New Economics Papers
on Banking
Issue of 2014‒07‒05
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. What drives heterogeneity of loan loss provisions’ procyclicality in the EU? By Olszak, Małgorzata; Pipień, Mateusz; Kowalska, Iwona; Roszkowska, Sylwia
  2. Banks as Secret Keepers By Tri Vi Dang; Gary Gorton; Bengt Holmström; Guillermo Ordonez
  3. Current Problems in the Development of the Banking System of the Russian Federation By Alexey Vedev; Sergey Drobyshevsky; Mikhail Khromov; Sergey Sinelnikov-Murylev
  4. Bank Competition, Borrower Competition and Interest Rates By Carlos Bellón
  5. Measuring competition in banking: A critical review of methods By Florian LEON
  6. Quantifying and Explaining Implicit Public Guarantees for European Banks By Oana Toader
  7. Bank-lending Constraints, Trade Credit and Alternative External Finance since the Financial Crisis: Evidence from European SMEs By O'Toole, Conor; Casey, Eddie
  8. Bank Competition and Credit Constraints in Developing Countries: New Evidence By Florian LEON
  9. Leverage Restrictions in a Business Cycle Model By Lawrence Christiano; Daisuke Ikeda
  10. The Liquidity Premium of Near-Money Assets By Stefan Nagel
  11. Excess reserves, interbank markets and domestic money market intervention By Willmott, Bryony
  12. Inflation Targeters Do Not Care (Enough) about Financial Stability: A Myth? By Armand Fouejieu Azangue
  13. Improving experience in the prepaid card industry: a customer service workshop By Herbst-Murphy, Susan
  14. Does Bank Market Power Affect SME Financing Constraints? By O'Toole, Conor; Ryan, Robert; McCann, Fergal
  15. Prepayment option of a perpetual corporate loan: the impact of the funding costs By Timothée Papin; Gabriel Turinici
  16. Contagion Effects of US Subprime Crisis on ASEAN-5 Stock Markets: Evidence from MGARCH-DCC Application By Chunxiu, Ma; Masih, Mansur
  17. Advances in Financial Risk Management and Economic Policy Uncertainty: An Overview By Shawkat Hammoudeh; Michael McAleer

  1. By: Olszak, Małgorzata; Pipień, Mateusz; Kowalska, Iwona; Roszkowska, Sylwia
    Abstract: This paper documents a large cross-bank and cross-country variation in the relationship between loan loss provisions and the business cycle and explores bank management specific, bank-activity specific and country specific (institutional and regulatory) features that explain this diversity in the European Union. Our results indicate that LLP in large, publicly traded and commercial banks, as well as in banks reporting in consolidated statements’ format, are more procyclical. Better investor protection and more restrictive bank regulations reduce the procyclicality of LLP. Additional evidence shows that moral hazard resulting from deposit insurance renders LLP more procyclical. We do not find support for the view that better quality of market monitoring mitigates the risk-taking behavior of banks. Our findings clearly indicate the empirical importance of earnings management for LLP procyclicality. Sensitivity of LLP to the business cycle seems to be limited in the case of banks which engage in more income smoothing and which apply prudent credit risk management.
    Keywords: loan loss provisions, procyclicality, earnings management, investor protection, bank regulation, bank supervision
    JEL: E32 E44 G21
    Date: 2014–06–20
  2. By: Tri Vi Dang; Gary Gorton; Bengt Holmström; Guillermo Ordonez
    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.
    JEL: D82 E44 G11 G14 G21
    Date: 2014–06
  3. By: Alexey Vedev (Gaidar Institute for Economic Policy); Sergey Drobyshevsky (Gaidar Institute for Economic Policy); Mikhail Khromov (Gaidar Institute for Economic Policy); Sergey Sinelnikov-Murylev (Russian Foreign Trade Academy)
    Abstract: In 2013 the situation in the banking sector of the RF underwent major changes. On the one hand, the volume indicators of the banking sector continued to grow, although more slowly than before. However, this growth was mainly due to aggressive behaviour of the banks in the consumer lending market, despite actions by the Bank of Russia aimed at reducing the attractiveness to the banks of such loans. On the other hand, there was an increased imbalance in the banking sector related to the non-uniform distribution of liquid funds, the outflow of customers from small and medium-sized banks to larger ones (principally to banks with government participation in their capital). This last factor was strengthened by the Bank of Russia’s efforts to rehabilitate the banking sector by withdrawing the licences of a significant number of banks, including those working in the market of private deposits. Within the framework of this policy of the Bank of Russia, aimed at reducing the number of banks and terminating the activities of any banks violating prudential standards, one should note the necessity for a more integrated approach to the reform of the sector, including measures aimed at increasing capitalisation, and the formation of an institute of systemically important banks with a reduction in the proportion of banks with government participation.
    Keywords: Russian Economy, banking sector, central bank.
    JEL: E58 G21 G28
    Date: 2014
  4. By: Carlos Bellón
    Abstract: The effect bank competition has on interest rates should depend on the fact that borrowers compete against each other. The borrowing rate of a firm affects its ability to compete in the industrial marketplace, and ultimately, its ability to repay its loans. Thus, competition amongst borrowers acts as a limit to the amount of rents financial oligopolists can extract. I find evidence that firms that operate within areas of limited bank competition face higher rates than their peers. I also identify an innovative control group that can be used in tests of bank market structure.
    Keywords: Bank competition, Small business lending
    JEL: D43 E43 G21
    Date: 2014–06
  5. By: Florian LEON (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: Many studies have attempted to investigate the determinants and implications of competition in the banking industry. The literature on the measurement of competition can be divided between the structural and non-structural approaches. The structural approach infers the degree of competition from the structure of the market. The non-structural approach, based on the New Empirical Industrial Organization, assesses the degree of competition directly by observing behavior of firms in the market. This paper reviews the most frequently-used structural and non structural measures of competition in banking. It highlights their strengths and weaknesses, especially for studies based on a limited number of observations.
    Keywords: Boone indicator;Panzar-Rosse model;Conjectural variation model;Lerner index;HHI;Bank;competition
    Date: 2014–06–27
  6. By: Oana Toader (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: This study provides estimations of public implicit guarantees over the period 1997 to 2012 using a rating-based model. The investigation focuses on a sample of 45 large, listed European banks. It appears that the main element for determining the value of the public subsidy is the intrinsic strength of the bank. In addition, we provide evidence on the importance of guarantor strength on the value of the implicit guarantee: a higher sovereign rating of a bank‟s home country leads to larger implicit subsidies for bank' debt. Our findings also suggest that the recently observed decrease in the value of implicit subsidies goes beyond the decline in European sovereigns' strength. Rather, it is consistent with the implementation of resolution regimes and practices moving from a "bail-out" resolution policy to "bail-in" recapitalizations. Bank insolvencies would be handled in a more explicit context. Therefore, expectations on implicit public support are reduced.
    Keywords: banks ; implicit subsidy ; ratings ; resolution
    Date: 2014–06–26
  7. By: O'Toole, Conor; Casey, Eddie
    Keywords: crisis/Trade
    Date: 2014–05
  8. By: Florian LEON (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: Whether competition helps or hinders small firms' access to finance is in itself a much debated question in the economic literature and in policy circles, especially in the developing world. Economic theory offers conflicting predictions and empirical contributions provide mixed results. This paper considers the consequences of interbank competition on credit constraints using firm level data covering 70 developing and emerging countries. In addition to the classical concentration measures, competition is assessed by computing three non-structural measures (Lerner index, Boone indicator, and H-statistics). The results show that bank competition alleviates credit constraints, while bank concentration measures are not robust predictors of a firm's access to finance. Findings highlight that bank competition not only leads to less severe loan approval decisions but also reduces borrowers' discouragement. In addition, a secondary result of this paper documents that banking competition enhances credit availability more by reducing prices than by increasing relationship lending.
    Keywords: discouraged borrower;developing countries;access to credit;Bank competition
    Date: 2014–06–27
  9. By: Lawrence Christiano; Daisuke Ikeda
    Abstract: We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic effects of placing leverage restrictions on financial intermediaries. The financial intermediaries (`bankers') in the model must exert effort in order to earn high returns for their creditors. An agency problem arises because banker effort is not observable to creditors. The consequence of this agency problem is that leverage restrictions on banks generate a very substantial welfare gain in steady state. We discuss the economics of this gain. As a way of testing the model, we explore its implications for the dynamic effects of shocks.
    Date: 2014–03
  10. By: Stefan Nagel
    Abstract: Treasury bills and other near-money assets provide owners with liquidity service benefits that are reflected in prices in the form of a liquidity premium. I relate time variation in this liquidity premium to changes in the opportunity cost of money: The liquidity service benefits of near-money assets are more valuable when short-term interest rates are high and hence the opportunity cost of holding money is high. Consistent with this prediction, the liquidity premium of T-bills and other near-money assets is strongly positively correlated with the level of short-term interest rates. Once short-term interest rates are controlled for, Treasury security supply variables lose their explanatory power for the liquidity premium. I argue that an analysis of scarcity and price of near-money assets is incomplete without taking into account the substitution relationship with money and its supply by the central bank. Payment of interest on reserves (IOR) could potentially reduce liquidity premia because IOR reduces the opportunity cost of at least one type of money (reserves). In the UK and Canada, however, the introduction of IOR did not shrink liquidity premia. Apparently, the reduction in banks' opportunity cost of money did not result in a broader fall in the opportunity costs of money for non-bank market participants.
    JEL: E41 E43 G12
    Date: 2014–06
  11. By: Willmott, Bryony
    Abstract: This paper considers whether relationships exist between the daily weighted average 7-day interbank rate, the change in the daily 7-day interbank rate, the daily level of commercial banks excess reserves and the change in the daily level of excess reserves, which may guide domestic money market intervention. Monetary survey data for the period 1st June 2011 – 13th September 2013 (i.e. inflation targeting lite period) is used. Results show no correlation between excess reserves and interbank rate movements, even though a Granger causality test shows that in the absence of money market intervention, the level of excess reserves may determine both the level of and changes in the interbank rate. There is also highly significant causality from Central Bank intervention to the target interbank rate, but no correlation between the two. Furthermore, there is no evidence of correlation or causation between excess reserves and interbank rates when the interbank rate falls outside of the target. In conclusion, the relatively shallow nature of the Ugandan financial system prevents a distinct relationship between the interbank money market interest rate and commercial banks excess reserves, as a result a rules-based intervention policy is not suitable to Uganda.
    Keywords: Monetary policy, Intervention, Excess reserves, interbank interest rate
    JEL: E4 E42 E44 E5 G1
    Date: 2014–01
  12. By: Armand Fouejieu Azangue (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: The 2008/2009 financial crisis raised issues related to the monetary policy doctrine of the last two decades. Inflation targeting has been criticized as its main objective of inflation stabilisation might have diverted central banks from other concerns such as financial stability. As a first attempt in the literature on emerging countries, this study aims at investigating (i) whether inflation targeting is associated to higher financial instability, and (ii) whether inflation targeting central banks are less responsive to financial imbalances relative to non-targeters. To this end, we build a composite index in order to get a more complete and comprehensive view of the financial conditions in emerging countries. The paper concludes that, in spite of a stronger central banks' response to financial imbalances, inflation targeters are facing more financial instability than others. These findings suggest that, even if inflation targeting might be associated to higher financial fragility, this can hardly be attributed to the central banks 'carelessness' about developments in the financial sector. For emerging market economies, especially those implementing inflation targeting, this highlights the need for a broader and more integrated framework such as macro-prudential policies to tackle the issue of financial stability.
    Keywords: Inflation targeting ; financial stabiity ; central banks' reaction function
    Date: 2014–06–25
  13. By: Herbst-Murphy, Susan (Federal Reserve Bank of Philadelphia)
    Abstract: Contact Solutions LLC provides third-party contact center support for a number of government-sponsored prepaid card programs, including U.S. Treasury’s Direct Express. One of the explicit objectives of these programs is to link previously unbanked individuals with access to electronic banking services. With little prior experience as banking consumers, these individuals exhibit usage and behavior patterns, including their consumption of customer service, that differ from those of customers more familiar with financial services. This has presented some new challenges for contact centers. Contact Solutions executives facilitated a Payment Cards Center workshop during which they described some of these challenges and discussed how contact centers are responding.
    Keywords: Contact center; prepaid cards; interactive voice response; underbanked consumers; customer-operator
    JEL: D1
    Date: 2014–05–01
  14. By: O'Toole, Conor; Ryan, Robert; McCann, Fergal
    Date: 2014–03
  15. By: Timothée Papin (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Gabriel Turinici (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)
    Abstract: We investigate in this paper a perpetual prepayment option related to a corporate loan. The short interest rate and default intensity of the firm are supposed to follow CIR processes. A liquidity term that represents the funding costs of the bank is introduced and modeled as a continuous time discrete state Markov chain. The prepayment option needs specific attention as the payoff itself is a derivative product and thus an implicit function of the parameters of the problem and of the dynamics. We prove verification results that allows to certify the geometry of the exercise region and compute the price of the option. We show moreover that the price is the solution of a constrained minimization problem and propose a numerical algorithm building on this result. The algorithm is implemented in a two-dimensional code and several examples are considered. It is found that the impact of the prepayment option on the loan value is not to be neglected and should be used to assess the risks related to client prepayment. Moreover the Markov chain liquidity model is seen to describe more accurately clients' prepayment behavior than a model with constant liquidity.
    Keywords: funding costs, liquidity regime, loan prepayment, mortgage option, American option, perpetual option, option pricing, variational inequality, prepayment option, CIR process, switching regimes, Markov modulated dynamics.
    Date: 2014–06–13
  16. By: Chunxiu, Ma; Masih, Mansur
    Abstract: We attempted to investigate the contagion effects of the US subprime crisis on ASEAN-5 stock markets [including Malaysia (conventional and Islamic), Thailand, Singapore, Indonesia, Philippines] by applying MGARCH-DCC through the period of January 1, 2004 to July 5, 2012 on daily stock indices returns, and also Continuous Wavelet Transform coherence method through the period of January 1, 2006 to December 31, 20091 on daily stock indices returns. This is motivated by the fact that the 2007-2009 crises in the US mortgage market were transmitted to the rest of the world through cross-country banking linkages. This paper, to our best knowledge, is the first attempt to explore such issue for the ASEAN-5 markets (including Malaysia Islamic stock market) using the most recent econometric techniques. We found evidence that there were statistically significant contagion effects from the US sub-prime crisis to the ASEAN-5 countries and the contagion occurred probably around mid-2008. Our results tend to indicate consistent co-movement between most of the ASEAN-5 stock markets and the US stock market in the long run. We also uncovered evidence of a wide variation in co-movement across different timescales during the financial crisis. The Malaysia conventional stock market is found to be more contagious than its counterpart, the Malaysia Islamic stock market, and the latter is negatively correlated with the US stock market with a decreasing co-movement pattern even during the crisis period indicating policy implications for portfolio diversification.
    Keywords: contagion, ASEAN stock markets, MGARCH-DCC
    JEL: C22 G15
    Date: 2014–06–29
  17. By: Shawkat Hammoudeh; Michael McAleer (University of Canterbury)
    Abstract: Financial risk management is difficult at the best of times, but especially so in the presence of economic policy uncertainty. The purpose of this special issue on “Advances in Financial Risk Management and Economic Policy Uncertainty” is to highlight some areas of research in which novel econometric, financial econometric and empirical finance methods have contributed significantly to the analysis of financial risk management when there is economic policy uncertainty, specifically the power of print: uncertainty shocks, markets, and the economy, determinants of the banking spread in the Brazilian economy, forecasting value-at-risk using block structure multivariate stochastic volatility models, the time-varying causality between spot and futures crude oil prices, a regime-dependent assessment of the information transmission dynamics between oil prices, precious metal prices and exchange rates, a practical approach to constructing price-based funding liquidity factors, realized range volatility forecasting, modelling a latent daily tourism financial conditions index, bank ownership, financial segments and the measurement of systemic risk, model-free volatility indexes in the financial literature, robust hedging performance and volatility risk in option markets, price cointegration between sovereign CDS and currency option markets in the GFC, whether zombie lending should always be prevented, preferences of risk-averse and risk-seeking investors for oil spot and futures before, during and after the GFC, managing financial risk in Chinese stock markets, managing systemic risk in The Netherlands, mean-variance portfolio methods for energy policy risk management, on robust properties of the SIML estimation of volatility under micro-market noise and random sampling, asymmetric large-scale (I)GARCH with hetero-tails, the economic fundamentals and economic policy uncertainty of Mainland China and their impacts on Taiwan and Hong Kong, prediction and simulation using simple models characterized by nonstationarity and seasonality, and volatility forecast of stock indexes by model averaging using high frequency data.
    Keywords: Financial risk management, Economic policy uncertainty, Financial econometrics, Empirical finance
    JEL: C58 D81 E60 G32
    Date: 2014–06–23

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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