New Economics Papers
on Banking
Issue of 2013‒08‒05
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Shocks Abroad, Pain at Home? Bank-Firm Level Evidence on the International Transmission of Financial Shocks By Steven Ongena; Jose Luis Peydro; Neeltje van Horen
  2. Banking crises and the role of bank coalitions By Daniel R. Sanches
  3. Assessing Systemic Risk in the Brazilian Interbank Market By Benjamin M. Tabak; Sergio R. S. Souza; Solange M. Guerra
  4. Corporate governance of banks: A survey By Jakob de Haan; Razvan Vlahu
  5. Price Differentiation and Menu Costs in Credit Card Payments By Marcos Valli Jorge; Wilfredo Leiva Maldonado
  6. Banks, government bonds, and default: what do the data say? By Nicola Gennaioli; Alberto Martin; Stefano Rossi
  7. Bank Behavior in Oligopoly, Bank- Clients and Monetary Policy By dala, eleni; karpetis, christos; varelas, erotokritos
  8. The Influence of Social Capital Dimensions on Household Participation in Micro-Credit Groups and Loan Repayment Performance in Uasin Gishu County, Kenya By Kangogo, Daniel; Lagat, Job; Ithinji, Gicuru
  9. The real cost of credit constraints: Evidence from micro-finance By Renuka Sane; Susan Thomas
  10. Banking Crises and “Japanization”: Origins and Implications By Kawai, Masahiro; Morgan, Peter
  11. How do Banks’ Stock Returns Respond to Monetary Policy Committee Announcements in Turkey? Evidence from Traditional versus New Monetary Policy Episodes By Guray Kucukkocaoglu; Deren Unalmis; Ibrahim Unalmis
  12. An effective equity model allowing long term investments within the framework of Solvency II By Mohamed Majri; François-Xavier De Lauzon
  13. Network Topologies of Financial Market During the Global Financial Crisis By Ashadun Nobi; Seong Eun Maeng; Gyeong Gyun Ha; Jae Woo Lee
  14. A Comment on Chicago Rule, Chicago School, and Commercial Bank Seigniorage By varelas, erotokritos
  15. A nonparametric test of a strong leverage hypothesis By Oliver Linton; Yoon-Jae Whang; Yu-Min Yen
  16. Factors affecting adoption of mobile banking in Pakistan: Empirical Evidence By Kazi, Abdul Kabeer; Mannan, Muhammad Adeel

  1. By: Steven Ongena; Jose Luis Peydro; Neeltje van Horen
    Abstract: We study the international transmission of shocks from the banking to the real sector during the global financial crisis. For identification, we use matched bank-firm level data, including many small and medium-sized firms, in Eastern Europe and Central Asia. We find that internationally-borrowing domestic and foreign-owned banks contract their credit more during the crisis than domestic banks that are funded only locally. Firms that are dependent on credit and at the same time have a relationship with an internationally-borrowing domestic or a foreign bank (as compared to a locally-funded domestic bank) suffer more in their financing and real performance. Single-bank-relationship firms, small firms and firms with intangible assets suffer most. For credit-independent firms, there are no differential effects. Our findings suggest that financial globalization has intensified the international transmission of financial shocks with substantial real consequences
    Keywords: international transmission; firm real effects; foreign banks; international wholesale funding; credit shock
    JEL: G01 G21 F23 F36
    Date: 2013–07
  2. By: Daniel R. Sanches
    Abstract: The goal of this paper is to provide a framework to analyze the effectiveness of bank coalition formation in response to an external aggregate shock that may cause disruption to the payment mechanism and real economic activity. I show that the kind of insurance mechanism provided by a specific type of bank coalition allows society to completely prevent any disruption to real activity that can be caused by a temporary drop in the value of banking assets, at least in the case of a shock that is not too big. If the shock is relatively large, then a private bank coalition will be unable to completely prevent a disruption in real activity even though it will be able to substantially mitigate the effects on equilibrium quantities and prices. Thus, the existence of a private bank coalition of the kind described in this paper can be an effective means of preventing significant disruptions in trading activity.
    Keywords: Banks and banking ; Interbank market ; Payment systems
    Date: 2013
  3. By: Benjamin M. Tabak; Sergio R. S. Souza; Solange M. Guerra
    Abstract: In this paper, we propose a methodology to measure systemic risk that stems from financial institutions (FIs) interconnected in interbank markets. We show that this framework is useful to identify systemically important FIs. This methodology can be used to perform stress tests using additional information from FIs default probabilities and their correlation structure. We present how to implement this methodology and apply it to the Brazilian case. We also evaluate the effects of the recent global crisis on the interbank market.
    Date: 2013–07
  4. By: Jakob de Haan; Razvan Vlahu
    Abstract: This paper reviews the empirical literature on the corporate governance of banks. We start by highlighting the main differences between banks and non-financial firms and focus on three characteristics which make banks special: (i) regulation, (ii) the capital structure of banks, and (iii) the complexity and opacity of their business and structure. Next, we discuss the characteristics of corporate governance in banks and how they differ from the governance of non-financial firms. We then review the evidence on three governance mechanisms: (i) boards, (ii) ownership structures, and (iii) executive compensation. Our review suggests that some of the empirical regularities found in the literature on corporate governance of nonfinancial institutions, such as the positive (negative) association between board independence (size) and performance, do not hold for banks. Also, existing work provides less than conclusive results regarding the relation between different governance mechanisms and various measures for banks’ performance. We discuss potential explanations for these mixed results.
    Keywords: banking; governance; boards; bank ownership; executive remuneration
    JEL: G21 G34 G35
    Date: 2013–07
  5. By: Marcos Valli Jorge; Wilfredo Leiva Maldonado
    Abstract: We build a model of credit card payments where the retailers are allowed to charge differential prices depending on the instrument of payment chosen by the consumer. We follow the Rochet and Wright (2010) approach, but assuming a credit card system without a no-surcharge rule or any type of price differentiation disincentive. In a Hotelling competition framework at the retailers level, the competitive equilibrium prices are computed assuming that the store credit provided by the retailer is less cost efficient than the one provided by the credit card. In accordance with the literature, we obtain that the interchange fee becomes neutral if we eliminate the no-surcharge rule, when the interchange fee loses its ability to distort the individual consumer’s decisions displacing the aggregated consumers’ welfare from its maximum. We prove that the average price obtained under price differentiation is smaller than the single retail price under the no-surcharge rule, despite the retailer’s margins being the same in both scenarios. Furthermore, we show how some cross subsidies are eliminated when price differentiation is allowed. In addition, we introduce menu costs to prove that there is a threshold value for the interchange fee such that price differentiation is equilibrium if that fee is above this value. The threshold may be interpreted as an endogenous cap for the interchange fee fixed by the credit card industry. Finally we conclude that, even with menu costs associated to price differentiation, the consumers’ welfare can be greater in the price differentiated equilibrium than in the single price equilibrium under the non-surcharge rule.
    Date: 2013–07
  6. By: Nicola Gennaioli; Alberto Martin; Stefano Rossi
    Abstract: We use data from Bankscope to analyze the holdings of public bonds by over 18,000 banks located in 185 countries and the role of these bonds in 18 sovereign debt crises over the period 1998-2012. We find that: (i) banks hold a sizeable share of their assets in government bonds (about 9% on average), particularly in less financially developed countries; (ii) during sovereign crises, banks on average increase their bondholdings by 1% of their assets, but this increase is concentrated among larger and more profitable banks, and; (iii) the correlation between a bank's holdings of public bonds and its future loans is positive in normal times, but turns negative during defaults. A 10% increase in bank bond-holdings during default is associated with a 3.2% reduction in future loans, and bonds bought in normal times account for 75% of this effect. Our results are consistent with the view that there is a liquidity benefit for banks to hold public bonds in normal times, which is critical for understanding bank fragility during sovereign crises.
    Keywords: Sovereign Risk, Sovereign Default, Government Bonds
    JEL: F34 F36 G15 H63
    Date: 2013–07
  7. By: dala, eleni; karpetis, christos; varelas, erotokritos
    Abstract: This paper investigates the impact of monetary policy on the optimal bank behavior under oligopolistic conditions. In addition, we attempt to extend this analysis in the sphere of bank-clients behavior.We concentrate on the way the minimum reserve requirements of commercial banks influence the optimal bank behavior in oligopoly. In particular, we are interested in the influence of this instrument of monetary policy on the interest rate spread. For this reason, we formulate a two-stage Cournot game with scope economies.We conclude that the sign of each change depends on the type of scope economies. Finally, treating an overlapping generation model as a guiding principle, we show that the minimum reserve requirements of commercial banks have an impact on the depositors’ and borrowers’ two periods’ optimal level of consumption.
    Keywords: Bank behavior, Scope economics, Monetary policy
    JEL: D4 E44 E51
    Date: 2013–06–30
  8. By: Kangogo, Daniel; Lagat, Job; Ithinji, Gicuru
    Abstract: Lack of access to credit is a key obstacle for economic development of transitional economies such as Kenya. The underlying problem is related to information asymmetry combined with the lack of collateral by low income households. Microfinance led group lending model offer a new way to deal with this problem without resorting to collateral requirements. The core issue in group lending is that it systematically exploits elements of social capital that inherently exist in groups into an incentive contract that substitutes collateral; a formal bank conventional requirement of lending that is virtually unavailable to the poor. This study sought to ascertain the influence of social capital dimensions on households’ participation and repayment performance in micro-credit groups in the study area. The study was conducted in Moiben Division, Uasin Gishu County, Kenya based on a sample of 174 households selected using a multi-stage sampling technique. The data was collected using a personally administered structured questionnaire. In the analysis descriptive statistics, Heckman two stage and a Tobit regression models were employed. The results show that individual and group borrowers had significant differences in gender, age, farm size, years of education, income and land tenure. It was established that household size, farm income and distance to the nearest financial institution positively influenced a household to join micro-credit group. On the other hand age, gender, years of education, farm size and interest rate were found to be significant and negatively influenced household decision to join micro-credit groups. The level of household participation in micro-credit groups measured by the number of loan borrowings was significantly and positively influenced by age, total income, years of experience in group borrowing and decision making index while farm size, heterogeneity index and density of membership had a negative affect on household number of loan borrowings. Lastly, the results on group loan repayment performance using the Tobit model revealed that experience in group borrowing, number of visits by loan officer, peer pressure, meeting attendance index and heterogeneity index positively and significantly influenced loan default rate while gender, household size, distance to the nearest financial institution and density of membership were significant but negatively influenced household loan repayment performance. The study therefore recommends that MFIs should increase awareness and encourage poor households to form micro-credit groups. These institutions are obliged to provide training to households on group dynamics in order to take advantage of social capital existing within well organized and managed groups.
    Keywords: Social capital, Access to Credit, Group Lending, Microfiance, Heckman two step Model, Tobit Model, Loan Repayment, Micro-credit Group
    JEL: D7 D71 G2 G23
    Date: 2013–04–25
  9. By: Renuka Sane (Indira Gandhi Institute of Development Research); Susan Thomas (Indira Gandhi Institute of Development Research)
    Abstract: In December 2010, the Indian state of Andhra Pradesh passed a law that severely restricted the operations of micro-finance institutions and brought the micro-finance industry to an abrupt halt. We measure the impact of micro-credit withdrawal in this unique natural experiment and find that average household expenditure dropped by 19 percent relative to a control group after the ban. The largest decrease was observed in expenditure on food. There is some evidence of higher volatility in consumption after the ban. All households were affected and not just the borrower households, which may suggest general equilibrium effects.
    Keywords: Consumption smoothing, credit, household finance, micro-finance ban, natural experiment
    JEL: D14 G21 G28
    Date: 2013–07
  10. By: Kawai, Masahiro (Asian Development Bank Institute); Morgan, Peter (Asian Development Bank Institute)
    Abstract: Japan’s “two lost decades” perhaps represent an extreme example of a weak recovery from a financial crisis, and are now referred to as “Japanization.” More recently, widespread stagnation in advanced economies in the wake of the global financial crisis led to fears that Japanization might spread to other countries. This study examines the dimensions of Japanization—including low trend growth, debt deleveraging, deflation and massive increases in government debt—and analyzes their possible causes—including inadequate macroeconomic policy responses, delayed banking sector restructuring, inadequate corporate investment, loss of industrial competitiveness, a slowdown in total factor productivity (TFP) growth due to excessive regulation and economic rigidities, and an aging society.
    Keywords: economic growth; total factor productivity; inflation; demographics; credit growth; banking crises
    JEL: E20 E31 E51 F31 G01
    Date: 2013–07–30
  11. By: Guray Kucukkocaoglu; Deren Unalmis; Ibrahim Unalmis
    Abstract: Using a methodology that is robust to endogeneity and omitted variables problems, it is found that the stock returns of all banks that are listed in Borsa Istanbul respond significantly to the monetary policy surprises on Monetary Policy Committee (MPC) meeting days prior to May 2010. It is shown that stock returns of banks for which interest payments constitute an important share in their balance sheets respond more aggressively to the changes in policy rates. In addition, foreign banks and participation banks give relatively less responses to monetary policy surprises. Estimation results differ between traditional and new monetary policy episodes.
    Keywords: Monetary Policy, Stock Market, Banking System, Emerging Markets, Identification through Heteroscedasticity
    JEL: E43 E44 E52
    Date: 2013
  12. By: Mohamed Majri (SMABTP - SMABTP); François-Xavier De Lauzon (SMABTP - SMABTP)
    Abstract: We propose an effective equity model adapted for medium term and long term risk assessment. One of its specific aspects is to allow an asymetrical dampening of the equity risk (called the dampener effect) conditional to the cyclical level of equity prices and to enable accurate Value At Risk assessements for medium and long term horizons (1 year and beyond). For a set of selected equity indexes we compare its relevancy for the 1-year 99.5% Value At Risk (VaR) assessment with the different releases of the Solvency II dampener equity models. In a second step we test its relevancy for VaR assessments beyond a 1 year investment horizon. We show in our analysis that this alternative model gives quite good results and outperforms widely the others tested. It appears particularly suitable for insurance companies and pension funds given their medium or long term asset management process.
    Keywords: Value-At-Risk, Long term Equity Risk Assessment, Solvency II, Dampener, Standard Formula, Back Testing
    Date: 2013–05–15
  13. By: Ashadun Nobi; Seong Eun Maeng; Gyeong Gyun Ha; Jae Woo Lee
    Abstract: We consider the effects of the global financial crisis through a local Korean financial market around the 2008 crisis. We analyze 185 individual stock prices belonging to the KOSPI (Korea Composite Stock Price Index), cosidering three time periods: the time before, during, and after the crisis. The complex networks generate from the fully connected correlation network by using the cross-correlation coefficients among the stock price time series of the companies. We generate the threshold networks (TN), the minimal spanning tees (MST), and the hierarchical network (HN) from the fully connected cross-correlation networks. By assigning a threshold value of the cross-correlation coefficient, we obtain the threshold networks. We observe the power law of the degree distribution in the limited range of the threshold. The degree distribution of the largest cluster in the threshold networks during the crisis is fatter than other periods. The clustering coefficient of the threshold networks follows the power law in the scaling range. We also generate the minimal spanning trees from the fully connected correlation networks. The MST during the crisis period shrinks in comparison to the periods before and after the crisis. The cophenetic correlation coefficient increases during the crisis, indicating that the hierarchical structure increases during this period. When the crisis hit the market, the companies behave synchronously and their correlations become stronger than the normal period.
    Date: 2013–07
  14. By: varelas, erotokritos
    Abstract: Chicago rule is shown to be the unique optimal monetary policy rule from the viewpoint of an intergenerational welfare-maximizing social planner. But, in the absence of commercial banking, it really mandates the elimination of the public sector, because it involves the elimination of central bank seigniorage and hence, of the government spending based on this seigniorage, rendering subsequently tax finance incapable of sustaining alone such spending. In the presence of commercial banking, the government does have the option of benefiting from commercial bank seigniorage by borrowing it countercyclically as implied by Chicago rule, which is found to operate like a full-reserve requirement
    Keywords: Chicago rule, Seigniorage, Intergenerational modeling
    JEL: E3 E4 E5 E6
    Date: 2013–08–01
  15. By: Oliver Linton (Institute for Fiscal Studies and Cambridge University); Yoon-Jae Whang (Institute for Fiscal Studies and Seoul National University); Yu-Min Yen
    Abstract: The so-called leverage hypothesis is that negative shocks to prices/ returns affect volatility more than equal positive shocks. Whether this is attributable to changing financial leverage is still subject to dispute but the terminology is in wide use. There are many tests of the leverage hypothesis using discrete time data. These typically involve the fitting of a general parametric or semiparametric model to conditional volatility and then testing the implied restrictions on parameters or curves. We propose an alternative way of testing this hypothesis using realised volatility as an alternative direct nonparametric measure. Our null hypothesis is of conditional distributional dominance and so is much stronger than the usual hypotheses considered previously. We implement our test on a number of stock return datasets using intraday data over a long span. We find powerful evidence in favour or our hypothesis.
    Keywords: distribution function; leverage effect; gaussian process
    JEL: C14 C15
    Date: 2013–07
  16. By: Kazi, Abdul Kabeer; Mannan, Muhammad Adeel
    Abstract: In this research paper we investigated the determinants likely to influence the adoption of mobile banking services, with a special focus on under banked/unbanked low-income population of Pakistan. The adoption of mobile banking services has been a strategic goal, both for banks and telcos. For this purpose, Technology Acceptance Model (TAM) was used, with additional determinants of perceived risk and social influence. Data was collected by surveying 372 respondents from the two largest cities (Karachi and Hyderabad) of the province Sindh, in Pakistan using judgement sampling method. This study empirically concluded that consumers’ intention to adopt mobile banking services was significantly influenced by social influence, perceived risk, perceived usefulness, and perceived ease of use. The most significant positive impact was of social influence on consumers’ intention to adopt mobile banking services. The paper concluded with discussion on results, and several business implications for the banking industry of Pakistan.
    Keywords: Mobile banking; technology adoption; social influence; perceived risk; low-income sector; Pakistan
    JEL: G2 G20 G21
    Date: 2013–04–04

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