New Economics Papers
on Banking
Issue of 2014‒06‒02
33 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Moral Hazard and Debt Maturity By Huberman, Gur; Repullo, Rafael
  2. Bank Insolvency Risk and Z-Score Measures: A Refinement By Frank Strobel
  3. The Impact of Financial Development on the Relationship between Trade Credit, Bank Credit and Firm Characteristics By Jézabel Couppey-Soubeyran; Jérôme Héricourt
  4. When Credit Dries Up: Job Losses in the Great Recession By Bentolila, Samuel; Jansen, Marcel; Jiménez, Gabriel; Ruano, Sonia
  5. Capital controls and the resolution of failed cross-border banks: the case of Iceland By Baldursson, Fridrik Mar; Portes, Richard
  6. Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights By Acharya, Viral V; Engle III, Robert F; Pierret, Diane
  7. Financial Integration and the Great Leveraging By Daniel Carvalho
  8. Gambling for resurrection in Iceland: the rise and fall of the banks By Baldursson, Fridrik Mar; Portes, Richard
  9. Banking Integration and House Price Comovement By Landier, Augustin; Sraer, David; Thesmar, David
  10. Business Cycles, Monetary Policy, and Bank Lending: Identifying the bank balance sheet channel with firm-bank match-level loan data By HOSONO Kaoru; MIYAKAWA Daisuke
  11. How does corporate governance affect bank capitalization strategies? By Anginer, Deniz; Demirguc-Kunt, Asli; Huizinga, Harry; Ma, Kebin
  12. Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market By Ippolito, Filippo; Ozdagli, Ali; Perez Orive, Ander
  13. Optimal Prudential Regulation of Banks and the Political Economy of Supervision By Tressel, Thierry; Verdier, Thierry
  14. Bank capital regulation (BCR) model By Hyejin Cho
  15. A Century of Firm – Bank Relationships: Did Banking Sector Deregulation Spur Firms to Add Banks and Borrow More? By Braggion, Fabio; Ongena, Steven
  16. Relationship and Transaction Lending in a Crisis By Bolton, Patrick; Freixas, Xavier; Gambacorta, Leonardo; Mistrulli, Paolo Emilio
  17. Bank Capital and Dividend Externalities By Acharya, Viral V; Le, Hanh; Shin, Hyun Song
  18. Macroprudential Regulation and Macroeconomic Activity By Sudipto Karmakar
  19. Diversification of Geographic Risk in Retail Bank Networks: Evidence from Bank Expansion after the Riegle-Neal Act By Aguirregabiria, Victor; Clark, Robert; Wang, Hui
  20. The role of bank lending tightening on corporate bond issuance in the eurozone By Kaya, Orcun; Wang, Lulu
  21. The ECB and the banks: the tale of two crises By Reichlin, Lucrezia
  22. "Shadow Banking: Policy Challenges for Central Banks" By Thorvald Grung-Moe
  23. Assessing Credit Risk in Money Market Fund Portfolios By Collins, Sean; Gallagher, Emily
  24. Does Relationship Lending Require Opaque (and Conservative) Financial Reporting? By Bigus, Jochen; Hakenes, Hendrik
  25. Institutional quality and bank instability: cross-countries evidence in emerging countries By ESSID, ZINA; BOUJELBENE, YOUNES; PLIHON, DOMINIQUE
  26. Fresh Patterns of Liberalization, Bank Return and Return Uncertainty in Africa By Asongu Simplice
  27. Improving Access to Banking: Evidence from Kenya By Allen, Franklin; Carletti, Elena; Cull, Robert; Qian, Jun; Senbet, Lemma W; Valenzuela, Patricio
  28. Banks restructuring sonata: How capital injection triggered labor force rejuvenation in Japanese banks By Kazuki Onji; Takeshi Osada; David Vera
  29. Global financial inclusion challenges for banking system of Uzbekistan By Aliqoriev, Olimkhon
  30. Has Financial Liberalization Improved Economic Efficiency in the Republic of Korea? Evidence from Firm-Level and Industry-Level Data By Park, Jungsoo; Park, Yung Chul
  31. An Empirical Analysis of Excess Interbank Liquidity: A Case Study of Pakistan By Muhammad, Omer; de Haan, Jakob; Scholtens, Bert
  32. Lehman Brothers: What Did Markets Know? By Gehrig, Thomas; Haas, Marlene
  33. SHG-Bank Linkage in India in the third Millennium By Pillai, Rajasekharan

  1. By: Huberman, Gur; Repullo, Rafael
    Abstract: We present a model of the maturity of a bank's uninsured debt. The bank borrows funds and chooses afterwards the riskiness of its assets. This moral hazard problem leads to an excessive level of risk. Short-term debt may have a disciplining effect on the bank's risk-shifting incentives, but it may lead to inefficient liquidation. We characterize the conditions under which short-term and long-term debt are feasible, and show circumstances under which only short-term debt is feasible and under which short-term debt dominates long-term debt when both are feasible. Thus, short-term debt may have the salutary effect of mitigating the moral hazard problem and inducing lower risk-taking. The results are consistent with key features of the common narrative of the period preceding the 2007-2009 financial crisis.
    Keywords: Inefficient liquidation; Long-term debt; Optimal financial contracts; Risk-shifting; Rollover risk; Short-term debt
    JEL: G21 G32
    Date: 2014–04
  2. By: Frank Strobel
    Abstract: We re-examine the probabilistic foundation of the link between Z-score measures and banks' probability of insolvency, offering an improved measure and banks' probability of insolvency, offering an improved measure of that probability without imposing further distributional assumptions. While the traditional measure of the probability of insolvency thus provides a less effective upper bound of the probability of insolvency, it can be meaningfully reinterpreted as a measure capturing the odds of insolvency instead. We similarly obtain refined probabilistic interpretations of the commonly used simple and log-transformed Z-score measures; the log of the Z-score is shown to be negatively proportional to the log odds of insolvency, making it an attractive and unproblematic insolvency risk measure more generally.
    Keywords: Insolvency risk; Z-score; probability; odds
    JEL: G21
    Date: 2014–04
  3. By: Jézabel Couppey-Soubeyran (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, Paris School of Economics - Université Paris I - Panthéon-Sorbonne); Jérôme Héricourt (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille I - Sciences et technologies - Université Lille II - Droit et santé - Université Lille III - Sciences humaines et sociales - PRES Université Lille Nord de France)
    Abstract: Using a database of more than 1,300 firms from six countries in the MENA region, we study the impact of financial development on the relationship between trade credit on the one hand and bank credit access and firm-level characteristics, especially financial health, on the other hand. Trade credit use increases with the difficulty for gaining access to bank credit, and indicators of the quality of the firm's financial structure negatively influence the use of trade credit. Additional investigations tend to suggest that increased financial development significantly reduces the substitution relationship between trade credit and bank credit, and more generally decreases the influence of most firm-level determinants for trade credit usage. These results are plausibly explained by a demand-driven story: when bank credit access gets increasingly difficult, or when financial health deteriorates, the demand for trade credit increases. Similarly, when financial development increases, firms have better access to bank credit, and impact of this variable (or financial health proxies) on the demand for trade credit becomes less or not significant.
    Keywords: trade credit;bank credit; financial constraints; financial development
    Date: 2013
  4. By: Bentolila, Samuel; Jansen, Marcel; Jiménez, Gabriel; Ruano, Sonia
    Abstract: We use a unique dataset to estimate the impact of a large credit supply shock on employment in Spain. We exploit marked differences in banks' health at the onset of the Great Recession. Several weak banks were rescued by the State and they reduced credit more than other banks. We compare employment changes from 2006 to 2010 at firms heavily indebted to weak banks before the crisis and the rest. Our estimates imply that these firms suffered an additional employment drop between 3 and 13.5 percentage points due to weak-bank attachment, representing between 8% and 36% of aggregate job losses.
    Keywords: credit constraints; Great Recession; Job losses
    JEL: D92 G33 J23
    Date: 2013–12
  5. By: Baldursson, Fridrik Mar; Portes, Richard
    Abstract: We examine Iceland’s capital controls, which were imposed in October 2008 in order to prevent massive capital flight and a complete collapse of the exchange rate. The controls have not been lifted yet, primarily because of the risk of outflows of domestic holdings of the failed cross-border Icelandic banks. A substantial restructuring of domestic holdings of foreign creditors of the old banks is required before capital controls can be lifted. We argue that even if the controls are damaging, the gains from lifting them are likely to be much lower than the costs associated with a potential currency crisis following a premature liberalisation of capital outflows. The case of Iceland illustrates the difficulty of resolving large cross-border banks situated in a small currency area.
    Keywords: capital controls; cross-border banking; Icelandic banks; resolution of failed banks
    JEL: E58 F31 G21
    Date: 2013–10
  6. By: Acharya, Viral V; Engle III, Robert F; Pierret, Diane
    Abstract: Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. We provide a test of these stress tests by comparing their risk assessments and outcomes to those from a simple methodology that relies on publicly available market data and forecasts the capital shortfall of financial firms in severe market-wide downturns. We find that: (i) The losses projected on financial firm balance-sheets compare well between actual stress tests and the market-data based assessments, and both relate well to actual realized losses in case of future stress to the economy; (ii) In striking contrast, the required capitalization of financial firms in stress tests is found to be inadequate ex post compared to that implied by market data; (iii) This discrepancy arises due to the reliance on regulatory risk weights in determining required levels of capital once stress-test losses are taken into account. In particular, the continued reliance on regulatory risk weights in stress tests appears to have left financial sectors under-capitalized, especially during the European sovereign debt crisis, and likely also provided perverse incentives to build up exposures to low risk-weight assets.
    Keywords: macroprudential regulation; risk-weighted assets; stress test; systemic risk
    JEL: G01 G11 G21 G28
    Date: 2014–01
  7. By: Daniel Carvalho
    Abstract: This paper studies how international capital flows affect domestic credit and money holdings. While previous studies have focused on credit growth and highlighted the importance of the equity/debt mix of flows, this paper shows that there are also important implications of flows going to different domestic recipient sectors, especially concerning money dynamics. In particular, cross-border banking flows display a strong comovement with credit but none with broad money; in turn, flows of domestic non-banks display comovement with both credit and money. For this reason, banking flows correlate with the decoupling of these two variables – the Great Leveraging –, a stylised fact documented for several economies in the past decades and associated to the rapid expansion of banks non-monetary liabilities. These results thus shed light on the mechanisms through which the international banking activity might have consequences for the composition of the domestic bank balance sheet.
    JEL: E44 F30 G15
    Date: 2014
  8. By: Baldursson, Fridrik Mar; Portes, Richard
    Abstract: We examine the evolution of the Icelandic banking sector in its macroeconomic environment. The story culminates in the crisis of October 2008, when all three major banks in Iceland collapsed in three successive days. The country is still struggling to cope with the consequences. The paper follows on our report of autumn 2007. The macroeconomic boom that peaked in 2007 led to severe imbalances. The banks had expanded at a rapid pace and reported healthy profits, capital ratios and liquidity until their collapse. An official report (SIC, 2010) has, however, exposed severe weaknesses in the banks’ assets and governance. The Icelandic Financial Services Authority (FSA) clearly knew little of the magnitude of large, single exposures and lending to the banks’ owners, although they strongly maintained otherwise in autumn 2007. Neither the FSA nor the Central Bank of Iceland (CBI) saw the systemic risks created by lending to owners and related parties, which increased greatly from September 2007. With the financial turmoil that began in August 2007, the banks’ access to capital markets was curtailed. They then gambled on resurrection, expanding their balance sheets and refinancing the investments of their owners and other big borrowers, while they should have been deleveraging and securing their liquidity positions in foreign currency. The banks also prevented their share prices from collapsing by purchases of their own shares in the stock market, offloading accumulated shares in private deals, usually financed by themselves. All this went on apparently unnoticed by regulators. The Icelandic banks did not buy toxic securities – but together, they administered their own potent mix of systemic poison.Only a month before the collapse of October 2008 the banks all reported strong liquidity positions. These reports were misleading, but we also show how financing unravelled over the course of a few days, and collapse became inevitable. The rapid evaporation of liquidity and market funding is one of the key lessons of the story. Whereas the United States, the United Kingdom and other countries had the resources to bail out their irresponsible and illiquid banks, Iceland did not, and it received little foreign help or even sympathy. Iceland’s response to the crisis, with its heterodox policies and aid from the IMF, has been relatively successful.
    Keywords: banking crisis; carry trade; currency crisis; financial crisis of 2008; Icelandic banks; liquidity
    JEL: E44 E52 E63 F31 F32 G01 G15 G21
    Date: 2013–09
  9. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: The correlation across US states in house price growth increased dramatically between 1976 and 2000. This paper shows that the contemporaneous geographic integration of the US banking market, via the emergence of large banks, was a primary driver of this phenomenon. To this end, we first theoretically derive an appropriate measure of banking integration across state pairs and document that house price growth correlation is strongly related to this measure of financial integration. Our IV estimates suggest that banking integration can explain up to one third of the rise in house price correlation over the period.
    Keywords: comovement; financial integration; house prices
    JEL: F36 G21 R30
    Date: 2013–11
  10. By: HOSONO Kaoru; MIYAKAWA Daisuke
    Abstract: This paper examines the impact of business cycles and monetary policy on bank loan supply. To this end, we use a unique firm-bank match-level dataset covering listed firms in Japan that allows us to control for firms' time-varying unobservable loan demand and endogenous bank-firm matching, so that we can identify the effects of business cycles and monetary policy on loan supply through the bank balance sheet channel. The estimation results indicate that banks with more liquidity or capital tend to lend more to their client firms. The quantitative impact of bank liquidity and capital on loan supply was economically sizable and larger when economic growth was lower. Furthermore, the quantitative impact of bank liquidity on the growth rate of loans more than doubled when quantitative easing was terminated. Overall, these results imply that changes in economic growth and monetary policy significantly affected loan supply through the bank balance sheet channel. We also find evidence that fluctuations in economic growth and monetary policy are transmitted to capital investment through the bank balance sheet channel in the case of firms with high investment opportunities.
    Date: 2014–05
  11. By: Anginer, Deniz; Demirguc-Kunt, Asli; Huizinga, Harry; Ma, Kebin
    Abstract: This paper examines how corporate governance and executive compensation affect bank capitalization strategies for an international sample of banks over the 2003-2011 period. ‘Good’ corporate governance, which favors shareholder interests, is found to give rise to lower bank capitalization. Boards of intermediate size, separation of the CEO and chairman roles, and an absence of anti-takeover provisions, in particular, lead to low bank capitalization. However, executive options and stock wealth invested in the bank is associated with better capitalization except just before the crisis in 2006. In that year stock options wealth was associated with lower capitalization which suggests that potential gains from taking on more bank risk outweighed the prospect of additional loss. Banks’ tendency to continue payouts to shareholders after experiencing negative income shocks are shown to reflect executive risk-taking incentives.
    Keywords: Bank capital; Corporate governance; Dividend payouts; Executive compensation
    JEL: G21 M21
    Date: 2013–10
  12. By: Ippolito, Filippo; Ozdagli, Ali; Perez Orive, Ander
    Abstract: We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt to total assets. We show that a two standard deviation increase in the bank dependence of a firm makes its stock price about 25% more responsive to monetary policy shocks. We explore the channels through which this effect occurs, and find that the stock prices of bank-dependent firms that borrow from financially weaker banks display a stronger sensitivity to monetary policy shocks. This finding is consistent with the bank lending channel, a theory according to which the strength of bank balance sheets matters for monetary policy transmission. We construct a new database of hedging activities and show that the stock prices of bank-dependent firms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. This finding is consistent with an interest rate pass-through channel that operates via the direct transmission of policy rates to lending rates associated with the widespread use of floating-rates in bank loans and credit line agreements.
    Keywords: bank financial health; bank lending channel; firm financial constraints; floating interest rates; monetary policy transmission
    JEL: E52 G21 G32
    Date: 2013–10
  13. By: Tressel, Thierry; Verdier, Thierry
    Abstract: We consider a moral hazard economy with the potential for collusion between bankers and borrowers to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates or a low return on investment may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium is not optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the state of the macro-financial cycle, and that,in presence of production externalities, the capital ratio should be complemented by a constraint on asset allocation. We study the political economy of supervision. We show that the political process tends to exacerbate excessive risk taking and credit cycles by weakening the quality of banking supervision when instead it should be strengthened.
    Keywords: banking regulation; political economy; regulatory forbearance
    JEL: D8 E44 G2
    Date: 2014–03
  14. By: Hyejin Cho (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: The motivation of this article is to induce the bank capital management solution for banks and regulation bodies on commercial bank. The goal of the paper is intended to mitigate the risk of banking area and also provide the right incentive for banks to support the real economy.
    Keywords: Demand Deposit; Risks of on-the-balancesheet and off-the-balancesheet; Portfolio composition; minimum equity capital regulation
    Date: 2014–03–12
  15. By: Braggion, Fabio; Ongena, Steven
    Abstract: We study how firm-bank relationships and corporate financing evolved during the Twentieth century in Britain. We document a remarkable transition from single to multiple relationships. Transparent, larger, and global companies were more likely to add a bank, especially when located in more competitive local banking markets. Deregulation and intensifying competition in the banking sector during the 1970s spurred banks to supply credit through multilateral arrangements. Firms that added a bank following deregulation borrowed more than similar firms that did not add a bank, and their bank debt expanded while their trade credit and share issuance contracted.
    Keywords: banking sector; competition; multiple banking
    JEL: G21 N23 N24
    Date: 2013–10
  16. By: Bolton, Patrick; Freixas, Xavier; Gambacorta, Leonardo; Mistrulli, Paolo Emilio
    Abstract: We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, which allows them to provide loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship-banks are higher than those of transaction-banks. In our model, where relationship-banks compete with transaction-banks, a key result is that relationship-banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction of the model that relationship banks charged a higher spread before the crisis, offered more favorable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.
    Keywords: crisis; relationship banking; transaction banking
    JEL: E44 G21
    Date: 2013–09
  17. By: Acharya, Viral V; Le, Hanh; Shin, Hyun Song
    Abstract: In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.
    Keywords: externalities; financial crises; franchise value; risk-shifting
    JEL: G01 G21 G24 G28 G32 G35 G38
    Date: 2014–03
  18. By: Sudipto Karmakar
    Abstract: This paper develops a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on bank’s financial decisions and the implications for the real sector. I explicitly incorporate costs and benefits of capital requirements. I model an occasionally binding capital constraint and approximate it using an asymmetric non linear penalty function. This friction means that the banks refrain from valuable lending. At the same time, countercyclical buffers provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations. I also show that stronger regulation can induce banks to hold buffers and hence mitigate an economic downturn as well. Increasing the capital requirements do not seem to have an adverse effect on the welfare. Lastly, I also show that switching to a countercyclical capital requirement regime can help reduce fluctuations and raise welfare.
    JEL: G01 G21 G28
    Date: 2013
  19. By: Aguirregabiria, Victor; Clark, Robert; Wang, Hui
    Abstract: The 1994 Riegle Neal (RN) Act removed interstate banking restrictions in the US. The primary motivation was to permit geographic risk diversification (GRD). Using a factor model to measure banks' geographic risk, we show that RN expanded GRD possibilities in small states, but that few banks took advantage. Using our measure of geographic risk and an empirical model of bank choice of branch network, we identify preferences towards GRD separately from the contribution of other factors that may limit the expansion of some banks after RN. Counterfactual experiments based on the estimated structural model show that risk has a significant negative effect on bank value, but this has been counterbalanced by economies of density/scale, reallocation/merging costs, and concerns for local market power.
    Keywords: Branch networks; Commercial banking; Geographic risk diversification; Liquidity risk; Oligopoly competition; Riegle Neal Act
    JEL: G21 L13 L51
    Date: 2014–02
  20. By: Kaya, Orcun; Wang, Lulu
    Abstract: This paper empirically tests the role of bank lending tightening on non-financial corporate (NFC) bond issuance in the eurozone. By utilizing a unique data set provided by the ECB Bank Lending Survey, we capture the pure credit supply effect on corporate external financing. We find that tightened credit standards positively affect the NFC bond issuance: A 1pp increase in banks reporting considerable tightening on loans leads to around a 7% increase in firms' bond issuance in the eurozone. Focusing on a spectrum of aspects contributing to bank credit tightening, we document that banks' balance sheet constraints, as well as the perception of risk lead to significantly higher NFC bond issuance. In addition, we show that stricter lending conditions, such as wider margins, higher collateral requirements and covenants significantly increase NFC bond issuance volumes too. Furthermore, the impact of bank credit tightening on firms' bond issuance is particularly observable in core eurozone countries and not in peripheral countries. This is partially due to the underdeveloped debt capital markets in the peripheral countries. --
    Keywords: Debt Securities,Corporate Financing,Euro Area,Structural Change
    JEL: E44 G23 G32
    Date: 2014
  21. By: Reichlin, Lucrezia
    Abstract: The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to banks, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector. It shows that euro area banks, over the 2008-2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP keeping them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises pointing to a progressive dismantling of financial integration involving the inter-bank market since the first crisis and the market for government bonds since the second.
    Keywords: banks; monetary policy; recession
    JEL: E5
    Date: 2013–09
  22. By: Thorvald Grung-Moe
    Abstract: Central banks responded with exceptional liquidity support during the financial crisis to prevent a systemic meltdown. They broadened their tool kit and extended liquidity support to nonbanks and key financial markets. Many want central banks to embrace this expanded role as "market maker of last resort" going forward. This would provide a liquidity backstop for systemically important markets and the shadow banking system that is deeply integrated with these markets. But how much liquidity support can central banks provide to the shadow banking system without risking their balance sheets? I discuss the expanding role of the shadow banking sector and the key drivers behind its growing importance. There are close parallels between the growth of shadow banking before the recent financial crisis and earlier financial crises, with rapid growth in near monies as a common feature. This ebb and flow of shadow-banking-type liabilities are indeed an ingrained part of our advanced financial system. We need to reflect and consider whether official sector liquidity should be mobilized to stem a future breakdown in private shadow banking markets. Central banks should be especially concerned about providing liquidity support to financial markets without any form of structural reform. It would indeed be ironic if central banks were to declare victory in the fight against too-big-to-fail institutions, just to end up bankrolling too-big-to-fail financial markets.
    Keywords: Financial Regulation; Financial Stability; Monetary Policy; Central Bank Policy
    JEL: E44 E52 E58 G28
    Date: 2014–05
  23. By: Collins, Sean; Gallagher, Emily
    Abstract: This paper measures credit risk in prime money market funds (MMFs), studies how such credit risk evolved in 2011-2012, and tests the efficacy of the Securities and Exchange Commission’s (SEC) January 2010 reforms. To accomplish this, we estimate the credit default swap premium (CDS) needed to insure each fund’s portfolio against credit losses. We also calculate by Monte Carlo the cost of insuring a fund against losses amounting to over 50 basis points. We find that credit risk of prime MMFs rose from June to December 2011 before receding in 2012. Contrary to common perceptions, this did not primarily reflect funds’ credit exposure to eurozone banks. Instead, credit risk in prime MMFs rose because of the deteriorating credit outlook of banks in the Asia-Pacific region. Finally, we find evidence that the SEC’s 2010 liquidity and weighted average life (WAL) requirements reduced the credit risk of prime MMFs.
    Keywords: Money market funds, credit risk, SEC, eurozone, CDS
    JEL: G01 G15 G18 G22 G23 G28
    Date: 2014–05–27
  24. By: Bigus, Jochen; Hakenes, Hendrik
    Abstract: For many private firms, relationship lending is the only viable form of outside financing. Relationship lending typically relies on intertemporal loan pricing: losses from early years are recovered by information rents in later years, which stem from the lender's private information regarding the firm's creditworthiness. Our model shows that overly transparent financial reporting reduces the relationship lender's information rent such that the lender has insufficient incentive to offer early stage financing as a result. During financial distress, private firms find it easier to obtain liquidity support from relationship lenders when financial reporting is sufficiently opaque. Conservative opacity enables relationship lending more effectively than aggressive reporting. This paper seeks to explain why private firm financial reporting is (conservatively) opaque and raises concerns regarding recent regulatory efforts that require private firms to engage in more transparent financial reporting because such efforts may result in undesirable side effects.
    Keywords: Accounting conservatism; Financial reporting opacity; Private firms; Relationship lending; Small and medium enterprises
    JEL: G21 G32 M41
    Date: 2014–04
    Abstract: This paper highlights the relevant role of the quality of institutions in maintaining banking stability. Poor institutions constitute the key determinants in explaining the emergence of banking crises. An empirical study of 52 emerging and / or developing countries from 1996 to 2009 finds that banking instability is widely associated with a variety of macroeconomic, financial and ,particularly, institutional factors. Our main conclusion stipulates that the strengthening of institutional quality is an essential condition to ensure banking stability. Political stability, voice and accountability, and respect for the rule and law are relevant institutional characteristics in particular.
    Keywords: quality of institutions, supervision and prudential regulation schemes, bank instability, Logit technique, emerging and / or developing countries.
    JEL: G0 G01 O1 O5
    Date: 2014–05–27
  26. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: This chapter complements exiting African liberalization literature by providing fresh patterns of two main areas. First, it assesses whether African banking institutions have benefited from liberalization policies in terms of bank returns. Second, it models bank return and return uncertainty in the context of openness policies to examine fresh patterns for the feasibility of common policy initiatives. The empirical evidence is based on 28 African countries for the period 1999-2010. Varying non-overlapping intervals and autoregressive orders are employed for robustness purposes. The findings show that, while trade openness has increased bank returns and return uncertainties, financial openness and institutional liberalization have decreased bank returns and reduced return uncertainty respectively. But for some scanty evidence of convergence in return on equity, there is overwhelming absence of catch-up among sampled countries. Implications for regional integration and portfolio diversification are discussed.
    Keywords: Liberalization policies; Capital return; Africa
    JEL: D6 F30 F41 F50 O55
    Date: 2014–01
  27. By: Allen, Franklin; Carletti, Elena; Cull, Robert; Qian, Jun; Senbet, Lemma W; Valenzuela, Patricio
    Abstract: Using household surveys and bank penetration data at the district-level in 2006 and 2009, this paper examines the impact of Equity Bank—a leading private commercial bank focusing on microfinance—on the access to banking in Kenya. Unlike other commercial banks in Kenya, Equity Bank pursues distinct branching strategies that target underserved areas and less privileged households. Equity Bank presence has a positive and significant impact on households’ use of bank accounts and bank credit, especially for Kenyans with low income, no salaried job and less education, and those that do not own their own home. The findings are robust to using the district-level proportion of people speaking a minority language as an instrument for Equity Bank presence. It appears that Equity Bank’s business model—providing financial services to population segments typically ignored by traditional commercial banks and generating sustainable profits in the process—can be a solution to the financial access problem that has hindered the development of inclusive financial sectors in many African countries.
    Keywords: bank account; bank penetration; Equity Bank; microfinance; minority language
    JEL: G2 O1 R2
    Date: 2014–02
  28. By: Kazuki Onji (Graduate School of Economics, Osaka University); Takeshi Osada (Faculty of Service Management, Bunri University of Hospitality); David Vera (Department of Economics, California State University)
    Abstract: Divergent interests of bank managers and financial regulators potentially compromise the efficacy of bank rescue operations. This paper analyses an agency problem encountered in a capital injection program implemented in Japan. We hypothesize that the operationfs requirement to downsize lead banks to overstate the extent of downsizing by reassigning older workers to bank subsidiaries. We implement a difference-in-difference analysis using a panel of Japanese banks from 1990 through 2010. We also employ propensity score matching to control for the sample selection. The result shows that recipients of public capital exhibited workforce rejuvenation relative to non-recipient banks. Among injected banks, average worker age falls by approximately one year, which is equivalent to about seventy less 65-years-old workers. On stand-alone basis, the number of employees in injected banks decreases as a response to injection, but on consolidated basis, which accounts for subsidiary employment, the number of employees at banking does not fall. Our finding suggests that the Japanese practice of life-time employment survived, albeit in a limited form, among restructuring banks.
    Keywords: Recapitalization program, lifetime employment, Japanese banks
    JEL: C23 G21 G28
    Date: 2014–05
  29. By: Aliqoriev, Olimkhon
    Abstract: This paper examines the current status and trends of the banking system of Uzbekistan, assesses the development potential of commercial banks and provides scientific and practical implications for improving the balance and stability of banking system of Uzbekistan based on the qualitative and quantitative analyses and the identified problems.
    Keywords: banking system; commercial bank; development potential; financial access; economic indicator; financial services; gross domestic product.
    JEL: G0 G00 G01 G2 G20 G21
    Date: 2013–12–05
  30. By: Park, Jungsoo (Asian Development Bank Institute); Park, Yung Chul (Asian Development Bank Institute)
    Abstract: This study analyzes the effects of financial liberalization on the lending behavior of banks and non-bank financial institutions (NBFIs) before and after the 1997 Asian financial crisis, using panel regressions on Republic of Korea firm-level and industry-level data of the period 1991–2007. It also develops a financial liberalization index to incorporate the multifaceted nature of financial reform. Findings show that financial liberalization has led banks and NBFIs to allocate more of their loans to small and medium-sized firms with good performance histories, thereby helping these entities to improve their total factor productivity growth. This paper does not find similar effects of financial liberalization on efficiency at large firms or at the industry level. Heavier reliance on direct financing after the crisis has not improved the productivity of large firms.
    Keywords: financial liberalization; economic efficiency; banking; external finance
    JEL: G20 O40
    Date: 2014–05–19
  31. By: Muhammad, Omer; de Haan, Jakob; Scholtens, Bert
    Abstract: We investigate the drivers of excess interbank liquidity in Pakistan, using the Autoregressive Distributed Lag approach on weekly data for December 2005 to July 2011. We find that the financing of the government budget deficit by the central bank and non-banks leads to persistence in excess liquidity. Moreover, we identify a structural shift in the interbank market in June 2008. Before June 2008, low credit demand was driving the excess liquidity holdings by banks. After June 2008, banks’ precautionary investments in risk-free securities drive excess liquidity holdings. Monetary policy is less effective if banks hold excess liquidity for precautionary reasons.
    Keywords: Excess liquidity, interbank money market, Pakistan, structural breaks, bound test, Autoregressive Distributed Lag approach
    JEL: E44 E61 E63
    Date: 2014–05–22
  32. By: Gehrig, Thomas; Haas, Marlene
    Abstract: On September 15, 2008, Lehman Brothers Inc. announced their filing for bankruptcy. The reaction of Lehman's competitors and market participants to this bankruptcy filing announcement provides a unique field experiment of how the insolvency spills over to other financial institutions and how interconnectedness might trigger a financial crisis. Specifically, we analyze transaction prices of major U.S. investment and commercial banks prior to and after the bankruptcy. By decomposing their equity bid-ask spreads, we find evidence that the bankruptcy contributed to increasing adverse selection risk as well as inventory holding risk. Moreover, we find supporting evidence that the degree of competition among market makers did decline. All three components did contribute to a significant rise in transaction costs. Interestingly, the relative contribution of each channel has remained roughly constant. Finally, there is little evidence about insider information within the banking industry just prior to the bankruptcy. In the case of Lehman's stocks the adverse selection component rises in the last days of trading prior to the bankruptcy filing announcement. Moreover, we find no evidence of an increase in the adverse selection component of potential bidders, from which we interpret that the market did not expect a take-over or merger. We explore the robustness of our decomposition by employing volume-synchronized probability of informed trading-measures and impact regressions on prices, quantities, and their respective innovations. In general, we find that information effects are rather short-lived except for the three days prior to the Lehman insolvency.
    Keywords: adverse selection costs; bid ask spreads; contagion; systemic risk
    JEL: D53 G12 G14
    Date: 2014–03
  33. By: Pillai, Rajasekharan
    Abstract: India embraced financial inclusion as a major macroeconomic reform initiative to amplify the social approach of banking even in the era of privatisation of banking and finance. The SHG-Bank linkage programme is trying to build partnership between an entrepreneurial class and repository of finance. A growing country like India, with perceptible rural-urban divide, has ample potential to develop and nurture entrepreneurial culture. Bank nationalisation gave an impetus to the social approach of banking. The broad based role of financial inclusion is possible only through the focus oriented partnership of government, banking institutions, RBI, NGOs, MFIs and SHGs. The present paper reviews the SHG-Bank linkage programme during 2001 to 2010 in Indian perspective.
    Keywords: financial inclusion, micro-credit, micro finance, NABARD, pro-poor banking, SHG-Bank Linkage
    JEL: G2 G21 G28
    Date: 2014–05

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