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on Banking |
| By: | Corbae, Dean (University of Wisconsin - Madison and NBER); D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia) |
| Abstract: | We develop a model of banking industry dynamics to study the quantitative impact of capital requirements on bank risk taking, commercial bank failure, and market structure. We propose a market structure where big, dominant banks interact with small, competitive fringe banks. Banks accumulate securities like Treasury bills and undertake short-term borrowing when there are cash flow shortfalls. A nontrivial size distribution of banks arises out of endogenous entry and exit, as well as banks’ buffer stocks of securities. We test the model using business cycle properties and the bank lending channel across banks of different sizes studied by Kashyap and Stein (2000). We find that a rise in capital requirements from 4% to 6% leads to a substantial reduction in exit rates of small banks and a more concentrated industry. Aggregate loan supply falls and interest rates rise by 50 basis points. The lower exit rate causes the tax/output rate necessary to fund deposit insurance to drop in half. Higher interest rates, however, induce higher loan delinquencies as well as a lower level of intermediated output. |
| Keywords: | Banking; Capital requirements; Risk; Commercial bank failure; Market structure |
| Date: | 2014–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:14-13&r=ban |
| By: | Liu, Xiaochun |
| Abstract: | This paper extends the Conditional Value-at-Risk approach of Adrian and Brunnermeier (2011) by allowing systemic risk structures subject to economic regime shifts, which are governed by a discrete, latent Markov process. This proposed Markov-Switching Conditional Value-at-Risk is more suitable to Supervisory Stress Scenario required by FederalReserve Bank in conducting Comprehensive Capital Analysis and Review, since it is ca-pable of identifying the risk states in which the estimated risk levels are characterized. Applying MSCoVaR to stress-testing the U.S. largest commercial banks, this paper finds that the CoVaR approach underestimates systemic risk contributions of individual banks by around 131 basis points of asset loss on average. In addition, this paper constructs Banking Systemic Risk Index by value-weighted individual risk contributions for specifically monitoring the systemic risk of the banking system as a whole. |
| Keywords: | Markov-Switching Conditional Value-at-Risk, Conditional Expected Shortfall, Bayesian Quantile Inference, Stress-testing, Value-at-Risk, Commercial Banks, Banking Systemic Risk Index |
| JEL: | G1 G12 G17 G21 |
| Date: | 2013–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55801&r=ban |
| By: | Alvarez, Fernando (University of Chicago); Barlevy, Gadi (Federal Reserve Bank of Chicago) |
| Abstract: | This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, we assume banks can profitably invest funds provided by outsiders, but will divert these funds if their equity is low. Investors thus value knowing which banks were hit by shocks to assess the equity of the banks they invest in. We find that when the extent of contagion is large, it is possible for no information to be disclosed in equilibrium but for mandatory disclosure to increase welfare by allowing investment that would not have occurred otherwise. Absent contagion, mandatory disclosure cannot raise welfare, even if markets are frozen. |
| Keywords: | Information; Networks; Contagion; Stress Tests |
| JEL: | G01 G14 G17 |
| Date: | 2014–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2014-04&r=ban |
| By: | Tolga Umut Kuzubas; Burak Saltoglu; Can Sever |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bou:wpaper:2014/01&r=ban |
| By: | Guillaume Bazot (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This paper proposes to assess financial intermediation efficiency in Germany, France, the UK, and Europe more broadly, over the past 60 years. I rely on Philippon's (2012) methodology, which calculates the unit cost of financial intermediation through the ratio of 'financial consumption' | measured by financial income | to 'financial output' | approximated by the sum of outstanding assets intermediated. The contribution of this paper is threefold. First, because financial industry VA ignores banks' capital income (capital gains, dividends and interest on securities) it is an imperfect measure of the consumption of financial intermediation. So long as capital income generates wages and profits to financial intermediaries, it is akin to an implicit consumption of financial services. Using banking income instead of banking VA to measure the consumption of banking services, I show that the GDP share of finance has increased continuously in Germany, France, the UK and Europe as a whole. Second, the unit cost of financial intermediation increased over the past 40 years, except in France where, overall, it stagnated. In addition, the European unit cost matches the US unit cost calculated by Philippon (2012). Finally, because financial intermediaries deal with nominal stocks and ows, and because the unit cost increases during periods of monetary troubles, I focus here on nominal rates of interest to explain the evolution of unit cost. I show that a rise in nominal rates of interest increases the spread of bank interest, so that 1970s and 1980s high unit costs are statistically explained by increases in short-term interest rates. On the other hand, post-1990s high unit cost seems to coincide with the development of new market-based activities. |
| Keywords: | Financial Consumption ; Financial Efficiency ; Europe |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00986912&r=ban |
| By: | Born, Benjamin; Pfeifer, Johannes |
| Abstract: | Jesús-Fernández-Villaverde, Pablo A. Guerrón-Quintana, Juan F. Rubio-Ramírez and Martín Uribe (2011) find that risk shocks are an important factor in explaining emerging market business cycles. We show that their model needs to be recalibrated because it underpredicts the targeted business cycle moments by a factor of three once a time aggregation error is corrected. Recalibrating the corrected model for the benchmark case of Argentina, the peak response of output after an interest rate risk shock increases by 63 percent and the contribution of interest rate risk shocks to business cycle volatility more than doubles. Hence, risk matters more in the recalibrated model. However, the recalibrated model does worse in capturing the business cycle properties of net exports once an additional error in the computation of net exports is corrected. |
| Keywords: | Interest Rate Risk; Stochastic Volatility |
| JEL: | E32 E43 F32 F44 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:039&r=ban |
| By: | Thomas Lux |
| Abstract: | This paper studies a simple dynamic model of interbank credit relationships. Starting from a given balance sheet structure of a banking system with a realistic distribution of bank sizes, the necessity of establishing interbank credit connections 3merges from idiosyncratic liquidity shocks. Banks initially choose potential trading partners randomly, but form preferential relationships via an elementary reinforcement learning algorithm. As it turns out, the dynamic evolution of this system displays a formation of a core-periphery structure with mainly the largest banks assuming the roles of money center banks mediating between the liquidity needs of many smaller banks. Statistical analysis shows that this evolving interbank market shares virtually all of the salient characteristics of interbank credit relationship that have been put forth in recent literature. Preferential interest rates for borrowers with strong attachment to a lender may prevent the system from becoming extortionary and guarantee the survival of the small peripherical banks |
| Keywords: | liquidity, interbank market, network formation |
| JEL: | D85 G21 D83 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1917&r=ban |
| By: | Tomas Fiala (Tilburg University and Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic and Czech National Bank) |
| Abstract: | Foreign-dominated banking sectors, such as those prevalent in Central and Eastern Europe, are susceptible to two major sources of systemic risk: (i) linkages between local banks, and (ii) linkages between a foreign par- ent bank and its local subsidiary. Using a nonparametric method based on extreme value theory, which accounts for fat-tail shocks, we analyze interde- pendencies in downward risk in the banking sectors of the Czech Republic, Hungary, Poland, and Slovakia during 1994–2013. In contrast to the pre- sumptions of the current regulatory policy of these countries, we find that the risk of contagion from a foreign parent bank to its local subsidiary is substantially smaller than the risk between two local banks. |
| Keywords: | systemic risk, extreme value theory, financial stability, Central Eastern Europe, banking, parent-subsidiary relationship |
| JEL: | F23 F36 G01 G21 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2014_10&r=ban |
| By: | Karl Finger; Thomas Lux |
| Abstract: | This paper investigates the driving forces behind banks’ link formation in the interbank market by applying the stochastic actor oriented model (SAOM) developed in sociology. Our data consists of quarterly networks constructed from the transactions on an electronic platform (e-MID) over the period from 2001 to 2010. Estimating the model for the time before and after the global financial crisis (GFC), shows relatively similar behavior over the complete period. We find that past trades are a significant predictor of future credit relations which indicates a strong role for the formation of lasting relationships between banks. We also find strong importance of size-related characteristics, but little influence of past interest rates. The major changes found for the period after the onset of the financial crisis are that: (1) large banks and those identified as `core´ intermediaries became even more popular and (2) indirect counterparty risk appears to be more of a concern as indicated by a higher tendency to avoid indirect exposure via clustering effects |
| Keywords: | interbank market, network formation, financial crisis |
| JEL: | G21 G01 C35 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1916&r=ban |
| By: | Majid Bazarbash |
| Abstract: | Building on Goodfriend and McCallum (2007), the paper presents a theory of money and banking in which the interbank Treasury-Bill (TED) spread (and other spreads) reflect the valuation of government bond collateral services in banking. Government debt held by households defrays the cost of borrowing from banks to finance deposits; and government debt held by banks facilitates the production of interbank credit in the provision of transactions services on deposits. The economy-wide collateral services yield is determined in general equilibrium by integrating the household and bank demand for collateral in an otherwise standard representative agent new synthesis (new Keynesian) model. Banking model parameters are calibrated to match average interest rate spreads and other banking aggregates from 1971 to 2006 (pre-crisis). The calibrated banking system demand for government bonds relative to deposits is a reasonably well-behaved function of the TED spread throughout the sample period. According to the calibrated model, the secular variation in the supply of government bonds relative to GDP over the sample explains the secular variation in the TED spread during the period. Significant short-term fluctuations in the TED spread are attributed to shocks to banking productivity. Spikes in the TED spread are purged of the collateral supply effects to measure and compare underlying distress in various banking crises during the sample period. The model is employed to assess the quantitative impact on various interest rate spreads of three policy exercises: an increase in the supply of government debt, an increase in aggregate bank reserves, and an exchange of government debt for bank reserves. The positive observed TED spread yields a calibrated bank loan to collateral ratio in excess of unity. Thus, the model predicts that a central bank open market purchase of debt for bank reserves creates a net scarcity of collateral, which raises the collateral services yield and elevates TED and other rate spreads. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:1099211575&r=ban |
| By: | Dr Cinzia Rienzo; Dr Angus Armstrong; Iana Liadze; Professor E. Philip Davis |
| Abstract: | Background The availability of bank finance to small and medium sized enterprises (SMEs) is important to allow SMEs to start up and finance investment for growth. There has been widespread comment regarding the continued difficulty SMEs perceive in obtaining external finance since the financial crisis of 2008. This followed a period in which credit was more widely available in the early to mid 2000s. BIS commissioned this project to develop an understanding of the changes in lending to SMEs from 2001-12; to identify the extent to which bank lending has contracted since 2008, and to identify whether SMEs were disproportionately affected in their ability to access finance. An important focus of the research was also to identify SME characteristics associated with greater difficulties in accessing finance. Methodology The project used data from a series of SME surveys that provide detailed information on the characteristics of a sample of UK SMEs, their owners and experiences of obtaining finance[1]. Using econometric models, which included controls for SME characteristics and risk factors, indicators of changes in the supply of bank lending over the time period abstracting from borrower risk could be obtained. Key findings SMEs have faced a more challenging environment for accessing credit after the financial crisis of 2008 and subsequent recession. Even controlling for risk factors, rejection rates for both overdrafts and term loans were significantly higher in the period from 2008-9 onwards, which is indicative of constraints to the supply of credit. The evidence suggests greater credit restrictions for term loans than overdrafts. Firm characteristics associated with greater likelihood of rejection included higher credit risk rating, previous financial delinquency and lower sales levels, whilst older more established businesses were less likely to be rejected. Margins for both overdrafts and term loans were also significantly higher in the period from 2008-9 onwards, even controlling for risk, as cuts in the Bank of England base rate were not fully transferred on to SME borrowers. However there was no significant increase over time in the likelihood of an SME with given risk characteristics having to provide collateral. Whilst arrangement fees were high during 2008-9, they subsequently returned to levels that were not significantly different from the period before 2008. The tightening in credit since 2008-9 has disproportionately affected low and average risk SMEs (based on Dun and Bradstreet credit scores). However there was no significant change over this period in the likelihood of rejection for SMEs rated as above (e.g. greater than) average risk. This suggests banks viewed lending to the safer categories of SMEs as relatively more risky in the period after the financial crisis than they did before, although the pattern is also suggestive of a partial withdrawal from SME lending as an asset class. After 2009 there was also an increase in the proportion of SMEs rated as above average credit risk due to the effects of the recession on sales, profitability and asset prices. Effects of ethnic origin of the owner on lending to SMEs were detected, with black entrepreneurs more likely to be refused credit. The newly-nationalised banks in 2008-9 were more willing to provide SME credit overall than were other institutions. Time series modelling reveals that greater uncertainty in economic conditions appears to have had greater negative effect on lending to SMEs compared to the corporate sector as a whole. This suggests economic uncertainty as has prevailed since 2008-9 leads to a general shift away from higher risk SME lending towards lending to larger businesses. Overall, we suggest that the research is indicative of a shortage of finance for SMEs, reflecting banks’ attitudes to risk and their own pressures to delever combined with banks’ market power in the SME sector. Although demand is also probably subdued, there is a high level of discouragement from application for lending as well as high rejection rates and margins on credit after controlling for risk. If the situation is not resolved, output, investment and employment will be lower than would otherwise be the case, with adverse effects on economic performance in the short and longer term. [1] Surveys include: Finance for Small and Medium-sized Enterprises 2004, UK Survey of Small and Medium-sized Enterprises’ Finances 2008, BIS SME Finance Survey 2009 and the SME Finance Monitor covering 2010-12. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:11269&r=ban |
| By: | Afonso, Gara M. (Federal Reserve Bank of New York); Lagos, Ricardo (Federal Reserve Bank of Minneapolis) |
| Abstract: | We present a dynamic over-the-counter model of the fed funds market and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the discount window lending rate, and the interest rate on bank reserves. |
| Keywords: | Fed funds market; Search; Bargaining; Over-the-counter market |
| JEL: | C78 D83 E44 G10 |
| Date: | 2014–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:711&r=ban |
| 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. |
| Keywords: | Interbank, monetary policy, contagion, networks, super-spreader, central bank. |
| JEL: | E5 G2 L14 |
| Date: | 2014–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:011187&r=ban |
| By: | Diana Zigraiova (Czech National Bank and Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Jakubik (European Insurance and Occupational Pensions Authority (EIOPA) and Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This work develops an early warning system framework for assessing systemic risks and for predicting systemic events, i.e. periods of extreme financial instability with potential real costs, over the short horizon of six quarters and the long horizon of twelve quarters on the panel of 14 countries, both advanced and developing. First, we build Financial Stress Index to identify starting dates of systemic financial crises for each country in the panel. Second, early warning indicators for assessment and prediction of systemic risks are selected in a two-step approach; relevant prediction horizons for each indicator are found by the univariate logit model followed by the application of Bayesian model averaging method to identify the most useful indicators. Next, we validate early warning model, containing only useful indicators, for both horizons on the panel. Finally, the in-sample performance of the constructed EWS over both horizons is assessed for the Czech Republic. We find that the model over the 3 years’ horizon slightly outperforms the EWS with the horizon of 1.5 years on the Czech data. The long model attains the maximum utility in crises detection as well as it maximizes area under Receiver Operating Characteristics curve which measures the quality of the forecast. |
| Keywords: | Systemic risk, Financial stress, Financial crisis, Early warning indicators, Bayesian model averaging, Early warning system |
| JEL: | C33 E44 F47 G01 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2014_01&r=ban |
| By: | Paolo Gelain (Norges Bank); Pelin Ilbas (National Bank of Belgium, Research Department) |
| Abstract: | We estimate the Smets and Wouters (2007) model augmented with the Gertler and Karadi (2011) financial intermediation sector on US data by using real and financial observables. Given the framework of the estimated model, we address the question whether and how standard monetary policy should interact with macroprudential policy in order to safeguard real and financial stability. For this purpose, monetary policy is described by a flexible inflation targeting regime using the interest rate as instrument, while the macroprudential regulator adopts a tax/subsidy on bank capital in a countercyclical manner in order to stabilize nominal credit growth and the output gap. We look at the gains from coordination between the central bank and the macroprudential regulator under alternative assumptions regarding the degree of importance assigned to output gap fluctuations in the macroprudential mandate. The results suggest that there can be considerable gains from coordination if the macroprudential regulator has been assigned a sufficiently high weight on output gap stabilization, i.e. the common objective with monetary policy. If, on the other hand, the main focus of the macroprudential mandate is on credit growth, the macroprudential policy maker can reach better outcomes, while the central bank does worse, in the absence of coordination. Therefore, whether and to which extent monetary policy gains from coordination with the macroprudential regulator depends on the relative weight assigned to output fluctuations in the macroprudential mandate. Our counterfactual analysis further confirms the effectiveness of the countercyclical macroprudential tax/subsidy in containing the amplification effects triggered by a financial shock, and suggests that having a macroprudential regulatory tool at work could have successfully avoided the massive drop in credit such as the one observed at the onset of the Great Recession. |
| Keywords: | Monetary policy, financial frictions, macroprudential policy, policy coordination, capital tax/subsidy |
| JEL: | E42 E44 E52 E58 E61 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201405-258&r=ban |
| By: | Hana Dzmuranova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Teply (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic and Department of Banking and Insurance Faculty of Finance and Accounting, University of Economics University of Economics, Prague) |
| Abstract: | This paper deals with the risk management of savings accounts. Savings accounts are non-maturing accounts bearing a relatively attractive rate of return and two embedded options: a customer’s option to withdraw money at any time and a bank’s option to set the deposit as it wishes. The risk management of saving accounts remains a big challenge for banks and simultaneously raises serious concerns by some regulators. In this paper, we focus on the interest rate risk management of savings accounts. By constructing the replicating portfolio and simulating six scenarios for the market rate and client rates, we show that under the severest scenario, some banks in the Czech Republic might face a capital shortage up to 22% in next two years if market rates start to increase dramatically. We conclude that savings accounts are risky instruments that cannot be hedged by standard risk mitigation techniques. Since savings accounts in the Czech Republic are not subject to any special regulation yet, we propose imposing stricter regulation and supervision (the Belgium framework might be an inspiring model to consider). |
| Keywords: | demand deposits, interest rate risk, replicating portfolio, risk management, savings accounts, simulations |
| JEL: | C15 G21 G11 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2014_09&r=ban |
| By: | Jan A. Kregel; Mario Tonveronachi (Tallinn University of Technology, Estonia) |
| Abstract: | The financial system is a private-public partnership coming from government ceding the right to produce means of payment with the related permission on leveraged lending services, against the acceptance of rules designed to ensure stability for both individual institutions and the financial system. The experience shows that market-based regulation does not produce the wanted results, while rules-based and principle-based regulatory systems are prone to regulatory avoidance and capture, especially with complex regulatory schemes. While the reaction to the recent crisis has prompted a wide range of financial reforms, in a duel to match complexity with complexity, the previous approach based on leaving market forces to mould the financial structure with few if any constraints maintained. The paper shows that this approach adopts faulty or casuistic policy implications derived from both the laissez faire and the second-best versions of mainstream economic theory. However, some of its basic features, such as regulating institutions and products and not functions, and as promoting the international level playing field, are not coherent with its reputed theoretical foundations. Furthermore, the absence of strong principles and the impossibility to derive conclusive quantitative proposals from cost-benefit evaluations leaves an unacceptably wide area of discretion for experimentation with trial and error processes, easily leading to weak or distorted regulation. The difficulties experienced within this framework to deal with problems such as those posed by systemic institutions, shadow banking, weak rules and supervision, distorted risk evaluation, high compliance costs, etc. has convinced some observers that a ‘revolution’ in economic thinking and policy is required. Following Minsky, the conclusions review a heterodox approach to financial fragility and regulation. Characterising banking in terms of liquidity creation through acceptance, and distinguishing it from the production of liquidity by other financial institutions, it concludes that financial organisations should be regulated according to their function in providing liquidity of different types to the financial system. |
| Keywords: | Financial regulation, financial supervision, financial fragility, Hyman Minsky |
| JEL: | G01 G21 G24 G28 G32 |
| Date: | 2014–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper29&r=ban |
| By: | Benjamin Käfer (University of Kassel) |
| Abstract: | The question of whether central banks should bear responsibility for financial stability is still unan-swered. Regarding interest rate implementation, it is thus not clear if and how the Taylor rule should be augmented by an additional financial stability term. This paper reviews the normative and positive literature on Taylor rules augmented with exchange rates, asset prices, credit, and spreads. These measures have developed as common indicators of financial (in)stability in the Taylor rule literature. In addition, our own analysis describes the development of these indicators for the core and the periphery of the Eurozone. Given the large degree of heterogeneity between euro area countries, the conclusion here is that an interest rate reaction to instability by the European Central Bank would be inappropriate in times of crisis. However, this conclusion is somewhat weakened if there is no crisis. |
| Keywords: | Taylor rule, financial stability, sovereign debt crisis, Eurozone heterogeneity, exchange rates, asset prices, credit spreads |
| JEL: | E52 F33 F42 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201430&r=ban |
| By: | Renée Fry-McKibbin; Cody Yu-Ling Hsiao |
| Abstract: | A new test for financial market contagion based on changes in extremal dependence defined as co-kurtosis and co-volatility is developed to identify the propagation mechanism of shocks across international financial markets. The proposed approach captures changes in various aspects of the asset return relationships such as crossmarket mean and skewness (co-kurtosis) as well as cross-market volatilities (covolatility). In an empirical application involving the global financial crisis of 2008-09, the results show that significant contagion effects are widespread from the US banking sector to global equity markets and banking sectors through either the co-kurtosis or the co-volatility channel, reinforcing that higher order moments matter during crises. |
| Keywords: | Co-skewness, Co-kurtosis, Co-volatility, Contagion testing, Extremal dependence, Financial crisis, Lagrangian multiplier tests. |
| JEL: | C12 F30 G11 G21 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-38&r=ban |
| By: | Shih-Kang Chao; Wolfgang Karl Härdle; Hien Pham-Thu; |
| Abstract: | As observed in the financial crisis, CDS spreads tend to increase simutaneously as a reaction to common shocks. Focusing on the spillover effects triggered by extreme events, we propose a credit risk analysis tool by applying credit default swap spread returns to the concept of 4CoVaR suggested by Adrian and Brunnermeier (2011). The interconnection and mutual impact on credit spreads are investigated based on CDS spreads of the biggest derivative dealers in the market. By including factors identified as determinants of CDS spreads to the set of explanatory variables such as equity return and equity volatility and implementing the variable selection technique least absolute shrinkage and selection operator (LASSO), the results demonstrate an improved performance in CDS spread VaR calculation. The enhancement is more significant in pre-crisis period but both methodologies tend to overestimate risk in turbulent period. Further, non-linear effects between CDS spreads in extreme events are captured by the introduction of a partial linear model in the CoVaR calculation. |
| Keywords: | CDS, VaR, CoVaR, stressed VaR, Central Counterparty, Quantile Regression |
| JEL: | G12 G13 G23 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2014-026&r=ban |
| By: | Hakimi, Abdelaziz; Hamdi, Helmi |
| Abstract: | In this article, we investigate the link between the duration of bank relationships and its consequences on the performance of Tunisian firms. Performance is measured by the return on equity (ROE) and the return on Assets (ROA). We collected data of 100 Tunisian companies for the period of 2000-2007. Applying panel data estimation, our results opine that the cost of credit decreases the performance of Tunisian firms while the duration of bank relationships improves their performance and increase their profitability. |
| Keywords: | Bank relationships, Tunisia, Panel Data |
| JEL: | G30 L10 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55754&r=ban |
| By: | Xin Dong; Harry Zheng |
| Abstract: | In this paper we discuss a credit risk model with a pure jump L\'evy process for the asset value and an unobservable random barrier. The default time is the first time when the asset value falls below the barrier. Using the indistinguishability of the intensity process and the likelihood process, we prove the existence of the intensity process of the default time and find its explicit representation in terms of the distance between the asset value and its running minimal value. We apply the result to find the instantaneous credit spread process and illustrate it with a numerical example. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1405.3767&r=ban |
| By: | Davis, J. Scott (Federal Reserve Bank of Dallas); Mack, Adrienne (Federal Reserve Bank of Dallas); Phoa, Wesley (The Capital Group Companies); Vandenabeele, Anne (The Capital Group Companies) |
| Abstract: | What is the marginal effect of an increase in the private sector debt-to-GDP ratio on the probability of a banking crisis? This paper shows that the marginal effect of rising debt levels depends on an economy's external position. When the current account is in surplus or in balance, the marginal effect of an increase in debt is rather small; a 10 percentage point increase in the private sector debt-to-GDP ratio increases the probability of a crisis by about 1 to 2 percentage points. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect can be large. When a country has a current account deficit of 10% of GDP (which is similar to the value in the Eurozone periphery on the eve of the recent crisis) a 10 percentage point increase in the private sector debt ratio leads to a 10 percentage point increase in the probability of a crisis. |
| Keywords: | money supply; credit; financial economics |
| JEL: | E51 F32 G01 |
| Date: | 2014–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:178&r=ban |
| By: | Jan Kregel |
| Abstract: | In the context of current debates about the proper form of prudential regulation and proposals for the imposition of liquidity and capital ratios, Senior Scholar Jan Kregel examines Hyman Minsky's work as a consultant to government agencies exploring financial regulatory reform in the 1960s. As Kregel explains, this often-overlooked early work, a precursor to Minsky's "financial instability hypothesis"(FIH), serves as yet another useful guide to explaining why regulation and supervision in the lead-up to the 2008 financial crisis were flawed—and why the approach to reregulation after the crisis has been incomplete. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levppb:ppb_131&r=ban |
| By: | Fabian Lindner |
| Abstract: | This paper looks at the relation between mortgage credit and housing values. It has become conventional wisdom in policy circles that credit growth led to the housing bubble in the US. However, this statement has not been empirically tested as of yet. The paper uses the Johansen procedure to estimate a long run relationship between mortgage credit and housing prices between 1984 and 2012 and analyzes the interactions between the variables. To this effect, two models with two different housing price variables are estimated. It is found that mortgage credit is weakly exogenous. Impulse-response functions, variance decompositions and out of sample forecast also show that mortgage credit drives housing prices and not vice versa. The paper also looks at the effect of short-term and long-term interest rates and does not find important influences of both on housing prices or mortgage credit. The role of monetary policy is not likely to have been very strong in the built-up of the housing bubble. |
| Keywords: | Housing Prices, Mortgage Markets, Monetary Policy |
| JEL: | E22 E44 E52 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:133-2013&r=ban |
| By: | Fisher, Richard W. (Federal Reserve Bank of Dallas) |
| Abstract: | The Federal Reserve knows what community and regional banks do for their communities. We appreciate that you are the backbone for the homeowners, small businesses, service clubs and school sports teams and scouts and churches and myriad other activities that make for better communities. We want you not only to endure, but to succeed and grow. |
| Keywords: | community banks; monetary policy |
| Date: | 2014–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddsp:149&r=ban |
| By: | Jean-Michel Sahut; Sandrine Boulerne |
| Date: | 2014–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-290&r=ban |
| By: | Mário Jorge Mendonça; Adolfo Sachsida |
| Abstract: | Este estudo tem como objetivo estudar a demanda de crédito para veículos no Brasil. Com base no modelo com mudança de regime tipo Markov-Switching (MS), estimou-se uma função de demanda usando dados mensais agregados de outubro de 2000 a dezembro de 2012. Os resultados mostraram que a demanda por financiamento esteve sujeita a três estados distintos durante este período. O primeiro deles marca o estado em que o crédito foi determinado pelos fundamentos de mercado, sendo que o período em que ele mais se destacou foi um ciclo de forte e contínua expansão do crédito, que aconteceu entre 2004 e 2008. A este regime segue-se um estado relacionado à fase recessiva do ciclo de crédito fortemente influenciado pela crise econômica. O terceiro regime, que acorre num único ciclo entre dezembro de 2008 e outubro de 2010, aconteceu em decorrência das medidas anticíclicas adotadas pelo Banco Central do Brasil (BCB) e governo federal, com o intuito de mitigar os efeitos da crise. Estas medidas promoveram a expansão do crédito de modo artificial, levando a um processo de formação de bolha que culminou com a necessidade da introdução das chamadas medidas macroprudenciais, de modo mais incisivo a partir de dezembro de 2010, quando já havia em curso uma tendência de contínuo aumento da inadimplência. This study aims to analyse the demand for credit in Brazilian market for vehicles. Based on the Markov Switching model to dealing with regime change, we estimate a demand function using aggregated monthly data from Oct./2000 to Dec./2012. The results showed that the demand for credit was subject to three distinct states during this period. The first one marks the state where the credit was determined by the market fundamentals. This regime most appeared from 2004 to 2008 in which one perceives a cycle of continued and strong expansion of credit. After it follows one state strongly influenced by the economic crisis occurred in the beginning of 2008. In this period there was a great fall in credit. The third regime that rushes in a single cycle between Dec./2008 Oct./2010 happened as a result of countercyclical measures adopted by the Central Bank and the Federal Government with the aim of mitigating the effects of the economic crisis. Such measures promoted the quickly expansion of credit leading to the process of bubble formation in market for vehicles that led to the need for the introduction of so-called macro prudential measures by the Central Bank when there was already an ongoing trend of continuous increase in default. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1960&r=ban |
| By: | Fonseca, Marcelo Gonçalves da Silva; Pereira, Pedro L. Valls |
| Abstract: | This paper investigates the implications of the credit channel of the monetary policy transmission mechanism in the case of Brazil, using a structural FAVAR (SFAVAR) approach. The term structural comes from the estimation strategy, which generates factors that have a clear economic interpretation. The results show that unexpected shocks in the proxies for the external nance premium and the bank balance sheetchannel produce large and persistent uctuations in in ation and economic activity accounting for more than 30% of the error forecast variance of the latter in a three-year horizon. The central bank seems to incorporate developments in credit markets especially variations in credit spreads into its reaction function, as impulse-response exercises show the Selic rate is declining in response to wider credit spreads and acontraction in the volume of new loans. Counterfactual simulations also demonstrate that the credit channel ampli ed the economic contraction in Brazil during the acute phase of the global nancial crisis in the last quarter of 2008, thus gave an important impulse to the recovery period that followed. |
| Date: | 2014–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:358&r=ban |
| By: | Camilo González; Luisa Silva; Carmiña Vargas; Andrés M. Velasco |
| Abstract: | We set a dynamic stochastic model for the interbank daily market forfunds in Colombia. The framework features exogenous reserve requirements and requirement period, competitive trading among heterogeneouscommercial banks, daily open market operations held by the Central Bank(auctions and window facilities), and idiosyncratic demand shocks anduncertainty in the daily auction. Analytical derivations of their decisionmaking process show that banks involvement in the interbank market andopen market operations depend on their individualrequirement constraintand daily liquid assets. Our results do not show a linkage between theuncertainty in the money supply mechanism and activity in the interbankmarket. Equilibrium interest rate for the interbank market is derived,and is shown that it is distorted by uncertainty at the daily auction heldby the monetary authority. Using data for Colombia, we test the mainresults of the model and corroborate the Martingale hypothesis for theinterbank interest rate. |
| Keywords: | Interbank Market; Overnight Rates; Reserve Demand |
| JEL: | E44 E52 G21 |
| Date: | 2013–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:011094&r=ban |
| By: | Carlos León; Clara Machado; Andrés Murcia |
| Abstract: | This document presents an enhanced and condensed version of preceding proposals for identifying systemically important financial institutions in Colombia. Three systemic importance metrics are implemented: (i) money market net exposures network hub centrality; (ii) large-value payment system network hub centrality; and (iii) an adjusted assets measure. Two complementary aggregation methods for those metrics are implemented: fuzzy logic and principal component analysis. The two resulting indexes concur in several features: (i) the ranking and remoteness of the top-two most systemically important financial institutions; (ii) the preeminence of credit institutions in the indexes; (iii) the appearance of a brokerage firm in the top-six; (iv) the skewed nature of the indexes, which match the skewed (i.e. inhomogeneous) nature of the three metrics and their approximate scale-free distribution. The indexes are non-redundant and provide a comprehensive relative assessment of each financial institution’s systemic importance, in which the choice of metrics pursues the macro-prudential perspective of financial stability. The indexes may serve financial authorities as quantitative tools for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be the greatest. They may also serve them for enhanced policy and decision-making. |
| Keywords: | Systemic Importance, Systemic Risk, Fuzzy Logic, Principal Component Analysis, Financial Stability, Macro-prudential |
| JEL: | D85 C63 E58 G28 |
| Date: | 2013–12–26 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:011105&r=ban |
| By: | Ignacio Lozano; Alexander Guarín |
| Abstract: | In this paper, we study the empirical relationship between credit funding sources and the financial vulnerability of the Colombian banking system. We propose a statistical model to measure and predict banking-fragility episodes associated with credit funding sources classified into retail deposits and wholesale funds. We compute the probability of financial fragility for both the aggregated banking system and the individual banks. Our approach performs a Bayesian averaging of estimated logit regression models with monthly balance sheet data between 1996 and 2013. The results show the increasing use of wholesale funding to support credit expansion is a potential source of financial fragility. Therefore, monitoring credit funding sources could provide an additional tool to warn against banking disruptions. |
| Keywords: | Credit cycle, financial stability, wholesale funds, balance sheet, logistic model regression, Bayesian model averaging. |
| JEL: | C11 C23 C52 C53 G01 G20 G21 |
| Date: | 2014–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:011145&r=ban |
| By: | Kashiwabara, Chie |
| Abstract: | Based on the consolidated statements data of the universal/commercial banks (UKbank) and non-bank financial institutions with quasi-banking licenses, this paper presents a keen necessity of obtaining data in detail on both sides (assets and liabilities) of their financial conditions and further analyses. Those would bring more adequate assessments on the Philippine financial system, especially with regard to each financial subsector's financing/lending preferences and behavior. The paper also presents a possibility that the skewed locational and operational distribution exists in the non-UKbank financial subsectors. It suggests there may be a significant deviation from the authorities' (the BSP, SEC and others) intended/anticipated financial system in the banking/non-bank financial institutions' real operations. |
| Keywords: | Philippines, Financial institutions, Banks, Non-banking, Credit, Monetary policy, Credit channel, Financial intermediaries, Non-bank financial institutions |
| JEL: | E42 E52 G21 G38 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper468&r=ban |