New Economics Papers
on Banking
Issue of 2013‒10‒25
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Level Effect of Bank Lending Standards on Business Lending By Koen van der Veer; Marco Hoeberichts
  2. Female Access to Credit in France: How Microfinance Institutions Import Disparate Treatment from Banks By Anastasia Cozarenco; Ariane Szafarz
  3. The relations between bank-funding costs, retail rates, and loan volumes : Evidence form Norwegian microdata By Arvid Raknerud; Bjørn Helge Vatne
  4. The Development of Opacity in U.S. Banking By Gary Gorton
  5. Macroprudential Measures, Housing Markets and Monetary Policy By José A Carrasco-Gallego; Margarita Rubio
  6. Selection and hidden bias in cross-border bank acquisitions: Ukraine’s takeover wave By Muzaffarjon Ahunov; Leo Van Hove; Marc Jegers
  7. Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy By Landier, Augustin; Sraer, David; Thesmar, David
  8. Market-Based Bank Capital Regulation By Jeremy Bulow; Paul Klemperer
  9. Credit Unions, Consolidation and Small Business Lending: Evidence from Canada By Morgan, Horatio M.
  10. Bank competition and export diversification By Nakhoda, Aadil
  11. Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare By José A Carrasco-Gallego; Margarita Rubio
  12. Pricing Default Events: Surprise, Exogeneity and Contagion. By Gouriéroux, C.; Monfort, A.; Renne, J-P.
  13. The capital structure of banks and practice of bank restructuring By Dübel, Achim
  14. Housing Market Dynamics and the GFC: The Complex Dynamics of a Credit Shock By Arthur Grimes; Sean Hyland
  15. The Net Stable Funding Ratio and banks’ participation in monetary policy operations: some evidence for the euro area By Antonio Scalia; Sergio Longoni; Tiziana Rosolin
  16. Businesses seized from organized crime groups: their relations with the banking system By Luigi Donato; Anna Saporito; Alessandro Scognamiglio
  17. When Cards and ATM’s are the only choice: A fortnight in Cyprus with no banking system, nor trust By Efthymiou, Leonidas; Michael, Sophia
  18. Do Measures of Financial Constraints Measure Financial Constraints? By Joan Farre-Mensa; Alexander Ljungqvist
  19. Predatory Lending and the Subprime Crisis By Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas D. Evanoff
  20. Banking Deregulation and The Rise in House Price Comovement By Landier, Augustin; Sraer, David; Thesmar, David
  21. Small and Medium Enterprises' Access to Finance: Evidence from Selected Asian Economies By Charles HARVIE; Dionisius NARJOKO; Sothea OUM
  22. Has the Growth of Real GDP in the UK been Overstated because of Mis-Measurement of Banking Output? By Nicholas Oulton

  1. By: Koen van der Veer; Marco Hoeberichts
    Abstract: Do tightenings of bank lending standards permanently reduce bank lending? We construct a measure of a bank’s level of lending standards using micro-data from the sample of banks participating in the Eurosystem Bank Lending Survey in The Netherlands and show that this level measure affects business lending. The level effect is statistically robust and economically relevant; a one point tightening reduces a bank’s quarterly growth rate of business lending by about half a percentage point until bank lending standards are eased. This level effect of bank lending standards helps to explain low bank lending growth after a period of prolonged tightening as well as high bank lending growth in a period of prolonged easing. As such, the analysis provides another potential indicator for macroprudential policy.
    Keywords: bank lending standards; bank lending survey; bank lending; level effect; macroprudential policy
    JEL: E44 E51 G01 G21
    Date: 2013–10
  2. By: Anastasia Cozarenco (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Ariane Szafarz (Université Libre de Bruxelles (ULB), SBS-EM, Centre Emile Bernheim, and Centre for European Research in Microfinance (CERMi))
    Abstract: This paper compares the loans granted to male and female entrepreneurs by a French microfinance institution (MFI). The sample period is split in two: before and after the MFI implemented the French EUR 10,000 regulatory loan-size ceiling. In the first period, the MFI does not co-finance projects with mainstream banks and loan size is gender-insensitive. In the second period, the MFI does co-finance above-ceiling projects with mainstream banks, and we observe a gender gap in loan size. The results suggest that co-financing leads the originally gender-neutral MFI to import disparate treatment from mainstream banks.
    Keywords: microcredit, loan-size ceiling regulation, commercial bank loan, gender discrimination, glass ceiling, France
    JEL: G21 J16 M13 L51 G28 O52 I38
    Date: 2013–10
  3. By: Arvid Raknerud; Bjørn Helge Vatne (Statistics Norway)
    Abstract: In this paper, we examine two questions: i) how changes in the funding costs of banks affect retail loan rates and ii) how changes in relative loan rates between banks affect their market shares. To do so, we estimate a simultaneous system of equations model using panel data for six Norwegian bank groups. The data set consists of quarterly data for the period 2002Q1-2011Q3 and includes information on loan volumes and retail (interest) rates for loans to firms and households. The cost of market funding is represented in our analysis by the three-month money market rate and a proxy for market risk; the credit spread on unsecured senior bonds issued by Norwegian banks. Our estimates suggest that a 10 basis points increase in the market rate leads to an approximately 8 basis points increase in retail loan rates. We also find that credit demand from households is more elastic with regard to the loan rate than credit demand from businesses.
    Keywords: Credit demand; Pass-through; Funding costs; Monopolistic competition; Panel data; Dynamic factor model
    JEL: C33 E27 E43
    Date: 2013–05
  4. By: Gary Gorton
    Abstract: An examination of U.S. banking history shows that economically efficient private bank money requires that information-revealing securities markets for bank liabilities be closed. That is, banks are optimally opaque, which is why they are regulated and examined. I show this by examining the transition from private bank notes, the predominant form of money before the U.S. Civil War, to demand deposits and show that markets endogenous closed. The opacity of bank money in the recent financial crisis is also briefly discussed.
    JEL: E32 E41 E42 E44 G01 G21
    Date: 2013–10
  5. By: José A Carrasco-Gallego; Margarita Rubio
    Abstract: The recent financial crisis has raised the discussion among policy makers and researchers on the need of macroprudential policies to avoid systemic risks in financial markets. However, these new measures need to be combined with the traditional ones, namely monetary policy. The aim of this paper is to study how the interaction of macroprudential and monetary policies affect the economy. We take as a baseline a dynamic stochastic general equilibrium (DSGE) model which features a housing market in order to evaluate the performance of a rule on the loan-to-value ratio (LTV) interacting with the traditional monetary policy conducted by central banks. We find that, introducing the macroprudential rule mitigates the effects of booms on the economy by restricting credit. From a normative perspective, results show that the combination of monetary policy and the macroprudential rule is unambiguously welfare enhancing, especially when monetary policy does not respond to output and house prices and only to inflation.
    Keywords: Macroprudential, monetary policy, collateral constraint, credit,loan-to-value
  6. By: Muzaffarjon Ahunov (EBRD); Leo Van Hove (Free University Brussels (VUB)); Marc Jegers (Free University Brussels (VUB))
    Abstract: We investigate the impact of cross-border takeovers on the performance of target banks in Ukraine. We combine propensity score matching and a difference-in-difference methodology, checking for temporary unobservables. Acquirers mainly targeted large less-capitalised banks with average efficiency and profitability. After takeover, the cost efficiency of the acquired banks improved thanks to a decreased reliance on deposits but this did not result in higher profitability or higher loan market shares. Overall, our findings only tally piecemeal with the existing multi-country studies for transition economies.
    Keywords: cross-border takeovers, bank performance, selection bias, hidden bias
    JEL: G15 G21 G34 F36
    Date: 2013–10
  7. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile.
    Date: 2013–02
  8. By: Jeremy Bulow (Standford University, USA); Paul Klemperer (Nuffield College, University of Oxford, UK)
    Abstract: Today’s regulatory rules, especially the easily-manipulated measures of regulatory capital, have led to costly bank failures. We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). One key innovation is “ERNs” (equity recourse notes--superficially similar to, but importantly distinct from, “cocos”) which gradually "bail in" equity when needed. Importantly, although our system uses market information, it does not rely on markets being “right”.
    Date: 2013–09–15
  9. By: Morgan, Horatio M.
    Abstract: This study examines how consolidation activity in the credit union system may impact small business lending. Drawing on Canadian provincial-level data over the period 1992-2009, it provides systematic evidence which suggests that the size of credit unions has a statistically significant negative effect on the rate of new business formation. While the magnitude of this negative effect was found to be very small when the degree of competition was low, it grew as competition intensified in the credit union system. Meanwhile, the size of the federally chartered banking sector was found to have a statistically significant, but economically insignificant negative effect on the rate of new business formation. This result was not affected by consolidation activity in the credit union system. These findings suggest that it is the intensification of competition that most acutely undermines small business lending, and by extension, new business formation in a concentrated credit union system.
    Keywords: Competition, Consolidation, Credit unions, New business formation, Relationship lending, Small business lending
    JEL: C33 G18 G21 L16 L26 M13
    Date: 2013–10–18
  10. By: Nakhoda, Aadil
    Abstract: The role of the banking industry in export promotion cannot be over-emphasized as banks provide the necessary financial support for borrowers in various industries to undertake investment activities. The banking industry consists of larger and smaller banks and the former are likely to be the preferred lenders as they provide loans for investment activities at a lower interest rate but may only finance the good borrowers within selected industries that are considered profitable. The banks require an appropriate market structure based on the level of competition in order to finance the maximum number of industries and in turn promote exporting activities across several industries within an economy. The influence of the market structure on export diversification is determined by the level of financial development and the prevailing macroeconomic conditions within an economy. With the help of an industry-level dataset on bilateral trade flows between various countries, I consider OLS and IV regressions to determine whether the Lerner Index of the banking industry, an indicator on the degree of competition, influences the number of industries exported. In order to consider the impact of competition in the banking industry on export diversification at different levels of financial development of the exporting countries, I split the countries into OECD member countries, non OECD countries and include a pooled set of countries. As macroeconomic conditions are likely to influence the market structure of the banking industry, I further split the samples of countries on the basis of the median levels of lending and the deposit rate spread, foreign bank participation rate and the ratio of government credit to private credit provided by the domestic banks for the respective groups of countries based on their OECD membership status and find varying results under different macroeconomic conditions and levels of financial development. In the recent years, several studies have determined the role of financial markets on exporting activities to be significant at the country-level as well as at the firm-level. To the best of my knowledge, this is one of the first paper to study the influence of competition within the banking industry on export diversification at the industry-level.
    Keywords: International trade; export diversification; financial markets; banking industry; financial intermediation; bank competition; foreign banks; government debt; lending and deposit rate spread; transaction-based and relationship-based lending;
    JEL: E52 E58 F14 G21 G28 L25 L60
    Date: 2013–10–21
  11. By: José A Carrasco-Gallego; Margarita Rubio
    Abstract: In this paper, we analyse the implications of macroprudential and monetary policies for business cycles, welfare, and .nancial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule on the loan-to-value ratio (LTV), which responds to output and house price deviations, interacts with a traditional Taylor rule for monetary policy. From a positive perspective, introducing a macroprudential tool mitigates the effects of booms in the economy by restricting credit. However, monetary and macroprudential policies may enter in conflict when shocks come from the supply-side of the economy. From a normative point of view, results show that the introduction of this macroprudential measure is welfare improving. Then, we calculate the combination of policy parameters that maximizes welfare and find that the optimal LTV rule should respond relatively more aggressively to house prices than to output deviations. Finally, we study the efficiency of the policy mix. We propose a tool that includes not only the variability of output and inflation but also the variability of borrowing, to capture the effects of policies on financial stability: a three-dimensional policy frontier (3DPF). We find that both policies acting together unambiguously improve the stability of the system.
    Keywords: Macroprudential, monetary policy, welfare, financial stability, three-dimensional policy frontier, loan-to-value, Taylor curve
  12. By: Gouriéroux, C.; Monfort, A.; Renne, J-P.
    Abstract: In order to derive closed-form expressions of the prices of credit derivatives, standard credit-risk models typically price the default intensities, but not the default events themselves. The default indicator is replaced by an appropriate prediction and the prediction error, that is the default-event surprise, is neglected. Our paper develops an approach to get closed-form expressions for the prices of credit derivatives written on multiple names without neglecting default-event surprises. This approach differs from the standard one, since the default counts necessarily cause the factor process under the risk-neutral probability, even if this is not the case under the historical probability. This implies that the standard exponential pricing formula of default does not apply. Using U.S. bond data, we show that allowing for the pricing of default events has important implications in terms of both data-fitting and model-implied physical probabilities of default. In particular, it may provide a solution to the credit spread puzzle. Besides, we show how our approach can be used to account for the propagation of defaults on the prices of credit derivatives.
    Keywords: Credit Derivative, Default Event, Default Intensity, Frailty, Contagion, Credit Spread Puzzle.
    JEL: E43 E47 G12
    Date: 2013
  13. By: Dübel, Achim
    Abstract: This study presents an empirical analysis of capital and liability management in eight cases of bank restructurings and resolutions from eight different European countries. It can be read as a companion piece to an earlier study by the author covering the specific bank restructuring programs of Greece, Spain and Cyprus during 2012/13. The study portrays for each case the timelines between the initial credit event and the (last) restructuring. It proceeds to discuss the capital and liability management activity before restructuring and the restructuring itself, launches an attempt to calibrate the extent of creditor participation as well as expected loss by government, and engages in a counterfactual discussion of what could have been a least cost restructuring approach. Four of the eight cases are resolutions, i.e. the original bank is unwound (Anglo Irish Bank, Amagerbanken, Dexia, Laiki), while the four other banks have de-facto or de-jure become nationalized and are awaiting re-privatization after the restructuring (Deutsche Pfandbriefbank/Hypo Real Estate, Bankia, SNS Reaal, Alpha Bank). The case selection follows considerations of their model character for the European bank restructuring and resolution policy discussion while straddling both the U.S. (2007-2010) and the European (2010- ) legs of the financial crisis, which each saw very different policy responses. [...] --
    Date: 2013
  14. By: Arthur Grimes (Motu Economic and Public Policy Research and the University of Auckland); Sean Hyland (Motu Economic and Public Policy Research)
    Abstract: We analyse the multiple channels of influence that GFC-induced credit restrictions had on New Zealand’s subnational housing markets. Our model isolates dynamics caused by impacts on the supply and the demand sides of the market. These dynamics are compared to those caused by a migration shock, a more common form of housing shock in New Zealand. We focus on the impacts on two outcome variables: house prices and housing supply; both shocks cause substantial cyclical adjustments in each variable. Similar cyclical dynamics could complicate the conduct of macro-prudential policies which are designed to affect bank credit allocation.
    Keywords: House prices, housing supply, credit restrictions, GFC, migration
    JEL: E51 R21 R31
    Date: 2013–10
  15. By: Antonio Scalia (Bank of Italy); Sergio Longoni (Bank of Italy); Tiziana Rosolin (Bank of Italy)
    Abstract: Based on a review of the analytical underpinnings of the effects of the NSFR on banks’ choices, this paper attempts to relate banks’ strategies to developments in the value of the ratio in the euro area. In spite of a not-so-near implementation date, the evidence is that the NSFR already matters for banks’ choices, and it might be more relevant as a decision variable than alternative leverage indicators. As part of a convergence process towards the 100 per cent threshold, we estimate that the ECB’s 3-year LTROs have raised the available stable funding by €429 billion as of June 2012 for the sample banks with a shortfall and that the NSFR may affect loans to the economy. In view of the phasing-in of the Basel III liquidity standards, the evidence suggests that, when evaluating non-standard monetary policy measures, central banks should also take into account their impact on the fulfilment of the NSFR and the possible cliff effects related to their expiration.
    Keywords: Basel III, liquidity regulation, central bank operations
    JEL: E5 G2
    Date: 2013–09
  16. By: Luigi Donato (Bank of Italy); Anna Saporito (Bank of Italy); Alessandro Scognamiglio (Bank of Italy)
    Abstract: This paper analyzes the relations between businesses seized from organized crime and the banking system. The first part of the paper examines legislative developments regarding seized and confiscated assets and highlights the persistence of problem areas despite the efforts to create a systematic framework for measures to combat crime on the economic plane. The analysis of firms’ credit and operational profiles in the second part of the paper finds no evidence that banks, following the confiscation order, impose more onerous terms and conditions with respect to other companies in the same sectors, located in the same geographical areas and having similar operational profiles. This finding appears to be linked to the observation that the deterioration of the main indicators dates back to the years before the confiscation order, presumably in part following preventive action by the banks, prompted as a precaution to reduce their exposure at the first hint of a firm’s involvement in anti-mafia investigations. The paper concludes with implications for policy, taking into consideration the crucial role of expectations, the need to restore firms to healthy conditions through timely planning and the importance of economically efficient operational choices.
    Keywords: requisition, organized crime, bank-firm relationships
    JEL: K42 G32
    Date: 2013–09
  17. By: Efthymiou, Leonidas; Michael, Sophia
    Abstract: The aim of this article is to offer some insights into the remarkable happenings that occurred in Cyprus during a two-week period (15 March – 28 March 2013) when the country was left with no banking system, subsisting solely on ATMs and cards. At the same time, we aim to provide some new perceptions into the role of ATMs, POSs and credit cards in critical economic situations where a bank run, bank insolvency, or bail-in are likely to happen. We adopt a ‘procedural approach’ and use the sequence of events method towards building up a ‘timeline analysis’. Our discussion suggests that for a number of reasons, the Cypriot bail-in case has breached the confidence of unsecured and secured depositors and investors on a global scale. Also, we suggest that during the preparations of the supposedly unexpected bail-in, which Cypriot MPs firstly rejected and then accepted the Eurogroup and IMF proposal, ATMs, POSs and credit cards have played a pre-arranged role, securing a controlled circulation of money and transactions with restrictions.
    Keywords: ATMs, Levy, bank-run, informal economy, cashless society, Cyprus
    JEL: N2 O33
    Date: 2013–06
  18. By: Joan Farre-Mensa; Alexander Ljungqvist
    Abstract: Financial constraints are not directly observable, so empirical research relies on indirect measures. We evaluate how well five popular measures (paying dividends, having a credit rating, and the Kaplan-Zingales, Whited-Wu, and Hadlock-Pierce indices) identify firms that are financially constrained, using three novel tests: an exogenous increase in a firm’s demand for credit; exogenous variation in the supply of bank loans; and the tendency for firms to pay out the proceeds of equity issues to their shareholders (“equity recycling”). We find that none of the five measures identifies firms that behave as if they were constrained: public firms classified as constrained have no trouble raising debt when their demand for debt increases, are unaffected by changes in the supply of bank loans, and engage in equity recycling. The point estimates are little different for supposedly constrained and unconstrained firms, even though we find important differences in their characteristics and sources of financing. On the other hand, privately held firms (particularly small ones) and public firms with below investment-grade ratings appear to be financially constrained.
    JEL: G31 G32 G33
    Date: 2013–10
  19. By: Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas D. Evanoff
    Abstract: We measure the effect of an anti-predatory pilot program (Chicago, 2006) on mortgage default rates to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, risky borrowers and/or risky mortgage contracts triggered review sessions by housing counselors who shared their findings with the state regulator. The pilot cut market activity in half, largely through the exit of lenders specializing in risky loans and through decline in the share of subprime borrowers. Our results suggest that predatory lending practices contributed to high mortgage default rates among subprime borrowers, raising them by about a third.
    JEL: D14 D18
    Date: 2013–10
  20. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: This paper documents a steady increase in the average correlation of house price growth across US states over the 1976-2006 period and shows that this phenomenon can be explained in large part by the geographic integration of the banking market over this period. We theoretically derive an appropriate measure of banking integration across state pairs and document that the cross section of state pair correlations is strongly related to this measure of nancial integration. We then use bilateral cross state banking deregulations to instrument banking integration of a state pair. Using our IV estimates, we nd that nancial integration of the US banking market explains about 25% of the rise of the average home price correlation over the period.
    Date: 2013–03
  21. By: Charles HARVIE (School of Economics, Facutly of Commerce, University of Wollongong); Dionisius NARJOKO (Economic Research Institute for ASEAN and East Asia (ERIA)); Sothea OUM (Economic Research Institute for ASEAN and East Asia (ERIA))
    Abstract: This paper sheds light on the issue of SME financing in selected Asian economies using a unique sample survey. It elaborates on (i) the key sources of external finance for SMEs (ii) the extent to which, if at all, the SME sector as identified by firm size, country and in aggregate for a sample of countries in Asia is systematically disadvantaged, or rationed, with respect to access to external financing, (iii) the key factors contributing to the extent of this rationing, focusing upon firm characteristics, owner characteristics and firm performance, and (iv) the importance of financial rationing for SME performance. Our empirical results confirm the salient characteristics of successful SMEs with regard to accessing external funding, their ability to access multiple financial institutions and types of finance, and identifying potential credit rationing or risk premiums imposed by financial institutions on SMEs. The results also reveal how risk premiums affect the innovation capability and exporting activity of SMEs.
    Keywords: small and medium enterprises (SMEs), external financing, rationing, firm characteristics, Asia.
    JEL: G32 L22
    Date: 2013–10
  22. By: Nicholas Oulton
    Abstract: If official figures overstated the growth of banking output in the UK in the recent boom, does this mean that GDP growth was overstated too? The answer is no. It is truer to say that if banking output was overstated then the output of some other industry or industries must have been understated, leaving GDP relatively unaffected. The reason is that the Office for National Statistics measures the real growth of GDP primarily from the expenditure side. And from the expenditure side most of the problematic part of banking output drops out since it constitutes intermediate consumption not final expenditure. Consequently, the effect of any mis-measurement of banking output on GDP growth in the boom of 2000-2007 is likely to have been small: GDP growth might have been overstated by about 0.1% p.a.
    Keywords: GDP, national income accounting, banking, financial services, mis-measurement
    JEL: E01 G21
    Date: 2013–01

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