New Economics Papers
on Banking
Issue of 2014‒03‒08
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Disentangling Systematic and Idiosyncratic Dynamics in Panels of Volatility Measures By Matteo Barigozzi; Christian T. Brownlees; Giampiero M. Gallo; David Veredas
  2. Shocks to Bank Lending, Risk-Taking, Securitization, and Their Role for U.S. Business Cycle Fluctuations By Peersman, G.; Wagner, W.B.
  3. On bank credit risk: systemic or bank-specific? Evidence from the US and UK By Junye Li; Gabriele Zinna
  4. Banks’ Loan Screening Incentives with Credit Risk Transfer: An Alternative to Risk Retention By Arnold, Marc
  5. Loan quality determinants: evaluating the contribution of bank-specific variables, macroeconomic factors and firm level information By Faiçal Belaid
  6. Ailing Mothers, Healthy Daughters? Contagion in the Central European Banking Sector By Tomas Fiala; Tomas Havranek
  7. Bankruptcy Remoteness and Incentive-compatible Securitization By G. Chiesa
  8. Foreign ownership and market power in banking: Evidence from a world sample By Manthos D. Delis; Sotirios Kokas
  9. Asymmetric Information and Roll-Over Risk By Philipp König; David Pothier
  10. The Benefits of Intrastate and Interstate Geographic Diversification in Banking By Céline Meslier; Donald P. Morgan; Katherine Somolyk; Amine Tarazi
  11. Stress Testing Engineering: the real risk measurement? By Dominique Guegan; Bertrand Hassani
  12. Group lending or individual lending? Evidence from a randomised field experiment in Mongolia By Attanasio, Orazio; Augsburg, Britta; de Haas, Ralph; Fitzsimons, Emla; Harmgart, Heike

  1. By: Matteo Barigozzi (London School of Economics and Political Science – Department of Statistics); Christian T. Brownlees (Universitat Pompeu Fabra – Department of Economics and Business & Barcelona GSE); Giampiero M. Gallo (Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti", Università di Firenze); David Veredas (ECARES – Solvay Brussels School of Economics and Management – Université libre de Bruxelles)
    Abstract: Realized volatilities measured on several assets exhibit a common secular trend and some idiosyncratic pattern. We accommodate such an empirical regularity extending the class of Multiplicative Error Models (MEMs) to a model where the common trend is estimated nonparametrically while the idiosyncratic dynamics are assumed to follow univariate MEMs. Estimation theory based on seminonparametric methods is developed for this class of models for large cross-sections and large time dimensions. The methodology is illustrated using two panels of realized volatility measures between 2001 and 2008: the SPDR Sectoral Indices of the S&P500 and the constituents of the S&P100. Results show that the shape of the common volatility trend captures the overall level of risk in the market and that the idiosyncratic dynamics have an heterogeneous degree of persistence around the trend. An out–of–sample forecasting exercise shows that the proposed methodology improves volatility prediction over a number of benchmark specifications.
    Keywords: Vector Multiplicative Error Model, Seminonparametric Estimation, Volatility.
    JEL: C32 C51 G01
    Date: 2014–02
  2. By: Peersman, G.; Wagner, W.B. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Shocks to bank lending, risk-taking and securitization activities that are orthogonal to real economy and monetary policy innovations account for more than 30 percent of U.S. output variation. The dynamic effects, however, depend on the type of shock. Expansionary securitization shocks lead to a permanent rise in real GDP and a fall in inflation. Bank lending and risktaking shocks, in contrast, have only a temporary effect on real GDP and tend to lead to a (moderate) rise in the price level. Furthermore, there is evidence for a strong search-for-yield effect on the side of investors in the transmission mechanism of monetary policy. These effects are estimated with a structural VAR model, where the shocks are identified using a model of bank risk-taking and securitization.
    Keywords: Bank lending;risk-taking;securitization;SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2014
  3. By: Junye Li (ESSEC Business School); Gabriele Zinna (Bank of Italy)
    Abstract: We develop a multivariate credit risk model that accounts for joint defaults of banks and al-lows us to disentangle how much of banks' credit risk is systemic. We find that the US and UK dif-fer not only in the evolution of systemic risk, but in particular in their banks' systemic exposures. In both countries, however, systemic credit risk varies substantially, represents about half of total bank credit risk on average, and induces high risk premia. Further, the results suggest that sovereign and bank systemic risk are particularly interlinked in the UK.
    Keywords: systemic bank credit Risk, credit default swaps, distress risk premia, Bayesian estimation
    JEL: F34 G12 G15
    Date: 2014–02
  4. By: Arnold, Marc
    Abstract: This article analyzes the impact of credit risk transfer on banks' screening incentives on the primary loan market. While credit derivatives allow banks to transfer risk to investors, they negatively affect the incentive to screen due to the asymmetry of information between banks and investors. I show that screening incentives can be reestablished with standardized credit derivatives that fully transfer the underlying loan default risk. In particular, a callable credit default swap reveals a loan's quality to the investor by letting him observe the bank's readiness to pay for the implicit call feature. The ability to signal loan quality induces screening incentives. The paper also examines the impact of current developments such as higher regulatory capital standards, stricter margin requirements, and central clearing on the design of the optimal credit risk transfer contract.
    Keywords: Credit Risk Transfer, Callable Credit Default Swaps, Screening Incentives
    JEL: G18 G28
  5. By: Faiçal Belaid (Central Bank of Tunisia)
    Abstract: This paper uses probit and ordered probit methods to examine the impact of banks’ policies in terms of cost efficiency, capitalization, activity diversification, credit growth and profitability, on the loan quality in the Tunisian banking sector after controlling for the effects of firm-specific characteristics and macroeconomic conditions. Using a data set with detailed information for more than 9 000 firms comprising the portfolios of the ten largest Tunisian banks, we show that banks which are cost inefficient, low capitalized, diversified and small, are more likely to have a low quality of loans portfolios. However, bank’s profitability does not seem to offer an important contribution in explaining the loan quality evolution. Finally, our findings highlight the importance of taking into account firm-specific characteristics and macroeconomic developments when assessing the loan quality of banks from a financial stability perspective.
    Keywords: Problem loan, Bank specific factors, Firm specific characteristics, Probit models, Ordered probit models
    Date: 2014–02–18
  6. By: Tomas Fiala; Tomas Havranek
    Abstract: Foreign-dominated banking sectors, such as those prevalent in Central and Eastern Europe, are susceptible to two major sources of systemic risk: (i) linkages between local banks and (ii) linkages between a foreign mother bank and its local subsidiary. Using a nonparametric method based on extreme value theory, which accounts for fat-tail shocks, we analyze inter- dependencies in downward risk in the banking sector of the Czech Republic, Hungary, Poland, and Slovakia during 1994-2013. In contrast to the pre- sumptions of the current regulatory policy of these countries, we find that the risk of contagion from a foreign mother bank to its local subsidiary is substantially smaller than the risk between two local banks.
    Keywords: systemic risk, extreme value theory, financial stability, Central Eastern Europe, banking, parent-subsidiary relationship
    JEL: F23 F36 G01 G21
    Date: 2014–01–01
  7. By: G. Chiesa
    Abstract: Securitization performs two functions. One refers to the risk allocation between the bank and outside investors; the other consists of creating transferable/liquid securities. A key ingredient of liquid/claimtransferability is bankruptcy remoteness - the insolvency of the sponsor (the loan originator) has no impact on the securities. We explore the implications of bankruptcy remoteness on risk allocation and regulatory/policy issues. Under traditional banking, when debt/deposits coexist with securitization, bankruptcy remoteness amounts to: i) a seniority structure when debt/deposits (the claim that insist on the bank as a whole) have the lowest priority; ii) the bank finds it optimal to grant securities maximum protection - securitization without risk transfer. This constrains incentive-compatible lending below the social optimum, whenever at an optimal allocation not all risk bears on the bank. Policies that implement the social optimum are derived.
    JEL: G21 G28 K22 D86
    Date: 2014–02
  8. By: Manthos D. Delis; Sotirios Kokas
    Abstract: Using a novel global data set with bank-year estimates of market power, we examine the impact of (i) the ownership status (foreign or domestic) of individual banks and (ii) the country-level trends in foreign bank presence on our market power estimates. We find that the ownership status of individual banks does not explain banks’ market power. In contrast, the country-level trends in foreign bank ownership have a positive and significant effect on banks’ market power that is primarily due to the fact that most foreign bank entry occurs through mergers and acquisitions and not through de novo penetration. We also find that the positive nexus between foreign bank presence and market power is considerably weaker in countries with well-capitalized banks.
    Keywords: Bank market power, Competition, Foreign banks, World sample
    Date: 2014–02
  9. By: Philipp König; David Pothier
    Abstract: How do banks choose their debt maturity structure when credit markets are subject to information frictions? This paper proposes a model of equilibrium maturity choice with asymmetric information and endogenous roll-over risk. We show that in the presence of public signals about firms' creditworthiness (credit ratings), firms choose to expose themselves to positive roll-over risk in order to minimize price distortions. Short-term financing is socially desirable when banks' capacity to repay short-term creditors depends on their credit rating, as it helps mitigate the underlying adverse selection problem. Notwithstanding these social benefits, the equilibrium maturity structure always exhibits inefficient short-termism. If banks receiving a credit downgrade face sufficiently high roll-over risk, the equilibrium maturity structure approaches the constrained efficient allocation.
    Keywords: Debt maturity, rollover risk, asymmetric information, global games
    JEL: G10 G20 G30 G32
    Date: 2014
  10. By: Céline Meslier (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Donald P. Morgan (Federal Reserve Bank of New-York - Federal Reserve Bank of New-York); Katherine Somolyk (Consumer Financial Protection Bureau - Consumer Financial Protection Bureau); 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 estimate the benefits of intrastate and interstate geographic diversification for bank risk and return, and assess whether such benefits could be shaped by differences in bank size and disparities in economic conditions within states or across U.S. states. For small banks, only intrastate diversification is beneficial in terms of risk-adjusted returns but for very large institutions both intrastate and intrastate expansions are rewarding. However, in all cases the relationship is hump-shaped for both intrastate and interstate diversification indicating limits for banks of all size. Moreover, while our results indicate that the average 'very large' bank has already reached its optimal diversification level, the average 'small bank' could still benefit in terms of risk-adjusted returns from further geographic diversification. Higher economic disparity as measured by the dispersion in unemployment rates either across counties or states impacts the benefits of diversification. At initially low levels of diversification, moving to other markets with dissimilar economic conditions lowers the added value of diversification but it becomes more beneficial at higher diversification levels.
    Keywords: Bank Holding Company; Geographic Diversification; Intrastate and interstate disparities in economic activity; Bank risk and return
    Date: 2014–02–21
  11. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne)
    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
    Date: 2014–02
  12. By: Attanasio, Orazio; Augsburg, Britta; de Haas, Ralph; Fitzsimons, Emla; Harmgart, Heike
    Abstract: Although microfinance institutions across the world are moving from group lending towards individual lending, this strategic shift is not substantiated by sufficient empirical evidence on the impact of both types of lending on borrowers. We present such evidence from a randomised field experiment in rural Mongolia. We find a positive impact of access to group loans on food consumption and entrepreneurship. Among households that were offered group loans the likelihood of owning an enterprise increases by 10 per cent more than in control villages. Enterprise profits increase over time as well, particularly for the less-educated. For individual lending on the other hand, we detect no significant increase in consumption or enterprise ownership. These results are in line with theories that stress the disciplining effect of group lending: joint liability may deter borrowers from using loans for non-investment purposes. Our results on informal transfers are consistent with this hypothesis. Borrowers in group-lending villages are less likely to make informal transfers to families and friends while borrowers in individual-lending villages are more likely to do so. We find no significant difference in repayment rates between the two lending programmes, neither of which en-tailed weekly repayment meetings. --
    Keywords: group lending,poverty,access to finance,randomised field experiment
    JEL: O16 G21 D21 I32
    Date: 2014

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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