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on Banking |
| By: | DeAngelo, Harry (University of Southern CA); Stulz, Rene M. (OH State University and ECGI) |
| Abstract: | Liquidity production is a central role of banks. When there is a market premium for the production of (socially valuable) liquid financial claims and no other departures from the Modigliani and Miller (1958, MM) assumptions, we show that high leverage is optimal for banks. In this model, high leverage is not the result of distortions from agency problems, deposit insurance, or tax motives to borrow. The model can explain (i) why bank leverage increased over the last 150 years or so without invoking any of these distortions, (ii) why high bank leverage per se does not necessarily cause systemic risk, and (iii) why limits on the leverage of regulated banks impede their ability to compete with unregulated shadow banks. MM's leverage irrelevance theorem is inapplicable to banks: Because debt-equity neutrality assigns zero weight to the social value of liquidity, it is an inappropriately equity-biased baseline for assessing whether the high leverage ratios of real-world banks are excessive or socially destructive. |
| JEL: | E42 E51 G01 G21 G32 L51 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2013-08&r=ban |
| By: | M. Hashem Pesaran; TengTeng Xu |
| Abstract: | This paper proposes a theoretical framework to analyze the relationship between credit shocks, firm defaults and volatility, and to study the impact of credit shocks on business cycle dynamics. Firms are identical ex ante but differ ex post due to different realizations of firm-specific technology shocks, possibly leading to default by some firms. The paper advances a new modelling approach for the analysis of firm defaults and financial intermediation that takes account of the financial implications of such defaults for both households and banks. Results from a calibrated version of the model suggest that, in the steady state, a firm’s default probability rises with its leverage ratio and the level of uncertainty in the economy. A positive credit shock, defined as a rise in the loan-to-deposit ratio, increases output, consumption, hours and productivity, and reduces the spread between loan and deposit rates. The effects of the credit shock tend to be highly persistent, even without price rigidities and habit persistence in consumption behavior. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates; Economic models; Financial Institutions |
| JEL: | E32 E44 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-19&r=ban |
| By: | Alexander Karaivanov (Simon Fraser University); Anke Kessler (Simon Fraser University) |
| Abstract: | We develop a model to study the choice between formal and informal sources of credit in a setting with strategic default due to limited enforcement. Informal loans (e.g., from friends or relatives) are enforced by the threat of both parties losing the friendship relation. In contrast, formal loans (e.g., from banks) can only be enforced via collateral requirement. We show that the optimal informal loan contract features zero interest rate and zero physical collateral requirement. In contrast, formal loans always charge positive interest and require collateral. Borrowers are more likely to choose informal loans for small investment needs, and for loans with no or low default risk. Riskier loans, up to a limit, are optimally taken from formal sources since physical collateral, unlike social collateral is divisible, and defaulting with a bank is thus less costly than defaulting with a friend. Very risky loans, in contrast, can only be financed by informal sources due to insufficient collateral. Because default with social capital is relatively costly, however, personal loans also imply a limited growth potential. Empirical results from a cross section of 2880 Thai households are consistent with the predicted pattern of formal versus informal credit. |
| Keywords: | Informal credit, family loans, social capital, peer-to-peer lending, microfinance. |
| JEL: | G21 O12 O16 O17 D19 D64 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp13-03&r=ban |
| By: | Iyer, Rajkamal (MIT); Khwaja, Asim Ijaz (Harvard University); Luttmer, Erzo F. P. (Dartmouth University); Shue, Kelly (University of Chicago) |
| Abstract: | The recent banking crisis highlights the challenges faced in credit intermediation. New online peer-to-peer lending markets offer opportunities to examine lending models that primarily cater to small borrowers and that generate more types of information on which to screen. This paper evaluates screening in a peer-to-peer market where lenders observe both standard financial information and soft, or nonstandard, information about borrower quality. Our methodology takes advantage of the fact that while lenders do not observe a borrower's exact credit score, we do. We find that lenders are able to predict default with 45% greater accuracy than what is achievable based on just the borrower's credit score, the traditional measure of creditworthiness used by banks. We further find that lenders effectively use nonstandard or soft information and that such information is relatively more important when screening borrowers of lower credit quality. In addition to estimating the overall inference of creditworthiness, we also find that lenders infer a third of the variation in the dimension of creditworthiness that is captured by the credit score. This credit-score inference relies primarily upon standard hard information, but still draws relatively more from softer or less standard information when screening lower-quality borrowers. Our results highlight the importance of screening mechanisms that rely on soft information, especially in settings targeted at smaller borrowers. |
| JEL: | D53 D80 G21 L81 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp13-017&r=ban |
| By: | Gros, Daniel |
| Abstract: | In many eurozone countries, domestic banks often hold more than 20% of domestic public debt, which is an unsatisfactory situation given that banks are highly leveraged and that sovereign debt is inherently subject to default risk within the euro area. This paper by Daniel Gros finds, however, that the relative concentration of public debt on bank balance sheets is not just a result of the euro crisis, for there are strong additional incentives for banks in some countries to increase their sovereign. His contribution discusses a number of these regulatory incentives – the most important of which is specific to the euro area – and explores ways in which euro area banks can be weaned from massive investments in government bonds. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:7904&r=ban |
| By: | Patrick A. Pintus (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)); Jacek Suda (Banque de france - Banque de France) |
| Abstract: | This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their economic environment. When agents update their beliefs about the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with the actual leverage innovations, the learning model predicts the correct magnitude for the Great Recession, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the impact of learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks. Finally, we illustrate how learning with a misspecified model that ignores real/financial linkages also contributes to magnify financial shocks. |
| Keywords: | borrowing constraints; collateral; leverage; learning; financial shocks; recession |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00830480&r=ban |
| By: | Merrill, Craig B. (Brigham Young University); Nadauld, Taylor (Brigham Young University); Sherlund, Shane M. (OH State University) |
| Abstract: | Much attention has been paid to the large decreases in value of non-agency residential mortgage-backed securities (RMBS) during the financial crisis. Many observers have argued that the fall in prices was partly caused by fire sales. We use capital requirements and accounting rules to identify circumstances where financial institutions had incentives to engage in fire sales and then examine whether such sales occurred. For financial institutions subject to credit-sensitive capital requirements, capital requirements increase as an asset's credit becomes impaired. When accounting rules require such an asset's value to be marked-to-market and the fair value loss to be recognized in earnings, a capital-constrained firm can improve its capital position by selling the credit-impaired asset even if it has to accept a liquidity discount to do so. In contrast, a financial firm whose fair value losses are not recognized in earnings for the purpose of calculating capital requirements is more likely to satisfy capital requirements by selling liquid assets whose value has not fallen and hence would be unlikely to engage in fire sales. Using a sample of 5,000 repeat transactions of non-agency RMBS by insurance companies from 2006 to 2009, we show that insurance companies that became more capital-constrained because of operating losses (uncorrelated with RMBS credit quality) and also recognized fair value losses sold comparable RMBS at much lower prices than other insurance companies during the crisis. |
| JEL: | G01 G21 G22 G23 M41 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2013-02&r=ban |
| By: | Pavel V. Shevchenko; Gareth W. Peters |
| Abstract: | The management of operational risk in the banking industry has undergone significant changes over the last decade due to substantial changes in operational risk environment. Globalization, deregulation, the use of complex financial products and changes in information technology have resulted in exposure to new risks very different from market and credit risks. In response, Basel Committee for banking Supervision has developed a regulatory framework, referred to as Basel II, that introduced operational risk category and corresponding capital requirements. Over the past five years, major banks in most parts of the world have received accreditation under the Basel II Advanced Measurement Approach (AMA) by adopting the loss distribution approach (LDA) despite there being a number of unresolved methodological challenges in its implementation. Different approaches and methods are still under hot debate. In this paper, we review methods proposed in the literature for combining different data sources (internal data, external data and scenario analysis) which is one of the regulatory requirement for AMA. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1306.1882&r=ban |
| By: | Swamy, Vighneswara; S, Vijayalakshmi |
| Abstract: | This paper intends to analyse and elucidate the impact of Fair Value Accounting on the banking industry in general and Indian Banking in particular in the light of the move towards convergence to International Financial Reporting Standards across the globe. In the light of criticism against fair value accounting for amplifying the subprime crisis and for causing a financial meltdown, the article has analysed the nature and impact of Fair Value Accounting in view of the recent announcement of the Indian version of IFRS i.e Ind AS by the regulators in India and its impact in relation to the contentious issues like; systemic risk, contagion and its impact on investors. Further, the article highlights the areas in which Indian banking industry is required to focus before and after the implementation of Fair Value Accounting and their consequences on the financial statements of the Bank. |
| Keywords: | IFRS, Banking, Convergence of IFRS, Financial reporting, Investment, Capital, Banking |
| JEL: | E22 G24 M41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47514&r=ban |
| By: | Juan-Angel Jimenez-Martin (Complutense University of Madrid, Spain); Michael McAleer (Complutense University of Madrid, Spain, Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands, and Kyoto University, Japan); Teodosio Perez Amaral (Complutense University of Madrid, Spain); Paulo Araujo Santos (University of Lisbon, Portugal) |
| Abstract: | In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions. |
| Keywords: | Value-at-Risk (VaR), DPOT, daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel, global financial crisis |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2013–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130070&r=ban |
| By: | Mauro Bernardi; Ghislaine Gayraud; Lea Petrella |
| Abstract: | Recent financial disasters emphasised the need to investigate the consequence associated with the tail co-movements among institutions; episodes of contagion are frequently observed and increase the probability of large losses affecting market participants' risk capital. Commonly used risk management tools fail to account for potential spillover effects among institutions because they provide individual risk assessment. We contribute to analyse the interdependence effects of extreme events providing an estimation tool for evaluating the Conditional Value-at-Risk (CoVaR) defined as the Value-at-Risk of an institution conditioned on another institution being under distress. In particular, our approach relies on Bayesian quantile regression framework. We propose a Markov chain Monte Carlo algorithm exploiting the Asymmetric Laplace distribution and its representation as a location-scale mixture of Normals. Moreover, since risk measures are usually evaluated on time series data and returns typically change over time, we extend the CoVaR model to account for the dynamics of the tail behaviour. Application on U.S. companies belonging to different sectors of the Standard and Poor's Composite Index (S&P500) is considered to evaluate the marginal contribution to the overall systemic risk of each individual institution |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1306.2834&r=ban |
| By: | Manabu Asai (Soka University, Japan); Massimiliano Caporin (University of Padova, Italy); Michael McAleer (Erasmus University Rotterdam, The Netherlands, Complutense University of Madrid, Spain, and Kyoto University, Japan) |
| Abstract: | Most multivariate variance or volatility models suffer from a common problem, the “curse of dimensionality”. For this reason, most are fitted under strong parametric restrictions that reduce the interpretation and flexibility of the models. Recently, the literature has focused on multivariate models with milder restrictions, whose purpose is to combine the need for interpretability and efficiency faced by model users with the computational problems that may emerge when the number of assets can be very large. We contribute to this strand of the literature by proposing a block-type parameterization for multivariate stochastic volatility models. The empirical analysis on stock returns on the US market shows that 1% and 5 % Value-at-Risk thresholds based on one-step-ahead forecasts of covariances by the new specification are satisfactory for the period including the Global Financial Crisis. |
| Keywords: | block structures; multivariate stochastic volatility; curse of dimensionality; leverage effects; multi-factors; heavy-tailed distribution |
| JEL: | C32 C51 C10 |
| Date: | 2013–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130073&r=ban |
| By: | Ayadi, Rym; Arbak, Emrah; De Groen, Willem Pieter |
| Abstract: | This analysis of regulatory convergence shows that substantial improvements have been made in the southern and eastern Mediterranean countries (SEMCs), yet they still suffer from key weaknesses in deposit insurance, entry obstacles, political interference and the strength of legal rights. In particular, deposit insurance systems in many SEMCs are not explicit, which could lead to uncertainties in the provision of support to banks in case of default. Moreover, most systems do not attempt to align the banks’ incentives in risk-taking with those of taxpayers by implementing risk-based premiums. Another persistent issue is the presence of entry obstacles, with signs of substantial barriers to entry and continued government ownership of banks. The comparison of regulatory systems also highlights that some SEMCs have barely been able to catch up with the strong increase in supervisory independence in EU Mediterranean countries in recent years. While creditor protection remains relatively weak, significant improvements in credit information have occurred since 2003, notably through the establishment of private credit bureaus with universal coverage. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:7853&r=ban |
| By: | G. Bellettini; F. Delbono |
| Abstract: | Differently from Atkinson and Morelli (2011) who detect no clear link between increases in income inequality and systemic banking crises, we show that a large majority of crises occurred between 1982 and 2008 have been preceded by persistently high levels of income inequality. Such association is robust when considering Gini values for incomes after-tax as well as before-tax and transfers. Moreover, we investigate the pattern of income inequality levels before and after a group of banking crises and the relative levels of income inequality in a large sample of OECD countries that did not experience banking crises between 1980 and 2010. |
| JEL: | D31 G21 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp885&r=ban |
| By: | Jiri Witzany (University of Economics in Prague) |
| Abstract: | The paper analyzes a two-factor credit risk model allowing to capture default and recovery rate variation, their mutual correlation, and dependence on various explanatory variables. At the same time, it allows computing analytically the unexpected credit loss. We propose and empirically implement estimation of the model based on aggregate and exposure level Moody’s default and recovery data. The results confirm existence of significantly positive default and recovery rate correlation. We empirically compare the unexpected loss estimates based on the reduced two-factor model with Monte Carlo simulation results, and with the current regulatory formula outputs. The results show a very good performance of the proposed analytical formula which could feasibly replace the current regulatory formula. |
| Keywords: | credit risk, Basel II regulation, default rates, recovery rates, correlation |
| JEL: | G20 G28 C51 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2013_03&r=ban |
| By: | José Eduardo Gómez; Jair Ojeda Joya; Fernando Tenjo Galarza; Héctor Manuel Zárate Solano |
| Abstract: | In this document we estimate credit and GDP cycles for three Latin-American economies and study their relation in the time and frequency domains. Cycles are estimated in order to analyze their medium and short-term frequencies. We find that short-term cycles are usually more volatile than medium-term cycles for credit and GDP in Chile, Colombia and Peru. We also find that credit-cycle peaks in the middle 1990s and middle 2000s precede notable GDP recessions 2 or 3 years later in these countries. Additionally, credit cycles in Latin-American economies tend to cause later movements in economic activity. This effect can be decomposed into two components: first, a negative effect in the case of business-cycle frequencies, and a positive effect in the case of medium-term GDP fluctuations. |
| Date: | 2013–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:010833&r=ban |
| By: | Sergio Masciantonio (Banca d'Italia); Andrea Tiseno (Banca d'Italia) |
| Abstract: | We document the development of the major international banks since the late 1990s, analysing balance-sheet data for 27 large and complex financial institutions. We argue that balance-sheet expansion and business line diversification paved the way for the rise of the universal banking model. This model, apparently sound and efficient in the run-up to the crisis, revealed all its shortcomings when the crisis erupted. European banks displayed greater fragilities in their business models. The changed financial and regulatory landscape that followed has challenged this model further. Many proposed remedies to the global financial crisis appear to push for a return to a narrower model for banking activity. |
| Keywords: | banks, banking crises, financial crises, balance sheets |
| JEL: | G21 G01 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_164_13&r=ban |
| By: | Swamy, Vighneswara; S, Sreejesh |
| Abstract: | Why do banks squeeze their lending activity? is an oft-repeated question during the times of financial crisis. This study examines an emerging economy’s banking system and contributes to the evolving body of literature on the topic by providing answers as to what causes the sluggish bank credit during the times of recession. By employing cointegration technique, the study shows that bank credit has a significant positive relationship with the borrowing activity of the banks and on the contrary, inverse relationship with investment activity during the financial crisis. Accordingly, we suggest that banks could increase their lending by increasing the borrowings rapidly either from the Central Banks or from Government supported long term lending institutions during recessionary periods. |
| Keywords: | Time-Series Models, Financial Markets, Interest Rates, Bank lending, Financial Crisis |
| JEL: | C22 D53 E43 E51 G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47518&r=ban |
| By: | Paolo Manasse; Roberto Savona; Marika Vezzoli |
| Abstract: | This paper employs a recent statistical algorithm (CRAGGING) in order to build an early warning model for banking crises in emerging markets. We perturb our data set many times and create “artificial” samples from which we estimated our model, so that, by construction, it is flexible enough to be applied to new data for out-of-sample prediction. We find that, out of a large number (540) of candidate explanatory variables, from macroeconomic to balance sheet indicators of the countries’ financial sector, we can accurately predict banking crises by just a handful of variables. Using data over the period from 1980 to 2010, the model identifies two basic types of banking crises in emerging markets: a “Latin American type”, resulting from the combination of a (past) credit boom, a flight from domestic assets, and high levels of interest rates on deposits; and an “Asian type”, which is characterized by an investment boom financed by banks’ foreign debt. We compare our model to other models obtained using more traditional techniques, a Stepwise Logit, a Classification Tree, and an “Average” model, and we find that our model strongly dominates the others in terms of out-of-sample predictive power. JEL: E44, G01, G21 Keywords: Banking Crises, Early Warnings, Regression and Classification Trees, Stepwise Logit |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:481&r=ban |
| By: | Swamy, Vighneswara |
| Abstract: | Determinants of default risk of banks in emerging economies have so far received inadequate attention in the literature. Using panel data techniques, this paper seeks to examine the impact of macroeconomic and endogenous factors on non-performing assets for the period from 1997-2009. The findings of the study reveal some interesting inferences contrary to the perception of few opinion makers. Lending Rates have been found to be not so significant in affecting the NPAs contrary to the general perception Bank Assets has turned out to be negatively significant indicating that large banks may have better risk management procedures and technology which definitely allows them to finish up with lower levels of NPAs. Further, this study has established that private banks and foreign banks have advantages in terms of their efficiencies in better credit management in containing the NPAs that indicates that bank privatization can lead to better management of default risk. |
| Keywords: | Banks, Risk Management, Ownership Structure, Financial Markets, Non-Performing Assets, Lending Policy, Macro-economy, Central Banks |
| JEL: | E44 E51 G21 G32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47517&r=ban |
| By: | Seth B. Carpenter; Selva Demiralp; Jens Eisenschmidt |
| Abstract: | A growing number of studies have sought to measure the effects of non-standard policy on bank funding markets. The purpose of this paper is to carry those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending, using a simultaneous equation approach. By separately modeling loan supply and demand, we determine how non-standard central bank measures affected bank lending by reducing stress in bank funding markets. We focus on the Federal Reserve and the European Central Bank. Our results suggest that non-standard policy measures lowered bank funding volatility. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustain lending activity. We consider this as strong evidence for a "bank liquidity risk channel", operative in crisis environments, which complements the usual channels of transmission of monetary policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-34&r=ban |
| By: | Nicolas Véron |
| Abstract: | In the wake of recent crisis developments in the US and Europe, non-bank credit channels have often been portrayed as 'shadow banking' and have been considered primarily through the lens of the risks they may pose to financial stability. However, the debate about financial system structures remains immature, in large part due to lack of reliable and comparable data. The available evidence actually points towards a correlation between the development of non-bank credit and higher resilience against systemic risk, at least in developed economies. Policy should aim at better statistical information, and at strengthening the infrastructure for the gradual development of sustainable nonbank credit provision. A version of this Policy Contribution was prepared for discussion at the China-US Economists Symposium The path to recovery, co-organised by the China Finance 40 Forum and the Peterson Institute for International Economics in Beijing, 12-13 April, 2013, and published in the volume of conference proceedings. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:781&r=ban |
| By: | Swamy, Vighneswara |
| Abstract: | Determinants of default risk of banks in emerging economies have so far received inadequate attention in the literature. Using panel data techniques, this paper seeks to study the determinants bank asset quality and profitability using robust data sets for the period from 1997-2009. The findings of the study reveal some interesting inferences contrary to the established perceptions. Priority sector credit has been found to be not significant in affecting the NPAs contrary to the general perception and similar is the case with that of rural branches implying that aversion to rural credit is a falsely founded perception. Bad Debts are dependent more on the performance of the industry than other sectors of the economy. Public sector banks have shown significant performance in containing bad debts private banks have continued to be stable in containing the bad debts as they have better risk management procedures and technology, which definitely allows them to finish up with lower levels of NPAs. Further, investigating the effect of determinants on profitability it is established that while capital adequacy and investment activity significantly affect the profitability of commercial banks apart from other accepted determinants of profitability, asset size has no significant impact on profitability. |
| Keywords: | Banks, Risk management, Ownership structure, Financial markets, Non-Performing Assets, Lending Policy, Macro-economy, Central Banks, Banking regulation, Financial system stability |
| JEL: | E44 E58 G21 G28 G32 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47513&r=ban |
| By: | Swany, Vighneswara |
| Abstract: | This paper while emphasising the importance of the concept of financial stability in the wake of recent global financial crisis attempts to highlight the significance of the soundness of banking sector in emerging economies where banking sector constitutes a lion’s share in the financial system. Attempt is made to define financial stability in backdrop of the ongoing definition debate for financial stability. Another contribution of this study is that, employing the appropriate key determinants of banking sector soundness, the paper models a basic axiomatic form of banking stability index (BSI) in the context of an emerging economy banking sector. |
| Keywords: | Financial stability; Instability; Banks and financial institutions, Indicator, Crisis |
| JEL: | E44 E58 G2 G21 G28 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47512&r=ban |
| By: | Micossi,Stefano |
| Abstract: | Stefano Micossi argues in this paper that the Basel framework for bank prudential requirements is deeply flawed and that the Basel III revision has failed to correct these flaws, making the system even more complicated, opaque and open to manipulation. In practice, he finds that the present system does not offer regulators and financial markets a reliable capital standard for banks and its divergent implementation in the main jurisdictions of the European Union and the United States has broken the market into special fiefdoms governed by national regulators in response to untoward special interests. The time is ripe to stop tinkering with minor adjustment and revisions in order to rescue the system, because the system cannot be rescued. In response to the current situation, Micossi calls for abandoning reference to risk-weighted assets calculated by banks with their internal risk management models for the determination of banks’ prudential capital, together with the preoccupation with the asset side of banks in correcting for risk exposure. He suggests that the alternative may be provided by a combination of a straight capital ratio and a properly designed deposit insurance system. It is a logical, complete and much less distortive alternative; it would serve better the cause of financial stability as well as the interest of the banks in clear, transparent and level playing field. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:8075&r=ban |
| By: | Ron Feldman; Ken Heinecke; Jason Schmidt |
| Abstract: | In this Economic Policy Paper, we quantify the cost of increased regulation on community banks. We do so by modeling the impact of new regulatory costs as the hiring of additional staff, resulting in higher total compensation and lower profitability. We then analyze the changes in the distribution of community bank profitability. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmep:13-3&r=ban |
| By: | Jiri Witzany (University of Economics in Prague) |
| Abstract: | The paper argues that it would be natural to replace the standard normal distribution function by the logistic function in the regulatory Basel II (Vasicek’s) formula. Such a model would be in fact consistent with the standard logistic regression PD modeling approach. An empirical study based on US commercial bank’s loan historical delinquency rates re-estimates the default correlations and unexpected losses for the normal and logistic distribution models. The results indicate that the capital requirements could be up to 100% higher if the normal Vasicek’s model was replaced by the logistic one. |
| Keywords: | credit risk, Basel II regulation, default rates |
| JEL: | G20 G28 C51 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2013_01&r=ban |
| By: | Zubeyir Kilinc; Hatice Gokce Karasoy; Eray Yucel |
| Abstract: | The composition of bank liabilities has captured a lot of attention especially after the global financial crisis. It is argued that movements particularly in the non-core liabilities may reflect the stage of financial cycle. The literature claims that banks usually fund their credits with core liabilities, which grow with households’ wealth, but when there is a faster growth in credits compared to deposits, the banks resort to non-core liabilities to meet the excess demand. Despite this significant role assumed to be played by the non-core liabilities, there are not too many country-specific studies on this issue. This study analyzes the relationship between the non-core liabilities and credits within a small open economy, namely Turkey. It investigates the relationship under alternative settings and reveals a robust relationship between credits and non-core liabilities under all frameworks. The study also verifies that elevated demand for credit may induce some increase in the non-core liabilities. Finally, the relationship is affirmed in the long-run. |
| Keywords: | Core Liabilities, Non-core Liabilities, Credits, Small Open Economy, VAR, VECM |
| JEL: | E44 E51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1324&r=ban |
| By: | William Forbes (Loughborough University - Business School); Sheila Frances O'Donohoe (Waterford Institute of Technology); Jörg Prokop (University of Oldenburg - Finance and Banking & ZenTra) |
| Abstract: | We study the unfolding of the credit crisis until 2008, and the diversity of policy responses in Germany, Ireland, and the UK. We show that although the channels through which these three European states manifested financial distress were different, the crisis evoked similar reactions by regulators and national governments. Our conclusion emphasise the role of state regulatory bodies as a primary source of the “rules of the game” in financial markets, and they support several of the policy measures taken in the aftermath of the credit crisis. In particular, we argue that adverse regulatory incentives at a national level require strengthening regulation at the European level, to avoid national capture and a resulting race to the bottom by national financial regulators. |
| Keywords: | regulation, Europe, banking, financial crisis |
| JEL: | E44 G01 G18 H11 H12 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:zen:wpaper:18&r=ban |
| By: | Joshua Aizenman; Mahir Binici; Michael M. Hutchison |
| Abstract: | This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries. However, the association between credit rating changes and spreads shifted markedly between the pre-crisis and crisis periods. European countries had quite similar CDS responses to credit rating changes during the pre-crisis period, but that large differences emerged during the crisis period between the now highly-sensitive GIIPS group and other European country groupings (EU and Euro Area excluding GIIPS, and the non-EU area). We also find a complicated non-linear pattern dependent on the level of the credit rating. The results are robust to the including credit “outlook” or “watch” signals by credit rating agencies. In addition, contagion from rating downgrades in GIIPS to other euro countries is not evident once own-country credit rating changes are taken into account. |
| JEL: | F30 F34 G01 G24 H63 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19125&r=ban |