New Economics Papers
on Banking
Issue of 2013‒10‒11
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Balance sheet strength and bank lending during the global financial crisis By Kapan, Tümer; Minoiu, Camelia
  2. Currency Union with and without Banking Union. By Bignon, V.; Breton, R.; Rojas Breu, M.
  3. Contagion in the interbank network: An epidemiological approach By Toivanen, Mervi
  4. Universal banking, competition and risk in a macro model By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  5. Systemic Risk Score: A Suggestion By Christophe Hurlin; Christophe Pérignon
  6. Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market By Filippo Ippolito; Ali K. Ozdagli; Ander Perez
  7. The government’s role in government-owned banks By Shen, Chung-Hua; Hasan, Iftekhar; Lin , Chih-Yung
  8. Governing the banking industry: A severe case of supervisory failure By Martín Lagos
  9. Equity returns in the banking sector in the wake of the great recession and the European sovereign debt crisis By Chan-Lau, Jorge A.; Liu, Estelle X.; Schmittmann, Jochen M.
  10. Cascades in real interbank markets By Fariba Karimi; Matthias Raddant
  11. A new index of the business environment for microfinance By Cull, Robert; Navajas, Sergio; Nishida, Ippei; Zeiler, Renate
  12. Credit and Liquidity in Interbank Rates: a Quadratic Approach. By Dubecq, S.; Monfort, A.; Renne, J-P.; Roussellet, G.
  13. Net interoffice accounts of global banks: the role of domestic funding. By D’Avino, C.
  14. An Asian Perspective on Global Financial Reforms By Peter J. Morgan; Victor Pontines
  15. Sovereigns versus Banks: Credit, Crises, and Consequences By Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
  16. How does corporate governance affect bank capitalization strategies ? By Anginer, Deniz; Demirguc-Kunt, Asli; Huizinga, Harry; Ma, Kebin
  17. From pawn shops to banks : the impact of formal credit on informal households By Ruiz, Claudia
  18. Financial sector-output dynamics in the euro area: Non-linearities reconsidered By Schleer, Frauke; Semmler, Willi
  19. Banking Union: integrating components and complementary measures By Santiago Fernandez de Lis; Ana Rubio; Jorge Sicilia
  20. China's Capital Controls - Through the Prism of Covered Interest Differentials By Yin-Wong Cheung; Risto Herrala
  21. Estimating Contract Indexation in a Financial Accelerator Model By Charles T. Carlstrom; Last: T. Carlstrom; Timothy S. Fuerst; Last: S. Fuerst; Alberto Ortiz; Last: Ortiz; Matthias Paustian; Last: Paustian
  22. The European Central Bank in the age of banking union By Zsolt Darvas; Silvia Merler

  1. By: Kapan, Tümer; Minoiu, Camelia
    Abstract: We examine the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy. Using data from the syndicated loan market, we exploit variation in banks' reliance on wholesale funding and their structural liquidity positions in 2007Q2 to estimate the impact of exposure to market freezes during 2007-08 on the supply of bank credit. We find that banks with strong balance sheets were better able to maintain lending during the crisis. In particular, banks that were ex ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks. However, higher levels of better-quality capital mitigated this effect. Our results suggest that strong bank balance sheets are key for the recovery of credit following crises, and provide support for regulatory proposals under the Basel III framework. --
    Keywords: bank lending channel,wholesale funding,capital,net stable funding ratio,Basel III
    JEL: G21 G18 G01
    Date: 2013
  2. By: Bignon, V.; Breton, R.; Rojas Breu, M.
    Abstract: This paper analyzes a two-country model of currency, banks and endogenous default to study whether impediments to credit market integration across jurisdictions impact the desirability of a currency union. We show that when those impediments induce a higher cost for banks to manage cross-border credit compared to domestic credit, welfare may not be maximal under a regime of currency union. But a banking union that would suppress hurdles to banking integration restores the optimality of that currency arrangement. The empirical and policy implications in terms of banking union are discussed.
    Keywords: banks, currency union, credit, default, limited commitment.
    JEL: E42 E50 F3 G21
    Date: 2013
  3. By: Toivanen, Mervi (Financial Markets and Statistics, Bank of Finland)
    Abstract: This paper analyses the importance of individual bank-specific factors on financial stability. First, we use a novel method to model the spreading of the contagion in the interbank network by implementing an epidemiologic model. Actual data on European banks is exploited with simulated scale-free networks. The average contagion affected 70% and 40% of European banks’ total assets in 2007 and in 2010, respectively. Country-level results suggest that French, British, German and Spanish banks are the most contagious ones, whereas banks from Ireland, Greece and Portugal induce only limited negative effects. Secondly, cross-sectional panel estimations are performed to disentangle the leading indicators influencing the level of contagion. Bank clustering, large incoming interbank loans and bank reputation are more prominent explanatory variables than the size or leverage. Finally, central banks’ interventions reduce contagion only slightly.
    Keywords: contagion; banks; Europe; interbank; epidemiology; panel regression
    JEL: C15 G01 G21
    Date: 2013–09–03
  4. By: Tatiana Damjanovic (Department of Economics, University of Exeter); Vladislav Damjanovic (Department of Economics, University of Exeter); Charles Nolan (University of Glasgow)
    Abstract: A macroeconomic model is developed to analyse integration of retail and investment banks with and without deposit insurance. Benefits flow from elimination of double marginalization and insurance premia which retail banks otherwise charge investment banks. Deposit insurance increases average output, whether banks are universal or separated, and can be welfare improving as it counters monopoly distortion. However, when unfavourable shocks hit the economy, the size of government bailout is larger with integrated than with separated banks. The welfare assessment of the structure of banks depends on the kinds of shock hitting the economy, the degree of competitiveness of the banking sectors as well as on the efficiency of government intervention (the excess burden of deposit insurance). Scenarios are sketched in which different banking structures are desirable.
    Keywords: Financial intermediation in DSGE models, separating commercial and investment banking, competition and risks, systematic and idiosyncratic risks, bailouts, deposit insurance and economic wedges.
    JEL: E13 E44 G11 G24 G28
    Date: 2013
  5. By: Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Pérignon (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: We identify a potential bias in the methodology disclosed in July 2013 by the Basel Committee on Banking Supervision (BCBS) for identifying systemically important financial banks. Contrary to the original objective, the relative importance of the five categories of risk importance (size, cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure, and complexity) may not be equal and the resulting systemic risk scores are mechanically dominated by the most volatile categories. In practice, this bias proved to be serious enough that the substitutability category had to be capped by the BCBS. We show that the bias can be removed by simply standardizing each input prior to computing the systemic risk scores.
    Keywords: Systemic risk ; score ; G-SIFIs
    Date: 2013–09–27
  6. By: Filippo Ippolito; Ali K. Ozdagli; Ander Perez
    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: Shen, Chung-Hua (National Taiwan University and Southwest Chiao Tung University); Hasan, Iftekhar (Fordham University and Bank of Finland); Lin , Chih-Yung (National Taichung University of Science and Technology)
    Abstract: In this study, we reinvestigate the question of whether government banks are inferior to private banks. We use cross country data from 1993 to 2007 to trace the different types of government banks. These types comprise banks that acquire distressed banks, normal banks, or no banks at all. Contrary to common belief, the evidence shows that unless government banks are required to purchase a distressed bank because of political factors (the government’s role), their performances are at par with that of private banks. This fact particularly holds true in countries with poor records on political rights and governance.
    Keywords: government banks; political factor; government role; merger; distressed bank; institutional factor
    JEL: C23 G21 G28 G34
    Date: 2013–08–16
  8. By: Martín Lagos
    Abstract: After summarizing the birth and basic notions of credit, money and banking, sections 1 to 4 review the extraordinary potential, but also the substantial core risks of fractional reserve banking. The appearance of central banks, fiduciary monies, prudential regulation and supervision, as well as technological change, had huge impact on banking, but its basic business model remained the same old, risky one. Sections 5 and 6 describe how the contagion risk proper of the opaqueness and informational asymmetries of commercial banking plus the external diseconomies associated to systemic crises have justified the growth of thick safety nets, guarantees and government involvement in critical situations. These realities require not only top-level technical expertise in the supervisory bodies, but also outstanding moral integrity and political independence within their heads. Sections 7 and 8 pretend to summarize the key factors surrounding the subprime mortgage lending bubble and the supervisory failure leading to the worst economic crisis in seventy years.
    Date: 2013–09
  9. By: Chan-Lau, Jorge A.; Liu, Estelle X.; Schmittmann, Jochen M.
    Abstract: This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk and to a lesser extent, by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, better capitalized and less leveraged banks have outperformed their peers, a finding that supports policymakers' efforts to strengthen bank capitalization. --
    Keywords: banks,equity returns,financial crisis,sovereign risk,sovereign debt crisis,economic growth,regulatory capital,panel data econometrics
    JEL: G01 G14 G21
    Date: 2013
  10. By: Fariba Karimi; Matthias Raddant
    Abstract: We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the ability to limit default risk by spreading the lending to many counterparts decreased with the financial crisis. To evaluate the influence of the network structure on market stability, we compare the simulated cascades from the empirical network with results from different randomized network models. The results show that the empirical network has non-random features, which cannot be captured by rewired networks. The analysis also reveals that simulations assuming homogeneity for size of banks and loan contracts dramatically overestimates the fragility of the interbank market.
    Date: 2013–10
  11. By: Cull, Robert; Navajas, Sergio; Nishida, Ippei; Zeiler, Renate
    Abstract: This paper describes a new index of the quality of the business environment for microfinance institutions (the Global Microscope on the Microfinance Business Environment). Regressions are used to validate the index by linking it and its subcomponents to microfinance outcomes. The main findings are that the components of the index related to the supporting institutional framework are strongly linked to measures of microfinance penetration (such as microfinance borrowers as a share of total population). Components related to the framework for regulation and supervision are more strongly linked to outcomes at the microfinance institution level, including loan portfolio quality, financial self-sufficiency, average loan size, and the share of lending to women. Many, but not all, of these relationships are robust to using instrumental variables estimation in which a country's general stringency with respect to financial regulation is used as an instrument for the index and its components.
    Keywords: Debt Markets,Banks&Banking Reform,Environmental Economics&Policies,Bankruptcy and Resolution of Financial Distress,Economic Theory&Research
    Date: 2013–09–01
  12. By: Dubecq, S.; Monfort, A.; Renne, J-P.; Roussellet, G.
    Abstract: We propose a quadratic term-structure model of the EURIBOR-OIS spreads. Contrary to OIS, EURIBOR rates incorporate credit and liquidity risks resulting in compensations for (a) facing default risk of debtors, and (b) possible unexpected funding needs on the lender’s side. Our approach allows us to decompose the whole term structure of spreads into credit- and liquidity-related parts and into an expectation part and risk premiums. Our results shed new light on the effects of unconventional monetary policy carried out in the Eurosystem. In particular, our findings suggest that most of the recent easing in the euro interbank market is liquidity-related.
    Keywords: Quadratic term-structure model, liquidity risk, credit risk, interbank market, unconventional monetary policy.
    JEL: E43 E44 G12 G21
    Date: 2013
  13. By: D’Avino, C.
    Abstract: Using US banks' balance sheet data, this paper examines the responsiveness of net interoffice accounts, that is, the net liabilities of parent offices due to their foreign-related offices, to variations in different types of domestic funding. Furthermore, it investigates whether the relationship between net interoffice accounts and domestic policy-steered rates depends on cross-sectional differences in the funding structure of global banks. Estimation results suggest that domestic interbank and repo borrowings are important drivers of net interoffice accounts, the latter being significant during the crisis period. A negative relationship between policy rates and net interoffice accounts is observed only for those global banks with a relatively higher share of repo borrowings.
    Keywords: US global banks, net interoffice accounts, funding.
    JEL: G21 F34 E58
    Date: 2013
  14. By: Peter J. Morgan (Asian Development Bank Institute (ADBI)); Victor Pontines
    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. Part one reviews the lessons of the global financial crisis (GFC) of 2007–09 and their relevance for Asian economies. Part two describes the major regulatory reforms that have been announced and possible concerns about their impacts on emerging economies. Part three reviews the literature aimed at quantifying the impacts of Basel III capital adequacy rules. Part four develops our methodology and analysis of the quantitative impact of Basel III capital adequacy rules on a panel of Southeast Asian financial institutions with emphasis on the effect on economic growth. Finally, the study concludes with a discussion on the policy implications of the results obtained from the previous section for Asian financial sectors and economies. Overall, we 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: Financial Reform, global financial crisis, Basel III, regulatory reform, Capital Adequacy Ratio, Asian economies, Southeast Asian, financaial institutions
    JEL: E17 G01 G18 G21
    Date: 2013–08
  15. By: Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
    Abstract: Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2013–10
  16. By: Anginer, Deniz; Demirguc-Kunt, Asli; Huizinga, Harry; Ma, Kebin
    Abstract: This paper examines how corporate governance and executive compensation affected bank capitalization strategies for an international sample of banks in 2003-2011."Good"corporate governance, which favors shareholder interests, is found to give rise to lower bank capitalization. Boards of intermediate size, separation of the chief executive officer and chairman roles, and an absence of anti-takeover provisions, in particular, lead to low bank capitalization. However, executive options and stock wealth invested in the bank are associated with better capitalization except just before the crisis in 2006. In that year, stock options wealth was associated with lower capitalization, which suggests that potential gains from taking on more bank risk outweighed the prospect of additional loss. Banks'tendencies to continue payouts to shareholders after experiencing negative income shocks are shown to reflect executive risk-taking incentives.
    Keywords: Banks&Banking Reform,Debt Markets,Economic Theory&Research,Investment and Investment Climate,Corporate Law
    Date: 2013–10–01
  17. By: Ruiz, Claudia
    Abstract: This paper examines the effects of expanding access to credit on the decisions and welfare of households. It focuses on the entry of Banco Azteca, the first bank in Mexico targeting households from the informal sector. Panel data suggest that informal households in municipalities with Banco Azteca branches experienced several changes in their saving, credit and consumption patterns. In order to estimate the impact of Azteca's entry, the paper develops a dynamic model of household choices in which the bank is endogenously selecting the municipalities for branch openings. The analysis finds that in municipalities in which the bank entered, households were better able to smooth their consumption and accumulate more durable goods even though the overall proportion of households that save went down by 6.6 percent. These results suggest that the use of savings as a buffer on income fluctuations declines once formal credit is available. What is more, these effects vary across households. Among informal households, those who never receive formal job offers have the highest decline in saving rates. The model is also used to evaluate a legislation to cap interest rates levied by formal credit institutions. Simulations suggest that if the Mexican government were to cap the interest rate of Azteca at the rate for traditional banks, Azteca would stop operating in the poorest and least populated municipalities.
    Keywords: Access to Finance,Banks&Banking Reform,Small Area Estimation Poverty Mapping,Economic Theory&Research,Debt Markets
    Date: 2013–10–01
  18. By: Schleer, Frauke; Semmler, Willi
    Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for euro area countries. Our study employs newly constructed financial condition indices that incorporate extensively banking variables. We apply a nonlinear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the financial sector-output linkages. The VSTAR model appears appropriate since it allows for smooth regime changes and asymmetric dynamics. We find that regime-switching takes place rather smoothly which dampens the negative output response after a shock in the financial sector in the selected euro area countries. Moreover, linearity cannot be rejected for all countries over some extensive time period questioning non-linearities in the financial sector-output nexus as unambiguous feature. In particular, we show that the negative effect of financial stress on output typically observed is not always present. This holds specifically for the time before the Lehman collapse, even if this is a model-defined high stress regime. After the collapse, we observe strong amplification mechanisms. This suggests that events leading to a strong economic breakdown are rare but large events and related to financial cycles which exhibit low frequency. --
    Keywords: Vector STAR,financial stress,financial cycle,real economy,regime-switching,euro area
    JEL: E2 E44 G01
    Date: 2013
  19. By: Santiago Fernandez de Lis; Ana Rubio; Jorge Sicilia
    Abstract: The crisis has led to increased financial fragmentation and revealed the link between sovereign and national banking risks, whose persistence over time would be incompatible with the euro. The solution to these problems must be the banking union, which should be constructed at the same time as the current crisis is being resolved. The process will be eventually complemented by the creation of cross-border banks. The process of the banking union does not have an optimal design, it will be long and will generate tensions during the transition period, but it is politically feasible. In the end, we will have a Europe that is much more integrated from the monetary, banking, fiscal and political points of view.
    Keywords: banking union, Europe, supervision, fragmentation
    JEL: F33 F34 F36 G18 G21
    Date: 2013–08
  20. By: Yin-Wong Cheung (City University of Hong Kong and Hong Kong Institute for Monetary Research); Risto Herrala (Bank of Finland)
    Abstract: We study the renminbi (RMB) covered interest differential - an indicator of the effectiveness of capital controls. It is found that the differential is not shrinking over time and, in fact, appears larger after the global financial crisis than before. That is, capital controls in China are still substantial and effective. In addition to exchange rate changes and volatilities, the RMB covered interest differential is affected by credit market tightness indicators. The marginal explanatory power of these macroeconomic factors, however, is small relative to the autoregressive component and the dummy variables that capture changes in China's policy.
    Keywords: NDF Implied RMB Interest Rate, Capital Controls, Asymmetric Response, Macro Determinants, Credit Market Tightness
    JEL: E44 F31 F32
    Date: 2013–09
  21. By: Charles T. Carlstrom; Last: T. Carlstrom (Federal Reserve Bank of Cleveland); Timothy S. Fuerst; Last: S. Fuerst (University of Notre Dame; Federal Reserve Bank of Cleveland); Alberto Ortiz; Last: Ortiz (Centro de Estudios Monetarios Latinoamericanos; EGADE Business School); Matthias Paustian; Last: Paustian (Bank of England)
    Abstract: This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principle conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks.
    Keywords: Agency costs; financial accelerator; business cycles.
    JEL: E32 E44
    Date: 2013–06
  22. By: Zsolt Darvas; Silvia Merler
    Abstract: During the crisis the European Central Bankâ??s roles have been greatly extended beyond its price stability mandate. In addition to the primary objective of price stability and the secondary objective of supporting EU economic policies, we identify ten new tasks related to monetary policy and financial stability. We argue that there are three main constraints on monetary policy: fiscal dominance, financial repercussions and regional divergences. By assessing the ECBâ??s tasks in light of these constraints, we highlight a number of synergies between these tasks and the ECBâ??s primary mandate of price stability. But we highlight major conflicts of interest related to the ECBâ??s participation in financial assistance programmes. We also underline that the ECBâ??s government bond purchasing programmes have introduced the concept of â??monetary policy under conditionalityâ??, which involves major dilemmas. A solution would be a major change towards a US-style system, in which state public debts are small, there are no federal bail-outs for states, the central bank does not purchase state debt and banks do not hold state debt. Such a change is unrealistic in the foreseeable future.
    Date: 2013–10

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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