New Economics Papers
on Banking
Issue of 2013‒04‒27
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Credit Pro-cyclicality and Bank Balance Sheet in Colombia By Franz Alonso Hamann Salcedo; Rafael Hernández; Luisa Fernanda Silva Escobar; Fernando Tenjo Galarza
  2. Loans Growth and Banks’ Risk: New Evidence By Juan Sebastián Amador Torres; José Eduardo Gómez G.; Andrés Murcia Pabón
  3. Why do banks optimize risk weights? The relevance of the cost of equity capital. By Beltratti, Andrea; Paladino, Giovanna
  4. The Bank Lending Channel and Monetary Policy Rules for European Banks: Further Extensions By Nicholas Apergis; Stephen M. Miller; Effrosyni Alevizopoulou
  5. Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility By Ho-Chuan (River) Huang; Stephen M. Miller
  6. New bank equity capital rules in the European Union: A critical evaluation By Schuster, Thomas; Kövener, Felix; Matthes, Jürgen
  7. State intervention and the (micro)credit market in developed countries: loan guarantee and business development services By Renaud Bourlès; Anastasia Cozarenco
  8. Uses And Motivations For Credit Derivatives: An Empirical Investigation Into Italian Banks By Eleonora Broccardo; Maria Mazzuca; Elmas Yaldiz
  9. Systemic Risk Contribution of Individual Banks By Huseyin Cagri Akkoyun; Ramazan Karasahin; Gursu Keles
  10. Monitoring of Credit Risk through the Cycle: Risk Indicators By Yashkir, Olga; Yashkir, Yuriy
  11. Dynamic stochastic general equilibrium model with banks and endogenous defaults of firms By Sergei Ivashchenko
  12. Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights By Viral V. Acharya; Robert Engle; Diane Pierret
  13. Economics of bankruptcy exemption: Signaling value of collateral, cost of credit and access to credit By Pasqualina Arca; Gianfranco Atzeni; Luca Deidda
  14. The impact of the Goods and Services Tax on mortgage costs of Australian credit unions By Benjamin Liu; Allen Huang
  15. Endogenous Sources of Volatility in Housing Markets: The Joint Buyer-Seller Problem By Elliot Anenberg; Patrick Bayer
  16. Bank-lending constraints and alternative financing during the financial crisis: Evidence from European SMEs By Casey, Eddie; O'Toole, Conor
  17. Euro area CDS spreads in the crisis: The role of open market operations and contagion By Gerlach, Petra
  18. Financial Literacy and High-Cost Borrowing in the United States By Annamaria Lusardi; Carlo de Bassa Scheresberg
  19. Censored Posterior and Predictive Likelihood in Bayesian Left-Tail Prediction for Accurate Value at Risk Estimation By Lukasz Gatarek; Lennart Hoogerheide; Koen Hooning; Herman K. van Dijk
  20. The GST and mortgage costs: Australian evidence By Allen Huang; Benjamin Liu
  21. Essays in macro-finance. Essais de macro-finance . By Isore, Marlène

  1. 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.
    Date: 2013–04–07
  2. By: Juan Sebastián Amador Torres; José Eduardo Gómez G.; Andrés Murcia Pabón
    Abstract: This study provides new evidence on the relationship between abnormal loan growth and banks’ risk taking behavior, using data from a rich panel of Colombian financial institutions. We show that abnormal credit growth during a prolonged period of time leads to an increase in banks’ riskiness, supported by a reduction in solvency and an increase in the ratio of non-performing loans to total loans. We also show that abnormal credit growth played a fundamental role in the bank-failure process during the late 1990s financial crisis in Colombia. Our results have important implications for financial regulation and macro-prudential policy.
    Date: 2013–04–11
  3. By: Beltratti, Andrea; Paladino, Giovanna
    Abstract: Banks use internal models to optimize risk weights and better account for the specific risk of each asset class. As the choice of a set of risk weights directly amounts to affecting the regulatory capital ratio, economic theory suggests that banks should optimize their risk weights also with respect to the cost and benefit of holding equity capital. Banks with a higher cost of capital, and banks with better growth opportunities, should be more aggressive in reducing risk weights. We consider a large panel of international banks and find that, after controlling for a number of bank and country characteristics, banks do respond to the cost and benefit of holding capital when selecting their average risk weights. We also find that banks that are more aggressive in terms of such optimization have a subsequent lower return on equity and are more likely to have raised capital during the credit crisis.
    Keywords: Basel Accord, risk-weighted assets, internal rating models, panel OLS, dynamic system GMM.
    JEL: C23 G18 G21
    Date: 2013–04–21
  4. By: Nicholas Apergis (Department of Banking and Financial Management, University of Piraeus); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Effrosyni Alevizopoulou (Department of Banking and Financial Management, University of Piraeus)
    Abstract: The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results.
    Keywords: Monetary policy rules, bank lending channel, European banks, GMM methodology
    Date: 2012–04
  5. By: Ho-Chuan (River) Huang (Department of Banking and Finance, Tamkang University Author-Name: WenShwo Fang; Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas)
    Abstract: While the existing literature acknowledges the effect of banking structure on industrial growth as well as the effect of financial development on industrial growth and its volatility, we examine whether banking structure, given bank (financial) development, exerts any nontrivial effect on industrial growth volatility. We show that bank concentration magnifies industrial growth volatility, but reduces the volatility in sectors with higher external liquidity needs. The reduction in industrial growth volatility mostly reflects the smoothing in the variance of real value added per firm growth. Finally a variety of sensitivity checks show that our findings remain for different model specifications, banking market structure measures, liquidity needs indicators, and omitted variables.
    Keywords: Bank Concentration, External Liquidity, Bank Development, Industrial Growth Volatility.
    JEL: G2 O16 E32
    Date: 2012–12
  6. By: Schuster, Thomas; Kövener, Felix; Matthes, Jürgen
    Abstract: This paper presents and critically evaluates the bank capital requirement rules proposed by the European Union - the capital requirements directive CRD IV and the capital requirements regulation CRR. First, the rules of the Basel III accord about equity capital standards of banks are briefly described. Second, the EU proposal based on Basel III is presented. The article differentiates between rules fully in line with Basel III, modified rules, and new rules not covered by Basel III. Third, the EU proposals are critically evaluated. The paper concludes that the proposals lead in the right direction, but there is still much room for improvement. In fact, some of the planned rules should be urgently revised. Above all, risk weights for member state government bonds must be introduced, liquidity requirements should not overly favour government bonds, and member states should be able to set capital requirements which are greater than 18% of risk-weighted assets. --
    Keywords: Banken und Versicherungen,Europäische Währungsunion,Finanzmärkte,Finanzmarktregulierung
    JEL: G21 G18 G32
    Date: 2013
  7. By: Renaud Bourlès; Anastasia Cozarenco
    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: 2013–04–25
  8. By: Eleonora Broccardo; Maria Mazzuca; Elmas Yaldiz
    Abstract: This study examines the extent to which Italian banks use credit derivatives (CD), whether there are differences between users and nonusers, and the underlying motivations for the use of CD. The results show that a limited number of credit institutions use CD, and that this usage varies over time (2007 seems to be a peak year). Differences exist between users and nonusers (with reference to the risk and capitalization, attitude in hedging, and profitability, and the fact that users tend to be larger, listed and commercial banks). To test the determinants of CD use, we identify two main incentives: managing credit risk, and increasing the bankÕs income diversification. The results seem not to support the hedging hypothesis, and signals emerge for the fact that users employ CD for different/speculative purposes. The findings seem to indicate a direct relationship between the probability of using CD and the banksÕ financial distress costs. The probability of using CD increases in the case of larger and listed banks. The findings regarding the separate estimates for small/large banks and for listed/unlisted banks show that the probability of using CD varies when different sub-samples are considered. Finally, relevant differences emerge between the pre- and post-crisis period.
    Keywords: credit derivatives, credit default swaps, Italian banks
    JEL: G20 G21 G28
    Date: 2013
  9. By: Huseyin Cagri Akkoyun; Ramazan Karasahin; Gursu Keles
    Abstract: In this study, we measure systemic importance of individual banks that are listed in the Istanbul Stock Exchange. Regarding the whole system as a portfolio of individual banks, we calculate the system-wide risk via contingent claims analysis. Using Shapley values, we assess the systemicimportance of each bank according to its marginal contribution to the calculated system wide risk measure, expected shortfall of the system. Our calculations reveal that market participants perceived 2000 and 2001 banking crises to be devastating for the Turkish banking sector. Since 2002, the banking sector seems to do a good job in eliminating idiosyn- cratic shocks within the system.
    Keywords: Systemic Risk, Contingent Claims Analysis, Shapley Value
    JEL: G10 G13 C71
    Date: 2013
  10. By: Yashkir, Olga; Yashkir, Yuriy
    Abstract: The new Credit Risk Indicator (CRI) based on credit rating migration matrices is introduced. We demonstrate strong correlation between CRI and a number of defaults through several business cycles. The new model for the simulation of the annual number of defaults, based on the 1st quarter CRI data, is proposed.
    Keywords: Credit Risk, Risk Indicator, Correlation, Business Cycle, Default Rate
    JEL: E32 E37 G17
    Date: 2013–03–02
  11. By: Sergei Ivashchenko (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences (RAS))
    Abstract: A dynamic stochastic general equilibrium (DSGE) model with endogenous defaults of firms is developed. Proposed mechanism of defaults is very flexible. It takes into account amount of assets owned by firms. It suggests that banks receive some payment from firm after default. The model is estimated for USA and for Russia.
    Keywords: DSGE, endogenous defaults of firms
    JEL: E32 E43 E44 E47 G21
    Date: 2013–01–25
  12. By: Viral V. Acharya; Robert Engle; Diane Pierret
    Abstract: Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. We provide a test of these stress tests by comparing their risk assessments and outcomes to those from a simple methodology that relies on publicly available market data and forecasts the capital shortfall of financial firms in severe market-wide downturns. We find that: (i) The losses projected on financial firm balance-sheets compare well between actual stress tests and the market-data based assessments, and both relate well to actual realized losses in case of future stress to the economy; (ii) In striking contrast, the required capitalization of financial firms in stress tests is found to be rather low, and inadequate ex post, compared to that implied by market data; (iii) This discrepancy arises due to the reliance on regulatory risk weights in determining required levels of capital once stress-test losses are taken into account. In particular, the continued reliance on regulatory risk weights in stress tests appears to have left financial sectors under-capitalized, especially during the European sovereign debt crisis, and likely also provided perverse incentives to build up exposures to low risk-weight assets.
    JEL: G01 G11 G21 G28
    Date: 2013–04
  13. By: Pasqualina Arca; Gianfranco Atzeni; Luca Deidda
    Abstract: We analyze the effect of a bankruptcy law according to which some of the borrower’s assets are exempt from liquidation in the event of default in the context of a competitive credit market characterized either by moral hazard (MH) or by adverse selection (AS). In particular, we study how the level of such exemption affects the role of collateral depending on the dominant source of asymmetric information. Under MH, conditional on the level of exemption, the cost of credit is higher for borrowers who are requested to post collateral. Moreover, conditional on posting collateral, the cost of credit does not change with the level of asset exemption. Differently, in the case of AS, the decision to post collateral results in a lower cost of credit, whenever the equilibrium is separating. Finally, under AS, a higher level of exemption is generally associated with a lower level of credit rationing. Similarly, credit rationing either stays unchanged or goes down with exemption in the case of MH. We exploit cross State variability in the level of asset exemption from liquidation – according to personal bankruptcy US State laws prior to 2005 federal reform – in order to identify the signaling role played by collateral in a sample of american small business taken from the SBFF data.
    Keywords: Bankruptcy; Collateral; Exemption levels; Moral hazard; Signal; Screening
    JEL: K35 G32 G33 D82
    Date: 2013
  14. By: Benjamin Liu; Allen Huang
    Keywords: Australian GST, mortgage costs of credit unions, housing affordability, lender pricing behaviour
    JEL: G21 G14 H25 G12
    Date: 2013–01
  15. By: Elliot Anenberg; Patrick Bayer
    Abstract: This paper presents new empirical evidence that internal movement - selling one home and buying another - by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility.
    JEL: E32 R0 R21 R3 R31
    Date: 2013–04
  16. By: Casey, Eddie; O'Toole, Conor
    Abstract: The financial crisis has brought to the fore concerns regarding small- and medium-sized enterprises' (SMEs) capacity to access traditional bank lending. Using European firm-level data on SME access to finance since the onset of the financial crisis, we find that bank-lending constrained SMEs are significantly more likely to avail of alternative forms of external finance, controlling for firm-level and country-level characteristics. We then determine the implications that usage of alternative forms of finance can have for certain economically desirable business activities. In particular, we find that using alternative finance substantially reduces the likelihood of business fixed investment. This effect is not evident for business innovation.
    Keywords: data/investment
    Date: 2013–03
  17. By: Gerlach, Petra
    Abstract: This paper studies euro area CDS spreads during the financial crisis. We examine the impact of the crisis on both commercial banks and sovereigns, and focus on two questions. First, have the ECB's open market operations reduced market stress? It seems that large repo volumes, especially if credited to banks the same day, helped initially, and that the announcement of the Securities Market Programme also calmed markets. Asset purchase volumes do not seem to matter directly. Second, was there contagion among and between banks and sovereigns? We find evidence for both. Interestingly, sovereign CDS spreads appear immune after April 2010. We argue that this might reflect the ECB's efforts to stop contagion during the euro crisis.
    Date: 2013–02
  18. By: Annamaria Lusardi; Carlo de Bassa Scheresberg
    Abstract: In this paper, we examine high-cost methods of borrowing in the United States, such as payday loans, pawn shops, auto title loans, refund anticipation loans, and rent-to-own shops, and offer a portrait of borrowers who use these methods. Considering a representative sample of more than 26,000 respondents, we find that about one in four Americans has used one of these methods in the past five years. Moreover, many young adults engage in high-cost borrowing: 34 percent of young respondents (aged 18–34) and 43 percent of young respondents with a high school degree have used one of these methods. Using well-tested questions to measure financial literacy, we document that most high-cost borrowers display very low levels of financial literacy, i.e., they lack numeracy and do not possess knowledge of basic financial concepts. Most importantly, we find that those who are more financially literate are much less likely to have engaged in high-cost borrowing. Our empirical work shows that it is not only the shocks inflicted by the financial crisis or the structure of the financial system but that the level of financial literacy also plays a role in explaining why so many individuals have made use of high-cost borrowing methods.
    JEL: D91
    Date: 2013–04
  19. By: Lukasz Gatarek (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam); Lennart Hoogerheide (VU University Amsterdam); Koen Hooning (Delft University of Technology); Herman K. van Dijk (Econometric Institute, Erasmus University Rotterdam, and VU University Amsterdam)
    Abstract: Accurate prediction of risk measures such as Value at Risk (VaR) and Expected Shortfall (ES) requires precise estimation of the tail of the predictive distribution. Two novel concepts are introduced that offer a specific focus on this part of the predictive density: the censored posterior, a posterior in which the likelihood is replaced by the censored likelihood; and the censored predictive likelihood, which is used for Bayesian Model Averaging. We perform extensive experiments involving simulated and empirical data. Our results show the ability of these new approaches to outperform the standard posterior and traditional Bayesian Model Averaging techniques in applications of Value-at-Risk prediction in GARCH models.
    Keywords: censored likelihood; censored posterior; censored predictive likelihood; Bayesian Model Averaging; Value at Risk; Metropolis-Hastings algorithm.
    JEL: C11 C15 C22 C51 C53 C58 G17
    Date: 2013–04–15
  20. By: Allen Huang; Benjamin Liu
    Keywords: Australian GST, mortgage costs, house affordability
    JEL: G21 G14 H25 G12
    Date: 2013–02
  21. By: Isore, Marlène
    Abstract: This dissertation consists of three essays in financial macroeconomics. The methodological approach common to the first two articles is the application of the search and matching theory to financial markets. The third essay builds on the literature on rare events. In the first article, I develop a tractable two-country model in which financial contagion may arise despite a flexible exchange rate regime and substitutability between home and foreign financial assets, contrary to the open-economy standard results under these two conditions. While monetary contractions imply negative output co-movements, in line with the literature, non-walrasian shocks to banks’ funding costs do generate the contagion. The second essay analyzes the role of bankers’ behavior in bank default. The model accounts for heterogeneity in entrepreneurs’ productivity and information asymmetry at the expense of capital holders. Moral hazard arises following a productivity shock: bankers tend to choose investments that are more profitable in the short-run but whose risk is borne by the financiers. This mechanism magnifies credit rationing in the economy and contributes to bank default. The third article examines the macroeconomic impact of a change in the probability of rare events in a New Keynesian model. A rise in the probability of disaster is sufficient to generate a recession without effective occurrence of the disaster. After accounting for monopolistic competition and price stickiness, the responses of consumption and wages are also reminiscent of distressed times. The article thus provides a framework of the dynamic effects of rare events, particularly suitable for further policy analysis.
    Abstract: Cette thèse comprend trois articles en macroéconomie financière. L’approche méthodologique commune aux deux premiers est l’application des modèles d’appariement aux marchés financiers. Le troisième contribue à l’étude des événements rares. Le premier article démontre qu’une contagion financière internationale est susceptible d’émerger malgré un régime de taux de change flexible et une substituabilité entre les actifs financiers nationaux et étrangers, contrairement aux résultats standards sous ces deux conditions. A l’inverse des contractions monétaires traditionnelles, des chocs non-walrasiens de coûts de capitalisation bancaire génèrent une contagion internationale. Le deuxième article étudie le rôle du comportement des banquiers dans le défaut bancaire. Le modèle tient compte de l’hétérogénéité des emprunteurs et incorpore une asymétrie d’information au détriment des détenteurs de capitaux. Un aléa moral survient à la suite d’un choc de productivité : les banquiers tendent à choisir les investissements plus rentables à court terme mais dont le risque est supporté par les investisseurs. Ce mécanisme amplifie le rationnement du crédit dans l’économie et alimente le défaut bancaire. Le troisième article étudie l’impact macroéconomique d’une variation de la probabilité d’un événement rare dans un modèle néo-keynésien. Une hausse de la probabilité suffit notamment à générer une récession sans réelle occurrence du « désastre » et produit, en concurrence monopolistique, des réactions de la consommation et des salaires cohérentes. Nous proposons ainsi un cadre d’analyse des effets dynamiques des événements rares, préalable à l’investigation du rôle de la politique monétaire.
    Keywords: Crise financière, frictions, appariement, contagion, banques, aléa moral, événement rare, désastre économique;
    Date: 2012–09

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