New Economics Papers
on Banking
Issue of 2013‒08‒10
ten papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Colombian bank efficiency and the role of market structure By Diana Fernández Moreno; Dairo Estrada
  2. Network versus portfolio structure in financial systems By Teruyoshi Kobayashi
  3. Asset Allocation under the Basel Accord Risk Measures By Zaiwen Wen; Xianhua Peng; Xin Liu; Xiaoling Sun; Xiaodi Bai
  4. Replacing Ratings By Bo Becker; Marcus Opp
  5. Efficient immunization strategies to prevent financial contagion By Teruyoshi Kobayashi; Kohei Hasui
  6. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima
  7. Bank financing of SMEs in five Sub-Saharan African countries : the role of competition, innovation, and the government By Berg, Gunhild; Fuchs, Michael
  8. Regulation and the Crisis: The Efficiency of Italian Cooperative Banks By Cristian Barra; Sergio Destefanis; Giuseppe Lubrano Lavadera
  9. Profit and cost efficiency in the Italian banking industry (2006-2011) By Aiello, Francesco; Bonanno, Graziella
  10. Optimal Prevention for Correlated Risks By Christophe Courbage; Henry Loubergé; Richard Peter

  1. By: Diana Fernández Moreno; Dairo Estrada
    Abstract: Colombia’s financial system has undertaken major changes during the last decade, with new regulatory regimes being implemented, as well as a significant expansion of financial services. Nevertheless, the recent literature has yet to analyze this new epoch for banking institutions under an efficiency framework. Taking into account the availability of new information and the methodological advances of recent years, our purpose is to study the evolution of bank efficiency during the past few years, as well as to evaluate the influence of some market structure variables on the latter. We find evidence, both under SFA and Order-m, supporting an increase in efficiency over time. Moreover, relating the latter with market structure variables suggests that there is a positive relationship between market power and efficiency; this occurs due to product differentiation, which allows banks to gain in efficiency provided they don’t set excessive credit prices. Nonetheless, there is an open debate concerning the behavior of banks with the highest market shares, since the negative relation between market concentration and efficiency advocates for a "quiet life form", where banks don’t have incentives to fully minimize costs. Additional to these results, we provide evidence of potential impacts that mergers and credit specialization may have on efficiency.
    Keywords: Bank Efficiency, Concentration, Market Power, Stochastic Frontier Analysis, Order-m. Classification JEL: C14, D40, D61, G21
  2. By: Teruyoshi Kobayashi
    Abstract: The question of how to stabilize financial systems has attracted considerable attention since the global financial crisis of 2007-2009. Recently, Beale et al. ("Individual versus systemic risk and the regulator's dilemma", Proc Natl Acad Sci USA 108: 12647-12652, 2011) demonstrated that higher portfolio diversity among banks would reduce systemic risk by decreasing the risk of simultaneous defaults at the expense of a higher likelihood of individual defaults. In practice, however, a bank default has an externality in that it undermines other banks' balance sheets. This paper explores how each of these different sources of risk, simultaneity risk and externality, contributes to systemic risk. The results show that the allocation of external assets that minimizes systemic risk varies with the topology of the financial network as long as asset returns have negative correlations. In the model, a well-known centrality measure, PageRank, reflects an appropriately defined "infectiveness" of a bank. An important result is that the most infective bank need not always be the safest bank. Under certain circumstances, the most infective node should act as a firewall to prevent large-scale collective defaults. The introduction of a counteractive portfolio structure will significantly reduce systemic risk.
    Date: 2013–08
  3. By: Zaiwen Wen; Xianhua Peng; Xin Liu; Xiaoling Sun; Xiaodi Bai
    Abstract: Financial institutions are currently required to meet more stringent capital requirements than they were before the recent financial crisis; in particular, the capital requirement for a large bank's trading book under the Basel 2.5 Accord more than doubles that under the Basel II Accord. The significant increase in capital requirements renders it necessary for banks to take into account the constraint of capital requirement when they make asset allocation decisions. In this paper, we propose a new asset allocation model that incorporates the regulatory capital requirements under both the Basel 2.5 Accord, which is currently in effect, and the Basel III Accord, which was recently proposed and is currently under discussion. We propose an unified algorithm based on the alternating direction augmented Lagrangian method to solve the model; we also establish the first-order optimality of the limit points of the sequence generated by the algorithm under some mild conditions. The algorithm is simple and easy to implement; each step of the algorithm consists of solving convex quadratic programming or one-dimensional subproblems. Numerical experiments on simulated and real market data show that the algorithm compares favorably with other existing methods, especially in cases in which the model is non-convex.
    Date: 2013–08
  4. By: Bo Becker; Marcus Opp
    Abstract: Since the financial crisis, replacing ratings has been a key item on the regulatory agenda. We examine a unique change in how capital requirements are assigned to insurance holdings of mortgage-backed securities. The change replaced credit ratings with regulator-paid risk assessments by Pimco and BlackRock. We find no evidence for exploitation of the new system for trading purposes by the providers of the credit risk measure. However, replacing ratings has led to significant reductions in aggregate capital requirements: By 2012, equity capital requirements for structured securities were at $3.73bn compared to of $19.36bn if the old system had been maintained. These savings reflect the new measures of risk, and new rules allowing companies to economize on capital charges if assets are held below par. These book-value adjustments dilute the predictive power of the underlying risk measures, Our results are consistent with a regulatory change being largely driven by industry interests rather than maintaining financial stability.
    JEL: G22 G24 G28
    Date: 2013–07
  5. By: Teruyoshi Kobayashi; Kohei Hasui
    Abstract: Many immunization strategies have been proposed to prevent infectious viruses from spreading through a network. In this study, we propose efficient immunization strategies to prevent a default contagion that might occur in a financial network. An essential difference from the previous studies on immunization strategy is that we take into account the possibility of serious side effects. Uniform immunization refers to a situation in which banks are "vaccinated" with a common low-risk asset. The riskiness of immunized banks will decrease significantly, but the level of systemic risk may increase due to the de-diversification effect. To overcome this side effect, we propose another immunization strategy, counteractive immunization, which prevents pairs of banks from failing simultaneously. We find that counteractive immunization can efficiently reduce systemic risk without altering the riskiness of individual banks.
    Date: 2013–08
  6. By: Keiichiro Kobayashi (Keio University); Tomoyuki Nakajima (Kyoto University)
    Abstract: We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-fulfilling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-fulfilling crisis but increases that of fundamental crisis.
    Keywords: Debt overhang, liquidity, working capital, systemic crisis.
    JEL: E30 G01 G21
    Date: 2013–08
  7. By: Berg, Gunhild; Fuchs, Michael
    Abstract: This paper provides an overview of the state of access to bank financing for SMEs in five Sub-Saharan African countries and analyzes the drivers behind banks'involvement with SMEs. The paper builds on data collected through five in-depth studies in Kenya, Nigeria, Rwanda, South Africa, and Tanzania between 2010 and 2012. The paper shows that the share of SME lending in the overall loan portfolios of banks varies between 5 and 20 percent. Reasons for this finding vary, but key contributing factors are the structure and size of the economy and the extent of Government borrowing, the degree of innovation mainly as introduced by foreign entrants to financial sectors, and the state of the financial sector infrastructure and enabling environment.
    Keywords: Access to Finance,Banks&Banking Reform,Debt Markets,Financial Intermediation,Environmental Economics&Policies
    Date: 2013–08–01
  8. By: Cristian Barra (Università di Salerno); Sergio Destefanis (Università di Salerno, CELPE and CSEF); Giuseppe Lubrano Lavadera (IRAT, CNR, Naples)
    Abstract: In this paper we analyze the impact of the current financial crisis on the determination of technical efficiency in a sample of Italian small banks, highlighting the interaction of the crisis with different regulatory regimes existing for cooperative banks (CB’s) and other banks. We find that the crisis has a negative impact on efficiency, more so for CB's. This is to be expected, as the CB's principle of external mutuality and their branching regulations are likely to locate them in less performing areas. In accordance with this prior, the differential impact of the crisis attenuates or vanishes when we include in the production set some indicators of local environment (GDP per capita). Correspondingly, we find novel evidence in favour of the “bad luck” hypothesis suggested by Berger and De Young (Journal of Banking and Finance, 1997).
    Keywords: Cooperative banks, Technical efficiency, Local shocks, Territorial diversification
    JEL: D24 G21 L89
    Date: 2013–07–30
  9. By: Aiello, Francesco; Bonanno, Graziella
    Abstract: This study evaluates the cost and the profit efficiency of Italian banking sector over the period 2006-2011. Translog stochastic frontiers are used for this purpose. Following the intermediation approach, efficiency scores are computed from estimating a model with three inputs and three outputs. Results indicate that Italian banks perform well, given that the average levels of cost and profit efficiency are both around 90% and they are quite stable over time. However, there is high heterogeneity in results. Differences have been found when banks are classified by size (efficiency tends to decrease with size), legal type (cooperatives perform better than others) and area (the best performers are in the North East of the country).
    Keywords: Banking; Translog Stochastic Frontiers; Cost and Profit Efficiency
    JEL: C13 D01 G21
    Date: 2013–08–08
  10. By: Christophe Courbage; Henry Loubergé; Richard Peter
    Abstract: This paper analyzes optimal prevention expenditures in a situation of multiple correlated risks. We focus on probability reduction (self-protection). This renders correlation endogenous so that we measure dependence as the relative deviation of the probability of joint losses from the uncorrelated case. If prevention concerns only one risk, introducing a negatively correlated exogenous risk increases the level of prevention expenditures. If prevention expenditures may be invested for both risks, a substitution effect arises due to the competition for resources. Under decreasing returns on self-protection we find that increased dependence increases overall prevention expenditures, but not necessarily prevention expenditures for each risk due to differences in prevention efficiency. Similar results are found when considering the impact of more severe losses. We derive policy implications from our results.
    Keywords: Prevention, correlation, multiple risks
    Date: 2013–07

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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