New Economics Papers
on Banking
Issue of 2014‒06‒28
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Dividend Persistence and Equity Agency Costs in Banking: Evidence from the Financial Crisis By Benoît D'Udekem
  2. Banks as Secret Keepers By Tri Vi Dang; Gary Gorton; Beng Holmstrom; Guillermo Ordonez
  3. Measuring the Risk-Return Tradeoff with Time-Varying Conditional Covariances By Esben Hedegaard; Robert J. Hodrick
  4. Sovereign and bank CDS spreads: two sides of the same coin for European bank default predictability? By Avino, Davide; Cotter, John
  5. Impact of the World Financial Crisis to SMEs: The determinants of bank loan rejection in Europe and USA By Aurelie SANNAJUST
  6. Filling in the Blanks: Network Structure and Interbank Contagion By Kartik Anand; Ben Craig; Goetz von Peter
  7. Banking and Sovereign Debt Crises in a Monetary Union Without Central Bank Intervention By Jing Cheng; Meixing Dai; Frédéric Dufourt
  8. Retail Payment Innovations and Cash Usage: Accounting for Attrition Using Refreshment Samples By Heng Chen; Marie-Hélène Felt; Kim Huynh
  9. Deposit insurance database By Demirguc-Kunt, Asli; Kane, Edward; Laeven, Luc
  10. Bank Competition and Account Penetration: Evidence from Mexico By Ana Georgina Marín; Rainer  Schwabe   
  11. Access to Credit: Awareness and Use of Formal and Informal Credit Institutions By Alejandra Campero; Karen Kaiser  
  12. Improving Overnight Loan Identification in Payments Systems By Mark Rempel
  13. Paying for risk: Bankers, compensation, and competition By Sepe, Simone M.; Whitehead, Charles K.
  14. Borrowing on the Wrong Credit Card: Evidence from Mexico By Alejandro Ponce; Enrique Seira; Guillermo Zamarripa      
  15. The Revolving Door and Worker Flows in Banking Regulation By David Lucca; Amit Seru; Francesco Trebbi
  16. Credit default swaps and corporate cash holdings By Subrahmanyam, Marti G.; Tang, Dragon Yongjun; Wang, Sarah Qian
  17. Fresh Patterns of Liberalization, Bank Return and Return Uncertainty in Africa By Asongu, Simplice
  18. Regional US house price formation: One model fits all? By André Kallåk Anundsen; Christian Heebøll
  19. Effects of Unconventional Monetary Policy on Financial Institutions By Gabriel Chodorow-Reich

  1. By: Benoît D'Udekem
    Abstract: By persisting in paying dividends during crises, banks not only weaken their liquidity and solvency positions; they also exacerbate systemic risks. However, the drivers of such persistence remain elusive. In this paper, we analyse the propensity of US banks to omit or cut dividends during the 2007-09 financial crisis. We observe that banks pay dividends to mitigate agency costs, maintain their reputation, and preserve market access. We conclude that agency costs, rather than size, induce banks to continue paying dividends during periods of greater cash flow uncertainty. We also conclude that bank managers trade off solvency against favourable funding.
    Keywords: banks; dividends; agency costs; market access
    JEL: G21 G28 G35
    Date: 2014–06–20
  2. By: Tri Vi Dang (Department of Economics, Columbia University); Gary Gorton (Department of Economics, Yale University); Beng Holmstrom (Department of Economics, MIT and NBER); Guillermo Ordonez (Department of Economics, University of Pennsylvania)
    Abstract: Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets – loans – not be revealed, so that bank money does not fluctuate in value, reducing the efficiency of trade. This need for opacity conflicts with the production of information about investment projects, needed for allocative efficiency. Intermediaries exist to hide such information, so banks select portfolios of information-insensitive assets. For the economy as a whole, firms endogenously separate into bank finance and capital market/stock market finance depending on the cost of producing information about their projects.
    Keywords: Banks vs. Capital Markets, Financial Intermediation, Information and Opacity, Optimal Portfolio, Private Money
    JEL: G21 D82 G11 G14 E44
    Date: 2014–06–01
  3. By: Esben Hedegaard; Robert J. Hodrick
    Abstract: We examine the prediction of Merton’s intertemporal CAPM that time varying risk premiums arise from the conditional covariances of returns on assets with the return on the market and other state variables. We find a positive and significant price of risk for the covariance with the market return that is driven by the time series variation in the conditional covariances, and the risk-premium on the market remains positive and significant after controlling for additional state variables. Our method estimates the risk-return tradeoff in the ICAPM using multiple portfolios as test assets.
    JEL: G12
    Date: 2014–06
  4. By: Avino, Davide; Cotter, John
    Abstract: This paper investigates the relationship between sovereign and bank CDS spreads with reference to their ability to convey timely signals on the default risk of European sovereign countries and their banking systems. For a sample including six major European economies, we find that sovereign and bank CDS spreads are cointegrated variables at the country level. We then perform a more in-depth investigation of the underlying price discovery mechanisms, and find that both variables have an important price discovery role in the period preceding the financial crisis of 2007-2009. However, during the global financial crisis and the subsequent European sovereign debt crisis, sovereign CDS spreads dominate the price discovery process. Our findings strongly suggest that, especially during crisis periods, sovereign CDS spreads incorporate more timely information on the default probability of European banks than their corresponding bank CDS spreads. Price discovery measures based on CDS prices could be used as market triggers to increase equity levels at financial institutions and in the various forms of contingent capital
    Keywords: Credit default swap spreads; price discovery; information flow; financial crisis; banks; sovereign risk; bank capital; contingent capital
    JEL: D8 G01 G12 G14 G20
    Date: 2013–06
  5. By: Aurelie SANNAJUST
    Abstract: This paper shows that SMEs with the world financial crisis suffer more and more and they face a
    Keywords: SMEs, rejection of bank loans, Europe, USA, micro and macro economics determinants
    JEL: G01 G20 G21
    Date: 2014–06–16
  6. By: Kartik Anand; Ben Craig; Goetz von Peter
    Abstract: The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding networks with minimum density. When used in a stress-testing context, the minimum density solution overestimates contagion, whereas maximum entropy underestimates it. Using the two benchmarks side by side defines a useful range that bounds the cost of systemic stress present in the true interbank network when counterparty exposures are unknown.
    Keywords: Econometric and statistical methods, Financial Institutions, Financial stability
    JEL: C13 C14 C21
    Date: 2014
  7. By: Jing Cheng (Université de Strasbourg (BETA), CNRS); Meixing Dai (Université de Strasbourg (BETA), CNRS); Frédéric Dufourt (Aix-Marseille UniversitÈ (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS and Institut Universitaire de France)
    Abstract: We analyze the conditions of emergence of a twin banking and sovereign debt crisis within a monetary union in which: (i) the central bank is not allowed to provide direct financial support to stressed member states or to play the role of lender of last resort in sovereign bond markets, and (ii) the responsibility of fighting against large scale bank runs, ascribed to domestic governments, is ensured through the implementation of a financial safety net (banking regulation and government deposit guarantee). We show that this broad institutional architecture, typical of the Eurozone at the onset of the financial crisis, is not always able to prevent the occurrence of a twin banking and sovereign debt crisis triggered by pessimistic investors' expectations. Without significant backstop by the central bank, the financial safety net may actually aggravate, instead of improve, the financial situation of banks and of the government.
    Keywords: banking crisis, sovereign debt crisis, bank runs, financial safety net, liquidity regulation, government deposit guarantee, self-fulfilling propheties
    JEL: E32 E44 F3 F4 G01 G28
    Date: 2014–06
  8. By: Heng Chen; Marie-Hélène Felt; Kim Huynh
    Abstract: We exploit the panel dimension of the Canadian Financial Monitor (CFM) data to estimate the impact of retail payment innovations on cash usage. We estimate a semiparametric panel data modelthat accounts for unobserved heterogeneity and allows for general forms of non-random attrition. We use annual data from the CFM on the methods of payment and cash usage for the period 2010–12. Estimates based on cross-sectional methods find a large impact of retail payment on cash usage (around 10 percent). However, after correcting for attrition, we find that contactless credit cards and multiple stored-value cards (reloadable) have no significant impact on cash usage, while single-purpose stored-value cards reduce the usage of cash by 2 percent in terms of volume. These results point to the uneven pace of the diffusion of payment innovations, especially contactless credit.
    Keywords: Bank notes, E-Money, Econometric and statistical methods, Financial services
    JEL: C35 E41
    Date: 2014
  9. By: Demirguc-Kunt, Asli; Kane, Edward; Laeven, Luc
    Abstract: This paper provides a comprehensive, global database of deposit insurance arrangements as of 2013. The authors extend their earlier dataset by including recent adopters of deposit insurance and information on the use of government guarantees on banks'assets and liabilities, including during the recent global financial crisis. They also create a Safety Net Index capturing the generosity of the deposit insurance scheme and government guarantees on banks'balance sheets. The data show that deposit insurance has become more widespread and more extensive in coverage since the global financial crisis, which also triggered a temporary increase in the government protection of non-deposit liabilities and bank assets. In most cases, these guarantees have since been formally removed but coverage of deposit insurance remains above pre-crisis levels, raising concerns about implicit coverage and moral hazard going forward.
    Keywords: Deposit Insurance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Access to Finance
    Date: 2014–06–01
  10. By: Ana Georgina Marín; Rainer  Schwabe   
    Abstract: This paper documents a positive relation between bank competition and the penetration of bank accounts at the municipal level in Mexico. To account for potential biases in our regressions due to the endogeneity of market structure, we employ a two-stage estimation approach based on an equilibrium structural model. Our preferred estimate implies that moving from a monopoly to a duopoly will lead to an increase of 1,016 accounts per 10,000 adults, a 42% increase over the cross-municipality mean. This is comparable to the effect of large increases in per capita income and years of schooling, or the establishment of an additional branch by a bank who is already present in the local market. Our results suggest that competition policy should be given a prominent role in the financial inclusion agenda.
    Keywords: Financial inclusion, banking, competition
    JEL: O16 G21 L13 D43
    Date: 2013–10
  11. By: Alejandra Campero; Karen Kaiser  
    Abstract: In this paper we study the determinants of use of formal and informal credit sources. Given that awareness is a necessary step towards use of credit, in order to control for the possible selection bias we decompose the decision to use credit as a two stage decision process in which first, households form their choice set by deciding which type of institutions they want to consider as possible lenders (awareness), and then choose among them (use). Additionally, we allow for correlation between being aware of a specific source of credit and using it. We find evidence that supports the hypothesis that the formal and informal credit markets in Mexico attend different segments of the population. However, our results also show that informal lending sources' characteristics are valued per-se by consumers in certain situations, such as emergencies.
    Keywords: Credit demand, consideration set, informal credit, formal credit, Mexico
    JEL: D1 D14 G2
    Date: 2013–06
  12. By: Mark Rempel
    Abstract: Information on the allocation and pricing of over-the-counter (OTC) markets is scarce. Furfine (1999) pioneered an algorithm that provides transaction-level data on the OTC interbank lending market. The veracity of the data identified, however, is not well established. Using permutation methods, I estimate an upper bound on the daily false positive rate of this algorithm to be slightly above 10%. I propose refinements that reduce the bound below 10% with negligible power loss. The results suggest that the inferred prices and quantities of overnight loans do provide viable estimates of interbank lending market activity.
    Keywords: Econometric and statistical methods, Financial markets, Interest rates, Payment clearing and settlement systems
    JEL: E42 E44 C53 C38 G10
    Date: 2014
  13. By: Sepe, Simone M.; Whitehead, Charles K.
    Abstract: Efforts to control bank risk address the wrong problem in the wrong way. They presume that the financial crisis was caused by CEOs who failed to supervise risk-taking employees. The responses focus on executive pay, believing that executives will bring non-executives into line - using incentives to manage risk-taking - once their own pay is regulated. What they overlook is the effect on non-executive pay of the competition for talent. Even if executive pay is regulated, and executives act in the bank's best interests, they will still be trapped into providing incentives that encourage risk-taking by non-executives due to the negative externality that arises from that competition. Greater risk-taking can increase short-term profits and, in turn, the amount a non-executive receives, potentially at the expense of long-term bank value. Non-executives, therefore, have an incentive to incur significant risk upfront so long as they can depart for a new employer before any losses materialize. The result is an upward spiral in compensation - reducing an executive's ability to set non-executive pay and the ability of any one bank to adjust compensation to reflect risk-taking and long-term outcomes. New regulation must address the tension between compensation and competition. Regulators should take account of the effect of competition on market-wide levels of pay, including by non-banks who compete for talent. The ability of non-executives to jump from a bank employer to another financial firm should also be limited. In addition, banks should be required to include a long-term equity component in non-executive pay, with subsequent employers being restricted from compensating a new employee for any losses she incurs related to her prior work. --
    Date: 2014
  14. By: Alejandro Ponce; Enrique Seira; Guillermo Zamarripa      
    Abstract: We study how consumers allocate debt across credit cards they already hold using new data on credit card activity for a representative sample of consumers with two homogeneous cards in Mexico. We find that relative prices are a very weak predictor of the allocation of debt, purchases, and payments. On average, consumers pay 31% above their minimum financing cost. Evidence on cross-card debt elasticities with respect to interest rates and credit limits show no substitution in the price margin. Our findings offer evidence against the cost-minimizing hypothesis and provide support to behavioral explanations.
    Keywords: Credit cards, household finance, consumer behavior, Mexico
    JEL: D12 D14 D40 G02 G20 G28
    Date: 2014–02
  15. By: David Lucca; Amit Seru; Francesco Trebbi
    Abstract: This paper traces career transitions of federal and state U.S. banking regulators from a large sample of publicly available curricula vitae, and provides basic facts on worker flows between the regulatory and private sector resulting from the revolving door. We find strong countercyclical net worker flows into regulatory jobs, driven largely by higher gross outflows into the private sector during booms. These worker flows are also driven by state-specific banking conditions as measured by local banks’ profitability, asset quality and failure rates. The regulatory sector seems to experience a retention challenge over time, with shorter regulatory spells for workers, and especially those with higher education. Evidence from cross-state enforcement actions of regulators shows gross inflows into regulation and gross outflows from regulation are both higher during periods of intense enforcement, though gross outflows are significantly smaller in magnitude. These results appear inconsistent with a "quid-pro-quo" explanation of the revolving door, but consistent with a "regulatory schooling" hypothesis.
    JEL: G21 G28
    Date: 2014–06
  16. By: Subrahmanyam, Marti G.; Tang, Dragon Yongjun; Wang, Sarah Qian
    Abstract: We examine the effects of credit default swaps (CDS), a major type of over-thecounter derivative, on the corporate liquidity management of the reference firms. CDS help firms to access the credit market since the lenders can hedge their credit risk more easily using these contracts. However, CDS-protected creditors can be tougher in debt renegotiations and less willing to support distressed borrowers, causing some firms to become more cautious. Consequently, we find that firms hold significantly more cash after the inception of CDS trading on their debt. The increase in cash holdings by CDS firms is more pronounced for financially constrained firms and firms facing higher refinancing risk. Moreover, bank relationships and outstanding credit facilities intensify the CDS effect on cash holding. Finally, firms with greater financial expertise hold more cash when their debt is referenced by CDS. These findings suggest that CDS, which are primarily a risk management tool for lenders, induce firms to adopt more conservative liquidity policies. --
    Date: 2014
  17. By: Asongu, Simplice
    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: 2014–01–04
  18. By: André Kallåk Anundsen; Christian Heebøll (Norges Bank)
    Abstract: Does a "one model fits all" approach apply to the econometric modeling of regional house price determination? To answer this question, we utilize a panel of 100 US Metropolitan Statistical Areas over the period 1980q1-2010q2. For each area we estimate a separate cointegrated VAR model, focusing on differences in the effect of subprime lending and lagged house price appreciation. Our results demonstrate substantial differences in the importance of subprime lending for house price determination across regional housing markets. Specifically, we find a greater impact of subprime lending in areas with a high degree of physical and regulatory restrictions on land supply. Likewise, lagged house price appreciation - interpreted as capturing an adaptive expectation channel - is found to be more important in areas where the supply of dwellings is more constrained, in areas located in a state with non-recourse lending and in more populous areas. Our results also suggest that disequilibrium constellations are restored more slowly in areas located in a state with non-recourse lending.
    Keywords: Cointegration, Panel heterogeneity, Regional house price dynamics, Subprime lending
    JEL: C32 C51 C52 G01 R21 R31
    Date: 2014–05–27
  19. By: Gabriel Chodorow-Reich
    Abstract: Monetary policy affects the real economy in part through its effects on financial institutions. High frequency event studies show the introduction of unconventional monetary policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies. I interpret the positive effects on life insurers as expansionary policy recapitalizing the sector by raising the value of legacy assets. Expansionary policy had small positive or neutral effects on banks and life insurers through 2013. The interaction of low nominal interest rates and administrative costs forced money market funds to waive fees, producing a possible incentive to reach for yield to reduce waivers. I show money market funds with higher costs reached for higher returns in 2009-11, but not thereafter. Some private defined benefit pension funds increased their risk taking beginning in 2009, but again such behavior largely dissipated by 2012. In sum, unconventional monetary policy helped to stabilize some sectors and provoked modest additional risk taking in others. I do not find evidence that the financial institutions studied formented a tradeoff between expansionary policy and financial stability at the end of 2013.
    JEL: E44 E52 G20
    Date: 2014–06

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