New Economics Papers
on Banking
Issue of 2013‒07‒15
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  2. Bank Lending Procyclicality and Credit Quality during Financial Crises By Guglielmo Maria Caporale; Stefano Di Colli; Juan Sergio Lopez
  3. When Banks Strategically React to Regulation: Market Concentration as a Moderator for Stability By Eva Schliephake
  4. How bank competition influence liquidity creation By Horvath, Roman; Seidler, Jakub; Weill, Laurent
  5. The effects of foreign and government ownership on bank lending behavior during a crisis in Central and Eastern Europe By Allen, Franklin; Jackowicz, Krzysztof; Kowalewski, Oskar
  6. A Bayesian Perspective to Analyze Branch Location Patterns in Spanish Banking By Alamá Sabater Luisa; Conesa Guillén David; Forte Deltell Anabel; Tortosa-Ausina Emili
  7. Does bank competition influence the lending channel in the euro area? By Fungácová, Zuzana; Solanko, Laura; Weill, Laurent
  8. Risk Weighted Capital Regulation and Government Debt By Eva Schliephake
  9. Bank Lending, Risk Taking, and the Transmission of Monetary Policy: New Evidence for Colombia By Ruth Reyes Nidia; José Eduardo Gómez G.; Jair Ojeda Joya
  10. The impact of sovereign debt exposure on bank lending: Evidence from the European debt crisis By Alexander Popov; Neeltje van Horen
  11. Excess Reserves and Economic Activity By Scott J. Dressler; Erasmus Kersting
  12. The effects of capital requirements on real economy: a cointegrated VAR approach for US commercial banks By Miele, Maria Grazia
  13. Bank linkages and international trade By Galina Hale; Christopher Candelaria; Julian Caballero; Sergey Borisov
  14. Heterogeneous bank loan responses to monetary policy and bank capital shocks: a VAR analysis based on Japanese disaggregated data By Naohisa Hirakata; Yoshihiko Hogen; Nao Sudo; Kozo Ueda
  15. Should competition policy in banking be amended during crises? Lessons from the EU By Hasan, Iftekhar; Marinc , Matej
  16. Lending for Growth? An Analysis of State-Owned Banks in China By Andersson, Fredrik N. G.; Burzynska, Katarzyna; Opper, Sonja
  17. Microfinance Banks and Household Access to Finance By Brown, Martin; Guin, Benjamin; Kirschenmann, Karolin
  18. Card versus cash: empirical evidence of the impact of payment card interchange fees on end users’ choice of payment methods By Ardizzi, Guerino
  19. Financial exposure and the international transmission of financial shocks By Gunes Kamber; Christoph Thoenissen
  20. Contraction or steady state? An analysis of credit risk management in Italy in the period 2008-2012 By Stefano Olgiati; Alessandro Danovi
  21. Bayesian analysis of dynamic effects in inefficiency : evidence from the Colombian banking sector By Jorge E. Galán; Helena Veiga; Michael P. Wiper
  22. Measuring the financial soundness of U.S. firms, 1926-2012 By Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
  23. 'By a Silken Thread': regional banking integration and pathways to financial development in Japan's Great Recession By Mathias Hoffmann; Toshihiro Okubo
  24. Measuring Competition using the Boone Relative Profit Difference Indicator: an application to Banking Systems in Emerging Economies By Meryem Deygun; Mohamed Shaban; Tom Weyman-Jones

  1. By: Lars Peter Hansen (University of Chicago)
    Abstract: Sparked by the recent "great recession" and the role of financial markets, considerable interest exists among researchers within both the academic community and the public sector in modeling and measuring systemic risk. In this essay I draw on experiences with other measurement agendas to place in perspective the challenge of quantifying systemic risk, or more generally, of providing empirical constructs that can enhance our understanding of linkages between financial markets and the macroeconomy.
    Date: 2013–06
  2. By: Guglielmo Maria Caporale; Stefano Di Colli; Juan Sergio Lopez
    Abstract: This paper analyses macroeconomic and financial determinants of bad loans applying a SVAR approach to investigate whether excessive loans granted during expansionary phases can explain the more than proportional increase in non-performing loans during contractionary periods. The results indicate that the effects of a permanent shock to bad loans on the excess of credit are significant and persistent for bad loans to firms, but not for bad loans to households or in the case of Cooperative Credit Banks, who adopt more efficient lending policies.
    Keywords: loan losses, macroeconomic determinants, Italian banking system, SVAR
    JEL: E44 G01 G21 C22
    Date: 2013
  3. By: Eva Schliephake (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Minimum capital requirement regulation forces banks to refund a substantial amount of their investments with equity. This creates a buffer against losses, but also increases the cost of funding. If higher refunding costs translate into higher loan interest rates, then borrowers are likely to become more risky, which may destabilize the lending bank. This paper argues that, in addition to the buffer and cost effect of capital regulation, there is a strategic effect. A binding capital requirement regulation restricts the lending capacity of banks, and therefore reduces the intensity of loan interest rate competition and increases the banks' price setting power as shown in Schliephake and Kirstein (2013). This paper discusses the impact of this indirect effect from capital regulation on the stability of the banking sector. It is shown that the enhanced price setting power can reverse the net effect that capital requirements have under perfect competition.
    Keywords: Capital Requirement Regulation, Competition; Financial Stabilityt
    JEL: G21 K23 L13
    Date: 2013–06
  4. By: Horvath, Roman (BOFIT); Seidler, Jakub (BOFIT); Weill, Laurent (BOFIT)
    Abstract: This paper evaluates the effect of bank competition on liquidity creation by banks. Thus, we contribute to the literature on both bank competition and the determinants of liquidity creation by banks. To explore this relationship, we conduct dynamic GMM panel estimations on a dataset of Czech banks from 2002 to 2010. We find that enhanced competition reduces liquidity creation, a finding we observe under different specifications, including alternative measures of liquidity creation. We explain this finding in terms of the impact of increased bank competition on the financial fragility of banks, which leads banks to reduce their lending and deposit activities. The evidence suggests that pro-competitive policies in the banking industry can reduce liquidity provision by banks.
    Keywords: bank competition; liquidity creation
    JEL: G21
    Date: 2013–06–19
  5. By: Allen, Franklin; Jackowicz, Krzysztof; Kowalewski, Oskar
    Abstract: We examine whether foreign-owned and government-owned banks in Central and Eastern Europe reacted differently during a domestic systematic banking crisis and the global financial crisis of 2008. Our panel dataset comprises data on more than 400 banks for the period 1994- 2010. Our analysis shows that foreign banks provided credit during domestic banking crises in host countries, while government-owned banks contracted. In contrast, foreign-owned banks reduced their credit base during the global financial crisis, while government-owned banks expanded. Consequently, our results show that foreign-owned banks may contribute to financial stability during domestic crisis episodes, but also increase the risk of importing instability from abroad during a crisis in their home markets. However, government-owned banks may substitute for foreign-owned banks and hinder the transmission of international shocks. Thus, our results indicate that a mixed banking sector consisting of foreign-owned and government-owned banks is most advisable.
    Keywords: foreign banks, government-owned banks, credit growth, crisis, emerging market
    JEL: F36 G21 P34
    Date: 2013–06–30
  6. By: Alamá Sabater Luisa (Jaume I Universtity); Conesa Guillén David (University of Valencia); Forte Deltell Anabel (Jaume I University); Tortosa-Ausina Emili (INSTITUTO VALENCIANO DE INVESTIGACIONES ECONÓMICAS (Ivie) UNIVERSITY JAUME I)
    Abstract: We analyze the determinants of bank branch location in Spain controlling for geography explicitly. After a long period of intense expansion, most savings banks are now involved in merger processes. However, given the contributions of this type of bank to combatting financial exclusion, this process might exacerbate the consequences of the crisis for some social groups. Related problems such as new banking regulation initiatives, or the current excess capacity in the sector, add further relevance to this problem. We address the issue from a Bayesian spatial perspective, which has several advantages over other methodologies used in previous studies. Specifically, the techniques we choose allow us to assess with some precision whether over-branching or under-branching have taken place. Results suggest that both phenomena exist in the Spanish banking sector, although implications for the three types of banks in the industry (commercial banks, savings banks, credit unions) differ.
    Keywords: Bank, Bayesian statistics, branch, municipality.
    JEL: G21 R10 C11
    Date: 2013–07
  7. By: Fungácová, Zuzana (BOFIT); Solanko, Laura (BOFIT); Weill, Laurent (BOFIT)
    Abstract: This paper examines how bank competition influences the bank lending channel in the Euro area countries. Using a large panel of banks from 12 euro area countries over the period 2002-2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy through the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that the bank market power has a significant impact on monetary policy effectiveness. Therefore, wide variations in the level of bank market power may lead to asymmetric effects of a single monetary policy.
    Keywords: bank competition; bank lending channel; monetary policy; euro area
    JEL: E52 G21
    Date: 2013–06–25
  8. By: Eva Schliephake (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Microprudential capital requirements are designed to reduce the excessive risk taking of banks. If banks are required to use more equity funding for risky assets they invest more funds into safe assets. This paper analyzes a government that simultaneously regulates the banking sector and borrows from it. I argue that a government may have the incentive to use capital requirements to alleviate its budget burden. The risk weights for risky assets may be placed relatively too high compared to the risk weight on government bonds. This could have a negative impact on welfare. The supply of loans for the risky sector shrinks, which may have a negative impact on long term growth. Moreover, the government may be tempted to increase its debt level due to better funding conditions, which increases the risk of a future sovereign debt crisis. A short term focused government may be tempted to neglect the risk and, thereby, may introduce systemic risk in the banking sector.
    Keywords: Capital Requirement Regulation, Government Debt
    JEL: G21 G28 G32
    Date: 2013–06
  9. By: Ruth Reyes Nidia; José Eduardo Gómez G.; 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.
    Keywords: Monetary policy transmission; Bank lending channel; Risk taking channel; Colombia. Classification JEL: E5; E52; E59; G21.
    Date: 2013–06
  10. By: Alexander Popov; Neeltje van Horen
    Abstract: Using loan-level data, we find that syndicated lending by European banks with sizeable balance sheet exposures to impaired sovereign debt was negatively affected after the start of the euro area sovereign debt crisis. We also observe a reallocation away from foreign (especially US) markets. The overall reduction in lending is not driven by changes in borrower demand and/or quality, or by other types of shocks to bank balance sheets. The slowdown in lending is lower for banks that reduced their debt holdings in the later stages programs.
    Keywords: Sovereign debt; bank lending; international transmission
    JEL: E44 F34 G21 H63
    Date: 2013–06
  11. By: Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University); Erasmus Kersting (Department of Economics and Statistics, Villanova School of Business, Villanova University)
    Abstract: This paper examines a DSGE environment with endogenous excess reserve holdings in the banking sector. Excess reserves act as an extensive margin of bank lending which is inactive in traditional limited participation models where banks hold minimal reserves by assumption. The results of our model suggest that this extensive margin of bank lending can dampen and even overcome the standard liquidity effect of monetary contractions, amplify the output response to productivity shocks, and bring about large, short-run responses to changes in the interest rate paid on reserves.
    Keywords: Financial Intermediation; Excess Reserves; Liquidity Effect; Output Amplification
    JEL: C68 E44
    Date: 2013–07
  12. By: Miele, Maria Grazia
    Abstract: This paper addresses the following questions: which was the contribution of banks’assets to the US’ expansion in the period until the financial crisis? Did commercial banks respect capital requirements? The two questions are strictly interrelated as, according to a recent literature, business cycle is directly related to banks’ capital requirements for market and credit risk. The analysis highlight that US commercial banks actually respected capital requirements but these were not relevant in the explanation of US growth; it confirms that most of the growth can instead be explained by the rise in productivity. Nevertheless, the analysis does not consider the role of the non banking intermediation (investment banks, broker dealers, mutual funds, etc.) that steadily increased until the crisis. Its effects over real economy could be investigated in further work.
    Keywords: commercial banks, crisis, capital requirements, business cycle
    JEL: E32 E44 G01 G21
    Date: 2013–07–08
  13. By: Galina Hale; Christopher Candelaria; Julian Caballero; Sergey Borisov
    Abstract: We show that bank linkages have a positive effect on international trade. We construct the global banking network (GBN) at the bank level, using individual syndicated loan data from Loan Analytics for 1990-2007. We compute network distance between bank pairs and aggregate it to country pairs as a measure of bank linkages between countries. We use data on bilateral trade from IMF DOTS as the subject of our analysis and data on bilateral bank lending from BIS locational data to control for financial integration and financial flows. Using gravity approach to modeling trade with country-pair and year fixed effects, we find that new connections between banks in a given country-pair lead to an increase in trade flow in the following year, even after controlling for the stock and flow of bank lending between the two countries. We conjecture that the mechanism for this effect is that bank linkages reduce the risk exporters face and present four sets of results that supports this conjecture.
    Keywords: Monetary policy
    Date: 2013
  14. By: Naohisa Hirakata; Yoshihiko Hogen; Nao Sudo; Kozo Ueda
    Abstract: In this paper, we study bank loan responses to monetary policy and bank capital shocks using Japan’s disaggregated data sorted by borrower firms’ size and industry. Employing a block recursive VAR, we demonstrate that bank loan responses exhibit large sectoral heterogeneity. Among a broad range of indicators about borrower firms’ characteristics, the heterogeneity is tightly linked to borrower firms’ liability conditions. Firms with a lower capital ratio tend to experience larger drops in bank loans following a contractionary monetary policy shock and/or a negative bank capital shock. In addition, we find that firms’ substitution motive from alternative financial measures also explains the heterogeneity, while the firms’ inventory motive that is stressed in the empirical literature for U.S. banks does not. Our results indicate the importance of considering a compositional shift of bank loans across borrower firms in implementing accommodative monetary policy and capital injection policy.
    Date: 2013
  15. By: Hasan, Iftekhar (Fordham University and Bank of Finland); Marinc , Matej (University of Ljubljana and ACLE)
    Abstract: This article investigates the nexus of competition and stability in European banking. It analyzes the European legal framework for competition policy in banking and several cases that pertain to anti-cartel policy, merger policy, and state-aid control. It discusses whether and how competition policy should be amended in order to preserve the stability of the banking system during crises. The article argues for increased cooperation between prudential regulators and competition authorities, as well as an enhanced framework for bank regulation, supervision, and resolution that could mitigate the need to change competition policy in crisis times.
    Keywords: banking; competition policy; financial crisis
    JEL: G21 G28 K21 L40
    Date: 2013–05–19
  16. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Burzynska, Katarzyna (Department of Economics, Lund University); Opper, Sonja (Department of Economics, Lund University)
    Abstract: This paper provides the first comparative analysis of different types of publicly owned banks operating in China between 1997 and 2008. Using principal component analysis and Granger-causality tests, this study shows that China’s state-owned commercial banks and rural credit cooperatives did not promote GDP growth during the observation period. State-owned commercial banks even had a negative effect on growth in the manufacturing sector. By contrast, state policy banks and joint stock commercial banks did promote domestic growth. China’s experience presents a more nuanced picture of state banking that goes beyond the role of ownership to consider functional and institutional differences.
    Keywords: China; Banking sector; Economic growth
    JEL: G21 O16 P30
    Date: 2013–06–17
  17. By: Brown, Martin; Guin, Benjamin; Kirschenmann, Karolin
    Abstract: We examine how the expansion of the branch network of a microfinance bank between 2006 and 2010 in South-East Europe has affected the use of bank accounts by households in the region. Our analysis is based on survey data reporting the use of bank accounts, socioeconomic characteristics and geographic location of 8,000 households in four countries. We geocode the location of each household and match this data with branch location information for the major microfinance bank in the region, ProCredit Bank, as well as for a large retail bank in each country. We report three key results: First, in locations where ProCredit opened a new branch between 2006 and 2010 the share of households with a bank account increased more than in locations where it did not open a new branch. Second, a new ProCredit branch leads to a stronger increase in the use of bank accounts among low- and middle-income households than among high-income households. Third, we find that ProCredit not only opens branches in areas with high economic activity, but also in areas where average household incomes are low. Overall our results suggest that microfinance banks do expand the frontier of finance as compared to ordinary retail banks.
    Keywords: Access to finance, Microfinance, Bank-ownership, Mission drift.
    JEL: G21 L2 O16 P34
    Date: 2013–02
  18. By: Ardizzi, Guerino
    Abstract: Interchange fees in card payments are a mechanism to balance costs and revenues between banks for the joint provision of payment services. However, such fees represent a relevant input cost used as a reference price for the final fee charged to the merchants, who may be reluctant to accept cards and induce the cardholder to withdraw cash. In this paper, we empirically verify for the first time the effect of the interchange fee on the decision to withdraw cash and compare it with that of paying with payment cards, considering a balanced panel data set of Italian issuing banks. Finally, results show that there is a positive correlation between the cash usage and the level of the interchange fees. Accordingly, regulation of the multilateral interchange fee level may be an effective tool in reducing cash payments at the point of sale, although there is no clear evidence that a zero interchange fee rate (or a close-to-zero rate) would be optimal.
    Keywords: MIF, interchange fee, payment card, ATM, POS, cash
    JEL: E4 E41 E42 E5 E51 G21 L14
    Date: 2013–05–29
  19. By: Gunes Kamber; Christoph Thoenissen
    Abstract: This paper analyzes the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks.
    Date: 2013–06
  20. By: Stefano Olgiati; Alessandro Danovi
    Abstract: Credit risk management in Italy is characterized, in the period June 2008 to June 2012, by frequent (frequency=0.5 cycles per year) and intense (peak amplitude: mean=39.2 billion Euros, s.e.=2.83 billion Euros) quarterly contractions and expansions around the mean (915.4 billion Euros, s.e.=3.59 billion Euros) of the nominal total credit used by non-financial corporations. Such frequent and intense fluctuations are frequently ascribed to exogenous Basel II procyclical effects on credit flow into the economy and, consequently, Basel III output based point in time Credit to GDP countercyclical buffering advocated. We have tested the opposite null hypotheses that such variation is significantly correlated to actual default rates, and that such correlation is explained by fluctuations of credit supply around a steady state. We have found that, in the period June 2008 to June 2012 (n=17), linear regression of credit growth rates on default rates reveals a negative correlation of r=minus 0.6903 with R squared=0.4765, and that credit supply fluctuates steadily around the default rate with an Internal Steady State Parameter SSP=0.00245 with chi squared=37.47 (v=16, P<.005). We conclude that fluctuations of the total credit used by non-financial corporations are exhaustively explained by variation of the independent variable default rate, and that credit variation fluctuates around a steady state. We conclude that credit risk management in Italy has been effective in parameterizing credit supply variation to default rates within the Basel II operating framework. Basel III prospective countercyclical point in time output buffers based on filtered Credit to GDP ratios and dynamic provisioning proposals should take into account this underlying steady state statistical pattern.
    Date: 2013–07
  21. By: Jorge E. Galán; Helena Veiga; Michael P. Wiper
    Abstract: Firms face a continuous process of technological and environmental changes that implies making managerial decisions in a dynamic context. However, costs and other constraints prevent firms from making instant adjustments towards optimal conditions and may cause inefficiency to be persistent in time. In this work, we propose a flexible dynamic model that makes possible to distinguish persistent effects in the inefficiency from firm inefficiency heterogeneity and to capture differences in the adjustment costs between firms. The new model is fitted to a ten year sample of Colombian banks. Our findings suggest that firm characteristics associated to size and foreign ownership have negative effects on inefficiency and separating these heterogeneity factors from the dynamics of inefficiency improves model fit. On the other hand, acquisitions are found to have positive and persistent effects on inefficiency. Colombian banks are found to present high inefficiency persistence but there exist important differences between institutions. In particular, merged banks present low costs of adjustment that allow them to recover rapidly the efficiency losses derived from merging processes
    Keywords: Banks efficiency, Bayesian inference, Dynamic effects, Persistent shocks, Heterogeneity, Stochastic frontier models
    JEL: C11 C22 C23 C51 D24 G21
    Date: 2013–06
  22. By: Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
    Abstract: Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. We use this method to retrace quantitatively the history of firms’ financial soundness during U.S. business cycles over most of the last century. We highlight three main findings. First, the three worst recessions between 1926 and 2012 coincided with insolvency crises, but other recessions did not. Second, fluctuations in asset volatility appear to drive variation in firms’ financial soundness. Finally, the financial soundness of financial firms largely resembles that of nonfinancial firms.
    Keywords: Business cycles
    Date: 2013
  23. By: Mathias Hoffmann; Toshihiro Okubo
    Abstract: Regional differences in banking integration determined how Japan’s Great Recession after 1990 spread across the country. We explain these differences with the emergence of silk reeling as the main export industry after Japan’s opening to trade in the 19th century. The silk-exporting prefectures developed a system of export finance centered on local, cooperative banks that preserved their dominant local position long after the decline of the silk industry. Our findings suggest that different pathways to financial development can lead to long-term differences in de facto financial integration, even if there are no formal barriers to capital mobility between regions.
    Keywords: financial development; financial integration; Japan; Great Recession; Lost Decade; banking integration; regional business cycles; transmission of financial shocks; misallocation of credit; trade credit; export finance; silk industry
    JEL: F15 F30 F40 G01 N15 N25 O16
    Date: 2013–06
  24. By: Meryem Deygun (University of Leicester School of Management, UK); Mohamed Shaban (University of Leicester School of Management, UK); Tom Weyman-Jones (School of Business and Economics, Loughborough University, UK)
    Abstract: This paper suggests an operational method for implementing the theoretical relative prot dierence test for intensity of competition due to Boone (2008). We use polynomial quantile regressions for which integral areas and their standard errors can easily be computed and compared using Wald tests. An empirical example is presented which applies the test to a panel data sample of banks in dierent emerging economies. The results indicate that the trend towards more intense competition amongst emerging economy banks continued during the period of the nancial upheaval in 2005-2008, and that India and China among others were leading this process.
    Date: 2013–06

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