New Economics Papers
on Banking
Issue of 2013‒07‒28
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Large Scale Asset Purchases with Segmented Mortgage and Corporate Loan Markets By Meixing Dai; Frédéric Dufourt; Qiao Zhang
  2. Converting the NPL Ratio into a Comparable Long Term Metric By Rodrigo Lara Pinto; Gilneu Francisco Astolfi Vivan
  3. Relationship and Transaction Lending in a Crisis By Patrick Bolton; Xavier Freixas; Leonardo Gambacorta; Paolo Emilio Mistrulli
  4. Fragmentation in European Financial Markets. Measures, Determinants, and Policy Solutions By Maria Abascal; Tatiana Alonso; Sergio Mayordomo
  5. A new index of financial conditions By Gary Koop; Dimitris Korobilis
  6. Should monetary policy lean against the wind? - an analysis based on a DSGE model with banking By Leonardo Gambacorta; Federico M Signoretti
  7. A liquidity risk index as a regulatory tool for systemically important banks? An empirical assessment across two financial crises By Gianfranco Gianfelice; Giuseppe Marotta; Costanza Torricelli
  8. An Alternative Model to Basel Regulation By Sofiane Aboura; Emmanuel Lépinette
  9. Macroeconomic stabilisation and bank lending: A simple workhorse model By Spahn, Peter
  10. Risco Sistêmico no Mercado Bancário Brasileiro - Uma abordagem pelo método CoVar By Gustavo Silva Araújo; Sérgio Leão
  11. Incidence of Bank Levy and Bank Market Power By Gunther Capelle-Blancard; Olena Havrylchyk
  12. Narrow Banking, Real Estate, and Financial Stability in the UK, c.1870-2010 By Avner Offer
  13. Profitability of the Banking Sector of Pakistan: Panel Evidence from Bank-Specific, Industry-Specific and Macroeconomic Determinants By Raza, Syed Ali; Jawaid, Syed Tehseen; Shafqat, Junaid
  14. Modeling US bank CDS spreads during the Global Financial Crisis with a deferred filtration pricing model By Peter Spencer
  15. Real Estate Valuation, Current Account, and Credit Growth Patterns Before and After the 2008–2009 Crisis By Aizenman, Joshua; Jinjarak, Yothin
  16. Transmissão da Política Monetária pelos Canais de Tomada de Risco e de Crédito: uma análise considerando os seguros contratados pelos bancos e o spread de crédito no Brasil By Debora Pereira Tavares; Gabriel Caldas Montes; Osmani Teixeira de Carvalho Guillén
  17. CVA for Bilateral Counterparty Risk under Alternative Settlement Conventions By Cyril Durand; Marek Rutkowski
  18. Banking system soundness is the key to more SME financing By Zsolt Darvas
  19. Bank’s regulation, asset portfolio choice of banks, and macroeconomic dynamics By Kosuke Aoki; Nao Sudo
  20. Quantifying the Impact of Leveraging and Diversification on Systemic Risk By Tasca, Paolo; Mavrodiev, Pavlin; Schweitzer, Frank
  21. Group Lending Without Joint Liability By Thiemo Fetzer; Maitreesh Ghatak; Jonathan de Quidt

  1. By: Meixing Dai (BETA, University of Strasbourg); Frédéric Dufourt (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Qiao Zhang (BETA, University of Strasbourg)
    Abstract: We introduce Large Scale Asset Purchases (LSAPs) in a New-Keynesian DSGE model that features distinct mortgage and corporate loan markets. We show that following a significant disruption of financial intermediation, central-bank purchases of mortgage-backed securities (MBS) are uniformly less effective at easing credit market conditions and stabilizing economic activity than outright purchases of corporate bonds. Moreover, the size of the effects crucially depends on the extent to which credit markets are segmented, i.e. to which a "portfolio balance channel" is at work in the economy. More segmented credit markets imply larger, but more local effects of particular asset purchases. With strongly segmented credit markets, large scale purchases of MBS are useful to stabilize the housing market but do little to mitigate the contractionary effect of the crisis on employment and output.
    Keywords: Financial frictions, mortgage-backed securities (MBS), corporate bonds, unconventional monetary policy, large scale asset purchases (LSAPs), portfolio balance channel, credit spreads.
    JEL: E32 E44 E52 E58
    Date: 2013–03
  2. By: Rodrigo Lara Pinto; Gilneu Francisco Astolfi Vivan
    Abstract: The NPL ratio is probably the most widely used metric to measure the credit risk present in the loan portfolio of financial institutions. However, factors other than credit risk, such as the time a loan remains in the NPL condition, the distribution of defaults over time within a certain vintage, the growth rate of the loan portfolio and its term to maturity, may influence its dynamics. Moreover, accounting differences related to recognition and definition of an event of default makes it difficult to compare this metric across different countries. In this paper, we propose an alternative metric to assess the dynamics of credit risk in the loan portfolio. Based on a theoretical portfolio, we develop an analytical model in order to estimate the weighted average of lifetime default ratios of all vintages where the weight is assigned based on the contribution of each vintage to the current stock of loans. We call it implied NPL ratio, which consists of a transformation that adjusts the observed NPL ratio for the effects of changes in the portfolio growth rate and in its average term to maturity, and also takes into account differences in the default distribution across time and the amount of time a past due loan remains in the balance sheet. The results of applying this transformation to the three most relevant types of loans to households in Brazil (auto loans, housing financing and payroll-deducted loans) demonstrate that (a) the implied NPL ratio was a good forecast of the portfolio lifetime default; (b) changes in the components mentioned above affected the dynamics of the NPL ratio and therefore compromised the assessment of credit risk based on this metric (c) the analysis of differences in the evolution of NPL and INPL gives rise to important insights regarding the dynamics of credit risk.
    Date: 2013–07
  3. By: Patrick Bolton; Xavier Freixas; Leonardo Gambacorta; Paolo Emilio Mistrulli
    Abstract: We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, which allows them to provide loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship-banks are higher than those of transaction-banks. In our model, where relationship-banks compete with transaction-banks, a key result is that relationship-banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction of the model that relationship banks charged a higher spread before the crisis, offered more favorable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.
    Keywords: Relationship Banking, Transaction Banking, Crisis
    Date: 2013–07
  4. By: Maria Abascal; Tatiana Alonso; Sergio Mayordomo
    Abstract: This paper measures fragmentation in four European financial markets (interbank, sovereign debt, equity, and the CDS market for financial institutions) and develops a new measure of global fragmentation using these markets as inputs. We find that, during the recent crisis, fragmentation in the interbank market has been, on average, higher in the peripheral countries than in the core ones and it has increased particularly during periods of financial stress. Among the most significant factors that contributed to the high fragmentation levels observed are counterparty risk and financing costs (overall factors), and country-specific factors such as banking sector openness, the debt–to-GDP and the relative size of the financial sector. We also study the short-run effect of the ECB programmes and announcements and find a significant decrease in the daily levels of fragmentation immediately after the mplementation of the SMP, 3Y-LTROs and the second CBPP of the ECB as well as key announcements relative to banking union and the OMT. These helped restore investors’ confidence in the euro and confirmed the ECB’s support for tackling the challenges of the European sovereign debt crisis. Nevertheless, additional measures seem to be necessary to guarantee a new process of re-integration and thus a more stable European banking sector.
    Keywords: Eurozone, financial fragmentation, Interbank market, Banking Union
    JEL: G15 G18 F36
    Date: 2013–07
  5. By: Gary Koop (Department of Economics, University of Strathclyde); Dimitris Korobilis (Department of Economics, University of Glasgow)
    Abstract: We use factor augmented vector autoregressive models with time-varying coefficients to construct a financial conditions index. The time-variation in the parameters allows for the weights attached to each .financial variable in the index to evolve over time. Furthermore, we develop methods for dynamic model averaging or selection which allow the financial variables entering into the FCI to change over time. We discuss why such extensions of the existing literature are important and show them to be so in an empirical application involving a wide range of .financial variables.
    Keywords: financial stress, dynamic model averaging, forecasting
    JEL: C11 C32 C52 C53
    Date: 2013–06
  6. By: Leonardo Gambacorta; Federico M Signoretti
    Abstract: The global financial crisis has reaffirmed the importance of financial factors for macroeconomic fluctuations. Recent work has shown how the conventional pre-crisis prescription that monetary policy should pay no attention to financial variables over and above their effects on inflation may no longer be valid in models that consider frictions in financial intermediation (Cúrdia and Woodford, 2009). This paper analyzes whether Taylor rules augmented with asset prices and credit can improve upon a standard rule in terms of macroeconomic stabilization in a DSGE with both a firms' balance-sheet channel and a bank-lending channel and in which the spread between lending and policy rates endogenously depends on banks' leverage. The main result is that, even in a model in which financial stability does not represent a distinctive policy objective, leaning-against-the-wind policies are desirable in the case of supply-side shocks whenever the central bank is concerned with output stabilization, while both strict inflation targeting and a standard rule are less effective. The gains are amplified if the economy is characterized by high private sector indebtedness.
    Keywords: DSGE, monetary policy, asset prices, credit channel, Taylor rule, leaning-against-the-wind
    Date: 2013–07
  7. By: Gianfranco Gianfelice; Giuseppe Marotta; Costanza Torricelli
    Abstract: We provide an assessment of the IMF suggestion, based on Severo (2012), to use an index of systemic liquidity risk (SLRI) that could help to estimate a Pigouvian tax on large banks for the externality on the international banking system out of their risk exposure. To this end we compute a parsimonious and fully documented SLRI and investigate its statistical significance in explaining level and variability of stock returns for a group of large international banks during the subprime financial and the Eurozone sovereign debt crises. The empirical investigation consistently fails to detect, within and across the two crises, a core group among the systemically important banks listed by the Financial Stability Board and thus supports a sceptical assessment of the proposal.
    Keywords: subprime crisis, Eurozone sovereign crisis, systemic risk, banks’ stock returns, macroprudential regulation
    JEL: C58 G01 G12 G13
    Date: 2013–07
  8. By: Sofiane Aboura (CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris IX - Paris Dauphine); Emmanuel Lépinette (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)
    Abstract: The post-crisis financial reforms address the need for systemic regulation, focused not only on individual banks but also on the whole financial system. The regulator principal objective is to set banks' capital requirements equal to international minimum standards in order to mimimise systemic risk. Indeed, Basel agreement is designed to guide a judgement about minimum universal levels of capital and remains mainly microprudential in its focus rather than being macroprudential. An alternative model to Basel framework is derived where systemic risk is taken into account in each bank's dynamic. This might be a new departure for prudential policy. It allows for the regulator to compute capital and risk requirements for controlling systemic risk. Moreover, bank regulation is considered in a two-scale level, either at the bank level or at the system-wide level. We test the adequacy of the model on a data set containing 19 banks of 5 major countries from 2005 to 2012. We compute the capital ratio threshold per year for each bank and each country and we rank them according to their level of fragility. Our results suggest to consider an alternative measure of systemic risk that requires minimal capital ratios that are bank-specific and time-varying.
    Keywords: Systemic risk; Bank Regulation; Basel Accords
    Date: 2013–07–19
  9. By: Spahn, Peter
    Abstract: A hybrid standard macro model is supplemented by an explicit analysis of bank lending, based on a five-position aggregative balance sheet. In the model's two versions credit supply is based on a leverage targeting rule or on simple optimisation, taking into account lending risks and funding costs. Model simulations explore consequences of supply and demand disturbances, discretionary interest rate moves, asset valuation and credit risk shocks. Besides standard Taylor policies, the paper compares the relative efficiency of additional stabilisation tools like external-funding taxes and anti-cyclical leverage regulation. Quantitative restrictions for bank activities seem to be useful. --
    Keywords: Taylor rule,Leverage targeting,Financial market shocks,Funding costs,Endogenous money
    JEL: E1 E5 G2
    Date: 2013
  10. By: Gustavo Silva Araújo; Sérgio Leão
    Abstract: The 2007-2009 global financial crisis has highlighted the need for a review of the practices of banking supervision. The trend of the post-crisis is a macro-prudential regulation in order to smooth out economic cycles and mitigate systemic risk. Accordingly, Adrian & Brunnermeier (2011) propose a measure of systemic risk - the CoVaR. Basically, the CoVaR of an institution represents the value at risk of the financial system conditional on the institution being under distress. They also define the institution's contribution to systemic risk as the difference between CoVaR conditional on the institution being under distress and the CoVaR in the median state of the institution. The aim of this paper is to evaluate the application of the CoVaR measure in the Brazilian banking system. The results for the Brazilian market indicate that: i) VaR is a poor measure to capture the systemic risk of an institution; ii) although larger institutions have less individual risks, they offer higher systemic risks; iii) some smaller institutions are also among the ones offering higher systemic risks; iv) on average, one unit of a larger institution individual risk increases more the systemic risk than one unit of a small institution individual risk; v) on average, the systemic risk is lower for public financial institutions. Furthermore, the findings (ii) and (iv) indicate that, on average, institutions with higher individual risk have minor marginal contributions to the systemic risk.
    Date: 2013–07
  11. By: Gunther Capelle-Blancard; Olena Havrylchyk
    Abstract: This is the first analysis of the incidence of a bank tax that is imposed on banks’ balance sheets. Within the framework of an oligopolistic version of the Monti-Klein model, the pass-through of a bank tax levied on loans is stronger when elasticity of credit demand is low. To test this hypothesis, we investigate the incidence of the Hungarian bank tax that was introduced in 2010 on banks’ assets. This case is well suited for our analysis because the tax rate is much higher for large banks than for small banks, which allows relying on difference-in-difference methodology to disentangle the impact of the tax from any other shock that might have occurred simultaneously. In line with model predictions, our estimations show that the tax is shifted to customers with the smallest demand elasticity, such as households. In terms of economic policy implications, our results suggest that enhanced borrower mobility could reduce the ability of banks to shift taxes to customers.
    Keywords: banks;bank levy;tax incidence; market power
    JEL: G21 H22 L13
    Date: 2013–07
  12. By: Avner Offer
    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: 2013–06–14
  13. By: Raza, Syed Ali; Jawaid, Syed Tehseen; Shafqat, Junaid
    Abstract: This study investigates determinants of banks’ profitability in Pakistan by using the panel data of 18 banks from the period of 2001 to 2010. Pedroni panel cointegration results confirm that there exists valid long run relationship between considered variables. Results of random effects model suggest negative and significant effect of bank size, credit risk, liquidity, taxation, and nontraditional activity with profitability. Conversely, positive and significant effects of capitalization, banking sector development and inflation have been found with profitability. However, the stock market development has negative but insignificant relationship with profitability. Sensitivity analyses confirm that the results are robust.
    Keywords: Profitability, Banks, Panel Data, Credit Risk
    JEL: E44 G21 L8
    Date: 2013–07–05
  14. By: Peter Spencer
    Abstract: This paper uses a simplified version of the Duffie and Lando (2002) deferred filtration model to handle the effect of asymmetric information about US banks asset portfolios during the recent crisis, when banks were reluctant to lend to one another because they were not sure about the balance sheet strength of the counterparty and its ability to repay. The accounting lag in the deferred filtration model gives a very useful way of calibrating this uncertainty and provides convenient closed forms suitable for econometric models. I use these to model the default probabilities implied by CDS rates. Comparing the fit of this model with that of the standard full information structural defaultable debt pricing model strongly supports the hypothesis that investors were wary of the value of accounting information. The performance of the model is comparable to that of a benchmark reduced form hazard rate model, the workforce of the empirical literature to date.
    Keywords: deferred filtration, default risk, credit crunch, CDS spread, LIBOR
    JEL: G12 G33 G38
    Date: 2013–07
  15. By: Aizenman, Joshua (Asian Development Bank Institute); Jinjarak, Yothin (Asian Development Bank Institute)
    Abstract: This paper explores the stability of the key conditioning variables accounting for real estate valuation before and after the crisis of 2008–2009, in a panel of 36 countries, for the period of 2005:I–2012:IV, recognizing the incidence of global financial crisis. Our paper validates the robustness of the association between the real estate valuation of lagged current account patterns, both before and after the crisis. The results are supportive of both current account and credit growth channels, with the animal-spirits and momentum channels playing the most important role in the boom and bust of real estate valuation.
    Keywords: current account; real estate; credit supply; global crisis; housing boom
    JEL: F15 F21 F32 R21 R31
    Date: 2013–07–23
  16. By: Debora Pereira Tavares; Gabriel Caldas Montes; Osmani Teixeira de Carvalho Guillén
    Abstract: This research presents a pioneering contribution to the literature on the transmission mechanism of monetary policy through the credit channel and the risk-taking channel, since it analyzes the influence of monetary policies on the insurance hiring process by banks in order to protect them against losses in lending transactions to individuals and, also, investigates the impact of contracting this type of insurance on credit spread in Brazil. The results indicate that: i) monetary policies influence the credit insurance premium; and ii) there exists a positive relationship between the insurance premium and the spread, suggesting that the credit spread is sensitive to the amount of insurance paid by financial institutions.
    Date: 2013–07
  17. By: Cyril Durand; Marek Rutkowski
    Abstract: We depart from the usual methods for pricing contracts with the counterparty credit risk found in most of the existing literature. In effect, typically, these models do not account for either systemic effects or at-first-default contagion and postulate that the contract value at default equals either the risk-free value or the pre-default value. We propose instead a fairly general framework, which allows us to perform effective Credit Value Adjustment (CVA) computations for a contract with bilateral counterparty risk in the presence of systemic and wrong or right way risks. Our general methodology focuses on the role of alternative settlement clauses, but it is also aimed to cover various features of margin agreements. A comparative analysis of numerical results reported in the final section supports our initial conjecture that alternative specifications of settlement values have a non-negligible impact on the CVA computation for contracts with bilateral counterparty risk. This emphasizes the practical importance of more sophisticated models that are capable of fully reflecting the actual features of financial contracts, as well as the influence of the market environment.
    Date: 2013–07
  18. By: Zsolt Darvas
    Abstract: The SME access-to-finance problem is not universal in the European Union and there are reasons for the fall in credit aggregates and higher SME lending rates in southern Europe. Possible market failures, high unemployment and externalities justify making greater and easier access to finance for SMEs a top priority. Previous European initiatives were able to support only a tiny fraction of Europeâ??s SMEs; merely stepping-up these programmes is unlikely to result in a breakthrough. Without repairing bank balance sheets and resuming economic growth, initiatives to help SMEs get access to finance will have limited success. The European Central Bank can foster bank recapitalisation by performing in the toughest possible way the asset quality review before it takes over the single supervisory role. Of the possible initiatives for fostering SME access to finance, a properly designed scheme for targeted central bank lending seems to be the best complement to the banking clean-up, but other options, such as increased European Investment Bank lending and the promotion of securitisation of SME loans, should also be explored.
    Date: 2013–07
  19. By: Kosuke Aoki (The University of Tokyo); Nao Sudo (Bank of Japan)
    Abstract: Since the middle of 1990s, the Japanese banks have continuously tilted their asset portfolio towards the government bonds, reducing their lending to …rms. In this paper, we investigate the causes and consequences of such changes in the banks behaviors, by introducing the bank’s asset portfolio decision into an otherwise standard New Keynesian model. The banks in our model construct their portfolio under the value at risk constraint, that requires banks repay their debt regardless of the realization of the asset returns. Under the constraint, an increase in down-side risks, tightening of capital requirement rules or deterioration of the banks net worth reduce the banks’ risk taking capacity, and incurs a shrinkage of the bank’s balance sheet and asset rebalancing towards government bond. The changes in banks’ investment decisions dampen output and inflation. Empirical studies suggest that our theoretical predictions are consistent with behavior of the Japanese banks.
    Date: 2013–07
  20. By: Tasca, Paolo; Mavrodiev, Pavlin; Schweitzer, Frank
    Abstract: Excessive leverage, i.e. the abuse of debt financing, is considered one of the  primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be considered independent. Based on the structural framework by Merton (1974), we discuss a model in which these  correlations arise from overlaps in banks' portfolios. Portfolio  diversification is used as a strategy to mitigate losses from investments in risky projects. We calculate an optimal level of  diversification that has to be reached for a given level of excessive leverage to still mitigate an increase in systemic risk. In our  model, this optimal diversification further depends on the market size and the market conditions (e.g. volatility). It allows to distinguish between a safe regime, in which excessive leverage does not result in an increase of systemic risk, and a risky regime, in which excessive leverage cannot be mitigated leading to an increased systemic risk. Our results are of relevance for financial regulators.
    Keywords: Business, Systemic Risk, Leverage, Diversification
    Date: 2013–03–22
  21. By: Thiemo Fetzer; Maitreesh Ghatak; Jonathan de Quidt
    Abstract: This paper contrasts individual liability lending with and without groups to joint liability lending. By doing so, we shed light on an apparent shift away from joint liability lending towards individual liability lending by some microfinance institutions First we show that individual lending with or without groups may constitute a welfare improvement so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how a purely mechanical argument in favor of the use of groups - namely lower transaction costs - may actually be used explicitly by lenders to encourage the creation of social capital. We also carry out some simulations to evaluate quantitatively the welfare impact of alternative forms of lending, and how they relate to social capital.
    Keywords: microfinance, group lending, joint liability, mutual insurance
    JEL: G11 G21 O12 O16
    Date: 2013–07

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