New Economics Papers
on Banking
Issue of 2014‒06‒07
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How does macroprudential regulation change bank credit supply? By Anil K Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis
  2. Does Innovation Affect Credit Access? New Empirical Evidence from Italian Small Business Lending By Andrea Bellucci; Ilario Favaretto; Germana Giombini
  3. Everybody Hurts: Banking Crises and Individual Wellbeing By Alberto Montagnoli; Mirko Moro
  4. Mortgage Default during the U.S. Mortgage Crisis By Thomas Schelkle
  5. Japanese SMEs and the Credit Guarantee System after the Global Financial Crisis By Nobuyoshi Yamori
  6. How Do Fair Value Measurements of Financial Instruments Affect Investments in Banks? By Ralf Bergheim; Jürgen Ernstberger; Michael W.M. Roos
  7. Estimating Operational Risk Capital with Greater Accuracy, Precision, and Robustness By J. D. Opdyke
  8. Having it Both Ways: A Theory of the Banking Firm with Time-Consistent and Time-Inconsistent Depositors By Carolina Laureti; Ariane Szafarz
  9. Non-Performing Loans and Credit Managers' Role: A Comparative Approach from Pakistan and Turkey By Omar Masood; Mondher Bellalah; Walid Mansour; Frederic Teulon
  10. How do exogenous shocks cause bankruptcy? Balance sheet and income statement channels By Mikhed, Vyacheslav; Scholnick, Barry
  11. How Strong are the Linkages between Real Estate and Other Sectors in China? By Wenlang Zhang; Gaofeng Han; Steven Chan
  12. Quantitative Easing and the Loan to Collateral Value Ratio By Tatiana Damjanovic; Šar?nas Gird?nas
  13. The Changing Way We Pay: Trends in Consumer Payments By Crystal Ossolinski; Tai Lam; David Emery
  14. The Separation of Information and Lending and the Rise of Rating Agencies in the United States By Marc Flandreau; Gabriel Geisler Mesevage

  1. By: Anil K Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis
    Abstract: We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank’s leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation.
    JEL: E44 G01 G21 G28
    Date: 2014–05
  2. By: Andrea Bellucci; Ilario Favaretto; Germana Giombini
    Abstract: In this paper we analyze the access to credit of innovative firms on the price and non-price dimensions of bank lending. Using information from two datasets, we use a propensity score matching procedure to estimate the impact of the innovative nature of firms on: (a) loan interest rates; (b) the probability of having to post collateral; and (c) the probability of overdrawing. Our analysis reveals that banks trade off higher interest rates and lower collateral requirements for firms involved in innovative processes. Further, innovative firms have a lower probability of being credit rationed than their non-innovative peers.
    Keywords: innovative firms, interest rate, firm’s financing, relationship lending
    JEL: D82 E43 D40 G21
    Date: 2014–05
  3. By: Alberto Montagnoli (Department of Economics, University of Sheffield, UK); Mirko Moro (Division of Economics, Stirling Management School, University of Stirling, UK)
    Abstract: We investigate whether banking crises affect individuals' subjective wellbeing (SWB) in eighteen European countries between 1980-2011. We address the potential endogeneity between banking crises and SWB by exploiting spatial and temporal differences in banking crises episodes. We find negative, robust, pronounced and highly persistent effects for events prior to 2007. The 2007-2008 crash lowered SWB in countries that had previously experienced a credit boom. Individuals living in regions hosting financial centres suffer bigger losses. Yet, the impact is similar across socio-demographic groups. These effects extend beyond changes in macroeconomic factors, wealth and fiscal policies: they are hidden psychological costs.
    Keywords: well-being; happiness; financial crises; banking crises; difference-in-differences; uncertainty
    JEL: D1 E44 G21 H0
    Date: 2014–05
  4. By: Thomas Schelkle
    Abstract: Which of the main competing theories of mortgage default can quantitatively explain the rise in default rates during the U.S. mortgage crisis? This paper finds that the double-trigger hypothesis attributing mortgage default to the joint occurrence of negative equity and a life event like unemployment is consistent with the evidence. In contrast a traditional frictionless default model predicts a too strong increase in default rates. The paper also provides micro-foundations for double-trigger behavior in a model where unemployment may cause liquidity problems for the borrower. Using this framework for policy analysis reveals that a mortgage crisis may be mitigated at a lower cost by relieving the liquidity problems of borrowers instead of bailing out lenders.
    Keywords: Mortgage default, mortgage crisis, house prices, negative equity
    JEL: E21 G21 D11
    Date: 2014–05–16
  5. By: Nobuyoshi Yamori (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper provides a brief explanation of the Japanese public credit guarantee system and analyzes what role it played during the global financial crisis. The author conducted a questionnaire survey of small and medium-sized enterprises (SMEs) in Aichi Prefecture, the prefecture most seriously hit by the crisis, in collaboration with the Aichi-ken Credit Guarantee Corporation. Using the survey, which provides valuable information about the usage of the credit guarantee program, this paper finds that the credit guarantee system was effective in protecting the economy from collapsing. The system was so generous that now all SMEs want it to remain unchanged. However, as the generous system brings heavy financial burdens on the government and, more seriously, discourages firms and banks from improving their efficiencies, the author insists that reforms, such as limiting the target and the guarantee coverage, are inevitable.
    Keywords: Credit Guarantee System, Japan; Financial Crisis, Questionnaire, Small and Medium-sized Enterprises
    JEL: G01 G21 G28
    Date: 2014–05
  6. By: Ralf Bergheim; Jürgen Ernstberger; Michael W.M. Roos
    Abstract: This paper experimentally investigates how fair value measurements of financial instruments affect the decision of nonprofessional investors to invest in a bank’s shares. Specifically, we assess how investors respond to variations in net income resulting from fair value adjustments in trading assets and how the reliability of the fair value estimates affects their decision.
    Keywords: Banks; fair value accounting; nonprofessional investors; investment decision; experiment
    JEL: C91 G11 M41
    Date: 2014–05
  7. By: J. D. Opdyke
    Abstract: The largest US banks are required by regulatory mandate to estimate the operational risk capital they must hold using an Advanced Measurement Approach (AMA) as defined by the Basel II/III Accords. Most use the Loss Distribution Approach (LDA) which defines the aggregate loss distribution as the convolution of a frequency and a severity distribution representing the number and magnitude of losses, respectively. Estimated capital is a Value-at-Risk (99.9th percentile) estimate of this annual loss distribution. In practice, the severity distribution drives the capital estimate, which is essentially a very high quantile of the estimated severity distribution. Unfortunately, because the relevant severities are heavy-tailed AND the quantiles being estimated are so high, VaR is a convex function of the severity parameters, so all widely-used estimators will generate biased capital estimates due to Jensen's Inequality. This capital inflation is sometimes enormous, even hundreds of millions of dollars at the unit-of-measure (UoM) level. Herein I present an estimator of capital that essentially eliminates this upward bias. The Reduced-bias Capital Estimator (RCE) is more consistent with the regulatory intent of the LDA framework than implementations that fail to mitigate, if not eliminate this bias. RCE also notably increases the precision of the capital estimate and consistently increases its robustness to violations of the i.i.d. data presumption (which are endemic to operational risk loss event data). So with greater capital accuracy, precision, and robustness, RCE lowers capital requirements at both the UoM and enterprise levels, increases capital stability from quarter to quarter, ceteris paribus, and does both while more accurately and precisely reflecting regulatory intent. RCE is straightforward to explain, understand, and implement using any major statistical software package.
    Date: 2014–06
  8. By: Carolina Laureti; Ariane Szafarz
    Abstract: Our equilibrium model determines the liquidity premium offered by a monopolistic bank to a pool of depositors made up of time-consistent and time-inconsistent agents. Time-consistent depositors demand compensation for illiquidity, whereas time-inconsistent ones are willing to forgo interest on illiquid savings accounts to discipline their future selves. We show that formal financial markets can reward time-inconsistent clients for illiquidity, even though these agents would agree to pay for it. The explanation combines two factors: the existence of reserve requirements making the bank keen to reward illiquid accounts more than liquid ones, and the presence of time-consistent agents who view illiquidity as a burden and therefore demand compensation for holding illiquid accounts.
    Keywords: Deposit; commitment; flexibility; liquidity premium; hyperbolic discounting; Bangladesh
    JEL: G21 D53 D82 D91 O12 O16
    Date: 2014–05–26
  9. By: Omar Masood; Mondher Bellalah; Walid Mansour; Frederic Teulon
    Date: 2014–06–02
  10. By: Mikhed, Vyacheslav (Federal Reserve Bank of Philadelphia); Scholnick, Barry (University of Alberta)
    Abstract: We are the first to examine whether exogenous shocks cause personal bankruptcy through the balance sheet channel and/or the income statement channel. For identification, we examine the effect of exogenous, politically motivated government payments on 200,000 Canadian bankruptcy filings. We find support for the balance sheet channel, in that receipt of the exogenous cash increases the net balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone) required by filers. We also find limited support for the income statement channel, in that exogenous payments reduce bankruptcy filings from individuals whose current expenses exceed their current income.
    Keywords: Exogenous shocks; Bankruptcy;
    JEL: D41 H31
    Date: 2014–05–01
  11. By: Wenlang Zhang (Hong Kong Monetary Authority); Gaofeng Han (Hong Kong Monetary Authority); Steven Chan (Hong Kong Monetary Authority)
    Abstract: International experience points to the critical role of stable property markets in maintaining financial stability. In China, the real estate sector has become increasingly important for the economy, but existing evidence has likely understated its importance as its linkages with other sectors have not been taken into account. This paper attempts to shed some light on these linkages which occur through both real and financial channels. Our analysis based on input-output tables shows that the linkages between the real estate and other sectors have strengthened through real channels, and that the real estate sector has been much more important to the economy's output than suggested by the share of its value added in total value added. The real estate industry is also closely linked to other sectors through various financial channels, including serving as collateral in credit expansion. We quantify these financial linkages by studying the spill-overs of credit risk across sectors using data of listed firms. In general, we find that corporate credit risk has risen in recent years, and that credit risk in the real estate sector can potentially have large-scale spill-over effects onto other sectors. Consequently, shocks to the property market could have much larger impact on the Chinese economy than suggested by headline figures.
    Date: 2014–05
  12. By: Tatiana Damjanovic (Exeter); Šar?nas Gird?nas (Exeter)
    Abstract: We study monetary optimal policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.
    Keywords: optimal monetary policy, zero lower bound, quantitative easing, money multiplier, loan to value ratio, collateral constraint, house prices
    JEL: E44 E51 E52 E58
    Date: 2014–05–17
  13. By: Crystal Ossolinski (Reserve Bank of Australia); Tai Lam (Reserve Bank of Australia); David Emery (Reserve Bank of Australia)
    Abstract: The Reserve Bank of Australia's third Survey of Consumers' Use of Payment Methods was conducted in November 2013. The survey used a diary and end-of-survey questionnaire to collect data on the use of cash, cards and a range of other payment methods, both at the point of sale and via remote channels (online, mail and telephone). The 2013 data show that cash and cheque use has continued to fall. The use of cards has risen significantly, and there has also been an increase in the use of PayPal. The growth in the use of cards and the reduction in cash use are evident across households in all age and household income groups. The strong growth in remote payments is one contributor to the observed change in the use of cash and cards. However, the main contribution is from the increased use of cards at the point of sale, which is likely to reflect both growth in the availability of card terminals at merchants and changing consumer preferences as authentication methods have evolved. In particular, we find some indication that the adoption of contactless technology, which lowers the tender time of card payments at the point of sale, may have increased card use. The paper presents detailed information about the use of contactless card and smartphone payments by demographic group and payment type. It also provides an update on the payment of surcharges on card payments, including information about the value of card surcharges that were paid by consumers, and the payment of ATM fees.
    Keywords: method of payment; consumer payment choice; consumer survey; retail payment systems
    JEL: D12 D14 E42
    Date: 2014–06
  14. By: Marc Flandreau; Gabriel Geisler Mesevage (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper provides a new interpretation of the early rise of rating agencies in the United States (initially known as ‘Mercantile Agencies’). We explain this American exceptionality through an inductive approach that revisits the conventional parallel with the UK. In contrast with earlier narratives that have emphasized the role of Common Law and the greater understanding of American judges that would have supported the rise of an ethos of ‘transparency’, we argue that Mercantile Agencies prospered as a remedy to deficient bankruptcy law and weak protection of creditor rights in the US. The result was to raise the value of the nation-wide registry of defaulters which the Mercantile Agencies managed. This ensured the Agencies’ profitability and endowed them with resources to buy their survival in a legal environment that remained stubbornly hostile.
    Keywords: Rating, Mercantile Agencies, Information, Credit Insurance, Comparative Economic History, Libel, Business Law
    JEL: P5 G2 N2 K2
    Date: 2014–05–27

This issue is ©2014 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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