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on Banking |
| By: | Francisco B. Covas; Ben Rump; Egon Zakrajsek |
| Abstract: | We propose an econometric framework for estimating capital shortfalls of bank holding companies (BHCs) under pre-specified macroeconomic scenarios. To capture the nonlinear dynamics of bank losses and revenues during periods of financial stress, we use a fixed effects quantile autoregressive (FE-QAR) model with exogenous macroeconomic covariates, an approach that delivers a superior out-of-sample forecasting performance compared with the standard linear framework. According to the out-of-sample forecasts, the realized net charge-offs during the 2007-09 crisis are within the multi-step-ahead density forecasts implied by the FE-QAR model, but they are frequently outside the density forecasts generated using the corresponding linear model. This difference reflects the fact that the linear specification substantially underestimates loan losses, especially for real estate loan portfolios. Employing the macroeconomic stress scenario used in CCAR 2012, we use the density forecasts generated by the FE-QAR model to simulate capital shortfalls for a panel of large BHCs. For almost all institutions in the sample, the FE-QAR model generates capital shortfalls that are considerably higher than those implied by its linear counterpart, which suggests that our approach has the potential for detecting emerging vulnerabilities in the financial system. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-55&r=ban |
| By: | Simon Gilchrist; Egon Zakrajsek |
| Abstract: | Estimating the effect of Federal Reserve's announcements of Large-Scale Asset Purchase (LSAP) programs on corporate credit risk is complicated by the simultaneity of policy decisions and movements in prices of risky financial assets, as well as by the fact that both interest rates of assets targeted by the programs and indicators of credit risk reacted to other common shocks during the recent financial crisis. This paper employs a heteroskedasticity-based approach to estimate the structural coefficient measuring the sensitivity of market-based indicators of corporate credit risk to declines in the benchmark market interest rates prompted by the LSAP announcements. The results indicate that the LSAP announcements led to a significant reduction in the cost of insuring against default risk--as measured by the CDX indexes--for both investment- and speculative-grade corporate credits. While the unconventional policy measures employed by the Federal Reserve to stimulate the economy have substantially lowered the overall level of credit risk in the economy, the LSAP announcements appear to have had no measurable effect on credit risk in the financial intermediary sector. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-56&r=ban |
| By: | Luis Brandao-Marques; Ricardo Correa; Horacio Sapriza |
| Abstract: | Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of rated banks and find that government support is associated with more risk taking by banks, especially prior and during the 2008-2009 financial crisis. We also find that restricting banks’ range of activities ameliorates the link between government support and bank risk taking. We conclude that strengthening market discipline by reducing bank complexity is needed to address this moral hazard problem |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1086&r=ban |
| By: | Peter Debbaut; Andra C. Ghent; Marianna Kudlyak |
| Abstract: | Young borrowers are the least experienced financially and, conventionally, thought to be most prone to financial mistakes. We study the relationship between age and financial problems related to credit cards. Our results challenge the notion that young borrowers are bad borrowers. We show that young borrowers are among the least likely to experience a serious credit card default. We then exploit the 2009 CARD Act to identify which individuals self-select into obtaining a credit card early in life. We find that individuals who choose early credit card use default less and are more likely to get a mortgage while young. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:13-09&r=ban |
| By: | Richard Sullivan; Zhu Wang |
| Abstract: | This paper studies the diffusion and impact of a cost-saving technological innovation—Internet banking. Our theory characterizes the process through which the innovation is adopted sequentially by large and small banks, and how the adoption affects bank size distribution. Applying the theory to an empirical study of Internet banking diffusion among banks across 50 U.S. states, we examine the technological, economic and institutional factors governing the process. The empirical findings allow us to disentangle the interrelationship between Internet banking adoption and change in average bank size, and explain the variation in diffusion rates across geographic regions. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:13-10&r=ban |
| By: | Elisa Luciano; Clas Wihlborg |
| Abstract: | We analyze theoretically banks choice of organization and leverage in branches or subsidiaries in the presence of organizational and financial synergies, government bailouts, bankruptcy costs and varying correlations between risk-factors. The social efficiency of banks’ choices are analyzed as well taking into account operational synergies and distortions caused by banks’ exploitation of benefits of limited liability if there is a probability of governments bail-out. Leverage choice can be viewed as a trade-off between expected benefits of limited liability and bankruptcy costs. The choice of subsidiary vs branch organization can be viewed as a trade-off between organizational synergies and bankruptcy costs and this tradeoff depends on other factors mentioned. The theoretical and numerical analysis has a number of policy implications. We emphasize the role of capital requirements, explicit and implicit protection of banks’ creditors, restrictions on organizational choice with different synergies, insolvency procedures for banks affecting private and social costs associated with a bank’s insolvency |
| Keywords: | bank subsidiaries, bank branches |
| JEL: | G21 G32 G33 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpicer:06-2013&r=ban |
| By: | Elliot Anenberg; Patrick Bayer |
| Abstract: | This paper presents new empirical evidence that internal movement--selling one home and buying another--by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-60&r=ban |
| By: | Magomet Yandiev; Alexander Pakhalov |
| Abstract: | The article presents calculations that prove practical importance of the earlier derived theoretical relationship between the interest rate on the interbank credit market, volume of investment and the quantity of securities tradable on the stock exchange. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.5703&r=ban |
| By: | Rama Cont (Laboratoire de Probabilités et Modèles Aléatoires CNRS); Lakshithe Wagalath (IESEG School of Management) |
| Abstract: | We propose a tractable framework for quantifying the impact of fire sales on the volatility and correlations of asset returns in a multi-asset setting. Our results enable to quantify the impact of fire sales on the covariance structure of asset returns and provide a quantitative explanation for spikes in volatility and correlations observed during liquidation of large portfolios. These results allow to test for the presence of fire sales during a given period of time and to estimate the impact and magnitude of fire sales from observation of market prices: we give conditions for the identifiability of model parameters from time series of asset prices, propose an estimator for the magnitude of fire sales in each asset class and study the consistency and large sample properties of the estimator. We illustrate our estimation methodology with two empirical examples: the hedge fund losses of August 2007 and the Great Deleveraging following the default of Lehman Brothers in Fall 2008. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:f201301&r=ban |