New Economics Papers
on Banking
Issue of 2013‒12‒15
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Capital and Dividend Externalities By Viral V. Acharya; Hanh Le; Hyun Song Shin
  2. A Model of Shadow Banking By Nicola Gennaioli; Andrei Shleifer; Robert W. Vishny
  3. Large Scale Asset Purchases with segmented mortgage and corporate loan markets. By Meixing Dai; Frédéric Dufourt; Qiao Zhang
  4. A Capital Adequacy Buffer Model By David Allen; Michael McAleer; Robert Powell; Abhay Singh
  5. Financing Investment: The Choice between Bonds and Bank Loans By Morellec , Erwan; Valta , Philip; Zhdanov , Alexei
  6. Essays on financial fragility and regulation. By Ma, K.
  7. Why Have Bank Interest Margins Been so High in Indonesia Since the 1997/1998 Financial Crisis? By Irwan Trinugroho; Agusman Agusman; Amine Tarazi
  8. Interbank Linkages and Contagion Risk in the Portuguese Banking System By Lara Mónica Machado Fernandes,; Maria Rosa Borges
  9. Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience By Ager, Philipp; Spargoli, Fabrizio
  10. Modeling default correlation in a US retail loan portfolio By Magdalena Pisa; Dennis Bams; Christian Wolff
  11. Excess Control Rights, Financial Crisis and Bank Profitability and Risk By Amine Tarazi; Nadia Zedek
  12. Operational risk: A Basel II++ step before Basel III. By Dominique Guegan; Bertrand K. Hassani
  13. What lies behind the (Too-Small-To-Survive) banks? By Theoharry Grammatikos,; Nikolaos I. Papanikolaou
  14. Bank Income Smoothing, Ownership Concentration and the Regulatory Environment By Vincent Bouvatier; Laetitia Lepetit; Frank Strobel
  15. Can Non-Interest Rate Policies Stabilize Housing Markets? Evidence from a Panel of 57 Economies By Kenneth N. Kuttner; Ilhyock Shim
  16. Bank Risk - Return Efficiency and Bond Spread: Is There Evidence of Market Discipline in Europe By Cecile Casteuble; Emmanuelle Nys; Philippe Rous
  17. Managerial style and bank loan contracting By Francis, Bill B.; Hasan, Iftekhar; Zhu, Yun
  18. Optimal Time-Consistent Macroprudential Policy By Javier Bianchi; Enrique G. Mendoza
  19. Feasibility of Mortgage-Backed Securitization for the Underserved Housing Market in the Philippines By Ballesteros, Marife M.; Dulay, Daisy

  1. By: Viral V. Acharya; Hanh Le; Hyun Song Shin
    Abstract: In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.
    JEL: G01 G21 G24 G28 G32 G35 G38
    Date: 2013–12
  2. By: Nicola Gennaioli; Andrei Shleifer; Robert W. Vishny
    Abstract: We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors neglect tail risks.
  3. By: Meixing Dai; Frédéric Dufourt; Qiao Zhang
    Abstract: We introduce Large Scale Asset Purchases (LSAPs) in a New-Keynesian DSGE model that features distinct mortgage and corporate loan markets. We show that following a significant disruption of financial intermediation, central-bank purchases of mortgage-backed securities (MBS) are less effective at easing credit market conditions and stabilizing economic activity than outright purchases of corporate bonds. Moreover, the size of the effects crucially depends on the extent to which credit markets are segmented, i.e. to which a "portfolio balance channel" is at work in the economy. More segmented credit markets imply larger, but more local effects of particular asset purchases. With strongly segmented credit markets, large scale purchases of MBS are useful to stabilize the housing market but do little to mitigate the contractionary effect of the crisis on employment and output.
    Keywords: Financial frictions, mortgage-backed securities (MBS), corporate bonds, unconventional monetary policy, large scale asset purchases (LSAPs), portfolio balance channel, credit spreads.
    JEL: E32 E44 E52 E58
    Date: 2013
  4. By: David Allen; Michael McAleer (University of Canterbury); Robert Powell; Abhay Singh
    Abstract: In this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model, which measures distance to default, and the timeless capital asset pricing model (CAPM) which measures additional returns to compensate for additional share price risk.
    Keywords: Credit risk, Capital buffer, Distance to default, Conditional value at risk, Capital adequacy buffer model
    JEL: G01 G21 G28
    Date: 2013–10–16
  5. By: Morellec , Erwan; Valta , Philip; Zhdanov , Alexei
    Abstract: We build a dynamic model of investment and financing decisions to study the choice between bonds and bank loans in a firm's marginal financing decision and its effects on corporate investment. We show that firms with more growth options, higher bargaining power in default, operating in more competitive product markets, and facing lower credit supply are more likely to issue bonds. We also demonstrate that, by changing the cost of financing, these characteristics affect the timing of investment. We test these predictions using a sample of U.S. firms and present new evidence which supports our theory.
    Keywords: debt structure; capital structure; investment; credit supply; competition
    JEL: D83 G12 G32 G33
    Date: 2013–12–10
  6. By: Ma, K. (Tilburg University)
    Abstract: Abstract: This thesis investigates various issues in regulation, with three chapters on financial fragility and banking regulation, and one chapter on competition policy. Chapter 2 studies banks’ herding driven by their need for market liquidity, highlighting a trade-off between systemic risk and liquidity creation. The model also suggests that systemic risk and leverage are mutually reinforcing, offering an explanation of why banks collectively exposed themselves to mortgage-backed securities prior to the crisis, and why the exposure grew when banks were increasingly leveraged using wholesale short-term funding. Chapter 3 examines the possible trade-off between banking competition and financial stability by highlighting banks' endogenous leverage. Competition is shown to affect portfolio risk, insolvency risk, liquidity risk and systemic risk differently. The model leads us to revisit the existing empirical literature using a more precise taxonomy of risk and take into account endogenous leverage, thus clarifying a number of apparently contradictory empirical results. Chapter 4 presents a model where fire-sales and bank runs are self-fulfilling and mutually reinforcing. With endogenous fire sale prices, the model delivers two new policy insights: First Bank capital can have unintended consequences on illiquidity and contagion, and therefore is not a panacea for financial stability. Second, as acknowledging a crisis aggravates financial contagion, full commitment to regulatory transparency can be suboptimal from a social welfare point-of-view. Chapter 5 is devoted to antitrust policy. It studies how cost asymmetry affects the effectiveness of corporate leniency programs. The analysis shows that using leniency programs involves a trade-off between ex-ante deterrence and ex-post efficiency. For traditional antitrust investigation can both deter cartels and improve allocation, leniency programs should be viewed as a second best solution for budget-constrained antitrust authorities.
    Date: 2013
  7. By: Irwan Trinugroho (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Agusman Agusman (bank indonesia - bank indonesia); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: We investigate the determinants of net interest margins of Indonesian banks after the 1997/1998 financial crisis. Using data for 93 Indonesian banks over the 2001-2009 period, we estimate an econometric model using a pooled regression as well as static and dynamic panel regressions. Our results confirm that the structure of loan portfolios matters in the determination of interest margins. Operating costs, market power, risk aversion and liquidity risk have positive impacts on interest margins, while credit risk and cost to income ratio are negatively associated with margins. Our results also corroborate the loss leader hypothesis on cross-subsidization between traditional interest activities and non-interest activities. State- owned banks set higher interest margins than other banks, while margins are lower for large banks and for foreign banks.
    Date: 2012
  8. By: Lara Mónica Machado Fernandes,; Maria Rosa Borges
    Abstract: Interbank money markets play a fundamental role in financial systems but they can also be a channel through which problems in one institution can spread to the remaining ones. In particular, the potential for contagion stemming from interbank money markets is closely related with the pattern of interbank lending relationships. In this study, we characterize the Portuguese overnight interbank money market between 1999 and 2009 and analyze its inherent potential for contagion, based on bilateral interbank exposures. We conclude that: (i) the Portuguese overnight interbank money market has a multiple money center structure, where some banks have, simultaneously, an important role as lenders as well as borrowers; (ii) although unlikely, the failure of one institution can have contagion effects, pushing others into failure; (iii) however, even under the most extreme assumptions, banks that fail by contagion represent less than 10 per cent of the total banking systems assets.
    Keywords: Money market, Interbank lending, Financial contagion
    JEL: D40 G15 G21
    Date: 2013–12
  9. By: Ager, Philipp; Spargoli, Fabrizio
    Abstract: We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic growth. As governments were not concerned about systemic stability in this period, we are able to isolate the effects of bank competition from those of state implicit guarantees. We find that the introduction of free banking laws stimulated the creation of new banks and led to more bank failures. Our empirical evidence indicates that states adopting free banking laws experienced an increase in output per capita compared to the states that retained state bank chartering policies. We argue that the fiercer bank competition following the introduction of free banking laws might have spurred economic growth by (1) increasing the money stock and the availability of credit; (2) leading to efficiency gains in the banking market. Our findings suggest that the more frequent bank failures occurring in a competitive banking market do not harm long-run economic growth in a system without public safety nets.
    Keywords: Bank Deregulation, Bank Competition, Economic Growth, Financial Development, Dynamic Efficiency, Free Banking
    JEL: G18 G21 G28 N21
    Date: 2013–11–25
  10. By: Magdalena Pisa; Dennis Bams; Christian Wolff (LSF)
    Abstract: This paper generalizes the existing asymptotic single-factor model to address issues related to industry heterogeneity, default clustering and capital requirement s parameter uncertainty in US retail loan portfolios. We argue that the Basel II capital requirement overstates the riskiness of small businesses even with prudential adjustments.Moreover, our estimates show that both location and spread of loss distribution bare uncertainty.Their shifts over the course of the recent crisis have important risk management implications. The results are based on a unique representative dataset of US small businesses from 2005 to 2011 and give fundamental insights into the US economy.
    Keywords: Retail credit risk, default correlation, multiple defaults, generalized method of moments
    JEL: C51 G32 E44
    Date: 2012
  11. By: Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Nadia Zedek (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: We empirically investigate the impact of shareholders' excess control rights (greater control than cash-flow rights) on bank profitability and risk before, during, and after the global financial crisis of 2007-2008. We use a unique hand-crafted dataset tracing the complete control chains of 788 European commercial banks and cover the 2002-2010 period. We find that the presence of excess control rights is associated with lower profitability, higher risk- taking and higher default risk before (2002-2006) and after (2009-2010) the crisis. Conversely, it improves profitability and no longer affects risk during the crisis (2007-2008). Further evidence shows that, regardless of the period, the effect of excess control rights on profitability and risk is accentuated in family-controlled banks and in countries with relatively weak shareholder protection rights and that such an effect is only effective at intermediate and high levels of excess control rights. Overall, our findings contribute to the literature examining the corporate governance determinants of banks' performance during the 2007- 2008 financial crisis and have several policy implications.
    Date: 2013
  12. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K. Hassani (BPCE et Centre d'Economie de la Sorbonne)
    Abstract: Following Banking Committee on Banking Supervision, operational risk quantification is based on the Basel matrix which enables sorting incidents. In this paper, we deeply analyze these incidents and propose strategies for carrying out the supervisory guidelines proposed by the regulators. The objectives are as follows. On the first hand, banks need to provide a univariate capital charge for each cell of the Basel matrix. On the other hand, banks need also to provide a global capital charge corresponding to the whole matrix taking into account dependences. This paper proposes several solutions and attracts the regulators and managers attention on two crucial points: the granularity and the risk measures.
    Keywords: Operational risks, Loos Distribution Function, risk measures, EVT, Vine Copula.
    JEL: C18
    Date: 2011–09
  13. By: Theoharry Grammatikos,; Nikolaos I. Papanikolaou (LSF)
    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
    Date: 2013
  14. By: Vincent Bouvatier (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Frank Strobel (university of birmingham - Department of Economics)
    Abstract: Abstract We empirically examine whether the way a bank might use loan loss provisions to smooth its income is in‡uenced by its ownership concentration and the regulatory environment. Using a panel of European commercial banks, we find evidence that banks with more concentrated ownership use discretionary loan loss provisions to smooth their income. This behavior is less pronounced in countries with stronger supervisory regimes or higher external audit quality. Banks with low levels of ownership concentration do not display such discretionary income smoothing behavior. This suggests the need to improve existing or implement new corporate governance mechanisms.
    Date: 2013
  15. By: Kenneth N. Kuttner; Ilhyock Shim
    Abstract: Using data from 57 countries spanning more than three decades, this paper investigates the effectiveness of nine non-interest rate policy tools, including macroprudential measures, in stabilizing house prices and housing credit. In conventional panel regressions, housing credit growth is significantly affected by changes in the maximum debt-service-to-income (DSTI) ratio, the maximum loan-to-value ratio, limits on exposure to the housing sector and housing-related taxes. But only the DSTI ratio limit has a significant effect on housing credit growth when we use mean group and panel event study methods. Among the policies considered, a change in housing-related taxes is the only policy tool with a discernible impact on house price appreciation.
    JEL: G21 G28 R31
    Date: 2013–12
  16. By: Cecile Casteuble (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Emmanuelle Nys (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Philippe Rous (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: The aim of this paper is to empirically investigate the relationship between bank risk-return efficiency and bond spread priced in the primary market. Our study is based on a sample of European listed banks for the period 1996-2011. Applying a parametric frontier based on the Battese and Coelli (1993) model, we can compute risk-return efficiency score for each bank at each date. Compared to previous studies, we investigate the effectiveness of market discipline taking into account not only risk and return independently, but also the level of profitability for a given level of risk on the pricing of bond spread. We find that, over the complete sample period, bondholders require a higher spread from more inefficient banks. A closer analysis actually shows that market discipline is not effective during sound economic period, but market investors comes to discipline banks during distressed economic period by pricing lower spread to more efficient banks.
    Date: 2013
  17. By: Francis, Bill B. (Lally School of Management, Rensselaer Polytechnic Institute); Hasan, Iftekhar (Fordham University and Bank of Finland); Zhu, Yun (Lally School of Management, Rensselaer Polytechnic Institute)
    Abstract: This paper provides direct evidence that managerial style is a key determinant of the firm’s cost of capital, in the context of private debt contracting. Applying the novel empirical method by Abowd, Karmarz, and Margolis (1999) to a large sample that tracks job movement of top managers, we find that managerial style is a critical factor that explains a large part of the variation in loan contract terms. The loan-term-related managerial styles correlate with managerial styles of firm performance and corporate decisions, implying that certain managers achieve better firm performance via lower cost of capital and other desirable non-price loan terms. We further find direct evidence that banks “follow” managers’ job changes and offer loan contracts with preferential terms to their new firms. Some of the preferred managerial styles reflect managers’ personal characteristics, such as managerial ability, authority and conservatism.
    Keywords: managerial style; cost of capital; bank loan contract; firm performance; firm decision-making
    JEL: G21 G32 G34
    Date: 2013–11–23
  18. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: Collateral constraints widely used in models of financial crises feature a pecuniary externality, because agents do not internalize how collateral prices respond to collective borrowing decisions, particularly when binding collateral constraints trigger a crisis. We show that agents in a competitive equilibrium borrow "too much" during credit expansions compared with a financial regulator who internalizes this externality. Under commitment, however, this regulator faces a time inconsistency problem: It promises low future consumption to prop up current asset prices when collateral constraints bind, but this is not optimal ex post. Instead, we study the optimal, time-consistent policy of a regulator who cannot commit to future policies. Quantitative analysis shows that this policy reduces the incidence and magnitude of crises, removes fat tails from the distribution of returns and reduces risk premia. A key element of this policy is a state-contingent macro-prudential debt tax (i.e. a tax imposed in normal times when a financial crisis has positive probability next period) of about 1 percent on average. Constant debt taxes also reduce the frequency of crises but are less effective at reducing their severity and reduce welfare when credit constraints bind.
    JEL: E0 F0 G0
    Date: 2013–12
  19. By: Ballesteros, Marife M.; Dulay, Daisy
    Abstract: This paper draws lessons from international practices to determine the feasibility of developing mortgage-backed securitization (MBS) to expand housing finance to the underserved market in the country. Despite the risks of securitization, as evidenced by the recent US subprime crisis, the huge beneficial effects of opening up the capital market to individual investors and to borrowers that were previously out of reach is well-acknowledged in literature. Several countries developed MBS to facilitate and promote housing finance. The international best practices show that efficient securitization can be established based on: (1) clear regulatory framework; (2) prudent underwriting and valuation process; (3) reliable credit rating companies to mitigate moral hazards and adverse selection risks; and (4) the need for originators to have adequate capital so that warranties and representations can be taken seriously. In particular, the US subprime crisis highlights a major lesson that needs to be avoided, that is, the use of securitization as a tool for balance sheet arbitrage instead of funding and investments in the real economy. In the country, the National Home Mortgage Corporation (NHMFC) was established with the same intent as the US Fannie Mae and Freddie Mac. However, after three decades of existence, it was only in 2007 that NHMFC laid the building blocks to operate as a secondary mortgage institution (SMI). The corporation`s initial securitization issuances were successful and twice oversubscribed. However, to enable NHMFC to efficiently function as an SMI, government needs to undertake the following: (1) strengthen the housing finance industry and rationalize the role of HGC, HDMF, and NHMFC; (2) support NHMFC to improve its balance sheet and strengthen its organizational capabilities; (3) develop standardized housing loan documents and quality underwriting through mortgage insurance; (4) integrate/create credit information data base for all housing loan borrowers; (5) provide incentives to securitization through tax exemptions, reactivation of NHMFC limited sovereign guarantee, recognition of MBS bonds and NHMFC issuances as compliance to statutory liquidity requirements of financial institutions, etc; and (6) automation of MBS servicing and reporting.
    Keywords: housing finance, Philippines, mortgage-backed securitization
    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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