New Economics Papers
on Banking
Issue of 2014‒02‒21
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Systemic Losses Due to Counter Party Risk in a Stylized Banking System By Annika Birch; Tomaso Aste
  2. Forecasting Bank Credit Ratings By Gogas, Periklis; Papadimitriou, Theophilos; Agrapetidou, Anna
  3. GSoft Information and Default Prediction in Cooperative and Social Banks By Simon Cornée
  4. Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia By Ramayandi, Arief; Rawat, Umang; Tang, Hsiao Chink
  5. How Does Loan-To-Value Policy Strengthen Banks' Resilience to Property Price Shocks - Evidence from Hong Kong By Eric Wong; Andrew Tsang; Steven Kong
  6. The role of demographics in small business loan pricing By Neuberger, Doris; Räthke-Döppner, Solvig
  7. What drives the dynamics of bank debt renegotiation in Europe? A survival analysis approach By Christophe Godlewski
  8. Banks competition, managerial efficiency and the interest rate pass-through in India By Jugnu Ansari; Ashima Goyal
  9. The interbank market risk premium, central bank interventions, and measures of market liquidity By Alexius, Annika; Birenstam, Helene; Eklund, Johanna
  10. Inflation targeting and Quantitative Tightening: Effects of Reserve Requirements in Peru By Armas, Adrián; Castillo, Paul; Vega, Marco
  11. Shock and Volatility Transmissions between Bank Stock Returns in Romania: Evidence from a VARGARCH Approach By Anissa Chaibi; Maria Ulici
  12. Structural Disposal and Cyclical Adjustment: Non-performing Loan, Structural Transition, and Regulatory Reform in Japan, 1998-2013 By KAWASHIMA, Toshiki; NAKABAYASHI, Masaki
  13. Stress Testing Engineering: the real risk measurement?. By Dominique Guegan; Bertrand K Hassani

  1. By: Annika Birch; Tomaso Aste
    Abstract: We report a study of a stylized banking cascade model investigating systemic risk caused by counter party failure using liabilities and assets to define banks' balance sheet. In our stylized system, banks can be in two states: normally operating or distressed and the state of a bank changes from normally operating to distressed whenever its liabilities are larger than the banks' assets. The banks are connected through an interbank lending network and, whenever a bank is distressed, its creditor cannot expect the loan from the distressed bank to be repaid, potentially becoming distressed themselves. We solve the problem analytically for a homogeneous system and test the robustness and generality of the results with simulations of more complex systems. We investigate the parameter space and the corresponding distribution of operating banks mapping the conditions under which the whole system is stable or unstable. This allows us to determine how financial stability of a banking system is influenced by regulatory decisions, such as leverage; we discuss the effect of central bank actions, such as quantitative easing and we determine the cost of rescuing a distressed banking system using re-capitalisation. Finally, we estimate the stability of the UK and US banking systems in the years 2007 and 2012 showing that both banking systems were more unstable in 2007 and connectedness on the interbank market partly caused the banking crisis.
    Date: 2014–02
  2. By: Gogas, Periklis (Democritus University of Thrace, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics); Agrapetidou, Anna (Democritus University of Thrace, Department of Economics)
    Abstract: Purpose - This study presents an empirical model designed to forecast bank credit ratings using only quantitative and publicly available information from their financial statements. 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 in annual frequency 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 are already known to the public.
    Keywords: Banking; Forecasting; Credit Rating; Logit
    JEL: G20 G24
    Date: 2014–02–14
  3. By: Simon Cornée (CREM UMR CNRS 6211, University of Rennes 1, and CERMi, France)
    Abstract: In this paper, to begin with, we define soft information as qualitative, subjective information produced by banks through the establishment of long-term lending relationships. We then highlight the importance of soft information for cooperative and social banks in the screening, pricing and monitoring of their borrowers as a result of their institutional features (governance, values, etc.) and the specificities of their clientele. We finally emphasise the value of qualitative (economic, social and/or environmental) factors stemming from the production of soft information in predicting credit default events.
    Keywords: Relationship Lending, Soft Information, Credit Rating, Cooperative and Social Banking
    JEL: G21 L22 M21 P13
    Date: 2014–02
  4. By: Ramayandi, Arief (Asian Development Bank); Rawat, Umang (Faculty of Economics, University of Cambridge); Tang, Hsiao Chink (Asian Development Bank)
    Abstract: Events surrounding the global financial crisis have brought to light the potential role of monetary policy in precipitating the crisis. Numerous studies on advanced economies have documented a significant negative relationship between interest rates and bank risk-taking. This paper also finds the presence of the risk-taking channel based on a panel of publicly listed bank data in Asia. Using both annual and quarterly data, "too low" interest rates are found to lead to an increase in bank risk-taking.
    Keywords: Bank risk-taking; interest rates; panel data; monetary policy; Asian banks
    JEL: E43 E52 G21
    Date: 2014–01–01
  5. By: Eric Wong (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority); Steven Kong (Hong Kong Monetary Authority)
    Abstract: This paper sheds light on the transmission mechanism of loan-to-value (LTV) policy to financial stability by providing three findings from Hong Kong. First, there is evidence that LTV cap tightening since 2009 has dampened both borrowers' leverage and credit growth, and that lower leverage has played a major role in strengthening banks' resilience to property price shocks. Second, the effect on loan growth is found to be state-dependent due to loan market disequilibrium, with a much stronger impact on loan supply than on demand, suggesting that calibrating this tool to curb loan growth needs an accurate estimate of both loan demand and supply. Operationally, this could pose challenges for policymakers. Finally, we find evidence of low responsiveness of housing demand to caps on LTV ratios, which is suggestive of a weak direct pass-through of LTV policy to the property market. These findings together support the view that operationally it would be optimal for LTV policy to primarily target household leverage, and that there are limitations in using this instrument to stabilise credit growth and property prices.
    Keywords: Banking, Disequilibrium, Hong Kong, Loan-To-Value, Macroprudential Policy
    JEL: E58 G21
    Date: 2014–02
  6. By: Neuberger, Doris; Räthke-Döppner, Solvig
    Abstract: To sustain growth in an aging economy, it is important to ease the financing of small firms by bank loans. Using bank internal data of small business loans in Germany, we examine the determinants of loan rates in the period 1995-2010. Beyond characteristics of the firm, the loan contract, and the lending relationship, demographic aspects matter. However, collateral and relationship lending play a larger role in loan pricing than the entrepreneur's age. Banks do not seem to discriminate older borrowers by higher loan rates. We rather find statistical discrimination of younger borrowers because of their lower wealth. Single entrepreneurs obtain cheaper loans than married ones. Firms in peripheral regions with low population density are disadvantaged by higher loan rates compared to those in agglomerated regions. --
    Keywords: small business finance,savings banks,relationship lending,aging,demographic change
    JEL: D14 E43 G21 J14 L26
    Date: 2014
  7. By: Christophe Godlewski (LaRGE Research Center, Université de Strasbourg)
    Abstract: Debt renegotiation matters for the borrower-lender relationship to ensure the credit agreement is regularly amended to include new information and make it more “complete”. I investigate the determinants of the dynamics of bank loan renegotiations using a sample of 1 600 amendments to private debt contracts in Europe. The median duration between loan amendments equals 1 year, although frequently renegotiated contracts are amended every 5 months. Employing a stratified Cox-type hazard model, I find that initial loan terms, banking pool features, amendments’ characteristics, and the legal environment significantly influence the duration time between renegotiations. Contract complexity, informational frictions in the borrower-lender relationship, the uncertainty of the economic environment, and the legal protection of creditors also play a major role in shaping the dynamics of bank loan renegotiation in Europe.
    Keywords: renegotiation process, bank loans, multiple failure-time data, Cox model, Europe.
    JEL: C41 G14 G20
    Date: 2014
  8. By: Jugnu Ansari (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: If banks solve an inter-temporal problem under adverse selection and moral hazard, then bank specific factors, regulatory and supervisory features, market structure, and macroeconomic factors affect banks loan interest rates and their spread over deposit interest rates. To examine post financial-reform interest rate pass through for Indian banks after controlling for all these factors, we estimate the determinants of commercial banks loan pricing decisions, using dynamic panel methods. The several factors commercial banks consider, apart from the policy rate, limit policy pass through. More competition reduces policy pass-through but it can improve monetary transmission provided it improves managerial efficiency.
    Keywords: Banks, panel data, interest rates, net interest income, operating cost
    JEL: G20 G21 C23 E43 L10
    Date: 2014–01
  9. By: Alexius, Annika (Dept. of Economics, Stockholm University); Birenstam, Helene (Department of Statistics, Stockholm University); Eklund, Johanna (Sveriges Riksbank)
    Abstract: When the interbank market risk premium soared during the finnancial crisis, it created a wedge between interest rates actually paid by private agents and the rapidly falling policy rates. Many central banks attempted to improve the situation by supplying liquidity to the domestic interbank market. This paper studies the Swedish interbank market risk premium using a unique data set on traded volume between banks and between banks and the Riksbank. We find that the main determinants of the Swedish interbank premium are international variables, such as US and EURO area risk premia. International exchange rate volatility and the EURO/USD deviations from CIP also matters, while standard mesures of domestic market liquidity and domestic credit risk have insignificant effects. Our measure of actual turnover in the interbank market is however associated with a significant reduction of the interbank market risk premium, as are credit provisions by the central bank.
    Keywords: Interbank market risk premium; liquidity risk; credit risk; credit provisions.
    JEL: F31 F41
    Date: 2014–02–06
  10. By: Armas, Adrián (Banco Central de Reserva del Perú); Castillo, Paul (Banco Central de Reserva del Perú); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: This paper provides an overview of the Reserve Requirements measures undertaken by the Central Bank of Peru. We provide a rationale for the use of these instruments as well as empirical evidence on their effectiveness. In general, the results show that a reserve requirement tightening has the desired effects on interest rates and credit levels both at banks and smaller financial institutions (cajas municipales).
    Keywords: Non-conventional monetary policy, Inflation Targeting, Reserve requirements.
    JEL: E51 E52 E58 G21
    Date: 2014–02
  11. By: Anissa Chaibi; Maria Ulici
    Abstract: We develop a VAR-GRACH approach to invesigate shock and volatility transmissions between bank stock returns in Romania during the 2007-2009 international financial crisis.Our findings provide eveidence of significant shock and volatility transmissions between Romanian bank returns.We also show how our empirical results can be used to build effective diversification and hedging strategies.
    Keywords: Shock and volatility transmission, financial crisis, Romanian banks.
    JEL: G1 G2 P2
    Date: 2014–02–12
  12. By: KAWASHIMA, Toshiki; NAKABAYASHI, Masaki (Institute of Social Science, The University of Tokyo)
    Abstract: Japan experienced falling asset prices, a financial market reform, and non-performing loan reduction from the late 1990s. This paper examines whether it was efficient to guide the banking sector to aggressively write off non-performing loans in the early 2000s under the shadow of regulatory reform and structural transition of corporate financing. Our results indicate that non-performing loans could have been cyclically reduced only by further extension of mortgage loan, as the deregulated corporate sector cut reliance on the banking and increased bond issuance. If another bubble of housing market to be avoided, the structural disposal is justified.
    Keywords: Non-performing loan reduction; structural transition; regulatory reform;mortgage loan; Japan
    JEL: G18 G28 K23
    Date: 2014–02–11
  13. By: Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Bertrand K Hassani (Centre d'Economie de la Sorbonne et Grupo Santander)
    Abstract: Stress testing is used to determine the stability or the resilience of a given financial institution by deliberately submitting. In this paper, we focus on what may lead a bank to fail and how its resilience can be measured. Two families of triggers are analysed: the first stands in the stands in the impact of external (and / or extreme) events, the second one stands on the impacts of the choice of inadequate models for predictions or risks measurement; more precisely on models becoming inadequate with time because of not being sufficiently flexible to adapt themselves to dynamical changes.
    Keywords: Stress test, Risk, VaR.
    JEL: C1 C6
    Date: 2014–02

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.