New Economics Papers
on Banking
Issue of 2014‒06‒14
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Cross Sectional Facts on Bank Balance Sheets over the Business Cycle By Osman Furkan Abbasoglu; Serife Genc; Yasin Mimir
  2. Carrying the (paper) burden: A portfolio view of systemic risk and optimal bank size By Bos J.W.B.; Lamers M.A.J.; Purice V.
  3. Banking Fragility in Colombia: An Empirical Analysis Based on Balance Sheets By Ignacio Lozano; Alexander Guarín
  4. Bank lending and capital By Gerbert Hebbink; Mark Kruidhof; Jan Willem Slingenberg
  5. Collateral Composition, Diversification Risk, and Systemically Important Merchant Banks By Alexis Derviz
  6. The impact of sovereign and credit risk on interest rate convergence in the euro area By Ivo Arnold; Saskia van Ewijk
  7. Has Financial Liberalization Improved Economic Efficiency in the Republic of Korea? Evidence from Firm-Level and Industry-Level Data By Jungsoo Park; Yung Chul Park
  8. Monetary policy effects on bank risk taking By Abbate, Angela; Thaler, Dominik
  9. Bail-in Provisions in State Aid and Resolution Procedures: Are they consistent with systemic stability? By Micossi, Stefano; Bruzzone, Ginevra; Cassella, Miriam
  10. Inflation Targeting and Banking System Soundness: A Comprehensive Analysis By Dimas M. Fazio; Benjamin M. Tabak; Daniel O. Cajueiro
  11. Rollover Risk, Liquidity and Macroprudential Regulation By Toni Ahnert
  12. Understanding the Cash Demand Puzzle By Janet Hua Jiang; Enchuan Shao
  13. Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data By John Bagnall; David Bounie; Kim Huynh; Anneke Kosse; Tobias Schmidt; Scott Schuh; Helmut Stix
  14. Macroprudential framework:key questions applied to the French case. By Bennani, T.; Després, M.; Dujardin, M.; Duprey, T.; Kelber, A.
  15. Chinese banks - risks and challenges By Piet Buitelaar
  16. Macroprudential Policy Implementation in a Heterogeneous Monetary Union By Margarita Rubio
  17. Financial (dis-)information : evidence from an audit study in Mexico By Gine, Xavier; Martinez Cuellar, Cristina; Mazer, Rafael Keenan
  18. Complex Financial Networks and Systemic Risk: A Review By Spiros Bougheas; Alan Kirman
  19. Third-country relations in the directive establishing a framework for the recovery and resolution of credit institutions By María J. Nieto
  20. Debt, Managers and Cartels By Salvatore Piccolo; Giancarlo Spagnolo
  21. Collateral and Credit Rationing: The role of collateral in explaining and remediating the limited flow of credit to households and SMEs By Helsen, Frederic; Chmelar, Ales

  1. By: Osman Furkan Abbasoglu; Serife Genc; Yasin Mimir
    Abstract: We investigate the cyclical behavior of banks' balance sheet variables for different size groups using bank-level Turkish data. We first rank banks based on the size of their assets, and then systematically document business cycle facts of various balance sheet items and profitability measures of different bank groups. We find that the cyclical behavior of these variables is quite heterogeneous at the cross-sectional level : (i) Bottom 25 percent banks finance 73 percent of their asset growth with equity while larger banks fund 55 percent of it with deposits, (ii) bank assets and bank credit are highly procyclical and the level of procyclicality is lower for larger banks, (iii) total deposits are procyclical except for top 25 percent and equity issuance is acyclical to countercyclical at best, (iv) loan spread is strongly countercyclical except for small banks while return on assets and equity are acyclical, and (v) switching between debt and equity financing is more pronounced for the top 25 percent and the aggregate banking sector compared to the bottom 25 percent and top 5 percent. The rich set of cross-sectional empirical facts about the cyclicality of bank balance sheets presented in this paper should be helpful for researchers to build and evaluate theoretical heterogeneous models about financing sources of banks.
    Keywords: Debt finance, Equity finance, Banking sector, Business cycle
    JEL: E44 E51 G21 G28
    Date: 2014
  2. By: Bos J.W.B.; Lamers M.A.J.; Purice V. (GSBE)
    Abstract: We examine the relationship between bank size and financial stability by viewing the supervisor of a banking system as an investor holding a portfolio of banks. Based on this view, we investigate the role of large banks in determining the systemic risk in this portfolio. Our results, based on book data of U.S. banks and Bank Holding Companies, indicate that the largest banks are consistently overrepresented in the current portfolio compared with the minimum variance portfolio. Moreover, the risk level of the portfolio can be reduced by limiting concentration without sacrificing returns.
    Keywords: Optimization Techniques; Programming Models; Dynamic Analysis; Financial Markets and the Macroeconomy; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy; Banks; Depository Institutions; Micro Finance Institutions; Mortgages;
    JEL: C61 E44 E63 G21
    Date: 2014
  3. 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. Classification JEL: C11, C23, C52, C53, G01, G20, G21
    Date: 2014–03
  4. By: Gerbert Hebbink; Mark Kruidhof; Jan Willem Slingenberg
    Abstract: The capital rules that banks have to comply with have become much more stringent since the financial crisis. The financial crisis brought home the fact that the capital buffers of banks were too small to absorb shocks. Financial aid from the state was required on a white scale to avoid more serious consequences for the financial system. In reaction to the crisis, the Basel Committee developed a new regulatory framework to make the banking system more resilient (Basel III). In Europa Basel III is being implemented through the CRD-IV/CRR legislative package. At the heart of the reforms, which should prevent new problems arising at banks, are the stricter rules governing bank capital.
    Date: 2014–04
  5. By: Alexis Derviz
    Abstract: We study the impact of collateral diversification by non-financial firms on systemic risk in a general equilibrium model with standard production functions and mixed debt-equity financing. Systemic risk comes about as soon as firms diversify their collateral by holding claims on a big wholesale bank (called merchant bank in the paper) whose asset side includes claims on the same producer set. The merchant bank sector proves to be fragile (has a short distance to default) regardless of competition. In this setting, the policy response, consisting in official guarantees for the merchant bank's liabilities, entails considerable government loss risk. An alternative without the need for public sector involvement is to encourage systemically important merchant banks to introduce a simple bail-in mechanism by restricting their liabilities to contingent convertible bonds. This line of regulatory policy is particularly relevant to the containment of systemic events in globally leveraged economies serviced by big international banks outside host country regulatory control.
    Keywords: CoCos, collateral, merchant bank, systemic risk
    JEL: C68 D21 F36 G24 G38
    Date: 2013–12
  6. By: Ivo Arnold; Saskia van Ewijk
    Abstract: This paper employs a time-varying parameter state space model to explore the impact of the crisis on bank retail rates in the euro area. We show that σ-convergence in interest rates has been adversely affected by the crisis and quantify the role of sovereign and credit risk as two alternative explanations for the increase in financial fragmentation. A key finding is that the heterogeneity in sovereign risk across member states accounts for a sizable part of the increase in the cross-sectional dispersion of various lending and deposit rates. In contrast, the impact of the increased heterogeneity in credit risk on bank retail rates is negligible. Our results suggest that efforts to reduce sovereign tensions - as exemplified by the ECB's OMT program - may help to reduce financial fragmentation.
    Keywords: bank retail rates; σ-convergence; sovereign risk; credit risk; state space model
    JEL: E43 G21 H63
    Date: 2014–06
  7. By: Jungsoo Park (Asian Development Bank Institute (ADBI)); Yung Chul Park
    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, non-bank financial institutions, Lending Behavior, firm-level and industry-level data, Financial Reform, small and medium-sized firm, Total Factor Productivity Growth
    JEL: G20 O40
    Date: 2014–05
  8. By: Abbate, Angela; Thaler, Dominik
    Abstract: The contribution of this paper is twofold. First, we provide empirical evidence on the existence of a risk-taking channel in the US economy. By identifying a Bayesian VAR through sign restrictions, we find that an expansionary monetary policy shock causes a persistent increase in proxies for bank risk-taking behaviour. We then develop a New Keynesian model with a risk-taking channel, where low levels of the risk free rates induce banks to extend credit to riskier borrowers. Conditional on calibration values, the simulated responses of key banking sector variables is compatible with the transmission mechanism observed in the data.
    Keywords: Bank Risk; Monetary policy; DSGE Models; Bayesian Analysis
    JEL: E12 E44 E58 C11
    Date: 2014
  9. By: Micossi, Stefano; Bruzzone, Ginevra; Cassella, Miriam
    Abstract: This CEPS Policy Brief examines the provisions for bail-in in the European Union – that is, the principle whereby any public measure to recapitalise a bank with insufficient prudential capital must be preceded by a write-down or conversion into equity of creditors’ claims – in state aid policies and in the new resolution framework for failing banks, with two aims: i) to assess whether and how they are coordinated and ii) more importantly, whether they address satisfactorily the question of systemic stability that may arise when investors fear that creditors’ claims are likely to be bailed-in in a bank crisis. The issue is especially relevant in the present context, as the comprehensive assessment exercise underway for EU banks falling under the direct supervision of the European Central Bank may lead supervisors to require substantial capital injections simultaneously for many of the banks involved, possibly shaking investors’ confidence across EU banking markets. The authors conclude that the two sets of rules are, broadly speaking, mutually consistent and that they already contain sufficient safeguards to address systemic stability concerns. However, the balance of the elements underpinning the European Commission’s decisions in individual cases may not be clear to bank creditors and potential investors in financial markets. The impression of unneeded rigidity on this very sensitive issue has been heightened by official statements over-emphasising that each case will be assessed individually under competition rules, thus feeding the concern that the systemic dimension of the issue may have been underestimated. Therefore, further clarification by the Commission may be needed on how the various criteria will be applied during the ongoing transition to banking union – perhaps through a new communication completing the state aid framework for banks in view of the adoption of the new resolution rules.
    Date: 2014–05
  10. By: Dimas M. Fazio; Benjamin M. Tabak; Daniel O. Cajueiro
    Abstract: Several specialists and authorities blame inflation targeting (IT) regime for not responding to the increasing systemic risk and the development of asset bubbles. Nevertheless, we employ a database with commercial banks from 71 countries between 1998 and 2012, and we present evidence that: banks from IT countries: (i) are, on average, more stable; (ii) have sounder systemically important banks; and (iii) are less affected in times of global liquidity shortage. These results are in line with the existence of a price stability channel towards financial stability. Our conclusions are robust to whether we compare banks from countries that have the same legal origins, whether we control for the responsibility of bank supervision being delegated to other bodies rather than the Central Bank
    Date: 2014–02
  11. By: Toni Ahnert
    Abstract: I study rollover risk in the wholesale funding market when intermediaries can hold liquidity ex ante and are subject to fire sales ex post. Precautionary liquidity restores multiple equilibria in a global rollover game. An intermediate liquidity level supports both the usual run equilibrium and an efficient equilibrium. I provide a uniqueness refinement to characterize the privately optimal liquidity choice. Because of fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the liquidity of other intermediaries, causing excessive liquidation. A macroprudential authority internalizes the systemic nature of liquidity and restores constrained efficiency by imposing a macroprudential liquidity buffer.
    Keywords: Financial Institutions, Financial system regulation and policies
    JEL: G01 G11 G28
    Date: 2014
  12. By: Janet Hua Jiang; Enchuan Shao
    Abstract: We develop a model to explain a puzzling trend in cash demand in recent years: the value of bank notes in circulation as a percentage of GDP has remained stable despite decreasing cash usage at points of sale owing to competition from alternative means of payment such as credit cards. The main feature of the model is that cash circulates between economic activities where the substitutability between cash and other means of payment is uneven. Our model predicts that, once credit expands beyond a certain level, agents adjust their cash management practices in response to further credit expansions, causing the velocity of cash to slow down, so that the demand for cash can remain flat despite diminishing cash transactions.
    Keywords: Bank notes, Credit and credit aggregates, E-Money
    JEL: E41 E51
    Date: 2014
  13. By: John Bagnall; David Bounie; Kim Huynh; Anneke Kosse; Tobias Schmidt; Scott Schuh; Helmut Stix
    Abstract: We measure consumers’ use of cash by harmonizing payment diary surveys from seven countries. The seven diary surveys were conducted in 2009 (Canada), 2010 (Australia), 2011 (Austria, France, Germany and the Netherlands), and 2012 (the United States). Our paper finds cross-country differences - for example, the level of cash usage differs across countries. Cash has not disappeared as a payment instrument, especially for low-value transactions. We also find that the use of cash is strongly correlated with transaction size, demographics, and point-of-sale characteristics such as merchant card acceptance and venue.
    Keywords: Bank notes, E-Money, Econometric and statistical methods, Financial services
    JEL: E41 D12 E58
    Date: 2014
  14. By: Bennani, T.; Després, M.; Dujardin, M.; Duprey, T.; Kelber, A.
    Abstract: This paper presents the main features of macroprudential policy with a focus on the French case. We first recall the ultimate objective of this policy, which is to prevent and to mitigate systemic risk, i.e. the risk of “widespread disruptions to the provision of financial services that have serious consequences for the real economy” (CGFS, 2012). We put forward two goals to achieve this ultimate objective, namely (i) increasing the resilience of the financial sector and (ii) leaning against the financial cycle. Then, in the context of the ongoing reflections on the organisation of macroprudential policy at the national and European level, we analyse the macroprudential institutional framework recently adopted in France. We discuss the instruments available to macroprudential authorities in light of the two main goals of macroprudential policy. Drawing on theoretical considerations and past experience, we favour a macroprudential toolkit broadly consistent with the European CRD IV/CRR package. Finally, we emphasise the need for macroprudential authorities to be able to monitor and detect systemic risk. To this end, several indicators and their reliability are analysed.
    Keywords: macroprudential policy, central bank, systemic risk, financial crisis
    JEL: E58 G28 G18 G01 C50
    Date: 2014
  15. By: Piet Buitelaar
    Abstract: The Chinese banking sector has been in a state of flux in recent years. This stems from China's economic reform process and the continued strong economic growth the country has witnessed over the past few decades. At the turn of the country, the Chinese banking sector was technically bankrupt. Vast capital transfers from the government to the banks were necessary to carry out extensive recapitalisation and restructuring. According to official figures, this exercise restored the banks, the majority of which are state-owned, to a strong capital position.
    Date: 2014–05
  16. By: Margarita Rubio
    Abstract: I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore how macroprudential policies should be conducted in a heterogeneous monetary union. I consider four types of cross-country heterogeneity: asymmetric shocks, di¤erent loan-to-value ratios (LTV), different proportion of borrowers, and mortgage contract heterogeneity (…xed and variable rates). As a macroprudential tool, I propose a Taylor-type rule for the LTV which responds to deviations in output and house prices. This policy can be applied at a national or union level. Results show that asymmetries matter for the implementation of macroprudential policies, especially when the heterogeneity delivers di¤erences in economic and …nancial volatilities. A centralized macroprudential policy is preferred if there is an asymmetric shock, to balance out the cross-country di¤erent …nancial volatilities. For the mortgage contract heterogeneity, the economy is better o¤ with a decentralized policy that compensates the lack of effectiveness of monetary policy in the …xed-rate country. For the LTV asymmetry and the di¤erent proportion of borrowers, conducting the macroprudential policy at a national or union level produces similar welfare gains.
    Keywords: Macroprudential, Housing market, LTV, monetary union, Â…nancial stability
    Date: 2014
  17. By: Gine, Xavier; Martinez Cuellar, Cristina; Mazer, Rafael Keenan
    Abstract: An audit study was conducted in peri-urban Mexico to understand the quality of information and products offered to low-income potential customers. Trained auditors visited multiple financial institutions seeking credit and savings products. Consistent with Gabaix and Laibson (2006), staff voluntarily provides little information about avoidable fees, especially to auditors trained to reveal little knowledge about the market. In addition, clients are almost never offered the cheapest product, most likely because staff is incentivized to offer more expensive products that are thus more profitable to the institution. This suggests that disclosure and transparency policies may be ineffective if they undermine the commercial interest of financial institutions.
    Keywords: Financial Literacy,Access to Finance,Banks&Banking Reform,Insurance&Risk Mitigation,Emerging Markets
    Date: 2014–06–01
  18. By: Spiros Bougheas; Alan Kirman
    Abstract: In this paper we review recent advances in financial economics in relation to the measurement of systemic risk. We start by reviewing studies that apply traditional measures of risk to financial institutions. However, the main focus of the review is on studies that use network analysis paying special attention to those that apply complex analysis techniques. Applications of these techniques for the analysis and pricing of systemic risk has already provided significant benefits at least at the conceptual level but it also looks very promising from a practical point of view.
    Keywords: Comlex Financial Systems, Networks, Systemic Risk
    Date: 2014
  19. By: María J. Nieto (Banco de España)
    Abstract: This article presents a critical analysis of the principles behind the scope and forms of cooperation between EU Member States and third-country resolution authorities in the context of the 2014 Bank Recovery and Resolution Directive. The article also explores the future responsibilities of the prospective Single Resolution Authority regarding relations between the euro area and third-country resolution authorities.
    Keywords: European Union, banks, international economics, bankruptcy
    JEL: F39 G18 G33 G38 K33 L51
    Date: 2014–05
  20. By: Salvatore Piccolo (Università Cattolica del Sacro Cuore di Milano and CSEF); Giancarlo Spagnolo (SITE Stockholm School of Economics, DEF Tor Vergata, and CEPR)
    Abstract: We propose a theory of anticompetitive effects of debt finance based on the interaction between capital structure, managerial incentives, and firms ability to sustain collusive agreements. Shareholders' commitments not to expropriate debtholders through managers with valuable reputations or common incentive schemes greatly facilitate collusive behavior in product markets. Disclosure rules aimed at improving transparency in corporate governance or network-based credit markets can confer credibility to such arrangements even in environments where firms lack commitment power, thereby inducing collusion through leverage in otherwise competitive downstream industries. Managers are happy with the arrangement since they share in the collusive rent.
    Keywords: Bankruptcy, capital structure, collusion, corporate governance, credit markets, disclosure rules, financial regulation, managerial incentives, product market competition.
    JEL: D21 G32 L13 L41
    Date: 2014–06–06
  21. By: Helsen, Frederic; Chmelar, Ales
    Abstract: European-wide data concerning both companies and households indicate that the credit rationing phenomenon, which has been predicted by theory, does in fact occur to a significant degree in the European credit market. Among SMEs, micro companies are most vulnerable and the current economic crisis has only made these concerns more pressing. Top-down use of the monetary transmission mechanism alone is insufficient to counter the problem. The other solution consists of a bottom-up, microeconomic stimulation of lending transactions, by focusing on collateral and guarantees. The data confirm the high importance that lenders – especially individual households and micro companies – attach to collateral and guarantees when making their lending decisions. As a consequence, we would argue that those parts of the law governing security interests and guarantees should be one of the primary targets for government policy aimed at improving credit flows, especially in avoiding a conflict between consumer protection measures and laws on surety and guarantees. This policy brief firstly aims to give an overview of the problem of credit rationing and to show that low-income households and SMEs are most concerned by the phenomenon. Focusing solely on loans as a way of financing and on the issues related to access to finance by micro and small companies as well households, it then sketches possible solutions focused on guarantees. This paper brings together data from the Eurosystem Household Finance and Consumption survey (HFCS), Eurostat, and both the latest wave of the extended biennial EC/ECB Survey on the access to finance of SMEs (EC/ECB SAFE 2013) and the latest wave of the smaller semi-annual ECB SAFE Survey, covering the period between October 2012 and March 2013.
    Date: 2014–02

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