New Economics Papers
on Banking
Issue of 2013‒11‒22
eleven papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financing as a Supply Chain: The Capital Structure of Banks and Borrowers By William Gornall; Ilya A. Strebulaev
  2. Essays on risk management and systematic risk. By Silva Buston, C.F.
  3. Optimal versus realized bank credit risk and monetary policy By Manthos D. Delis; Yiannis Karavias
  4. Financial network systemic risk contributions By Hautsch, Nikolaus; Schaumburg, Julia; Schienle, Melanie
  5. What lies behind the “too-small-to-survive” banks? By Grammatikos, Theoharry; Papanikolaou, Nikolaos I.
  6. The relationship between stock market parameters and interbank lending market: an empirical evidence By Magomet Yandiev; Alexander Pakhalov
  7. Response to Northern Ireland Affairs Committee - Public Inquiry into the Banking Structure in Northern Ireland. By Mr Derek Bond; Professor Elaine Ramsey; Ms Emer Gallagher
  8. China's Credit Boom: New Risks Require New Reforms By Nicholas Borst
  9. Funding liquidity, market liquidity and TED spread : A two-regime model By Kris Boudt; Ellen C.S. Paulus; Dale W.R. Rosenthal
  10. Spatial correlation in credit risk and its improvement in credit scoring By Fernandes, Guilherme Barreto; Artes , Rinaldo
  11. The Effects of the Saving and Banking Glut on the U.S. Economy By Alejandro Justiniano; Giorgio Primiceri; Andrea Tambalotti

  1. By: William Gornall; Ilya A. Strebulaev
    Abstract: We develop a model of the joint capital structure decisions of banks and their borrowers. Strikingly high bank leverage emerges naturally from the interplay between two sets of forces. First, seniority and diversification reduce bank asset volatility by an order of magnitude relative to that of their borrowers. Second, previously unstudied supply chain effects mean that highly levered financial intermediaries are the most efficient. Low asset volatility enables banks to safely take on high leverage; supply chain effects compel them to do so. Firms with low leverage also arise naturally as borrowers internalize the systematic risk costs they impose on their lenders. Because risk assessment techniques from the Basel II framework underlie our structural model, we can quantify the impact capital regulation and other government interventions have on bank leverage, firm leverage, and fragility. Deposit insurance and the expectation of government bailouts lead not only to risk taking by banks, but increased risk taking by firms. Capital regulation lowers bank leverage but can lead to compensating increases in the leverage of firms, as well as a small increase in borrowing costs.
    JEL: G01 G18 G2 G21 G28 G32 G38
    Date: 2013–11
  2. By: Silva Buston, C.F. (Tilburg University)
    Abstract: Abstract: Through the creation of the Financial Stability Board (FSB), G20 members have committed to regulate the financial sector across the globe in order to enhance the resilience of the system. Two important points in this agenda are the regulation of OTC derivatives, such as Credit Default Swaps (CDS) and the regulation of Systemically Important Financial Institutions (SIFIs). The first two chapters of this thesis relate to the first point. These papers study the effects of the use of CDS at banks on banks' behavior and stability. The last chapter of the thesis addresses the second point. This chapter discusses the proper assessment of systemic risk, and the characteristics and performance of systemically important banks based on this assessment.
    Date: 2013
  3. By: Manthos D. Delis; Yiannis Karavias
    Abstract: Standard banking theory suggests that there exists an optimal level of credit risk that yields maximum bank profit. We identify the optimal level of risk-weighted assets that maximizes banks’ returns in the full sample of US banks over the period 1996–2011. We find that this optimal level is cyclical, being higher than the realized credit risk in relatively stable periods with high profit opportunities for banks but quickly decreasing below the realized in periods of turmoil. We place this cyclicality into the nexus between bank risk and monetary policy. We show that a contractionary monetary policy in stable periods, where the optimal credit risk is higher than the realized credit risk, increases the gap between them. An increase in this gap also comes as a result of an expansionary monetary policy in bad economic periods, where the realized risk is higher than the optimal risk.
    Keywords: Banks; Optimal credit risk; Profit maximization; Monetary policy
  4. By: Hautsch, Nikolaus; Schaumburg, Julia; Schienle, Melanie
    Abstract: We propose the realized systemic risk beta as a measure for financial companies' contribution to systemic risk given network interdependence between firms' tail risk exposures. Conditional on statistically pre-identified network spillover effects and market as well as balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm's Value-at-risk (VaR) on the system's VaR. Statistical inference reveals a multitude of relevant risk spillover channels and determines companies' systemic importance in the U.S. financial system. Our approach can be used to monitor companies' systemic importance allowing for a transparent macroprudential supervision. --
    Keywords: time-varying systemic risk contribution,systemic risk network,network topology estimation,Value at Risk
    JEL: G01 G18 G32 G38 C21 C51 C63
    Date: 2013
  5. By: Grammatikos, Theoharry; Papanikolaou, Nikolaos I.
    Abstract: It is a common place that during financial crises, like the one started in 2007, authorities provide substantial financial support to some problem banks, whilst at the same time let several others to go bankrupt. Is this happening because some particular banks are considered important and big enough to save, whereas some others are perceived as being ‘Too-Small-To-Survive’? Is the size of banks the fundamental factor that makes authorities to treat them differently, or it is also that some banks perform poorly and are not capable of withstanding some considerable shocks whatsoever? Our study provides concrete answers to these questions thus filling part of the void in the existing literature. A short- and a long-run positive relationship between size and performance is documented regardless of the level of bank soundness (healthy vs. failed and assisted banks) under scrutiny. Importantly, we pose and lend support to the ‘Too-Small-To-Survive’ hypothesis according to which the impact of bank performance on failure probability strongly depends on size. Evidence shows that authorities tend not to save banks whose size is below some specific threshold.
    Keywords: CAMEL ratings; financial crisis; bank size; ‘Too-Small-To-Survive’ banks
    JEL: C23 D02 G01 G21
    Date: 2013–11
  6. By: Magomet Yandiev (Department of Economics, Lomonosov Moscow State University); Alexander Pakhalov (Department of Economics, Lomonosov Moscow State University)
    Abstract: The article presents calculations that prove practical importance of the earlier derived theoretical relationship between the interest rate on the interbank credit market, volume of investment and the quantity of securities tradable on the stock exchange.
    Keywords: pricing of financial assets, rate of return, interbank credit market, speculations, stock market, stocks, stock exchange
    JEL: G12 G14 G17 G21
    Date: 2013–11
  7. By: Mr Derek Bond; Professor Elaine Ramsey; Ms Emer Gallagher
    Abstract: This paper has been prepared by a team of academics based at the University of Ulster currently involved in a research project examining the property market bubble in Northern Ireland. A primary objective of the research is to examine the structure of the decision making processes adopted by banks in Northern Ireland in regard to lending. This submission describes a number of findings of relevance here, identified as part of the overall study - • The general structure of the banking system in Northern Ireland, with the mixture of domestic and international banks in the current climate, can be viewed as advantageous from a consumer viewpoint. • The structure of decision making in regard to lending has become more centralised post crisis. Centralised decision making increases the quality, standard and consistency of decision making in regard to lending decisions. It can however, also be problematic due to less negotiation at the local level, a lack of local knowledge and understanding and the lower speed at which decisions are often reached. • Lending policy post 2007 has become more stringent which impacts on the ability of firms and individuals to access finance. • There are consequences for the ownership structure of banks in Northern Ireland, including a lack of control over the behaviour of these institutions. This area warrants further research. • It is not only the sale of assets by NAMA that may be impacting on Northern Ireland property values. Other financial institutions are affecting recovery through their asset disposal strategies also. The submission also makes a number of suggestions in relation to the issues raised by the inquiry - • Immediate clarity over the future of Ulster Bank and NAMA is necessary to aid the recovery process. • Consider the potential role for NISRA in producing regional lending statistics for Northern Ireland in order to increase transparency and allow for a clearer understanding of the nature and scale of the problem in Northern Ireland. • Further analysis into the regulatory implications of the varying ownership structures adopted by the banks operating in Northern Ireland would enable a better understanding of the impact of the structure on Northern Ireland. • The implication of recent changes to the branch network in Northern Ireland is that new delivery channels may be necessary. Substitutes to the rural branch network include extending the services currently provided through the Post Office, increase the services that Credit Unions are permitted to engage in and the implementation of off-site banking kiosks. • Encourage further education initiatives and awareness raising activities surrounding the use of online and mobile banking facilities.
    Keywords: Northern Ireland Affairs Committee , Banking, property bubble, Northern Ireland, banks, lending, policy, property, decision making
    Date: 2013–04
  8. By: Nicholas Borst (Peterson Institute for International Economics)
    Abstract: The Chinese financial system stands at a crossroads. The response to the global financial crisis eroded some of the hard-earned discipline put in place during the 2000s. As a result, significant risks have accumulated, and the financial sector once again appears vulnerable to large-scale credit misallocation and spiraling bad debts. Reducing these risks will take a new wave of concerted action. Absent better regulation, the tremendous growth of credit in recent years has the potential to result in large-scale financial distress.
    Date: 2013–10
  9. By: Kris Boudt (Vrije Universiteit Brussel; V.U. University Amsterdam); Ellen C.S. Paulus (London Business School); Dale W.R. Rosenthal (University of Illinois at Chicago)
    Abstract: We investigate the effect of market liquidity on equity-collateralized funding accounting for endogeneity. Theory suggests market liquidity can affect funding liquidity in stabilizing and destabilizing manners. Using the average fee on stock loans as a proxy for equity-collateralized funding liquidity, we confirm the existence of these two regimes over the period of July 2006 – May 2011. Furthermore, we show that we can separate the two regimes using the yield spread of Eurodollars over T-bills (TED spread) and that a regime switch seems to occur near a TED spread of 48 basis points.
    Keywords: equity-collateralized funding liquidity; market liquidity; two-regime model; financial distress
    JEL: G01 G18
    Date: 2013–11
  10. By: Fernandes, Guilherme Barreto; Artes , Rinaldo
    Date: 2013–10
  11. By: Alejandro Justiniano; Giorgio Primiceri; Andrea Tambalotti
    Abstract: We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.
    JEL: E20 E21 E44 F32 G21
    Date: 2013–11

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