New Economics Papers
on Banking
Issue of 2013‒10‒05
twelve 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; Paolo Emilio Mistrulli
  2. Multi-layered Interbank Model for Assessing Systemic Risk By Christoffer Kok; Mattia Montagna
  3. A quantitative look at the Italian banking system: evidence from a new dataset since 1861 By Riccardo De Bonis; Fabio Farabullini; Miria Rocchelli; Alessandra Salvio; Andrea Silvestrini
  4. Extreme Spillover Between Shadow Banking and Regular Banking By Paraschiv, Florentina; Qin, Minzi
  5. Bank Bailouts and Market Discipline: How Bailout Expectations Changed During the Financial Crisis By Florian Hett; Alexander Schmidt
  6. Is bank debt special for the transmission of monetary policy? Evidence from the stock market By Filippo Ippolito; Ali K. Ozdagli; Ander Pérez Orive
  7. The Euro Interbank Repo Market By Mancini, Loreano; Ranaldo, Angelo; Wrampelmeyer, Jan
  8. Corporate Bond Clawbacks as Contingent Capital By Fernando Díaz; Gabriel Ramírez; Kenneth Daniels
  9. Financial liberalization, market structure and credit penetration By Felipe Balmaceda; Ronald Fischer; Felipe Ramirez
  10. The Leverage Ratchet Effect By Anat R. Admati; Peter M. DeMarzo; Martin F. Hellwig; Paul Pfleiderer
  11. Bank lending in a cointegrated VAR model By Filippo Maria Pericoli; Roberto Galli; Cecilia Frale; Stefania Pozzuoli
  12. The links between some European financial factors and the BRICS credit default swap spreads. By Avouyi-Dovi, Sanvi; Ano Sujithan, Kuhanathan

  1. By: Patrick Bolton; Xavier Freixas; Leonardo Gambacorta; Paolo Emilio Mistrulli
    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: Christoffer Kok; Mattia Montagna
    Abstract: In this paper, we develop an agent-based multi-layered interbank network model based on a sample of large EU banks. The model allows for taking a more holistic approach to interbank contagion than is standard in the literature. A key finding of the paper is that there are non-negligible non-linearities in the propagation of shocks to individual banks when taking into account that banks are related to each other in various market segments. In a nutshell, the contagion effects when considering the shock propagation simultaneously across multiple layers of interbank networks can be substantially larger than the sum of the contagion-induced losses when considering the network layers individually. In addition, a bank “systemic importance” measure based on the multi-layered network model is developed and is shown to outperform standard network centrality indicators
    Keywords: Financial Contagion, interbank market, Network theory
    JEL: C45 C63 D85 G21
    Date: 2013–09
  3. By: Riccardo De Bonis; Fabio Farabullini; Miria Rocchelli; Alessandra Salvio; Andrea Silvestrini
    Abstract: Building on a new dataset on Italian banks and other financial corporations from 1861 to 2011, the novelty of this paper is to examine the patterns of the main items of bank’s balance sheets, such as deposits, capital and reserves, bonds issued, bonds held in portfolio, and loans for a period of 150 years. The long time behaviour of credit maturity, postal savings, State ownership of banks, and bank interest rates is also studied.
    Keywords: Banks, central bank, loans, deposits, interest rates, postal savings
    JEL: C82 G21 N13 N14 Y1
    Date: 2013–09
  4. By: Paraschiv, Florentina; Qin, Minzi
    Abstract: The current financial crisis brought light to a large banking sector that existed for decades within the “darkness” of the financial system - the shadow banking sector. Shadow bank assets are widely traded in the financial markets and shadow banking activities are intertwined with the daily business of regular banks. This unregulated banking sector has become systematically important. Its failure affected the entire banking system. We present a model based on multivariate extreme value theory, which allows us to measure crashes and liquidity squeezes. Using the stable tail dependence structure, we measure the interdependency between the tail probabilities of the regular banking sector and the shadow banking sector. This allows us to calculate the conditional spillover likelihood between asset returns and liquidity spreads for selected crash levels. The empirical results indicate a fairly strong contagion probability between shadow bank assets and regular bank assets.
    Date: 2013–07
  5. By: Florian Hett (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany); Alexander Schmidt (Goethe University Frankfurt and GSEFM, Germany)
    Abstract: We show that market discipline, defined as the extent to which frm specific risk characteristics are reflected in market prices, eroded during the recent financial crisis in 2008. We design a novel test of changes in market discipline based on the relation between firm specific risk characteristics and debt-to-equity hedge ratios. We find that market discipline already weakened after the rescue of Bear Stearns before disappear- ing almost entirely after the failure of Lehman Brothers. The effect is stronger for investment banks and large financial institutions, while there is no comparable effect for non-financial firms.
    Keywords: Bailout, Implicit Guarantees, Too-Big-To-Fail, Market Discipline
    JEL: G14 G21 G28 H81
    Date: 2013–08–01
  6. By: Filippo Ippolito; Ali K. Ozdagli; Ander Pérez Orive
    Abstract: We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt to total assets. We show that a two standard deviation increase in the bank dependence of a firm makes its stock price about 25% more responsive to monetary policy shocks. We explore the channels through which this effect occurs, and find that the stock prices of bank-dependent firms that borrow from financially weaker banks display a stronger sensitivity to monetary policy shocks. This finding is consistent with the bank lending channel, a theory according to which the strength of bank balance sheets matters for monetary policy transmission. We construct a new database of hedging activities and show that the stock prices of bank-dependent firms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. This finding is consistent with an interest rate pass-through channel that operates via the direct transmission of policy rates to lending rates associated with the widespread use of floating-rates in bank loans and credit line agreements.
    Keywords: bank lending channel, monetary policy transmission, firm financial constraints, bank financial health, floating interest rates
    JEL: G21 G32 E52
    Date: 2013–09
  7. By: Mancini, Loreano; Ranaldo, Angelo; Wrampelmeyer, Jan
    Abstract: The market for repurchase agreements (repos) is an important part of the shadow banking system. Using a novel and comprehensive dataset, we provide the first systematic study of the euro interbank repo market. We document the evolution of repo market activity and identify risk and central bank liquidity provisions as the main state variables. In contrast to repo markets in the United States, we find that the bilateral central counterparty-based segment was resilient during 2006{13, which includes severe crisis periods. An increase in risk significantly increases repo trading volume, but has virtually no effect on repo rates, average maturity, and haircuts. Moreover, volume in the unsecured market is negatively related to repo volume. This suggests that, under certain conditions, banks use the repo market as a means of liquidity hoarding. We identify the distinguishing characteristics that render the euro interbank repo market resilient during the crisis, namely its infrastructure, including anonymous trading via a central counterparty, the exclusive reliance on safe collateral, and the reusability of collateral.
    Keywords: Repo market, secured funding, liquidity hoarding, shadow banking system, financial crisis, unconventional monetary policy
    JEL: G01 G21 G28
    Date: 2013–09
  8. By: Fernando Díaz (Facultad de Economía y Empresa, Universidad Diego Portales); Gabriel Ramírez (Coles College of Business, Kennesaw State University); Kenneth Daniels (Coles College of Business, Kennesaw State University)
    Abstract: We propose a clawback-type security (COCLA) as an alternative source of contingent capital for banks. We develop a equilibrium model that contains several distinctive features not found in the existing literature. A bank owner/manager maximizes her expected utility by choosing the bank’s loans supply and the amount of junior debt and by exercising effort to screen credit quality of borrowers. The manager has the choice to convert and the decision results from the trade off she faces between the private benefits of control and the expected costs of financial distress, thus, getting around the so called “trigger problem”. We show that the clawback conversion rate that maximizes the manager/owner expected utility, the level of her effort and amount of loans is 30%. Our model endogenizes many features of the actual decision problems faced by banks and provides for a security that is socially beneficial as the credit for consumers is increased when compared with the outcomes of simply using straight subordinated or convertible debt. The results of the model are robust and calibration of the model produces bank asset and debt structures that are very close to that of the average top 60 largest banks in the USA.
    Date: 2013–09
  9. By: Felipe Balmaceda (Facultad de Economía y Empresa, Universidad Diego Portales); Ronald Fischer (Departamento de Ingenieria Industrial, Universidad de Chile); Felipe Ramirez (Departamento de Ingenieria Industrial, Universidad de Chile)
    Abstract: This paper shows that the eects of financial liberalization on the credit market of a small and capital constrained economy depend on the market structure of domestic banks prior to liberalization. Specifically, under perfect competition in the domestic credit market prior to liberalization, liberalization leads to lower domestic interest rates, in turn leading to increased credit penetration. However, when the initial market structure is one of imperfect competition, liberalization can lead to the exclusion of less wealthy entrepreneurs from the credit market. This provides a rationale for the mixed empirical evidence concerning the eects of liberalization on access to credit in developing markets. Moreover, the analysis provides new insights into the consequences of foreign lenders’ entry into developing economies.
    Date: 2013–07
  10. By: Anat R. Admati (Graduate School of Business, Stanford University); Peter M. DeMarzo (Graduate School of Business, Stanford University); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods); Paul Pfleiderer (Graduate School of Business, Stanford University)
    Abstract: Shareholder-creditor conflicts can create leverage ratchet effects, resulting in inefficient capital structures. Once debt is in place, shareholders may inefficiently increase leverage but avoid reducing it no matter how beneficial leverage reduction might be to total firm value. We present conditions for an irrelevance result under which shareholders view asset sales, pure recapitalization and asset expansion with new equity as equally undesirable. We then analyze how seniority, asset heterogeneity, and asymmetric information affect shareholders’ choice of leverage-reduction method. Our results are particularly relevant to banking and highlight the benefit and importance of capital regulation to constrain inefficient excessive borrowing.
    Date: 2013–08
  11. By: Filippo Maria Pericoli; Roberto Galli; Cecilia Frale; Stefania Pozzuoli
    Abstract: This paper aims at identifying the link between financial markets and the real sector of the economy. Following the literature on the topic, we select a small set of variables representing the principal financial and real dynamics observed for the Italian economy. As a first result, we find cointegration among the chosen set of variables. Thus we specify and estimate a Vector Error Correction Model which captures both the long-run and the short-term dynamics of the multivariate system. The main innovation of this work lies in investigating the link between lending and growth at a monthly frequency. Moreover, we allow the model to include a structural break due to the latest economic and financial crisis. The model obtained represents an innovative forecasting tool for improving the knowledge, nowcasting and shortterm forecasting of the business cycle by exploiting shocks originating from the lending market that propagate to the real economy.
    Keywords: Bank Lending, Forecast, Cointegrated VAR
    JEL: C53 E47 E51
    Date: 2013–09
  12. By: Avouyi-Dovi, Sanvi; Ano Sujithan, Kuhanathan
    Abstract: Emerging economies and especially the BRICS countries have strong economic ties with the euro area. In addition, the financial crisis in the euro area may have effects on other markets or areas, especially those of the main emerging markets. Credit default swap (CDS) spreads are relevant indicators of credit risks. After identifying a set of fundamental determinants for sovereign CDS spreads, including euro area financial factors and computing Markov switching unit root test, we estimate Markov switching models over the period from January 2002 to August 2012, in order to examine the behaviour of sovereign CDS spreads in the BRICS countries. , i) We detect two different regimes for the BRICS, that finding is backed by conventional robustness checks and economic events; ii) most of the explanatory variables are involved in the determining theses regimes. Thus both financial and real factors have an impact on the relations defining each regime, except for Russia which is only impacted by financial ones. Especially, euro area financial indicators are largely involved in the BRICS sovereign CDS spreads’ dynamics. Besides, the robustness check supports the use of euro area variables as determinants of BRICS sovereign CDS spreads.
    Keywords: Credit default swap; BRICS; emerging markets; euro area financial markets indicators; Markov switching;
    JEL: C13 G12 G15

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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