New Economics Papers
on Banking
Issue of 2014‒03‒15
38 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Capital Requirements, Banking Supervision and Lending Behavior: Evidence from Tunisia By Guizani, Brahim
  2. Do Banks Lend Less in Uncertain Times? By Burkhard Raunig; Johann Scharler; Friedrich Sindermann
  3. The Safer, the Riskier: A Model of Financial Instability and Bank Leverage By Ryo Kato; Takayuki Tsuruga
  4. The Evolution of Bank Supervision: Evidence from U.S. States By Mitchener, Kris James
  5. Sovereign and bank CDS spreads: two sides of the same coin? By John Cotter; Davide Avino
  6. Foreign ownership and market power in banking: Evidence from a world sample By Delis, Manthos D; Kokas, Sotiris
  7. Is There a Cooperative Bank Difference? By Leonardo Becchetti; Rocco Ciciretti; Adriana Paolantonio
  8. New CNB measures to stimulate credit growth: problems and solutions By Vidakovic, Neven; Zbašnik, Dušan
  9. Bank Income Smoothing, Ownership Concentration and the Regulatory Environment By Vincent Bouvatier; Laetitia Lepetit; Frank Strobel
  10. Czech Export Credit Agencies and their Market Power By Janda, Karel
  11. Filling in the blanks: Network structure and interbank contagion By Anand, Kartik; Craig, Ben; von Peter, Goetz
  12. SME Financing in Japan during the Global Financial Crisis: Evidence from Firm Surveys By Ono, Arito; Uesugi, Iichiro
  13. Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit? By Wenli Li; Ishani Tewari; Michelle J. White
  14. Optimal Return in a Model of Bank Small-business Financing By Peia, Oana; Vranceanu , Radu
  15. Anatomy of a Bail-In By Thomas Conlon; John Cotter
  16. How do banking crises affect aggregate consumption? Evidence from international crisis episodes By Gerlach-Kristen, Petra; O'Connell, Brian; O'Toole, Conor
  17. Do Loan Officers’ Incentives Lead to Lax Lending Standards? By Sumit Agarwal; Itzhak Ben-David
  18. Inside Money, Procyclical Leverage, and Banking Catastrophes By Charles D. Brummitt; Rajiv Sethi; Duncan J. Watts
  19. Inflation targeting and Quantitative Tightening: Effects of Reserve Requirements in Peru By Armas, Adrián; Castillo, Paul; Vega, Marco
  20. Corporate Investment and Financial Crisis: Can Under- and Overinvestment Be Mitigated by Banks in an Emerging Market? By Tsapin Andriy; Tsapin Oleksandr
  21. The Vulnerability of Minority Homeowners in the Housing Boom and Bust By Patrick Bayer; Fernando Ferreira; Stephen L. Ross
  22. International Transmission of Shocks and Fragility of a Bank Network By Xiaobing Feng; Woo Seong Jo; Beom Jun Kim
  23. Prudential Capital Controls or Bailouts? The Impact of Different Collateral Constraint Assumptions By Mitsuru Katagiri; Ryo Kato; Takayuki Tsuruga
  24. Earnings baths by bank CEOs during turnovers By Bornemann, Sven; Pfingsten, Andreas; Kick, Thomas; Schertler, Andrea
  25. How Financial Innovation Might Cancel Out Bank Regulation Along Financial Cycles. A Keynes’s State of Confidence Interpretation. By Konstantinos I. Loizos
  26. Do Women-owned Start-ups Have a Lower Probability of Obtaining Loans? An empirical analysis using panel data from Japan (Japanese) By HIGUCHI Yoshio; KODAMA Naomi
  27. Managing Credit Bubbles By Alberto Martin; Jaume Ventura
  28. Reserve requirements in the brave new macroprudential world By Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo
  31. The Effects of Student Loans on Long-Term Household Financial Stability By Gicheva, Dora; Thompson, Jeffrey
  33. Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending By Peter Koudijs; Hans-Joachim Voth
  34. Basel III, Clubs and Eurozone Asymmetries By Michele Fratianni; John Pattison
  35. A Simple and Precise Method for Pricing Convertible Bond with Credit Risk By Xiao, Tim

  1. By: Guizani, Brahim
    Abstract: This paper represents a contribution to the still meager literature on the impact of prudential regulation bank behavior in Tunisia. It aims to examine the effect of the capital requirements on bank credits during the period from 1999 through 2010 and to assess the effectiveness of the banking supervision policy in containing banking system’s risk. For this purpose a dynamic model is built and then an empirical regression is estimated. The results shows that regulatory capital framework has been binding bank lending in Tunisia during the period of study; well-capitalized banks have lent more than less-capitalized ones. Despite the apparent stringency of the bank regulator in Tunisia, banking supervision has been weakly effective in restraining banks’ overall risk. Further strengthening of the banking supervision policy is still needed on the part of the central bank of Tunisia; i.e., the bank regulator.
    Keywords: capital requirements, Basel Accords, dynamic model, banking supervision, non-performing loans.
    JEL: C63 D92 G21 G28
    Date: 2014–03–08
  2. By: Burkhard Raunig; Johann Scharler; Friedrich Sindermann
    Abstract: We study the development of bank lending in the U.S. after four large jumps in uncertainty using an event study approach. We find that more liquid banks reduce lending less than banks with smaller liquidity ratios after a surge in uncertainty. Lending by smaller banks is also less responsive to increases in uncertainty. Banks with a higher capitalization ratio keep up lending to a greater extent, but the effect is only significant for banks which are not part of a multi-bank holding company. This heterogeneity across banks suggests that declines in bank lending following increases in uncertainty are partly the result of a reduced supply of bank loans.
    Keywords: uncertainty, bank loan supply, event study
    JEL: E44 E20 E30
    Date: 2014–03
  3. By: Ryo Kato; Takayuki Tsuruga
    Abstract: We examine the role of bank leverage to explain why the 2007-08 financial crisis unfolded at a time when the economy appears to be less fragile to crisis risks. To this end, we extend the model introduced by Diamond and Rajan (2012) to a variant where the probability of financial crises varies endogenously. In our model, aggregate liquidity shock plays a key role in precipitating a crisis because high liquidity demand in a highly leveraged banking system is likely to expose the economy to greater crisis risks. We consider an example of a “safe” environment where liquidity demand tends to be low on average. Using numerical analysis, we show that the “safer” environment could incentivize banks to raise their leverage, resulting in a banking system that is more vulnerable to liquidity shocks.
    Keywords: Bank run, Financial crisis, Maturity mismatch
    JEL: E3 G01 G21
    Date: 2014–03
  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: John Cotter (UCD School of Business, University College Dublin); Davide Avino (UCD School of Business, University College Dublin)
    Abstract: This paper investigates the relationship between sovereign and bank CDS spreads with reference to their ability to convey timely signals on the default risk of European sovereign countries and their banking systems. By using a sample including six major European economies, we find that sovereign and bank CDS spreads are cointegrated variables at the country level. We then perform a more in-depth investigation of the underlying price discovery mechanisms, and find that both variables have an important price discovery role in the period preceding the financial crisis of 2007-2009. However, during the global financial crisis and the subsequent European sovereign debt crisis, sovereign CDS spreads dominate the price discovery process. Our findings suggest that, especially during crisis periods, sovereign CDS spreads incorporate more timely information on the default probability of European banks than their corresponding bank CDS spreads.
    Keywords: Credit default swap spreads; price discovery; information flow; financial crisis; banks; sovereign risk; bank capital
    JEL: G01 G12 G14 G20 D8
    Date: 2014–02–19
  6. By: Delis, Manthos D; Kokas, Sotiris
    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
    JEL: D4 F23 G21
    Date: 2014–02–26
  7. By: Leonardo Becchetti (Department of Law, Economics, and Institutions, University of Rome Tor Vergata, Italy); Rocco Ciciretti (Department of Economics and Finance, University of Rome Tor Vergata, Italy; RCEA, Italy); Adriana Paolantonio (Food and Agriculture Organization of the United Nations (FAO), Italy)
    Abstract: We compare characteristics of cooperative and non cooperative banks at world level in a time spell including the global financial crisis. Cooperative banks have higher net loans/total assets ratio, lower income from non traditional activites and lower shares of derivatives over total assets than non cooperative banks. From an econometric point of view, we find that the cooperative bank specialization has a positive and significant effect on the net loans/total assets ratio in the overall sample period and in the post financial crisis subperiod. Derivatives (both in terms of assets and revenues) have a quantitatively strong and significant negative effect on the same dependent variable during both time spells. We finally document that, in a conditional convergence specification, the net loans/total assets ratio is positively and significantly correlated with the value added growth of the manufacturing sector with the exception of the two extremes of self-financing sectors and sectors in high need of external finance.
    Keywords: cooperative banks, value added, global financial crisis
    JEL: G21 O40 E44
    Date: 2014–02
  8. By: Vidakovic, Neven; Zbašnik, Dušan
    Abstract: The paper analyses the new measure implemented by Croatian national bank (CNB). The measure is a decrease in the reserve requirement, but the actual release of funds is contingent on increase in lending to firms. This new measure is significant because for the first time in Croatia there is a measure whose purpose is to affect specifically credit policy of the banks. Although this new measure has good intentions it does not solve the problem of why highly liquid banking system in Croatia is not willing to increase lending. The reason for lack of credit growth lies in two separate problems. The first problem is the willingness of banks to have more credit risk and the second problem is the way monetary policy is conducted in Croatia.
    Keywords: conduct of monetary policy, banks, credit
    JEL: E51 E58 G21
    Date: 2014–02
  9. By: Vincent Bouvatier (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Frank Strobel (university of birmingham - Department of Economics)
    Abstract: Abstract We empirically examine whether the way a bank might use loan loss provisions to smooth its income is in‡uenced by its ownership concentration and the regulatory environment. Using a panel of European commercial banks, we find evidence that banks with more concentrated ownership use discretionary loan loss provisions to smooth their income. This behavior is less pronounced in countries with stronger supervisory regimes or higher external audit quality. Banks with low levels of ownership concentration do not display such discretionary income smoothing behavior. This suggests the need to improve existing or implement new corporate governance mechanisms.
    Date: 2014
  10. By: Janda, Karel
    Abstract: We describe the export credit agencies in the Czech Republic and the export promotion strategy of the Czech government. The policy part of the paper is focused on the interac- tion of government owned and supported Czech Export Bank with the Czech commercial banks. We argue that the major market share of Czech Export Bank in export credit market may be explained by a number of factors in addition to the competitive advantage provided by lower pro�t margins of Czech Export Bank. These factors may be grouped into strategic factors related to competition among commercial banks and into factors based on Czech Export Bank being state owned specialized export bank as opposed to private general banks.
    Keywords: international trade, state promotion, export credit agencies, Czech Republic
    JEL: F14 G21 G28
    Date: 2014–03–04
  11. By: Anand, Kartik; Craig, Ben; von Peter, Goetz
    Abstract: The pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unknown, and maximum entropy serves as the leading method for estimating unobserved counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, leading to networks with minimum density. When used in a stress testing context, the minimum density approach performs better than maximum entropy and also permits more robust analysis. Using the two benchmarks side by side helps identify a range of possible systemic risk outcomes when the true pattern of counterparty exposures is unknown. --
    Keywords: interbank markets,networks,entropy,intermediation,systemic risk
    JEL: G21 L14 D85 C63
    Date: 2014
  12. By: Ono, Arito; Uesugi, Iichiro
    Abstract: Employing data from a unique firm survey, this article examines small and medium-sized enterprise (SME) financing in Japan during the global financial crisis. The major findings of the article are two-fold. First, in terms of credit availability, loans extended by main banks were the “first line of defense” for most Japanese SMEs to deal with the crisis. In contrast, the role of trade credit provided by firms’ main suppliers was relatively limited. The Emergency Credit Guarantees (ECG) program introduced by the government in response to the crisis also helped to increase credit availability. Second, in terms of firms’ ex-post performance, loans extended by firms’ main bank and loans backed by government policy measures did not have any measurable impact. While the average profitability of firms that received these loans deteriorated more than that of firms that did not in 2009, the difference between these two groups vanished after 2010.
    Keywords: SME financing, main bank, trade credit, credit guarantees
    JEL: G21 G28 G30 G38
    Date: 2014–02
  13. By: Wenli Li; Ishani Tewari; Michelle J. White
    Abstract: We assess the credit market impact of allowing mortgage “strip-down”—that is, reducing the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 13 bankruptcy. Our identification is provided by a series of U.S. Circuit Court of Appeals decisions in the early 1990’s that introduced mortgage strip-down in parts of the U.S., followed by a 1993 Supreme Court ruling that abolished it all over the U.S. We find that the Supreme Court decision led to a short-term reduction of 3% in mortgage interest rates and a short-term increase of 1% in mortgage approval rates, but only the approval rate effect persists in longer sample periods. In contrast, the circuit court decisions to allow strip-down did not have consistent effects on mortgage terms. We also show that strip-down had little effect on default rates by homeowners with existing mortgages. Taken together, these results suggest that mortgage lenders responded weakly to both the adoption and abolition of strip-down because strip-down had little effect on their profits from mortgage lending. According to these findings, re-introducing strip-down of mortgages in bankruptcy as a foreclosure-prevention program would have only small and transient effects on the supply of mortgage loans.
    JEL: G21 K2 K35
    Date: 2014–03
  14. By: Peia, Oana (ESSEC Business School); Vranceanu , Radu (ESSEC Business School)
    Abstract: This paper develops a simple model showing how banks can increase the access to finance of small, risky firms by mitigating coordination problems among investors. If investors observe a biased signal about the true implementation cost of real sector projects, the model can be solved for a switching equilibrium in the classical global games approach. We show that the socially optimal interest rate that maximizes the probability of success of the firm is higher than the risk-free rate. Yet if banks maximize investors' expected return, they would choose an interest higher than the socially optimal one. This gives rise to a form of credit rationing, which stems from the funding constraints of the banks.
    Keywords: Bank finance; Small business; Global games; Switching equilibrium; Optimal return rium; Optimal return
    JEL: C72 D82 G21 G32
    Date: 2014–02
  15. By: Thomas Conlon (UCD School of Business, University College Dublin); John Cotter (UCD School of Business, University College Dublin)
    Abstract: To mitigate potential contagion from future banking crises, the European Commission recently proposed a framework which would provide for the bail-in of bank creditors in the event of failure. In this study, we examine this framework retrospectively in the context of failed European banks during the global nancial crisis. Empirical ndings suggest that equity and subordinated bond holders would have been the main losers from the e535 billion impairment losses realized by failed European banks. Losses attributed to senior debt holders would, on aggregate, have been proportionally small, while no losses would have been imposed on depositors. Cross-country analysis, incorporating stress-tests, reveals a divergence of outcomes with subordinated debt holders wiped out in a number of countries, while senior debt holders of Greek, Austrian and Irish banks would have required bail-in.
    Keywords: Bank Resolution, Bail-In, European Bank Failure, Global Financial Crisis, Impairment Charges.
    Date: 2014–02–21
  16. By: Gerlach-Kristen, Petra; O'Connell, Brian; O'Toole, Conor
    Abstract: This paper considers the effect of systemic financial crises on aggregate consumption. Using a sample of 23 countries over 32 years, we find that consumption growth seems lower during banking crises, crises following credit booms and crises following house price booms. Moreover, the response to income growth seems to change, which may be due to credit constraints. In the long run, consumption appears to be linked to income, housing and other financial wealth.
    Keywords: Financial Crises/Consumption/Housing Wealth/Panel Error Correction Model/Weak Exogeneity
    Date: 2014–10
  17. By: Sumit Agarwal; Itzhak Ben-David
    Abstract: We study a controlled corporate experiment in which loan officers’ compensation structure was altered from fixed salary to volume-based pay. The incentives increased aggressiveness of origination: higher origination rates (+31%), larger loan sizes (+15%), and higher default rates (+28%). Under the incentive system, loan officers have greater influence on loan approval decisions; however, their recommendations do not convey more information. Poor loan performance is caused by lax approval and aggressive loan terms, and is more likely to occur among end-of-month originations, male loan officers, and tenured loan officers. About 10% of the loans under the incentive system are likely to have negative net present value.
    JEL: G01 G21
    Date: 2014–02
  18. By: Charles D. Brummitt; Rajiv Sethi; Duncan J. Watts
    Abstract: We explore a model of the interaction between banks and outside investors in which the ability of banks to issue inside money (short-term liabilities believed to be convertible into currency at par) can generate a collapse in asset prices and widespread bank insolvency. The banks and investors share a common belief about the future value of certain long-term assets, but they have different objective functions; changes to this common belief result in portfolio adjustments and trade. Positive belief shocks induce banks to buy risky assets from investors, and the banks finance those purchases by issuing new short-term liabilities. Negative belief shocks induce banks to sell assets in order to reduce their chance of insolvency to a tolerably low level, and they supply more assets at lower prices, which can result in multiple market-clearing prices. A sufficiently severe negative shock causes the set of equilibrium prices to contract (in a manner given by a cusp catastrophe), causing prices to plummet discontinuously and banks to become insolvent. Successive positive and negative shocks of equal magnitude do not cancel; rather, a banking catastrophe can occur even if beliefs simply return to their initial state. Capital requirements can prevent crises by curtailing the expansion of balance sheets when beliefs become more optimistic, but they can also force larger price declines. Emergency asset price supports can be understood as attempts by a central bank to coordinate expectations on an equilibrium with solvency.
    Date: 2014–03
  19. 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
  20. By: Tsapin Andriy; Tsapin Oleksandr
    Abstract: This study explores the question whether the problems of under- and overinvestment can be mitigated by banks. Using a unique matched dataset of Ukrainian companies and their main banks we apply robust IV-GMM-system, dynamic GMM-system techniques, and treatment effect model to estimate the role of banks incorporate investment. The available evidence shows that companies raise the use of bank loans in favorable times to accumulate working capital and spend it in the time of tight constraints. Ukrainian banks do lessen financial constraints spurring fi rms to invest more in the case of underinvestment. Banks also are able to restrain the companies from overinvestment but this impact depends signi cantly on the bank fi nancial health. Our fi ndings demonstrate that certain banks financed excessive corporate investment in pre-crisis period but this practice shrinks down with the onset of the crisis.
    JEL: G30 G31 G32
    Date: 2014–02–26
  21. By: Patrick Bayer (Duke University); Fernando Ferreira (University of Pennsylvania); Stephen L. Ross (University of Connecticut)
    Abstract: This paper examines mortgage outcomes for a large, representative sample of individual home purchases and refinances linked to credit scores in seven major US markets in the recent housing boom and bust. We find that among those with similar credit scores, black and Hispanic homeowners had much higher rates of delinquency and default in the downturn. These differences are not explained by the likelihood of receiving a subprime loan or by differential exposure to local shocks in the housing and labor market and are especially pronounced for loans originated near the peak of the boom. There is also heterogeneity within minorities: black and Hispanics that live in areas with lower employment rates and that have high debt to income ratios are the driving force of the observed racial differences in foreclosures and delinquencies. Our findings suggest that those black and Hispanic homeowners drawn into the market near the peak were especially vulnerable to adverse economic shocks and raise serious concerns about homeownership as a mechanism for reducing racial disparities in wealth.
    Keywords: Mortgage, Foreclosure, Delinquency, Minority, Homeownership, Housing Bust, Wealth Disparities
    JEL: I38 J15 J71 R21
    Date: 2014–02
  22. By: Xiaobing Feng; Woo Seong Jo; Beom Jun Kim
    Abstract: The weighted and directed network of countries based on the number of overseas banks is analyzed in terms of its fragility to the banking crisis of one country. We use two different models to describe transmission of shocks, one local and the other global. Depending on the original source of the crisis, the overall size of crisis impacts is found to differ country by country. For the two-step local spreading model, it is revealed that the scale of the first impact is determined by the out-strength, the total number of overseas branches of the country at the origin of the crisis, while the second impact becomes more serious if the in-strength at the origin is increased. For the global spreading model, some countries named "triggers" are found to play important roles in shock transmission, and the importance of the feed-forward-loop mechanism is pointed out. We also discuss practical policy implications of the present work.
    Date: 2014–03
  23. By: Mitsuru Katagiri; Ryo Kato; Takayuki Tsuruga
    Abstract: A fast growing literature on small open economy models with pecuniary externalities has provided the theoretical grounds for the policy analysis of macro prudential regulations. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of bailout can outperform prudential capital controls. We show that the result depends on the functional form of the collateral constraint faced by households. If households collateralize their assets that they purchase at the same time as their borrowing, subsidizing debt during crises is preferable. If, on the other hand, the maximum borrowing is constrained by the value of their assets that they have purchased before they borrow, a stronger case can be made for prudential capital controls.
    Keywords: Financial crises, Credit externalities, Bailouts, Macroprudential policies
    JEL: E32 G01 G18
    Date: 2014–03
  24. By: Bornemann, Sven; Pfingsten, Andreas; Kick, Thomas; Schertler, Andrea
    Abstract: This study investigates the development of income-decreasing discretionary expenses surrounding CEO turnovers at banks. We expect incoming CEOs to take an earnings bath during the initial stage of their tenure. For a sample of German banks over the period 1993-2012, we document that (1) incoming CEOs increase discretionary expenses, i. e. engage in big bath accounting, during their first (partial) year in charge, (2) incoming CEOs from outside the bank take a larger earnings bath than insiders, and (3) incoming CEOs take a smaller earnings bath when the incumbent CEOs retire than when they leave for other reasons. Our findings are robust to several modifications. Most importantly, they also hold true when the incoming CEO's objective of rectifying shortages in the existing stock of risk provisions has been taken into account, which may provide an alternative explanation for observing extraordinary amounts of discretionary expenses in turnover years. --
    Keywords: CEO turnover,Earnings management,Big bath accounting,Discretionary expenses,Financial institutions
    JEL: C23 G21 M41
    Date: 2014
  25. By: Konstantinos I. Loizos (University of Athens)
    Abstract: The question posed in this paper is how financial innovation may render conventional bank regulation ineffective. It is argued that the root cause as well as the essence of financial innovation is the predominance of trust in the financial markets, as it is confidence in the financial markets which makes the acceptance of financial innovation possible. In particular, mutual trust in the interbank market depends on the degree of confidence by which expectations are held, which, in turn, affects the relevant risk premia. Consequently, bank regulation may fail to accomplish its stabilization purpose if it cannot check overconfidence in the upswing or inspire and redress lack of confidence in the downturn.
    Keywords: Financial Innovation, Bank Regulation, State of Confidence, Financial Cycles
    JEL: G28 G01
    Date: 2014–02
  26. By: HIGUCHI Yoshio; KODAMA Naomi
    Abstract: Using data of start-up businesses in Japan, we compare the probability of women obtaining loans to that of men. We control for not only individual attributes but also firm characteristics containing yieldability, cash flow, and the ability of debt redemption. Women-owned start-ups have a 11-14 percentage point lower probability of obtaining loans when they need credit. On the other hand, once they apply for credit, they have just a 2-3 percentage point lower probability of obtaining it than do men-owned start-ups. This means that women are likely to give up on obtaining loans before applying. Are banks reluctant to lend money to women? We take this one step further and find that women-owned businesses with a similar propensity score in obtaining loans show a comparable performance to men-owned businesses. This indicates that banks make the proper decision in whether to provide credit based on each business' characteristics and expected performance.
    Date: 2014–03
  27. By: Alberto Martin; Jaume Ventura
    Abstract: We study a dynamic economy where credit is limited by insufficient collateral and, as a result, investment and output are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). During a credit bubble, there is more credit available for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an "optimal" bubble size that trades off these two effects and maximizes long-run output and consumption. The "equilibrium" bubble size depends on investor sentiment, however, and it typically does not coincide with the "optimal" bubble size. This provides a new rationale for macroprudential policy. A lender of last resort can replicate the "optimal" bubble by taxing credit when the "equilibrium" bubble is too high, and subsidizing credit when the "equilibrium" bubble is too low. This leaning-against-the-wind policy maximizes output and consumption. Moreover, the same conditions that make this policy desirable guarantee that a lender of last resort has the resources to implement it.
    JEL: E32 E44 O40
    Date: 2014–03
  28. By: Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo
    Abstract: Using a new, large data set on quarterly reserve requirements for the period 1970-2011, this paper provides new evidence on the use of reserve requirements as a countercyclical macroprudential tool in developing countries. The appeal of reserve requirements lies in the pro-cyclical behavior of the exchange rate over the business cycle in developing countries. This enormously complicates the use of interest rates as a countercyclical instrument (because of its effect on the exchange rate) and calls for a second instrument. The paper suggests that conflicts may arise between the microprudential and macroprudential policy stances.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Theory&Research,Banks&Banking Reform
    Date: 2014–02–01
    Date: 2014
    Date: 2014
  31. By: Gicheva, Dora (University of North Carolina at Greensboro, Department of Economics); Thompson, Jeffrey (Federal Reserve Board)
    Abstract: By examining how student borrowers fare financially after graduation, we attempt to further the existing knowledge of the costs associated with education debt and the manageability of the typical debt burden. We compare the financial stability of individuals who have borrowed for education to similar individuals who have not. We show that, keeping education constant, more student debt is associated with higher probability of being credit constrained and greater likelihood of declaring bankruptcy, particularly for individuals who accumulate debt but do not complete a Bachelor’s degree. We find evidence that homeownership rates may also be affected by education loans. Controlling for earnings tends to strengthen these relationships, which is consistent with omitted variable bias combined with positive return to student loans.
    Keywords: student debt; personal bankruptcy; homeownership
    JEL: D14 I22 I24
    Date: 2014–02–28
    Date: 2014
  33. By: Peter Koudijs; Hans-Joachim Voth
    Abstract: What determines risk-bearing capacity and the amount of leverage in financial markets? Using unique archival data on collateralized lending, we show that personal experience can affect individual risk-taking and aggregate leverage. When an investor syndicate speculating in Amsterdam in 1772 went bankrupt, many lenders were exposed. In the end, none of them actually lost money. Nonetheless, only those at risk of losing money changed their behavior markedly – they lent with much higher haircuts. The rest continued as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam stock market declined as a result.
    JEL: G01 G02 G12 G21 G32 N2
    Date: 2014–03
  34. By: Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR); John Pattison (retired banker)
    Abstract: Financial regulation has shifted from a system managed as an oligopoly dominated by the G2/G5 to expanded clubs like the Basel Committee for Banking Supervision. Expansive clubs have to agree to terms that are closer to the preferences of soft-regulation members. Yet, once a global agreement on minimum standards, such as Basel III, is reached, the transposition is left to national or regional regulators. Deviations from the Basel III standards are bound to occur; the complexity of the agreement will facilitate an asymmetric implementation of national regulation and supervision. On the high side, countries like the US, UK, Australia, some Scandinavian countries and Canada have chosen higher standards. On the low side, we should expect deviations to take place in those member countries of the Eurozone that are heterogeneous, have different preferences and tradeoffs between regulatory stringency and economic activity. The requirements of both global clubs and the EU regional club for transparency, monitoring and a level playing field will cause a collision between the interests of the clubs and their members.
    Keywords: Basel III clubs, Eurozone, asymmetries, financial regulation
    JEL: F33 F36 F42
    Date: 2014–03
  35. By: Xiao, Tim
    Abstract: This paper presents a new framework for valuing hybrid defaultable financial instruments, for example, convertible bonds. In contrast to previous studies, the model relies on the probability distribution of a default jump rather than the default jump itself, as the default jump is usually inaccessible. As such, the model can back out the market prices of convertible bonds. A prevailing belief in the market is that convertible arbitrage is mainly due to convertible underpricing. Empirically, however, we do not find evidence supporting the underpricing hypothesis. Instead, we find that convertibles have relatively large positive gammas. As a typical convertible arbitrage strategy employs delta-neutral hedging, a large positive gamma can make the portfolio highly profitable, especially for a large movement in the underlying stock price.
    Keywords: hybrid financial instrument, convertible bond, convertible underpricing, convertible arbitrage, default time approach (DTA), default probability approach (DPA), jump diffusion.
    JEL: G1 G12
    Date: 2014–02–18
    Date: 2014
    Date: 2014
    Date: 2014

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