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on Banking |
| By: | Allan M. Malz |
| Abstract: | This paper describes a set of indicators of systemic risk computed from current market prices of equity and equity index options. It displays results from a prototype version, computed daily from January 2006 to January 2013. The indicators represent a systemic risk event as the realization of an extreme loss on a portfolio of large-intermediary equities. The technique for computing them combines risk-neutral return distributions with implied return correlations drawn from option prices, tying together the single-firm return distributions via a copula to simulate the joint distribution and thus the financial-sector portfolio return distribution. The indicators can be computed daily using only current market prices; no historical data are involved. They are therefore forward-looking and can exploit all the information impounded in current prices. However, the indicators blend both market expectations and the market's desire to protect itself against volatility and tail risk, so they cannot be readily decomposed into these two elements. The paper presents evidence that the indicators have some predictive power for systemic risk events and that they can serve as a meaningful market-adjusted point of comparison for fundamentals-based systemic risk indicators. |
| Keywords: | Systemic risk ; Options (Finance) |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:607&r=ban |
| By: | Franklin Allen; Elena Carletti |
| Abstract: | In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the choice of bank and firm capital structure and the cost of equity and deposit finance. Despite risk neutrality, equity capital is more costly than deposits. When banks directly finance risky investments, they hold positive capital and diversify. When they make risky loans to firms, banks trade off the high cost of equity with the diversification benefits from a lower bankruptcy probability. When bankruptcy costs are high, banks use no capital and only lend to one sector. When these are low, banks hold capital and diversify. JEL Codes: G21, G32, G33 Keywords: Deposit finance, bankruptcy costs, bank diversification |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:477&r=ban |
| By: | Tobias Adrian; Daniel Covitz; Nellie Liang |
| Abstract: | While the Dodd Frank Act (DFA) broadens the regulatory reach to reduce systemic risks to the U.S. financial system, it does not address some important risks that could migrate to or emanate from entities outside the federal safety net. At the same time, it limits the types of interventions by financial authorities to address systemic events when they occur. As a result, a broad and forward-looking monitoring program, which seeks to identify financial vulnerabilities and guide the development of pre-emptive policies to help mitigate them, is essential. Systemic vulnerabilities arise from market failures that can lead to excessive leverage, maturity transformation, interconnectedness, and complexity. These vulnerabilities, when hit by adverse shocks, can lead to fire sale dynamics, negative feedback loops, and inefficient contractions in the supply of credit. We present a framework that centers on the vulnerabilities that propagate adverse shocks, rather than shocks themselves, which are difficult to predict. Vulnerabilities can emerge in four areas: (1) systemically important financial institutions (SIFIs), (2) shadow banking, (3) asset markets, and (4) the nonfinancial sector. This framework also highlights how policies that reduce the likelihood of systemic crises may do so only by raising the cost of financial intermediation in non-crisis periods. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-21&r=ban |
| By: | Iichiro Uesugi; Taisuke Uchino |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd12-292&r=ban |
| By: | Huang, Pidong |
| Abstract: | This work builds on the model in Goldstein and Pauzner (GP) (2005), a global-games version of the Diamond-Dybvig (DD) (1983) model in which there is uncertainty about the long-term return and in which agents observe noisy signals about that return. GP limited their investigation to a banking contract that makes a noncontingent promised payoff to those who withdraw early until the bank's resources are exhausted. We amend the contract and permit suspension. As we show, there is a class of suspension policies that gives rise to uniqueness without requiring the new assumption introduced in a proof in GP; namely, the short-term return is also random. In general, both the GP policy and my generalization of it to allow suspension seem not to be the best banking contracts. However, if the return uncertainty is sufficiently small, then there are policies in the class we study that imply ex ante welfare close to the first-best outcome in DD, which itself is an upper bound on welfare in the model with return uncertainty. |
| Keywords: | Bank run: Global Game |
| JEL: | G21 |
| Date: | 2013–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46622&r=ban |
| By: | Giovanni Pepe (Bank of Italy) |
| Abstract: | Since 1996 the Basel risk-weighting regime has been based on the distinction between the trading and the banking book. For a long time credit items have been weighted less strictly if held in the trading book, on the assumption that they are easy to hedge or sell. The Great Financial Crisis made evident that banks declared a trading intent on positions that proved difficult or impossible to sell quickly. The Basel 2.5 package was developed in 2009 to better align trading and banking books’ capital treatments. Working on a number of hypothetical portfolios I show that the new rules fell short of reaching their target and instead merely reversed the incentives. A model bank can now achieve a material capital saving by allocating its credit securities to the banking book, irrespective of its real intention or capability of holding them until maturity. The advantage of doing so is particularly pronounced when the incremental investment increases the concentration profile of the trading book, as usually happens for exposures towards banks’ home government. Moreover, in these cases trading book requirements are exposed to powerful cliff-edge effects triggered by rating changes. |
| Keywords: | Basel 2.5, trading book, market risk, risk-weighted-assets, capital arbitrage |
| JEL: | G18 G21 G28 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_159_13&r=ban |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School) |
| Abstract: | We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Eurozone 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 unfiltered 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. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2013/3&r=ban |
| By: | Rajkamal Iyer; Samuel Da-Rocha-Lopes; José-Luis Peydró; Antoinette Schoar |
| Abstract: | We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, there are no overall positive effects of central bank liquidity, but higher hoarding of liquidity. |
| Keywords: | credit crunch, banking crisis, interbank markets, access to credit, flight to quality, lender of last resort, liquidity hoarding |
| JEL: | G01 G21 G28 G32 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:687&r=ban |
| By: | Leonardo Gambacorta; Adrian Van Rixtel |
| Abstract: | The paper examines the basic rationale and features of the proposals adopted to separate specific investment and commercial banking activities (Volcker rule, Vickers and Liikanen proposals). In particular, it focuses on the likely implications of such initiatives for: (i) financial stability and systemic risk; (ii) banks' business models; and (iii) the international activities of global banks. |
| Keywords: | regulation, bank business models, systemic risk, economies of scale, economies of scope, too big to fail |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:412&r=ban |
| By: | Francesco Cannata (Bank of Italy); Marco Bevilacqua (Bank of Italy); Simone Enrico Casellina (Bank of Italy); Luca Serafini (Bank of Italy); Gianluca Trevisan (Bank of Italy) |
| Abstract: | In December 2010 the Basel Committee on Banking Supervision published a set of new regulations for banks in response to the financial crisis. This paper aims at evaluating the possible effects of the new framework on banks’ available regulatory capital and risk-weighted assets and assessing their positioning with respect to future leverage and liquidity constraints. The evidence, based on the data collected from a representative sample of 13 Italian banking groups updated to 30 June 2012, show that capital and liquidity positions relatively to the Basel 3 targets have improved considerably over the last two years. Furthermore, compared to banks in other jurisdictions, Italian intermediaries are likely to be less affected by the reform, due to a business model more focused on credit intermediation. Importantly, the estimates cannot be interpreted as a forecast of capital and liquidity needs as they do not incorporate any assumption about future balance-sheet items or banks’ reactions to the changing regulatory and economic environment. |
| Keywords: | Basel 3, QIS, impact assessment, bank, capital, liquidity |
| JEL: | G21 G28 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_157_13&r=ban |
| By: | Marcello Bofondi (Bank of Italy); Luisa Carpinelli (Bank of Italy); Enrico Sette (Bank of Italy) |
| Abstract: | We study the effect of the increase in Italian sovereign debt risk on credit supply on a sample of 670,000 bank-firm relationships between December 2010 and December 2011, drawn from the Italian Central Credit Register. To identify a causal link, we exploit the lower impact of sovereign risk on foreign banks operating in Italy than on domestic banks. We study firms borrowing from at least two banks and include firm x period fixed effects in all regressions to controlling for unobserved firm heterogeneity. We find that Italian banks tightened credit supply: the lending of Italian banks grew by about 3 percentage points less than that of foreign banks, and their interest rates were 15-20 basis points higher, after the outbreak of the sovereign debt crisis. We test robustness by splitting foreign banks into branches and subsidiaries, and then examine whether selected bank characteristics may have amplified or mitigated the impact. We also study the extensive margin of credit, analyzing banks' propensity to terminate existing relationships and to grant new loan applications. Finally, we test whether firms were able to compensate for the reduction of credit from Italian banks by borrowing more from foreign banks. We find that this was not the case, so that the sovereign crisis had an aggregate impact on credit supply. |
| Keywords: | credit supply, sovereign debt crisis, bank lending channel |
| JEL: | G21 F34 E44 E51 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_909_13&r=ban |
| By: | Joseph P. Hughes; Loretta J. Mester |
| Abstract: | The Great Recession focused attention on large financial institutions and systemic risk. We investigate whether large size provides any cost advantages to the economy and, if so, whether these cost advantages are due to technological scale economies or too-big-to-fail subsidies. Estimating scale economies is made more complex by risk-taking. Better diversification resulting from larger scale generates scale economies but also incentives to take more risk. When this additional risk-taking adds to cost, it can obscure the underlying scale economies and engender misleading econometric estimates of them. Using data pre- and post-crisis, we estimate scale economies using two production models. The standard model ignores endogenous risk-taking and finds little evidence of scale economies. The model accounting for managerial risk preferences and endogenous risk-taking finds large scale economies, which are not driven by too-big-to-fail considerations. We evaluate the costs and competitive implications of breaking up the largest banks into smaller banks. ; This paper supersedes Federal Reserve Bank of Philadelphia Working Paper No. 11-27 |
| Keywords: | Banks and banking ; Risk ; Economies of scale |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-13&r=ban |
| By: | Höwer, Daniel |
| Abstract: | Do firms select their main bank relationship according to their risk or risk preferences? Relationship banking is attractive for high risk firms since it improves their access to finance and provides liquidity insurance. Low risk firms instead may not want to bear the additional costs. I employ a nested logit model to study the determinants of the main bank relationship decision by newly established German firms. I find that firms that ask for bank support in case of financial distress are more likely to choose a relationship-oriented bank, such as a public or cooperative bank. Cost sensitive firms are more likely to choose a private bank. But I find no evidence that firms select a bank according to ex ante risk. Transaction oriented banks are not able to attract low risk firms. -- |
| Keywords: | Relationship Banking,Start-up,Entrepreneurship,Financing Choice |
| JEL: | G21 G32 M13 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:13018&r=ban |
| By: | Francesco Cannata (Bank of Italy); Giorgio D’Acunto (Bank of Italy); Alessandro Allegri (Bank of Italy); Marco Bevilacqua (Bank of Italy); Gateano Chionsini (European Banking Authority); Tiziana Lentini (Bank of Italy); Francesco Marino (Bank of Italy); Gianluca Trevisan (Bank of Italy) |
| Abstract: | After a decade of deep transformation, which influenced both lending policies and risk management, Italy’s mutual banks are faced with the upcoming Basel III reform. Economic trends continue to exert pressure on the traditional bank business model. The entry into force of Basel III provides an opportunity to assess the changes under way, and identify potential problems. A simulation exercise conducted on June 2012 data evaluates the position of both mutual banks and central institutions relative to the new rules on capital and liquidity. The exercise paints a picture of broad compliance with the prudential targets, although some elements warrant greater attention. On the one hand, although the banks’ capital endowment is of better quality and higher than the future minimum regulatory requirements, persistent low profitability and the increasing credit risk in the balance sheets might pose a problem in the future; on the other hand, a more efficient allocation of liquidity present in the system seems necessary, including via the introduction of new coordination measures. |
| Keywords: | Basel 3, QIS, impact assessment, bank, capital, liquidity |
| JEL: | G21 G28 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_158_13&r=ban |
| By: | Lukasz A. Drozd; Ricardo Serrano-Padial |
| Abstract: | In the data, most consumer defaults on unsecured credit are informal and the lending industry devotes significant resources to debt collection. We develop a new theory of credit card lending that takes these two features into account. The two key elements of our model are moral hazard and costly state verification that relies on the use of information technology. We show that the model gives rise to a novel channel through which IT progress can affect outcomes in the credit markets, and argue that this channel can be critical to understand the trends associated with the rapid expansion of credit card borrowing in the 1980s and over the 1990s. Independently, the mechanism of the model helps reconcile high levels of defaults and indebtedness observed in the US data. |
| Keywords: | Credit cards ; Consumer credit ; Credit ; Moral hazard |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-12&r=ban |
| By: | Vítor Castro (University of Coimbra, GEMF and NIPE, Portugal) |
| Abstract: | In this paper, we analyse the link between the macroeconomic developments and the banking credit risk in a particular group of countries – Greece, Ireland, Portugal, Spain and Italy (GIPSI) – recently affected by unfavourable economic and financial conditions. Employing dynamic panel data approaches to these five countries over the period 1997q1-2011q3, we conclude that the banking credit risk is significantly affected by the macroeconomic environment: the credit risk increases when GDP growth and the share and housing price indices decrease and rises when the unemployment rate, interest rate, and credit growth increase; it is also positively affected by an appreciation of the real exchange rate; moreover, we observe a substantial increase in the credit risk during the recent financial crisis period. Several robustness tests with different estimators have also confirmed these results. The findings of this paper indicate that all policy measures that can be implemented to promote growth, employment, productivity and competitiveness and to reduce external and public debt in these countries are fundamental to stabilize their economies. |
| Keywords: | Credit risk; Macroeconomic factors; Banking system; GIPSI; Panel data. |
| JEL: | C23 G21 F41 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2013-12.&r=ban |
| By: | Friederike Niepmann |
| Abstract: | Individual banks differ substantially in their foreign operations. This paper introduces heterogeneous banks into a general equilibrium framework of banking across borders to explain the documented variation. While the model matches existing micro and macro evidence, novel and unexplored predictions of the theory are also strongly supported by the data: The efficiency of the least efficient bank active in a host country increases the greater the impediments to banking across borders and the efficiency of the banking sector in the host country. There is also evidence of a tradeoff between proximity and fixed costs in banking. Banks hold more assets and liabilities in foreign affiliates relative to cross-border positions if the target country is further away and the cost of foreign direct investment is low. These results suggest that fixed costs play a crucial role in the foreign activities of banks. |
| Keywords: | Banks and banking, International ; Banks and banking, Foreign ; Banks and banking - Costs ; Bank investments |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:609&r=ban |
| By: | Leonardo Becchetti (University of Rome ÒTor VergataÓ); Stefano Castriota (University of Rome ÒTor VergataÓ); Pierluigi Conzo (University of Naples "Federico II" &CSEF) |
| Abstract: | The poor in developing countries are the most exposed to natural catastrophes and microfinance organizations may potentially ease their economic recovery. Yet, no evidence on MFIs strategies after natural disasters exists. We aim to fill this gap with a database which merges bank records of loans, issued before and after the 2004 Tsunami by a Sri Lankan MFI recapitalized by Western donors, with detailed survey data on the corresponding borrowers. Evidence of effective post-calamity intervention is supported since the defaults in the post-Tsunami years (2004-2006) do not imply smaller loans in the period following the recovery (2007-2011) while Tsunami damages increase their size. Furthermore, a cross-subsidization mechanism is in place: clients with a long successful credit history (and also those not damaged by the calamity) pay higher interest rates. All these features helped damaged people to recover and repay both new and previous loans. However, we also document an abnormal and significant increase in default rates of non victims suggesting the existence of contagion and/or strategic default problems. For this reason we suggest reconversion of donor aid into financial support to compulsory micro insurance schemes for borrowers. |
| Keywords: | Tsunami, disaster recovery, microfinance, strategic default, contagion, microinsurance |
| JEL: | G21 G32 G33 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ent:wpaper:wp43&r=ban |
| By: | Shaofeng Xu |
| Abstract: | This paper examines the contributions of population aging, mortgage innovation and historically low interest rates to the sharp rise in U.S. house prices and mortgage debt between 1994 and 2005. I construct an overlapping generations general equilibrium housing model and find that these three factors together account for over half of the increase in house prices and most of the increase in mortgage debt during this period. Population aging contributes to rising house prices and mortgage debt, but it accounts for only a small portion of their observed changes. Meanwhile, mortgage innovation significantly increases the mortgage borrowing of various age cohorts, but it has a trivial effect on house prices because interest rates rise due to higher demand for mortgage loans. This increases households’ savings in financial assets and leaves their housing assets nearly unchanged. The observed run-up in house prices can, however, be justified in an open-economy setting where interest rates fall due to a global saving glut. Declining interest rates force households at prime saving ages to reallocate their wealth from financial assets to housing assets, which dramatically drives up house prices. |
| Keywords: | Asset Pricing; Credit and credit aggregates; Economic models |
| JEL: | E21 E44 G11 R21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-9&r=ban |
| By: | Tatiana Damjanovic (Department of Economics, University of Exeter); Sarunas Girdenas (Department of Economics, University of Exeter) |
| Abstract: | We study optimal policy in a New Keynesian model at zero bound interest rate where households use cash alongside with house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall we observe decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or in the loan to collateral value ratio. We also find that optimal monetary policy generates large and more persistent fall in the money multiplier in response to drop in the loan to collateral value ratio. |
| Keywords: | optimal monetary policy, money supply, money multiplier, loan to value ratio, collateral constraint, house prices, zero bound interest rate. |
| JEL: | E44 E51 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1303&r=ban |