New Economics Papers
on Banking
Issue of 2013‒06‒24
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Is there a relationship between income inequality and credit cycles? By Tuomas Malinen
  2. Banking, Liquidity and Bank Runs in an Infinite-Horizon Economy By Mark Gertler; Nobuhiro Kiyotaki
  3. 'Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility' By Pierre-Richard Agénor; Roy Zilberman
  4. Why High Leverage is Optimal for Banks By Harry DeAngelo; René M. Stulz
  5. Bank Bonuses and Bail-Outs By Hendrik Hakenes; Isabel Schnabel
  6. From Text to Bank Interrelation Maps By Samuel Ronnqvist; Peter Sarlin
  7. Concentration in Mortgage Lending, Refinancing Activity and Mortgage Rates By David S. Scharfstein; Adi Sunderam
  8. The effect of foreclosure regulation: Evidence for the US mortgage market at state level By Fernando López Vicente
  9. Evaluation of minimum capital requirements for bank loans to SMEs By Düllmann, Klaus; Koziol, Philipp
  10. Bank Debt Regulations Implications for Bank Capital and Bond Risk By Stig Helberg; Snorre Lindset
  11. Catharsis - The real effects of bank insolvency and resolution By Korte, Josef
  12. Complex Networks and Banking Systems Supervision By Theophilos Papadimitriou; Periklis Gogas; Benjamin M. Tabak
  13. Distance to Default and the Financial Crisis. By Alistair Milne
  14. Duration dependence and change-points in the likelihood of credit booms ending By Castroa, Vitor; Kubota, Megumi
  15. How interbank lending amplifies overlapping portfolio contagion: A case study of the Austrian banking network By Fabio Caccioli; J. Doyne Farmer; Nick Foti; Daniel Rockmore
  16. The Impact of Interstate Bank Branching Deregulations on the U.S. Agricultural Sector: From Better Access to Credit to Higher Farm Sales and Profits By Kandilov, Amy; Kandilov, Ivan
  17. Collateral registries for movable assets : does their introduction spur firms'access to bank finance ? By Love, Inessa; Peria, Maria Soledad Martinez; Singh, Sandeep
  18. The Capital Structure of Commercial Banks and its Impact on Participation in the Farm Service Agency's Guaranteed Loan Program By McWilliams, Bruce T.
  19. Bank Lending, Risk Taking, and the Transmission of Monetary Policy: New Evidence for Colombia By Ruth Reyes Nidia; José Eduardo Gómez; Jair Ojeda Joya

  1. By: Tuomas Malinen (University of Helsinki and HECER)
    Abstract: Recent studies by Atkinson (2011); Rajan (2010); Kumhof and Ranciére (2010); Bordo and Meissner (2013) have assessed the relationship between income inequality and financial stability. Bordo and Meissner found that changes in income inequality do not have an effect on the growth of credit. We extend their study by assessing the relationship between levels of income inequality and leverage. We find that the relationship between inequality and credit is long-run, i.e. trending, in nature and that removing this relation with first differencing will lead to biased inference. In conclusion we find that income inequality is associated with increased leverage in the economy.
    Keywords: top 1% income share, bank loans, unit root, cointegration Classification-JEL: C23, D31, G21
    Date: 2013–03
  2. By: Mark Gertler; Nobuhiro Kiyotaki
    Abstract: We develop a variation of the macroeconomic model with banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates counter-cyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenously determined liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.
    JEL: E44
    Date: 2013–06
  3. By: Pierre-Richard Agénor; Roy Zilberman
    Abstract: Interactions between loan loss provisioning rules and business cycle fluctuations are studied in a dynamic stochastic general equilibrium model with credit market imperfections. With a backward-looking provisioning system, provisions are triggered by past due payments, which, in turn, depend on current economic conditions and the loan loss reserves-loan ratio. With a forward-looking system, both past due payments and expected losses over the whole business cycle are accounted for, and provisions are smoothed over the cycle. Experiments show that holding more provisions can reduce the procyclicality of the financial system. However, a forward-looking provisioning regime can increase or lower procyclicality, depending on whether holding more loan loss reserves translates into a higher or lower fraction of nonperforming loans. A credit gap-augmented Taylor rule, coupled with a backward-looking provisioning system may be quite effective at mitigating real and financial volatility
    Date: 2013
  4. By: Harry DeAngelo; René M. Stulz
    Abstract: Liquidity production is a central role of banks. We show that, under idealized conditions, high leverage is optimal for banks when there is a market premium for (socially valuable) liquid financial claims and no deviations from Modigliani and Miller (1958) due to agency problems, deposit insurance, taxes, or any other distortions. Our model can explain (i) why bank leverage increased over the last 150 years or so, (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. Our model indicates that MM’s debt-equity neutrality principle 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.
    JEL: E42 E51 G01 G21 G32 L51
    Date: 2013–06
  5. By: Hendrik Hakenes (University of Bonn, Finance Department); Isabel Schnabel (Gutenberg School of Management and Economics, Johannes Gutenberg University Mainz)
    Abstract: This paper shows that bonus contracts may arise endogenously as a response to agency problems within banks, and analyzes how compensation schemes change in reaction to anticipated bail-outs. If there is a risk-shifting problem, bail-out expectations lead to steeper bonus schemes and even more risk-taking. If there is an effort problem, the compensation scheme becomes flatter and effort decreases. If both types of agency problems are present, a sufficiently large increase in bailout perceptions makes it optimal for a welfare-maximizing regulator to impose caps on bank bonuses. In contrast, raising managers’ liability can be counterproductive.
    Keywords: bonus payments, bank bail-outs, bank management compensation, risk-shifting, underinvestment, limited and unlimited liability
    JEL: J33 G21 G28 M52
    Date: 2013–02
  6. By: Samuel Ronnqvist; Peter Sarlin
    Abstract: In the wake of the ongoing global financial crisis, interdependencies among banks have come into focus in trying to assess systemic risk. To date, such analysis has largely been based on numerical data. By contrast, this study attempts to gain further insight into bank interconnections by tapping into financial discussion. Co-mentions of bank names are turned into a network, which can be visualized and analyzed quantitatively, in order to illustrate characteristics of individual banks and the network as a whole. The approach allows for the study of temporal dynamics of the network, to highlight changing patterns of discussion that reflect real-world events, the current financial crisis in particular. For instance, it depicts how connections from distressed banks to other banks and supervisory authorities have emerged and faded over time, as well as how global shifts in network structure coincide with severe crisis episodes. The usage of textual data holds an additional advantage in the possibility of gaining a more qualitative understanding of an observed interrelation, through its context. We illustrate our approach using a case study on Finnish banks and financial institutions. The data set comprises 3.9M posts from online, financial and business-related discussion, during the years 2004 to 2012. Future research includes analyzing European news articles with a broader perspective, and a focus on improving semantic description of relations.
    Date: 2013–06
  7. By: David S. Scharfstein; Adi Sunderam
    Abstract: We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, increasing concentration by one standard deviation reduces the overall impact of a decline in MBS yields by approximately 50%. In the time series, a decrease in MBS yields today has a 40% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.
    JEL: E44 E52 G21 G23 L85
    Date: 2013–06
  8. By: Fernando López Vicente (Banco de España)
    Abstract: Do laws to protect borrowers curb foreclosures? This question is addressed by analysing the impact of foreclosure laws on default rates at state level in the US mortgage market. Using panel data techniques, we find a statistically significant effect of regulation on the different stages of the foreclosure process. More precisely, we analyse the effect of regulation on 60- day delinquencies and foreclosure starts, with a focus on three protective elements commonly found in state foreclosure laws, namely requiring a judicial process, granting a redemption period and banning a deficiency judgment. We find that, whereas protective states exhibit, on average, lower 60-day delinquency rates, more protection does not ultimately bring about lower foreclosure rates. Lenders seem to ration credit to mitigate costly protective laws, thereby reducing delinquency rates; but this effect is overshadowed by a moral hazard problem since, once borrowers are delinquent, they have incentives to take advantage of the protection due to the lower costs of foreclosure. We also find that the recent housing market crisis has exacerbated that behaviour. Finally, we show that lengthening the foreclosure process is no cure for the foreclosure crisis
    Keywords: foreclosure laws, borrower protection, credit rationing, moral hazard
    JEL: E44 G21 G28 K11 R20 R30
    Date: 2013–05
  9. By: Düllmann, Klaus; Koziol, Philipp
    Abstract: Our paper addresses firm size as a driver of systematic credit risk in loans to small and medium enterprises (SMEs). Key contributions are the use of a unique data set of SME lending by over 400 German banks and relating systematic risk to the size dependence of regulatory capital requirements. What sets our sample apart is its comprehensive coverage of the particularly rich and well developed credit market for SMEs in Germany. We estimate asset correlations as the key measure of systematic risk from historical default rates. Our results suggest that systematic risk tends to increase with firm size, conditional on the respective rating category. We also compare the size of this effect with the capital relief that has been granted in Basel II for SMEs relative to large firms. For SME loans in the corporate portfolio of the Internal Ratings-Based Approach and also for SME loans treated under the revised standardized approach of Basel II, our asset correlation estimates suggest a significantly larger relative difference from large firms than reflected in the regulatory capital requirements. --
    Keywords: Asset Correlation,Basel II,Minimum Capital Requirements,Single Risk Factor Model
    JEL: G21 G33 C13
    Date: 2013
  10. By: Stig Helberg (Department of Economics, Norwegian University of Science and Technology); Snorre Lindset (Department of Economics, Norwegian University of Science and Technology)
    Abstract: We use a structural model of default risk to study how optimal bank capital and bond risk are influenced by deposit insurance, implicit guarantees, depositor preference, asset encumbrance, and bail-in resolution frameworks. We find that these features of bank financing, in addition to having an immediate impact on bond debt risk, also change optimal bank capital, countering the first-order effect on bond debt risk. Bondholders' risk is thereby not materially affected, but shareholder value and public sector value are. A gap between optimal capital and required capital represents a cost to shareholders, and increases the risk of regulatory arbitrage. Enhancing capital requirements, and at the same time adopting bank debt regulations that reduce the optimal capital, is to gain some and lose some in terms of financial stability. Based on a small sample of European banks, we find support for the central model predictions.
    Keywords: Bank debt regulations, optimal bank capital, bond risk.
    JEL: G21 G28 G32
    Date: 2013–06–13
  11. By: Korte, Josef
    Abstract: In general, banks play a growth-enhancing role for the real economy. However, distorted incentives for banks, depositors, and regulators in connection with bank insolvency may corrupt banks' credit allocation and monitoring decisions, leading to suboptimal real economic outcomes. A rules-based prompt resolution regime for insolvent banks may reestablish the incentive system and provide for economically superior credit allocation and monitoring. We test the hypothesis that regulatory insolvency has a cathartic effect using a large firm-level dataset and proposing a new indicator to measure the strength of catharsis. Employing an instrumental variable setup and an interaction approach, we try to overcome concerns about causality and potential endogeneity which are usually inherent to research into the real economic implications of bank regulation. We find a comparably stronger implementation of a hypothetical positive capital closure rule to have a positive and statistically as well as economically significant effect on individual firm growth - particularly for firms that are structurally more dependent on bank financing. Our findings are robust to various specifications. Investigating the transmission channels of the 'catharsis effect', we find that it essentially works through benefiting better quality firms and reallocating credit towards firms that need it most. Additional analyses suggest that the 'catharsis effect' works best in open banking systems that provide high access to international finance and, hence, mitigate potentially negative credit supply effects of insolvent bank liquidation. Taken together, our findings advocate stronger attention being given to incentive-compatible bank resolution regimes. --
    Keywords: bank insolvency,bank resolution,bank closure,bank regulation,finance and growth
    JEL: G21 G28 G33
    Date: 2013
  12. By: Theophilos Papadimitriou; Periklis Gogas; Benjamin M. Tabak
    Abstract: Comprehensive and thorough supervision of all banking institutions under a Central Bank’s regulatory control has become necessary as recent banking crises show. Promptly identifying bank distress and contagion issues is of great importance to the regulators. This paper proposes a methodology that can be used additionally to the standard methods of bank supervision or the new ones proposed to be implemented. By this, one can reveal the degree of banks’ connectedness and thus identify “core” instead of just “big” banks. Core banks are central in the network in the sense that they are shown to be crucial for network supervision. Core banks can be used as gauges of bank distress over a sub-network and promptly raise a red flag so that the central bank can effectively and swiftly focus on the corresponding neighborhood of financial institutions. In this paper we demonstrated the proposed scheme using as an example the asset returns variable. The method may and should be used with alternative variables as well.
    Date: 2013–05
  13. By: Alistair Milne (School of Business and Economics, Loughborough University, UK)
    Abstract: This paper analyses contingent-claims based measures of distance to default (D2D) for the 41 largest global banking institutions over the period 2006H2 to 20011H2. D2D falls from end-2006 through to end-2008. Cross-sectional differences in D2D prior to the crisis do not predict either bank failure or bank share prices decline, but D2D measured in mid-2008 does have some predictive value for failure by end-year. The ‘option value’ of the bank safety net remains small except at the height of the crisis and there is little indication of bank shareholders consciously using the safety net to shift risk onto taxpayers. (99 words)
    Keywords: bank default, bank moral hazard, bank regulation, bank safety net, contingent claims, early warning systems, global financial crisis, market-based risk measurement, systemic risk, risk shiftingCreation-Date: 110613
    JEL: F15 F54 P33
    Date: 2013–06
  14. By: Castroa, Vitor; Kubota, Megumi
    Abstract: Whether the likelihood of a credit boom ending is dependent on its age or not, or whether the respective behavior is smooth or bumpy are important issues to which the economic literature has not given attention yet. This paper tries to fill that gap, exploring those issues with a proper duration analysis. Credit booms are identified considering two criteria well established in the literature: (i) the Mendoza-Terrones criteria and (ii) and the Gourinchas-Valdes-Landarretche criteria. A continuous-time Weibull duration model is employed over a group of 71 countries for the period 1975q1-2010q4 to investigate whether credit booms are duration dependent or not. The findings show that the likelihood of credit booms ending increases over their duration and that these events have become longer over the past decades. In addition, the paper extends the baseline Weibull duration model in order to allow for change-points in the duration dependence parameter. The empirical findings support the presence of a change-point: increasing positive duration dependence is observed in booms that last less than eight to ten quarters, but it becomes decreasing or even irrelevant for longer events. Analogous results are found for those credit boom episodes that are followed by systemic banking crisis (bad credit booms). The findings also show that credit booms are, on average, longer in industrial than in developing countries.
    Keywords: Financial Crisis Management&Restructuring,Economic Theory&Research,Currencies and Exchange Rates,Bankruptcy and Resolution of Financial Distress,Financial Intermediation
    Date: 2013–06–01
  15. By: Fabio Caccioli; J. Doyne Farmer; Nick Foti; Daniel Rockmore
    Abstract: In spite of the growing theoretical literature on cascades of failures in interbank lending networks, empirical results seem to suggest that networks of direct exposures are not the major channel of financial contagion. In this paper we show that networks of interbank exposures can however significantly amplify contagion due to overlapping portfolios. To illustrate this point, we consider the case of the Austrian interbank network and perform stress tests on it according to different protocols. We consider in particular contagion due to (i) counterparty loss; (ii) roll-over risk; and (iii) overlapping portfolios. We find that the average number of bankruptcies caused by counterparty loss and roll-over risk is fairly small if these contagion mechanisms are considered in isolation. Once portfolio overlaps are also accounted for, however, we observe that the network of direct interbank exposures significantly contributes to systemic risk.
    Date: 2013–06
  16. By: Kandilov, Amy; Kandilov, Ivan
    Abstract: In this paper, we show that relaxing credit constraints and increasing access to finance by lifting state-level restrictions on interstate bank expansions from the 1970s through the early 1990s benefited the U.S. agricultural industry by increasing farm sales and profits. In our empirical analysis, we use historical county-level data from 1970 until 1994 for the entire U.S. and a difference-in-differences econometric framework that exploits only within state variation in bank deregulation to distinguish the effect of an increase in bank competition and reduction in credit constraints from potential confounding factors. Further, by including region-by-year fixed effects in our econometric equation, we estimate the impact of banking deregulations by comparing changes (in farm sales and expenditures) in states that lift restrictions on interstate banking to changes in states that do not lift such restrictions in the same (Census) region of the country. Finally, we also show that the empirical results are robust to comparing only counties along state borders, which have very similar climate, soil fertility, and access to transportation. Our estimates indicate that county-level farm sales increase by about 3.9 percent after the state deregulates its banking sector and allows interstate bank expansion. The results also show that county-level agricultural production expenditures in the state rise by 1.9 percent, which is less than the increase in sales, thus leading to higher farm profits. The positive impact on farm sales and expenditures is larger in metropolitan counties than in rural counties. Overall, our work demonstrates that government policies aimed at improving farmers’ access to credit can lead to higher farm sales, both in urban and rural locations.
    Keywords: Sales, Farm Expenditure, Banking Deregulation, Credit Constraints, Agribusiness, Agricultural Finance, Crop Production/Industries, Financial Economics, Livestock Production/Industries, Public Economics, G18, G21, Q13, Q14,
    Date: 2013–05–30
  17. By: Love, Inessa; Peria, Maria Soledad Martinez; Singh, Sandeep
    Abstract: Using firm-level surveys for up to 73 countries, this paper explores the impact of introducing collateral registries for movable assets on firms'access to bank finance. It compares firms'access to bank finance in seven countries that introduced collateral registries for movable assets against three control groups: firms in all countries that did not introduce a registry, firms in a sample of countries matched by location and income per capita to the countries that introduced registries for movable assets, and firms in countries that undertook other types of collateral reforms but did not set up registries for movable assets. Overall, the analysis finds that introducing collateral registries for movable assets increases firms'access to bank finance. There is also some evidence that this effect is larger among smaller firms.
    Keywords: Access to Finance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Emerging Markets
    Date: 2013–06–01
  18. By: McWilliams, Bruce T.
    Abstract: The decision of small agricultural banks to participate in the Farm Service Agency’s Guaranteed Loan Program was examined using an econometric analysis that included a binomial limited dependent variable LOGIT model to estimate likelihoods of participating and Least Squares methods to estimate bank portfolio allocations. In the process of this investigation, a hypothesis that this decision was significantly impacted by the “capitalization effect” was tested. This effect presumes a bank utilizes loan guarantees in order to take greater advantage of its capital reserves and extend its conventional lending. The econometric analysis found U.S. commercial bank participation in the Farm Service Agency’s Guaranteed Loan Program [was/was not] significantly affected by _______, _______, and/or _______.
    Keywords: Agricultural Finance, Financial Economics,
    Date: 2013
  19. By: Ruth Reyes Nidia; José Eduardo Gómez; Jair Ojeda Joya
    Abstract: We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics.
    Date: 2013–06–16

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