New Economics Papers
on Banking
Issue of 2014‒05‒04
thirty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The international transmission of bank capital requirements: evidence from the United Kingdom By Aiyar, Shekhar; Calomiris, Charles; Hooley, John; Korniyenko , Yevgeniya; Wieladek, Tomasz
  2. Insurance Contracts and Derivatives that Substitute for Them: How and Where Should Their Systemic and Nonperformance Risks be Regulated? By Edward J. Kane
  3. Understanding financial inclusion in China By Fungácová, Zuzana; Weill, Laurent
  4. The two faces of cross-border banking flows: an investigation into the links between global risk, arms-length funding and internal capital markets By Reinhardt, Dennis; Riddiough, Steven
  5. Systemic Risk and Regulation of the U.S. Insurance Industry By J. David Cummins; Mary A. Weiss
  6. Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk By Boubacar Camara; Laetitia Lepetit; Amine Tarazi
  7. Gates, fees, and preemptive runs By Cipriani, Marco; Martin, Antoine; McCabe, Patrick E.; Parigi, Bruno
  8. Does income inequality contribute to credit cycles? By Malinen, Tuomas
  9. Credit Risk Modeling under Conditional Volatility By Rohde, Johannes; Sibbertsen, Philipp
  10. A Survey of Systemic Risk Measures: Methodology and Application to the Japanese Market By Akio Hattori; Kentaro Kikuchi; Fuminori Niwa; Yoshihiko Uchida
  11. Should Financial Regulators Engage in International Policy Coordination? By David VanHoose
  12. The Effect of Payment Reversibility on E-commerce and Postal Quality By Christian Jaag; Christian Bach
  13. The Authority of the FSOC and the FSB to Designate SIFIs: Implications for the Regulation of Insurers in the United States after the Prudential Decision By Peter J. Wallison
  14. Systemic Liquidity Crisis with Dynamic Haircuts By Sever, Can
  15. Estimation of Banking technology under credit uncertainty By Emir Malikov; Diego A. Restrepo-Tobón; Subal C. Kumbhakar
  16. The single supervisory mechanism or “SSM”, part one of the Banking Union By Eddy Wymeersch
  17. Dynamics in the correlations of the Credit Default Swaps’ G14 dealers: Are there any contagion effects due to Lehman Brothers’ bankruptcy and the global financial crisis? By Irfan Akbar Kazi; Suzanne Salloy
  18. Earnings quality and performance in the banking industry: A profit frontier approach By Diego Prior; Emili Tortosa-Ausina; Manuel Illueca; Mª Pilar García-Alcober
  19. The impact of the global and eurozone crises on European banks stocks Some evidence of shift contagion By Jean-Pierre Allegret; Hélène Raymond; Houda Rharrabti
  20. Model Risk in Backtesting Risk Measures By Evers, Corinna; Rohde, Johannes
  21. Identifying central bank liquidity super-spreaders in interbank funds networks By Carlos León; Clara Machado; Miguel Sarmiento
  22. Special agricultural lending Institutions - the Case of Macedonia By Kovachev, Goran
  23. Measuring the efficiency of banking systems: A relational two-stage window DEA approach By Halkos, George; Tzeremes, Nickolaos; Kourtzidis, Stavros
  24. Electronic Money and Payments: Recent Developments and Issues By Ben Fung; Miguel Molico; Gerald Stuber
  25. An exploration on interbank markets and the operational framework of monetary policy in Colombia By Camilo González; Luisa F. Silva; Carmiña O. Vargas; Andrés M. Velasco
  26. Cost and revenue efficiency in Spanish banking: What distributions show By M» Pilar Garc’a-Alcober; Emili Tortosa-Ausina; Diego Prior; Manuel Illueca
  27. Profit efficiency of U.S. commercial banks: a decomposition By Diego A. Restrepo-Tobón; Subal C. Kumbhakar
  28. Contrôle de Gestion Bancaire : de l’évolution de la fonction et des outils By Elisabeth CALLANDRET-BIGOT; Dominique BONET; Jean-Louis GALLIAN
  29. Does Co-integration and Causal Relationship Exist between the Non- stationary Variables for Chinese Bank’s Profitability? An Empirical Evidence By Omar Masood; Priya Darshini Pun Thapa; Olivier Levyne; Frederic Teulon; Rabeb Triki
  30. Bank Lending, Risk Taking, and the Transmission of Monetary Policy: New Evidence for Colombia By Nidia Ruth Reyes; José Eduardo Gómez G.; Jair Ojeda Joya
  31. Credit Risk Modeling Of Residential Mortgage Lending In Russia By Agatha M. Poroshina

  1. By: Aiyar, Shekhar (International Monetary Fund); Calomiris, Charles (Columbia Business School); Hooley, John (International Monetary Fund); Korniyenko , Yevgeniya (International Monetary Fund); Wieladek, Tomasz (Bank of England)
    Abstract: We use data on UK banks’ minimum capital requirements to study the impact of changes to bank-specific capital requirements on cross-border bank loan supply from 1999 Q1 to 2006 Q4. By examining a sample in which each recipient country has multiple relationships with UK-resident banks, we are able to control for demand effects. We find a negative and statistically significant effect of changes to banks’ capital requirements on cross-border lending: a 100 basis point increase in the requirement is associated with a reduction in the growth rate of cross-border credit of 5.5 percentage points. We also find that banks tend to favour their most important country relationships, so that the negative cross-border credit supply response in ‘core’ countries is significantly less than in others. Banks tend to cut back cross-border credit to other banks (including foreign affiliates) more than to firms and households, consistent with shorter maturity, wholesale lending which is easier to roll off and may be associated with weaker borrowing relationships.
    Keywords: Cross-border lending; loan supply; capital requirements; international transmission
    JEL: E44 E51 E52 G18 G21
    Date: 2014–04–17
  2. By: Edward J. Kane
    Abstract: Traditionally, individual states have shared responsibility for regulating the US insurance industry. The Dodd-Frank Act changes this by tasking the Federal Reserve with regulating the systemic risks that particularly large insurance organizations might pose and assigning the regulation of swap-based substitutes for insurance and reinsurance products to the SEC and CFTC. This paper argues that prudential regulation of large insurance firms and weaknesses in federal swaps regulation could reduce the effectiveness of state-based systems for protecting policyholders and taxpayers from nonperformance in the insurance industry. Swap-based substitutes for traditional insurance and reinsurance contracts offer protection sellers a way to transfer responsibility for guarding against nonperformance into potentially less-effective hands. The CFTC and SEC lack the focus, expertise, experience, and resources to manage adequately the ways that swaps transactions can affect US taxpayers’ equity position in global safety nets, while regulators at the Fed refuse to recognize that conscientiously monitoring accounting capital at financial holding companies will not adequately protect taxpayers and policyholders until and unless it is accompanied by severe penalties for managers that willfully hide their firm's exposure to destructive tail risks.
    Keywords: Dodd-Frank Act, systemic risk, nonperformance risk, regulatory culture, financial reform
    JEL: E61 G21 G22 G28 K42
    Date: 2014–04
  3. By: Fungácová, Zuzana (BOFIT); Weill, Laurent (BOFIT)
    Abstract: We use data from the World Bank Global Findex database for 2011 to analyze financial inclusion in China, including comparisons with the other BRICS countries. We find a high level of financial inclusion in China manifested by greater use of formal account and formal saving than in the other BRICS. Financial exclusion, i.e. not having a formal account, is mainly voluntary. The use of formal credit is however less frequent in China than in the other BRICS. Borrowing through family or friends is the most common way of obtaining credit in all the BRICS countries, but other channels for borrowing are not very commonly used by individuals in China. We find that higher income, better education, being a man, and being older are associated with greater use of formal accounts and formal credit in China. Income and education influence the use of alternative sources of borrowing. Overall financial inclusion does not constitute a major problem in China, but such limited use of formal credit can create a challenge for further economic development.
    Keywords: financial inclusion; financial institutions; China
    JEL: G21 O16 P34
    Date: 2014–04–08
  4. By: Reinhardt, Dennis (Bank of England); Riddiough, Steven (Warwick Business School)
    Abstract: We decompose gross cross-border bank-to-bank funding between arms-length (interbank) and related (intragroup) funding, and show that while interbank funding is withdrawn when global risk is high, intragroup funding remains stable during these periods, despite being more volatile on average. We disaggregate intragroup funding further and find advanced economy parent banks benefit from inflows during episodes of heightened global risk. However, we do not find evidence of significantly reduced intragroup funding to foreign affiliates during these periods. Our results are in contradiction with theoretical predictions on the behaviour of cross-border banking flows, and help explain why certain banking systems lost more cross-border bank-to-bank funding than others during the global financial crisis.
    Keywords: Cross-border banking flows; global risk; parent banks and foreign affiliates
    JEL: F32 F34 G21
    Date: 2014–04–17
  5. By: J. David Cummins; Mary A. Weiss
    Abstract: This paper analyzes the characteristics of U.S. insurers for purposes of determining whether they are systemically risky. More specifically, primary factors (size, interconnectedness, and lack of substitutability) and contributing factors (leverage, liquidity risk and maturity mismatch, complexity and government regulation) associated with systemic risk are assessed for the insurance sector. A distinction is made between the core activities of insurers (e.g., underwriting, reserving, claims settlement, etc.) and non-core activities (such as providing financial guarantees). Statistical analysis of insurer characteristics and their relationship with a well-known systemic risk measure, systemic expected shortfall, is provided. Consistent with other research, the core activities of propertycasualty insurers are found not to be systemically risky. However, we do find evidence that some core activities of life insurers, particularly separate accounts and group annuities, may be associated with systemic risk. The non-core activities of both property-casualty and life insurers can contribute to systemic risk. However, research findings indicate that generally insurers are victims rather than propagators of systemic risk events. The study also finds that insurers may be susceptible to intrasector crises such as reinsurance crises arising from counterparty credit risk. New and proposed state and federal regulation are reviewed in light of the potential for systemic risk for this sector.
    Keywords: Systemic risk, Insurance regulation, Financial Stability Oversight Council
    JEL: G20 G22
    Date: 2013–03
  6. By: Boubacar Camara (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: We investigate the impact of changes in capital of European banks on their risk- taking behavior from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks' ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks' risk changes. We find that, for highly capitalized and strongly undercapitalized banks, an increase in equity positively affects risk; but an increase in subordinated debt has the opposite effect namely for undercapitalized banks. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital. Hybrid capital and equity have the same impact for banks with low capital buffers. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.
    Date: 2013
  7. By: Cipriani, Marco (Federal Reserve Bank of New York); Martin, Antoine (Federal Reserve Bank of New York); McCabe, Patrick E. (Federal Reserve Bank of New York); Parigi, Bruno (Federal Reserve Bank of New York)
    Abstract: We build a model of a financial intermediary, in the tradition of Diamond and Dybvig (1983), and show that allowing the intermediary to impose redemption fees or gates in a crisis—a form of suspension of convertibility—can lead to preemptive runs. In our model, a fraction of investors (depositors) can become informed in advance about a shock to the return on the intermediary’s assets. Later, the informed investors learn the realization of the shock and choose their redemption behavior based on this information. We prove two results: First, there are situations in which informed investors would wait until the uncertainty is resolved before redeeming if redemption fees or gates cannot be imposed, but those same investors would redeem preemptively if fees or gates are possible. Second, we show that for the intermediary, which maximizes the expected utility only of its own investors, imposing gates or fees can be ex post optimal. These results have important policy implications for intermediaries that are vulnerable to runs, such as money market funds, because the preemptive runs that can be caused by the possibility of gates or fees may have damaging negative externalities.
    Keywords: runs; gates; fees; money market funds; banks
    JEL: G01 G21 G23
    Date: 2014–04–01
  8. By: Malinen, Tuomas
    Abstract: Recent literature has presented arguments linking income inequality on the financial crash of 2007 - 2009. One proposed channel is expected to work through bank credit. We analyze the relationship between income inequality and bank credit in panel cointegration framework, and find that they have a long-run dependency relationship. Results show that income inequality has contributed to the increase of bank credit in developed economies after the Second World War.
    Keywords: top 1% income share, bank loans, cointegration
    JEL: C23 D31 G21
    Date: 2014–04
  9. By: Rohde, Johannes; Sibbertsen, Philipp
    Abstract: The accuracy of measuring credit risk directly decides on the interest on credit, which has to be paid when raising a credit, and the amount of capital to keep in reserve by a firm. The structural credit risk model proposed by Merton (1974) lays the groundwork for the assessment of a firm's credit risk by its default probability. Doubtlessly, the volatility of the firm's equity represents the most sensitive parameter influencing the default probability. By combining the Merton approach with conditional volatility models, we empirically examine in this article that the specification of conditional volatility affects the probability of default and therefor the credit rating. More precisely, we show on German stock market data that financial market data properties (i.e. asymmetric response of conditional volatility to return shocks and long-range dependencies within the conditional volatility) may not be neglected within the computation of credit risk. Moreover, the influence on the default probability by the type of conditional distribution is pointed out.
    Keywords: Credit risk, Merton model, conditional volatility, default probability, stylized facts
    JEL: C22 C58 G24
    Date: 2014–04
  10. By: Akio Hattori (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kentaro Kikuchi (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Lecturer, Faculty of Economics, Shiga University, E-mail: kentaro-kikuchi@biwako.; Fuminori Niwa (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, Financial Markets Department), Bank of Japan (E-mail:; Yoshihiko Uchida (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: The recent financial crisis has prompted academia, country authorities, and international bodies to study quantitative tools to monitor the financial system, especially systemic risk measures. This paper aims to outline these measures and apply them to Japanfs financial system. The paper demonstrates that they are effective tools for monitoring the robustness of financial system on a real-time basis, although there are some caveats.
    Keywords: Systemic risk, Risk measure, Early warning indicators, Stress test, Scenario analysis, Macro-prudence, Financial crisis
    JEL: C51 G01 G19
    Date: 2014–04
  11. By: David VanHoose
    Abstract: This policy brief examines issues associated with the design and implementation of regulatory policymaking in interconnected financial markets. The policy brief explains why international interdependence among nations’ financial markets and regulations can provide an incentive for national financial supervisory agencies to contemplate coordinating their regulatory policies. It also assesses, in the context of a review of recent research on the part of banking and financial economists, ways in which interdependence among financial systems can create a potential for international regulatory policy conflicts. In addition, the policy brief evaluates whether such conflicts are insurmountable or might be somewhat mitigated at least somewhat via bargains among regulatory authorities.
    Keywords: international financial regulation, financial regulatory coordination
    JEL: G2 G28 F3 F5
    Date: 2013–08
  12. By: Christian Jaag; Christian Bach
    Abstract: In this paper we develop a stylized model of competition between brick-and-mortar merchants and online retailers. An offline transaction, matching payment with delivery, is without risk for both the seller and the buyer. In an online transaction the seller faces the potential risk of non-payment while the buyer risks failed delivery. The effects of these two risks depend on the reversibility of payment. While traditional payment systems for e-commerce are reversible, virtual currencies like Bitcoin offer irreversible transactions. This shifts the risk from the receiver of the payment to its sender. The paper explores the effect of payment reversibility on competition between offline and online merchants and on the importance of postal quality for e-commerce. It finds that payment irreversibility may strengthen e-commerce due to reduced overall risk. Moreover, under reasonable conditions, postal operators have stronger incentives for quality since it affects volumes more strongly if payment is irreversible.
    Keywords: Virtual Currencies, Bitcoin, E-Commerce
    JEL: L81
    Date: 2014–04
  13. By: Peter J. Wallison
    Abstract: The Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Act, has the extraordinary authority to designate financial firms as systemically important financial institutions (SIFIs). Firms so designated are then turned over to the Fed for “stringent” regulation. FSOC’s recent designation of Prudential Financial as a SIFI shows that the agency is unlikely to set any standards that might limit its own discretion, raising the possibility that other insurers will also be designated in the future. Moreover, the US Treasury and the Federal Reserve are both members of an international regulatory group, the Financial Stability Board (FSB) that has been empowered by the G20 leaders to reform the international financial system in the wake of the 2008 financial crisis. The FSB has also taken it upon itself to designate global SIFIs, including three US insurers—AIG, Prudential and MetLife—and has done so with the concurrence of the US Treasury and the Fed. The FSOC just followed the FSB’s lead. This, together with the absence of any standards for what constitutes a SIFI, suggests that if the FSB continues to designate other insurers in the future the FSOC will follow suit. This will have major effects on competition in the insurance industry in the future.
    Keywords: Financial Stability Oversight Council, Dodd-Frank Act, Insurance Regulation, SIFI, G-SII, International Association of Insurance Supervisors, Financial Stability Board
    JEL: G22 G28 F3 F5
    Date: 2014–03
  14. By: Sever, Can
    Abstract: In this paper, using network tools, I analyse systemic impacts of liquidity shocks in interbank market in case of endogenous haircuts. Gai, Haldane and Kapadia (2011) introduce a benchmark for liquidity crisis following haircut shocks, and Gorton and Metrick (2010) reveal the evidence from 2007-09 crisis for increasing haircuts with banking panic. In the benchmark model, I endogenize and update haircuts dynamically during the period of stress. The results significantly differ from static haircut case. I show that the gap in the impacts of haircut shocks between dynamic and static haircuts is persistent for different experiments. I analyse the effects of connectivity, balance sheet and network positions of banks, and liquidity level and distribution on crisis. As well as aggregate and idiosyncratic shocks, by considering possible correlations on the asset sides of banks, I also introduce a shock hitting several banks at the same time. This study may be useful for policy makers to predict the consequences of liquidity shocks more accurately. The findings are also related to microprudential regulation on liquidity surcharge for systemically important financial institutions (SIFI's) and produce policy recommendations on minimum liquidity requirements.
    Keywords: systemic risk, liquidity risk, liquidity crisis, liquidity hoarding, random network, geometric network, dynamic haircut, liquidity surcharge, systemically important �nancial institution (SIFI)
    JEL: G01 G02 G1 G15 G17 G18 G2 G21 G28 G3 G32 G33
    Date: 2014–04–25
  15. By: Emir Malikov; Diego A. Restrepo-Tobón; Subal C. Kumbhakar
    Abstract: Credit risk is crucial to understanding banks’ production technology and should be explicitly accounted for when modeling the latter. The banking literature has largely accounted for risk by using ex-post realizations of banks’ uncertain outputs and the variables intended to capture risk. This is equivalent to estimating an ex-post realization of bank’s production technology which, however, may not reflect optimality conditions that banks seek to satisfy under uncertainty. The ex-post estimates of technology are likely to be biased and inconsistent, and one thus may call into question the reliability of the results regarding banks’ technological characteristics broadly reported in the literature. However, the extent to which these concerns are relevant for policy analysis is an empirical question. In this paper, we offer an alternative methodology to estimate banks’ production technology based on the ex-ante cost function. We model credit uncertainty explicitly by recognizing that bank managers minimize costs subject to given expected outputs and credit risk. We estimate unobservable expected outputs and associated credit risk levels from banks’ supply functions via nonparametric kernel methods. We apply this framework to estimate production technology of U.S. commercial banks during the period from 2001 to 2010 and contrast the new estimates with those based on the ex-post models widely employed in the literature.
    Keywords: Ex-Ante Cost Function; Production Uncertainty; Productivity; Returns to Scale; Risk
    JEL: C10 D81 G21
    Date: 2013–05–15
  16. By: Eddy Wymeersch (University of Gent, European Corporate Governance Institute)
    Abstract: The Regulation on the Single Supervisory Mechanism mandates the European Central Bank to exercise prudential supervision on the banks located in the Euro area, whether directly by the Bank’s own services for the significant banks, or indirectly by the national prudential supervisors but under the general guidance of the ECB for the less significant banks. The paper gives a detailed analysis of the new regime, its scope, the consequences for the existing supervisory systems, especially the home-host attribution of competences and the cooperation between the ECB and the national supervisors, the consequences for the non-euro Member States and for the third country jurisdictions. This regime is likely to substantially modify the existing supervisory landscape. It is the first step towards the Banking Union and is to be followed by legislative instruments on Bank Recovery and Resolution Directive, the Regulations on a Single Resolution Mechanism and on Deposit Guarantee Schemes. These three measures should allow dealing with defaulting banks without calling on the taxpayers.
    Keywords: Regulation Single Supervisory Mechanism, European Central Bank, European Banking Authority, banking prudential supervision, home-host, banking crisis
    JEL: G20 G28 G38
    Date: 2014–04
  17. By: Irfan Akbar Kazi; Suzanne Salloy
    Abstract: This article investigates the dynamics of conditional correlation among the G14 banks’ dealer for the credit default swap market from January 2004 until May 2009. By using the asymmetric dynamic conditional correlation model developed by Cappiello, Engle and Sheppard (2006), we examine if there is contagion during the global financial crisis, following Lehman Brothers’ bankruptcy of September 15th, 2008. The main contribution of this article is to analyze if the interdependence structure between the G14 banks changed significantly during the crisis period. We try to identify the banks which were the most or the least affected by losses induced by the crisis and we draw some conclusions in terms of their vulnerability to financial shocks. We find that all banks became highly interdependent during Lehman Brothers’ bankruptcy (short term impact), but only some banks faced high contagion during the global financial crisis (long term impact). Regulators who try to reinforce banks’ stability with the Basel 3 reforms proposals should be interested by these results.
    Keywords: Financial Crisis, Contagion, Credit Default Swap, Lehman Brothers, Asymmetric Dynamic Conditional Correlation.
    JEL: G01 G15 G21 G33
    Date: 2014–04–28
  18. By: Diego Prior (Department of Business, Universitat Autònoma de Barcelona, Spain); Emili Tortosa-Ausina (IVIE, Valencia and Department of Economics, Universidad Jaume I, Castellón, Spain); Manuel Illueca (IVIE, Valencia and Department of Finance and Accounting, Universidad Jaume I, Castellón, Spain); Mª Pilar García-Alcober (Department of Economics and business, Universidad CEU-Cardenal Herrera, Valencia, Spain)
    Abstract: The analysis of efficiency and productivity in banking has received a great deal of attention for almost three decades now. However, most of the existing literature to date has not explicitly accounted for risk when measuring efficiency. We propose an analysis of profit efficiency taking into account how the inclusion of a variety of bank risk measures might bias efficiency scores. Our measures of risk are partly inspired by the literature on earnings management and earnings quality taking into account that loan loss provisions, as a generally accepted proxy for risk,can be adjusted to manage earnings and regulatory capital. We also consider some variants of traditional models of profit efficiency where different regimes are stipulated so that financial institutions can be evaluated in different dimensions—i.e. prices, quantities, or prices and quantities simultaneously. We perform this analysis on the Spanish banking industry, whose institutions are deeply affected by the current international financial crisis, and where re-regulation is taking place. Our results can be explored in multiple dimensions but, in general, they indicate that the impact of earnings management on profit efficiency is of less magnitude than what might be a priori expected, and that the performance of savings banks has been generally worse than that of commercial banks. However, the former firms are adapting to the new regulatory scenario and catching up with commercial banks rapidly, especially in some dimensions of performance.
    Keywords: bank, efficiency, loan loss provision, profit, risk
    JEL: C14 C61 G21 L50
    Date: 2014
  19. By: Jean-Pierre Allegret; Hélène Raymond; Houda Rharrabti
    Abstract: This paper analyzes the influence of successive crises, including the recent European sovereign debt crisis, on banks’ equity returns for 11 countries. Our data span the period December 14th 2007-March 8th 2013 that encompasses different episodes of economic and financial turmoil since the collapse of the subprime credit market. Our contribution to the literature is twofold. First, we use an explicit multifactor model of equity returns extended with a sovereign risk factor. Second, we adopt a Smooth Transition Regression(STR) framework that allows for an endogenous definition of crisis periods and captures the changes in parameters associated with shift contagion. We find that contagion from the European sovereign debt crisis to banks’ equity returns has been confined to eurozone banks, whereas U.S. banks’ equity returns were unharmed by its direct impact and may even have benefited from a kind of flight to quality effect. Besides, across banks from the euro area, German financial institutions have not been completely spared by the eurozone debt crisis, though they have been relatively less affected.
    Keywords: Smooth Transition Regression model, European sovereign debt crisis, Banks’ equity returns, Contagion, Interdependence.
    JEL: E6 F3 G2
    Date: 2014
  20. By: Evers, Corinna; Rohde, Johannes
    Abstract: Under the Basel II regulatory framework non-negligible statistical problems arise when backtesting risk measures. In this setting backtests often become infeasible due to a low number of violations leading to heavy size distortions. According to Escanciano and Olmo (2010, 2011) these problems persist when incorporating estimation and model risk by adjusting the asymptotic variance of the test statistics. In this paper, we analyze backtests based on hit and duration sequences in a univariate framework by running a simulation study in order to identify the problems of backtests that examine the adequacy of Value at Risk measures. One main finding indicates that backtests of all classes show heavy size distortions. These problems for the relevant Basel II set-up, however, cannot be alleviated by modifying backtests in a way that accounts for estimation risk or misspecification risk.
    Keywords: Model risk, backtesting, Value at risk
    JEL: C12 C52 G32
    Date: 2014–04
  21. By: Carlos León; Clara Machado; Miguel Sarmiento
    Abstract: Evidence suggests that the Colombian interbank funds market is an inhomogeneous and hierarchical network in which a few financial institutions fulfill the role of “super-spreaders” of central bank liquidity among market participants. Results concur with evidence from other interbank markets and other financial networks regarding the flaws of traditional direct financial contagion models based on homogeneous and non-hierarchical networks, and provide further evidence about financial networks’ self-organization emerging from complex adaptive financial systems. Our research work contributes to central bank’s efforts by (i) examining and characterizing the actual connective structure of interbank funds networks; (ii) identifying those financial institutions that may be considered as the most important conduits for monetary policy transmission, and the main drivers of contagion risk within the interbank funds market; (iii) providing new elements for the implementation of monetary policy and for safeguarding financial stability. Classification JEL: E5, G2, L14.
    Date: 2014–04
  22. By: Kovachev, Goran
    Abstract: Accounting over 10% of country’s GDP, agriculture has substantial role in Macedonian economy. As a viable, yet risky economic sector, it is of great significance for this paper to show to the policymakers that creating special financial (sometimes state owned) institutions for lending in agriculture is a key element in helping farmers to enhance agricultural activities, thus to obtain self-sustainability. One such institution already operating in Macedonia is Agricultural Credit Discount Fund (ACDF). The main purpose of this study is to emphasize the importance of ACDF’s operations in expanding the outreach and accelerating economic welfare of farmers and rural poor. Brief analysis of ACDF’s performances in the last 10 years shows that the Fund operating in close collaboration with the participating financial institutions and the Government has significantly succeeded in increasing banks’ agriculture credit portfolio by 204%, decreasing interest rates by 8.5 percentage points and supporting over 15,000 jobs or about 1.6% of nation’s work force. The general conclusion of the study suggests that ACDF’s ‘modus operandi’ could be a guideline for similar institutions in developing and transition countries, as it creates prerequisites for easier access to finance, stronger competition among banks and increased income to its beneficiaries.
    Keywords: agriculture; Macedonia; agro-finance; Agricultural Credit Discount Fund; Macedonian Bank for Development Promotion
    JEL: E5 G2 H8 Q1
    Date: 2014–03–31
  23. By: Halkos, George; Tzeremes, Nickolaos; Kourtzidis, Stavros
    Abstract: This study examines the efficiency of banking systems in seventeen OECD countries over the period 1999-2009. For the purpose of our analysis we introduce a window-based version of two relational two-stage DEA models. Furthermore, we apply different versions of the additive and the multiplicative decomposition approaches in order to capture the trends of the efficiencies over the examined period. The robust version of the proposed models enables us to treat deposits as an intermediate variable and therefore be able to link the “value added activity” stage with the “profitability” stage over time. Our findings reveal similarities among the results of the two models. Finally, the estimated efficiencies appear to have minor fluctuations indicating a stability of the examined banking systems over time.
    Keywords: Relational two-stage DEA; Window analysis; Banking systems.
    JEL: C61 C67 G21
    Date: 2014–05–01
  24. By: Ben Fung; Miguel Molico; Gerald Stuber
    Abstract: The authors review recent developments in retail payments in Canada and elsewhere, with a focus on e-money products, and assess their potential public policy implications. In particular, they study how these developments will affect the demand for bank notes, and the central bank’s balance sheet and its seigniorage revenue, which as a result might affect the central bank’s ability to implement and conduct monetary policy and to promote financial stability. Other public policy issues, such as safety and efficiency, and user protection as well as legal, security and law enforcement, are also considered. While the demise of cash is not imminent, it is important for the central bank to continue to evaluate its potential roles with regard to e-money.
    Keywords: Bank notes, E-money, Financial services, Payment clearing and settlement systems
    JEL: E41 E42
    Date: 2014
  25. By: Camilo González; Luisa F. Silva; Carmiña O. Vargas; Andrés M. Velasco
    Abstract: We set a dynamic stochastic model for the interbank daily market for funds in Colombia. The framework features exogenous reserve requirements and requirement period, competitive trading among heterogeneous commercial banks, daily open market operations held by the Central Bank (auctions and window facilities), and idiosyncratic demand shocks and uncertainty in the daily auction. The model highlights the institutional framework and the money supply mechanisms for the interbank market. We construct a data base for the Colombian case that incorporates the principal variables of the model and give us some insights about the behavior of them in a typical requirement period. We corroborate the Martingale hypothesis for the interbank interest rate.
    Keywords: Interbank Market; Overnight Rates; Reserve Demand.
    JEL: E44 E52 G21
    Date: 2013–09–18
  26. By: M» Pilar Garc’a-Alcober (Department of Economics and business, Universidad CEU-Cardenal Herrera, Valencia, Spain); Emili Tortosa-Ausina (IVIE, Valencia and Department of Economics, Universidad Jaume I, Castell—n, Spain); Diego Prior (Department of Business, Universitat Aut˜noma de Barcelona, Spain); Manuel Illueca (IVIE, Valencia and Department of Finance and Accounting, Universidad Jaume I, Castell—n, Spain)
    Abstract: The literature analyzing the efficiency of financial institutions has evolved rapidly over the last twenty years. Most research has focused on the input side, analyzing either cost, input technical efficiency or input allocative efficiency, whereas comparatively fewer studies have examined the revenue side. However, both sides are relevant when evaluating banksÕ performance. This article explicitly explores how serious it may be to confine the analysis to one side of banksÕ activities only, comparing the efficiencies yielded by either minimizing costs or maximizing revenues. We focus on the Spanish banking sector, which is currently undergoing a profound process of change and restructuring. The application shows how severely biased the analysis is when only a partial efficiency measurement is conducted. It also shows the growing relevance of the issue since the beginning of the financial crisis.
    Keywords: bank, cost efficiency, revenue efficiency, kernel smoothing
    JEL: C14 C61 G21 L50
    Date: 2014
  27. By: Diego A. Restrepo-Tobón; Subal C. Kumbhakar
    Abstract: This paper presents new evidence regarding the relation between profit, revenue, and cost efficiencies of U.S. commercial banks. Building on the widely used nonstandard profit function (NSPF) approach, we show (i) why estimation of NSPF would be wrong and (ii) how revenue and cost efficiencies contribute to profit efficiency. Using data from U.S. comercial banks from 2001 to 2010, we find that losses due to profit inefficiency represents about 8.2% of banks’ equity of which 3.5% is due to revenue inefficiency and 4.7% to cost inefficiency. Cost efficiency weighs more than revenue efficiency in estimated profit efficiency. However, compared with cost inefficiency, revenue inefficiency affects more overall profitability.
    Keywords: Pro?t Ef?ciency; Revenue ef?ciency; Cost ef?ciency; Nonstandard Pro?t Function; Stochastic Frontier
    JEL: D24 G21 L13
    Date: 2013–08–05
  28. By: Elisabeth CALLANDRET-BIGOT; Dominique BONET; Jean-Louis GALLIAN
    Abstract: Since the 1984 Banking Act and the Regulatory Reforms (Basel I, II and, in the very near future, Basel III), French and European banks have developed performance analysis systems based on the implementation of internal control, regulatory reporting, and compliance with prudential standards, changing the role and content of management control. In this context, our exploratory research aims to study the evolution of bank control and related management tools. It allows us to understand how banks have adapted their business model to profound changes in the sector, particularly in a context of crisis.
    Keywords: Controller, bank, function, tools
    Date: 2014–04–28
  29. By: Omar Masood; Priya Darshini Pun Thapa; Olivier Levyne; Frederic Teulon; Rabeb Triki
    Abstract: This study aims to give the analysis of the determinants of banks’ profitability in the Kingdom of China over the period 2003-2007. This paper investigates the co-integration and causal relationship between total assets (TA) and total equity (TE) of Chinese banks. The analysis employs Augmented Dickey Fuller (ADF) test, Johansen’s co integration test, Granger causality test. Analyzing the co integration and other tests on Chinese banking sector over the study period, the relationships between the two variables are examined. The empirical results have found strong evidence that the variables are co-integrated.
    Keywords: banking; bank profitability; total assets; total equity; co-integration
    Date: 2014–04–28
  30. By: Nidia Ruth Reyes; José Eduardo Gómez G.; Jair Ojeda Joya
    Abstract: We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics.
    Keywords: Monetary policy transmission, Bank lending channel, Risk taking channel, Colombia
    JEL: E5 E52 E59 G21
    Date: 2013–06–17
  31. By: Agatha M. Poroshina (National Research University Higher School of Economics)
    Abstract: This paper analyzes the problems of credit risk modeling of residential mortgage lending in Russia. Using unique mortgage loan and macro data from a regional branch of the Agency of Home Mortgage Lending (2008-2012), we find that borrower and mortgage loan characteristics affect the loan performance and play an important role in predicting default as well as a macroeconomic situation. On the residential mortgage market, borrowers with undeclared income have the lowest probability of default, mainly explained by the difference in declared and real income. Obtained results are robust under parametric and semiparametric specifications with correction for selectivity bias.
    Keywords: credit risk, default, mortgage lending, sample selection, Russia
    JEL: C14 D12 R20
    Date: 2014

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