New Economics Papers
on Banking
Issue of 2013‒05‒24
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. A Semiparametric Early Warning Model of Financial Stress Events By Ian Christensen; Fuchun Li
  2. Dynamic Effects of Credit Shocks in a Data-Rich Environment By Jean Boivin; Marc P. Giannoni; Dalibor Stevanovic
  3. Do Depositors Monitor Banks? By Rajkamal Iyer; Manju Puri; Nicholas Ryan
  4. Trading partners in the interbank lending market By Gara Afonso; Anna Kovner; Antoinette Schoar
  5. The ‘Celtic Crisis’: Guarantees, transparency, and systemic liquidity risk By Philipp König; Kartik Anand; Frank Heinemann;
  6. The role of the bank lending channel and impacts of stricter capital requirements on the Chinese banking industry By Xiong , Qiyue
  7. Loan officer Incentives and the Limits of Hard Information By Tobias Berg; Manju Puri; Jorg Rocholl
  8. The impact of housing markets on consumer debt: credit report evidence from 1999 to 2012 By Meta Brown; Sarah Stein; Basit Zafar
  9. The history of cyclical macroprudential policy in the United States By Douglas J. Elliott; Greg Feldberg; Andreas Lehnert
  10. The risk of fire sales in the tri-party repo market By Brian Begalle; Antoine Martin; James McAndrews; Susan McLaughlin
  11. Bank Lending Relationships and the Use of Performance-Sensitive Debt By Tim R. Adam; Daniel Streitz; ;
  12. Social costs of POS payments in the Netherlands 2002–2012: Efficiency gains from increased debit card usage By Nicole Jonker
  13. A Regime Switching Skew-normal Model for Measuring Financial Crisis and Contagion By Joshua C.C. Chan; Cody Yu-Ling Hsiao; Renée A. Fry-McKibbin
  14. Social trust and use of banking services across households in 28 transitional countries By Afandi, Elvin; Habibov, Nazim

  1. By: Ian Christensen; Fuchun Li
    Abstract: The authors use the Financial Stress Index created by the International Monetary Fund to predict the likelihood of financial stress events for five developed countries: Canada, France, Germany, the United Kingdom and the United States. They use a semiparametric panel data model with nonparametric specification of the link functions and linear index function. The empirical results show that the semiparametric early warning model captures some well-known financial stress events. For Canada, Germany, the United Kingdom and the United States, the semiparametric model can provide much better out-of-sample predicted probabilities than the logit model for the time period from 2007Q2 to 2010Q2, while for France, the logit model provides better performance for non-financial stress events than the semiparametric model.
    Keywords: Econometric and statistical methods; Financial stability
    JEL: G01 G17 C12 C14
    Date: 2013
  2. By: Jean Boivin; Marc P. Giannoni; Dalibor Stevanovic
    Abstract: We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. The identified credit shocks, interpreted as unexpected deteriorations of credit market conditions, immediately increase credit spreads, decrease rates on Treasury securities, and cause large and persistent downturns in the activity of many economic sectors. Such shocks are found to have important effects on real activity measures, aggregate prices, leading indicators, and credit spreads. Our identification procedure does not require any timing restrictions between the financial and macroeconomic factors, and yields interpretable estimated factors. <P>
    Keywords: Credit shock, structural factor analysis,
    JEL: E32 E44 C32
    Date: 2013–05–01
  3. By: Rajkamal Iyer; Manju Puri; Nicholas Ryan
    Abstract: We use unique micro-level depositor data for a bank that faced a run due to a shock to its solvency to study whether depositors monitor banks. Specifically, we examine depositor withdrawal patterns in response to a timeline of private and public signals of the bank’s financial health. In response to a public announcement of the bank’s financial troubles, we find depositors with uninsured balances, depositors with loan linkages and staff of the bank are far more likely to run. Even before the run, a regulatory audit, which was in principle private information, found the bank insolvent. We find that depositors act on this private information and withdraw in a pecking order beginning at the time of the regulatory audit, with staff moving first, followed by uninsured depositors and finally other depositors. By comparing the response to this fundamental shock with an earlier panic at the same bank, we argue that withdrawals in the fundamental run are due in part to monitoring by depositors though the monitoring appears to be more of regulatory signals rather than of fundamentals. Our results give sharp empirical evidence on the importance of fragility in a bank’s capital structure and may inform banking regulation.
    JEL: G01 G2 G21
    Date: 2013–05
  4. By: Gara Afonso; Anna Kovner; Antoinette Schoar
    Abstract: There is substantial heterogeneity in the structure of trading relationships in the U.S. overnight interbank lending market: Some banks rely on spot transactions, while most form stable, concentrated borrowing relationships to hedge liquidity needs. As a result, borrowers pay lower prices and borrow more from their concentrated lenders. Exogenous shocks to liquidity supply (days with low GSE lending) lead to marketwide drops in liquidity and a rise in interest rates. However, borrowers with concentrated lenders are almost completely insulated from the shocks, while liquidity transmission affects the rest of the market via higher interest rates and reduced borrowing volumes.
    Keywords: Interbank market ; Bank liquidity
    Date: 2013
  5. By: Philipp König; Kartik Anand; Frank Heinemann;
    Abstract: Bank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and stave off bank runs. However, as the experiences of some European countries, most notably Ireland, have demonstrated, the credibility and effectiveness of these guarantees is crucially intertwined with the sovereign’s funding risks. Employing methods from the literature on global games, we develop a simple model to explore the systemic linkage between the rollover risks of a bank and a government, which are connected through the government’s guarantee of bank liabilities. We show the existence and uniqueness of the joint equilibrium and derive its comparative static properties. In solving for the optimal guarantee numerically, we show how its credibility may be improved through policies that promote balance sheet transparency. We explain the asymmetry in risk-transfer between sovereign and banking sector, following the introduction of a guarantee as being attributed to the resolution of strategic uncertainties held by bank depositors and the opacity of the banks’ balance sheets.
    Keywords: bank debt guarantees, transparency, bank default, sovereign default, global games
    JEL: G01 G28 D89
    Date: 2013–05
  6. By: Xiong , Qiyue (BOFIT)
    Abstract: This paper focuses on the role the bank lending channel in transmission of monetary policy in China. Using unbalanced quarterly panel data from 2Q2000 to 4Q2011, a one-step GMM estimator is applied to establish the existence the bank lending channel. The findings suggest central bank monetary policy asymmetrically affects bank lending behavior. Small banks are found more sensitive to contractionary monetary policy in the Chinese context. Well capitalized banks appear to be more likely to adjust their lending behaviors in response to expansionary monetary policy, and conversely, undercapitalized banks tend to adjust with the advent of contractionary monetary policy. The importance of the bank lending channel declines after China introduced stricter capital regulations in early 2004, but the effect is still apparent in times of expansionary policy.
    Keywords: bank characteristics; capital regulation; bank lending channel; asymmetric effects
    JEL: E52
    Date: 2013–05–02
  7. By: Tobias Berg; Manju Puri; Jorg Rocholl
    Abstract: Poor loan quality is often attributed to loan officers exercising poor judgment. A potential solution is to base loans on hard information alone. However, we find other consequences of bypassing discretion stemming from loan officer incentives and limits of hard information verifiability. Using unique data where loans are based on hard information, and loan officers are volume-incentivized, we find loan officers increasingly use multiple trials to move loans over the cut-off, both in a regression-discontinuity design and when the cut-off changes. Additional trials positively predict default suggesting strategic manipulation of information even when loans are based on hard information alone.
    JEL: G01 G2 G21 G3
    Date: 2013–05
  8. By: Meta Brown; Sarah Stein; Basit Zafar
    Abstract: We investigate the impact of large swings in the housing market on nonmortgage borrowing, including student, credit card, auto, and home equity debts. For this purpose, we use CoreLogic geographic house price variation, matched with rich data on consumer liabilities from the Equifax-sourced FRBNY Consumer Credit Panel. The length and timing of our panel allow us to study the consumer debt portfolio response to house price changes during a boom-and-bust cycle of historic magnitude as well as during more ordinary times. In first-differenced instrumental variables estimation, we find that during 1999-2001, homeowners substituted out of nonhousing (largely credit card) debt and into home equity-based debt at a nearly dollar-for-dollar rate in response to house price increases. During the housing boom of 2002-06, however, homeowners abandoned the practice of substituting into less costly debt as equity grew, and instead increased obligations across the board. From 2007-12, sample homeowners experienced a 23 percent average house price decline, and withdrew from home equity debt without adding to non-housing debt. We observe substantial heterogeneity in this pattern: Substitution in both 1999-2001 and 2007-12 ranges from 50 cents to more than dollar-for-dollar for older and prime borrowers, while the decidedly nonprime borrow more modestly, show less evidence of substitution, and shed large amounts of all types of debt from 2007-12. Finally, difference-in-differences and FD-IV estimates are consistent with both 1) a 2012 relative debt overhang of at least $1,800 on average, despite little remaining home equity advantage, for homeowners who experienced a more pronounced boom-and-bust cycle and 2) little substitution out of home equity debt into student loans in response to recent house price declines.
    Keywords: Housing - Prices ; Consumer credit ; Debt ; Home ownership
    Date: 2013
  9. By: Douglas J. Elliott; Greg Feldberg; Andreas Lehnert
    Abstract: Since the financial crisis of 2007-2009, policymakers have debated the need for a new toolkit of cyclical "macroprudential" policies to constrain the build-up of risks in financial markets, for example, by dampening credit-fueled asset bubbles. These discussions tend to ignore America's long and varied history with many of the instruments under consideration to smooth the credit cycle, presumably because of their sparse usage in the last three decades. We provide the first comprehensive survey and historic narrative of these efforts. The tools whose background and use we describe include underwriting standards, reserve requirements, deposit rate ceilings, credit growth limits, supervisory pressure, and other financial regulatory policy actions. The contemporary debates over these tools highlighted a variety of concerns, including "speculation," undesirable rates of inflation, and high levels of consumer spending, among others. Ongoing statistical work suggests that macroprudential tightening lowers consumer debt but macroprudential easing does not increase it.
    Date: 2013
  10. By: Brian Begalle; Antoine Martin; James McAndrews; Susan McLaughlin
    Abstract: This paper studies the risk of "fire sales" in the tri-party repo market, a large and important market where securities dealers find short-term funding for a substantial portion of their own and their clients' assets. We distinguish between fire sales of assets by a dealer who, facing a run that could lead to default, sells securities to generate liquidity, and fire sales of assets by repo investors after a dealer's default has occurred. While fire sales do cause damage no matter how they arise, the tools available to lessen the harm from the two types of fire sales are different. We find that limited tools are available to mitigate the risk of pre-default fire sales and that no established tools currently exist to mitigate the risk of post-default sales.
    Keywords: Repurchase agreements ; Securities ; Liquidity (Economics) ; Default (Finance)
    Date: 2013
  11. By: Tim R. Adam; Daniel Streitz; ;
    Abstract: We show that performance-sensitive debt (PSD) is used to reduce hold-up problems in repeated lending relationships. Using a large sample of bank loans, we find a more frequent use of PSD if hold-up is more likely, e.g. if a longterm lending relationship exists and the borrower has fewer outside financing alternatives. The use of PSD is less likely in syndicated relationship loans, as hold-up is less important in this market. Finally, we find a substitution effect between the use of PSD and the tightness of financial covenants, which is consistent with PSD reducing hold-up problems caused by the use of covenants.
    Keywords: Performance-Sensitive Debt, Relationship Lending, Hold-Up, Covenants
    JEL: G21 G31 G32
    Date: 2013–05
  12. By: Nicole Jonker
    Abstract: The overall costs of the payment system to society are considerable. These costs depend on the relative usage of the available payment instruments, which differ in the costs that each entails to market participants in the payment chain. In the Netherlands, debit card payments have become less costly than cash payments. In 2012 an average cash payment cost EUR 0.44 whereas an average debit card payment cost EUR 0.30. Between 2002 and 2012, the number of debit card payments more than doubled to 2.5 billion, while cash usage declined to 3.75 billion payments. As a result of the changing payment behaviour of the Dutch, the total costs of cash and debit card payments to society declined by 10% from over EUR 2.6 billion in 2002 to less than EUR 2.4 billion in 2012. Relative to GDP, the social costs dropped from 0.57% to 0.40% of GDP. The costs incurred by banks for cash and debit card payments have been rather stable. Retailers, on the other hand, have achieved major cost reductions. The trend towards more card and less cash usage is expected to continue. From a cost perspective this will be beneficial for society as a whole.
    Keywords: social costs; efficiency; payment instruments
    JEL: D21 D23 D24 E42 G21
    Date: 2013–04
  13. By: Joshua C.C. Chan; Cody Yu-Ling Hsiao; Renée A. Fry-McKibbin
    Abstract: A regime switching skew-normal model for financial crisis and contagion is proposed in which we develop a new class of multiple-channel crisis and contagion tests. Crisis channels are measured through changes in ‘own’ moments of the mean, variance and skewness, while contagion is through changes in the covariance and co-skewness of the joint distribution of asset returns. In this framework: i) linear and non-linear dependence is allowed; ii) transmission channels are simultaneously examined; iii) crisis and contagion are distinguished and individually modeled; iv) the market that a crisis originates is endogenous; and v) the timing of a crisis is endogenous. In an empirical application, we apply the proposed model to equity markets during the Great Recession using Bayesian model comparison techniques to assess the multiple channels of crisis and contagion. The results generally show that crisis and contagion are pervasive across Europe and the US. The second moment channels of crisis and contagion are systematically more evident than the first and third moment channels.
    Keywords: Great Recession, Crisis tests, Contagion tests, Co-skewness, Regime switching skew-normal model, Gibbs sampling, Bayesian model comparison
    JEL: C11 C34 G15
    Date: 2013–03
  14. By: Afandi, Elvin; Habibov, Nazim
    Abstract: In this paper, we use survey data from a sample of 29,000 households from 28 transitional countries and Turkey to address two main questions: (i) is there any effect of social trust on the use of banking services and (ii) what are the household-level and country-specific determinants of using banking services in transitional countries. We found that the higher level of trust in people predicts a greater level in use of banking services by households regardless of the model specifications and econometric adjustments employed. This association appears to be more prominent among less educated respondents and in countries with low levels of legal enforcement. The results also suggest that location, income and wealth of households, along with country income level, legal enforcement and inflation rates strongly affect the decisions made by households regarding their use of banking services. In contrast, we found either a very small or non-significant impact with regard to bank ownership structure on the use of banking services across households.
    Keywords: use of banking services, social trust, transitional countries
    JEL: G21 O16 P20
    Date: 2012–08–02

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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