New Economics Papers
on Banking
Issue of 2013‒03‒30
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banking Systemic Vulnerabilities: A Tail-risk Dynamic CIMDO Approach By Xisong Jin; Francisco Nadal De Simone
  2. "Too big to fail" or "Too non-traditional to fail"?: The determinants of banks' systemic importance By Moore, Kyle; Zhou, Chen
  3. Fiscal Sustainability in the Presence of Systemic Banks: the Case of EU Countries. By Bénassy-quéré, A.; Roussellet, A.
  4. International Monetary Transmission with Bank Heterogeneity and Default Risk By Tsvetomira Tsenova
  5. Contagion Effects in the Aftermath of Lehman’s Collapse: Evidence from the US Financial Services Industry. By Dumontaux, N.; Pop, A.
  6. Rules of Thumb for Banking Crises in Emerging Markets By P. Manasse; R. Savona; M. Vezzoli
  7. Fluctuations Economiques et Dynamiques de la Constitution de Provisions Pour Créances Douteuses des Banques Luxembourgeoises By Sabbah Gueddoudj
  8. Calibrating Initial Shocks in Bank Stress Test Scenarios: An Outlier Detection Based Approach. By Darne, O.; Levy-Rueff, O.; Pop, A.
  9. The changing landscape of financial markets in Europe, the United States and Japan By Michiel Bijlsma; Gijsbert T. J. Zwart
  10. Spillovers From Costly Credit By Brian T. Melzer
  11. Advertising Expensive Mortgages By Umit G. Gurun; Gregor Matvos; Amit Seru
  12. The Market for OTC Derivatives By Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
  13. Central Bank Transparency and Financial Stability: Measurement, Determinants and Effects By Roman Horváth; Dan Vaško
  14. Financial stress, regime switching and macrodynamics: Theory and empirics for the US, EU and non-EU countries By Chen, Pu; Semmler, Willi
  15. A New Index of Financial Conditions By Koop, Gary; Korobilis, Dimitris

  1. By: Xisong Jin; Francisco Nadal De Simone
    Abstract: This study proposes a novel framework which combines marginal probabilities of default estimated from a structural credit risk model with the consistent information multivariate density optimization (CIMDO) methodology of Segoviano, and the generalized dynamic factor model (GDFM) supplemented by a dynamic t-copula. The framework models banks? default dependence explicitly and captures the time-varying non-linearities and feedback effects typical of financial markets. It measures banking systemic credit risk in three forms: (1) credit risk common to all banks; (2) credit risk in the banking system conditional on distress on a specific bank or combinations of banks and; (3) the buildup of banking system vulnerabilities over time which may unravel disorderly. In addition, the estimates of the common components of the banking sector short-term and conditional forward default measures contain early warning features, and the identification of their drivers is useful for macroprudential policy. Finally, the framework produces robust outof-sample forecasts of the banking systemic credit risk measures. This paper advances the agenda of making macroprudential policy operational.
    Keywords: financial stability; procyclicality, macroprudential policy; credit risk; early warning indicators; default probability, non-linearities, generalized dynamic factor model; dynamic copulas; GARCH
    JEL: C30 E44 G1
    Date: 2013–01
  2. By: Moore, Kyle; Zhou, Chen
    Abstract: This paper empirically analyzes the determinants of banks' systemic importance. In constructing a measure on the systemic importance of financial institutions we find that size is a leading determinant. This confirms the usual "Too big to fail'' argument. Nevertheless, banks with size above a sufficiently high level have equal systemic importance. In addition to size, we find that the extent to which banks engage in non-traditional banking activities is also positively related to banks' systemic importance. Therefore, in addition to ``Too big to fail", systemically important financial institutions can also be identified by a "Too non-traditional to fail" principle.
    Keywords: Too-big-to-fail, systemic importance, systemic risk, non-traditional banking, extreme value theory
    JEL: G01 G2 G28
    Date: 2013–02–23
  3. By: Bénassy-quéré, A.; Roussellet, A.
    Abstract: We provide a first attempt to include o?-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps a la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit o?-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies on microeconomic data at the bank level. The second one is based on econometric estimations of the probability and the cost of a systemic banking crisis. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.
    Keywords: Fiscal sustainability, tax gap, systemic banking risk, off-balance sheet liabilities.
    JEL: H21 H23 J41
    Date: 2013
  4. By: Tsvetomira Tsenova
    Abstract: This paper compares the effectiveness, efficiency and robustness of standard and non-standard monetary policy tools, such as the banks’ refinancing interest rate, penalty interest rate on deposit facility holdings and minimum reserve requirements on attracted deposits. The assessment is performed on the basis of a numerically evaluated open economy general equilibrium model for macro-prudential analysis where optimal decisions by internationally linked banks are key determinants of international financial flows and wider economic outcomes. Banks differ in terms of balance sheet endowments and risk preferences, and take decisions rationally and competitively. Default risk, borrowing and lending are endogenous results of individual decisions of private agents (banks and households), as well as systemic outcomes of market interaction.
    Keywords: Banking, Monetary Policy, Non-standard Instruments, Macro-Prudential Policies, Financial Stability, Contingency Planning
    JEL: C68 D58 E44 E51 E52 E58 G21
    Date: 2013–03
  5. By: Dumontaux, N.; Pop, A.
    Abstract: The spectacular failure of the 150-year old investment bank Lehman Brothers on September 15th, 2008 was a major turning point in the global financial crisis that broke out in the summer 2007. Through the use of stock market data and Credit Default Swap (CDS) spreads, this paper examines the investors’ reaction to Lehman’s collapse in an attempt to identify a spillover effect on the surviving financial institutions. The empirical analysis indicates that (i) the collateral damages were limited to the largest financial firms; (ii) the most affected institutions were the surviving “non-bank” financial services firms; (iii) the negative effect was correlated with financial conditions of the surviving institutions. We also detect significant abnormal jumps in the CDS spreads that we interpret as evidence of sudden upward revisions in the market assessment of future default probabilities assigned to the surviving financial firms.
    Keywords: bank failures; systemic risk; bailout; too-big-to-fail; contagion; financial crisis; regulation; market discipline; Credit Default Swap.
    JEL: G21 G28
    Date: 2013
  6. By: P. Manasse; R. Savona; M. Vezzoli
    Abstract: This paper employs a recent statistical algorithm (CRAGGING) in order to build an early warning model for banking crises in emerging markets. We perturb our data set many times and create “artificial” samples from which we estimated our model, so that, by construction, it is flexible enough to be applied to new data for out-of-sample prediction. We find that, out of a large number (540) of candidate explanatory variables, from macroeconomic to balance sheet indicators of the countries’ financial sector, we can accurately predict banking crises by just a handful of variables. Using data over the period from 1980 to 2010, the model identifies two basic types of banking crises in emerging markets: a “Latin American type”, resulting from the combination of a (past) credit boom, a flight from domestic assets, and high levels of interest rates on deposits; and an “Asian type”, which is characterized by an investment boom financed by banks’ foreign debt. We compare our model to other models obtained using more traditional techniques, a Stepwise Logit, a Classification Tree, and an “Average” model, and we find that our model strongly dominates the others in terms of out-of-sample predictive power.
    JEL: E44 G01 G21
    Date: 2013–03
  7. By: Sabbah Gueddoudj
    Abstract: This work uses dynamic panel data methods to identify the determinants of the loan loss provisioning ratio in the Luxembourg banking sector from 1995 Q1 to 2011 Q4. The study is motivated by the theoretical framework assuming that both macroeconomic and microeconomic variables have a strong impact on the loans quality and quantity. The empirical results for Luxembourg confirm the findings of previous studies: both macroeconomic and bank-specific variables have a large impact on the development of the loan loss provisioning ratio. Indeed, the results show that GDP growth, house prices, ROA and the solvency ratio have a negative impact on the loan loss provisioning ratio, whereas the unemployment and interest rate increase the ratio.
    Keywords: loan loss provisioning ratio Luxembourg banking system, macroeconomic factors and specific banking factors, dynamic data panel methods
    JEL: G21 C23
    Date: 2013–01
  8. By: Darne, O.; Levy-Rueff, O.; Pop, A.
    Abstract: We propose a rigorous and flexible methodological framework to select and calibrate initial shocks to be used in bank stress test scenarios based on statistical techniques for detecting outliers in time series of risk factors. Our approach allows us to characterize not only the magnitude, but also the persistence of the initial shock. The stress testing exercises regularly conducted by supervisors distinguish between two types of shocks, transitory and permanent. One of the main advantages of our framework, particularly relevant as regards the calibration of transitory shocks, is that it allows considering various reverting patterns for the stressed variables and informs the choice of the appropriate stress horizon. We illustrate the proposed methodology by implementing outlier detection algorithms to several time series of (macro)economic and financial variables typically used in bank stress testing.
    Keywords: Stress testing; Stress scenarios; Financial crises; Macroprudential regulation.
    JEL: G28 G32 G20 C15
    Date: 2013
  9. By: Michiel Bijlsma; Gijsbert T. J. Zwart
    Abstract: We compare the structure of the financial sectors of the EU27, Japan and the United States, looking at a set of 23 indicators. We find a large variation within the European Union in the structure of the financial sector. Using principal components analysis, we identify robust groups of EU countries. One group consists of the eastern European members that entered the EU more recently.These have substantially smaller financial sectors than the old member states. A second group can be classified as market-based (MBEU) and the third group is more bank-based (BBEU). We compare US, MBEU, BBEU, Eastern EU and Japan with the following main results. First, the groups within Europe are geographically related. Second, in many indicators, MBEU countries are closer to the (market-based) US, while BBEU countries more closely resemble Japan. Paradoxically, however, market-based EU countries also have large banking sectors. Banks in market-based countries have larger cross-border assets and liabilities, and derive a larger fraction of their income from fees, rather than interest income, than banks in bank-based countries. Finally, for most indicators, the ordering of groups of countries is quite stable over time, but while the crisis has had no impact on the relative ordering of the groups, it has slightly widened the gap between the US and all EU regions insome respects. We also find that during the crisis, substitution between market-based and bank-based sources of finance occurred in the US, and to a lesser extent in MBEU and BBEU countries.
    Date: 2013–03
  10. By: Brian T. Melzer
    Abstract: Recent research on the effects of credit access among low- and moderate-income households finds that high-cost payday loans exacerbate, rather than alleviate, financial distress for a subset of borrowers (Melzer 2011; Skiba and Tobacman 2011). In this study I find that others, outside the borrowing household, bear a portion of these costs too: households with payday loan access are 20% more likely to use food assistance benefits and 10% less likely to make child support payments required of non-resident parents. These findings suggest that as borrowers accommodate interest and principal payments on payday loan debt, they prioritize loan payments over other liabilities like child support payments and they turn to transfer programs like food stamps to supplement the household’s resources. To establish this finding, the analysis uses a measure of payday loan access that is robust to the concern that lender location decisions and state policies governing payday lending are endogenous relative to household financial condition. The analysis also confirms that the effect is absent in the mid-1990s, prior to the spread of payday lending, and that the effect grows over time, in parallel with the growth of payday lending.
    Date: 2013–03
  11. By: Umit G. Gurun; Gregor Matvos; Amit Seru
    Abstract: We use a unique dataset that combines information on advertising by subprime lenders and mortgages originated by them from 2002 to 2007 to study the relationship between advertising and the nature of mortgages obtained by consumers. We exploit the richness of our data and measure the relative expensiveness of a given mortgage as the excess rate of a mortgage after accounting for a broad set of borrower, contract, and regional characteristics associated with a given mortgage--less expensive mortgages, all else equal, are better products from the perspective of the consumer. We find a strong positive relationship between the intensity of local advertising and the expensiveness of mortgages extended by lenders within a given region, with the relationship strongest for advertising through newspapers, the most heavily used channel for local advertising of mortgages. This pattern survives even after conditioning for a rich set of borrower, loan and region characteristics and exploiting differences in advertising within a given lender. Advertisers lend to consumers who, all else equal, default less, making it unlikely that our results are driven by unobservable borrower quality. We also exploit variation in mortgage advertising induced by the entry of Craigslist across different regions to demonstrate that the relation between advertising and expensiveness of mortgages is not likely to be spurious. We corroborate that advertising is most effective when targeted at groups that might be less informed about mortgages, such as the poor, the less educated and minorities. These findings are inconsistent with the “informative view” under which advertising allows consumers to find cheaper products, and instead support the “persuasive view” that advertising in the subprime mortgage market was used to steer consumers into expensive choices.
    JEL: E65 G18 G21 L85
    Date: 2013–03
  12. By: Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
    Abstract: We develop a model of equilibrium entry, trade, and price formation in over-the- counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as “dealers,” trading mainly to provide intermediation services, while medium sized banks endogenously participate as “customers” mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.
    JEL: D83 G0
    Date: 2013–03
  13. By: Roman Horváth; Dan Vaško
    Abstract: We develop a comprehensive index of the transparency of central banks regarding their policy framework to promote financial stability for 110 countries from 2000 to 2011 and examine the determinants and effects of this transparency. We find that the degree of transparency increased in the 2000s, though it still varied greatly across the countries in our study. Our regression results suggest that more developed countries exhibit greater transparency, that episodes of high financial stress have a negative effect on transparency and that the legal origin matters, too. Importantly, we find that transparency regarding the level of financial stability is strongly affected by monetary policy transparency. The central banks that have a transparent monetary policy are more likely to show increased transparency in their framework for financial stability. Our results also suggest a non-linear effect of central bank financial stability transparency on financial stress. Unless the financial sector experiences severe distress, greater transparency is beneficial for financial stability.
    Keywords: financial stability, transparency, central banks
    JEL: E52 E58
    Date: 2013–03
  14. By: Chen, Pu; Semmler, Willi
    Abstract: Over-borrowing and financial stress has recently become an important issue in macroeconomic and policy discussions in the US as well as in the EU. In this paper we study two regimes of financial stress. In a regime of high financial stress, stress shocks can have large and persistent impacts on the real side of the economy whereas in regimes of low stress, shocks can easily dissipate having no lasting effects. In order to study the macroeconomic dynamics, with alternative paths resulting from financial stress shocks, we introduce a macromodel with a finance-macro link which uses multi-period decisions framework of economic agents. The agents can, in a finite horizon context, borrow and accumulate assets where however the above two scenarios may occur. The model is solved through nonlinear model predictive control (NMPC). Empirically then we use a Multi-Regime VAR (MRVAR) to study the impact of financial stress shocks on the macroeconomy in a large number of countries. --
    Keywords: financial stress,macro dynamics,MRVAR
    JEL: E3 G21
    Date: 2013
  15. By: Koop, Gary; Korobilis, Dimitris
    Abstract: We use factor augmented vector autoregressive models with time-varying coefficients to construct a financial conditions index. The time-variation in the parameters allows for the weights attached to each financial variable in the index to evolve over time. Furthermore, we develop methods for dynamic model averaging or selection which allow the financial variables entering into the FCI to change over time. We discuss why such extensions of the existing literature are important and show them to be so in an empirical application involving a wide range of financial variables.
    Keywords: financial stress; dynamic model averaging; forecasting
    JEL: C11 C32 C52 C53 C60 G17
    Date: 2013–03–13

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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