New Economics Papers
on Banking
Issue of 2014‒03‒01
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Non-Interest Income Activities and Bank Lending By Pejman Abedifar; Philip Molyneux; Amine Tarazi
  2. Building reputation on the syndicated lending market: A participant bank perspective By Marie-Hélène Broihanne; Christophe Godlewski
  3. Market structure, financial intermediation and riskiness of banks:Evidence from Asia Pacific By Wahyoe Soedarmono; Amine Tarazi
  4. The Savings Banks crises in Spain: When and How? By Pablo Martín-Aceña
  5. Densely Entangled Financial Systems By Bhaskar DasGupta; Lakshmi Kaligounder
  6. Disclosure, ownership structure and bank risk: Evidence from Asia By Bowo Setiyono; Amine Tarazi
  7. Trust in banks: a tentative conceptual framework By Butzbach, Olivier
  8. Mapping systemic risk: critical degree and failures distribution in financial networks By Matteo Smerlak; Brady Stoll; Agam Gupta; James S. Magdanz
  9. Falling short of expectations? Stress-testing the European banking system By Acharya, Viral V.; Steffen, Sascha
  10. Mortgage Loan Characteristics , Unobserved Heterogeneity and the Performance of United Kingdom Securitised Sub-Prime Loans By Lanot, Gauthier; Leece, David
  11. The impact of funding models and foreign bank ownership on bank credit growth : is Central and Eastern Europe different ? By Feyen, Erik; Letelier, Raquel; Love, Inessa; Maimbo, Samuel Munzele; Rocha, Roberto
  12. The causal effect of house prices on mortgage demand and mortgage supply By Christoph Basten; Cathérine Koch
  13. Framing Banking Union in the Euro Area: Some empirical evidence By Valiante, Diego
  14. The Effectiveness of Mandatory Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky Mortgages? By Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas Evanoff
  15. Multilateral Interchange Fees: Competition and regulation in light of recent legislative developments By Malaguti, Maria Chiara; Guerrieri, Alessandra
  16. Early Public Banks By Roberds, William; Velde, Francois R.
  17. Systemic Risk and Default Clustering for Large Financial Systems By Konstantinos Spiliopoulos
  18. Large deviation asymptotics for the left tail of the sum of dependent positive random variables By Peter Tankov

  1. By: Pejman Abedifar (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Philip Molyneux (Business School - Bangor University, Bangor); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: This paper investigates the impact of non-interest income businesses on bank lending. Using quarterly data on 7,578 U.S. commercial banks between 2003 and 2010 we find that, for banks with total assets above $100 million, non-interest income activities influence credit risk and loan portfolio compositions. Banks which emphasize fiduciary and life insurance businesses appear to have a lower credit risk. Moreover, we find that a greater reliance on loan servicing is associated with lower lending-deposit spreads. Finally, we find little evidence to suggest that cost complementarity explains the joint production of lending and relationship expanding non-interest income businesses
    Keywords: Scope Expansion; Non-interest Income; Relationship Banking; Credit Risk; Spread; Loan Composition; Cost Complementarities
    Date: 2014–02–12
  2. By: Marie-Hélène Broihanne (LaRGE Research Center, Université de Strasbourg); Christophe Godlewski (LaRGE Research Center, Université de Strasbourg)
    Abstract: Reputation of financial institutions is crucial for their activity and performance. Participant banks often rely on lead bank’s reputation in making future syndicated loan participation and lending decisions. We apply ordered probit regression techniques to a sample of more than 4,600 loans to investigate the determinants of participant banks reputation on the European syndicated lending market between 1999 and 2009. We find that the prestige of the lead bank in the first syndicate joined by a participant is crucial for his reputation. With a top 3 leader, participant reputation may increase by 85% while this effect drops to 30% when syndicating with a top 20 arranger. Establishing participant-lead bank relationships, developing a particular expertise in loan purpose or borrower industry, and funding very large deals also contributes to participant reputation. On the contrary, joining small club deals can be detrimental for reputation building.
    Keywords: bank loans, reputation, syndicated lending, Europe, ordered probit regression.
    JEL: G10 G21 G24 C25
    Date: 2014
  3. By: Wahyoe Soedarmono (Universitas Siswa Bangsa Internasional, Faculty of Business / Sampoerna School of Business - un); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: From a sample of commercial banks in Asia Pacific over the 1994-2009 period, this study highlights that banks in less competitive markets exhibit lower loan growth and higher instability. Such instability is further followed by a decline in deposit growth, suggesting that Asian banks are also subject to indirect market discipline mechanisms through bank market structure. This study therefore sheds light on the importance of enhancing bank competition to overcome bank risk and strengthen financial intermediation. This study also advocates greater reliance on market discipline to promote bank stability.
    Keywords: Bank competition; loan growth; risk; market discipline; Asia Pacific
    Date: 2014
  4. By: Pablo Martín-Aceña (Universidad de Alcalá, Madrid, Spain)
    Abstract: The present financial crisis has severely hit the Spanish savings banks sector. Of 45 savings banks in 2007 by the end of 2012 the number had dropped to only thirteen. Most of the institutions that have disappeared, have been consolidated into major groups, either by outright purchase by banks or as a result of merging operations among individual savings banks. The Bank of Spain and the Fund for Ordely Restructuring of the Banking Sector (FROB) have bailout seven savings banks or group of savings banks, and four of them have been nationalized. Moreover, nearly all merging operations have required the consumption of public resources, which in turn have increased the already large government budget deficit. First, the paper presents a short history of the savings banks crises, and shows that until very recently the sector has surmounted major crisis affecting the financial system. Their limited scope and scale, the principle of territoriality, and a prudent and conservative management avoided saving banks the financial turbulences suffered by the commercial and investment banks. Second, the paper reviews the causes of the current savings banks crisis and which have been the procedure and the cost of its resolution, which has required the astonishing figure of 60,000 million euros provided by the European Stability Mechanism.
    Keywords: savings banks, banking crises, financial regulation, Spain
    JEL: N23 N24 G21 G38
    Date: 2014–02
  5. By: Bhaskar DasGupta; Lakshmi Kaligounder
    Abstract: In [1] Zawadoski introduces a banking network model in which the asset and counter-party risks are treated separately and the banks hedge their assets risks by appropriate OTC contracts. In his model, each bank has only two counter-party neighbors, a bank fails due to the counter-party risk only if at least one of its two neighbors default, and such a counter-party risk is a low probability event. Informally, the author shows that the banks will hedge their asset risks by appropriate OTC contracts, and, though it may be socially optimal to insure against counter-party risk, in equilibrium banks will {\em not} choose to insure this low probability event. In this paper, we consider the above model for more general network topologies, namely when each node has exactly 2r counter-party neighbors for some integer r>0. We extend the analysis of [1] to show that as the number of counter-party neighbors increase the probability of counter-party risk also increases, and in particular the socially optimal solution becomes privately sustainable when each bank hedges its risk to at least n/2 banks, where n is the number of banks in the network, i.e., when 2r is at least n/2, banks not only hedge their asset risk but also hedge its counter-party risk.
    Date: 2014–02
  6. By: Bowo Setiyono (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: We investigate the impact of the interaction of disclosure and ownership structure on bank risk. Using a sample of 209 commercial banks from Asia during the 2004-2010 period, we find that disclosure is negatively associated with income volatility and that such an impact is stronger in the presence of block holders and institutional ownership and weaker with insider or government ownership. Our results also provide evidence that better disclosure ensures greater stability as measured by individual bank default risk. Furthermore, a deeper investigation shows that disclosure on income statement, loans, other earning assets, deposits, and memo lines plays a stronger role in limiting risk than disclosure on non-deposit liabilities.
    Keywords: Bank risk; disclosure index; bank ownership
    Date: 2014–02–13
  7. By: Butzbach, Olivier
    Abstract: Since the 2007-08 crisis, banks in many countries have been facing what seems to be a serious “trust crisis”. This sharp decline in trust in banks and banking, the likely outcome of the near-collapse of banking systems during the crisis, is partly captured by a growing empirical literature. However, this literature presents serious shortcomings, which reflect a more general lack of theorization of trust in banks. This lack of theorization certainly has much to do with the distance between the economic literature on banks and banking and the sociological and economic literature on trust. This paper aims at bridging this gap by proposing a new conceptual framework. In particular, the paper identifies three related dimensions of trust that seem to have relevance for the banking industry: “relational”, “systemic” and “vertical” trust. While mainstream financial intermediation theory and agency theory provide a good understanding of relational trust, they are less well equipped to deal with the other dimensions of trust. The paper, therefore, builds on heterodox theories of money and debt to build a more comprehensive understanding of trust in banks. This tentative conceptual framework, in turn, has implications for current theories of banking and of trust.
    Keywords: Trust; banks and banking; trust crisis; financial intermediation theory; institutional theory; money and debt, heterodox economics.
    JEL: B25 B52 D89 G21 Z13
    Date: 2014–01–31
  8. By: Matteo Smerlak; Brady Stoll; Agam Gupta; James S. Magdanz
    Abstract: The recent financial crisis illustrated the need for a thorough, functional understanding of systemic risk in strongly interconnected financial structures. Dynamic processes on complex networks being intrinsically difficult, most recent studies of this problem have relied on numerical simulations. In this paper, we report analytical results in a network model of interbank lending based on directly relevant financial parameters such as interest rates and leverage ratios. Using a mean-field approach, we obtain a closed-form formula for the "critical degree", viz. the number of creditors per bank below which an individual shock can cascade throughout the network. We relate the failures distribution (probability that a single shock induces $F$ failures) to the degree distribution (probability that a bank has $k$ creditors), showing in particular that the former is fat-tailed whenever the latter is. Remarkably, our criterion for the onset of contagion turns out to be isomorphic to a simple rule for the evolution of cooperation on graphs and social networks, supporting recent calls for a methodological rapprochement between finance and ecology.
    Date: 2014–02
  9. By: Acharya, Viral V.; Steffen, Sascha
    Abstract: Before the ECB takes over responsibility for overseeing Europe’s largest banks, as foreseen in the establishment of a eurozone banking union, it plans to conduct an Asset Quality Review (AQR) throughout the coming year, which will identify the capital shortfalls of these banks. This study finds that a comprehensive and decisive AQR will most likely reveal a substantial lack of capital in many peripheral and core European banks. The authors provide estimates of the capital shortfalls of banks that will be stress-tested under the AQR using publicly available data and a series of shortfall measures. Their analysis identifies which banks will most likely need capital, where a public back stop is likely to be needed and, since many countries are already highly leveraged, where an EU-wide backstop might be necessary.
    Date: 2014–01
  10. By: Lanot, Gauthier (Department of Economics, Umeå School of Business and Economics,); Leece, David (Keele Management School)
    Abstract: The research estimates a competing risk model of mortgage terminations on samples of UK securitised subprime mortgages. Given the argued role of these types of loan in the recent financial crisis then it is important to better understand their performance and supposed idiosyncratic behaviour. The methodological and empirical advance is the use of a general, flexible modelling of unobserved heterogeneity over several dimensions, controlling for both selection issues involving initial mortgage choices and dynamic selection over time. Moreover, we estimate specific coefficients for this unobserved heterogeneity and determine the correlation between the unobserved components of default and prepayment. The paper demonstrates the need for researchers and practitioners to jointly estimate household choices whiles controlling for selectivity through unobserved heterogeneity.
    Keywords: Subprime mortgages; unobserved heterogeneity; household behaviour; loan performance
    JEL: C13 C25 C51 D10 D14 E44 G21
    Date: 2014–02–20
  11. By: Feyen, Erik; Letelier, Raquel; Love, Inessa; Maimbo, Samuel Munzele; Rocha, Roberto
    Abstract: This paper provides new evidence on the factors affecting protracted credit contraction in the wake of the global financial crisis. The paper applies panel vector autoregressions to a global panel that consists of quarterly data for 41 countries for the period 2000-2011 and documents that domestic private credit growth is highly sensitive to cross-border funding shocks around the world. This relationship is significantly stronger in Central and Eastern Europe, a region with considerably stronger foreign presence, higher cross-border funding, and elevated loan-to-deposit ratios compared with the rest of the world. The paper shows that high foreign ownership per se does not appear to explain credit response differences to foreign funding shocks. Rather, there is a stronger response in countries that exhibit high loan-to-deposit ratios and a high reliance on foreign funding relative to local deposits. The results suggest that funding model differences were at the heart of the post-crisis credit contraction in several Central and Eastern European countries. These findings have important regulatory and supervisory implications for emerging countries in Central and Eastern Europe as well as for other countries.
    Keywords: Bankruptcy and Resolution of Financial Distress,Access to Finance,Banks&Banking Reform,Economic Theory&Research,Deposit Insurance
    Date: 2014–02–01
  12. By: Christoph Basten; Cathérine Koch
    Abstract: We identify the causal effect of house prices on mortgage demand and supply in Switzerland by exploiting exogenous shocks to immigration and thereby to house prices. Detailed micro data allow us to observe multiple offers for each mortgage request. We find a 1% increase in house prices to raise the requested mortgage amount by 0.52%. Due to positive feedback effects, the entire partial correlation is 0.78%. While we find higher house prices to increase mortgage demand, they induce banks to make fewer offers and charge higher rates, especially later in the boom and especially for highly leveraged households.
    Keywords: House prices, mortgage demand, mortgage supply, instrumental variables
    JEL: D14 G21 J61 R21
    Date: 2014–02
  13. By: Valiante, Diego
    Abstract: Evidence shows that financial integration in the euro area is retrenching at a quicker pace than outside the union. Home bias persists: Governments compete on funding costs by supporting ‘their’ banks with massive state aids, which distorts the playing field and feeds the risk-aversion loop. This situation intensifies friction in credit markets, thus hampering the transmission of monetary policies and, potentially, economic growth. This paper discusses the theoretical foundations of a banking union in a common currency area and the legal and economic aspects of EU responses. As a result, two remedies are proposed to deal with moral hazard in a common currency area: a common (unlimited) financial backstop to a privately funded recapitalisation/resolution fund and a blanket prohibition on state aids.
    Date: 2014–02
  14. By: Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas Evanoff
    Abstract: We explore the effects of mandatory third-party review of mortgage contracts on consumer choice—including the terms and demand for mortgage credit. Our study is based on a legislative pilot carried out by the State of Illinois in a selected set of zip codes in 2006. Mortgage applicants with low FICO scores were required to attend loan reviews by financial counselors. Applicants with high FICO scores had to attend counseling only if they chose “risky mortgages.” We find that low-FICO applicants for whom counselor review was mandatory did not materially change their contract choice. Conversely, applicants who could avoid counseling by choosing less risky mortgages did so. Ironically, the ultimate goals of the legislation (e.g., better loan terms for borrowers) were only achieved among the population that was not counseled. We also find significant adjustments in lender behavior as a result of the counseling program.
    JEL: D14 D18 L85 R21
    Date: 2014–02
  15. By: Malaguti, Maria Chiara; Guerrieri, Alessandra
    Abstract: Two-sided payment card markets generate costs that have to be distributed among the participating actors. For this purpose, payment card networks set an interchange fee, which is the fee paid by the merchant’s bank to the cardholder’s bank per transaction. While in recent years many antitrust authorities all over the world - including the European Commission - have opened proceedings against card brands in order to verify whether agreements to collectively establish the level of interchange fees are anticompetitive, the Reserve Bank of Australia – as a regulator - has directly tried to address market failures by lowering the level of interchange fees and changing some network rules. The US has followed with new legislation on financial consumer protection, which also intervenes on interchange fees. This has opened a strong debate not only on legitimacy of interchange fees, but also on the appropriateness of different public tools to address such issues. Drawing from economic and legal theories and a comparative analysis of recent case law in the EU and other jurisdictions, this work investigates whether a regulation rather than a purely competition policy approach would be more appropriate in this field, considering in particular, at EU level, all of the competition and regulatory concerns that have arisen from the operation of SEPA with multilateral interchange fees. The paper concludes that a wider regulation approach could address some of the shortcomings of a purely antitrust approach, proving to be highly beneficial to the development of an efficient European single payments area.
    Date: 2014–01
  16. By: Roberds, William (Federal Reserve Bank of Atlanta); Velde, Francois R. (Federal Reserve Bank of Chicago)
    Abstract: Publicly owned or commissioned banks were common in Europe from the fifteenth century. This survey argues that while the early public banks were characterized by great experimentation in their design, a common goal was to create a liquid and reliable monetary asset in environments where such assets were rare or unavailable. The success of these banks was however never guaranteed, and even well-run banks could become unstable over time as their success made them susceptible to fiscal exploitation. The popularization of bearer notes in the eighteenth century broadened the user base for the public banks’ money but was also accompanied by increased fiscal abuse. Wartime demands of the Napoleonic Era resulted in the reorganization or dissolution of many early public banks. A prominent exception was the Bank of England, whose adept management of a fiscally backed money provided a foundation for the development of central banks as they exist today.
    Keywords: Central banks; exchanges bank; public banks
    JEL: E58 N13
    Date: 2014–02–11
  17. By: Konstantinos Spiliopoulos
    Abstract: As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and computational tools for the quantification of such phenomena. Limiting analysis such as law of large numbers and central limit theorems allow to approximate the distribution in large systems and study quantities such as the loss distribution in large portfolios. Large deviations analysis allow us to study the tail of the loss distribution and to identify pathways to default clustering. Sensitivity analysis allows to understand the most likely ways in which different effects, such as contagion and systematic risks, combine to lead to large default rates. Such results could give useful insights into how to optimally safeguard against such events.
    Date: 2014–02
  18. By: Peter Tankov
    Abstract: We study the left tail behavior of the logarithm of the distribution function of a sum of dependent positive random variables. Asymptotics are computed under the assumption that the marginal distribution functions decay slowly at zero, meaning that the their logarithms are slowly varying functions. This includes parametric families such as log-normal, gamma, Weibull and many distributions from the financial mathematics literature. We show that the logarithmic asymptotics of the sum in question depend on a characteristic of the copula of the random variables which we term weak lower tail dependence function, and which is computed explicitly for several families of copulas in this paper. In applications, our results may be used to quantify the diversification of long-only portfolios of financial assets with respect to extreme losses. As an illustration, we compute the left tail asymptotics for a portfolio of options in the multidimensional Black-Scholes model.
    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.
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