New Economics Papers
on Banking
Issue of 2013‒04‒13
thirty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Robustness and informativeness of systemic risk measures By Löffler, Gunter; Raupach, Peter
  2. Banker compensation and bank risk taking: the organizational economics view By Arantxa Jarque; Edward S. Prescott
  3. Procyclical Leverage and Value-at-Risk By Tobias Adrian; Hyun Song Shin
  4. Financial Crises: Explanations, Types, and Implications By Claessens, Stijn; Kose, Ayhan
  5. Understanding Financial Crises: Causes, Consequences, and Policy Responses By Claessens, Stijn; Kose, Ayhan; Laeven, Luc; Valencia, Fabian
  6. The Market for OTC Derivatives By Atkeson, Andrew; Eisfeldt, Andrea L.; Weill, Pierre-Olivier
  7. The Great Financial Crisis: setting priorities for new statistics By Claudio Borio
  8. Rethinking the state's role in finance By Cihak, Martin; Demirguc-Kunt, Asli
  9. A Macroeconomic Model with a Financial Sector By Yuliy Sannikov; Markus Brunnermeier
  10. Financial Development in 205 Economies, 1960 to 2010 By Martin Čihák; Asli Demirgüč-Kunt; Erik Feyen; Ross Levine
  11. Understanding global liquidity By Eickmeier, Sandra; Gambacorta, Leonardo; Hofmann, Boris
  12. Capital Flows and the Risk-Taking Channel of Monetary Policy By Valentina Bruno; Hyun Song Shin
  13. Credit Risks and Monetary Policy Trade-Offs By Kevin x.d. Huang; J. scott Davis
  14. European bank deleveraging and global credit conditions : implications of a multi-year process on long-term finance and beyond By Feyen, Erik; del Mazo, Ines Gonzalez
  15. The efficiency of infrastructure spending By Fabrizio Balassone (editor)
  16. How Much do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data By Amiti, Mary; Weinstein, David E.
  17. Credit Market Competition and Liquidity Crises By Carletti, Elena; Leonello, Agnese
  18. Do we need a separate banking system? An assessment By Lang, Gunnar; Schröder, Michael
  19. Systemic Risk, Contagion, and Financial Networks: A Survey By Matteo Chinazzi; Giorgio Fagiolo
  20. Revenge of the steamroller: ABCP as a window on risk choices By Carlos Arteta; Mark Carey; Ricardo Correa; Jason Kotter
  21. Equilibrium Collateral Constraints By Cecilia Parlatore Siritto
  22. Capital, Trust and Competitiveness in the Banking Sector By Gehrig, Thomas
  23. Long Term Government Debt, Financial Fragility and Sovereign Default Risk By Christiaan van der Kwaak; Sweder van Wijnbergen
  24. Multinational Banking and Financial Contagion: Evidence from Foreign Bank Subsidiaries By Bang Nam Jeon; Maria Pia Olivero; Ji Wu
  25. The private value of too-big-to-fail guarantees By Michiel Bijlsma; Remco Mocking
  26. Macroprudential Policy and Its Instruments in a Small EU Economy By Jan Frait; Zlatuse Komarkova
  27. The Macroeconomics of Modigliani-Miller By Gersbach, Hans; Haller, Hans; Müller, Jürg
  28. Credit rationing or overlending:Who is right ? By Jean Bonnet; Sylvie Cieply; Marcus Dejardin
  29. Does co-integration and causal relationship exist between the non-stationary variables for Chinese bank’s profitability? Empirical evidence By Mondher bellalah; Olivier Levyne; Omar Masood
  30. Deleveraging from Emerging Markets. The Case of Euro-area Banks By Alicia Garcia-Herrero; Fielding Chen
  31. A new data set on competition in national banking markets By Sofronis Clerides; Manthos D. Delis; Sotirios Kokas
  32. What causes banking crises? An empirical investigation for the world economy By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Ou, Zhirong

  1. By: Löffler, Gunter; Raupach, Peter
    Abstract: Recent literature has proposed new methods for measuring the systemic risk of financial institutions based on observed stock returns. In this paper we examine the reliability and robustness of such risk measures, focusing on CoVaR, marginal expected shortfall, and option-based tail risk estimates. We show that CoVaR exhibits undesired characteristics in the way it responds to idiosyncratic risk. In the presence of contagion, the risk measures provide conflicting signals on the systemic risk of infectious and infected banks. Finally, we explore how limited data availability typical of practical applications may limit the measures' performance. We generate systemic tail risk through positions in standard index options and describe situations in which systemic risk is misestimated by the three measures. The observations raise doubts about the informativeness of the proposed measures. In particular, a direct application to regulatory capital surcharges for systemic risk could create wrong incentives for banks. --
    Keywords: Systemic Risk,CoVaR,Marginal Expected Shortfall,Tail Risk
    JEL: G21 G28
    Date: 2013
  2. By: Arantxa Jarque; Edward S. Prescott
    Abstract: Models of banks operating under limited liability with deposit insurance and employee incentive problems are used to analyze how banker compensation contracts can contribute to bank risk shifting. The first model is a multi-agent, moral-hazard model, where each agent (e.g. a loan officer) operates a risky lending technology. Results differ from the single-agent model; pay for performance contracts do not necessarily indicate risk at the bank level. Correlation of returns is the most important factor. If loan officer returns are uncorrelated, the form of pay is irrelevant for risk. If returns are correlated, a low wage causes risk. If correlation is endogenous, relative performance contracts that encourage correlation of returns can create bank risk. A sufficient condition for a contract to induce risk at the bank level is provided. The second model adds a loan review and risk management function that affects risk characteristics of loan officers' loans. Counter to common perception, paying loan reviewers and risk managers for performance does not necessarily create risk. The model also identifies the importance of evaluating the quality of bank controls as a means for limiting bank risk.
    Keywords: Bank supervision
    Date: 2013
  3. By: Tobias Adrian; Hyun Song Shin
    Abstract: The availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries. Empirically, we find that intermediary leverage is negatively aligned with the banks' Value-at-Risk (VaR). Motivated by the evidence, we explore a contracting model that captures the observed features. Under general conditions on the outcome distribution given by Extreme Value Theory (EVT), intermediaries maintain a constant probability of default to shifts in the outcome distribution, implying substantial deleveraging during downturns. For some parameter values, we can solve the model explicitly, thereby endogenizing the VaR threshold probability from the contracting problem.
    JEL: G21 G32
    Date: 2013–04
  4. By: Claessens, Stijn; Kose, Ayhan
    Abstract: This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.
    Keywords: asset booms; banking crises; credit booms; crises prediction; currency crises; debt crises; defaults; financial restructuring; policy implications; Sudden stops
    JEL: E32 E5 E6 F44 G01 H12
    Date: 2013–02
  5. By: Claessens, Stijn; Kose, Ayhan; Laeven, Luc; Valencia, Fabian
    Abstract: The global financial crisis of 2007-09 has led to an intensive research program analyzing a wide range of issues related to financial crises. This paper presents a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons. The book covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to crises, considers lessons on their antecedents, and analyzes their evolution and aftermath. It also provides valuable policy lessons on how to prevent, contain and manage financial crises.
    Keywords: asset price busts; banking crises; credit busts; currency crises; debt crises; defaults; global financial crisis; prediction of crises; restructuring; sudden stops; welfare cost
    JEL: E32 E5 E6 F44 G01 H12
    Date: 2013–01
  6. By: Atkeson, Andrew; Eisfeldt, Andrea L.; Weill, Pierre-Olivier
    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.
    Keywords: credit default swaps; dealers; OTC markets
    JEL: D83 G00
    Date: 2013–03
  7. By: Claudio Borio
    Abstract: Every financial crisis brings in its wake demands for more information; the latest one is no exception. Because, in deceptively tranquil times, it is well-nigh impossible to foster the consensus necessary to improve data availability, such a window of opportunity must not be missed. To be sure, the main reason why crises occur is not lack of statistics but the failure to interpret them correctly and to take remedial action. But better statistics can no doubt be a big help. Priorities for new data collections include better property prices and, above all, comprehensive financial information for banks on a consolidated and global basis, covering their balance sheets but also their income statements. This could be usefully complemented with corresponding information on the international geography of these banks' operations and, for crisis management purposes, with much more timely and granular data on their bilateral exposures. The collection of information should be based on sound governance arrangements, flexible and cost-efficient. The BIS can play and is playing a very active role.
    Keywords: financial crisis, systemic risk, banking statistics, property prices
    Date: 2013–04
  8. By: Cihak, Martin; Demirguc-Kunt, Asli
    Abstract: The global financial crisis has given greater credence to the idea that active state involvement in the financial sector can be helpful for stability and development. There is now evidence that, for example, lending by state-owned banks has helped in mitigating the impact of the crisis on aggregate credit. But evidence also points to negative longer-term effects of direct interventions on resource allocation and quality of intermediation. This suggests a need to rebalance the state's roles from direct to less direct involvement, as the crisis subsides. The state does have very important roles, especially in providing well-defined regulations and enforcing them, ensuring healthy competition, and strengthening financial infrastructure. One of the crisis lessons is the importance of getting the basics right first: countries with complex but poorly enforced regulations suffered more during the global crisis. Evidence also suggests that instead of restricting competition, the state needs to encourage contestability through healthy entry of well-capitalized institutions and timely exit of insolvent ones. There is also new evidence that supports the state's key role in promoting transparency of information and reducing counterparty risk. The challenge of financial sector policies is to better align private incentives with public interest, without taxing or subsidizing private risk-taking.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Financial Intermediation,Emerging Markets
    Date: 2013–04–01
  9. By: Yuliy Sannikov (Princeton University); Markus Brunnermeier (Princeton University)
    Abstract: This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplication effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in downturns. In an environment of low exogenous risk experts assume higher leverage making the system more prone to systemic volatility spikes - a volatility paradox. Securitization and derivatives contracts leads to better sharing of exogenous risk but to higher endogenous systemic risk. Financial experts may impose a negative externality on each other by not maintaining adequate capital cushion.
    Date: 2012
  10. By: Martin Čihák; Asli Demirgüč-Kunt; Erik Feyen; Ross Levine
    Abstract: This paper describes our construction of the Global Financial Development Database and uses the data to compare financial systems around the world. The database provides information on financial systems in 205 economies over the period from 1960 to 2010 and includes measures of (1) size of financial institutions and markets (financial depth), (2) degree to which individuals and firms can and do use financial services (access), (3) efficiency of financial intermediaries and markets in intermediating resources and facilitating financial transactions (efficiency), and (4) stability of financial institutions and markets (stability).
    JEL: G00 G01 G10 G20 O16
    Date: 2013–04
  11. By: Eickmeier, Sandra; Gambacorta, Leonardo; Hofmann, Boris
    Abstract: We explore the concept of global liquidity based on a factor model estimated using a large set of financial and macroeconomic variables from 24 advanced and emerging market economies. We measure global liquidity conditions based on the common global factors in the dynamics of liquidity indicators. By imposing theoretically motivated sign restrictions on factor loadings, we achieve a structural identification of the factors. The results suggest that global liquidity conditions are largely driven by three common factors and can therefore not be summarised by a single indicator. These three factors can be identified as global monetary policy, global credit supply and global credit demand. --
    Keywords: global liquidity,monetary policy,credit supply,credit demand,international business cycles,factor model,sign restrictions
    JEL: E5 E44 F3 C3
    Date: 2013
  12. By: Valentina Bruno; Hyun Song Shin
    Abstract: We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the "risk-taking channel" of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies.
    JEL: E5 F32 F33 F34 G21
    Date: 2013–04
  13. By: Kevin x.d. Huang (Vanderbilt University); J. scott Davis (Federal Reserve Bank of Dallas)
    Abstract: Financial frictions and …financial shocks can affect the trade-off between inflation stabilization and output-gap stabilization faced by a central bank. Financial frictions lead to a greater response in output following any deviation of inflation from target and thus lead to an increase in the sacrifice ratio. As a result, optimal monetary policy in the face of credit frictions is to allow greater output gap instability in return for greater inflation stability. Such a shift in optimal monetary policy can be mimicked in a Taylor-type interest rate feedback rule that shifts weight to inflation and the lagged interest rate and away from output. However, the ability of the conventional Taylor rule to mimic optimal policy gets worse as credit market frictions and shocks intensify. By including a …financial variable like the lending spread in the monetary policy rule, the central bank can partially reverse this worsening output-inflation trade-off brought about by financial frictions and partially undo the effects of credit market frictions and shocks. Thus the central bank may want to include lending spreads in the policy rule even when …financial distortions are not explicitly part of the central bank's objective function.
    Keywords: Credit friction; Credit shock; Credit spread; Monetary policy trade-offs; Taylor rule
    JEL: E0 G0
    Date: 2013–03–25
  14. By: Feyen, Erik; del Mazo, Ines Gonzalez
    Abstract: This paper assesses European bank deleveraging and its impact on global credit conditions. Before the onset of the global financial crisis, European banks had rapidly expanded their foreign lending activities. However, European banks have since been tightening credit conditions in Europe more for longer-term lending, a trend that banks expect to continue. European financial stress has been transmitted to emerging markets that have experienced a sustained deterioration of credit standards and funding conditions. As a result, European lending in emerging markets has been lagging behind lending of other international banks although European banks remain a dominant source of funding."Good"bank deleveraging is still necessary from a prudential perspective. Although acute"bad"deleveraging pressures due to financial stress, which can trigger a credit crunch, have subsided recently on account of decisive policy measures, tail risks remain. Curtailing lending will probably be a core component of this multi-year deleveraging process. Taken together, European bank deleveraging warrants close attention.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Financial Intermediation,Bankruptcy and Resolution of Financial Distress
    Date: 2013–03–01
  15. By: Fabrizio Balassone (editor)
    Abstract: The volume collects the papers presented at the Conference on "Banks, Local Credit Markets and Credit Supply" held in Milan, on 24 March 2010. The papers presented at the two sessions of the Conference analyse how banks' lending activities are organized and how this affects the supply of credit to small and medium-sized enterprises (SMEs). The first session focuses on new lending technologies and banking organization. The second session studies how these organizational variables affect the lending activity to SMEs. The papers draw on the results of a sample survey of more than 300 Italian banks conducted by the Bank of Italy in 2007.
    JEL: G2 L2
    Date: 2012–06
  16. By: Amiti, Mary; Weinstein, David E.
    Abstract: We show that supply-side financial shocks have a large impact on firms’ investment. We do this by developing a new methodology to separate firm credit shocks from loan supply shocks using a vast sample of matched bank-firm lending data. We decompose loan movements in Japan for the period 1990 to 2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix (2011). As a result, idiosyncratic bank shocks i.e., movements in bank loan supply net of borrower characteristics and general credit conditions can have large impacts on aggregate loan supply and investment. We show that these idiosyncratic bank shocks explain 40 percent of aggregate loan and investment fluctuations.
    Keywords: credit constraints; financial markets; granular shock
    JEL: E44 G21
    Date: 2013–03
  17. By: Carletti, Elena; Leonello, Agnese
    Abstract: We develop a model where banks invest in reserves and loans, and face aggregate liquidity shocks. Banks with liquidity shortage sell loans on the interbank market. Two equilibria emerge. In the no default equilibrium, all banks hold enough reserves and remain solvent. In the mixed equilibrium, some banks default with positive probability. The former exists when credit market competition is intense. The latter emerges when banks exercise market power. Thus, competition is beneficial to financial stability. The structure of liquidity shocks affects the severity and the occurrence of crises, as well as the amount of credit available in the economy.
    Keywords: default; Interbank market; price volatility
    JEL: G01 G21
    Date: 2013–01
  18. By: Lang, Gunnar; Schröder, Michael
    Abstract: Motivated by the current discussion on different separate banking systems, we provide an overview of the different systems, question them and outline their effect on systemic stability and the German banking sector. The results show that the various separate banking systems only play a minor role in reducing and limiting systemic risk. They only marginally contribute to solving conflicts of interest and can even be detrimental to banking business diversification. A separate banking system could, however, facilitate banking supervision by reducing the banking system's complexity. Furthermore, credible threats to not support investment banks with federal resources in times of crisis could lead to a more adequate incentives structure of suppliers of equity and outside capital. More efficient measures to further reduce systemic risk in the financial sector should, however, use different levers, such as additional minimum regulatory capital requirements. --
    Keywords: Banking Regulation,Commercial and Investment Banking,Financial Crises
    JEL: G01 G18 G24
    Date: 2013
  19. By: Matteo Chinazzi; Giorgio Fagiolo
    Abstract: The recent crisis has highlighted the crucial role that existing linkages among banks and financial institutions plays in channeling and amplifying shocks hitting the system. The structure and evolution of such web of linkages can be fruitfully characterized using concepts borrowed from the theory of (complex) networks. This paper critically surveys recent theoretical work that exploits this concept to explain the sources of contagion and systemic risk in financial markets. We taxonomize existing contributions according to the impact of network connectivity, bank heterogeneity, existing uncertainty in financial markets, portfolio composition of the banks. We end with a discussion of the most important challenges faced by theoretical network-based models of systemic risk. These include a better understanding of the causal links between network structure and the likelihood of systemic risk and increasingly using the empirical knowledge about real-world financial-network structures to calibrate theoretical models.
    Keywords: Systemic Risk, Contagion, Complex Networks, Resilience, Connectivity, Robust-yet-Fragile Networks, Financial and Economic Crisis
    Date: 2013–04–04
  20. By: Carlos Arteta; Mark Carey; Ricardo Correa; Jason Kotter
    Abstract: We empirically examine financial institutions' motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in the summer of 2007. We find evidence consistent with important roles for both owner-manager agency problems and government-induced distortions, especially government control or ownership of banks.
    Date: 2013
  21. By: Cecilia Parlatore Siritto (NYU)
    Abstract: I study a model in which banks need to borrow to make risky loans whose return is private information known only by the bank who made the loan. To raise funds, banks can either sell assets or pledge them as collateral. I show that collateral contracts arise in equilibrium even though all agents would value the asset the same in autarky. The persistence in the role as borrowers or lenders and the banks' ability to make a profits from loans imply that banks will value the asset more than lenders. On top of paying dividends, the asset resolves the banks' maturity mismatch problem and, since it is used as collateral, it relaxes a borrowing constraint. The amount that can be borrowed against the asset is determined in equilibrium. I show that increases in risk may decrease the asset's debt capacity and, thus, the level of intermediation in the economy.
    Date: 2012
  22. By: Gehrig, Thomas
    Abstract: This note critically assesses the Basel reform process of capital regulation. It highlights the political nature of this process and argues that the absence of clearly spelled-out societal objectives has been detrimental in furthering stability and soundness of the banking systems in the run-up of the 2007/8 financial crisis. The positive externalities of bank capital have not hitherto been explicitly been taken into consideration.
    Keywords: bank capital; Basel process of capital regulation; trust
    JEL: E58 G01 G21 H63
    Date: 2013–02
  23. By: Christiaan van der Kwaak (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: We analyze the interaction between bank rescues, financial fragility and sovereign debt discounts. We construct a model that contains balance sheet constrained financial intermediaries financing both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face the risk of a (partial) default of the government on its debt obligations. We analyse the impact of a financial crisis, first under full government credibility and then with an endogenous sovereign debt discount. The introduction of the default possibility does not have any impact IF all government debt is short term. Interest rates on debt reflect higher default probabilities, but because all debt is short term, bank balance sheets are unaffected and no further negative effects arise through the endogenous sovereign debt channel. But once long term government debt is introduced, the possibility of capital losses on bank balance sheets arises. Then o utcomes significantly deteriorate compared to the short term debt only case. Higher interest rates on new debt lead to capital losses on banks' holding of existing long term government debt. The associated increase in credit tightness leads to a negative amplification effect, significantly increasing output losses and declines in investment after a financial crisis. This causes potentially conflicting macroeconomic effects of a debt financed recapitalization of banks. We investigate the case where the government announces a bankrecapitalization to occur 4 quarters after announcement. Under the parameter values chosen, the positive effects from an anticipated capital injection dominate the effects of the associated increase in sovereign default risk.
    Keywords: Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk
    JEL: E44 E62 H30
    Date: 2013–04–02
  24. By: Bang Nam Jeon (Drexel University and Hong Kong Institute for Monetary Research); Maria Pia Olivero (Drexel University); Ji Wu (Southwestern University of Finance and Economics)
    Abstract: Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994-2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries¡¦ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and became more conspicuous in recent years than before. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries' reliance on funds from their parent bank, the subsidiaries' entry mode, and the capital account openness and banking market structure in host countries.
    Keywords: Internal Capital Markets, Multinational Banking, Transmission of Financial Shocks
    JEL: E44 F43 G21
    Date: 2013–05
  25. By: Michiel Bijlsma; Remco Mocking
    Abstract: We estimate the size of the funding advantage for a sample of 151 large European banks for the period 1-1-2008 until 15-6-2012 using rating agencies‟ assessment of banks‟ credit ratings uplift. We find that the size of the funding advantage is large and fluctuates substantially over time. </p><p align="left">It rises from 0.1% of GDP in the first half of 2008 to more than 1% of GDP mid 2011. The latter value is in line with results from other studies. We find that the marginal effect of total assets relative to GDP on the rating uplift is positive and declines with the size of the bank. In addition, a higher sovereign rating of a bank‟s home country corresponds on average to a higher rating uplift for that bank.
    JEL: G01 G21 G24
    Date: 2013–04
  26. By: Jan Frait; Zlatuse Komarkova
    Abstract: This paper focuses on the way the macroprudential policy framework in a small EU economy should be designed. With reference to the experience of the Czech Republic's financial system and the Czech National Bank it provides definitions of financial stability and macroprudential policy as well as of their objectives. It then explains how systemic risk evolves over the financial cycle and outlines approaches to preventing systemic risk in the accumulation stage of the cycle and subsequently mitigating the materialisation of such risk if prevention fails. The paper argues that for the establishment of a macroprudential policy framework in a bank-based economy with a relatively simple and small financial sector, the phenomenon of procyclical behaviour has to stand centrally. Correspondingly, a macroprudential authority in such an economy has to look primarily at cyclically induced sources of systemic risks. Nevertheless, structural sources of systemic risks and associated instruments are discussed as well. The arguments for the recommended arrangements are supported by empirical investigations into the extent of procyclicality in European banks' lending behaviour and the contribution of the regulatory and accounting framework to it.
    Keywords: Financial stability, macroprudential policy, monetary policy, procyclicality, systemic risk.
    JEL: E52 E58 E61 G12 G18
    Date: 2012–12
  27. By: Gersbach, Hans; Haller, Hans; Müller, Jürg
    Abstract: We examine the validity of a macroeconomic version of the Modigliani-Miller theorem. For this purpose, we develop a general equilibrium model with two production sectors, risk-averse households and financial intermediation by banks. Banks are funded by deposits and (outside) equity and monitor borrowers in lending. We impose favorable manifestations of the underlying frictions and distortions. We obtain two classes of equilibria. In the first class, the debt-equity ratio of banks is low. The first-best allocation obtains and banks' capital structure is irrelevant for welfare: a macroeconomic version of the Modigliani-Miller theorem. However, there exists a second class of equilibria with high debt-equity ratios. Banks are larger and invest more in risky technologies. Default and bailouts financed by lump sum taxation occur with positive probability and welfare is lower. Imposing minimum equity capital requirements eliminates all inefficient equilibria and guarantees the global validity of the macroeconomic version of the Modigliani-Miller theorem.
    Keywords: Banking; Capital Requirements; Capital Structure; Financial intermediation; General Equilibrium; Modigliani-Miller
    JEL: D53 E44 G2
    Date: 2013–03
  28. By: Jean Bonnet (Normandie University, Caen, Faculty of Economics and Business Administration - CREM CNRS UMR6211, France); Sylvie Cieply (Normandie University, Caen, Institut Banque-Assurance - CREM CNRS UMR6211, France); Marcus Dejardin (Université Catholique de Louvain and University of Namur, CERPE, Belgium)
    Abstract: There is a widespread belief in both academic literature and policy circles that small firms are unable to obtain sufficient banking loans.This idea finds a strong theoretical support in credit rationing theory, as initiated by Stiglitz and Weiss (1981). However, this is vigorously challenged by De Meza and Webb (1987, 2000) suggesting contrastingly that firms can benefit from an excess of credit. This empirical article is the first to test these two theories using data on the access to credit for new French businesses during the mid 1990s. Our results show that credit rationing was not highly spread among French new firms. The story described by De Meza and Webb (1987) appears to be a much more realistic model. Finally, we identify factors closely associated with credit rationing and overlending.
    Keywords: Credit Rationing, Overlending, Asymmetric information, New business
    JEL: L26 M13 D82 G21
    Date: 2013–03
  29. By: Mondher bellalah; Olivier Levyne; Omar Masood (THEMA, Universite de Cergy-Pontoise; Institue Superieur de Commerce de Paris, ISC Paris; Royal Business School, University of East London)
    Abstract: This study aims to give the analysis of the determinants of banks’ profitability in the Kingdom of China over the period starting 2003. The paper investigates the co-integration and causal relationship between total assets (TA) and total equity (TE) of Saudi banks. The analysis employs Augmented Dickey Fuller (ADF) test, Johansen’s cointegration test, Granger causality test. Analyzing the cointegration and other tests on Saudi Arabian banking sector over the study period, the relationships between the two variables are examined. The empirical results have found strong evidence that the variables are co-integrated.
    Keywords: Banking, bank profitability, total assets, total equity, co-integration.
    JEL: E50 F30 F17 G01 G21
    Date: 2013
  30. By: Alicia Garcia-Herrero; Fielding Chen
    Abstract: This paper shows stylized facts on the rather large retrenchment of cross-border lending by Euro-area banks into emerging markets. The clearest case is Asia where Euro-area banks have massively lost market share. The reason, however, is not only related to their retrenching but also to the surge in lending from others banks, especially from Emerging Asia. As a second step, we investigate empirically the determinants of cross-border bank flows with a gravity model and differentiate across Euro-area, US and Asian banks. We find a number of home factors behind the retrenchment in lending. Two are common to all home countries analyzed, namely global risk aversion and trade which, respectively, discourage and foster banks’ overseas lending. Other factors, however, are specific of Euro-area banks, such as the higher cost of funding which is found to discourage lending while poor economic growth tends to foster it. The latter result would indicate that economic weakness of the last few years may have actually cushioned Euro-area banks’ deleveraging from emerging markets. All in all, Euroarea banks’ cross border lending appear to be more dependent on their cycle (both in terms of growth and external cost of funding) when compared with US and Asian banks.
    Keywords: cross-border bank lending, emerging markets, Euro area, deleveraging
    JEL: F34 G01 O57 C23
    Date: 2013–03
  31. By: Sofronis Clerides; Manthos D. Delis; Sotirios Kokas
    Abstract: We estimate the degree of competition in the banking sectors of 148 countries worldwide over the period 1997-2010. We employ three methods, namely those of Lerner (1934), Koetter, Kolari and Spierdijk (2012) and Boone (2008a). For the estimation of marginal cost required under all methods, we use the semi-parametric methodology of Delis (2012) that allows increasing the flexibility of the functional form imposed on the cost function. All three indices show that the competitive conditions in banking have deteriorated on average during the period 1997-2006. This trend reverses until 2008, while in 2009 and 2010 market power again increases. Thus, we provide evidence that the competitive conditions are correlated with financial stability. The empirical results also highlight important differences between regional and income groups of countries. On average, the banking systems of Sub-Saharan Africa and subsequently of East Asia and Pacific are the least competitive, while the banking systems of Europe and Central Asia and South Asia seem to be the most competitive ones. Further, the non-OECD countries characterized by either high- or low-income levels have less competitive banking sectors, while middle-income countries have more competitive banking sectors. For the OECD countries the results of the Lerner-type indices and the method by Boone (2008a) give conflicting results.
    Keywords: Bank competition, Semi-parametric estimation, World sample
    Date: 2013–03
  32. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Ou, Zhirong
    Abstract: We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Euro-zone and the Rest of the World in order to explore the causes of the banking crisis. We test the model against linear-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test only on outputs in the two countries. We then extract the model’s implied residuals on unfi…ltered data to replicate how the model predicts the crisis. Banking shocks worsen the crisis but ‘traditional’ shocks explain the bulk of the crisis; the non-stationarity of the productivity shocks plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample Great Recessions occur on average once every quarter century. Financial shocks on their own, even when extreme, do not cause crises — provided the government acts swiftly to counteract such a shock as happened in this sample.
    Keywords: Banking; DSGE; Indirect Inference
    JEL: E0
    Date: 2013–03

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