New Economics Papers
on Banking
Issue of 2013‒09‒26
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Relationship and Transaction Lending in a Crisis By Patrick Bolton; Xavier Freixas; Leonardo Gambacorta
  2. Lending concentration, bank performance and systemic risk : exploring cross-country variation By Beck, Thorsten; De Jonghe, Olivier
  3. Bank Capital and Dividend Externalities By Acharya, Viral V; Le, Hanh; Shin, Hyun Song
  4. Approaches to Shadow Banking Regulation - Monitoring and Policy Framework By Jenny Poschmann
  5. Sovereign Default Risk and Banks in a Monetary Union By Uhlig, Harald
  6. Time Varying Risk Aversion By Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
  7. Rethinking Macro Policy II: Getting Granular By Olivier J. Blanchard; Giovanni Dell'Ariccia; Paolo Mauro
  8. Italian Sovereign Spreads: Their Determinants and Pass-through to Bank Funding Costs and Lending Conditions By Edda Zoli
  9. The Manipulation of Basel Risk-Weights By Mariathasan, Mike; Merrouche, Ouarda
  10. HEAT! A Bank Health Assessment Tool By Li L. Ong; Phakawa Jeasakul; Sarah Kwoh
  11. Input-Output-based Measures of Systemic Importance By Aldasoro, Iñaki; Angeloni, Ignazio
  12. Brazil's bank spread in international context : from macro to micro drivers By Jorgensen, Ole Hagen; Apostolou, Apostolos
  13. Payment Size, Negative Equity, and Mortgage Default By Andreas Fuster; Paul S. Willen
  14. The use of credit claims as collateral for Eurosystem credit operations By Tamura, Kentaro; Tabakis, Evangelos
  15. Statistics and indicators for financial stability analysis and policy By Israël, Jean-Marc; Sandars, Patrick; Schubert, Aurel; Fischer, Björn
  16. On the existence of credit rationing and screening with loan size in competitive markets with imperfect information By Kraus, Daniel
  17. Macroeconomic factors influencing interest rates of microfinance institutions in Latin America By Janda, Karel; Zetek, Pavel
  18. Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty By Hui Chen; Michael Michaux; Nikolai Roussanov
  19. The Interrupted Power Law and The Size of Shadow Banking By Davide Fiaschi; Imre Kondor; Matteo Marsili
  20. Rules, Discretion, and Macro-Prudential Policy By Itai Agur; Sunil Sharma

  1. By: Patrick Bolton; Xavier Freixas; Leonardo Gambacorta
    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
    JEL: E44 G21
    Date: 2013–09
  2. By: Beck, Thorsten; De Jonghe, Olivier
    Abstract: Using both market-based and annual report-based approaches to measure lending specialization for a broad cross-section of banks and countries over the period 2002 to 2011, this paper is the first to empirically gauge the relationship between bank lending specialization and bank performance and stability in an international sample. Theory suggests that banks might benefit from specialization in the form of higher screening and monitoring efficiency, while a diversified loan portfolio might also enhance stability. This paper finds that sectoral specialization increases volatility and systemic risk exposures, while not leading to higher returns. The paper also documents important time, cross-bank, and cross-county variation in this relationship, which is stronger post 2007, for richer countries, countries without regulatory requirements on diversification, banks with lower market power, and banks with more traditional intermediation models.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Mutual Funds,Financial Intermediation
    Date: 2013–09–01
  3. By: Acharya, Viral V; Le, Hanh; Shin, Hyun Song
    Abstract: While losses were accumulating during the 2007-09 financial crisis, many banks continued to maintain a relatively smooth dividend policy. We present a model that explains this behavior in a setting where there are financial externalities across banks. In particular, by paying out dividends, a bank transfers value to its shareholders away from its creditors, who in turn are other banks. This way, one bank's dividend payout policy aects the equity value and risk of default of otther banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.
    Keywords: externalities; financial crises; franchise value; risk-shifting
    JEL: G01 G21 G24 G28 G32 G35 G38
    Date: 2013–05
  4. By: Jenny Poschmann (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: In the recent years the shadow banking system had moved into the focus of regulators. New regulatory approaches affected the overall appearance of financial markets. The G20 detected the shadow banking system as remaining issue for sound and efficient regulation to ensure a stable financial system. The FSB was tasked to develop, in collaboration with other standard setting bodies, a policy framework to monitor and supervise shadow banking activities and entities. This work aims to outline the proposed recommendations of five workstreams and reflect their relevance critically.
    Keywords: Non-Bank financial institutions, Shadow Banking, Financial Regulation
    JEL: G21 G23 G24 K22
    Date: 2013–08–22
  5. By: Uhlig, Harald
    Abstract: This paper seeks to understand the interplay between banks, bank regulation, sovereign default risk and central bank guarantees in a monetary union. I assume that banks can use sovereign bonds for repurchase agreements with a common central bank, and that their sovereign partially backs up any losses, should the banks not be able to repurchase the bonds. I argue that regulators in risky countries have an incentive to allow their banks to hold home risky bonds and risk defaults, while regulators in other “safe” countries will impose tighter regulation. As a result, governments in risky countries get to borrow more cheaply, effectively shifting the risk of some of the potential sovereign default losses on the common central bank.
    Keywords: bank regulation; common central bank; ECB; Euro zone crisis; European Central Bank; haircuts; repurchase operations; risk shifting; sovereign default risk
    JEL: E51 E58 E61 E65 G21 G28 H63
    Date: 2013–08
  6. By: Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
    Abstract: We use a repeated survey of an Italian bank’s clients to test whether investors’ risk aversion increases following the 2008 financial crisis. We find that both a qualitative and a quantitative measure of risk aversion increases substantially after the crisis. After considering standard explanations, we investigate whether this increase might be an emotional response (fear) triggered by a scary experience. To show the plausibility of this conjecture, we conduct a lab experiment. We find that subjects who watched a horror movie have a certainty equivalent that is 27% lower than the ones who did not, supporting the fear-based explanation. Finally, we test the fear-based model with actual trading behavior and find consistent evidence.
    Keywords: Fear; Financial Crisis; Risk Aversion
    JEL: D1 D8 G11 G12
    Date: 2013–08
  7. By: Olivier J. Blanchard; Giovanni Dell'Ariccia; Paolo Mauro
    Abstract: This note explores how the economic thinking about macroeconomic management has evolved since the crisis began. It discusses developments in monetary policy, including unconventional measures; the challenges associated with increased public debt; and the policy potential, risks, and institutional challenges associated with new macroprudential measures. Rationale: The note contributes to the ongoing debate on several aspects of macroeconomic policy. It follows up on the earlier “Rethinking†paper, refining the analysis in light of the events of the past two years. Given the relatively fluid state of the debate (e.g., recent challenges to central bank independence), it is useful to highlight that while many of the tenets of the pre-crisis consensus have been challenged, others (such as the desirability of central bank independence) remain valid.
    Keywords: Monetary policy;Central banks;Inflation targeting;Liquidity;Interest rates;Capital flows;Fiscal policy;Public debt;Fiscal consolidation;Macroprudential Policy;Stabilization measures;Monetary policy, Inflation targets, Zero lower bound, Fiscal consolidation, Fiscal multipliers, Financial stability, Macroprudential policy
    Date: 2013–04–15
  8. By: Edda Zoli
    Abstract: Volatility in Italian sovereign spreads has increased since mid-2011. This paper finds that news on the euro area debt crisis and country specific events were important drivers of sovereign spreads. Movements in sovereign spreads affect CDS spreads and bond yields of Italian banks, and are transmitted rapidly to firm lending rates. Banks with lower capital ratios and higher nonperforming loans were found to be more sensitive to swings in sovereign spreads. Credit supply constraints due to bank funding shortages from the sovereign debt crisis were a major factor behind the lending slowdown in late 2011, while in 2012 weak demand appears to have been driving changes in credit more than supply.
    Keywords: Banking sector;Italy;Sovereign debt;Loans;Financial instruments;Italian sovereign spreads, bank funding costs, lending conditions.
    Date: 2013–04–03
  9. By: Mariathasan, Mike; Merrouche, Ouarda
    Abstract: In this paper, we examine the relationship between banks’ approval for the internal ratings-based (IRB) approaches of Basel II and the ratio of risk-weighted over total assets. Analysing a panel of 115 banks from 21 OECD countries that were eventually approved for applying the IRB to their credit portfolio, we find that risk-weight density is lower once regulatory approval is granted. The effect persists when we control for different loan categories, and we provide evidence showing that it cannot be explained by flawed modelling, or improved risk-measurement alone. Consistent with theories of risk-weight manipulation, we find the decline in risk-weights to be particularly prevalent among weakly capitalised banks, when the legal framework for supervision is weak, and in countries where supervisors are overseeing many IRB banks. We conclude that part of the decline in reported riskiness under the IRB results from banks’ strategic risk-modelling.
    Keywords: Basel II; capital regulation; internal ratings-based approach
    JEL: G20 G21 G28
    Date: 2013–05
  10. By: Li L. Ong; Phakawa Jeasakul; Sarah Kwoh
    Abstract: Developments during the global financial crisis have highlighted the importance of differentiating across financial systems and institutions. Assessments of financial stability have increasingly considered the characteristics of individual banks within a financial system, as well as those with significant international reach, to identify vulnerabilities and inform policy decisions. This paper proposes a simple measure of bank soundness, the Bank Health Index (BHI), to facilitate preliminary analyses of individual financial institutions relative to their peers. The evidence suggests that the BHI is useful for a first-pass identification of bank soundness conditions. Automated spreadsheet templates of the bank Health Assessment Tool (HEAT!) are provided for users with access to the BankScope, Bloomberg and/or SNL database(s).
    Keywords: Banks;Financial institutions;Bank soundness;Financial systems;asset quality, Bank Health Index, bank soundness, capital adequacy, earnings, HEAT!, heatmap, leverage, liquidity.
    Date: 2013–08–09
  11. By: Aldasoro, Iñaki; Angeloni, Ignazio
    Abstract: The analyses of intersectoral linkages of Leontief (1941)and Hirschman (1958) provide a natural way to study the transmission of risk among interconnected banks and to measure their systemic importance. In this paper we show how classic input-output analysis can be applied to banking and how to derive six indicators that capture different aspects of systemic importance, using a simple numerical example for illustration. We also discuss the relationship with other approaches, most notably network centrality measures, both formally and by means of a simulated network.
    Keywords: banks, input-output, systemic risk, too-interconnected-to fail, networks, interbank markets
    JEL: C67 G00 G01 G20
    Date: 2013–08
  12. By: Jorgensen, Ole Hagen; Apostolou, Apostolos
    Abstract: In an international context, this paper analyzes the main drivers of Brazil's bank spreads measured by the net interest margin, by estimating internationally comparable measures for (i) institutional and regulatory (micro-) factors; (ii) macro-economic factors; and (iii) banking competition factors. The paper produces and applies a novel data set covering 197 areas and countries; ranging from 1995 to 2009, including 106 banks for Brazil and 16,434 banks worldwide. The analysis finds that micro-factors are the main drivers of spreads across the world. In the case of Brazil, the spread is found to be strongly accounted for by micro-factors -- also in international comparison. For example, micro-factors contributed 7.2 percentage points (79 percent) of the 11.5 percent total spread in Brazil in 2009, while macro-factors and banking competition factors jointly accounted for only 1.9 percentage points (21 percent). Conversely, Brazil does not rank high in international comparison in terms of macro-economic risk: Brazil and other countries from Latin America and the Caribbean are found to feature the highest micro-factors in the world while having the second-highest spreads and the second-lowest contribution of macro-factors. These unique findings suggest that countries striving toward reducing bank spreads should consider policies aimed at reducing microeconomic frictions in their banking sectors, in particular, (i) the economic costs of holding reserves, (ii) credit risk, and (iii) implicit interest payments. In terms of policy dialogue, this would be especially relevant for Brazil and for Latin American and Caribbean countries in general.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Financial Intermediation,Emerging Markets
    Date: 2013–09–01
  13. By: Andreas Fuster; Paul S. Willen
    Abstract: Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate reductions dramatically affect repayment behavior, even for borrowers who are significantly underwater on their mortgages. Our estimates imply that cutting a borrower’s payment in half reduces his hazard of becoming delinquent by about 55 percent, an effect approximately equivalent to lowering the borrower’s combined loan-to-value ratio from 145 to 95 (holding the payment fixed). These findings shed light on the driving forces behind default behavior and have important implications for public policy.
    JEL: E43 G21
    Date: 2013–08
  14. By: Tamura, Kentaro; Tabakis, Evangelos
    Abstract: Credit claims (or bank loans) represent a large share of the collateral accepted by the Eurosystem in its credit operations in recent years. Hence the techniques and procedures used in the use of credit claims as collateral have become significant elements of the monetary policy implementation mechanism in the euro area. The procedures involved in credit claim collateralisation, however, are generally more complex than those for marketable assets traded in regulated markets or in other markets accepted by the Eurosystem. While several types of credit claims are eligible as Eurosystem collateral, each type of credit claim has different characteristics which require specific considerations in the eligibility assessment. This paper provides an overview of the issues involved in the use of credit claims as collateral and relates these to some measures taken by both the public and the private sector aimed at facilitating their use in the euro area. The paper also elaborates on the syndicated loan market in the euro area as this market is sizeable, while it appears that the use of such loans as collateral remains limited. JEL Classification: G10, G12, G13
    Keywords: central bank collateral eligibility, Credit claim, syndicated loan
    Date: 2013–06
  15. By: Israël, Jean-Marc; Sandars, Patrick; Schubert, Aurel; Fischer, Björn
    Abstract: Timely and accurate data are key to the preparation of macro-prudential policy recommendations and decisions by the ESRB, as well as to monitoring policy decisions in terms of their impact on, or transmission to, the financial and non-financial economy. This paper illustrates the work that has been carried out by the European Central Bank, the European Systemic Risk Board and the European Supervisory Authorities over a period of more than two years from 2010 to 2012 to prepare, develop, implement and manage the initial set of statistical and supervisory information necessary to support the European Systemic Risk Board, from its inception in January 2011. The paper also touches on the statistical information that is provided to support the financial stability function of the European Central Bank. JEL Classification: F31, F47, F30
    Keywords: financial stability statistics, financial statistics, systemic risk
    Date: 2013–04
  16. By: Kraus, Daniel
    Abstract: Although credit rationing has been a stylized fact since the groundbreaking papers by Stiglitz and Weiss (1981, hereinafter S-W) and Besanko and Thakor (1987a, hereinafter B-T), Arnold and Riley (2009) note that credit rationing is unlikely in the S-W model, and Clemenz (1993) shows that it does not exist in the B-T model. In this chapter, I explain why credit rationing, more specifically rationing of loan applicants, does exist in a competitive market with imperfect information, and occurs only for low-risk loan applicants. In cases of indivisible investment technologies, low-risk applicants are rationed. In cases of divisible investment technologies, rationing of loan size is restricted to rationing of loan applicants. In the event that the difference in the marginal return between the investment technologies is sufficiently small relative to the difference in their riskiness, rationing of loan size alone yields high opportunity costs; in addition, low-risk loan applicants are rationed in this case. --
    Keywords: Asymmetric Information,Financial Intermediation,Credit Rationing
    JEL: G21 D82
    Date: 2013
  17. By: Janda, Karel; Zetek, Pavel
    Abstract: Agricultural output in developing countries still represents a substantial part of GDP. This ratio has actually increased in some areas such as Latin America. As such, there is an increasing importance of microfinance institutions (MFIs) focusing on activities associated with agriculture and encouraging entrepreneurship in agriculture and in the rural communities in general. The contribution of microfinance institutions consists mainly in providing special-purpose loans, usually without collateral. However, questions exist as to the magnitude and adequate level of risk of providing micro-credit loans in relation to the interest rates being charged. We review two main approaches to setting interest rates in MFIs. One approach takes the view that interest rates should be set at a high level due to the excessive risk that these institutions undertake. The second approach is to convince the public of the possibility of reducing these rates through cost savings, increased efficiency, and sharing best practice, etc. Subsequently we econometrically analyse the impact of macroeconomic factors on microfinance interest rates in Latin America and the Caribbean. We show that these results depend on the chosen indicator of interest rate.
    Keywords: microfinance, interest rate, macroeconomic factors, agriculture
    JEL: E43 G21 O13
    Date: 2013–09–19
  18. By: Hui Chen; Michael Michaux; Nikolai Roussanov
    Abstract: We estimate a structural model of household liquidity management in the presence of long-term mortgages. Households face counter-cyclical idiosyncratic labor income uncertainty and borrowing constraints, which affect optimal choices of leverage, precautionary saving in liquid assets and illiquid home equity, debt repayment, mortgage refinancing, and default. Taking the observed historical path of house prices, aggregate income, and interest rates as given, the model quantitatively accounts for the run-up in household debt and consumption boom prior to the financial crisis, their subsequent collapse, and mild recovery following the Great Recession, especially among the most constrained households.
    JEL: E21 E44 G21
    Date: 2013–09
  19. By: Davide Fiaschi; Imre Kondor; Matteo Marsili
    Abstract: Using public data (Forbes Global 2000) we show that the distribution of asset sizes for the largest global firms follows a Pareto distribution in an intermediate range that is "interrupted" by a sharp cutoff in its upper tail, which is totally dominated by financial firms. This contrasts with a large body of empirical literature which finds a Pareto distribution for firm sizes both across countries and over time. Pareto distributions are generally traced back to a mechanism of proportional random growth, based on a regime of constant returns to scale: this makes our evidence of an "interrupted" Pareto distribution all the more puzzling, because we provide evidence that financial firms in our sample operate in such a regime. We claim that the missing mass from the upper tail of the asset size distribution is a consequence of shadow banking activity and that it provides an estimate of the size of the shadow banking system. This estimate -- that we propose as a shadow banking index -- compares well with estimates of the Financial Stability Board until 2009, but it shows a sharper rise in shadow banking activity after 2010.
    Date: 2013–09
  20. By: Itai Agur; Sunil Sharma
    Abstract: The paper examines the implementation of macro-prudential policy. Given the coordination, flow of information, analysis, and communication required, macro-prudential frameworks will have weaknesses that make it hard to implement policy. And dealing with the political economy is also likely to be challenging. But limiting discretion through the formulation of macro-prudential rules is complicated by the difficulties in detecting and measuring systemic risk. The paper suggests that oversight is best served by having a strong baseline regulatory regime on which a time-varying macro-prudential policy can be added as conditions warrant and permit.
    Keywords: Macroprudential Policy;Monetary policy;Political economy;Financial systems;Financial risk;Macro-prudential policy, systemic risk, financial stability, regulation
    Date: 2013–03–08

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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