involving two or more banks which had previously jointly financed the same firm, the share of credit granted to the client by the consolidated intermediaries moderately decreases over three years. This does not necessarily imply a reduction of the overall credit granted to the firm, because after consolidations involving its lending banks, the probability of diversifying the mix of lenders increases. Some of the features of credit relationships or the characteristics of borrowing firms, which reduce information asymmetries and the cost of soft information, seem to partially offset the decrease in the share of credit provided by consolidated banks. Indeed, if the company is geographically close to a branch of its financing bank, or if it belongs to an industrial district, the more exclusive credit relationships between the parties seem to mitigate or offset the diversification of credit relationships generated by M&As. By contrast, if a firm is in financial distress or located in the South of Italy – a geographical area with greater negative context externalities – diversification is significantly enhanced.
    Keywords: relationship banking, mergers and acquisitions, firms’ agglomerations
    JEL: G21 G34 L14 L22
    Date: 2013–02
  14. By: Lorenzo Esposito (Banca d'Italia)
    Abstract: The crisis has shown that banks that are too big to fail are at the core of the international financial system. These institutions are thus at the centre of a powerful wave of re-regulation of the banking system. Overall, the proposals developed to strengthen the capacity of big banks to weather future crises, starting with Basel 3, point in the right direction, but they are missing an essential element. SIFIs have a peculiar nature. Their most salient feature is that because of their size, interconnectedness and similar strategies, a crisis of one tends to become a crisis of all. Hence, it is essential to have a mechanism in place to link them together beforehand. The paper analyzes measures that can serve this end. It then proposes a tool designed to give SIFIs a shared interest in behaving correctly, i.e. taking into account the externality implied by their very existence.
    Keywords: financial crisis, too big to fail, macro-prudential, stability fund
    JEL: E60 G01 G28
    Date: 2013–02
  15. By: Raffaella Calabrese (Department of Quantitative Methods for Economics and Business Sciences, University of Milano-Bicocca); Paolo Giudici (Department of Economics and Management, University of Pavia)
    Abstract: This paper considers the joint role of macroeconomic and bankspecific factors in explaining the occurrence of bank failures. As bank failures are, fortunately, rare, we apply a regression model, based on extreme value theory, that turns out to be more effective than classical logistic regression models. The application of this model to the occurrence of bank defaults in Italy shows that, while capital ratios considered by the regulatory requirements of Basel III are extremely significant to explain proper failures, macroeconomic conditions are relevant only when failures are defined also in terms of merger and acquisition. We also apply the joint beta regression model, in order to estimate the factors that most contribute to the bank capital ratios monitored by Basel III. Our results show that the Tier 1 capital ratio and the Total capital ratio are affected by similar variables, at the micro and macroeconomic level. An important outcome of this part of the analysis is that capital ratio variables can be taken as reasonable proxies of distress, at least as far as the effect sign of the determinants of failure risk is being considered.
    Date: 2013–03
  16. By: Ruston, Agustina; García Fronti, Javier
    Abstract: The Greek sovereign debt crisis exposed the weaknesses of the financial system in relation to the control and risk management in the European context. Moreover, as part of the Greek sovereign debt is concentrated in European banks, a default affect its solvency and liquidity. The new regulation introduces by the Basel Committee, known as Basel III, raises new rules aiming to improve risk management in banks. The European Community has conducted stress tests on some European banks, whose results were presented in July 2011. These showed a strong banking system, with strong capital positions. However, current evidence, although preliminary, show otherwise.
    Keywords: stress test basel III greek crisis
    JEL: F3 G2
    Date: 2013
  17. By: Alessio D'Ignazio (Bank of Italy); Carlo Menon
    Abstract: We evaluate the effectiveness of a partial credit guarantee program implemented in a large Italian region using unique microdata from a broad set of firms. Our results show that the policy was effective to the extent that it resulted in an improved financial condition for the beneficiary firms. While the total amount of bank debt was unaffected, firms showed a significant increase in the long-term component. Furthermore, targeted firms benefited from a substantial decrease in interest rates. On the other hand, there is some evidence that the probability of default increases as a consequence of the treatment, although the effect is only marginally significant. There are, instead, no effects on the real outcomes.
    Keywords: financial subsidies, credit constraints, banking
    JEL: G2 H2 O16
    Date: 2013–02
  18. By: Pere Arqué-Castells (Universitat Autònoma de Barcelona & IEB); Elisabet Viladecans-Marsal (Universitat de Barcelona & IEB)
    Abstract: During the period 1965-1987 Spain was an emerging market in full transition from developing to developed status. During the same period the Spanish banking system underwent an unprecedented episode of expansion growing from 5,000 to over 30,000 bank branches. We examine whether the latter process partly caused the former by focusing on the relationship between branch expansion and entrepreneurship in the wholesale and retail trade industries. To address the non-random allocation of bank branches we exploit changes in branching policies that induced a plausibly exogenous time-varying pattern in the relationship between a municipality’s initial financial development and branch expansion. Our estimates, based on a panel data-set of over 2,000 Spanish municipalities, reveal that branch expansion had a strong positive impact on entrepreneurship. This effect was essentially driven by the savings banks, which have stronger regional development objectives than those held by the commercial banks, and which expanded more intensely into municipalities with more precarious financial services.
    Keywords: Banks, entrepreneurship, economic development
    JEL: G21 O43 L26
    Date: 2013
  19. By: Georgios Efthyvoulou; Canan Yildirim
    Abstract: The aim of this study is to undertake an up-to-date assessment of market power in Central and Eastern European banking markets and explore how the global financial crisis has affected market power and what has been the impact of foreign ownership. Three main results emerge. First, while there is some convergence in country-level market power during the pre-crisis period, the onset of the global crisis has put an end to this process. Second, bank-level market power appears to vary significantly with respect to ownership characteristics. Third, asset quality and capitalization affect differently the margins in the pre-crisis and crisis periods. While in the pre-crisis period the impacts are similar for all banks regardless of ownership status, in the crisis period non-performing loans have a negative effect and capitalization a positive effect only for domestically-owned banks.
    Keywords: Bank Market Power, CE European Countries, Global Financial Crisis, Foreign Ownership
    JEL: F23 G01 G21 L10
    Date: 2013–02
  20. By: Augustin Landier; David Sraer; David Thesmar
    Abstract: We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile.
    JEL: E51 E52 G2 G21 G3
    Date: 2013–02
  21. By: Tyson, J.; Shabani, M.
    Date: 2013
  22. By: Tomasz Piskorski; Amit Seru; James Witkin
    Abstract: We contend that buyers received false information about the true quality of assets in contractual disclosures by intermediaries during the sale of mortgages in the $2 trillion non-agency market. We construct two measures of misrepresentation of asset quality – misreported occupancy status of borrower and misreported second liens – by comparing the characteristics of mortgages disclosed to the investors at the time of sale with actual characteristics of these loans at that time that are available in a dataset matched by a credit bureau. About one out of every ten loans has one of these misrepresentations. These misrepresentations are not likely to be an artifact of matching error between datasets that contain actual characteristics and those that are reported to investors. At least part of this misrepresentation likely occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans. Lenders seem to be partly aware of this risk, charging a higher interest rate on misrepresented loans relative to otherwise similar loans, but the interest rate markup on misrepresented loans does not fully reflect their higher default risk. Using measures of pricing used in the literature, we find no evidence that these misrepresentations were priced in the securities at their issuance. A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent seems to be largely unrelated to measures of incentives for top management, to quality of risk management inside these firms or to regulatory environment in a region. Misrepresentations on just two relatively easy-to-quantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries up to $160 billion.
    JEL: G14 G21 G24 G28 K22
    Date: 2013–02
  23. By: Patrick Bajari; Chenghuan Sean Chu; Denis Nekipelov; Minjung Park
    Abstract: The increase in defaults in the subprime mortgage market is widely held to be one of the causes behind the recent financial turmoil. Key issues of policy concern include quantifying the role of various factors, such as home price declines and loosened underwriting standards, in the recent increase in subprime defaults and predicting the effects of various policy instruments designed to mitigate default. To address these questions, we estimate a dynamic structural model of subprime borrowers' default behavior. We prove that borrowers' time preference is identified in our model and propose an easily implementable semiparametric plug-in estimator. Our results show that principal writedowns have a significant effect on borrowers' default behavior and welfare: a uniform 10% reduction in outstanding mortgage balance for the pool of borrowers in our sample would reduce the overall default probability by 22%, and borrowers' average willingness to pay for the principal writedown would be $16,643
    JEL: C14 C5 G21
    Date: 2013–02
  24. By: Stefan Mittnik; Willi Semmler; ;
    Abstract: We introduce a dynamic banking–macro model, which abstains from conventional mean– reversion assumptions and in which—similar to Brunnermeier and Sannikov (2010)—adverse asset–price movements and their impact on risk premia and credit spreads can induce instabilities in the banking sector. To assess such phenomena empirically, we employ a multi–regime vector autoregression (MRVAR) approach rather than conventional linear vector autoregressions. We conduct bivariate empirical analyses, using country–specific financial–stress indices and industrial production, for the U.S., the UK and the four large euro–area countries. Our MRVAR–based impulse–response studies demonstrate that, compared to a linear specification, response profiles are dependent on the current state of the economy as well as the sign and size of shocks. Previous multi–regime–based studies, focusing solely on the regime–dependence of responses, conclude that, during a high–stress period, stress–increasing shocks have more dramatic consequences for economic activity than during low stress. Conducting size–dependent response analysis, we find that this holds only for small shocks and reverses when shocks become sufficiently large to induce immediate regime switches. Our findings also suggest that, in states of high financial stress, large negative shocks to financial–stress have sizeable positive effects on real activity and support the idea of “unconventional” monetary policy measures in cases of extreme financial stress.
    Keywords: banking–sector instability, financial stress, monetary policy, nonlinear VAR, regime dependence
    JEL: E2 E6 C13
    Date: 2013–02
  25. By: Margherita Bottero (Bank of Italy); Giancarlo Spagnolo (SITE – Stockholm School of Economics)
    Abstract: Credit registers collect, store and share information regarding borrowers’ past and current credit relations. Interestingly, such data is typically erased from the public records after a number of years, in accordance with privacy protection laws, which aim at providing individuals with a fresh start from past events. In order to secure credit-worthy but unlucky borrowers with a new beginning, however, these provisions end up removing all of the public information, including that possibly still relevant for screening purposes. This paper assesses such trade-off, by studying the impact of limited records on borrowers’ behavior and market outcomes in a stylized credit market for unsecured loans. In this setup, limited records endogenously give rise to beneficial reputation effects in the form of higher equilibrium effort, which alleviate, rather than worsen, the distortions caused by asymmetric information. Further, we demonstrate that when moral hazard is high, 1-period records can achieve higher welfare and lead to a lower default rate than records that show all, or nothing, of the past history.
    Keywords: privacy, data retention, credit registers, limited records
    JEL: G24 G18 D82
    Date: 2013–02

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