New Economics Papers
on Banking
Issue of 2013‒11‒16
35 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank ratings: What determines their quality? By Harald Hau; Sam Langfield; David Marques-Ibanez
  2. Interbank contagion and resolution procedures: inspecting the mechanism By Edoardo Gaffeo; Massimo Molinari
  3. Credit Cycles, Credit Risk and Countercyclical Loan Provisions By Martha López; Fernando TenjO; Héctor Zárate
  4. Basel III: Some costs will outweigh the benefits By Paul H. Kupiec
  5. Monetary policy, bank capital and credit supply: a role for discouraged and informally rejected firms By Popov, Alexander
  6. Bank Overleverage and Macroeconomic Fragility By Ryo Kato; Takayuki Tsuruga
  7. Sudden stop of capital flows and the consequences for the banking sector and the real economy By Neagu, Florian; Mihai, Irina
  8. Competition And Bank Risk: The Role Of Securitization And Bank Capital By Yener Altunbas; Michiel van Leuvensteijn; David Marques-Ibanez
  9. Predicting distress in European banks By Betz, Frank; Oprica, Silviu; Peltonen, Tuomas A.; Sarlin, Peter
  10. Central bank refinancing, interbank markets and the hypothesis of liquidity hoarding: evidence from a euro-area banking system By Affinito, Massimiliano
  11. Granularity in Banking and Growth: Does Financial Openness Matter? By F. Bremus; Claudia M. Buch
  12. Setting countercyclical capital buffers based on early warning models: would it work? By Behn, Markus; Detken, Carsten; Peltonen, Tuomas A.; Schudel, Willem
  13. The sovereign debt crisis: the impact on the intermediation model of Italian banks By Stefano Cosma; Elisabetta Gualandri
  14. Deposits and Bank Capital Structure By Franklin Allen; Elena Carletti
  15. Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute By Claudia M. Buch; T. Körner; B. Weigert
  16. How labour market regulation shapes bank performance in EU-15 countries? By Anastasia Koutsomanoli-Filippaki; Emmanuel Mamatzakis
  17. An Excursion-Theoretic Approach to Regulator's Bank Reorganization Problem By Masahiko Egami; Tadao Oryu
  18. Bridging the banking sector with the real economy: a financial stability perspective By Costeiu, Adrian; Neagu, Florian
  19. The Fragility of Short-Term Secured Funding Markets By Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
  20. Financial Intermediation, House Prices, and the Distributive Effects of the U.S. Great Recession By Dominik Menno; Tommaso Oliviero
  22. Bank-Lending Standards, Loan Growth and the Business Cycle in the Euro Area By Sylvia Kaufmann; Johann Scharler
  23. Systemic Risk, Sovereign Yields and Bank Exposures in the Euro Crisis By Niccolò Battistini; Marco Pagano; Saverio Simonelli
  24. House Prices, Heterogeneous Banks and Unconventional Monetary Policy Options By Andrew Lee Smith
  25. The Impact of Sovereign Credit Signals on Bank Share Prices during the European Sovereign Debt Crisis By Gwion Williams; Rasha Alsakka; Owain ap Gwilym
  26. Banks’ Earnings: an empirical evidence of the influence of economic and financial markets factors By Albert, Stéphane; Alexandre, Hervé
  27. Monetary Union, Banks and Financial Integration By Breton, Régis; Rojas Breu, Mariana; Bignon, Vincent
  28. "A Simple Model of Income, Aggregate Demand, and the Process of Credit Creation by Private Banks" By Giovanni Bernardo; Emanuele Campiglio
  29. The welfare effect of access to credit By Rojas Breu, Mariana
  30. Asset Commonality, Debt Maturity and Systemic Risk By Allen, Franklin; Babus, Ana; Carletti, Elena
  31. Learning to walk before you run : Financial Behavior and mobile banking in Madagascar By Venet, Baptiste; Arestoff, Florence
  32. Banking in Africa By Beck, Thorsten; Cull, Robert
  33. Repo Runs By Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
  34. On the use of monetary and macroprudential policies for financial stability in emerging markets By F. Gulcin Ozkan; D. Filiz Unsal
  35. Net leverage, risk, and credit spreads By Berardino Palazzo

  1. By: Harald Hau (University of Geneva, Swiss Finance Institute and CEPR); Sam Langfield (European Systemic Risk Board Secretariat and UK Financial Services Authority); David Marques-Ibanez (European Central Bank)
    Abstract: This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and help perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities.
    Keywords: Rating Agencies, Credit Ratings, Conflicts of Interest, Prudential Regulation
    JEL: G21 G23 G28
  2. By: Edoardo Gaffeo; Massimo Molinari
    Abstract: This paper develops a network model of a stylized banking system in which banks are connected to one another through interbank claims, which allows us to study the diffusion of default avalanches triggered by an exogenous shock under a number of different assumptions on the degree of interconnectedness, level of capitalization, liquidity buffers, the size of the interbank market and fire-sales. We expand upon the existing literature by embedding two alternative resolution mechanisms. First, liquidations triggered by either illiquidity or insolvency-related distress implying asset sales and compensation of creditors. Second, a bail-in mechanism avoiding bank closure by forcing a recapitalization provided by bank creditors. Our model speaks to how contagion dynamics unravel via illiquidity-driven defaults in the first case and higher-order losses in the latter one. Within this framework, we show how counter-party liquidity risk externality can be resolved and put forward a macro-criterion to assess the adequacy of the liquidity ratio introduced with Basel III.
    Keywords: Systemic Risk, Banking Network, Resolution Procedures
    JEL: D85 G28 G33
    Date: 2013
  3. By: Martha López; Fernando TenjO; Héctor Zárate
    Abstract: In this paper we investigate the impact of rapid credit growth on ex ante credit risk. We present micro-econometric evidence of the positive relationship between rapid credit growth and deterioration in lending portfolios: Loans granted during boom periods have higher probability of default than those granted during periods of slow credit growth. In addition, given their importance for macroprudential policy, we evaluate the effectiveness of the implementation of the countercyclical loan provisions. We find a negative relationship between the amplitude of credit cycles and this kind of macroprudential tool.
    Keywords: Ex ante credit risk, credit cycles, countercyclical provisioning. Classification JEL:E32, E51, E60, G18, G21
    Date: 2013–11
  4. By: Paul H. Kupiec (American Enterprise Institute)
    Abstract: The new Basel III regulations will require significantly higher minimum capital levels for banks and bank holding companies. Although many applaud higher capital levels for large institutions, it is unclear that there are good economic reasons to apply these rules to small banks.
    Keywords: financial services outlook,capital requirements,Basel III,Basel Committee on Banking Supervision
    JEL: A G
    Date: 2013–11
  5. By: Popov, Alexander
    Abstract: This paper conducts the first empirical study of the bank balance sheet channel using data on discouraged and informally rejected firms in addition to information on the formal loan granting process. I take advantage of a unique survey data on the credit experience of firms in 8 economies that use the euro or are pegged to it over 2004-2007, and analyze the effect of monetary policy and the business cycle on bank lending and risk-taking. Identification rests on exploiting 1) the exogeneity of monetary policy to local business cycles, and 2) firm-level and bank-level data to separate the supply of credit from changes in the level and composition of credit demand. Consistent with previous studies, I find that lax monetary conditions increase bank credit in general and bank credit to ex-ante risky firms in particular, especially for banks with lower capital ratios. Importantly, I find that the results are considerably stronger when data on informal credit constraints are incorporated. JEL Classification: E32, E51, E52, F34, G21
    Keywords: bank capital, bank lending channel, business cycle, cross-border lending, monetary policy
    Date: 2013–09
  6. By: Ryo Kato; Takayuki Tsuruga
    Abstract: This paper develops a dynamic general equilibrium model that explicitly includes a banking sector engaged in a maturity mismatch. We demonstrate that rational competitive banks take on excessive risks systemically, resulting in overleverage and ine¢ ciently high crisis probabilities. The model accounts for the banks seemingly over-optimistic outlook about their own solvency and the asset prices, compared to the social optimum. The result calls for policy intervention to reduce the high crisis probabilities. To this end, the government can commit to bailing out banks through public supply of liquidity or a low-interest rate policy. As opposed to the intention of the government, however, expectations of a bailout could incentivize banks to be even more overleveraged, leaving the economy exposed to higher crisis probabilities.
    Keywords: Financial crisis, Liquidity shortage, Maturity mismatch, Credit externalities, Financial regulation
    JEL: E3 G01 G21
  7. By: Neagu, Florian; Mihai, Irina
    Abstract: The paper develops a macro-prudential liquidity stress-testing tool in order to capture the possible consequences of a capital outflow (including a run of deposits). The tool includes a feedback from the banking sector to the real economy, incorporates a link between liquidity risk and solvency risk, and is tailored for emerging market features. The stress-testing tool aims to: (i) test the capacity of the banking sector to withstand the sudden stop of capital flows, and to gauge the consequences of the liquidity stress to the solvency ratio; (ii) quantify the liquidity deficit that a central bank should accommodate; (iii) assess the impact on credit supply when the sudden stop occurs; and (iv) support the implementation of an orderly disintermediation process. The macro-prudential tool is applied on the Romanian banking sector. JEL Classification: G21, F32
    Keywords: banks, emerging markets, macro-prudential tool, stress-testing, systemic liquidity
    Date: 2013–09
  8. By: Yener Altunbas (Bangor University); Michiel van Leuvensteijn (APG); David Marques-Ibanez (European Central Bank)
    Abstract: We find that the increased use of securitization activity in the banking sector augmented the effect of competition on realized bank risk during the 2007-2009 crisis. Our results suggest that securitization by itself does not lead to augmented risk while higher levels of capital do not buffer the impact of competition on realized risk. It follows that cooperation between supervisory and competition authorities would be beneficial when acting on the financial stability implications of financial innovation and the effects of bank capital regulation.
    Keywords: securitization; competition; bank risk
    JEL: G21 D22
    Date: 2013–10
  9. By: Betz, Frank; Oprica, Silviu; Peltonen, Tuomas A.; Sarlin, Peter
    Abstract: The paper develops an early-warning model for predicting vulnerabilities leading to distress in European banks using both bank and country-level data. As outright bank failures have been rare in Europe, the paper introduces a novel dataset that complements bankruptcies and defaults with state interventions and mergers in distress. The signals of the early warning model are calibrated not only according to the policy-maker’s preferences between type I and II errors, but also to take into account the potential systemic relevance of each individual financial institution. The key findings of the paper are that complementing bank specific vulnerabilities with indicators for macro-financial imbalances and banking sector vulnerabilities improves model performance and yields useful out-of-sample predictions of bank distress during the current financial crisis. JEL Classification: E44, E58, F01, F37, G01
    Keywords: bank distress, early-warning model, prudential policy, signal evaluation
    Date: 2013–10
  10. By: Affinito, Massimiliano
    Abstract: This paper tests the hypothesis of liquidity hoarding in the Italian banking system during the 2007-2011 global financial crisis. According to this hypothesis, in periods of crisis, interbank markets stop working and central banks’ interventions are ineffective because banks hoard the liquidity injected rather than channelling it on to other banks and the real economy. The test uses monthly data at banking-group level for all intermediaries operating in Italy between January 1999 and August 2011. This is the first paper to use micro data to analyse the relationship between single banks’ positions vis-à-vis the central bank and the interbank market. The results show that the Italian interbank market functioned well even during the crisis, and, contrary to widespread conjecture, the liquidity injected by the Eurosystem was intermediated among banks and towards the real economy. This finding is robust to the use of several estimation methods and data on the different segments of the money market. JEL Classification: G21, E52, C30
    Keywords: central bank refinancing, financial crisis, Interbank Market, liquidity
    Date: 2013–11
  11. By: F. Bremus; Claudia M. Buch
    Abstract: We explore the impact of large banks and of financial openness for aggregate growth. Large banks matter because of granular effects: if markets are very concentrated in terms of the size distribution of banks, idiosyncratic shocks at the bank-level do not cancel out in the aggregate but can affect macroeconomic outcomes. Financial openness may affect GDP growth in and of itself, and it may also influence concentration in banking and thus the impact of bank-specific shocks for the aggregate economy. To test these relationships, we use different measures of de jure and de facto financial openness in a linked micro-macro panel dataset. Our research has three main findings: First, bank-level shocks significantly impact on GDP. Second, financial openness lowers GDP growth. Third, granular effects tend to be stronger in financially closed economies.
    Keywords: bank market structure, financial openness, granular effects, growth
    JEL: G21 E32
    Date: 2013–10
  12. By: Behn, Markus; Detken, Carsten; Peltonen, Tuomas A.; Schudel, Willem
    Abstract: This paper assesses the usefulness of private credit variables and other macrofinancial and banking sector indicators for the setting of Basel III / CRD IV countercyclical capital buffers (CCBs) in a multivariate early warning model framework, using data for 23 EU Members States from 1982 Q2 to 2012 Q3. We find that in addition to credit variables, other domestic and global financial factors such as equity and house prices as well as banking sector variables help to predict vulnerable states of the economy in EU Member States. We therefore suggest that policy makers take a broad approach in their analytical models supporting CCB policy measures. JEL Classification: G01, G21, G28
    Keywords: banking crises, Basel III, countercyclical capital buffer, CRD IV, early warning model, financial regulation
    Date: 2013–11
  13. By: Stefano Cosma; Elisabetta Gualandri
    Abstract: The aim of the contribute is to analyze the impact of the financial crisis, in particular since the start of the sovereign debt phase, on Italian banks and their intermediation model. Italian banks’ specific business model explains why they suffered less than those of other countries during the first phase of the crisis, requiring one of the lowest levels of public facilities in the EC as compared to GDP. Most of these same characteristics have changed from positive to negative factors since the sovereign debt crisis, which hit Italy hard, affecting first banks’ liquidity and secondly the cost and volumes of funding and loans. Italian banks are now facing the effects of the double-dip recession, which has significantly weakened businesses and households, their key customer segments, and their borrowing and saving capability, with an increasing rate of non-performing loans. This situation is impairing the sustainability of the “traditional” intermediation model and means that banks must introduce strategies for significantly modifying the banking business model they adopt.
    Keywords: Italian banks, sovereign debt crisis, economic recession, intermediation model, credit crunch
    JEL: G01 G15 G18 G21 G28 L50
    Date: 2013–10
  14. By: Franklin Allen; Elena Carletti
    Abstract: In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the choice of bank and firm capital structure and the cost of equity and deposit finance. Despite risk neutrality, equity capital is more costly than deposits. When banks directly finance risky investments, they hold positive capital and diversify. When they make risky loans to firms, banks trade off the high cost of equity with the diversification benefits from a lower bankruptcy probability. When bankruptcy costs are high, banks use no capital and only lend to one sector. When these are low, banks hold capital and diversify.
    Keywords: Deposit finance, bankruptcy costs, bank diversification
    JEL: G21 G32 G33
    Date: 2013
  15. By: Claudia M. Buch; T. Körner; B. Weigert
    Abstract: The agreement to establish a Single Supervisory Mechanism in Europe is a major step towards a Banking Union, consisting of centralized powers for the supervision of banks, the restructuring and resolution of distressed banks, and a common deposit insurance system. In this paper, we argue that the Banking Union is a necessary complement to the common currency and the Internal Market for capital. However, due care needs to be taken that steps towards a Banking Union are taken in the right sequence and that liability and control remain at the same level throughout. The following elements are important. First, establishing a Single Supervisory Mechanism under the roof of the ECB and within the framework of the current EU treaties does not ensure a sufficient degree of independence of supervision and monetary policy. Second, a European institution for the restructuring and resolution of banks should be established and equipped with sufficient powers. Third, a fiscal backstop for bank restructuring is needed. The ESM can play a role but additional fiscal burden sharing agreements are needed. Direct recapitalization of banks through the ESM should not be possible until legacy assets on banks’ balance sheets have been cleaned up. Fourth, introducing European-wide deposit insurance in the current situation would entail the mutualisation of legacy assets, thus contributing to moral hazard.
    Keywords: banking union, Europe, single supervisory mechanism, risk sharing
    JEL: E02 E42 G18
    Date: 2013–10
  16. By: Anastasia Koutsomanoli-Filippaki (Bank of Greece); Emmanuel Mamatzakis (University of Sussex)
    Abstract: The European banking industry is undergoing significant structural changes and cost-cutting programs, also as a result of the financial crisis. Yet, the institutional features that affect banks’ ability to adjust costs and in particular personnel expenses, which comprise a significant part of banks’ non-interest cost structure, have not been adequately studied. This paper investigates the effect of labour market institutions and regulations on bank performance in EU-15 countries. Results indicate the existence of a negative relationship between bank performance and the liberalization of EU labour markets. However, when looking at the disaggregated components of the labour index, we find evidence that different forces are at play and that the liberalization of the minimum wage, hiring and firing regulations and the cost of dismissals could assert a positive effect on efficiency.
    Keywords: Labour regulation; technical; allocative efficiency; DEA; banks
    JEL: D22 D24 G21 L25 J30
    Date: 2013–09
  17. By: Masahiko Egami; Tadao Oryu
    Abstract: The importance of the global financial system cannot be exaggerated. When a large financial institution becomes problematic and is bailed out, that bank is often claimed as "too big to fail". On the other hand, to prevent bank's failure, regulatory authorities adopt the Prompt Corrective Action (PCA) against a bank that violates certain criteria, often measured by its leverage ratio. In this article, we provide a framework where one can analyze the cost and effect of PCA's. We model a large bank with deteriorating asset and regulatory actions attempting to prevent a failure. The model uses the excursion theory of Levy processes and finds an optimal leverage ratio that triggers a PCA. A nice feature includes it incorporates the fact that social cost associated with PCA's are be greatly affected by the size of banks subject to PCA's, so that one can see the cost of rescuing a bank "too big to fail".
    Date: 2013–11
  18. By: Costeiu, Adrian; Neagu, Florian
    Abstract: This paper builds a macro-prudential tool designed to assess whether the banking sector is adequately prepared to orderly withstand losses resulting from normal or stressed macroeconomic and microeconomic scenarios. The link between the banking sector and the real sector is established via the corporate sector channel. The macro-prudential tool consists of a two-step approach. In the first step, we build a model for the probability of default (PD) in the corporate sector, so as to quantify oneyear ahead developments in the quality of banks' corporate loans. The framework is established using micro data, with a bottom-up approach. The second step consists of bridging the PD model with a macroeconomic module in order to capture the feedback effects from the macroeconomic stance into the banking sector, via the corporate sector channel. The macro-prudential tool is tested on the Romanian economy. JEL Classification: G32, G21, E17
    Keywords: financial stability, macro-prudential analysis, probability of default, ROC
    Date: 2013–09
  19. By: Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
    Abstract: This paper develops an infinite-horizon model of financial institutions that borrow short-term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These determinants depend on the borrower’s (endogenous) balance sheet and on (exogenous) fundamentals. Systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform, and if the system as a whole is exposed to high short-term funding risk. The theory has policy implications for prudential regulation and lender-of-last-resort interventions.
    Keywords: Investment banking; securities dealers; repurchase agreements; runs; financial fragility; collateral; systemic risk.
    JEL: E44 E58 G24
    Date: 2013
  20. By: Dominik Menno; Tommaso Oliviero
    Abstract: This paper quantifies the effects of credit spread and income shocks on aggregate house prices and households’ welfare. We address this issue within a stochastic dynamic general equilibrium model with heterogeneous households and occasionally binding collateral constraints. Credit spread shocks arise as innovations to the financial intermediation technology of stylized banks. We calibrate the model to the U.S. economy and simulate the Great Recession as a contemporaneous negative shock to financial intermediation and aggregate income. We find that (i) in the Great recession constrained agents (borrowers) lose more than unconstrained agents (savers) from the aggregate house prices drop; (ii) credit spread shocks have, by their nature, re-distributive effects and - when coupled with a negative income shock as in the Great Recession - give rise to larger (smaller) welfare losses for borrowers (savers); (iii) imposing an always binding collateral constraint, the non-linearity coming from the combination of the two shocks vanishes, and the re-distributive effects between agents’ types are smaller.
    Keywords: HousingWealth, Mortgage Debt, Borrowing Constraints, Heterogeneous Agents, Welfare, Aggregate Credit Risk
    JEL: E21 E32 E43 E44 I31
    Date: 2013
  21. By: Paola Brighi; Valeria Venturelli
    Abstract: This paper investigates the effect of revenue and geographic diversification on bank performance, also on a risk adjusted basis. Using an unbalanced panel dataset of 3,002 observations relative to Italian banks for the period 2006-2011, the core question is to analyse the effect of geographic and functional diversification across and within both interest and non-interest income and their effect on some principal performance measures. Furthermore in our study we analyse whether certain type of institutions are better able to reap the benefits of diversification analysing performance implications for different categories of banks and if the results have been affected by the financial crisis. The main results suggest that revenue and geographical diversification play a role in determining bank performance. The relative effects appear, however, to be different between mutual and not-mutual banks suggesting different business strategies for different banks. Moreover, in the after crisis period, banks that have been less penalized in terms of riskadjusted profit are those characterised by a gretare focus on non interest income component and the ones more geographically diversified. These findings have strategic implications both for bank managers, regulators and supervisors for the consequences on banks’ performance and stability.
    Keywords: Bank heterogeneity, Revenue diversification, Geographic diversification, Risk adjusted performance, Panel data
    JEL: G21
    Date: 2013–10
  22. By: Sylvia Kaufmann; Johann Scharler
    Abstract: We study the relationship between bank lending standards, loan growth and the business cycle in the euro area and the US within a vector error correciton model using Bayesian estimation methods. To deal with the short data series available for the euro area, we exploit information from the estimated US system to improve the estimation of the euro area system. We find that tighter bank lending standards are associated with lower loan growth as well as lower output growth in both areas. Differences in reactions appear in the strength and the persistence of responses.
    Keywords: Bank Lending Standards, Bayesian Cointegration Analysis
    JEL: E40 E50
    Date: 2013–10
  23. By: Niccolò Battistini (Rutgers University); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR.); Saverio Simonelli (Università di Napoli "Federico II" and CSEF)
    Abstract: Since 2008, euro-area sovereign yields have diverged sharply, and so have the corresponding CDS premia. At the same time, banks’ sovereign debt portfolios featured an increasing home bias. We investigate the relationship between these two facts, and its rationale. First, we inquire to what extent the dynamics of sovereign yield differentials relative to the swap rate and CDS premia reflect changes in perceived sovereign solvency risk or rather different responses to systemic risk due to the possible collapse of the euro. We do so by decomposing yield differentials and CDS spreads in a country-specific and a common risk component via a dynamic factor model. We then investigate how the home bias of banks’ sovereign portfolios responds to yield differentials and to their two components, by estimating a vector error-correction model on 2008-12 monthly data. We find that in most countries of the euro area, and especially in its periphery, banks’ sovereign exposures respond positively to increases in yields. When bank exposures are related to the country-risk and common-risk components of yields, it turns out that (i) in the periphery, banks increase their domestic exposure in response to increases in country risk, while in core countries they do not; (ii) in most euro area banks respond to an increase in the common risk factor by raising their domestic exposures. Finding (i) hints at distorted incentives in periphery banks’ response to changes in their own sovereign’s risk. Finding (ii) indicates that, when systemic risk increases, all banks tend to increase the home bias of their portfolios, making the euro-area sovereign market more segmented.
    Keywords: sovereign yield differentials, dynamic latent factor model, home bias, vector error-correction model
    JEL: C32 C51 C58 G11 G15
    Date: 2013–10–28
  24. By: Andrew Lee Smith (Department of Economics, The University of Kansas)
    Abstract: Bank regulators acknowledge that large U.S. commercial banks allocate considerably more resources to originating and trading off-balance sheet assets than their smaller counter parts. In this paper: (i) I show the asset concentration in these large banks moves closely with home prices due to the collateralized nature of off-balance sheet assets. (ii) I then develop a general equilibrium capable of capturing this asset redistribution between heterogeneous banks. When home prices fall, endogenously tightening leverage constraints force the big productive banks to unload real-estate secured debt to small unproductive banks. The redistribution to less productive banks sets off an asset price spiral in the model - amplifying typical downturns into deep recessions. The model has predictions for the joint behavior of finance premiums, output, home prices and the share of assets held by large banks. (iii) I use a VAR to confirm the model's predictions for these variables are consistent with the data. (iv) Finally, I use this empirically verified model to examine the effectiveness of unconventional monetary policyin mitigating a recession generated by a drop in housing demand. Despite the fact that both equity injections into "Too Big to Fail" banks and asset purchases by the Fed such as "QE 1/2/3" mitigate the crisis, the nuances of the policies are important. A prolonged asset purchase program is preferable to a short-term equity injection.
    Keywords: Financial Crises, Financial Frictions, Housing, Unconventional Monetary Policy
    JEL: E32 E44 G01 G21
    Date: 2013–11
  25. By: Gwion Williams (Bangor University); Rasha Alsakka (Bangor Business School); Owain ap Gwilym (Bangor Business School)
    Abstract: The ongoing financial crisis has drawn attention to the role of credit rating agencies (CRAs). We investigate the relative impacts of sovereign actions by different CRAs on the share prices of major European banks during the financial crisis. We examine how bank abnormal returns are affected by sovereign rating changes, watch and outlook announcements, to capture how the crisis spills over across countries and from the sovereign to the financial sector. We find that CRAs’ signals affect share prices, although there is no evidence that CRA actions are the dominant force leading to falling share prices during the crisis.
    Keywords: European sovereign debt crisis; Credit signals; Spillover effect; Credit outlook/watch; Bank shares
    JEL: G15 G21 G24
    Date: 2013–10
  26. By: Albert, Stéphane; Alexandre, Hervé
    Abstract: Since the 1990s’, a relatively ample research has been undertaken regarding the measurement of the volatility of bank earnings over time. The comparison between traditional deposits-loans banking and financial activities is a further specific theme in bank performance research. Few analyses have however directly addressed the explanation of the volatility of earnings. The present paper provides with an analysis of the influence of economic and financial factors through the sub-components of net earnings. Using a panel of European banks over 2005-2010, a period of marked changes in banks’ earnings, we identify significant influences and shed a light on the sensitivity of activity types. We find that net earnings are positively influenced by GDP growth, stock markets and, for most banks, negatively by interest rates. The influence of GDP is primarily located with loan impairments but also with commissions. Stock markets support both commissions and, in a greater extent, trading. We identify a negative effect of interest rates for both net interest income and trading. Earnings associated with financial activities appear slightly more sensitive, but the resilience of more traditional banking activities is also affected by economic and financial factors. Our results also head towards more exposure of banks running significant additional equities-related commission activities and equity trading. On the other hand, exposure to changes in interest rates may mitigate the sensitivity of earnings.
    Keywords: Net interest income; bank commissions; trading; loan impairments; bank earnings; earnings volatility; risk factors; diversification; sustainability;
    JEL: G21 G28 L25
    Date: 2013–05
  27. By: Breton, Régis; Rojas Breu, Mariana; Bignon, Vincent
    Abstract: This paper analyzes a two-country model of money and banks to examine the conditions under which the creation of a monetary union between two countries is optimal. Is is shown that if agents resort to banks to adjust their monetary holdings through borrowing and if nobody can force them to repay their debts, it may be optimal for both countries to set up two different currencies, along with strictly positive conversion costs. A necessary condition for this is that credit market integration is limited. This arises even though both countries are perfectly identical.
    Keywords: Monetary union; credit; default; limited commitment;
    JEL: E42 G21
    Date: 2013–06
  28. By: Giovanni Bernardo; Emanuele Campiglio
    Abstract: This paper presents a small macroeconomic model describing the main mechanisms of the process of credit creation by the private banking system. The model is composed of a core unit--where the dynamics of income, credit, and aggregate demand are determined--and a set of sectoral accounts that ensure its stock-flow consistency. In order to grasp the role of credit and banks in the functioning of the economic system, we make an explicit distinction between planned and realized variables, thanks to which, while maintaining the ex-post accounting consistency, we are able to introduce an ex-ante wedge between current aggregate income and planned expenditure. Private banks are the only economic agents capable of filling this gap through the creation of new credit. Through the use of numerical simulation, we discuss the link between credit creation and the expansion of economic activity, also contributing to a recent academic debate on the relation between income, debt, and aggregate demand.
    Keywords: Banking System; Credit Creation; Growth; Aggregate Demand; Macroeconomic Modeling
    JEL: E20 E51 G21 O42
    Date: 2013–10
  29. By: Rojas Breu, Mariana
    Abstract: I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit affects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption-risk sharing more inefficient. I calibrate the model using U.S. data on credit-card transactions and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare.
    Keywords: Money; limited participation; risk sharing; credit;
    JEL: E41 E51
    Date: 2013
  30. By: Allen, Franklin (University of PA); Babus, Ana (Princeton University); Carletti, Elena (European University Institute)
    Abstract: We develop a model where financial institutions swap projects in order to diversify their individual risk. This can lead to two different asset structures. In a clustered structure groups of financial institutions hold identical portfolios and default together. In an unclustered structure defaults are more dispersed. With long term finance welfare is the same in both structures. In contrast, when short term finance is used, the network structure matters. Upon the arrival of a signal about banks' future defaults, investors update their expectations of bank solvency. If their expectations are low, they do not roll over the debt and all institutions are early liquidated. We compare investors' rollover decisions and welfare in the two asset structures.
    JEL: D85 G01 G21
    Date: 2013–02
  31. By: Venet, Baptiste; Arestoff, Florence
    Abstract: In Madagascar, Orange introduced its mobile banking services in September 2010. Mobile-banking (m-banking) is a system that allows users to conduct a number of financial transactions through a mobile phone. The existing body of literature suggests that the use of m-banking services may have a positive impact on individual savings, affect money transfer behavior and/or encourage financial inclusion. In 2012, we conducted a survey of 598 randomly selected Orange clients in Antananarivo. We use the matching methodology to assess the impacts of m-banking on clients' financial behavior. The results show that the use of m-banking services increases the number of national remittances sent and received. It is in line with the conclusions of the existing literature devoted to M-Pesa in Kenya. Yet we find that using of m-banking services has no significant impact on the sums saved by users or the sums of remittances sent and received, which appears to contradict the users' perceptions. This result may, however, be explained by a learning-by-doing process: users need to first learn to trust the e-money system before making any significant changes to their financial behavior.
    Keywords: Banque mobile; Matching; Comportements financiers; Pays en développement; Mobile banking; Low Income countries; Financial behavior; Matching methodology;
    JEL: G2 G21 O16
    Date: 2013–09
  32. By: Beck, Thorsten; Cull, Robert
    Abstract: This paper takes stock of the current state of banking systems across Sub-Saharan Africa and discusses recent developments including innovations that might help Africa leapfrog more traditional banking models. Using an array of different data, the paper documents that African banking systems are shallow but stable. African banks are well capitalized and over-liquid, but lend less to the private sector than banks in non-African developing countries. African enterprises and households are less likely to use financial services than their peers in other developing countries. The paper also describes a number of financial innovations across the continent that can help overcome different barriers to financial inclusion and have helped to expand the bankable and the banked population.
    Keywords: Access to Finance,Banks&Banking Reform,Debt Markets,Emerging Markets,Bankruptcy and Resolution of Financial Distress
    Date: 2013–10–01
  33. By: Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
    Abstract: The recent financial crisis has shown that short-term collateralized borrowing may be a highly unstable source of funds in times of stress. The present paper develops a dynamic equilibrium model and analyzes under what conditions such instability can be a consequence of market-wide changes in expectations. We derive a liquidity constraint and a collateral constraint that determine whether such expectations-driven runs are possible and show that they depend crucially on the microstructure of particular funding markets that we examine in detail. In particular, our model provides insights into the differences between the tri-party repo market and the bilateral repo market, which were both at the heart of the recent financial crisis.
    Keywords: Investment banking; repurchase agreements; tri-party repo; bilateral repo; money market mutual funds; asset-backed commercial paper; bank runs.
    JEL: E44 E58 G24
    Date: 2013–11
  34. By: F. Gulcin Ozkan; D. Filiz Unsal
    Abstract: This paper explores optimal monetary and macroprudential policy rules in an open-economy with significant exposure to external borrowing in the face of a sudden reversal of capital inflows. We consider optimal Taylor-type interest rate rules, where the policy rate is set as a function of inflation, output, and credit growth; and a macroprudential instrument is set as a function of credit growth. We have two key results. First, we find that, in the presence of macroprudential measures, there are no significant welfare gains from monetary policy also reacting to credit growth above and beyond its response to inflation. Thus, from a welfare point of view it is better to delegate ’lean against the wind’ squarely to macroprudential policy. Second, the source of borrowing (domestic versus foreign) plays a crucial role in the choice of policy instrument in responding to credit market developments. When the source of borrowing is external, monetary policy responses required to stabilize financial markets would be unduly large. In contrast, macroprudential instrument can directly influence the cost of credit and ease the fiancial markets. Therefore, emerging economies where foreign borrowing is typically sizeable are likely to find macroprudential measures particularly effective in promoting financial stability.
    Keywords: Financial instability; monetary policy; macroprudential measures; emerging markets; and financial crises
    JEL: E5 F3 F4
    Date: 2013–11
  35. By: Berardino Palazzo (Boston University, School of management)
    Abstract: This paper proposes a risk-based explanation of the negative relation between credit spreads and expected equity returns found in the data. In a model where issuing equity is costly and debt has a tax advantage, firms optimally choose a lower net leverage if their cash flows are more correlated to a source of aggregate fluctuations (i.e. if the firm is riskier), all else being equal. The model predicts that riskier firms have a lower net leverage and a lower credit spreads. I test these two predictions using data on U.S. public companies and I find that: (i) low net leverage firms earn a higher risk-adjusted return than high net leverage ones; (ii) risk-adjusted returns on net leverage sorted portfolios are negatively correlated to credit ratings (a proxy for credit spreads); and (iii) a net leverage-based factor has the potential to explain the variation in equity returns across portfolios sorted according to credit ratings.
    Date: 2013

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