New Economics Papers
on Banking
Issue of 2013‒11‒09
23 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Fire-sale spillovers and systemic risk By Fernando Duarte; Thomas Eisenbach
  2. Macroprudential Regulation and Bank Performance: Evidence from India By Ghosh, Saibal
  3. The Real Effects of Bank Capital Requirements By Brun , Matthieu; Fraisse , Henri; Thesmar , David
  4. CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry By Jeong-Bon Kim; Li Li; Mary L. Z. Ma; Frank M. Song Author-Workplace-Name: University of Hong Kong
  5. Supervisory reform for global banks By Sarah Dahlgren
  6. Introductory remarks at Workshop on "Fire Sales" as a Driver of Systemic Risk in Tri-Party Repo and Other Secured Funding Markets By William C. Dudley
  7. Title II resolution, a useful tool but not a panacea By William C. Dudley
  8. Funding structure, procyclicality and lending: Evidence from GCC banks By Ghosh, Saibal
  9. Securitization, Competition and Monitoring. By Ahn, J-H.; Breton, R.
  10. DebtRank Analysis of the Japanese Credit Network By AOYAMA Hideaki; Stefano BATTISTON; FUJIWARA Yoshi
  11. A model of mortgage losses and its applications for macroprudential instruments By Hott, Christian
  12. Why Do Japanese Non-Local Regional Banks Enter Other Prefectures Under the Region-Based Relationship Banking Policy? By Kondo, Kazumine; Harimaya, Kozo
  13. Fixing wholesale funding to build a more stable financial system By William C. Dudley
  14. Income-specific estimates of competition in European banking By Samantas, Ioannis
  15. Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility By Bo Young Chang; Bruno Feunou
  16. How does corporate governance affect bank capitalization strategies? By Anginer, D.; Demirgüc-Kunt, A.; Huizinga, H.P.; Ma, K.
  17. Disentangling contagion among sovereign cds spreads during the european debt crisis By Carmen Broto; Gabriel Perez-Quiros
  18. The Impact of the Dodd-Frank Act on Small Banks By Alqatawni, Tahsen
  19. Firm-Specific Human Capital, Organizational Incentives, and Agency Costs: Evidence from Retail Banking By Frank Jr. , Douglas H.; Obloj , Tomasz
  20. Risk Measure Inference By Christophe Hurlin; Sebastien Laurent; Rogier Quaedvlieg; Stephan Smeekes
  21. Bringing Back Subprime? The Hazards of Restructuring the GSEs By Dean Baker; Nicole Woo
  22. Modeling the stability dynamics of Ukrainian banking system By Kozmenko, Olha; Kuzmenko, Olha
  23. Tobin lives: integrating evolving credit market architecture into flow of funds based macro-models By John Duca; John Muellbauer

  1. By: Fernando Duarte; Thomas Eisenbach
    Abstract: We construct a new systemic risk measure that quantifies vulnerability to fire-sale spillovers using detailed regulatory balance-sheet data for U.S. commercial banks and repo market data for broker-dealers. Even for moderate shocks in normal times, fire-sale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in the first quarter of 2013 produces fire-sale externalities equal to 10 percent of system equity. For broker-dealers, a 0.1 percent shock to assets in August 2013 generates spillover losses equivalent to almost 6 percent of system equity. Externalities during the last financial crisis are between two and three times larger. Our systemic risk measure reaches a peak in the fall of 2008 but shows a notable increase starting in 2005, ahead of many other systemic risk indicators. Although the largest banks and broker-dealers produce—and are victims of—most of the externalities, leverage and "connectedness" of financial institutions also play important roles.
    Keywords: Systemic risk ; Bank holding companies ; Repurchase agreements ; Financial leverage ; Financial institutions
    Date: 2013
  2. By: Ghosh, Saibal
    Abstract: Employing data on Indian banks for 1992-2012, the article examines the impact of macroprudential measures on bank performance. First, it finds that state-owned banks tend to have lower profitability and soundness than their private counterparts. Next, it tests whether such differentials between state-owned and private banks are driven by macroprudential measures; it finds strong support for this hypothesis.
    Keywords: banking; macroprudential; capital adequacy; loan classification; provisioning; ownership; India
    JEL: G21 L51
    Date: 2013–10
  3. By: Brun , Matthieu; Fraisse , Henri; Thesmar , David
    Abstract: We measure the impact of bank capital requirements on corporate borrowing and expansion. We use French loan-level data and take advantage of the transition from Basel I to Basel II. While under Basel I the capital charge was the same for all firms, under Basel II, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this two-way variation to empirically estimate the sensitivity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find very large effects of capital requirements on bank lending: A 1 percentage point decrease in capital requirement leads to an increase in loan size by about 5%. At the firm level, borrowing also responds strongly although a bit less, consistent with some limited between-bank substitutability. Investment and employment also increase strongly. Overall, because the transition to Basel II led to an average reduction by 2 percentage points of capital requirements, we estimate that the new regulation led, in France, to an increase in average loan size by 10%, an increase in aggregate corporate lending by 1.5%, an increase in aggregate investment by 0.5%, and the creation or preservation of 235,000 jobs.
    Keywords: Bank capital ratios; Bank regulation; Credit supply
    JEL: E51 G21 G28
    Date: 2013–07–04
  4. By: Jeong-Bon Kim (City University of Hong Kong); Li Li (University of International Business and Economics and Hong Kong Institute for Monetary Research); Mary L. Z. Ma (York University); Frank M. Song Author-Workplace-Name: University of Hong Kong
    Abstract: This study predicts and finds that chief executive officer (CEO) risk-taking incentives induced by stock option compensation increase a bank's contribution to systemic distress risk and systemic crash risk. We also predict and find that this CEO incentive systemic risk relation operates through three channels (i) a bank's engagement in non-interest income-generating activities, (ii) investments in innovative financial products such as collateralized debt obligations and credit default swaps, and (iii) maturity mismatch associated with on short-term debt financing. Finally, the CEO incentive-systemic risk relation is moderated by information transparency, bank size, market liquidity, and financial crisis. We also discuss relevant policy implications.
    JEL: G01 G21 G32
    Date: 2013–10
  5. By: Sarah Dahlgren
    Abstract: Remarks at the Center for Transnational Legal Studies Seminar on the Impact of U.S. Regulatory Reform on Global Banks, New York City.
    Keywords: Bank supervision ; Banks and banking, International ; Risk management ; Banks and banking - Regulations ; Regulatory reform ; Transparency ; Corporate governance
    Date: 2013
  6. By: William C. Dudley
    Abstract: Remarks at Workshop on "Fire Sales" as a Driver of Systemic Risk in Tri-Party Repo and Other Secured Funding Markets, Federal Reserve Bank of New York, New York City.
    Keywords: Repurchase agreements ; Financial crises ; Government securities ; Intermediation (Finance) ; Financial stability ; Federal Reserve Bank of New York ; Bank liquidity ; Clearinghouses (Banking)
    Date: 2013
  7. By: William C. Dudley
    Abstract: Remarks at 2013 Resolution Conference: Planning for the Orderly Resolution of a Global Systemically Important Bank, Washington, D.C.
    Keywords: Financial institutions ; Systemic risk ; Federal Deposit Insurance Corporation ; Contracts ; Derivative securities ; Over-the-counter markets ; Liquidity (Economics) ; Bank liquidity ; Bank capital ; Financial Regulatory Reform (Dodd-Frank Act) ; Bankruptcy ; Bank supervision
    Date: 2013
  8. By: Ghosh, Saibal
    Abstract: The paper examines whether banks’ funding structure amplifies procyclicality. Using data for GCC banks for the period 1996-2009, the evidence suggests that banks with higher wholesale dependence cut back lending by a greater amount. In addition, the procyclicality of the financial system and the crisis exacerbates the effect, although the results differ across bank ownership
    Keywords: Wholesale dependence; Bank lending; Procyclicality; Commercial banks; Islamic banks; Crisis; GCC countries
    JEL: G28
    Date: 2013–08
  9. By: Ahn, J-H.; Breton, R.
    Abstract: We analyze the impact of loan securitization on competition in the loan market. Using a dynamic loan market competition model where borrowers face both exogenous and endogenous costs to switch between banks, we uncover a competition softening effect of securitization that allows banks to extract rents in the primary loan market. By reducing monitoring incentives, securitization mitigates winner’s curse effects in future stages of competition thereby decreasing ex ante competition for initial market share. Due to this competition softening effect, securitization can adversely affect loan market efficiency while leading to higher equilibrium profits for banks. This effect is driven by primary loan market competition, not by the exploitation of informational asymmetries in the secondary market for loans. We also argue that banks can use securitization as a strategic response to an increase in competition, as a tool to signal a reduction in monitoring intensity for the sole purpose of softening ex ante competition. Our result suggests that securitization reforms focusing exclusively on informational asymmetries in markets for securitized products may overlook competitive conditions in the primary market.
    Keywords: securitization, loan sales, banking competition, monitoring, rent extraction.
    JEL: G21 L12 L13
    Date: 2013
  10. By: AOYAMA Hideaki; Stefano BATTISTON; FUJIWARA Yoshi
    Abstract: We present an analysis of the lending/borrowing relationship between Japanese banks and Japanese firms, which form a bipartite credit network. We introduce distress to some initial node(s) (banks or firms) and allow it to propagate and contaminate other nodes in this network according to the relative exposure. First, by choosing the initial node to be a bank and taking the weighted average of the resulting distress distribution, with the weight proportional to the size (total assets) of each node, we identify the bank's importance to the whole network at the time of crisis. This leads to a nonlinear relationship between the importance and the size of the bank, which implies that mergers with the same-sized partner would result the most in the increase in importance. Second, by introducing the initial distress to firms in certain industrial sector(s), we evaluate the vulnerability of banks and firms in other sectors due to the distress in the initial sectors.
    Date: 2013–10
  11. By: Hott, Christian
    Abstract: We develop a theoretical model of mortgage loss rates that evaluates their main underlying risk factors. Following the model, loss rates are positively influenced by the house price level, the loan-to-value of mortgages, interest rates, and the unemployment rate. They are negatively influenced by the growth of house prices and the income level. The calibration of the model for the US and Switzerland demonstrates that it is able to describe the overall development of actual mortgage loss rates. In addition, we show potential applications of the model for different macroprudential instruments: stress tests, countercyclical buffer, and setting risk weights for mortgages with different loan-to-value and loan-to-income ratios. --
    Keywords: Mortgage Market,Credit Risk,Macroprudential Instruments
    JEL: E5 G21
    Date: 2013
  12. By: Kondo, Kazumine; Harimaya, Kozo
    Abstract: In this study, we investigate the market characteristics of prefectures in which non-local regional banks of other prefectures choose to enter and the motivations of such banks for doing so, considering the Japanese government’s requirements for regional financial institutions to play an active role in stimulating local economies. In particular, by pooling prefecture-level data, the market characteristics of prefectures that experience more entrances by non-local regional banks compared with other prefectures are examined. It was found that entrance by non-local regional banks is more common in prefectures where high-performing companies are active. Therefore, it can be considered that non-local regional banks that are not satisfied with lending opportunities in their home prefectures enter other prefectures to increase their lending opportunities to high-performing companies. This study contributes by clarifying why many regional banks do not concentrate on businesses within their local regions and intentionally enter other prefectures, which is in contrast with the intent of the region-based relationship banking policy.
    Keywords: region-based relationship banking, non-local regional banks, entries into other prefectures, characteristics of regional markets, expanding lending opportunities.
    JEL: G21
    Date: 2013–11–01
  13. By: William C. Dudley
    Abstract: Remarks at the New York Bankers Association's 2013 Annual Meeting & Economic Forum, The Waldorf Astoria, New York City.
    Keywords: Intermediation (Finance) ; Repurchase agreements ; Mutual funds ; Nonbank financial institutions ; Clearinghouses (Banking) ; Financial crises ; Financial market regulatory reform ; Federal Reserve Bank of New York ; Financial Regulatory Reform (Dodd-Frank Act) ; Bank liquidity ; Securities and Exchange Commission ; Open market operations ; Federal Reserve Act ; Mortgage-backed securities ; Lenders of last resort ; Commercial paper ; Asset-backed financing ; Term Asset-Backed Securities Loan Facility
    Date: 2013
  14. By: Samantas, Ioannis
    Abstract: This paper constitutes a new endeavor of investigating competitive conditions in European banking. Since the vast literature of competition modeling has produced mixed results, the proposed methodology goes one step further in order to investigate the intensity of key effects on bank competition as decomposed into specific bank activities. The sample comprises nine of the most developed banking markets in the European region during the period 2002-2010. The concluding remarks over the explanatory power of traditional collusion, relative market power and efficiency alongside other key controls on bank pricing conduct, provide considerable policy implications.
    Keywords: Competition; Banking income, Collusion, Market power, Cost efficiency
    JEL: D4 D57 G21 L11 L21
    Date: 2013–10
  15. By: Bo Young Chang; Bruno Feunou
    Abstract: We measure uncertainty surrounding the central bank’s future policy rates using implied volatility computed from interest rate option prices and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following the most important policy actions taken by the Bank of Canada as a response to the financial crisis of 2007-08, such as the conditional commitment of 2009-10, the unscheduled cut in the target rate coordinated with other major central banks, and the introduction of term purchase and resale agreements. We also find that, on average, uncertainty decreases following the Bank of Canada’s policy rate announcements. Furthermore, our measures of policy rate uncertainty improve the estimation of policy rate expectations from overnight index swap (OIS) rates by predicting the risk premium in the OIS market.
    Keywords: Credit and credit aggregates; Financial markets
    JEL: E4
    Date: 2013
  16. By: Anginer, D.; Demirgüc-Kunt, A.; Huizinga, H.P.; Ma, K. (Tilburg University, Center for Economic Research)
    Abstract: JEF Classification: G21, M21.
    Keywords: Bank capital;Dividend payouts;Corporate governance;Executive compensation
    Date: 2013
  17. By: Carmen Broto (Banco de España); Gabriel Perez-Quiros (Banco de España)
    Abstract: During the last crisis, developed economies’ sovereign Credit Default Swap (hereafter CDS) premia have gained in importance as a tool for approximating credit risk. In this paper, we fit a dynamic factor model to decompose the sovereign CDS spreads of ten OECD economies into three components: a common factor, a second factor driven by European peripheral countries and an idiosyncratic component. We use this decomposition to propose a novel methodology based on the real-time estimates of the model to characterize contagion among the ten series. Our procedure allows the country that triggers contagion in each period, which can be any peripheral economy, to be disentangled. According to our findings, since the onset of the sovereign debt crisis, contagion has played a non-negligible role in the European peripheral countries, which confirms the existence of signifi cant financial linkages between these economies.
    Keywords: sovereign Credit Default Swaps, contagion, dynamic factor models, credit risk
    JEL: C32 G01 G15
    Date: 2013–10
  18. By: Alqatawni, Tahsen
    Abstract: The Dodd-Frank Act is single longest bill ever passed by the U.S… The Dodd-Frank Act passed in reply to the latest financial meltdown, which applies to prevent further fraud and abuse in the markets, also geared toward protecting consumers with regulations like keeping borrowers from abusive lending conditions and mortgage practices by lenders. Dodd-Frank regulatory requirements set too many restrictions on local lenders and appraisers and that the Act created for large banks "too-big-to-fail”. However, the small banks, which do not fit neatly into standardized financial modeling, will face unintended consequences, as increased operations costs, which lead to reduced income and limited potential growth. The Act created enormous difficulties on small banks, which has little to do with the financial crisis.
    Keywords: Dodd-Frank Act , Law and Compliance , financial regulation
    JEL: G00 G33 G38 K2 K22 K23 K40
    Date: 2013–10–30
  19. By: Frank Jr. , Douglas H.; Obloj , Tomasz
    Abstract: This paper explores conflicting implications of firm-specific human capital (FSHC) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect: FSHC may facilitate more sophisticated “gaming” of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high-FSHC managers. Finally, profit losses increase more rapidly for high-FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits.
    Keywords: FSHC; firm-specific human capital; firm performance; incentives; multiunit retail bank
    JEL: G00
    Date: 2013–05–16
  20. By: Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Sebastien Laurent (IAE Aix-en-Provence - Institut d'Administration des Entreprises - Aix-en-Provence - Université Paul Cézanne - Aix-Marseille III, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - École des Hautes Études en Sciences Sociales [EHESS] - CNRS : UMR7316); Rogier Quaedvlieg (Maastricht University - univ. Maastricht); Stephan Smeekes (Maastricht University - univ. Maastricht)
    Abstract: We propose a widely applicable bootstrap based test of the null hypothesis of equality of two firms' Risk Measures (RMs) at a single point in time. The test can be applied to any market-based measure. In an iterative procedure, we can identify a complete grouped ranking of the RMs, with particular application to finding buckets of fi rms of equal systemic risk. An extensive Monte Carlo Simulation shows desirable properties. We provide an application on a sample of 94 U.S. financial institutions using the ΔCoVaR, MES and %SRISK, and conclude only the %SRISK can be estimated with enough precision to allow for a meaningful ranking.
    Keywords: Bootstrap; Grouped Ranking; Risk Measures; Uncertainty
    Date: 2013–10–28
  21. By: Dean Baker; Nicole Woo
    Abstract: There have been a number of proposals for replacing the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, with a system under which private financial institutions would issue mortgage-backed securities (MBS) that carry a government guarantee. This paper raises a number of questions about the merits of such a system. It points out that both the gains to low-income families seeking to become homeowners from such a system and interest rate savings are likely to be relatively modest, and that there are few obvious safeguards that would make this new system sounder than the system of privately-issued mortgage-backed securities in the bubble years.
    Keywords: housing, gses, mortgages,
    JEL: H H2 H24 G G2 G21 G28
    Date: 2013–10
  22. By: Kozmenko, Olha; Kuzmenko, Olha
    Abstract: The article is stressed on the stability indicator of the banking system as binary variable, which takes a single value in unstable condition and non-zero value otherwise. It is offered to explore stability dynamics of Ukrainian banking system as time series, suggested to perform stability indicator on the basis of stationary time series verification by adaptation of the Forster-Stewart method to the peculiarities of the research subject. In the article it is relevant to identify the main factors of stability indicator formation, realize decomposition of a system - forming components of the variable to be explained on the base of autoregression trend-seasonal additive or multiplicative models.
    Keywords: stability index of the banking system, stability dynamics, time series, decomposition analysis, regression analysis.
    JEL: G10 G21
    Date: 2013–08–01
  23. By: John Duca; John Muellbauer
    Abstract: After the global financial crisis, there is greater awareness of the need to understand the interactions between the financial sector and the real economy and hence the potential for financial instability. Data from the financial flow of funds, previously relatively neglected, are now seen as crucial to the data monitoring carried out by central banks. This paper revisits earlier efforts to understand financial-real linkages, such those of Tobin and the Yale School, and proposes a modeling framework for analysing the household flow of funds jointly with consumption. The consumption function incorporates household income, portfolios of assets and debt held at the end of the previous period, credit availability, and asset prices and interest rates. In a general equilibrium setting, these all have to be endogenised and since households make consumption and housing purchase decisions jointly with portfolio decisions, there is much to be gained in modeling a household sub-system of equations. Major evolutionary structural change – namely the evolving credit architecture facing households – is handled by our ‘Latent Interactive Variable Equation System’. A by-product is improved understanding of the secular decline in US saving rate, as well as of the household financial accelerator. Moreover, the models discussed in this paper offer new ways of interpreting data on credit, money and asset prices, which are crucial for central banks.
    Keywords: Financial crises ; Consumption (Economics) ; Credit control ; Households - Finance
    Date: 2013

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