New Economics Papers
on Banking
Issue of 2014‒01‒10
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Mortgages and monetary policy By Garriga, Carlos; Kydland, Finn E.; Šustek, Roman
  2. Do Small Businesses Still Prefer Community Banks? By Berger, Allen N.; Goulding, William; Rice, Tara
  3. Can taxes tame the banks? Evidence from European bank levies By Michael P. Devereux; Niels Johannesen; John Vella
  4. Are Banks' Internal Risk Parameters Consistent? Evidence from Syndicated Loans By Firestone, Simon; Rezende, Marcelo
  5. What Influences Banks' Choice of Risk Management Tools?: Theory and Evidence By Dilek Bülbül; Hendrik Hakenes; Claudia Lambert
  6. A model of financial contagion with variable asset returns may be replaced with a simple threshold model of cascades By Teruyoshi Kobayashi
  7. Systemic Risk, International Regulation, and the Limits of Coordination By Kara, Gazi
  8. When does the general public lose trust in banks? By David-Jan Jansen; Robert Mosch; Carin van der Cruijsen
  9. Forecasting Bank Credit Ratings By Periklis Gogas; Theophilos Papadimitriou; Anna Agrapetidou
  10. The Multiplex Structure of Interbank Networks By Leonardo Bargigli; Giovanni Di Iasio; Luigi Infante; Fabrizio Lillo; Federico Pierobon
  11. Supervisory transparency in the European banking union By Christopher Gandrud; Mark Hallerberg
  12. Sovereigns versus banks: credit, crises, and consequences By Jorda, Oscar; Schularick, Moritz; Taylor, Alan M.
  13. Does Bank Market Power Affect SME Financing Constraints? By Ryan, Robert M.; O'Toole, Conor; McCann, Fergal
  14. Determinants of Short-term Lender Location and Interest Rates By Taylor J. Canann; Richard W. Evans
  15. Misconceptions about Credit Ratings - An Empirical Analysis of Credit Ratings across Market Sectors and Agencies By Kerstin Lopatta; Magdalena Tchikov; Finn Marten Körner
  16. How should financial intermediation services be taxed? By Ben Lockwood

  1. By: Garriga, Carlos (Federal Reserve Bank of St. Louis); Kydland, Finn E. (University of California–Santa Barbara); Šustek, Roman (Queen Mary, University of London)
    Abstract: Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.
    Keywords: Mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment.
    JEL: E32 E52 G21 R21
    Date: 2013–12–05
  2. By: Berger, Allen N. (Board of Governors of the Federal Reserve System (U.S.)); Goulding, William (Board of Governors of the Federal Reserve System (U.S.)); Rice, Tara (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We formulate and test hypotheses about the role of bank type – small versus large, single-market versus multimarket, and local versus nonlocal banks – in banking relationships. The conventional paradigm suggests that "community banks" – small, single market, local institutions – are better able to form strong relationships with informationally opaque small businesses, while "megabanks" – large, multimarket, nonlocal institutions – tend to serve more transparent firms. Using the 2003 Survey of Small Business Finance (SSBF), we conduct two sets of tests. First, we test for the type of bank serving as the "main" relationship bank for small businesses with different firm and owner characteristics. Second, we test for the strength of these main relationships by examining the probability of multiple relationships and relationship length as functions of main bank type and financial fragility, as well as firm and owner characteristics. The results are often not consistent with the conventional paradigm, perhaps because of changes in lending technologies and deregulation of the banking industry.
    Keywords: Banks; relationships; small business; government policy
    JEL: G21 G28 G34
    Date: 2013–12–01
  3. By: Michael P. Devereux (Oxford University Centre for Business Taxation); Niels Johannesen (University of Copenhagen); John Vella (Oxford University Centre for Business Taxation)
    Abstract: In the wake of the fi?nancial crisis, a number of countries have introduced levies on bank borrowing with the aim of reducing risk in the ?financial sector. This paper studies the behavioural responses to the bank levies and evaluates the policy. We find that the levies induced banks to borrow less but also to hold more risky assets. The reduction in funding risk clearly dominates for banks with high capital ratios but is exactly offset by the increase in portfolio risk for banks with low capital ratios. This suggests that while the levies have reduced the total risk of relatively safe banks, they have done nothing to curb the risk of relatively risky banks, which presumably pose the greatest threat to fi?nancial stability.
    JEL: H25
    Date: 2013
  4. By: Firestone, Simon (Board of Governors of the Federal Reserve System (U.S.)); Rezende, Marcelo (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper examines consistency in the estimates of probability of default (PD) and loss given default (LGD) that nine large U.S. banks assign to syndicated loans for regulatory capital purposes. Using internal bank data on loans that had PDs and LGDs assigned by more than one bank, we find substantial dispersion in these parameters. Banks differ substantially in PDs, but only a few set PDs systematically higher or lower than the median bank. However, many banks differ from the median bank systematically in LGDs, and these differences affect their Basel II minimum regulatory capital significantly. The differences in LGDs imply that, for an identical loan portfolio, the bank that sets the highest LGDs would have Basel II minimum regulatory capital twice as large as the bank that sets the lowest LGDs. We argue that these differences in risk parameters across banks can be at least partially explained by bank behavior that complies with the Basel rules. We also find a negative relation between banks' LGDs and their shares in loan syndicates, suggesting that differences in risk parameters have implications beyond bank capital.
    Keywords: Probability of default; loss given default; bank capital
    Date: 2013–10–01
  5. By: Dilek Bülbül; Hendrik Hakenes; Claudia Lambert
    Abstract: This paper investigates the factors influencing banks' decision to engage in advanced risk management, from both a theoretical and an empirical perspective. In recent decades, credit risk management in banks has become highly sophisticated and banks have become more active and advanced in the management of credit risks. We identify two driving factors for risk management: bank competition and sector concentration in the loan market. We find empirical support for our hypotheses, using a unique data set of 249 German banks; parts of the data set are hand-collected. Bank competition pushes banks to implement advanced risk management. Sector concentration in the loan market promotes credit portfolio modeling, but inhibits credit risk transfer.
    Keywords: banking, risk management, credit risk, credit portfolio modeling, credit risk transfer
    Date: 2013
  6. By: Teruyoshi Kobayashi (Graduate School of Economics, Kobe University)
    Abstract: I show the equivalence between a model of financial contagion and the widely-used threshold model of global cascades proposed by Watts (2002). The model financial network comprises banks that hold risky external assets as well as interbank assets. It turns out that there is no need to construct the balance sheets of banks if the shadow threshold of default is appropriately defined in accordance with the stochastic fluctuations in external assets.
    Keywords: financial network, cascades, financial contagion, systemic risk
    JEL: G01 G18
    Date: 2013–12
  7. By: Kara, Gazi (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper examines the incentives of national regulators to coordinate regulatory policies in the presence of systemic risk in global financial markets. In a two-country and three-period model, correlated asset fire sales by banks generate systemic risk across national financial markets. Relaxing regulatory standards in one country increases both the cost and the severity of crises for both countries in this framework. In the absence of coordination, independent regulators choose inefficiently low levels of macro-prudential regulation. A central regulator internalizes the systemic risk and thereby can improve the welfare of coordinating countries. Symmetric countries always benefit from coordination. Asymmetric countries choose different levels of macro-prudential regulation when they act independently. Common central regulation will voluntarily emerge only between sufficiently similar countries.
    Keywords: Systemic risk; macroprudential regulation; international policy coordination
    Date: 2013–09–16
  8. By: David-Jan Jansen; Robert Mosch; Carin van der Cruijsen
    Abstract: When does the general public lose trust in banks? We provide empirical evidence using responses by Dutch survey participants to eight hypothetical scenarios. We find that members of the general public care strongly about executive compensation. Negative media reports, falling stock prices, and opaque product information also affect trust in banks. Experiencing a bank bailout leads to less concern about government intervention, while experience of a bank failure leads to greater concern on bonuses.
    Keywords: trust; banks; general public; financial crisis; survey data
    JEL: D12 D14 D18 G01 G21
    Date: 2013–11
  9. By: Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece); Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace, Greece); Anna Agrapetidou (Department of Economics, Democritus University of Thrace, Greece)
    Abstract: Purpose-This study presents an empirical model designed to forecast bank credit ratings. For this reason we use the long term ratings provided by Fitch in 2012. Our sample consists of 92 U.S. banks and publicly available information from their financial statements from 2008 to 2011. Methodology -First, in the effort to select the most informative regressors from a long list of financial variables and ratios we use stepwise least squares and select several alternative sets of variables. Then these sets of variables are used in an ordered probit regression setting to forecast the long term credit ratings. Findings-Under this scheme, the forecasting accuracy of our best model reaches 83.70% when 9 explanatory variables are used. Originality/value- The results indicate that bank credit ratings largely rely on historical data making them respond sluggishly and after any financial problems were already known to the public.
    Date: 2013–11
  10. By: Leonardo Bargigli (DISEI, Università degli Studi di Firenze); Giovanni Di Iasio (Bank of Italy); Luigi Infante; Fabrizio Lillo; Federico Pierobon (Bank of Italy - Banking and Finance Supervision Department)
    Abstract: The interbank market has a natural multiplex network representation. We employ a unique database of supervisory reports of Italian banks to the Banca d'Italia that includes all bilateral exposures broken down by maturity and by the secured and unsecured nature of the contract. We find that layers have different topological properties and persistence over time. The presence of a link in a layer is not a good predictor of the presence of the same link in other layers. Maximum entropy models reveal different unexpected substructures, such as network motifs, in different layers. Using the total interbank network or focusing on a specific layer as representative of the other layers provides a poor representation of interlinkages in the interbank market and could lead to biased estimation of systemic risk.
    Keywords: interbank market, network theory, systemic risk
    JEL: E51 G21 C49
    Date: 2013
  11. By: Christopher Gandrud; Mark Hallerberg
    Abstract: Bank supervisors should provide publicly accessible, timely and consistent data on the banks under their jurisdiction. Such transparency increases democratic accountability and leads to greater market efficiency. There is greater supervisory transparency in the United States compared to the member states of the European Union. The US supervisors publish data quarterly and update fairly detailed information on bank balance sheets within a week. By contrast, based on an attempt to locate similar data in every EU country, in only 11 member states is this data at least partially available from supervisors, and in no member state is the level of transparency as high as in the US. Current and planned European Union requirements on bank transparency are either insufficient or could be easily sidestepped by supervisors. A banking union in Europe needs to include requirements for greater supervisory transparency.
    Date: 2014–01
  12. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis)
    Abstract: Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.
    Keywords: leverage; booms; recessions; financial crises; business cycles; local projections
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2013
  13. By: Ryan, Robert M.; O'Toole, Conor; McCann, Fergal
    Abstract: This paper examines the extent to which bank market power alleviates or magnifies SME credit constraints using a large panel dataset of more than 118,000 SMEs across 20 European countries over the period 2005-2008. To our knowledge, this is the first study to examine bank market power and SME credit constraints in an international, developed economy setting. Moreover, our study is the first to address a number of econometric considerations simultaneously, in particular by controlling for the availability of profitable investment opportunities using a structural Q model of investment. Our results strongly support the market power hypothesis, namely, that increased market power results in increased financing constraints for SMEs. Additionally, we find that the relationship exhibits heterogeneity across firm size and opacity in a manner that suggests that the true relationship between bank market power and financing constraints might not be fully explained by the existing theory. Finally, we find that the effect of bank market power on financing constraints increases in financial systems that are more bank dependent.
    Date: 2013–11
  14. By: Taylor J. Canann (Department of Economics, Brigham Young University); Richard W. Evans (Department of Economics, Brigham Young University)
    Abstract: This study tests the degree to which payday and title lenders differentiate their store location and interest rates based on the socioeconomic characteristics of the areas in which they operate. We use store-level lender data, geographically matched IRS income data, and Census Bureau demographic data to answer these questions. In the case of lender location, we find that payday and title lenders tend to locate in areas with lower median age, a larger population of not married households, more restaurants, and more pawn shops. We also find a nonlinear relationship between lender location and individual incomes in the surrounding area. Regarding lender interest rates, we find that competition among lenders reduces average interest rates and that riskiness of borrowers, as measured by defaults, increases average interest rates. We also find that payday and title lenders have higher interest rates in areas with lower educational attainment, smaller proportions of Black residents, and fewer married households. This evidence seems to contradict the argument that payday and title lenders prey on minorities.
    Keywords: Consumer lending, interest rates, payday lending, lender location
    JEL: C35 D22 E43 G23
    Date: 2013–12
  15. By: Kerstin Lopatta (University of Oldenburg - Accounting and Corporate Governance & ZenTra); Magdalena Tchikov (University of Oldenburg - Accounting and Corporate Governance & ZenTra); Finn Marten Körner (University of Oldenburg & ZenTra)
    Abstract: Rating agencies strive to assign reliable, objective and comparable credit ratings as an indicator on one consistent scale. We test empirically how rating agencies meet their promise of providing objective and comparable assessments of credit risk of an issuer and thus creditworthiness. Logistic regressions of ratings across agencies and market sectors point to highly significant differences of ratings for issuers in the 11 market sectors in our sample. Based on inter-sectoral comparisons, we detect a systematically positive rating bias for financial issuers, while issuers operating in the cyclical consumer goods sector face relatively disadvantageous credit ratings. Our results indicate that the current assessment models and measurement standards do not only contain issuers’ credit risk but to a considerable extent also an assessment of industry and operating risk. Credit ratings should therefore not be equated with the likelihood of default as is often done in empirical applications. Stakeholders and especially investors – as well as researchers – should be aware of this misconception and not refer to ratings as pure measures of default risk.
    Keywords: credit ratings, credit risk, default probabilities, comparability
    JEL: G14 G15 G24
    Date: 2013–11
  16. By: Ben Lockwood (CBT, CEPR and Department of Economics, University of Warwick)
    Abstract: This paper considers the optimal taxation of savings intermediation services in a dynamic general equilibrium setting, when the government can also use consumption, income and profit taxes. When 100% taxation of profit is available, taxes on services supplied to firms should be deductible from profit, implying the optimality of a VAT-type tax. As for the rate of tax, in the steady state, an optimal arrangement is to set it equal to the rate of tax on capital income, not consumption. In turn, the capital income tax is zero when the when an unrestricted profit tax is available, but in the more realistic case when such a tax is not available, this rate can be positive or negative, but generally different to the optimal rate of tax on consumption.
    Keywords: financial intermediation services, tax design, banks, payment services
    JEL: G21 H21 H25
    Date: 2013

This issue is ©2014 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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