New Economics Papers
on Banking
Issue of 2014‒04‒29
nine papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Leverage, Financial Fragility and Prudential Regulation By Olivier Bruno; André Cartapanis; Eric Nasica
  2. Countercyclical capital buffers and real-time credit-to-GDP gap estimates: A South African perspective By Farrell, Greg
  3. CoMargin By Jorge Cruz Lopez; Jeffrey Harris; Christophe Hurlin; Christophe Pérignon
  4. Banking stress test effects on returns and risks By Ekaterina Neretina; Cenkhan Sahin; Jakob de Haan
  5. Is There a Cooperative Bank Difference? By Leonardo Becchetti; Rocco Ciciretti; Adriana Paolantonio
  6. Capital Buffers Based on Banks' Domestic Systemic Importance: Selected Issues By Michal Skorepa; Jakub Seidler
  7. Securitization under Asymmetric Information over the Business Cycle By Martin Kuncl
  8. Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data By Coibion, Olivier; Gorodnichenko, Yuriy; Kudlyak, Marianna; Mondragon, John
  9. Macroprudential oversight, risk communication and visualization By Peter Sarlin

  1. By: Olivier Bruno (GREDEG CNRS; University of Nice Sophia Antipolis, France; SKEMA Business School; OFCE-DRIC); André Cartapanis (Sciences Po Aix-en-Provence; GREDEG CNRS; CHERPA-Sciences Po Aix-en-Provence); Eric Nasica (GREDEG CNRS; University of Nice Sophia Antipolis, France)
    Abstract: We analyse the determinants of bank balance-sheets and leverage-ratio dynamics, and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral provided by firms, and the risk-free interest rate. These results lead us to advocate for the establishment of an adjustable leverage ratio depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.
    Keywords: Bank leverage, Leverage ratio, Financial instability, Prudential regulation
    JEL: E44 G28
    Date: 2014–04
  2. By: Farrell, Greg
    Abstract: Countercyclical capital buffers are intended to protect the banking sector and the broader economy from episodes of excessive credit growth, which have been associated with financial sector procyclicality and the build-up of systemic risk. The Basel Committee on Banking Supervision has suggested in its guidance to national authorities that the credit-to-GDP gap be used as a guide to taking decisions regarding the countercyclical capital buffer. This paper provides a South African perspective on the implementation of this guidance. Credit-to-GDP gaps are estimated by applying a range of Hodrick-Prescott filters to real-time South African data, specifically constructed for this study, and these gaps are mapped to countercyclical buffers. The properties of these estimates are compared, and the calibration of the lower and upper thresholds of the buffer in the South African case is also investigated. The study confirms that the mechanical application of the credit-to-GDP guide is not advisable, and raises a number of issues that policymakers will have to consider when implementing the countercyclical buffer guidance. The analysis also suggests that the calibration of the lower and upper thresholds for the gaps may need to be adjusted in the South African case if the Basel Committee’s expectation that the buffers be employed only every 10-20 years is to be met.
    Keywords: Countercyclical capital buffers, financial stability, real- time data, credit-to-GDP gaps.
    JEL: E44 E61 G21
    Date: 2014–04–16
  3. By: Jorge Cruz Lopez (Bank of Canada - Bank of Canada); Jeffrey Harris (American University Washington - American University Washington); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Pérignon (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: We present CoMargin, a new methodology to estimate collateral requirements in derivatives central counterparties (CCPs). CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants. Our approach internalizes trading externalities and enhances the stability of CCPs, thus, reducing systemic risk concerns. We assess our methodology using proprietary data from the Canadian Derivatives Clearing Corporation that includes daily observations of the actual trading positions of all of its members from 2003 to 2011. We show that CoMargin outperforms existing margining systems by stabilizing the probability and minimizing the shortfall of simultaneous margin-exceeding losses.
    Keywords: Collateral; Central Counterparties (CCPs); Derivatives Markets; Extreme Dependence
    Date: 2014–03–07
  4. By: Ekaterina Neretina; Cenkhan Sahin; Jakob de Haan
    Abstract: We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the US banking stress tests on banks' equity prices, credit risk, systematic risk, and systemic risk during the 2009-13 period. We find only weak evidence that stress tests after 2009 affected equity returns of large US banks. In contrast, CDS spreads declined in response to the disclosure of stress test results. We also find that bank systematic risk, as measured by betas, declined in some years after the publication of stress test results. Our evidence suggests that stress tests affect systemic risk.
    Keywords: stress tests; bank equity returns; CDS spreads; bank betas; systemic risk
    JEL: G21 G28
    Date: 2014–04
  5. By: Leonardo Becchetti (University of Rome "Tor Vergata"); Rocco Ciciretti (University of Rome "Tor Vergata"); Adriana Paolantonio (Food and Agriculture Organization of the United Nations (FAO))
    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 banking; finance and investment; global financial crisis.
    JEL: G21 O40 E44
    Date: 2014–04–17
  6. By: Michal Skorepa; Jakub Seidler
    Abstract: Regulators in many countries are currently considering ways to impose domestic systemic importance-based capital requirements on banks. Aiming to assist these considerations, this article discusses a number of issues concerning the calculation of a bank's systemic importance to the domestic banking sector, such as the choice of indicators used and the pros and cons of focusing on an individual or consolidated level. Also, the 'equal expected impact' procedure for determining adequate additional capital requirements is presented in detail and some of its properties are discussed. As an illustrative example of the practical use of the procedures presented, systemic importance scores and implied capital buffers are calculated for banks in the Czech Republic. The article also stresses the crucial role of public communication of the motivation for the buffers: regulators should make every effort to explain that the imposition of a non-zero systemic importance-based capital buffer on a bank is not to be interpreted by the markets as a signal that the bank is too big to fail and would therefore be guaranteed a public bail-out if it got into difficulties.
    Keywords: Bank failure, Basel III, capital adequacy, consolidation, systemic importance, public support
    JEL: G21 G28
    Date: 2014–03
  7. By: Martin Kuncl
    Abstract: This paper studies the effciency of financial intermediation through securitization with asymmetric information about the quality of securitized loans. In this theoretical model, I show that, in general, by providing reputation-based implicit recourse, the issuer of a loan can credibly signal its quality. However, in boom stages of the business cycle, information on loan quality remains private, and lower quality loans accumulate on balance sheets. This deepens a subsequent downturn. The longer the duration of a boom, the deeper will be the fall of output in a subsequent recession. In recessions, the model also produces amplification of adverse selection problems on re-sale markets for securitized loans. These are especially severe after a prolonged boom period and when securitized loans of high quality are no longer traded. Finally, the model suggests that excessive regulation that requires higher explicit risk-retention by the originators of loans can adversely affect both quantity and quality of investment in the economy.
    Keywords: securitization; financial crisis; asymmetric information; reputation; implicit recourse; market shutdowns; macro-prudential policy;
    JEL: E32 E44 G01 G20
    Date: 2014–02
  8. By: Coibion, Olivier (UT Austin and NBER); Gorodnichenko, Yuriy (UC Berkeley and NBER); Kudlyak, Marianna (Federal Reserve Bank of Richmond); Mondragon, John (UC Berkley)
    Abstract: One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to "keep up" with higher-income households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants’ incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period.
    Keywords: inequality; household debt; Great Recession
    JEL: D14 E21 E51 G21
    Date: 2014–01–10
  9. By: Peter Sarlin
    Abstract: This paper discusses the role of risk communication in macroprudential oversight and of visualization in risk communication. Beyond the soar in availability and precision of data, the transition from firm-centric to system-wide supervision imposes obvious data needs. Moreover, broad and effective communication of timely information related to systemic risks is a key mandate of macroprudential supervisors, which further stresses the importance of simple representations of complex data. Risk communication comprises two tasks: internal and external dissemination of information about systemic risks. This paper focuses on the background and theory of information visualization and visual analytics, as well as techniques provided within these fields, as potential means for risk communication. We define the task of visualization in internal and external risk communication, and provide a discussion of the type of available macroprudential data and an overview of visualization techniques applied to systemic risk. We conclude that two essential, yet rare, features for supporting the analysis of big data and communication of risks are analytical visualizations and interactive interfaces. This is illustrated with implementations of three analytical visualizations and five web-based interactive visualizations to systemic risk indicators and models.
    Date: 2014–04

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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