New Economics Papers
on Banking
Issue of 2014‒01‒24
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises By Balduzzi, Pierluigi; Brancati, Emanuele; Schiantarelli, Fabio
  2. Simple banking: profitability and the yield curve By Piergiorgio Alessandri; Benjamin Nelson
  3. Relations bancaires et crédits aux PME By Vigneron, Ludovic
  4. The Evolution of Bank Supervision: Evidence from U.S. States By Mitchener, Kris James
  5. Cross-Prefecture Expansion of Regional Banks in Japan and Its Effects on Lending-Based Income By Kondo, Kazumine
  6. Corporate Governance and Risk Management at Unprotected Banks: National Banks in the 1890s By Charles W. Calomiris; Mark Carlson
  7. Changing forces of gravity: How the crisis affected international banking By Buch, Claudia M.; Neugebauer, Katja; Schröder, Christoph
  8. Trade and finance: is there more than just 'trade finance'? Evidence from matched bank-firm data By Silvia Del Prete; Stefano Federico
  9. The Signaling Value of Online Social Networks: Lessons from Peer-to-Peer Lending By Seth Freedman; Ginger Zhe Jin
  10. Basel Norms and Analysis of Banking Risks; Performance and Future Prospects. By Bisht, Poonam
  11. Contextualizing Systemic Risk By Lukas Scheffknecht
  12. Banks, industrial relatedness and firms’ investments By Roberto Antonietti; Giulio Cainelli; Monica Ferrari; Stefania Tomasini
  13. Recovery from Financial Crises: Evidence from 100 Episodes By Carmen M. Reinhart; Kenneth S. Rogoff
  14. Technological Change, Financial Innovation, and Diffusion in Banking By W. Scott Frame; Lawrence J. White
  15. Surplus-invariant capital adequacy tests and their risk measures By Pablo Koch-Medina; Santiago Moreno-Bromberg; Cosimo Munari

  1. By: Balduzzi, Pierluigi (Boston College); Brancati, Emanuele (University of Rome Tor Vergata); Schiantarelli, Fabio (Boston College)
    Abstract: We test whether financial fluctuations affect firms' decisions, through their impact on banks' cost of funding. We exploit two shocks to Italian bank CDS spreads and equity valuations: the 2007-2009 financial crisis and the 2010-2012 sovereign debt crisis. Using newly available data linking over 3,000, mostly privately-held, non-financial firms to their bank(s), we find that increases in Italian banks' CDS spreads and decreases in their equity valuations lead younger and smaller firms to cut investment, employment, and borrowing. We conclude that financial market fluctuations affect even private firms' real decisions by affecting the costs of funds of their banks.
    Keywords: financial market shocks, banks, credit-default swaps, volatility, investment, employment, lending
    JEL: D92 G21 J23
    Date: 2013–12
  2. By: Piergiorgio Alessandri (Bank of Italy); Benjamin Nelson (Bank of England)
    Abstract: How does bank profitability vary with interest rates? We present a model of a monopolistically competitive bank subject to repricing frictions, and test the model’s predictions using a unique panel data set on UK banks. We find evidence that large banks retain a residual exposure to interest rates, even after accounting for hedging activity operating through the trading book. In the long run, both level and slope of the yield curve contribute positively to profitability. In the short run, however, increases in market rates compress interest margins, consistent with the presence of non negligible loan pricing frictions.
    Keywords: banking profitability, net interest margin, interest rates
    JEL: E4 G21
    Date: 2014–01
  3. By: Vigneron, Ludovic
    Abstract: We evaluate the impact of SME’s banking relationships configuration on the share of bank credit in their total debt. Crossing information from the DIANE and Kompass Europe databases, we select a sample of SMEs for which we can identify the different banks that they working with. We then test the effects of the number of banks an SME works with as well as that of its main bank’s organizational structure on the bank debt over total debt ratio. We find evidence that the more important this number is, the more important the ratio. We also report that SMEs working with a decentralized main bank present on average a higher ratio. Finally, studying the interaction term of the number of banks and the main bank’s organizational structure, we show that the ratio’s increase with the firm’s number of banks is less important for those engaged with a decentralized main bank than for those engaged with a centralized one.
    Keywords: SMEs; Relationship Banking; Main Bank Organisational structure; Number of Bank; Bank Credit
    JEL: G21 G32
    Date: 2014–01–16
  4. By: Mitchener, Kris James (University of Warwick)
    Abstract: We use a novel data set spanning 1820-1910 to examine the origins of bank supervision and assess factors leading to the creation of formal bank supervisory institutions across U.S. states. We show that it took more than a century for the widespread adoption of independent supervisory institutions tasked with maintaining the safety and soundness of banks. State legislatures initially pursued cheaper regulatory alternatives, such as double liability laws; however, banking distress at the state level as well as the structural shift from note-issuing to deposit-taking commercial banks propelled policymakers to adopt costly and permanent supervisory institutions.
    Keywords: bank supervision, U.S. States
    Date: 2014
  5. By: Kondo, Kazumine
    Abstract: This paper examines whether Japanese regional banks entering the banking market in other prefectures, including neighboring prefectures, can increase their lending-based income. To stimulate local economies and support local small- and medium-sized enterprises (SMEs), the current Japanese government’s policies for regional banks require these banks to engage in region-based relationship banking practices. In this study, three lending-based income measures were used as dependent variables, and estimation was made using panel data from Japanese regional banks. As a result, it was determined that regional banks that enter markets in other prefectures experience positive effects in all three lending-based income measures. Moreover, it was determined that regional banks whose headquarters are located in non-urban areas derive greater benefit from their loan businesses upon entry into other prefectures, including neighboring prefectures, where economic activity is more vibrant than regional banks whose headquarters are located in urban areas.
    Keywords: regional banks, non-urban regional banks, region-based relationship banking, entries into other prefectures, lending-based income
    JEL: G21
    Date: 2014–01–16
  6. By: Charles W. Calomiris; Mark Carlson
    Abstract: Managers’ incentives may conflict with those of shareholders or creditors, particularly at leveraged, opaque banks. Bankers may abuse their control rights to give themselves excessive salaries, favored access to credit, or to take excessive risks that benefit themselves at the expense of depositors. Banks must design contracting and governance structures that sufficiently resolve agency problems so that they can attract funding from outside shareholders and depositors. We examine banks from the 1890s, a period when there were no distortions from deposit insurance or government interventions to assist banks. We use national banks’ Examination Reports to link differences in managerial ownership to different corporate governance policies, risk, and methods of risk management. Formal corporate governance is lower when manager ownership shares are higher. Managerial rent seeking via salaries and insider lending is greater when managerial ownership is higher, and lower when formal governance controls are employed. Banks with higher managerial ownership target lower default risk. Higher managerial ownership and less-formal governance are associated with a greater reliance on cash rather than capital as a means of limiting risk, which we show is consistent both with higher adverse-selection costs of raising outside equity and with greater moral-hazard with respect to risk shifting.
    JEL: G21 G32 N21
    Date: 2014–01
  7. 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: 2014
  8. By: Silvia Del Prete (Bank of Italy); Stefano Federico (Bank of Italy)
    Abstract: Using unique matched bank-firm data on export, import and ordinary loans for a large sample of Italian manufacturing exporters for the years 2007-2010, this paper investigates the role of trade finance in a credit shock. We find that the credit shock faced by exporters in the aftermath of the Lehman Brothers' collapse was due more to a diminished availability of ordinary loans than to specific constraints in trade finance. We also show that the credit shock had a negative impact on exports: firms, especially financially distressed ones, that borrowed from banks which were more exposed to a negative funding shock exported less compared with firms that borrowed from less exposed intermediaries.
    Keywords: trade finance, trade collapse, credit shocks, export loans
    JEL: G21 F14 F30 G30 L20
    Date: 2014–01
  9. By: Seth Freedman; Ginger Zhe Jin
    Abstract: We examine whether social networks facilitate online markets using data from a leading peer-to-peer lending website. Borrowers with social ties are consistently more likely to have their loans funded and receive lower interest rates. However, most social loans do not perform better ex post, except for loans with endorsements from friends contributing to the loan or loans with group characteristics most likely to provide screening and monitoring. We also find evidence of gaming on borrower participation in social networks. Overall, our findings suggest that return-maximizing lenders should be careful in interpreting social ties within the risky pool of social borrowers.
    JEL: D53 D82 L81
    Date: 2014–01
  10. By: Bisht, Poonam
    Abstract: The aim of this paper is to analysis in detailed the major financial risks which are faced by the banking sector in general and Indian banks in particular. For the purpose a loss function is devised to estimate the various components of the credit risk which result in the net losses for the banks. The study is supported by empirical analysis conducted on financial data of a cross section of banks in Public Sector, Private Sector and Foreign Banks operating in India. Suggestions are also put forward mainly to minimize the credit risk.
    Keywords: Credit risks, Market risks, Operational risks, Basel II, Basel III
    JEL: G20
    Date: 2013–12–25
  11. By: Lukas Scheffknecht
    Abstract: I analyze the rapidly growing literature about systemic risk in financial markets and find an important commonality. Systemic risk is regarded to be an endogenous outcome of interactions by rational agents on imperfect markets. Market imperfections give rise to systemic externalities which cause an excessive level of systemic risk. This creates a scope for welfare-increasing government interventions. Current policy debates usually refer to them as ’macroprudential regulation’. I argue that efforts undertaken in this direction - most notably the incipient implementation of Basel III- are insufficient. The problem of endogenous financial instability and excessive systemic risk remains an unresolved issue which carries unpleasant implications for central bankers. In particular, monetary policy is in danger of persistently getting burdened with the difficult task to simultaneously ensure macroeconomic and financial stability.
    Keywords: Systemic Risk, Systemic Externalities, Macroprudential Regulation, Basel III
    JEL: E44 E52 G01 G18
    Date: 2013–12
  12. By: Roberto Antonietti; Giulio Cainelli; Monica Ferrari; Stefania Tomasini
    Abstract: In this paper, we study whether industrial relatedness affects firms’ fixed investment behaviour, and whether this relationship is linked also to the operational and organizational proximity between banks and local economies. By estimating different specifications of a dynamic investment equation on an unbalanced panel of Italian manufacturing firms for the period 2000-2007, we find that industrial relatedness boosts fixed investments by lowering their sensitivity to cash flow. This occurs because in technologically related areas banks benefit from lower screening and monitoring costs, easier re-allocation of property rights, and higher likelihood of establishing extended credit relationships with firms. However, we find also that the positive effect of industrial relatedness on investments disappears as the functional distance between local branches and their headquarters increases: more hierarchical and less embedded banks find it more difficult to collect tacit information on inter-firm production and financial linkages at the local level and therefore reduce credit provision.
    Keywords: error correction model, fixed investments, industrial relatedness, functional distance, operational proximity
    JEL: G21 G34 L60 O12 R51
    Date: 2014–01
  13. By: Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: We examine the evolution of real per capita GDP around 100 systemic banking crises. Part of the costs of these crises owes to the protracted nature of recovery. On average, it takes about eight years to reach the pre-crisis level of income; the median is about 6 ½ years. Five to six years after the onset of crisis, only Germany and the US (out of 12 systemic cases) have reached their 2007-2008 peaks in real income. Forty-five percent of the episodes recorded double dips. Postwar business cycles are not the relevant comparator for the recent crises in advanced economies.
    JEL: E32 E44 F44 G01 N10 N20
    Date: 2014–01
  14. By: W. Scott Frame; Lawrence J. White
    Date: 2014
  15. By: Pablo Koch-Medina; Santiago Moreno-Bromberg; Cosimo Munari
    Abstract: The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate, in the context of bounded financial positions, the class of surplus-invariant acceptance sets. These are characterized by the fact that acceptability does not depend on the positive part, or surplus, of a capital position. We argue that surplus invariance is a reasonable requirement from a regulatory perspective, because it focuses on the interests of liability holders of a financial institution. We provide a dual characterization of surplus-invariant, convex acceptance sets, and show that the combination of surplus invariance and coherence leads to a narrow range of capital adequacy tests, essentially limited to scenario-based tests. Finally, we analyze the relationship between surplus-invariant acceptance sets and loss-based and excess-invariant risk measures, which have been recently studied by Cont, Deguest, and He, and by Staum.
    Date: 2014–01

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