New Economics Papers
on Banking
Issue of 2013‒05‒11
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly By Malcolm Baker; Jeffrey Wurgler
  2. Rare Shocks, Great Recessions By Marco Del Negro; Vasco Curdia
  3. The Vulnerability of Minority Homeowners in the Housing Boom and Bust By Patrick Bayer; Fernando Ferreira; Stephen L. Ross
  4. Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity By Venky Venkateswaran; Randall Wright
  5. Can Europe Recover Without Credit? By Zsolt Darvas
  6. Evaluating the effects of the EU directive proposal for risk-based deposit insurance premiums in Spain By Pilar Gómez-Fernández-Aguado; Antonio Partal-Ureña; Antonio Trujillo-Ponce
  7. Sustainable Shadow Banking By Guillermo Ordonez
  8. Liquidity Contractions, Incomplete Financial Participation and the Prevalence of Negative Equity Non-recourse Loans By Iraola, Miguel; Torres-Martínez, Juan Pablo
  9. Regulatory capital determination and Its implications for internal ratings-based credit risk model development and validation By Cao, Honggao
  10. Identifying, ranking and tracking systemically important financial institutions (SIFIs), from a global, EU and Eurozone perspective By Masciantonio, Sergio
  11. Intebank liquidity crunch and the firm credit crunch: Evidence from the 2007-2009 crisis By Rajkamal Iyer; Samuel Da-Rocha-Lopes; José-Luis Peydró; Antoinette Schoar
  12. Network versus portfolio structure in financial systems By Teruyoshi Kobayashi
  13. The performance of commercial banks and the determinants of profitability: Evidence from Kosovo By Govori, Fadil
  14. Bank Competition and Outreach: Evidence from Turkey. By A. FARUK AYSAN; M. DISLI; K. SCHOORS
  15. Corporate Governance and Bank Performance: Evidence from Macedonia By Fidanoski, Filip; Mateska, Vesna; Simeonovski, Kiril

  1. By: Malcolm Baker; Jeffrey Wurgler
    Abstract: Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks’ leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data. We confirm that the equity of better-capitalized banks has lower systematic risk (beta) and lower idiosyncratic risk. However, over the last 40 years, lower risk banks have higher stock returns on a risk-adjusted or even a raw basis, consistent with a stock market anomaly previously documented in other samples. The size of the low risk anomaly within banks suggests that the cost of capital effects of capital requirements may be considerable. Assuming competitive lending markets, banks’ low asset betas implied an average risk premium of only 40 basis points above Treasury yields in our sample period; a calibration suggests that a ten percentage-point increase in Tier 1 capital to risk-weighted assets may have increased this to between 100 and 130 basis points per year. In summary, the low risk anomaly in the stock market produces a potentially significant cost of capital requirements.
    JEL: G14 G21 G32
    Date: 2013–05
  2. By: Marco Del Negro (Federal Reserve Bank of New York); Vasco Curdia (Federal Reserve Bank of New York)
    Abstract: We estimate a DSGE model where rare large shocks can occur, by replacing the commonly used Gaussian assumption with a Student-t distribution. We show that the latter is favored by the data in the context of a Smets and Wouters-type model estimated on macro variables, even if we allow for low frequency variation in the shocks' volatility. The evidence is even stronger when we introduce financial frictions as in Bernanke, Gertler and Gilchrist (1999), and correspondingly include a measure of interest rate spreads among the observables. We provide some evidence that introducing Student-t shocks reduces the importance of low-frequency time-variation in volatility. In particular, we show that the Great Recession of 2008-09 does not result in significant increases in estimated time-varying volatility (i.e., it is not a reversal of the Great Moderation) but is largely the outcome of large shocks.
    Date: 2012
  3. By: Patrick Bayer; Fernando Ferreira; Stephen L. Ross
    Abstract: This paper examines mortgage outcomes for a large, representative sample of individual home purchases and refinances linked to credit scores in seven major US markets in the recent housing boom and bust. Among those with similar credit scores, black and Hispanic homeowners had much higher rates of delinquency and default in the downturn. These differences are not readily explained by the likelihood of receiving a subprime loan or by differential exposure to local shocks in the housing and labor market and are especially pronounced for loans originated near the peak of the boom. Our findings suggest that those black and Hispanic homeowners drawn into the market near the peak were especially vulnerable to adverse economic shocks and raise serious concerns about homeownership as a mechanism for reducing racial disparities in wealth.
    JEL: J15 R2
    Date: 2013–05
  4. By: Venky Venkateswaran; Randall Wright
    Abstract: When limited commitment hinders unsecured credit, assets help by serving as collateral. We study models where assets differ in pledgability – the extent to which they can be used to secure loans – and hence liquidity. Although many previous analyses of imperfect credit focus on producers, we emphasize consumers. Household debt limits are determined by the cost households incur when assets are seized in the event of default. The framework, which nests standard growth and asset-pricing theory, is calibrated to analyze the effects of monetary policy and financial innovation. We show that inflation can raise output, employment and investment, plus improve housing and stock markets. For the baseline calibration, optimal inflation is positive. Increases in pledgability can generate booms and busts in economic activity, but may still be good for welfare.
    JEL: E41 E43 E44 E52 G12
    Date: 2013–05
  5. By: Zsolt Darvas
    Abstract: Data from 135 countries covering five decades suggests that creditless recoveries, in which the stock of real credit does not return to the pre-crisis level for three years after the GDP trough, are not rare and are characterised by remarkable real GDP growth rates: 4.7 percent per year in middle-income countries and 3.2 percent per year in high-income countries. However, the implications of these historical episodes for the current European situation are limited, for two main reasons. First, creditless recoveries are much less common in high-income countries, than in low-income countries which are financially undeveloped. European economies heavily depend on bank loans and research suggests that loan supply played a major role in the recent weak credit performance of Europe. There are reasons to believe that, despite various efforts, normal lending has not yet been restored. Limited loan supply could be disruptive for the European economic recovery and there has been only a minor substitution of bank loans with debt securities. Second, creditless recoveries were associated with significant real exchange rate depreciation, which has hardly occurred so far in most of Europe. This stylised fact suggests that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return.
    Keywords: creditless recoveries, credit growth, financial structure, real exchange rate adjustment
    JEL: E32 E44 E51 F31 G21 O40
    Date: 2013–02
  6. By: Pilar Gómez-Fernández-Aguado (Department of Financial Economics and Accounting, Universidad de Jaén); Antonio Partal-Ureña (Department of Financial Economics and Accounting, Universidad de Jaén); Antonio Trujillo-Ponce (Department of Financial Economics and Accounting, Universidad Pablo de Olavide)
    Abstract: Using This paper analyzes the effects on the Spanish banking system of the EU proposal for a new Directive on deposit insurance systems based on risk-sensitive premiums. To do this, we examine the risk profile of Spanish banks during the 2007-2011 period according to several indicators reflecting capital adequacy, asset quality, profitability and liquidity. We conclude that most of banks would increase their contributions with the proposed system, evidencing the cyclical character of the new model. Our results also suggest that risk-based schemes could provide an incentive for sound management by reducing the premiums for those banks with better risk profiles.
    Keywords: Banking regulation; financial safety net; deposit insurance premiums; deposit insurance system; moral hazard; European banking system
    Date: 2013–05
  7. By: Guillermo Ordonez
    Abstract: Commercial banks are subject to regulation that restricts their investments. When banks are concerned for their reputation, however, they could self-regulate and invest more efficiently. Hence, a shadow banking that arises to avoid regulation has the potential to improve welfare. Still, reputation concerns depend on future economic prospects and may suddenly disappear, generating a collapse of shadow banking and a return to traditional banking, with a decline in welfare. I discuss how a combination of traditional regulation and cross reputation subsidization may enhance shadow banking and make it more sustainable.
    JEL: D82 E44 G01 G18 G21
    Date: 2013–05
  8. By: Iraola, Miguel; Torres-Martínez, Juan Pablo
    Abstract: We address a dynamic general equilibrium model where securities are backed by collateralized loans, and borrowers face endogenous liquidity contractions and financial participation constraints. Although the only payment enforcement is the seizure of collateral guarantees, restrictions on credit access make individually optimal payment strategies---coupon payment, prepayment, and default---sensitive to idiosyncratic factors. In particular, the lack of liquidity and the presence of financial participation constraints rationalize the prevalence of negative equity loans. We prove equilibrium existence, characterize optimal payment strategies, and provide a numerical example illustrating our main results.
    Keywords: Asset-Backed Securities - Liquidity Contractions - Incomplete Financial Participation
    JEL: D52 D53
    Date: 2013–05
  9. By: Cao, Honggao
    Abstract: Focusing on the interconnections between the Basel regulatory capital formula and several well-specified statistical models, this working paper seeks to understand some of the important issues embedded in the Basel Accord. These include: Where does this formula come from? What risks does it try to capture? Why does the Basel Accord stipulate that the formula be implemented on a basis of homogeneous segments for retail exposures or similar risk ratings of wholesale obligors? Is there any desirable property on the number of loans for a segment (or obligor group)? Why is LGD treated as a constant as opposed to a random variable? When covering expected loss – and determined independently – how is the loss reserve related to the minimum regulatory capital? Answers to these questions have some important implications for Basel model development and validation.
    Keywords: Basel, Basel Model Development, Basel Model Validation, Regulatory Capital, Credit Risk Model, Basel Capital Formula
    JEL: G1 G18 G32 G38
    Date: 2012–10
  10. By: Masciantonio, Sergio
    Abstract: This paper develops a methodology to identify systemically important financial institutions building on that developed by the BCBS (2011) and used by the Financial Stability Board in its yearly G-SIFIs identification. This methodology is based on publicly available data, providing fully transparent results with a G-SIFIs list that helps to bridge the gap between market knowledge and supervisory decisions. Moreover the results encompass a complete ranking of the banks considered, according to their systemic importance scores. The methodology has then been applied to EU and Eurozone samples of banks to obtain their systemic importance ranking and SIFIs lists. A statistical analysis and some geographical and historical evidence provide further insight into the notion of systemic importance, its policy implications and the future applications of this methodology.
    Keywords: banks, balance sheets, systemic risk, SIFIs, financial stability, regulation
    JEL: C81 G01 G10 G18 G20 G21 G28
    Date: 2013–04–01
  11. 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
  12. By: Teruyoshi Kobayashi (Graduate School of Economics, Kobe University)
    Abstract: The question of how to stabilize financial systems has attracted considerable attention since the global financial crisis of 2007-2009. Recently, Beal et al. (gIndividual versus systemic risk and the regulator's dilemmah, Proc Natl Acad Sci USA 108: 12647-12652, 2011) demonstrated that higher portfolio diversity among banks would reduce systemic risk by decreasing the risk of simultaneous defaults at the expense of a higher likelihood of individual defaults. In practice, however, a bank default has an externality in that it undermines other banks' balance sheets. This paper explores how each of these different sources of risk, simultaneity risk and externality, contributes to systemic risk. The results show that the allocation of external assets that minimizes systemic risk varies with the topology of the financial network as long as asset returns have negative correlations. In the model, a well-known centrality measure, PageRank, reflects an appropriately defined ginfectivenessh of a bank. An important result is that the most infective bank need not always be the safest bank. Under certain circumstances, the most infective node should act as a firewall to prevent large collective defaults. The introduction of a counteractive portfolio structure will significantly reduce systemic risk.
    Keywords: Systemic risk, financial crisis, financial network, macro-prudential policy
    JEL: G18
    Date: 2013–04
  13. By: Govori, Fadil
    Abstract: Financial intermediaries perform indirect financing, and in this context, commercial banks are very important participants. They carry out the bulk of indirect financing transactions. On the other hand, the implementation mechanism of monetary policy is closely linked to the functioning of the banking system. Kosovo’s Commercial Banks performance is satisfactory compared with regional. In this paper we provide some of the performance indicators. The rates of return of commercial banks are greatly and directly affected by the net interest margin, provisions for loan losses, revenues and expenses by the non-interest, taxes and the equity multiplier. In this context, liquid assets do not appear to be of high impact in determining and variability the rate of return, high liquidity with low returns. Also, we address the impact of the global financial crisis “2008-20012” in the commercial banks performance in Kosovo, mainly through the impact of the decline in the asset use ratio. We think that was a positive approach that banks have followed the course of returns fall by the reduction in interest-expenditures, while the costs of provisions for loan losses to total average assets marked constant level throughout the period, despite the increasing ratio of nonperforming loans. Drawing on these findings it is recommended that banks even further engage in reducing operational costs; diversify income sources in order not to rely exclusively on the interests of loans, and to strengthen credit risk management in order to minimize the credit risk.
    Keywords: Banks, banking sector, banking performance, determinants of performance, profitability, rate of return, net interest margin, non-performing loans.
    JEL: G0 G01 G1 G11 G2 G21 G3 G32
    Date: 2013–05–03
    Abstract: In light of the importance of banking sector outreach and given concerns that competition may adversely affect it, this study explores the empirical linkage between banking structure and outreach in Turkey for the period 1988–2010. Bank-, province-, and bank-province-level estimation results indicate that competition is in general conducive to the outreach of banks. We do not find evidence for collusive behavior between banks when they have multimarket contact. On the province-level, thepresence of foreign owned banks is associated with higher outreach, while at the bank-province levelwe observe that outreach of domestic banks exceeds that of foreign banks. Together, these results suggest that there are pro-competitive spillover effects from foreign banks to their domestic counterparts.
    Keywords: bank competition, multimarket contact, bank outreach.
    JEL: E44 F43 G21
    Date: 2013–04
  15. By: Fidanoski, Filip; Mateska, Vesna; Simeonovski, Kiril
    Abstract: The role of banks is integral to the economic development of any country. Given the renewed attention on the corporate governance in banks with the global financial crises, this paper investigates the relevance of board size, board composition and CEO qualities in the banks and their performance. Thus, the following paragraphs will elaborate on the development of hypotheses to test whether good corporate governance system can contribute towards higher banks performance. This research is different from other studies, both practical and theoretical, as the object of study is commercial banks in developing country.
    Keywords: bank performance, board composition, board size, capital requirement, corporate governance, developing countries, diversity, Macedonia.
    JEL: G20 G21 G30 G34 K23
    Date: 2013–02

This issue is ©2013 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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