New Economics Papers
on Banking
Issue of 2014‒04‒18
28 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banking and Sovereign Debt Crises in Monetary Union Without Central Bank Intervention. By Jin Cheng; Meixing Dai; Frédéric Dufourt
  2. Fat-tails in VAR Models By Ching-Wai (Jeremy) Chiu; Haroon Mumtaz; Gabor Pinter
  3. Credit Risk in the Euro Area By Simon Gilchrist; Benoît Mojon
  4. Uncertainty, Financial Frictions, and Investment Dynamics By Simon Gilchrist; Jae W. Sim; Egon Zakrajšek
  5. The Flight from Maturity By Gary B. Gorton; Andrew Metrick; Lei Xie
  6. Simplicity, transparency, and market discipline in regulatory reform By Plosser, Charles I.
  7. Bank-based versus market-based financial systems: a critique of the dichotomy By Malcolm Sawyer
  8. Wholesale Funding, Coordination, and Credit Risk By Zhang, Lei; Zhang, Lin; Zheng, Yong
  9. Financial Market Regulation in Germany - Capital Requirements of Financial Institutions By Daniel Detzer
  10. Shadow banks and macroeconomic instability By Meeks, Roland; Nelson, Benjamin; Alessandri, Piergiorgio
  11. A Note on Leverage and the Macroeconomy By Khandokar Istiak; Apostolos Serletis
  12. Bank holding company dividends and repurchases during the financial crisis By Hirtle, Beverly
  13. What do VARs Tell Us about the Impact of a Credit Supply Shock? An Empirical Analysis By Haroon Mumtaz; Gabor Pinter; Konstantinos Theodoridis
  14. Systemic Risk in the Financial Industry: “Mimetism” for the Best and for the Worst By Thierry Warin; Robert E. Prasch
  15. Learning from financial crises By Lim , Jamus Jerome; Minne, Geoffrey
  16. The Evolution of Bank Supervision: Evidence from U.S. States By Mitchener, Kris James
  17. Does “Skin in the Game” Reduce Risk Taking? Leverage, Liability and the Long-Run Consequences of New Deal Financial Reforms By Mitchener, Kris James; Richardson, Gary
  18. Bank liquidity shocks in loan and deposit in emerging markets By Mehdi Mili; Jean-Michel Sahut
  19. Estimating the impact of changes in aggregate bank capital requirements during an upswing By Noss, Joseph; Toffano, Priscilla
  20. Systemic risk in an interconnected banking system with endogenous asset markets By Bluhm, Marcel; Krahnen, Jan Pieter
  21. Originators, traders, neutrals, and traditioners – various banking business models across the globe. Does the business model matter for financial stability? By Hryckiewicz, Aneta
  22. Asymmetric Information and Imperfect Competition in the Loan Market By Crawfordy, Gregory S; Pavaniniz, Nicola; Schivardi, Fabiano
  23. Identifying Banking Crises Using Money Market Pressure: New Evidence For A Large Set of Countries By Zhongbo Jing; Jakob de Haan; Jan P. A. M. Jacobs; Haizhen Yang
  24. The Invisible Hand and the Banking Trade: Seigniorage, Risk-shifting and More By Miller, Marcus; Zhang, lei
  25. Dynamic visualization of large transaction networks: the daily Dutch overnight money market By Ronald Heijmans; Richard Heuver; Clement Levallois; Iman van Lelyveld
  26. The liquidity reserve funding and management strategies By Heidorn, Thomas; Buschmann, Christian
  27. LIBOR: origins, economics, crisis, scandal, and reform By Hou, David; Skeie, David R.
  28. Stability and Identification with Optimal Macroprudential Policy Rules By Chatelain, Jean-Bernard; Ralf, Kirsten

  1. By: Jin Cheng; Meixing Dai; Frédéric Dufourt
    Abstract: We propose a model to analyze the conditions of emergence of a twin banking and sovereign debt crisis in a monetary union with an institutional framework which is broadly similar to the Eurozone at the onset of the financial crisis. We show that when the responsibility of rescuing the banking system is entirely ascribed to domestic governments - in particular because the central bank is not allowed to intervene as a lender of last resort on sovereign bond markets - the main tool to fight against a systemic banking crisis (the financial safety net) may aggravate, instead of mitigate, the solvency problems of banks and of the government. Depending on investors' expectations, the banking system and the government may either survive a negative financial shock or fail together. In this context of negative self-fulfilling expectations, we also analyze the role of credit rating agencies as potential catalysts to the crisis, we emphasize possible contagion effects to "healthy" member states through the banking system, and we discuss proposed policy options like the creation of "Eurobonds" to avoid the resurgence of such crises.
    Keywords: banking crisis, sovereign debt crisis, bank runs, financial safety net, liquidity regulation, government deposit guaranteen self fulfilling propheties.
    JEL: E43 F31 F34 F4 G2
    Date: 2014
  2. By: Ching-Wai (Jeremy) Chiu (Bank of England); Haroon Mumtaz (Queen Mary University of London); Gabor Pinter (Bank of England)
    Abstract: We confirm that standard time-series models for US output growth, inflation, interest rates and stock market returns feature non-Gaussian error structure. We build a 4-variable VAR model where the orthogonolised shocks have a Student t-distribution with a time-varying variance. We find that in terms of in-sample fit, the VAR model that features both stochastic volatility and Student-t disturbances outperforms restricted alternatives that feature either attributes. The VAR model with Student-t disturbances results in density forecasts for industrial production and stock returns that are superior to alternatives that assume Gaussianity. This difference appears to be especially stark over the recent financial crisis.
    Keywords: Bayesian VAR, Fat tails, Stochastic volatility
    JEL: C32 C53
    Date: 2014–03
  3. By: Simon Gilchrist; Benoît Mojon
    Abstract: We construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads on the yield of euro area private sector bonds relative to the yield on German federal government securities of matched maturities. The indicators are also constructed at the country level for Germany, France, Italy and Spain. These indicators reveal that the financial crisis of 2008 has dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 U.S. dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk increased further as the European debt crisis has unfolded since 2010. Since that time, credit spreads for both non-financial and financial firms increasingly reflect national rather than euro area financial conditions. Consistent with this view, credit spreads provide substantial predictive content for a variety of real activity and lending measures for the euro area as a whole and for individual countries. VAR analysis implies that disruptions in corporate credit markets lead to sizable contractions in output, increases in unemployment, and declines in inflation across the euro area.
    JEL: E32 E44 G12
    Date: 2014–04
  4. By: Simon Gilchrist; Jae W. Sim; Egon Zakrajšek
    Abstract: Micro- and macro-level evidence indicates that fluctuations in idiosyncratic uncertainty have a large effect on investment; the impact of uncertainty on investment occurs primarily through changes in credit spreads; and innovations in credit spreads have a strong effect on investment, irrespective of the level of uncertainty. These findings raise a question regarding the economic significance of the traditional “wait-and-see” effect of uncertainty shocks and point to financial distortions as the main mechanism through which fluctuations in uncertainty affect macroeconomic outcomes. The relative importance of these two mechanisms is analyzed within a quantitative general equilibrium model, featuring heterogeneous firms that face time-varying idiosyncratic uncertainty, irreversibility, nonconvex capital adjustment costs, and financial frictions. The model successfully replicates the stylized facts concerning the macroeconomic implications of uncertainty and financial shocks. By influencing the effective supply of credit, both types of shocks exert a powerful effect on investment and generate countercyclical credit spreads and procyclical leverage, dynamics consistent with the data and counter to those implied by the technology-driven real business cycle models.
    JEL: E22 E32 G31
    Date: 2014–04
  5. By: Gary B. Gorton; Andrew Metrick; Lei Xie
    Abstract: Why did the failure of Lehman Brothers make the financial crisis dramatically worse? The financial crisis was a process of a build-up of risk during the crisis prior to the Lehman failure. Market participants tried to preserve an option or exit by shortening maturities – the “flight from maturity”. With increasingly short maturities, lenders created the possibility of fast exit. The failure of Lehman Brothers was the tipping point of this build-up of systemic fragility. We produce a chronology of the crisis which formalizes the dynamics of the crisis. A crisis is a dynamic process in which “tail risk” is endogenous.
    JEL: E32 E42 E44 G01
    Date: 2014–04
  6. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: "Enhancing Prudential Standards in Financial Regulations," cohosted by the Federal Reserve Bank of Philadelphia, the Wharton Financial Institutions Center, and the Journal of Financial Services Research. Philadelphia, PA. President Plosser explores simplicity in regulatory rules, transparency in financial instruments, and the role of market forces in controlling risk-taking and enhancing supervision.
    Keywords: Financial stability; Regulatory reform; Transparency; Financial regulations; Financial intermediation; Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010
    Date: 2014–04–08
  7. By: Malcolm Sawyer (University of Leeds)
    Abstract: The paper sets out different perspectives on the bank-based vs market-based typology of financial systems. It presents a general critique of the typology, paying particular attention to the ways in which the typology reflects a loanable funds approach, ignoring the roles of banks in the credit money creation process, and the neglect of different types of banks. It is argued that banks should be viewed as institutions engaged in market transactions and the equity markets as also institutions involved in markets.
    Keywords: bank-based financial system, market-based financial system
    JEL: G19 G20
    Date: 2014–01–20
  8. By: Zhang, Lei (University of Warwick); Zhang, Lin (Southwestern University of Finance and Economics); Zheng, Yong (Southwestern University of Finance and Economics)
    Abstract: We use the global games approach to study key factors a?ecting the credit risk associated with roll-over of bank debt. When creditors are heterogenous, these include the extent of short-term borrowing and capital market liquidity for repo ?nancing. Speci?cally, in a model with a large institutional creditor and a continuum of small creditors independently making their roll-over decisions based on private information, we ?nd that increasing the proportion of short-term debt and/or decreasing market liquidity reduces the willingness of creditors to roll over. This raises credit risk in equilibrium. The presence of a large creditor does not always reduce credit risk, however, unless it is better informed.
    Keywords: Credit Risk; Coordination; Debt Crisis; Private information; Global games
    Date: 2013
  9. By: Daniel Detzer (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE))
    Abstract: This paper examines capital adequacy regulation in Germany. After a general overview of financial regulation in Germany, the paper focuses on the most important development in the area of capital adequacy regulation from the 1930s up to the financial crisis. Two main trends are identified: a gradual softening of the eligibility criteria for regulatory equity and the increasing reliance on banks’ internal risk models for the determination of risk weights. The first trend has been reversed with the regulatory reforms following the financial crisis. Internal risk models still play a central role. The rest of the paper focuses on the problems with the use of internal risk models for regulatory purposes. The discussion includes the moral hazard problem, the technical problems with the models, the difference between economically and socially optimal capital requirements, the procyclicality of the models and the problem occurring due to the existence of fundamental uncertainty. The regulatory reforms due to Basel 2.5 and Basel III and their potential to alleviate the identified problems are then examined. It is concluded that those cannot solve the most relevant problems and that currently the use of models for financial regulation is problematic. Finally, some suggestions of how the problems could be addressed are given.
    Keywords: Banking Regulation, Financial Regulation, Capital Requirements, Capital Adequacy, Bank Capital, Basel Accord, Risk Management, Risk Models, Germany
    JEL: G18 G28 N24 N44
    Date: 2014–02–15
  10. By: Meeks, Roland (Bank of England); Nelson, Benjamin (Bank of England); Alessandri, Piergiorgio (Bank of England)
    Abstract: We develop a macroeconomic model in which commercial banks can offload risky loans to a ‘shadow’ banking sector, and financial intermediaries trade in securitised assets. We analyse the responses of aggregate activity, credit supply and credit spreads to business cycle and financial shocks. We find that: interactions and spillover effects between financial institutions affect credit dynamics; high leverage in the shadow banking system makes the economy excessively vulnerable to aggregate disturbances; and following a financial shock, stabilisation policy aimed solely at the securitisation markets is relatively ineffective.
    Keywords: Business fluctuations; shadow banks; credit; securitisation
    JEL: E32 E50 G20
    Date: 2014–03–28
  11. By: Khandokar Istiak (University of Calgary); Apostolos Serletis (University of Calgary)
    Abstract: In this paper we investigate the relationship between leverage and the level of economic activity in the United States, using quarterly data over the 1951 to 2012 period. We address the question for …five different measures of leverage - —household leverage, non…financial fi…rm leverage, commercial bank leverage, broker-dealer leverage, and shadow bank leverage -— making a distinction between traditional banks and shadow banks, the latter being a consequence of fi…nancial innovation and deregulation in the …financial services industry over the past 30 years. We investigate whether the relationship between leverage and the level of economic activity is nonlinear and asymmetric using slope-based tests as well as tests of the null hypothesis of symmetric impulse responses, recently introduced by Kilian and Vigfusson (2011). Our results inform policymakers about the important distinction between traditional banks and market-based fi…nancial intermediaries that have been at the center of the global fi…nancial crisis of 2007-2009. They also inform about the macroeconomic effects of the deleveraging process that began in 2008 as well as about the need for countercyclical macroprudential policies to reduce the procyclicality of the fi…nancial system.
    Date: 2014–04–01
  12. By: Hirtle, Beverly (Federal Reserve Bank of New York)
    Abstract: Many large U.S. bank holding companies (BHCs) continued to pay dividends during the recent financial crisis, even as financial market conditions deteriorated, large losses accumulated, and emergency capital and liquidity were being provided by the official sector. In contrast, share repurchases by these BHCs dropped sharply in the early part of the crisis. Documenting this divergent behavior is one of the key contributions of this paper, as previous analysis has tended to focus on dividend payments alone. The paper also examines the role that repurchases played in large BHCs' decisions to reduce or eliminate dividends. Did BHCs with a high level of repurchases prior to the financial crisis cut dividends later, or by less, than BHCs with lower levels of pre-crisis repurchases? The key findings are that the smaller BHCs in the sample (those with assets between $5 billion and $25 billion) with higher levels of repurchases before the financial crisis reduced dividends later and by less than BHCs with lower pre-crisis repurchases. In contrast, larger BHCs with higher pre-crisis repurchases tended to reduce their dividends earlier in the financial crisis, though there is no relationship between pre-crisis repurchases and the size of dividend reductions for these institutions.
    Keywords: bank capital; stock repurchases; bank dividends; financial crisis
    JEL: G01 G21 G28 G35
    Date: 2014–03–01
  13. By: Haroon Mumtaz (Queen Mary University of London); Gabor Pinter (Bank of England); Konstantinos Theodoridis (Bank of England)
    Abstract: This paper evaluates the performance of structural VAR models in estimating the impact of credit supply shocks. In a simple Monte-Carlo experiment, we generate data from a DSGE model that features bank lending and credit supply shocks and use SVARs to try and recover the impulse responses to these shocks. The experiment suggests that a proxy VAR that uses an instrumental variable procedure to estimate the impact of the credit shock performs well and is relatively robust to measurement error in the instrument. A structural VAR with sign restrictions also performs well under some circumstances. In contrast, VARs of the narrative variety, i.e. VAR models that include measures of the credit shock as endogenous variables are highly sensitive to ordering and measurement error. An application of the proxy VAR model and the VAR with sign restrictions to US data suggests, however, that the credit supply shock is hard to identify in practice.
    Keywords: Credit supply shocks, Proxy SVAR, Sign restrictions, DSGE models
    JEL: C15 C32 E32
    Date: 2014–04
  14. By: Thierry Warin; Robert E. Prasch
    Abstract: In the wake of the worst financial crisis since 1929, economists are revisiting the received understanding of how financial markets and institutions actually operate. This paper aims to contribute to this reexamination. It builds upon the traditional and widely-accepted mean-variance approach to the processing of information under conditions of risk while reconsidering an inadequately contemplated premise: the actual organization of the financial market. Now, a lot has been said about perverse incentives and contracting arrangements, firms with oligopolistic power, the pricing and market advantages of being too big to fail, and the associated inefficiencies of the regulatory and supervision systems. While we believe that much of that work is valid, we also believe that too little has been done to meld modern portfolio theory (MPT) with insights that can be drawn from recent developments in Industrial Organization. In the model presented here, the MPT finds its place through the "coordination" mechanism, which is the transmission of financial information among agents. The IO perspective finds its place in our model through a variable capturing the fragility of the system: the probability that the quality of information can itself be altered by the system’s "complexity," which in its extreme from can be described as "opacity."
    Keywords: systemic risk, specific risk, systematic risk, financial industry, modern portfolio theory, complexity, opacity, Minsky moment, complex systems,
    Date: 2013–08–01
  15. By: Lim , Jamus Jerome; Minne, Geoffrey
    Abstract: This paper considers the question of whether international banks learn from their previous crisis experiences and reduce their lending to developing countries in the event of a financial crisis. The analysis combines a bank-level dataset of bank activity and ownership with country-level data on the stock of historical crisis events between 1800 and 2005. To circumvent selection and endogeneity concerns, the paper exploits temporal variations in the relative recency of crises as instruments for crisis experience. The results indicate that foreign banks with greater crisis experience reduced their lending significantly more relative to other foreign banks, which can be interpreted as evidence in favor of a learning effect. The findings survive robustness checks that include alternative measures of crisis experience, additional controls, and decompositions into different types of crises. The question of learning is also examined from the perspective of other measures of bank performance.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Financial Crisis Management&Restructuring
    Date: 2014–04–01
  16. 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
  17. By: Mitchener, Kris James (University of Warwick); Richardson, Gary (University of California, Irvine)
    Abstract: We examine how the Banking Acts of the 1933 and 1935 and related New Deal legislation influenced risk taking in the financial sector of the U.S. economy. Our analysis focuses on contingent liability of bank owners for losses incurred by their firms and how the elimination of this liability influenced leverage and lending by commercial banks. Using a new panel data set that compares balance sheets of state and national banks, we find contingent liability reduced risk taking, particularly when coupled with rules requiring banks to join the Federal Deposit Insurance Corporation. Leverage ratios are higher in states with limited liability for bank owners. Banks in states with contingent liability converted each dollar of capital into fewer loans, and thus could sustain larger loan losses (as a fraction of their portfolio) than banks in limited liability states. The New Deal replaced a regime of contingent liability with stricter balance sheet regulation and increased capital requirements, shifting the onus of risk management from banks to state and federal regulators. By separating investment banks from commercial banks, the Glass-Steagall Act left investment banks to manage their own leverage, a feature of financial regulation that, in part, depended on their partnership structure.
    Date: 2013
  18. By: Mehdi Mili; Jean-Michel Sahut
    Abstract: Abstract. This paper focuses on the transmission of bank liquidity shocks in loan and deposit in emerging markets. First, we attempt to identify the factors that affect the credit strategy of foreign banks in emerging countries. Second, we test whether depositors do exert market discipline on foreign subsidiaries. Combining between financial variables of subsidiaries, their parent banks, and macroeconomic variables of host and home countries, we investigate the factors that are likely to impact the depositors’ behaviour. Our empirical approach is based on a Partial Least Squares-Path model, through which we can identify the causal relationships between the various groups of variables. Our results show that foreign bank lending is determined by the specific financial variables of the parent bank as well as macroeconomic variables of the country of origin. This means that the foreign subsidiary’s strategy credit is centrally managed at the parent bank and that subsidiaries’ credit supply depends primarily on the financial situation of its parent bank. Finally, we evidence market discipline as applied to foreign subsidiaries in emerging countries. We demonstrate that market discipline is strongly affected by the specific characteristics of the subsidiary.
    Keywords: foreign banks, credit supply, market discipline, emerging countries.
    JEL: F15 F34 G21
    Date: 2014–04–10
  19. By: Noss, Joseph (Bank of England); Toffano, Priscilla (International Monetary Fund)
    Abstract: This paper estimates the effect of changes in capital requirements applied to all UK-resident banks on lending by studying the joint dynamics of the aggregate capital ratio of the UK banking system and a set of macro-financial variables. This is achieved by means of sign restrictions that attempt to identify shocks in past data that match a set of assumed directional responses of other variables to future changes in capital requirements aimed at increasing the resilience of the banking system to losses during an upswing. This may provide policymakers with a plausible ‘upper bound’ on the short-term effects of future increases in macroprudential capital requirements in certain states of the economic cycle. An increase in the aggregate bank capital requirement during an economic upswing is associated with a reduction of lending, with the effect larger for lending to corporates than for that to households. The impact on GDP growth is statistically insignificant.
    Keywords: Bank capital; bank lending; regulatory capital requirements; capital buffer; macroprudential policy
    JEL: G21 G28
    Date: 2014–03–28
  20. By: Bluhm, Marcel; Krahnen, Jan Pieter
    Abstract: We analyze the emergence of systemic risk in a network model of interconnected bank balance sheets. The model incorporates multiple sources of systemic risk, including size of financial institutions, direct exposure from interbank lendings, and asset fire sales. We suggest a new macroprudential risk management approach building on a system wide value at risk (SVaR). Under the SVaR metric, the contribution of individual banks to systemic risk is well defined and can be approximated by a Shapley value-type measure. We show that, in a SVaR regime, a fair systemic risk charge which is proportional to a bank's individual contribution to systemic risk diverges from the optimal macroprudential capitalization of the banks from a planner's perspective. The results have implications for the design of macroprudential capital surcharges. --
    Keywords: systemic risk,systemic risk charge,macroprudential supervision,Shapley value,financial network
    JEL: C15 G01 G21 G28
    Date: 2014
  21. By: Hryckiewicz, Aneta
    Abstract: Why were some banks heavily affected by mortgage crises, while others barely? Why were some banking sectors dominated by “originate and distribute” model, while others were trading? Why did some banks decide not to follow the others, and preferred to stay traditional banks? How the models chosen by banks translated into their risk-return profiles? And finally, which banking model makes the world safer? This article raises these issues. It shows that heterogeneity in the banking industry before the mortgage crisis was huge. We document that institutional factors were largely responsible for the development of individual banking models in single countries. We find that the most risky banking model is when banks specialize in trading and do not diversify. Therefore, the most “optimal” from risk-return profile seems to be the “balanced” model. The traditional model though appears as systemically the least risky, it does not allow banks to achieve sufficient return.
    Keywords: Bank risk, business models, bank regulation, financial crisis, banking stability
    JEL: G0 G00 G01 G2 G24 G28
    Date: 2014–03–20
  22. By: Crawfordy, Gregory S (University of Zurich, CEPR and CAGE); Pavaniniz, Nicola (zUniversity of Zurich); Schivardi, Fabiano (xLUISS, EIEF and CEPR)
    Abstract: We measure the consequences of asymmetric information in the Italian market for small business lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent individual defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying adverse selection and moral hazard. We use our results to quantify the impact of asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating these effects.
    Keywords: Italian, asymmetric information
    Date: 2013
  23. By: Zhongbo Jing; Jakob de Haan; Jan P. A. M. Jacobs; Haizhen Yang
    Abstract: We construct a money market pressure index based on central bank reserves and the short-term nominal interest rate to identify banking crises, thereby extending the index proposed by Von Hagen and Ho (2007). We compare the crises identified by both indices with banking crises according to the benchmark of Laeven and Valencia (2010). Both indices identify more crises than these benchmarks. The crises identified by our index are more in line with the benchmark than the crises identified by the Von Hagen and Ho index, while our index also gives fewer false signals.
    Keywords: banking crises, money market pressure index,
    JEL: C43 E44 G21
    Date: 2013–10–01
  24. By: Miller, Marcus (University of Warwick); Zhang, lei (University of Warwick)
    Abstract: The classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues of moral hazard,hardly appropriate when considering modern UK banking.We therefore modify the classic model to ncorporate franchise values due to market power; and risk-taking by banks with limited liability.We go further to show how the capacity of franchis evalues to mitigate risk taking maybe undermined by the bailout option; with explicit analytical results provided for the case of extreme risk-aversion.After a brief discussion of how this may impact on the distribution of income, we outline the ways in which the Vickers Report seeks to remedy these problems.
    Keywords: Money and banking,Seigniorage,Risk-taking,Bailouts,Regulation
    Date: 2013
  25. By: Ronald Heijmans; Richard Heuver; Clement Levallois; Iman van Lelyveld
    Abstract: This paper shows how large data sets can be visualized in a dynamic way to support exploratory research, highlight econometric results or provide early warning information. The case studies included in this paper case are based on the payments and unsecured money market transaction data of the Dutch part of the Eurosystem's large value payment system, TARGET2. We show how animation facilitates analysis at three different levels. First, animation shows how the market macrostructure develops. Second, it enables individual banks that are of interest to be followed. Finally, it facilitates a comparison of the same market at different moments in time and of different markets (such as countries) at the same moment in time.
    Keywords: interbank network; visualization
    JEL: G01 G2 G21
    Date: 2014–03
  26. By: Heidorn, Thomas; Buschmann, Christian
    Abstract: This paper investigates the managing strategies of a bank's liquidity reserve in the broader context of the role of asset-liability management according to the liquidity issues of a banking organisation. Several types of liquidity are presented and how these are interconnected and how they might affect a financial institution's liquidity risk. When managing the liquidity reserve and its included assets, the following influencing factors need to be taken into account: Firstly, the banking organisation itself, with its business model, funding structure and related types of risk; secondly, national and international regulatory requirements have to be fulfilled and lastly, financial market behaviour and its participants need to have carefully watched and anticipated, in order to manage the risk which might arise from the liquidity reserve itself. --
    Keywords: Asset Liability Management,Liquidity Management,Liquidity Reserve,Reserve Assets
    JEL: G18 G20 G24 G28
    Date: 2014
  27. By: Hou, David (Federal Reserve Bank of New York); Skeie, David R. (Federal Reserve Bank of New York)
    Abstract: The London Interbank Offered Rate (LIBOR) is a widely used indicator of funding conditions in the interbank market. As of 2013, LIBOR underpins more than $300 trillion of financial contracts, including swaps and futures, in addition to trillions more in variable-rate mortgage and student loans. LIBOR's volatile behavior during the financial crisis provoked questions surrounding its credibility. Ongoing regulatory investigations have uncovered misconduct by a number of financial institutions. Policymakers across the globe now face the task of reforming LIBOR in the aftermath of the scandal and crisis.
    Keywords: LIBOR; financial crisis; scandal; interbank; banking; reference rate; interest rate
    JEL: G01 G12 G15 G18
    Date: 2014–03–01
  28. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non- predetermined variables. --
    Keywords: Identification,Financial Stability,Monetary Policy,Optimal Policy under Commitment,Augmented Taylor rule
    JEL: C61 C62 E43 E44 E47 E52 E58
    Date: 2014–04–14

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.