New Economics Papers
on Banking
Issue of 2013‒12‒06
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Do capital requirements affect bank efficiency? Evidence from China By Pessarossi , Pierre; Weill , Laurent
  2. Liquidity, moral hazard and bank crises By S.Chatterji; S.Ghosal
  3. Heterogeneous Banking Efficiency : Allocative Distortions and Lending Fluctuations By Thibaut Duprey
  4. Bank reactions after capital shortfalls By Kok, Christoffer; Schepens, Glenn
  5. Central bank collateral, asset fire sales, regulation and liquidity By Bindseil, Ulrich
  6. Bad management, skimping, or both? The relationship between cost efficiency and loan quality in Russian banks By Mikhail Mamonov
  7. Funding credit card loans: current and future considerations By James van Opstal
  8. Deposit Insurance Adoption and Bank Risk-Taking: the Role of Leverage By Mathias Lé
  9. Informal loans in Russia: credit rationing or borrower’s choice? By Maria Semenova; Victoria Rodina
  10. Sitting on the fence: does having a ‘dual-director’ add to bank profitability? By Polina Savchenko; Maria Semenova
  11. Effects of earnings management and delays in loss recognition on bank opacity By Giuliano Iannotta; Simon Kwan
  12. Quantifying preferential trading in the e-MID interbank market By Hatzopoulos, V.; Iori, G.; Mantegna, R.; Micciche, S.; Tumminello, M.
  13. Women on Italian bank boards: are they “gold dust”? By Silvia Del Prete; Maria Lucia Stefani
  14. Payday loans and consumer financial health By Neil Bhutta

  1. By: Pessarossi , Pierre (BOFIT); Weill , Laurent (BOFIT)
    Abstract: This paper contributes to the debate on the effect of capital requirements on bank efficiency. We study the relation between capital ratio and bank efficiency for Chinese banks over the period 2004-2009, taking advantage of the profound regulatory changes in capital requirements that occurred during this period to measure the exogenous impact of an in-crease in the capital ratio on banks’ cost efficiency. We find that such an increase has a positive effect on cost efficiency, the size of which depends to an extent on the bank’s ownership type. Our results therefore suggest that capital requirements can improve bank efficiency.
    Keywords: bank; capital requirements; efficiency; China
    JEL: G21 G28
    Date: 2013–11–08
  2. By: S.Chatterji; S.Ghosal
    Abstract: Bank crises, by interrupting liquidity provision, have been viewed as resulting in welfare losses. In a model of banking with moral hazard, we show that second best bank contracts that improve on autarky ex ante require costly crises to occur with positive probability at the interim stage. When bank payoffs are partially appropriable, either directly via imposition of …nes or indirectly by the use of bank equity as a collateral, we argue that an appropriately designed ex-ante regime of policy intervention involving conditional monitoring can prevent bank crises.
    Keywords: bank runs, contagion, moral hazard, liquidity, random, contracts, monitoring.
    JEL: G21 D82
    Date: 2013–11
  3. By: Thibaut Duprey (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper is a first attempt to connect the heterogeneity in bank efficiency with lending fluctuations and allocation efficiency: there is a trade-off between the two in the presence of heterogeneity in bank monitoring efficiency. The mechanism at hand is twofold. (a) First the rent extracted by the most efficient bank distorts incentives of entrepreneurs to undertake efforts. (b) Second banks specialising on contracts that do not include monitoring feature less cyclical fluctuations of aggregate lending. This has clear implications: (i) the presence of banking heterogeneity decreases firms' average productivity as it increases adverse selection by entrepreneurs as well as favours rent extractions by banks; (ii) an individual bank featuring a lower cyclicality signals a lower efficiency in its monitoring abilities; (iii) a heterogeneous banking system featuring a lower cyclicality of aggregate lending might not be desirable as it may come along with allocative and incentives distortions.
    Keywords: Banking heterogeneity ; Moral hazard ; Adverse selection ; Endogenous market segmentation ; Allocation efficiency ; Lending cycle
    Date: 2013–11
  4. By: Kok, Christoffer; Schepens, Glenn
    Abstract: This paper investigates whether European banks have capital targets and how deviations from the target impact their equity composition and activity mix. Using quarterly data for a sample of large European banks between 2004 and 2011, we show that there are notable asymmetries in banks' reactions to deviations from optimal capital levels. Banks prefer to reshuffle risk-weighted assets or increase asset holdings when being above their optimal Tier 1 ratio, whereas they rather try to increase equity levels or reshuffle risk-weighted assets without changing asset holdings when being below target. At the same time, focusing instead on a unweighted equity ratio target, we find evidence of deleveraging and lower loan growth for undercapitalized banks during the recent financial crisis, whereas in the pre-crisis periods banks primarily reacted to deviations from their optimal target by adjusting equity levels. JEL Classification: D22, E44, G20, G21, G28
    Keywords: bank capital optimisation, banking, capital structure, deleveraging, financial regulation
    Date: 2013–11
  5. By: Bindseil, Ulrich
    Abstract: This paper analyses the potential roles of bank asset fire sales and recourse to central bank credit to ensure banks' funding liquidity and solvency. Both asset liquidity and central bank haircuts are modelled as power functions within the unit interval. Funding stability is captured as strategic bank run game in pure strategies between depositors. Asset liquidity, the central bank collateral framework and regulation determine jointly the ability of the banking system to deliver maturity transformation and financial stability. The model also explains why banks tend to use the least liquid eligible assets as central bank collateral and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can destabilize short term liabilities of banks. Finally, the model allows discussing how the collateral framework can be understood, beyond its essential aim to protect the central bank, as financial stability and non-conventional monetary policy instrument. JEL Classification: E42, G21
    Keywords: asset liquidity, bank run, central bank collateral framework, liquidity regulation, Unconventional monetary policy
    Date: 2013–11
  6. By: Mikhail Mamonov (Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF); National Research University Higher School of Economics, Laboratory for Analysis and Forecast of Economic Pro-cesses, Center for Fundamental Studies. Senior Expert)
    Abstract: This paper investigates the relationship between operating cost efficiency and the loan quality of Rus-sian banks. It tries to answer the question whether it is always beneficial for banks to be highly cost effi-cient (the “bad management” hypothesis) or whether this higher cost efficiency could mean inadequate spending on borrower screening, which could subject banks to higher credit risk exposures in the future (the “skimping” hypothesis)? Our main result implies that, while the “bad management” hypothesis holds on average for the banking sector as a whole, the “skimping” hypothesis could be the case for those Russian banks that are not just highly cost efficient, as predicted by Berger and DeYoung (1997) for US banks, but that at the same time pursue aggressive strategies in the market for loans to house-holds and non-financial firms, especially during the pre-crisis periods when banks are too optimistic to pay increased attention to the quality of borrowers in order to extract higher profits in the short run. In-terestingly, we show that the “skimping” strategy is not the case for those Russian banks that demon-strate a lower equity-to-assets ratio and that are highly cost efficient at the same time because, as we be-lieve, higher financial leverage forces these banks to filter out low quality borrowers to be able to repay borrowed funds. From perspective of regulatory policy, these conclusions provide clear arguments in favor of differential prudential regulation in Russia, which could, if being implemented, positively affect the loan quality of both banks that are skimpers (through restricting loans growth by higher capital ade-quacy requirements and/or increased payments to the Russian Deposit Insurance Agency) and banks that are not (through eliminating incentives to grow too fast), thus improving the stability of the banking sector as a whole
    Keywords: Russian banks, credit risk, cost efficiency, skimping, bad management, stochastic fron-tier analysis, market power
    JEL: G21 G28 D22 D43 C23
    Date: 2013
  7. By: James van Opstal
    Abstract: Many factors influence credit-card-issuing banks’ decisions about how to fund credit card loans. These factors include the size and structure of the institution, economic conditions, and the regulatory environment. Against the backdrop of a much smaller market for credit card asset-backed securitization, the Payment Cards Center (PCC) wanted to better understand how changes in any of the above factors and in the funding sources accessible to credit-card-issuing banks are affecting funding strategies now and in the future. To gain this perspective, the PCC interviewed a diverse set of credit-card-issuing bank executives. These participants were asked about the composition of their funding sources, changes in the markets for these sources of funds, and the effects of existing or potential regulation. This paper presents several themes that emerged from these discussions.
    Keywords: Credit cards ; Pricing
    Date: 2013
  8. By: Mathias Lé (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution)
    Abstract: Explicit deposit insurance is a crucial ingredient of modern financial safety nets. This paper investigates the effect of deposit insurance adoption on individual bank leverage. Using a panel of banks across 117 countries during the period 1986-2011, I show that deposit insurance adoption pushes banks to increase significantly their leverage by reducing their capital buffer. This increase in bank leverage then translates into higher probability of insolvency. Most importantly, I bring evidence that deposit insurance adoption has important competitive effects: I show that large, systemic and highly leveraged banks are unresponsive to deposit insurance adoption.
    Keywords: Deposit Insurance; Bank Risk-Taking; Leverage; Systemic Bank; Capital Buffer
    Date: 2013–11
  9. By: Maria Semenova (National Research University Higher School of Economics. Center for Institutional Studies. Research fellow); Victoria Rodina (National Research University Higher School of Economics. Center for Institutional Studies. Research assistant)
    Abstract: This paper examines the strategies of Russian households for choosing either the formal or informal banking sector as a source of credit. We aim to learn why households refuse to become clients of a bank and prefer to instead raise funds by borrowing from individuals – friends, colleagues, relatives, and other private parties. We use the results of “Monitoring the Financial Behavior of the Population” (2009-2010), a national survey of Russian households. Our results suggest that a household’s choice of the informal credit market is based not only on economic factors, but also on some institutional ones, including financial literacy, trust in the banking sector, and credit discipline. We show that choosing the informal market is explained by a lack of financial literacy, measured by mathematical competence and home accounting, as well as by a lack of trust in the banking sector as a whole. Borrowers from private parties demonstrate a higher degree of credit discipline: those who believe that repaying a loan is not obligatory are less frequently among informal borrowers and they choose the bank credit market. Our findings, however, are still in line with credit rationing theory. We show that better financial conditions reduce a household’s probability to use both formal and informal credit markets in favor of pure bank borrowing
    Keywords: household, consumer loans, informal loans, Russia
    JEL: D14 G21 P2
    Date: 2013
  10. By: Polina Savchenko (Research Assistant, Center for Institutional Studies, National Research University ‘Higher School of Economics’, Moscow, Russia); Maria Semenova (Research fellow, Associate Professor, Center for Institutional Studies, National Research University ‘Higher School of Economics’, Moscow, Russia)
    Abstract: This paper investigates how combining positions between the board of directors and top-management affects bank profitability. We use 2010 bank-level data from 112 countries. Our results suggest that combining positions reduces both ROE and ROA of banks. However, for banks in developing countries, the influence proves to be positive. We also show that the higher the proportion of the board members who simultaneously hold a managerial position, the lower the profitability of the bank. This effect is observed both for developed and developing countries
    Keywords: corporate governance, banks, profitability
    JEL: G21 G34
    Date: 2013
  11. By: Giuliano Iannotta; Simon Kwan
    Abstract: Using a banking firm’s unexpected loan loss provision to proxy for earnings management, it is found to have a significantly positive effect on bank opacity. The explanatory power of earnings management on bank opacity is stronger during the pre-crisis period than during the 2007-2009 financial crisis. When we examine the effects of delays in loan loss recognition on bank opacity, we found strong statistical relations during the financial crisis period, while the results for the pre-crisis period are mixed. We conclude that bank opacity is related to unexpected loan loss provision as well as delays in loan loss recognition.
    Date: 2013
  12. By: Hatzopoulos, V.; Iori, G.; Mantegna, R.; Micciche, S.; Tumminello, M.
    Abstract: Interbank markets allow credit institutions to exchange capital for purposes of liquidity management. These markets are among the most liquid markets in the financial system. However, liquidity of interbank markets dropped during the 2007-2008 financial crisis, and such a lack of liquidity influenced the entire economic system. In this paper, we analyze transaction data from the e-MID market which is the only electronic interbank market in the Euro Area and US, over a period of eleven years (1999-2009). We adapt a method developed to detect statistically validated links in a network, in order to reveal preferential trading in a directed network. Preferential trading between banks is detected by comparing empirically observed trading relationships with a null hypothesis that assumes random trading among banks doing a heterogeneous number of transactions. Preferential trading patterns are revealed at time windows of 3-maintenance periods. We show that preferential trading is observed throughout the whole period of analysis and that the number of preferential trading links does not show any significant trend in time, in spite of a decreasing trend in the number of pairs of banks making transactions. We observe that preferential trading connections typically involve large trading volumes. During the crisis, we also observe that transactions occurring between banks with a preferential connection occur at larger interest rates than the complement set - an effect that is not observed before the crisis.
    Keywords: Interbank markets; interbank rates; preferential links; statistically validated networks
    Date: 2013
  13. By: Silvia Del Prete (Bank of Italy); Maria Lucia Stefani (Bank of Italy)
    Abstract: Italy ranks among EU countries with the fewest women on bank boards. Using a rich dataset on Italian banks that combines individual data on bank governance with different measures of performance and risk, this paper analyses the determinants of the gender gap in top positions. Econometric results suggest that there is a “second glass ceiling” as they confirm a significantly lower probability of women holding top decision-making positions (Chairman, CEO, General Manager), other individual characteristics and bank features being equal. Moreover, results show that the number of women at the top is greater a) in banks belonging to the major banking groups, with larger and younger boards; and b) in banks that are more cost efficient or in those with a larger share of risky loans in the past (in need of restructuring). Preliminary evidence from performance equations suggests that the presence of women is negatively correlated with indicators of ex post riskiness, implying that credit policies are more stringent when women are on the board, possibly due to their higher risk aversion.
    Keywords: banking, corporate governance, gender diversity, board of directors.
    JEL: G21 G34 J16
    Date: 2013–06
  14. By: Neil Bhutta
    Abstract: The annualized interest rate for a payday loan often exceeds 10 times that of a typical credit card, yet this market grew immensely in the 1990s and 2000s, elevating concerns about the risk payday loans pose to consumers and whether payday lenders target minority neighborhoods. This paper employs individual credit record data, and Census data on payday lender store locations, to assess these concerns. Taking advantage of several state law changes since 2006 and, following previous work, within-state-year differences in access arising from proximity to states that allow payday loans, I find little to no effect of payday loans on credit scores, new delinquencies, or the likelihood of overdrawing credit lines. The analysis also indicates that neighborhood racial composition has little influence on payday lender store locations conditional on income, wealth and demographic characteristics.
    Date: 2013

This issue is ©2013 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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