New Economics Papers
on Banking
Issue of 2013‒04‒20
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Domino Effects when Banks Hoard Liquidity: The French network. By Fourel, V.; Héam, J-C.; Salakhova, D.; Tavolaro, S.
  2. Credit Pro-cyclicality and Bank Balance Sheet in Colombia By Franz Alonso Hamann Salcedo; Rafael Hernández; Luisa Fernanda Silva EScobar; Fernando Tenjo Galarza
  3. Impact of foreign capital entry in the Indonesian banking sector By Hamada, Miki
  4. Macroeconomic Implications of U.S. Banking Liberalisation By Stefan Notz
  5. Congressional Influence as a Determinant of Subprime Lending By Stuart A. Gabriel; Matthew E. Kahn; Ryan K. Vaughn
  6. Bank bailouts, competition, and the disparate effects for borrower and depositor welfare By Calderon, Cesar; Schaeck, Klaus
  7. Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules By Carlos De Resende; Ali Dib; René Lalonde; Nikita Perevalov
  8. Getting organized to lend in a period of crisis: Findings from a survey of Italian banks By Silvia Del Prete; Marcello Pagnini; Paola Rossi; Valerio Paolo Vacca
  9. On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier? By Kelly, Robert; McQuinn, Kieran
  10. Repayment of Short Term Loans in the Formal Credit Market: The Role of Accessibility to Credit from InformalSources By Manojit Bhattacharjee; Meenakshi Rajeev
  11. State Intervention and the (Micro) Credit Market in Developed Countries: Loan Guarantee and Business Development Services By Renaud Bourlès; Anastasia Cozarenco
  12. Measuring the default risk of sovereign debt from the perspective of network By Hongwei Chuang; Hwai-Chung Ho
  13. Loss Given Default Modelling: Comparative Analysis By Yashkir, Olga; Yashkir, Yuriy
  14. How does competition affect the performance of MFIs ? evidence from Bangladesh By Khandker, Shahidur R.; Koolwal, Gayatri B.; Badruddoza, Syed

  1. By: Fourel, V.; Héam, J-C.; Salakhova, D.; Tavolaro, S.
    Abstract: We investigate the consequences of banks' liquidity hoarding behavior for the stability of the financial system proposing a new model of banking contagion through two channels, bilateral exposures and funding shortage. Inspired by the key role of liquidity hoarding in the 2007-2009 financial crisis, we incorporate banks' hoarding behavior in a standard Iterative Default Cascade algorithm to compute the propagation of a common market shock through a banking system. In addition to potential solvency contagion, a market shock leads to banks’ liquidity hoarding that may generate problems of short-term funding for other banks. As an empirical exercise, we apply this model to the French banking system. Relying on data on bank’s bilateral exposures collected by the French Prudential Supervisor Authority, the French banking sector appears resilient to the combination of an initial market shock (losses on marked-to-market assets) and of the resulting solvency and liquidity contagion. Gauging the relative weights in the total loss of the various factors, the model sheds light on the complexity of liquidity hoarding effects.
    Keywords: Liquidity hoarding, solvency and funding contagion, financial networks, systemic risk.
    JEL: G01 G21 G28
    Date: 2013
  2. By: Franz Alonso Hamann Salcedo; Rafael Hernández; Luisa Fernanda Silva EScobar; Fernando Tenjo Galarza
    Abstract: The recent financial crisis has renewed the interest of economists, both at the theoretical and empirical level, in developing a better understanding of credit and its mechanisms. A rapidly growing strand of the literature views banks as facing funding restrictions that condition their borrowing to a risk-based capital constraint which, in turn, affects bank lending. This work explores the way banks in Colombia manage their balance sheet and sheds light into the dynamics of credit and leverage during the business cycle. Using a sample of monthly bank balance sheets for the period 1994-2012, we find not only that the Colombian banking sector is predominantly pro-cyclical, but also that the composition of bank liabilities provides important information to policy makers regarding the phase of the cycle of the economy. Shifts from low non-core liability ratios to higher ones during the upward phase of the leverage cycle could play the role of an early warning indicator of financial vulnerability. In addition, we find that bank heterogeneity matters and thus, an aggregate measure of bank leverage can mask successfully a fragile financial sector.
    Keywords: Banks, credit, leverage, non-core liabilities, balance sheet, business cycle, Colombia. Classification JEL: E32, G21, G32
    Date: 2013–04
  3. By: Hamada, Miki
    Abstract: After the Asian financial crisis of 1997/98, the Indonesian banking sector experienced significant changes. Ownership structure of banking sector is substantially-changed. Currently, ownership of major commercial banks is dominated by foreign capital through acquisition. This paper examines whether foreign ownership changes a bank’s lending behavior and performance. Foreign banks tend to lend mainly to large firms; this paper examines whether the credit to small and medium-sized enterprises (SMEs) is affected by foreign capital entry into the Indonesian banking sector. Empirical results show that banks owned by foreign capital tend to decrease SME credit.
    Keywords: Indonesia, Banks, Finance, Small and medium-scale enterprises, Banking, Foreign bank entry, SMEs
    JEL: G21 G34 O53
    Date: 2013–03
  4. By: Stefan Notz (University of Zurich)
    Abstract: I develop a Dynamic Stochastic General Equilibrium (DSGE) model featuring imperfect competition in banking to shed light on the macroeconomic repercussions of U.S. banking deregulation during the 1980s and 1990s. Banks function as traditional financial intermediaries, transferring funds from private households to entrepreneurs in the economy. Prior to deregulation, banks exploit their market power and charge high interest rates on loans to entrepreneurs. Financial liberalisation leads to more vigorous competition among banks, which effectively ameliorates credit market access of investors. I construct model generated panel data and reproduce various regression exercises implemented in related studies. In doing so, I contribute to bridging the gap between my theoretical framework and the vast empirical literature on U.S. banking deregulation. The model succeeds in both qualitatively and quantitatively replicating several empirical findings. In particular, bank market integration is associated with (i) an increase in investment in new firms, (ii) a decline in average firm size, (iii) an erosion of the bank capital ratio, (iv) a reduction of state business cycle volatility, and (v) improved consumption risk sharing of entrepreneurs.
    Date: 2012
  5. By: Stuart A. Gabriel; Matthew E. Kahn; Ryan K. Vaughn
    Abstract: We apply unique loan level data from New Century Financial Corporation, a major subprime lender, to assess whether attributes of Congressional Representatives were associated with access to and pricing of subprime mortgage credit. Research findings indicate higher likelihoods of subprime loan origination and lower mortgage pricing among borrowers represented by the Republican and Democratic leadership of Congress. Black borrowers also benefitted from significantly larger loan amounts in those same districts. Also, borrowers received mortgage interest rate discounts in districts where New Century donated to the Congressional Representative. Findings provide new insights into the political geography of the subprime crisis and suggest gains to trade between New Century Financial Corporation and targeted Congressional Representatives in the extension, pricing and sizing of subprime mortgage credit.
    JEL: G21 R21
    Date: 2013–04
  6. By: Calderon, Cesar; Schaeck, Klaus
    Abstract: This paper investigates how government interventions into banking systems such as blanket guarantees, liquidity support, recapitalizations, and nationalizations affect banking competition. This debate is important because the pricing of banking products has implications for borrower and depositor welfare. Exploiting data for 124 countries that witnessed different policy responses to 41 banking crises, and using difference-in-difference estimations, the paper presents the following key results: (i) Government interventions reduce Lerner indices and net interest margins. This effect is robust to a battery of falsification and placebo tests, and the competitive response also cannot be explained by alternative forces. The competition-increasing effect on Lerner indices and net interest margins is also confirmed once the non-random assignment of interventions is accounted for using instrumental variable techniques that exploit exogenous variation in the electoral cycle and in the design of the regulatory architecture across countries. (ii) Consistent with theoretical predictions, the competition-increasing effect of government interventions is greater in more concentrated and less contestable banking sectors, but the effects are mitigated in more transparent banking systems. (iii) The competitive effects are economically substantial, remain in place for at least 5 years, and the interventions also coincide with an increase in zombie banks. The results therefore offer direct evidence of the mechanism by which government interventions contribute to banks'risk-shifting behavior as reported in recent studies on bank level runs via competition. (iv) Government interventions disparately affect bank customers'welfare. While liquidity support, recapitalizations, and nationalizations improve borrower welfare by reducing loan rates, deposit rates decline. The empirical setup allows quantifying these disparate effects.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Deposit Insurance
    Date: 2013–04–01
  7. By: Carlos De Resende; Ali Dib; René Lalonde; Nikita Perevalov
    Abstract: Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target.
    Keywords: Economic models; Financial Institutions; Financial stability; International topics
    JEL: E32 E44 E5 G1 G2
    Date: 2013
  8. By: Silvia Del Prete (Banca d'Italia); Marcello Pagnini (Banca d'Italia); Paola Rossi (Banca d'Italia); Valerio Paolo Vacca (Banca d'Italia)
    Abstract: This paper analyses how banks organize their lending activity by using the results of two surveys carried out in 2006 and in 2009. During this period, the use of rating and scoring methodologies became more widespread even among the smaller banks. Larger banks used these techniques more frequently when pricing their loans, while the importance of ratings in deciding whether to grant a loan in the first place declined. Smaller banks continued to use ratings in a flexible way. In the wake of the crisis banks gave more importance to both hard and soft types of information and increased their guarantee requirements. The trend towards decentralizing decision-making seems to have halted and the average tenure of branch managers has shortened. These managers have mandates that are frequently correlated with the ratings, while pay incentives have not changed substantially. In brief, the 2008-09 recession in some cases contributed to the acceleration of reorganization processes already under way, in others however it altered their direction.
    Keywords: Banking organization, lending techniques, financial crisis
    JEL: G21 L15
    Date: 2013–04
  9. By: Kelly, Robert (Central Bank of Ireland); McQuinn, Kieran (Central Bank of Ireland)
    Abstract: Recently, some notable contributions suggest, that discretionary fiscal policy can be an effective and self- financing policy option in the presence of extreme macroeconomic conditions. Given the special relationship between the Irish sovereign and its main financial institutions, this paper assesses the implications for the Irish fiscal accounts of certain macroeconomic policy responses. Using a comprehensive empirical framework, the paper examines the relationship between house prices, unemployment and mortgage arrears. Loan loss forecasts over the period 2012-2014 are then generated for the mortgage book of the main Irish financial institutions under two different scenarios. It is shown that macroeconomic policies, which alleviate levels of mortgage distress, improve the solvency position of the guaranteed Irish institutions thereby reducing the sovereign’s future capital obligations. Thus, the unique situation the sovereign finds itself in vis-á-vis its main financial institutions, may have significant implications for the fiscal multiplier.
    Keywords: House prices, unemployment, mortgage arrears, fiscal multiplier
    JEL: G21 R30 C58
    Date: 2013–03
  10. By: Manojit Bhattacharjee (Institute for Social and Economic change); Meenakshi Rajeev (Institute for Social and Economic change)
    Abstract: This paper is an attempt to link the problem of non-repayment in the formal credit market with the accessibility to credit from informal sources. In many developing countries a well established network of informal lenders continues to prevail in spite of various formal lending programmes implemented by the government. Scholars often dealt with how the poorer households become the victim of usurious rates of interest charged by informal lenders and lose their valuable properties. We however show that more unfavourable the terms of loan from a moneylender compared to that of a formal lending agency, better is the chance of a borrower making timely repayment and get the benefit of formal loan on a recurring basis, which is not available in case of default. After establishing the conditions theoretically, the paper using National Sample Survey Organisation (NSSO, India) database, empirically tries to examine such an impact in the case of short term formal loans. The empirical analysis reveals the positive and significant impact of informal interest rates on repayment of formal loans.
    Keywords: Repayment, Formal Lending Agency, Informal Lending Agency
    Date: 2012
  11. By: Renaud Bourlès (Ecole Centrale Marseille (Aix-Marseille School of Economics), CNRS & EHESS); Anastasia Cozarenco (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: We analyze in this paper how various forms of State intervention can impact the microcredit market in developed countries. Using a simple model where entrepreneurs borrow without collateral, we study the effect of different policies on microfinance institutions' lending behavior. We first introduce state intervention through the loan guarantee and show that, not surprisingly, it increases the number of entrepreneurs receiving a loan. However, after modeling business development services provided by the microfinance institution, we show that the government loan guarantee can have a counterproductive effect by reducing the number of entrepreneurs benefiting from such services. We therefore analyze an alternative policy: the subsidization of business development services by the State. We then provide a condition under which - for fixed government expenditures - such subsidies are more effective (in terms of outreach) than loan guarantees.
    Keywords: microcredit, loan guarantee, business development services, microfinance institution.
    JEL: G14 G21 G38 D45 D82
    Date: 2013–04
  12. By: Hongwei Chuang; Hwai-Chung Ho
    Abstract: Recently, there has been a growing interest in network research, especially in these fields of biology, computer science, and sociology. It is natural to address complex financial issues such as the European sovereign debt crisis from the perspective of network. In this article, we construct a network model according to the debt--credit relations instead of using the conventional methodology to measure the default risk. Based on the model, a risk index is examined using the quarterly report of consolidated foreign claims from the Bank for International Settlements (BIS) and debt/GDP ratios among these reporting countries. The empirical results show that this index can help the regulators and practitioners not only to determine the status of interconnectivity but also to point out the degree of the sovereign debt default risk. Our approach sheds new light on the investigation of quantifying the systemic risk.
    Date: 2013–04
  13. By: Yashkir, Olga; Yashkir, Yuriy
    Abstract: In this study we investigated several most popular Loss Given Default (LGD) models (LSM, Tobit, Three-Tiered Tobit, Beta Regression, Inflated Beta Regression, Censored Gamma Regression) in order to compare their performance. We show that for a given input data set, the quality of the model calibration depends mainly on the proper choice (and availability) of explanatory variables (model factors), but not on the fitting model. Model factors were chosen based on the amplitude of their correlation with historical LGDs of the calibration data set. Numerical values of non-quantitative parameters (industry, ranking, type of collateral) were introduced as their LGD average. We show that different debt instruments depend on different sets of model factors (from three factors for Revolving Credit or for Subordinated Bonds to eight factors for Senior Secured Bonds). Calibration of LGD models using distressed business cycle periods provide better fit than data from total available time span. Calibration algorithms and details of their realization using the R statistical package are presented. We demonstrate how LGD models can be used for stress testing. The results of this study can be of use to risk managers concerned with the Basel accord compliance.
    Keywords: LGD, Credit Risk, LGD model, Linear regression, Tobit model, Stress testing
    JEL: G14 G17 G19 G24
    Date: 2013–03–27
  14. By: Khandker, Shahidur R.; Koolwal, Gayatri B.; Badruddoza, Syed
    Abstract: Over the past 20 years, Bangladesh has witnessed strong competition among microfinance institutions. Using program-level panel data from 2005-2010, this paper studies the microfinance institutions'recent competitive roles in their pricing of products, targeting strategies and portfolio shifts, as well as their ability to recover loans. The findings do not support the view that newer microfinance institutions are less risk-averse in their targeting, or that increased borrowing among households due to microfinance institution competition has lowered recovery rates. There is also a considerable urban-rural distinction; although newer microfinance institutions tend to attract riskier clients in urban areas, the opposite is true in rural areas. Loan recovery rates are also the highest among the newest microfinance institutions for women in rural areas, suggesting that microfinance institutions may offer distinct products in these areas to attract better-risk clients. The portfolio of newer microfinance institutions also has a greater share of lending for agriculture, and fewer savings products.
    Keywords: Debt Markets,Banks&Banking Reform,Emerging Markets,Microfinance,Rural Finance
    Date: 2013–04–01

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.