New Economics Papers
on Banking
Issue of 2013‒08‒31
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Liquidity Risk and the Credit Crunch of 2007-2009: Evidence from Micro-Level Data on Mortgage Loan Applications By Antoniades, Adonis
  2. Financial inclusion for financial stability : access to bank deposits and the growth of deposits in the Global Financial Crisis By Han, Rui; Melecky, Martin
  3. Bank leverage, financial fragility and prudential regulation By Olivier Bruno; André Cartapanis; Eric Nasica
  4. Mortgage Relationships By Brown, Martin; Hoffmann, Matthias
  5. On the welfare properties of fractional reserve banking By Daniel Sanches
  6. Measuring bank competition in China: a comparison of new versus conventional approaches applied to loan markets By Bing Xu; Adrian Van Rixtel; Michiel Van Leuvensteijn
  7. Microfinance Banks and Household Access to Finance By Brown, Martin; Guin, Benjamin; Kirschenmann, Karolin
  8. Market discipline during crisis: Evidence from bank depositors in transition countries By Hasan, Iftekhar; Jackowicz, Krzysztof; Kowalewski , Oskar; Kozlowski , Lukasz
  9. The extreme dangers of a deposit tax By John H. Makin
  10. Credit Growth Volatility By Oduncu, Arif; Ermişoğlu, Ergun; Polat, Tandogan
  11. An Asian Perspective on Global Financial Reforms By Morgan, Peter J.; Pontines, Victor
  12. Basis Risk, Procylicality, and Systemic Risk in the Solvency II Equity Risk Module By Eling, Martin; Pankoke, David
  13. Monetary policy and financial stability in the long run By Jin Cao; Loran Chollete
  14. Capital over the business cycle: renting versus ownership By Gal, Peter; Pinter, Gabor
  15. Measuring Market Power in the Banking Industry in the Presence of Opportunity Cost By Antonis Michis
  16. Payment choice with consumer panel data By Michael Cohen; Marc Rysman
  17. The impact of Dodd-Frank on community banks By Tanya D. Marsh; Joseph W. Norman
  18. A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and the 2000s: The Roles of Monetary and Financial Stability Policies By Ehsan U. Choudhri; Lawrence L. Schembri

  1. By: Antoniades, Adonis
    Abstract: I test the hypothesis that the banks' exposure to liquidity risk contributed to the contraction of mortgage credit during the financial crisis of 2007-2009. I use micro-level data on mortgage loan applications to control for variation in demand conditions and find that lenders who relied less on core-deposit funding or who had larger off-balance sheet exposure to credit lines, exhibited a sharper decline in their propensity to approve loan applications. These two sources of liquidity risk jointly accounted for a $41.5 billion-$61.9 billion contraction of mortgage credit during 2007-2009, or 5.2%-7.8% of total mortgage originations during this period.
    Keywords: liquidity risk, bank lending channel, lines of credit, core deposits, real estate, mortgage lending
    JEL: E51 G01 G11 G21
    Date: 2013–07–01
  2. By: Han, Rui; Melecky, Martin
    Abstract: In crisis times, depositors get anxious, can run on banks, and withdraw their deposits. Correlated withdrawals of bank deposits could be mitigated if bank deposits are more diversified, that is, held by more individuals. This paper examines the link between the broader access to bank deposits prior to the 2008 crisis and the dynamics of bank deposit growth during the crisis, while controlling for relevant covariates. Employing proxies for access to deposits and the use of bank deposits, the authors find that greater access to bank deposits can make the deposit funding base of banks more resilient in times of financial stress. Policy efforts to enhance financial stability should thus not only focus on macroprudential regulation, but also recognize the positive effect of broader access to bank deposits on financial stability.
    Keywords: Debt Markets,Banks&Banking Reform,Access to Finance,Deposit Insurance,Emerging Markets
    Date: 2013–08–01
  3. By: Olivier Bruno (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis [UNS]); André Cartapanis (CHERPA - Croyance, Histoire, Espace, Régulation Politique et Administrative - Institut d'Études Politiques [IEP] - Aix-en-Provence - Aix-Marseille Université - AMU); Eric Nasica (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis [UNS])
    Abstract: We analyse the determinants of banks' balance-sheet and leverage-ratio dynamics and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank's leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral and the riskless interest rate. This result leads us to advocate the establishment of anadjustableleverage ratio, depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.
    Keywords: Bank Leverage, Leverage ratios, Financial Instability, Prudential Regulation
    Date: 2013–08–23
  4. By: Brown, Martin; Hoffmann, Matthias
    Abstract: We examine the closeness of relationships between households and their mortgage lenders using survey data which provide information on the duration, geographical proximity and scope of all bank relationships of a representative sample of households. Our analysis is based on a sample of 470 households which have a mortgage and multiple bank relations, allowing us to compare mortgage relations and non-mortgage relations for the same households. We find that mortgage relations are used for a broader scope of payment and saving transactions, have been more recently established, and are held with banks that are located closer to the household than non-mortgage relations. Examining the heterogeneity of mortgage relations across households, we find that financially sophisticated borrowers are less likely to hold their mortgage with a local bank. We find no evidence that more opaque borrowers, e.g. younger and urban households, maintain tighter mortgage relations.
    Keywords: Mortgage loans, Household finance, Relationship banking.
    JEL: G21 D14
    Date: 2013–08
  5. By: Daniel Sanches
    Abstract: Monetary economists have long recognized a tension between the benefits of fractional reserve banking, such as the ability to undertake more profitable (long-term) investment opportunities, and the difficulties associated with fractional reserve banking, such as the risk of insolvency for each bank. The goal of this paper is to show that a specific form of private bank coalition (a joint-liability arrangement) allows the members of the banking system to engage in fractional reserve banking in such a way that the solvency of each member bank is completely guaranteed. Under this arrangement, I show that a lower reserve ratio usually translates into a higher exchange value of bank liabilities, benefitting the consumers who use them as a means of payment.
    Keywords: Banks and banking ; Interbank market
    Date: 2013
  6. By: Bing Xu; Adrian Van Rixtel; Michiel Van Leuvensteijn
    Abstract: Since the 1980s, important and progressive reforms have profoundly reshaped the structure of the Chinese banking system. Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition concluded that bank competition in China declined during the past decade, despite these reforms. In this paper, we show both empirically and theoretically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar-Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the relatively new Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not suffer from these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996–2008, we show that competition actually increased in the past decade when the PE indicator is used. We provide additional empirical evidence that supports our results. We find that these firstly are in line with the process of financial reform, as measured by several indices, and secondly are robust for a large number of alternative specifications and estimation methods. All in all, our analysis suggests that bank lending markets in China have been more competitive than previously assumed.
    Keywords: Competition, banking industry, China, lending markets, marginal costs, regulation, deregulation
    Date: 2013–08
  7. 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
  8. By: Hasan, Iftekhar (BOFIT); Jackowicz, Krzysztof (BOFIT); Kowalewski , Oskar (BOFIT); Kozlowski , Lukasz (BOFIT)
    Abstract: The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in a worse financial condition than their subsidiaries. This situation created a unique opportunity to study new aspects of market discipline exercised by non-financial depositors. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were more strongly influenced by negative press rumors concerning parent companies than by fundamentals. The impact of rumors was especially perceptible when rumors turned out ex post to be founded. Additionally, we document that public aid announcements were primarily interpreted by depositors as confirmation of a parent company’s financial distress. Our results, indicating that depositors react rationally to sources of information other than financial statements, have policy implications, as depositor disci-pline is usually the only viable and universal source of market discipline for banks in emerging economies.
    Keywords: depositor behavior; market discipline; crisis; emerging markets; market rumors
    JEL: G21 G28
    Date: 2013–08–12
  9. By: John H. Makin (American Enterprise Institute)
    Abstract: Cyprus and other economically beleaguered nations should avoid deposit taxes and instead attempt to reassure their citizens of the security of their bank deposits if they hope to rebuild their economies.
    Keywords: Cyprus,banking,Economic outlook,Eurozone crisis
    JEL: A F
    Date: 2013–03
  10. By: Oduncu, Arif; Ermişoğlu, Ergun; Polat, Tandogan
    Abstract: The Central Bank of the Republic of Turkey has started to implement its new policy mix since late 2010. In this new approach expectations, credit growth and reel exchange rate are monitored closely as key indicators for financial stability on top of price stability. The effect of this new monetary policy framework on the volatility of credit growth is the main theme of this note. To the best of our knowledge, we are the first to analyze the impact of new policy mix on the credit growth volatility. It is shown that there is a significant decrease in the volatility of credit growth after the introduction of new policy framework at late 2010. Therefore, it can be said that this new monetary policy framework contributes to financial stability in Turkey by lessening the credit growth volatility.
    Keywords: Volatility, Credit growth, Central banking, CBRT’s new policy mix, Financial Stability
    JEL: C22 E52 E58
    Date: 2013–08
  11. By: Morgan, Peter J. (Asian Development Bank Institute); Pontines, Victor (Asian Development Bank Institute)
    Abstract: The purpose of this study is to better understand the likely impact on Asian economies and financial institutions of various recent global financial reforms, including Basel III capital adequacy and liquidity rules. Overall, the authors find that the Basel III capital adequacy rules are likely to have limited impacts on economic growth in Asia, but other financial regulations, including liquidity standards and rules for over-the-counter (OTC) derivatives, could have stunting effects on financial development in the region.
    Keywords: asian economies; financial institutions; global financial reforms; basel iii; capital adequacy rules; liquidity rules; otc derivatives
    JEL: E17 G01 G18 G21
    Date: 2013–08–22
  12. By: Eling, Martin; Pankoke, David
    Abstract: This paper analyzes the equity risk module of Solvency II, the new regulatory framework in the European Union. The equity risk module contains a symmetric adjustment mechanism called equity dampener which shall reduce procyclicality of capital requirements and thus systemic risk in the insurance sector. We critically review the equity risk module in three steps: we first analyze the sensitivities of the equity risk module with respect to the underlying technical basis, then work out potential basis risk (i.e., deviations of the insurers actual equity risk from the Solvency II equity risk), and — based on these results — measure the impact of the symmetric adjustment mechanism on the goals of Solvency II. The equity risk module is backward looking in nature and a substantial basis risk exists if realistic equity portfolios of insurers are considered. Both results underline the importance of the own risk and solvency assessment (ORSA) under Solvency II. Moreover, we show that the equity dampener leads to substantial deviations from the proposed 99.5% confidence level and thereby reduces procyclicality of capital requirements. Our results are helpful for academics interested in regulation and risk management as well as for practitioners and regulators working on the implementation of such models.
    Keywords: Solvency II, procyclicality, systemic risk, CoVaR, MES.
    JEL: G22 G28 G32
    Date: 2013–02
  13. By: Jin Cao (Norges Bank (Central Bank of Norway), CESifo, Germany); Loran Chollete (UiS Business School, Norway)
    Abstract: Most theoretical central bank models use short horizons and focus on a single tradeoff. However, in reality, central banks play complex, long-horizon games and face more than one tradeoff. We account for these issues in a simple infinite-horizon game with a novel tradeoff: higher rates deter financial imbalances, but lower rates reduce the likelihood ofinsolvency. We term these factors discipline and stability effects, respectively. The centralbank's welfare decreases with dependence between real and financial shocks, so it may reduce costs with correlation-indexed securities. In our model, independent central banks cannot in general attain both low inflation and financial stability.
    Keywords: Central Bank, Correlation-indexed security, Discipline effect, Stability effect
    JEL: E50 G28
    Date: 2013–08–22
  14. By: Gal, Peter (Tinbergen Institute and OECD); Pinter, Gabor (Bank of England)
    Abstract: We find that capital renting makes up one fifth of US capital expenditures, and it increases during downturns. Further, we present cross-country evidence that output losses after financial crises are smaller where renting is more prevalent. To understand these findings, we build a general equilibrium model with borrowing constraints and with the option to rent or buy capital. The countercyclicality of rentals occurs because their supply increases, as renting serves as an additional means of savings when credit markets malfunction. Moreover, demand also shifts towards rentals as they become relatively cheaper. By absorbing excess savings, renting mitigates financial crises.
    Keywords: Renting; capital; business cycle; financial shocks
    JEL: E22 E32 E44 G01 G32
    Date: 2013–08–16
  15. By: Antonis Michis (Central Bank of Cyprus)
    Abstract: A conjectural variations model is developed to measure market power in the banking industry. Unlike previous studies, which use complete cost function specifications in the modelling framework, this study defines marginal cost based on an opportunity cost, which is represented by the interest rate on minimum reserves offered by the monetary authorities in a country. Deposits with the monetary authorities are considered to be an alternative use of available funds that are usually allocated to loans. The estimates of market power in the banking industry in Cyprus, using the proposed model, reject the monopoly hypothesis.
    Keywords: market power, conjectural variations, interest rates, opportunity cost.
    JEL: G21 L11
    Date: 2013–06
  16. By: Michael Cohen; Marc Rysman
    Abstract: We exploit scanner data to track payment choice for grocery purchases for a large panel of households over three years. We show that households focus most of their expenditures on one or at most two of these instruments in choosing between using cash, a check, or a card, and they very rarely switch. We focus particularly on the role of expenditure size in determining payment choice. While the use of a long panel for these purposes is novel, the introduction of controls for household heterogeneity has little effect on our estimates. Thus, we find that transaction size is an important determinant of payment choice, not only across households but within households.
    Keywords: Consumers' preferences ; Cash transactions ; Checks ; Credit cards ; Debit cards
    Date: 2013
  17. By: Tanya D. Marsh; Joseph W. Norman
    Abstract: Community banks are crucial to the vitality of the American economy, yet the Dodd-Frank Act will make them less robust.
    Keywords: Dodd-Frank Act,community banks
    JEL: A G
    Date: 2013–05
  18. By: Ehsan U. Choudhri (Carleton University, Canada); Lawrence L. Schembri (Bank of Canada, Canada)
    Abstract: The paper examines the experience of Canada and the United States in the run-up to the two biggest financial crises in global history, in the 1920s and 2000s, and the roles of their monetary and financial stability policies. Comparing the Canadian and the U.S. experiences over the two periods is instructive because Canadian monetary policy was somewhat more conservative than U.S. monetary policy and there were important institutional differences in the two periods: Canada did not have a central bank in the 1920’s and followed different financial stability policies in the 2000’s. We present evidence that suggests two conclusions. Firstly, a more moderate Canadian monetary policy in the two booms affected Canada’s relative macroeconomic performance during the booms; in particular, the extent of the economic expansion was less. Secondly, this difference, however, by itself, does not explain why Canada fared better in the recent crisis, but not in the Great Depression. Indeed, the comparative evidence suggests that it was the difference in the effectiveness of financial stability policies, primarily financial regulation supervision with respect to banks and housing finance, that explains the better Canadian performance during the recent crisis. In contrast, in the 1920s, both countries lacked the financial policies to control excess credit growth and both suffered as a consequence. In addition, both countries made policy mistakes in aftermath of the stock market crash and credit collapses; in particular, Canada pursued inflexible interest and exchange rate policies that aggravated the economic downturn.
    Date: 2013–08

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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