New Economics Papers
on Banking
Issue of 2014‒02‒15
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Determinants of financial distress in u.s. large bank holding companies By zhang, zhichao; Xie, Li; lu, xiangyun; zhang, zhuang
  2. The negative feedback loop between banks and sovereigns By Paolo Angelini; Giuseppe Grande; Fabio Panetta
  3. What do we know about regional banks? An exploratory analysis By Haubrich, Joseph G.; Balasubramanyan, Lakshmi
  4. Government guarantees and bank risk taking incentives By Markus Fischer; Christa Hainz; Jörg Rocholl; Sascha Steffen
  5. The Transmission of Real Estate Shocks Through Multinational Banks By Bertay, A.C.
  6. Optimal Monetary Policy with Counter-Cyclical Credit Spreads By Airaudo, Marco; Olivero, María Pía
  7. A Novel Banking Supervision Method using a Threshold-Minimum Dominating Set By Gogas, Periklis; Papadimitriou , Theophilos; Matthaiou, Maria- Artemis
  8. What drives the shadow banking system in the short and long run? By Duca, John V.
  9. A Macroeconomic Framework for Quantifying Systemic Risk By Zhiguo He; Arvind Krishnamurthy
  10. Mortgage choice in the housing boom: impacts of house price appreciation and borrower type By Furlong, Frederick T.; Takhtamanova, Yelena; Lang, David
  11. Banks, Financial Markets and Growth in Developed Countries: a Survey of the empirical literature By Michiel Bijlsma; Andrei Dubovik
  12. Towards a Banking Union: Open issues. A report. By Christian de Boissieu
  13. On the economics of committed liquidity facilities By Morten Bech; Todd Keister
  14. Reforming Finance; A Literature Review By Ton Notermans
  15. Money, liquidity and welfare By Wen, Yi
  16. A tale of fire-sales and liquidity hoarding By Aleksander Berentsen; Benjamin Müller
  17. Sticking to Your Plan: Hyperbolic Discounting and Credit Card Debt Paydown By Theresa Kuchler
  18. General purpose reloadable prepaid cards : penetration, use, fees and fraud risks By Hayashi, Fumiko; Cuddy, Emily
  19. Financial inclusion and the role of mobile banking in Colombia. Developments and potential By Santiago Fernandez de Lis; Maria Claudia Llanes; Carlos Lopez-Moctezuma; Juan Carlos Rojas; David Tuesta
  20. Confidence Levels for CVaR Risk Measures and Minimax Limits* By Anderson, Edward; Xu, Huifu; Zhang, Dali

  1. By: zhang, zhichao; Xie, Li; lu, xiangyun; zhang, zhuang
    Abstract: With a sample of 354 U.S. large bank holding companies, this paper investigates the determination of financial distress in financial institutions. We find that: (1) the house price index is consistently significant and positively associated with the Distance-to-Default (DD) measure in the U.S. banking market; (2) all the three major banking risk characteristics i.e. non-performing loans, short-term wholesale funding, and the credit-risk indicator are reliable factors behind DD determination; (3) for the two alternative measures of BHC activity diversification, non-interest income is positively related with BHCs’ DD whereas off-balance-sheet activity is negatively associated to the financial distress measure; and (4) Relevant capital requirements indicators including Tier I Risk-Based Capital Ratio, Total Risk-Based Capital Ratio, Tier I Leverage Ratio should be taken in regulatory assessment of BHCs’ financial distress.
    Keywords: Bank Holding Company; Distance-to-Default; Financial distress; Bank regulation; Capital requirements; Non-interest income; Off-balance-sheet activities.
    JEL: C53 G14 G21 G28
    Date: 2014–01–31
  2. By: Paolo Angelini (Banca d'Italia); Giuseppe Grande (Banca d'Italia); Fabio Panetta (Banca d'Italia)
    Abstract: More than three years since the outbreak of the sovereign debt crisis in the euro area the banking systems of several countries remain exposed to the vagaries of government bond markets. The paper analyzes the different channels through which sovereign risk affects banking risk (and vice versa), presents some new evidence on bank-sovereign links, and discusses policy options for addressing the related risks.
    Keywords: sovereign risk, sovereign debt crisis, global financial crisis, banking sector risk, bank regulation, contagion, credit crunch
    JEL: E44 E51 E58 G01 G21 G28 H63
    Date: 2014–01
  3. By: Haubrich, Joseph G. (Federal Reserve Bank of Cleveland); Balasubramanyan, Lakshmi (Federal Reserve Bank of Cleveland)
    Abstract: This study tries to get a sense of the topography of the regional banking landscape. We focus on bank holding companies and banks with $10 billion to $50 billion in assets and look for factors that potentially explain regional bank health from 2008 to 2013. Our dataset is a combination of bank Call Report data and confidential supervisory data. Our analysis shows that regional banks are not a monolithic group, and different factors explain bank safety and soundness for different types of banks.
    Keywords: Regional Banking Organizations; Banks and Banking; Supervisory Ratings
    JEL: G21 G28 L25 R11
    Date: 2014–01–09
  4. By: Markus Fischer (Goethe-Universität Frankfurt am Main); Christa Hainz (ifo Institute for Economic Research); Jörg Rocholl (ESMT); Sascha Steffen (ESMT)
    Abstract: This paper analyzes the effect of the removal of government guarantees on bank risk taking. We exploit the removal of guarantees for German Landesbanken which results in lower credit ratings, higher funding costs, and a loss in franchise value. This removal was announced in 2001, but Landesbanken were allowed to issue guaranteed bonds until 2005. We find that Landesbanken lend to riskier borrowers after 2001. This effect is most pronounced for Landesbanken with the highest expected decrease in franchise value. Landesbanken also significantly increased their off-balance sheet exposure to the global ABCP market. Our results provide implications for the debate on how to remove guarantees.
    Keywords: Government guarantees, exits, risk taking, franchise value, financial crisis, loans
    JEL: G20 G21 G28
    Date: 2014–02–12
  5. By: Bertay, A.C. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper investigates the credit supply of banks in response to domestic and foreign real estate price changes. Using a large international dataset of multinational banks, we find evidence of a significant transmission of domestic real estate shocks into lending abroad. A 1% decrease in real estate prices in home country, in particular, leads to a 0.2-0.3% decrease in credit growth in the foreign subsidiary. This response, however, is asymmetric: only negative house price changes are transmitted. Stricter regulation of activities of parent banks can reduce this effect, indicating a role for regulation in alleviating the transmission of real estate shocks. Further, the analysis of the impact of real estate shocks on foreign subsidiary funding indicates that shocks are transmitted through changes in long-term debt funding and equity.
    Keywords: Internal capital markets;multinational banking;transmission of real estate shocks
    JEL: F23 F36 G21
    Date: 2014
  6. By: Airaudo, Marco (School of Economics LeBow College of Business Drexel University); Olivero, María Pía (School of Economics LeBow College of Business Drexel University)
    Abstract: We study optimal monetary policy in a New Keynesian-DSGE model where the combination of a credit channel and customer-market features in banking gives rise to counter-cyclical credit spreads. In our setting, monopolistically competitive banks set lending rates in a forward-looking fashion as they internalize the fact that, due to borrowers. bank-specific (hence deep) habits, current interest rates also affect the future demand for loans by financially constrained. In particular, during a phase of economic expansion, banks might find it optimal to lower current lending rates to build up a larger customer base, which will be locked into a long-term relationship. The resulting counter-cyclicality of credit spreads makes optimal monetary policy depart substantially from the efficient allocation (and hence from price stability), under both discretion and commitment. Our analysis shows that the welfare costs of setting monetary policy under discretion (with respect to the optimal Ramsey plan) and of using simpler sub-optimal policy rules are strictly increasing in the magnitude of deep habits in credit markets and market power in banking.
    Keywords: Optimal monetary policy; Cost Channel; New-Keynesian model; Credit frictions; Deep habits; Credit spreads
    JEL: E32 E44 E50
    Date: 2014–01–25
  7. By: Gogas, Periklis (Democritus University of Thrace, Department of Economics); Papadimitriou , Theophilos (Democritus University of Thrace, Department of Economics); Matthaiou, Maria- Artemis (Democritus University of Thrace, Department of Economics)
    Abstract: A healthy and stable banking system resilient to financial crises is a prerequisite for sustainable growth. Minimization of a) the associated systemic risk and b) of the contagion effect in a banking crisis is a necessary condition to achieve this goal. The Central Bank is in charge of this significant undertaking via a close and detailed monitoring of the banking network that can significantly limit the outbreak of a crisis and a subsequent contagion. In this paper, we propose the use of an auxiliary monitoring system that is both efficient on the required resources and can promptly identify a set of banks that are in distress so that immediate and appropriate action can be taken by the supervising authority. We use the interrelations between banking institutions for efficient monitoring of the entire banking network employing tools from Complex Networks theory. In doing so, we introduce the Threshold Minimum Dominating Set (T-MDS). The T-MDS is used to identify the smallest most efficient subset of banks able to act as a) sensors of distress of a manifested banking crisis and b) provide a path of possible contagion. Moreover, at the discretion of the regulator, the methodology is versatile in providing multiple layers of supervision and monitoring by setting the appropriate threshold levels. We propose the use of this method as a supplementary monitoring tool in the arsenal of a Central Bank. Our dataset includes the 122 largest American banks in terms of their total assets. The empirical results show that when the T-MDS methodology is applied, we can have an efficient supervision of the whole banking network, by monitoring just a small subset of banks. We will show that, the proposed methodology is able to achieve an efficient overview of the 122 banks by only monitoring 47 T-MDS nodes.
    Keywords: Complex networks; Minimum Dominating Set; Banking supervision; Interbank loans
    JEL: D85 E58 G28
    Date: 2014–01–31
  8. By: Duca, John V. (Federal Reserve Bank of Dallas)
    Abstract: This paper analyzes how risk and other factors altered the relative use of short-term business debt funded by the shadow banking system since the early 1960s. Results indicate that the share was affected over the long-run not only by changing information and reserve requirement costs, but also by shifts in the impact of regulations on bank versus nonbank credit sources—such as Basel I in 1990 and reregulation in 2010. In the short-run, the shadow share rose when deposit interest rate ceilings were binding, the economic outlook improved, or risk premia declined, and fell when event risks disrupted financial markets.
    Keywords: shadow banking; regulation; financial frictions; credit rationing
    JEL: E44 E50 N12
    Date: 2014–02–13
  9. By: Zhiguo He; Arvind Krishnamurthy
    Abstract: Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a macroeconomic “stress test” linking a stress scenario to the probability of systemic risk states.
    JEL: E44 G01 G2
    Date: 2014–02
  10. By: Furlong, Frederick T. (Federal Reserve Bank of San Francisco); Takhtamanova, Yelena (Federal Reserve Bank of San Francisco); Lang, David (Federal Reserve Bank of San Francisco)
    Abstract: The U.S. housing boom during the first part of the past decade was marked by rapid house price appreciation and greater access to mortgage credit for lower credit-rated borrowers. The subsequent collapse of the housing market and the high default rates on residential mortgages raise the issue of whether the pace of house price appreciation and the mix of borrowers may have affected the influence of fundamentals in housing and mortgage markets. This paper examines that issue in connection with one aspect of mortgage financing, the choice among fixed-rate and adjustable-rate mortgages. This analysis is motivated in part by the increased use of adjustable-rate mortgage financing, notably among lower credit-rated borrowers, during the peak of the housing boom. Based on analysis of a large sample of loan level data, we find strong evidence that house price appreciation dampened the influence of a number of fundamentals (mortgage pricing terms and other interest rate related metrics) that previous research finds to be important determinants of mortgage financing choices. With regard to the mix of borrowers, the evidence indicates that, while low risk-rated borrowers were affected on the margin more by house price appreciation, on balance those borrowers tended be at least as responsive to fundamentals as high risk-rated borrowers. The higher propensity of low credit-rated borrowers to choose adjustable-rate financing compared with high credit-rated borrowers in the housing boom appears to have been related to borrower credit risk metrics. Given the evidence related to loan pricing terms, other interest rate metrics and fixed effects, the relation of credit risk to mortgage financing choice seems more consistent with considerations such as credit constraints, risk preferences, and mortgage tenor than just a systematic lack of financial sophistication among higher credit risk borrowers.
    Keywords: mortgage choice; mortgage contracts; household finance; fixed-rate; adjustable-rate
    JEL: D1 G11 G21 R2
    Date: 2014–01
  11. By: Michiel Bijlsma; Andrei Dubovik
    Abstract: We review the literature on finance and growth with a focus on developed countries We find little evidence that increases in the traditional proxies for financial development will enhance growth in these countries. Potential causes include: decreasing returns, misallocation of credit, difficulties in measuring efficient financial development, and increasing macroeconomic or systemic risk. To stimulate efficient financial intermediation, policy makers should focus on lending to firms instead of consumers; avoid too high concentration levels; and keep government ownership of banks at a minimum.
    JEL: G01 G38
    Date: 2014–02
  12. By: Christian de Boissieu (Université Paris I (Panthéon – Sorbonne); Département des Etudes économiques européennes, Collège d'Europe)
    Abstract: The purpose of this paper is to give an account of the debates regarding the implementation of a banking union in Europe that took place in Bruges in April 2013 at a Conference co-organised by the College of Europe and the European Commission's Joint Research Centre (JRC). The benefits to be expected from the banking union are reviewed. Then its components are analysed and discussed with a special focus on supervision and resolution of banks. The challenges are both functional and institutional. They involve micro-and macro prudential considerations. As regards the ECB, will there be possible conflicts of objectives and conflicts of interest when it cumulates its monetary policy function with its new supervisory role? For banking supervision, how to combine the division of labour between the ECB and the national competent authorities with the necessary coordination between them? The same kind of challenge applies to resolution and deposit insurance. The paper relates the transition to a banking union to other structural issues such as the separation of bank activities and the financing of the real economy in the new regulatory framework.
    Keywords: banking Union, economic and monetary union, financial Integration
    JEL: F36 G21
    Date: 2014–01
  13. By: Morten Bech; Todd Keister
    Abstract: We study the effects of the new Basel III liquidity regulations in jurisdictions with a limited supply of high-quality liquid assets. Using a model based on Bech and Keister (2013), we show how introducing a liquidity coverage ratio in such settings can have significant side effects, leading to a large liquidity premium and pushing the short-term interest rate to the floor of the central bank's rate corridor. Adding a committed liquidity facility allows the central bank to mitigate these effects. By pricing committed liquidity appropriately, the central bank can determine either the equilibrium liquidity premium or the quantity of liquid assets held by banks, but not both. We argue that the optimal pricing arrangement will depend on local market conditions.
    Keywords: Basel III, liquidity regulation, liquidity premium, liquidity coverage ratio, committed liquidity facility
    Date: 2014–01
  14. By: Ton Notermans (Department of International Relations, Tallinn School of Economics and Business Administration, Tallinn University of Technology)
    Abstract: The almost consensual view on the global financial crisis is that it should be attributed to massive regulatory failure. Regulation is either argued to have failed in constraining an inherently instable financial system or to have provoked the crisis by means of inappropriate regulatory changes. Even though a core conclusion from the present crisis is that a microeconomic focus on financial stability does not suffice and will need to be complemented by macroprudential regulation, there is also widespread consensus that the crisis has demonstrated the need to strengthen the microprudential regulatory framework itself. This literature review focuses on the microeconomic aspects of financial regulation. It is built around three main questions: what exactly did the regulatory failure consists of? How was it possible for regulatory failure to emerge? What lessons have been drawn from the crisis? Not surprisingly, the consensus in the literature evaporates when looking for precise answers to these questions. The introductory section of the paper address two broader question; i.e. why financial firms should be subjected to tighter regulation than the rest of the economy and how financial instability may be defined and measured.
    Keywords: Banking Union, Corporate Governance, Credit Rating Agencies, Financial Sector Reform, Financial Stability, Household, Indebtedness, Microprudential Regulation, Shadow Banking, Sovereign Debt
    JEL: G01 G21 G24 G28 G32 G35
    Date: 2013–12–03
  15. By: Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: This paper develops an analytically tractable Bewley model of money demand to shed light on some important questions in monetary theory, such as the welfare cost of inflation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 3% ~ 4% to avoid 10% annual inflation. The astonishingly large welfare costs of inflation arise because inflation increases consumption risk by eroding the buffer-stock-insurance value of money, thus hindering consumption smoothing at the household level. Such an inflation-induced increase in consumption risk at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of financial intermediation can mitigate the problem, with realistic credit limits the welfare loss of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our findings provide not only a justification for adopting a low inflation target by central banks, but also a plausible explanation for the robust positive relationship between moderate inflation and social unrest in developing countries where money is the major form of household financial wealth.
    Keywords: Liquidity Preference; Money Demand; Financial Intermediation; Velocity; Welfare Costs of Inflation
    JEL: D10 D31 D60 E31 E41 E43 E49 E51
    Date: 2014–02–07
  16. By: Aleksander Berentsen; Benjamin Müller
    Abstract: We extend the analysis of the interbank market model of Gale and Yorulmazer (2013) by studying a larger set of trading mechanisms. A trading mechanism, which allows for randomized trading, restores efficiency. In contrast to Gale and Yorulmazer, we find that fire-sale asset prices are efficient and that no liquidity hoarding occurs in equilibrium. While Gale and Yorulmazer find that the market provides insufficient liquidity, we find that it provides too much liquidity.
    Keywords: Fire-sales, lotteries, liquidity hoarding, interbank markets, indivisibility
    JEL: G12 G21 G33 D83
    Date: 2014–01
  17. By: Theresa Kuchler (Stanford University)
    Abstract: I use detailed data from an online financial management service to analyze the extent to which short-run impatience can explain why people hold expensive credit card balances. I first measure the sensitivity of consumption spending to paycheck receipt for each user and argue that it provides a proxy for short-run impatience. To distinguish between consumers who are aware (sophisticated) and unaware (naive) of their future impatience, I exploit the fact that the sensitivity to paycheck receipt should vary with available resources for sophisticated agents. I then relate the characteristics of each per- son’s consumption pattern to his planned and actual debt repayment behavior. Consistent with theory, planned paydown is significantly more predictive of actual paydown for sophisticated than for naive agents. In addition, higher measured impatience leads to lower debt paydown for sophisticated agents, whereas naive agents do not reduce their credit card balances substantially, irrespective of their level of impatience. These findings are inconsistent with several alternative explanations considered, such as credit constraints, and sup- port the view that short-run impatience and sophistication play a substantial role in explaining patterns of success and failure in debt paydown.
    Date: 2013–03
  18. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City); Cuddy, Emily (Federal Reserve Bank of Kansas City)
    Abstract: Prepaid cards are the most rapidly growing payment instrument. General purpose reloadable (GPR) prepaid cards, in particular, have gained considerable traction especially among the unbanked and underbanked. How these cards are used is now of acute interest to both policymakers, seeking to ensure broad access to electronic payment methods, consumer protection for prepaid cards, and payments system security, and to payment card industry participants, desiring to advance their product offerings and business models. This study examines the end-user experience of using a GPR card. It investigates which factors, if any, affect the intensity and duration of GPR card use, estimates the fee burden associated with various card usage patterns, and calculates fraud rates by transaction and merchant type. Because we lack cardholder information other than zip code, we supplement our card data with local demographic and socioeconomic data to test whether these factors are correlated with the observed variation in card use and incurred fees. Our results suggest that both account and local socio-demographic characteristics significantly influence the life span, the load and debit activities, the shares of purchase and cash withdrawals, and the average number and value of fees incurred per month, and that transaction and merchant types influence the rate of fraudulent transactions.
    Keywords: Prepaid cards; Unbanked; Fraud risks; Payment card fees; General Purpose Reloadable; Electronic payments
    Date: 2014–02–13
  19. By: Santiago Fernandez de Lis; Maria Claudia Llanes; Carlos Lopez-Moctezuma; Juan Carlos Rojas; David Tuesta
    Abstract: Colombia has a low level of financial depth. Efforts have been made by governments and the private sector in recent years to encourage the development of models which might provide enhanced access to financial services. These financial inclusion plans are based on creating access channels that can reduce high transaction costs for agents. They use the high level of coverage available through mobile telephony, the gradual development of banking correspondents and regulatory modifications to provide easier access to financial services. Against this background, this work has a twofold objective: first, to analyse recent experiences in the regulatory field with respect to mobile banking in Colombia; and second, to explore the potential for greater development of these programs. The work uses microdata analysis for Colombia to confirm the gradual progress being made in the country, identifying the huge possibilities for promoting an even greater level of financial inclusion
    Keywords: Mobile banking, financial inclusion, Colombia
    JEL: G21 O16
    Date: 2014–02
  20. By: Anderson, Edward; Xu, Huifu; Zhang, Dali
    Abstract: Conditional value at risk (CVaR) has been widely used as a risk measure in finance. When the confidence level of CVaR is set close to 1, the CVaR risk measure approximates the extreme (worst scenario) risk measure. In this paper, we present a quantitative analysis of the relationship between the two risk measures and it's impact on optimal decision making when we wish to minimize the respective risk measures. We also investigate the difference between the optimal solutions to the two optimization problems with identical objective function but under constraints on the two risk measures. We discuss the benefits of a sample average approximation scheme for the CVaR constraints and investigate the convergence of the optimal solution obtained from this scheme as the sample size increases. We use some portfolio optimization problems to investigate teh performance of the CVaR approximation approach. Our numerical results demonstrate how reducing the confidence level can lead to a better overall performanc e.
    Keywords: sample average approximation; distributional robust optimization; semi-infinate programming; minimax; robust optimization; CVaR approximation
    Date: 2014–01

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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