New Economics Papers
on Banking
Issue of 2013‒04‒06
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Optimal Financial Structure By C.A.E. Goodhart
  2. Who Should Pay for Credit Ratings and How? By Anil K Kashyap; Natalia Kovrijnykh
  3. The Financial Implications of a Banking Union. By ALLEN, Franklin; CARLETTI, Elena; GIMBER, Andrew
  4. The impact of unconventional monetary policy on the market for collateral: The case of the French bond market. By Avouyi-Dovi, Sanvi; Idier, Julien
  5. The Icelandic banking collapse - was the optimal policy path chosen? By Thorsteinn Thorgeirsson; Paul van den Noord
  7. The structure of bank supervision and corruption in lending: a study for transition economies By Zenathan Hasannudin
  8. Interest-Rate Modelling in Collateralized Markets: Multiple curves, credit-liquidity effects, CCPs By Andrea Pallavicini; Damiano Brigo
  9. Valuation of the Prepayment Option of a Perpetual Corporate Loan By Timothée Papin; Gabriel Turinici
  10. Rating Triggers, Market Risk and the Need for More Regulation By Federico Parmeggiani
  11. What should we do about (Macro) Pru? Macro Prudential Policy and Credit. By Ray Barrell; Dilruba Karim
  12. When does delinquency result in neglect?: mortgage delinquency and property maintenance By Lauren Lambie-Hanson
  13. Exploring the determinants of the productivity of microfinance institutions in India By Twaha, Koire; Rashid, Abdul
  14. Expectations of functions of stochastic time with application to credit risk modeling By Ovidiu Costin; Michael B. Gordy; Min Huang; Pawel J. Szerszen
  15. The Impact of Corporate Governance on the Market Value of Financial Institutions - Empirical Evidences from Italy By Bubbico, Rossana; Giorgino, Marco; Monda, Barbara

  1. By: C.A.E. Goodhart
    Abstract: None
    Date: 2012
  2. By: Anil K Kashyap; Natalia Kovrijnykh
    Abstract: This paper analyzes a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on the unobservable effort exerted by a credit rating agency (CRA). We analyze optimal compensation schemes for the CRA that differ depending on whether a social planner, the firm, or investors order the rating. We find that rating errors are larger when the firm orders it than when investors do. However, investors ask for ratings inefficiently often. Which arrangement leads to a higher social surplus depends on the agents' prior beliefs about the project quality. We also show that competition among CRAs causes them to reduce their fees, put in less effort, and thus leads to less accurate ratings. Rating quality also tends to be lower for new securities. Finally, we find that optimal contracts that provide incentives for both initial ratings and their subsequent revisions can lead the CRA to be slow to acknowledge mistakes.
    JEL: D82 D83 D86 G24
    Date: 2013–03
  3. By: ALLEN, Franklin; CARLETTI, Elena; GIMBER, Andrew
    Abstract: With calls for a banking union to resolve the issue of banking interdependence within the Eurozone, this paper explores the reasons behind such a policy, how it should be implemented and the possible ramifications.
    Date: 2012
  4. By: Avouyi-Dovi, Sanvi; Idier, Julien
    Abstract: We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.
    Keywords: Monetary policy; Collateral; Liquidity; Volatility; French bond market;
    JEL: G10 C22 C53
    Date: 2012–02
  5. By: Thorsteinn Thorgeirsson; Paul van den Noord
    Abstract: This study examines the economic policies of the Icelandic government in the wake of the banking collapse of 2008 in terms of counter-factual policy options. The path chosen was important for the recovery but policy makers faced alternative policy options for handling the many difficult situations that arose, with potential implications for government finances and economic growth. We utilize two complementary macroeconomic models to assess the decisions taken and the recovery and on that basis develop counter-factual scenarios of how the crisis could have played out if the decisions had been different. Four alternative scenarios are considered involving different ways to deal with the collapse: i) adopt a more pro-cyclical fiscal policy, ii) allow the ISK exchange rate to drop without imposing capital controls, iii) pay the interest expense on the initial Icesave agreement, or iv) rescue the banks as Ireland did. Macroeconomic model simulations are performed to assess the impact of different decisions involving public finances on economic growth, unemployment and other macroeconomic variables over the period 2008-2025. The results are compared to the actual path taken. Addressing this question is potentially interesting in its own right and also from the point of view of other countries that have experienced similar crises but have responded differently.
    Date: 2013–03
  6. By: KARL-THEODOR EISELE (LaRGE Research Center, Université de Strasbourg); PHILIPPE ARTZNER (LaRGE Research Center, Université de Strasbourg)
    Abstract: This paper is based on a general method for multiperiod prudential supervision of companies submitted to hedgeable and non-hedgeable risks. Having treated the case of insurance in an earlier paper, we now consider a quantitative approach to supervision of commercial banks. The various elements under supervision are the bank’s current amount of tradeable assets, the deposit amount, and four flow processes: future trading risk exposures, deposit flows, flows of loan repayments and of deposit remunerations. The approach uses a multiperiod risk assessment supposed not to allow supervisory arbitrage. Coherent and non-coherent examples of such risk assessments are given. The risk assessment is applied to the risk bearing capital process composed out of the amounts of assets and deposits, and the four flow processes mentioned above. We give a general definition of a supervisory margin which uses the risk assessment under the assumption of optimal trading risk exposures. The transfer principle together with a cost-of-capital ratio gives quantitative definitions of the risk margin and of the non-hedgeable equity capital requirement. The hedgeable equity capital requirement measures the inadequacy of the bank’s portfolio of tradeable assets with respect to the optimal trading risk exposures. The hierarchy of different interferences of a supervisor is related to these quantities. Finally, a simple allocation principle for margins and the equity capital requirements is derived.
    Keywords: equity capital requirements, hierarchy of supervisor’s interferences, multiperiod risk assessment, optimal trading risk exposures, supervisory margin.
    JEL: G18 G21 G32
    Date: 2013
  7. By: Zenathan Hasannudin (UP1 UFR02 - Université Paris 1, Panthéon-Sorbonne - UFR d'Économie - Université Paris I - Panthéon-Sorbonne)
    Abstract: This paper try to examine the relation between the structure of bank supervision and corruption in lending based on the data from 21 transition economies in Eastern Europe and Central Asia. We support Beck, Kunt, and Levine (2006) that higher supervisory power will increase the degree of corruption in lending while supervisory policies which promote private monitoring by pushing banks to disclose accurate information and give incentives to private agents to monitor bank will reduce the degree of corruption in lending. As the main finding in this paper, we prove that the structure of bank supervision has significant effect to corruption in lending. More specifically, we found that the degree of corruption in lending will increase when the bank supervisor function is not in the central bank. We also have found that after we control our model with various country-level variables, the higher independency of bank supervisor will decrease the degree of corruption in lending.
    Keywords: banques, pratiques déloyales
    Date: 2012
  8. By: Andrea Pallavicini; Damiano Brigo
    Abstract: The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for pricing under credit, collateral and funding risks into term structure modelling, integrating the origination of different term structures with such effects. Under a number of assumptions on collateralization, wrong-way risk, gap risk, credit valuation adjustments and funding effects, including the treasury operational model, and via an immersion hypothesis, we are able to derive a synthetic master equation for the multiple term structure dynamics that integrates multiple curves with credit/funding adjustments.
    Date: 2013–04
  9. By: Timothée Papin (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Gabriel Turinici (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)
    Abstract: We investigate in this paper a perpetual prepayment option related to a corporate loan.The default intensity of the firmis supposed to follow a CIR process. We assume that the contractual margin of the loan is defined by the credit quality of the borrower and the liquidity cost that reflects the funding cost of the bank. Two frameworks are discussed: firstly a loan margin without liquidity cost and secondly a multiregime framework with a liquidity cost dependent on the regime.The prepayment option needs specific attention as the payoff itself is an implicit function of the parameters of the problem and of the dynamics. In the unique regime case, we establish quasianalytic formulas for the payoff of the option; in both cases we give a verification result that allows for the computation of the price of the option. Numerical results that implement the findings are also presented and are completely consistent with the theory; it is seen that when liquidity parameters are very different (i.e., when a liquidity crisis occurs) in the high liquidity cost regime, the exercise domain may entirely disappear, meaning that it is not optimal for the borrower to prepay during such a liquidity crisis.The method allows for quantification and interpretation of these findings.
    Keywords: liquidity regime ; loan prepayment ; mortgage option ; American option ; perpetual option ; option pricing ; Snell envelope ; prepayment option ; CIR process ; switching regimes ; Markov modulated dynamics.
    Date: 2013–03–25
  10. By: Federico Parmeggiani
    Abstract: A rating trigger is a particular type of debt covenant that mandates the borrower to maintain its own credit rating above a certain rating threshold, requiring in the event of a rating downgrade the adoption of specific enforceable actions aimed at securing the lender claims from the borrower's higher risk level. Rating triggers lower the cost of borrowing capital, but in case they are activated they exacerbate the borrower's need for liquidity just in the moment when its credit risk is higher, making the borrower's default more likely to occur. Despite the potential threat posed by rating triggers on debt markets, these contractual devices remain almost unregulated both in the U.S.and in Europe. The purpose of this paper is first to analyze the effects rating triggers can ha ve on overall market risk and second to assess the proliferation of rating triggers among large U.S. companies in order to ensure whether these contractual devices need a stricter regulation. The article is divided in two parts. From section 2 to 5, I provide an overview on the different types of triggers and analyze the rationale behind their use in terms of advantages and disadvantages for both issuers and investors. From section 6 to 9 I perform an empirical analysis by assessing the rating triggers that have been used by Dow Jones Industrial Average index companies. I then examine the correlation between the use of rating triggers and the companies’ risk profiles by measuring their credit ratings and their Altman’s Z-Scores in order to find out whether triggers are mostly used by risky companies, capable of being impaired by the triggers’ activation and thus posing a threat to market stability . Then in section 10 I draw the conclusions suggesting the introduction by U.S. and European regulators of a specific duty to disclose all the rating triggers that listed companies include every year in bond indentures and in financial contracts.
    Keywords: Rating Trigger, Credit Rating, Credit Risk, Financial Regulation
    JEL: G24 G28 K2
    Date: 2013–03
  11. By: Ray Barrell; Dilruba Karim
    Abstract: Credit growth is widely used as an indicator of potential financial stress, and it plays a role in the new Basel III framework. However, it is not clear how good an indicator it is in markets that have been financially liberalised. We take a sample of 14 OECD countries and 14 Latin American and East Asian countries and investigate early warning systems for crises in the post Bretton Woods period. We show that there is a limited role for credit in an early warning system, and hence little reason for the Basel III structure. We argue that the choice of model for predicting crises depends upon both statistical criteria and on the use to which the model is to be put.
    Date: 2012
  12. By: Lauren Lambie-Hanson
    Abstract: Studies of foreclosure externalities have overwhelmingly focused on the impact of forced sales on the value of nearby properties, typically finding modest evidence of foreclosure spillovers. However, many quality-of-life issues posed by foreclosures may not be reflected in nearby sale prices. This paper uses new data from Boston on constituent complaints and requests for public services made to City government departments, matched with loan-level data, to examine the timing of foreclosure externalities. I find evidence that property conditions suffer most while homes are bank owned, although reduced maintenance is also common earlier in the foreclosure process. Since short sales prevent bank ownership, they should result in fewer neighborhood disamenities than foreclosures.
    Keywords: Foreclosure - Massachusetts ; Real property - Massachusetts ; Housing - Prices - Massachusetts
    Date: 2013
  13. By: Twaha, Koire; Rashid, Abdul
    Abstract: This paper attempts to investigate the determinants of productivity in microfinance institutions (MFIs) in India using the Empirical Bayesian technique. To do this, we utilize an unbalanced panel data set covering the period 2005-2011 with 292 observations from 64 institutions.Based on theoretical grounds, three broad factors are specified: institutional characteristics, outreach, and efficiency. We find convincing evidence that institutional characteristics and outreach have both positive and negative effects on the productivity of MFIs, depending of the proxy used in the analysis. However,the efficiency of MFIs affects the productivity negatively. Specifically, we find that the age of the institution positively influences the productivity by 6.1581 points, while number of offices and number of personnel negatively affect it by 26.41% and 8.77%, respectively. Of the outreach variables, numbers of active borrowers positively influence productivity by 0.04%, whereas, average loan size appears to have an inverse relationship with productivity. We further find that cost per loan – a proxy for efficiency, has a negative and statistically significant impact of 1.9604 points on the productivity of MFIs. Overall, our investigation suggests that there is a need to build client confidence, pursue innovative credit delivery techniques in reaching out to the poor and achieving high levels of productivity.
    Keywords: productivity, microfinance institutions, efficient, outreach,and Empirical Bayesian Estimation Technique
    JEL: G2 G21
    Date: 2012–12–15
  14. By: Ovidiu Costin; Michael B. Gordy; Min Huang; Pawel J. Szerszen
    Abstract: We develop two novel approaches to solving for the Laplace transform of a time-changed stochastic process. We discard the standard assumption that the background process (Xt) is Levy. Maintaining the assumption that the business clock (Tt) and the background process are independent, we develop two different series solutions for the Laplace transform of the time-changed process X-tildet=X(Tt). In fact, our methods apply not only to Laplace transforms, but more generically to expectations of smooth functions of random time. We apply the methods to introduce stochastic time change to the standard class of default intensity models of credit risk, and show that stochastic time-change has a very large effect on the pricing of deep out-of-the-money options on credit default swaps.
    Date: 2013
  15. By: Bubbico, Rossana; Giorgino, Marco; Monda, Barbara
    Abstract: This paper analyses how the quality of the corporate governance system impacts on the market value of the financial institutions listed on the Italian Stock Exchange. Implementing a good corporate governance is costly, therefore verifying whether the investment is worth its cost is a relevant issue. Despite the central role that financial institutions play in the real economy, there are few studies that focus specifically on the financial industry; filling this gap in literature is especially relevant to Italy, where the enterprises are highly dependent on the banking system for their financing needs. The first step of the present study is the assessment of the corporate governance quality of the sample companies through the Corporate Governance Index (CGI). CGI is a scoring model that analyses four different macro-areas of governance: Board, Compensation, Shareholders’ and Stakeholders’ Rights, and Disclosure. A Cross-sectional data regression is then used to study the relationship between the corporate governance quality and the market value of financial institutions. The analysis, using 2010 data, proves that there is a positive and statistically significant correlation between corporate governance and performance: this finding supports the hypothesis that governance creates value for companies and that investments to implement effective governance systems give net positive benefit and should therefore be pursued. Hence financial institutions should be encouraged to improve their corporate governance systems.
    Keywords: Corporate Governance, Corporate Governance Index, Banks performance, Governance of financial institutions
    JEL: G21 G32 G34
    Date: 2012–05

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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