New Economics Papers
on Banking
Issue of 2013‒06‒30
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Essays on banking and regulation. By Todorov, R.I.
  2. Global Banks, Financial Shocks And International Business Cycles: Evidence From An Estimated Model By Robert Kollmann
  3. Policy in adaptive financial markets—the use of systemic risk early warning tools By Dieter Gramlich; Mikhail V. Oet; Stephen J. Ong
  4. Financial infrastructure and house prices By Mandell, Svante; Wilhelmsson, Mats
  5. Implied Risk Exposures By Sylvain Benoit; Christophe Hurlin; Christophe Pérignon
  6. Macro-Financial Linkages in Egypt: A Panel Analysis of Economic Shocks and Loan Portfolio Quality By Inessa Love; Rima Turk Ariss
  7. Narrow banking, real estate, and financial stability in the UK, c.1870-2010 By Avner Offer
  8. Conditional euro area sovereign default risk By Lucas, André; Schwaab, Bernd; Zhang, Xin
  9. An extension of Davis and Lo's contagion model By Didier Rullière; Diana Dorobantu; Areski Cousin
  10. Stress tests and information disclosure By Itay Goldstein; Yaron Leitner
  11. Uncertainty shocks, banking frictions, and economic activity By Dario Bonciani; Björn van Roye
  12. Essays on banking and finance in China. By Lu, L.
  13. Reverse mortgage loans: a quantitative analysis By Makoto Nakajima; Irina A. Telyukova
  14. Assessing and combining financial conditions indexes By Sirio Aramonte; Samuel Rosen; John W. Schindler
  15. International transmission of financial stress: evidence from a GVAR By Jonas Dovern; Björn van Roye

  1. By: Todorov, R.I. (Tilburg University)
    Abstract: This thesis consists of three chapters that explore issues related to bank capital, multinational bank supervision, and bank lending in a developing country. The first chapter explores the impact of peer banks on bank capital adjustments. The second chapter evaluates the extent to which distortions in banks’ cross-border activities, such as foreign assets, deposits and equity, can introduce into regulatory interventions. The third chapter explores the impact of monetary policy and foreign credit market conditions on bank lending activities and asset portfolios in Uganda.
    Date: 2013
  2. By: Robert Kollmann
    Abstract: This paper estimates a two-country model with a global bank, using US and Euro Area (EA) data, and Bayesian methods. The estimated model matches key US and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for US real activity. Banking shocks account for about 3%-5% of the unconditional variance of US GDP and for 4%-14% of the variance of EA GDP. During the Great Recession (2007-09), banking shocks accounted for about 12%-20% of the fall in US and EA GDP, and for more than a third of the fall in EA investment and employment.
    Keywords: financial crisis, global banking, real activity, investment, Bayesian econometrics.
    JEL: F36 F37 E44 G21
    Date: 2013–05
  3. By: Dieter Gramlich; Mikhail V. Oet; Stephen J. Ong
    Abstract: How can a systemic risk early warning system (EWS) facilitate the financial stability work of policymakers? In the context of evolving financial market dynamics and limitations of microprudential policy, this study examines new directions for financial macroprudential policy. A flexible macroprudential approach is anchored in strategic capacities of systemic risk EWSs. Tactically, macroprudential applications are founded on information about the level, structure, and institutional drivers of systemic financial stress and aim to manage the financial system risk and imbalances in two dimensions: across time and institutions. Time-related EWS policy applications are analyzed in pursuit of prevention and mitigation. EWS applications across institutions are considered via common exposures and interconnectedness. Care must be taken in the calibration of macroprudential applications, given their reliance on quality of the underlying systemic risk-modeling framework.
    Keywords: Business cycles ; Regulation ; Financial stability
    Date: 2013
  4. By: Mandell, Svante (VTI); Wilhelmsson, Mats (KTH)
    Abstract: We argue that banks operating in a local market possess better information about the local housing market than do non-local banks. Possessing this information may influence their willingness to grant loans to house buyers and the specifics of the loan terms, which in turn may affect house prices because credit facilitation makes the housing market more efficient. Using a panel data set covering a period from 1993 to 2007 and involving 274 municipalities in Sweden, we establish a positive causal influence of local bank presence on local house prices. There are significant spatial and spillover effects – that is, banks in a municipality affect the housing markets in neighboring municipalities, although to a lesser extent than in their own municipality. Similar results are obtained through a gravity model. The results are robust over time and municipality size.
    Keywords: House prices; Lending; Financial infrastructure
    JEL: H31
    Date: 2013–06–18
  5. By: Sylvain Benoit (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Pérignon (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: Bank risk disclosures, such as Value-at-Risk (VaR), are affected by both changes in market volatility and bank's risk exposures. While the latter is typically unknown to the public, we show how to estimate it from public data on VaR and volatility. We propose a methodology, which we call Factor Implied Risk Exposure (FIRE), that breakdowns a change in risk disclosure into an exogenous volatility component and an endogenous risk exposure component. In a study of large US and international banks, we show that (1) the main driving force of bank risk disclosures is the shifts in risk exposures, (2) changes in risk exposures are negatively correlated with volatility changes, which suggests that banks reduce risk taking when volatility increases, and that (3) changes in risk exposures are positively correlated among banks, which is consistent with banks exhibiting herding behavior in trading.
    Keywords: Herding, Risk Disclosure, (Stressed) Value-at-Risk, Regulatory Capital
    Date: 2013–06–20
  6. By: Inessa Love (University of Hawaii at Manoa Economic Research Organization); Rima Turk Ariss (Lebanese American University)
    Abstract: This paper investigates macro-financial linkages in Egypt using two complementary methods, assessing the interaction between different macroeconomic aggregates and loan portfolio quality in a multivariate framework as well as through a panel vector autoregressive method that controls for bank-level characteristics. Using a panel of banks over 1993-2010, the authors find that a positive shock to capital inflows and growth in gross domestic product improves banks’ loan portfolio quality, and that the effect is fairly similar in magnitude using the multivariate and panel vector autoregressive frameworks. In contrast, higher lending rates may lead to adverse selection problems and hence to a drop in portfolio quality. The paper also reports that a larger market share of foreign banks in the industry improves loan quality.
    Keywords: Macroeconomic Shocks; Banks; Loan Quality; Panel Vector Autoregression
    JEL: C63 E44 G21 G28
    Date: 2013–06
  7. By: Avner Offer (All Souls College, University of Oxford)
    Abstract: Banking in the UK was stable for more than a century after 1866. Financial institutions were differentiated according to function. The core banks did not engage in maturity transformation, but in managing a payments system for business. Real estate was a potential source of instability due to high credit elasticity of demand and to long maturities, but credit was successfully rationed by building societies, who relied on the funds that their savers had actually withdrawn from consumption. After 1945, credit rationing came under pressure from consumers and housebuyers. Incremental liberalisations after 1971 released a tide of credit which created a property windfall economy. Borrowers and lenders both prospered until the system collapsed under its own weight in 2007.
    Date: 2013–06–02
  8. By: Lucas, André (VU University Amsterdam and Tinbergen Institute); Schwaab, Bernd (European Central Bank); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: We propose an empirical framework to assess the likelihood of joint and conditional sovereign default from observed CDS prices. Our model is based on a dynamic skewed-t distribution that captures all salient features of the data, including skewed and heavytailed changes in the price of CDS protection against sovereign default, as well as dynamic volatilities and correlations that ensure that uncertainty and risk dependence can increase in times of stress. We apply the framework to euro area sovereign CDS spreads during the euro area debt crisis. Our results reveal significant time-variation in distress dependence and spill-over effects for sovereign default risk. We investigate market perceptions of joint and conditional sovereign risk around announcements of Eurosystem asset purchases programs, and document a strong impact on joint risk.
    Keywords: sovereign credit risk; higher order moments; time-varying parameters; financial stability
    JEL: C32 G32
    Date: 2013–05–01
  9. By: Didier Rullière (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Diana Dorobantu (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Areski Cousin (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: The present paper provides a multi-period contagion model in the credit risk field. Our model is an extension of Davis and Lo's infectious default model. We consider an economy of n firms which may default directly or may be infected by other defaulting firms (a domino effect being also possible). The spontaneous default without external influence and the infections are described by not necessarily independent Bernoulli-type random variables. Moreover, several contaminations could be required to infect another firm. In this paper we compute the probability distribution function of the total number of defaults in a dependency context. We also give a simple recursive algorithm to compute this distribution in an exchangeability context. Numerical applications illustrate the impact of exchangeability among direct defaults and among contaminations, on different indicators calculated from the law of the total number of defaults. We then examine the calibration of the model on iTraxx data before and during the crisis. The dynamic feature together with the contagion effect seem to have a significant impact on the model performance, especially during the recent distressed period.
    Keywords: credit risk; contagion model; dependent defaults; default distribution; exchangeability; CDO tranches
    Date: 2013
  10. By: Itay Goldstein; Yaron Leitner
    Abstract: We study an optimal disclosure policy of a regulator who has information about banks’ ability to overcome future liquidity shocks. We focus on the following trade-off: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We also relate our results to the debate on the disclosure of stress test results.
    Keywords: Financial crises ; Financial stability
    Date: 2013
  11. By: Dario Bonciani; Björn van Roye
    Abstract: In this paper we investigate the effects of uncertainty shocks on economic activity using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in banking retail interest rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy
    Keywords: Uncertainty Shocks, Financial frictions, Monetary Policy, Stochastic Volatility, Perturbation Methods, Third-order approximation
    JEL: E32 E52
    Date: 2013–06
  12. By: Lu, L. (Tilburg University)
    Abstract: Abstract: The Chinese economy has grown at a spectacular speed during the past three decades while the financial system is not well developed in China. On the one hand, the informal financing channels, i.e. borrowing from family members, friends, moneylenders, trade credit, etc., may provide proper financing for the firms in China. On the other hand, the increasing intensity of banking competition may also enhance the access to finance in China. Chapter 1 introduces the Chinese economy; Chapter 2 shows the effect of trade credit on the export in China; Chapter 3 shows the effect of informal finance on the microenterprises in rural China; Chapter 4 shows the effect of co-funding on the growth of private firms in China; Chapter 5 shows the effect of the banking competition on alleviating the credit constraints of Chinese SMEs. The thesis basically supports the enhancing role of informal finance and the necessity of increasing the banking competition in China.
    Date: 2013
  13. By: Makoto Nakajima; Irina A. Telyukova
    Abstract: Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. In spite of growth in this market, only 2.1% of eligible homeowners had RMLs in 2011. In this paper, we analyze reverse mortgages in a life-cycle model of retirement, calibrated to age-asset profiles. The ex-ante welfare gain from RMLs is sizable at $1,000 per household; ex-post, low-income, low-wealth and poor-health households use them. Bequest motives, nursing-home moving risk, house price risk, and interest and insurance costs all contribute to the low take-up rate. The model predicts market potential for RMLs to be 5.5% of households.
    Keywords: Mortgages ; Mortgage loans, Reverse ; Housing ; Retirement ; Home equity loans
    Date: 2013
  14. By: Sirio Aramonte; Samuel Rosen; John W. Schindler
    Abstract: We evaluate the short horizon predictive ability of financial conditions indexes for stock returns and macroeconomic variables. We find reliable predictability only when the sample includes the 2008 financial crisis, and we argue that this result is driven by tailoring the indexes to the crisis and by non-synchronous trading. Financial conditions indexes are based on a variety of constituent variables and aggregation methods, and we discuss a simple procedure for consolidating the growing number of different indexes into a single proxy for financial conditions.
    Date: 2013
  15. By: Jonas Dovern; Björn van Roye
    Abstract: We analyze the international transmission of financial stress and its effects on economic activity. We construct country specific monthly financial stress indexes (FSI) using dynamic factor models from 1970 until 2012 for 20 countries. We show that there is a strong co-movement of the FSI during financial crises and that the FSI of financially open countries are relatively more correlated to FSI in other countries. Subsequently, we investigate the international transmission of financial stress and its impact on economic activity in a Global VAR (GVAR) model. We show that i) financial stress is quickly transmitted internationally, ii) financial stress has a lagged but persistent negative effect on economic activity, and iii) that economic slowdowns induce only limited financial stress
    Keywords: Financial stress, Financial crises, Business Cycles, Dynamic Factor Model, Global VAR
    JEL: E32 E52 F36 F37 F41
    Date: 2013–06

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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