New Economics Papers
on Banking
Issue of 2013‒12‒20
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Capital and Contagion in Financial Networks By di Iasio, Giovanni; Battiston, Stefano; Infante, Luigi; Pierobon, Federico
  2. Macroprudential Regulation and Macroeconomic Activity By Karmakar, Sudipto
  3. Shadow banks and macroeconomic instability By Roland Meeks; Benjamin Nelson; Piergiorgio Alessandri
  4. Bank Capital and Lending: An Analysis of Commercial Banks in the United States By Karmakar, Sudipto; Mok, Junghwan
  5. Cross-Border Interbank Networks, Banking Risk and Contagion By Lena Tonzer
  6. Loan/Loss Provisioning in Emerging Europe: Precautionary or Pro-Cyclical? By John Bonin; Marko Kosak
  7. Do Capital Buffers Matter? A Study on the Profitability and Funding Costs Determinants of the Brazilian Banking System By Benjamin Miranda Tabak; Denise Leyi Li; João V. L. de Vasconcelos; Daniel O. Cajueiro
  8. Cross-border Activity of Japanese Banks By Raphael W. Lam
  9. Changing forces of gravity: How the crisis affected international banking By Buch, Claudia M.; Neugebauer, Katja; Schröder, Christoph
  10. Supply tightening or lack of demand? An analysis of credit developments during the Lehman Brothers and the sovereign debt crises By Paolo Del Giovane; Andrea Nobili; Federico Maria Signoretti
  11. Search Frictions, Credit Market Liquidity, and Net Interest Margin Cyclicality By Kevin E. Beaubrun-Diant; Fabien Tripier
  12. Can non-interest rate policies stabilize housing markets? By Kenneth N. Kuttner; Illyock Shim
  13. Credit Unions, Consolidation and Business Formation: Evidence from Canadian provinces By Morgan, Horatio M.
  14. Prisoner’s dilemma for EU bank groups By Nedelchev, Miroslav
  15. Microprudential Regulation in a Dynamic Model of Banking By : Gianni De Nicolo; : Andrea Gamba; : Marcella Lucchetta
  16. Firm Risk and Leverage Based Business Cycles By Sanjay K. Chugh
  17. The Role of Subsidization and Organizational Status on Borrower Repayment Rates in Microfinance Institutions By Mariya Pylypiv; Sugato Chakravarty

  1. By: di Iasio, Giovanni; Battiston, Stefano; Infante, Luigi; Pierobon, Federico
    Abstract: We implement a novel method to detect systemically important financial institutions in a network. The method consists in a simple model of distress and losses redistribution derived from the interaction of banks' balance-sheets through bilateral exposures. The algorithm goes beyond the traditional default-cascade mechanism, according to which contagion propagates only through banks that actually default. We argue that even in the absence of other defaults, distressed-but-non-defaulting institutions transmit the contagion through channels other than solvency: weakness in their balance sheet reduces the value of their liabilities, thereby negatively affecting their interbank lenders even before a credit event occurs. In this paper, we apply the methodology to a unique dataset covering bilateral exposures among all Italian banks in the period 2008-2012. We find that the systemic impact of individual banks has decreased over time since 2008. The result can be traced back to decreasing volumes in the interbank market and to an intense recapitalization process. We show that the marginal effect of a bank's capital on its contribution to systemic risk in the network is considerably larger when interconnectedness is high (good times): this finding supports the regulatory work on counter-cyclical (macroprudential) capital buffers.
    Keywords: Systemic risk; interbank market; contagion; network; feedback centrality.
    JEL: C45 D85 G01 G21
    Date: 2013–12
  2. By: Karmakar, Sudipto
    Abstract: This paper develops a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on bank’s financial decisions and the implications for the real sector. I explicitly incorporate costs and benefits of capital requirements. I model an occasionally binding capital constraint and approximate it using an asymmetric non linear penalty function. This friction means that the banks refrain from valuable lending. At the same time, countercyclical buffers provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations. I also show that stronger regulation can induce banks to hold buffers and hence mitigate an economic downturn as well. Increasing the capital requirements do not seem to have an adverse effect on the welfare. Lastly, I also show that switching to a countercyclical capital requirement regime can help reduce fluctuations and raise welfare.
    Keywords: Capital Buffers, Prudential Regulation, Basel Core Banking Principles
    JEL: G01 G21 G28
    Date: 2013–05–31
  3. By: Roland Meeks (Essex University); Benjamin Nelson (Bank of England); Piergiorgio Alessandri (Bank of Italy)
    Abstract: We develop a macroeconomic model in which commercial banks can offload risky loans onto a ‘shadow’ banking sector and financial intermediaries trade in securitized assets. We analyze the responses of aggregate activity, credit supply and credit spreads to business cycle and financial shocks. We find that interactions and spillover effects between financial institutions affect credit dynamics, that high leverage in the shadow banking system heightens the economy’s vulnerability to aggregate disturbances, and that following a financial shock, a stabilization policy aimed solely at the securitization markets is relatively ineffective.
    Keywords: shadow banks, securitization, financial accelerator
    JEL: E32 E44 E58 G23
    Date: 2013–11
  4. By: Karmakar, Sudipto; Mok, Junghwan
    Abstract: This paper empirically evaluates the impact of bank capital on lending patterns of commercial banks in the United States. We construct an unbalanced quarterly panel of around seven thousand medium sized commercial banks over sixty quarters, from 1996 to 2010. Using two different measures of capital namely the capital adequacy ratio and tier 1 ratio, we find a moderate relationship between bank equity and lending. We also use an innovative instrumenting methodolgy which helps us overcome the endogeneity issues that are common in such analyses. Our results are broadly consistent with some other recent studies that have analyzed US banking data.
    Keywords: Bank Capital Buffers, Regulation, Risk Weighted Assets
    JEL: G21 G28 G32
    Date: 2013–10–30
  5. By: Lena Tonzer
    Abstract: Recent events emphasize the role of cross-border linkages between banking systems in transmitting local developments across national borders. This paper analyzes whether international linkages in interbank markets affect the stability of interconnected banking systems and channel financial distress within a network consisting of banking systems of main advanced countries for the period 1993-2009. Methodologically, I use a spatial modelling approach to test for spillovers in cross-border interbank markets. The results suggest that foreign exposures in banking play a significant role in channelling banking risk: I find that countries which are linked through foreign borrowing or lending positions to more stable banking systems abroad are significantly affected by positive spillover effects. From a policy point of view, this implies that especially in stable times linkages in the banking system can be beneficial, while they have to be taken with caution in times of financial turmoil covering the whole system.
    Keywords: Financial contagion, financial integration, banking networks
    JEL: F21 F34 G21 O16
    Date: 2013–12
  6. By: John Bonin (Department of Economics, Wesleyan University); Marko Kosak (Faculty of Economics, University of Ljubljana, Ljubljana, Slovenia)
    Abstract: The recent global financial crisis has generated considerable interest in reviewing the regulatory environment surrounding the banking sectors in most countries and proposals for changes designed to avoid such a severe outcome in the future. In this paper, we consider a particular aspect relevant to bank regulation, namely, the cyclicality of loan loss provisioning, in a region of emerging market economies. All eleven of the countries in our sample are currently new members of the European Union, the first group entering 2004 and the last country joining in 2013. Our time period from 1997 to 2010 covers roughly one and a half business cycles, starting with the impact of the Russian financial crisis and followed by a rapid growth of bank credit prior to the included global financial crisis. We find that the determinants of loan loss provisioning by banks in the region are similar to those found in the literature for other countries both developed and developing ones. We find evidence on income smoothing through provisioning and capital management by substitution. Unlike the results in much of the literature, we do not find statistically significant evidence of bank-specific pro-cyclicality, i.e., a strong positive relationship between provisioning and individual bank loan growth. However, we do find strong and robust evidence of macroeconomic pro-cyclicality, i.e., a strong positive relationship between provisioning and country GDP growth. Based on the innovative policy of dynamic (statistical) provisioning instrument adopted by Spanish regulators in 2000 to smooth provisioning over the business cycle, we draw implications for regulatory design specific to this region in which financial sectors are bank-centric and financial deepening is occurring.
    Date: 2013–12
  7. By: Benjamin Miranda Tabak; Denise Leyi Li; João V. L. de Vasconcelos; Daniel O. Cajueiro
    Abstract: This paper consists of an empirical investigation of Brazilian banks' profitability determinants. The panel data is composed of quarterly information for 71 banks between the first quarter of 2002 and the second quarter of 2012. Using data from the Brazilian banking system, we study the traditional determinants of bank profitability - controlling for macroeconomic environment, bank-specific characteristics and industrial structure of the banking sector - and contribute by analyzing the effects of capital buffers on bank profitability. We find that capital buffers have a positive impact on Brazilian banks' profitability. This result reinforces the hypothesis that buffers signalize stability and safety, reducing costs of fund raising. Other findings include a negative effect of high default rates on profitability; the positive effect of higher liquid assets ratios and, finally, the higher profitability of smaller, domestic private banks. The results are important to comprehend Brazilian banking institutions and can also help formulating and conducting monetary and regulatory policies
    Date: 2013–11
  8. By: Raphael W. Lam
    Abstract: This paper explores the determinants of Japanese banks’ overseas expansion and assesses whether the growing cross-border activity will continue under the new macroeconomic policies referred as “Abenomicsâ€. The analysis finds that Japanese banks are well positioned to scale up foreign exposures, thanks to their relative resilient balance sheets and continued growth in the region. Stronger domestic growth in Japan could mitigate the pace, but is unlikely to reverse the expansion as global and regional pull-factors play a more prominent role in the growth of cross-border claims. Increasing cross-border activity could pose funding risks and supervisory challenges and require continued close monitoring.
    Keywords: Banks;Japan;Financial institutions;Nonbank financial sector;Bank supervision;Banking systems;Japan, cross-border banking, Abenomics, funding risks
    Date: 2013–11–22
  9. By: Buch, Claudia M.; Neugebauer, Katja; Schröder, Christoph
    Abstract: The global financial crisis has brought to an end a rather unprecedented period of banks' international expansion. We analyze the effects of the crisis on international banking. Using a detailed dataset on the international assets of all German banks with foreign affiliates for the years 2002-2011, we study bank internationalization before and during the crisis. Our data allow analyzing not only the international assets of the banks' headquarters but also of their foreign affiliates. We show that banks have lowered their international assets, both along the extensive and the intensive margin. This withdrawal from foreign markets is the result of changing market conditions, of policy interventions, and of a weakly increasing sensitivity of banks to financial frictions. --
    Keywords: international banking,gravity model,financial frictions
    JEL: G01 F34 G21
    Date: 2013
  10. By: Paolo Del Giovane (Bank of Italy); Andrea Nobili (Bank of Italy); Federico Maria Signoretti (Bank of Italy)
    Abstract: We estimate a structural econometric model for the credit market in Italy, using bank-level information and the responses of Italian banks to the euro-area Bank Lending Survey to identify demand and supply, focusing on the recent financial crisis. The main results are the following. First, while in normal circumstances the functioning of the Italian credit market is consistent with a standard imperfect-competition model, during phases of high tension there are credit-rationing phenomena. Second, supply restrictions have a relevant impact on lending, both when they are due to banks’ balance-sheet constraints and when they are the effect of greater perceived borrower riskiness. Third, to a large extent the tightening during the sovereign debt crisis reflected the common shock of the widening sovereign spread, not idiosyncratic bank funding problems. Fourth, the role of supply was stronger during the sovereign than the global financial crisis, mainly due to greater banks’ funding difficulties. In a counterfactual exercise we estimate that in the second quarter of 2012 interest rates were more than 2 percentage points higher and the stock of loans more than 8 percent lower than would have been the case without the tightening of lending standards in the course of the entire crisis.
    Keywords: credit rationing, supply tightening, financial crisis, sovereign debt crisis
    JEL: E30 E32 E51
    Date: 2013–11
  11. By: Kevin E. Beaubrun-Diant; Fabien Tripier
    Abstract: The present paper contributes to the body of knowledge on search frictions in credit markets by demonstrating their ability to explain why the net interest margins of banks behave countercyclically. During periods of expansion, a fall in the net interest margin proceeds from two mechanisms: (i) lenders accept that they must finance entrepreneurs that have lower productivity and (ii) the liquidity of the credit market rises, which simplifies access to loans for entrepreneurs and thereby reinforces their threat point when bargaining the interest rate of the loan.
    Keywords: Search Friction;Matching Model;Nash Bargaining;Bank Interest Margin
    JEL: C78 E32 E44 G21
    Date: 2013–12
  12. By: Kenneth N. Kuttner (Williams College); Illyock Shim (Bank for International Settlements)
    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 stabilising 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 housingrelated 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.
    Keywords: House prices, housing credit, financial stability, macroprudential policy
    JEL: E44 G21 G28 R31
    Date: 2013–12
  13. By: Morgan, Horatio M.
    Abstract: This study empirically evaluates the impact of consolidation activity in the credit union system on the rate of business formation. Drawing on Canadian provincial-level data over the period 1992-2009, it provides evidence which suggests that consolidation activity is unlikely to hurt business formation in the absence of intense competition in the credit market. Specifically, a unit increase in credit union assets per working-age (15-64) individual has a negative, but negligible effect on the rate of business formation. However, the intensification of competition in the credit union system may increase the magnitude of this negative effect. These findings may inform the formulation of small business and entrepreneurship policies. In particular, they suggest that competition policies on the banking sector warrant greater attention as consolidation activity unfolds in the credit union system.
    Keywords: Competition, Consolidation, Credit unions, Business formation, Small business lending
    JEL: C33 G18 G21 L16 L26 M13
    Date: 2013–10–18
  14. By: Nedelchev, Miroslav
    Abstract: What happenned after 2007 requires that new kind of instruments are applied in order to face the global financial crisis. Non-coordinated actions undertaken by a single bank group have additionally sharpened the effects of the crisis and have resulted in the must of joint efforts which are better known as the "prisoner's dilema".
    Keywords: prisoner’s dilemma, bank groups, corporate governance
    JEL: C71 G21 G34
    Date: 2012–09
  15. By: : Gianni De Nicolo; : Andrea Gamba; : Marcella Lucchetta
    Date: 2013
  16. By: Sanjay K. Chugh (Boston College)
    Abstract: I characterize cyclical fluctuations in the cross-sectional dispersion of firm-level productivity in the U.S. manufacturing sector. Using the estimated dispersion, or "risk," stochastic process as an input to a baseline DSGE financial accelerator model, I assess how well the model reproduces aggregate cyclical movements in the financial conditions of U.S. non-financial firms. In the model, risk shocks calibrated to micro data induce large and empirically-relevant fluctuations in leverage, a nancial measure typically thought to be closely associated with real activity. In terms of aggregate quantities, however, pure risk shocks account for only a small share of GDP fluctuations in the model, less than one percent. Instead, it is standard aggregate productivity shocks that explain virtually all of the model's real fluctuations. These results reveal a dichotomy at the core of a popular class of DSGE financial frictions models: risk shocks induce large financial fiuctuations, but have little effect on aggregate quantity fluctuations.
    Keywords: leverage, second-moment shocks, time-varying volatility, credit frictions, financial accelerator, business cycles
    JEL: E10 E20 E32 E44
    Date: 2013–03–02
  17. By: Mariya Pylypiv (Purdue University); Sugato Chakravarty (Purdue University)
    Abstract: WWe use multilevel analysis to examine the effect of different types of subsidized funding (private vs. public) on microfinance institutions’ (MFIs) borrower repayment rates. Using information from Mixmarket data on 947 MFIs over a 10-year period (2000-2010) we find that private funding is positively related to MFIs’ abilities to screen borrowers and to monitor borrower repayment rates. We find that MFIs that have higher proportion of private donor funds to public subsidies have lower rates of portfolios at risk, fewer delinquent loans, and that their overall portfolios are less risky. Moreover, we find that regulated MFIs (vs. non-regulated MFIs) have lower rates of borrower delinquency, while for-profit MFIs have higher rates of written-off loans relative to their non-profit counterparts. Our findings promote a greater understanding of different lending practices used within MFIs with different organizational status (regulated vs. non-regulated, profit vs. not-for-profit) and identify strategies for a more efficient allocation of donor funds.
    Keywords: microfinance, subsidies, donations, loan repayment, loan portfolio, writer off ratio;
    Date: 2013–12

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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