New Economics Papers
on Banking
Issue of 2014‒07‒21
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. An Alternative Model to Basel Regulation By Aboura, Sofiane; Lépinette-Denis, Emmanuel
  2. The Real Estate and Credit Bubble: Evidence from Spain By Ozlem Akin; José G. Montalvo; Jaume García Villar; José-Luis Peydró; Josep Maria Raya
  3. How do banks respond to increased funding uncertainty? By Robert A. Ritz; Ansgar Walther
  4. Banks as Patient Fixed-Income Investors By Samuel G. Hanson; Andrei Shleifer; Jeremy C. Stein; Robert W. Vishny
  5. Integración financiera y modelos de financiación de los bancos globales By José María Serena; Eva Valdeolivas
  6. Deposit Insurance Database By Asli Demirgüç-Kunt; Edward J. Kane; Luc Laeven
  7. Liquidity Risk and U.S. Bank Lending at Home and Abroad By Ricardo Correa; Linda S. Goldberg; Tara Rice
  8. When arm’s length is too far: relationship banking over the business cycle By Thorsten Beck; Hans Degryse; Ralph De Haas; Neeltje van Horen
  9. Short-sale constraints and financial stability: Evidence from the Spanish market By Óscar Arce; Sergio Mayordomo
  10. Leaning Against Windy Bank Lending By Giovanni Melina; Stefania Villa
  11. Privatisation of Banks in Mexico and the Tequila Crisis By Shanti Chakravarty; Jonathan Williams
  12. Banking Union: Time Is Not On Our Side By Adrien Béranger; Jézabel Couppey Soubeyran; Jézabel Laurence Scialom
  13. Dealing with Cross-Firm Heterogeneity in Bank Efficiency Estimates: Some evidence from Latin America By John Goddard; Phil Molyneux; Jonathan Williams
  14. Bank Efficiency and Executive Compensation By Timothy King; Jonathan Williams
  15. UK deposit-taker responses to the financial crisis: what are the lessons? By Francis, William
  16. U.S. consumer demand for cash in the era of low interest rates and electronic payments By Briglevics, Tamas; Schuh, Scott
  17. Stability and Identification with Optimal Macroprudential Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  18. Sufficiency of an Outside Bank and a Default Penalty to Support the Value of Fiat Money: Experimental Evidence By Juergen Huber; Martin Shubik; Shyam Sunder
  19. Merchant steering of consumer payment choice: evidence from a 2012 Diary survey By Shy, Oz; Stavins, Joanna

  1. By: Aboura, Sofiane; Lépinette-Denis, Emmanuel
    Abstract: The post-crisis financial reforms address the need for systemic regulation, focused not only on individual banks but also on the whole financial system. The regulator principal objective is to set banks' capital requirements equal to international minimum standards in order to mimimise systemic risk. Indeed, Basel agreement is designed to guide a judgement about minimum universal levels of capital and remains mainly microprudential in its focus rather than being macroprudential. An alternative model to Basel framework is derived where systemic risk is taken into account in each bank's dynamic. This might be a new departure for prudential policy. It allows for the regulator to compute capital and risk requirements for controlling systemic risk. Moreover, bank regulation is considered in a two-scale level, either at the bank level or at the system-wide level. We test the adequacy of the model on a data set containing 19 banks of 5 major countries from 2005 to 2012. We compute the capital ratio threshold per year for each bank and each country and we rank them according to their level of fragility. Our results suggest to consider an alternative measure of systemic risk that requires minimal capital ratios that are bank-specic and time-varying.
    Keywords: Systemic risk; Bank Regulation; Basel Accords;
    JEL: E44 E58 G01 G21 G28
    Date: 2014–05
  2. By: Ozlem Akin; José G. Montalvo; Jaume García Villar; José-Luis Peydró; Josep Maria Raya
    Abstract: We analyze the determinants of real estate and credit bubbles using a unique borrower-lender matched dataset on mortgage loans in Spain. The dataset contain real estate credit and price conditions (loan principal and spread, and the appraisal and market price) at the mortgage level, matched with borrower characteristics (such as income, labor status and contract) and the lender identity, over the last credit boom and bust. We find that lending standards are softer in the boom than in the bust. Moreover, despite some adjustment in lending conditions in the good times depending on borrower risk, the results suggest too soft lending standards and excessive risk-taking in the boom. For example, mortgage spreads for non-employed are identical to employed borrowers during the boom. Banks with worse corporate governance problems soften even more the standards. Finally, we analyze the mechanism by which banks could increase the supply of mortgage loans despite of regulatory restrictions on LTVs. The evidence is consistent with banks encouraging real estate appraisal firms to introduce an upward bias in appraisal prices (29%), to meet loan-to-value regulatory thresholds (40% of mortgages are just bunched on these limits), thus building-up the credit and the real estate bubble.
    Keywords: lending standards, credit supply, excessive risk-taking, bank incentives, conflicts of interest, moral hazard, prudential policy, financial crises, real estate bubble
    JEL: G01 G21 G28
    Date: 2014–07
  3. By: Robert A. Ritz; Ansgar Walther
    Abstract: The 2007-9 .financial crisis began with increased uncertainty over funding conditions in money markets. We show that funding uncertainty can explain diverse elements of commercial banks behaviour during the crisis, including:(i) reductions in lending volumes, balance sheets, and profitability;(ii) more intense competition for retail deposits (including deposits turning into a .loss leader.);(iii) stronger lending cuts by more highly extended banks with a smaller deposit base;(iv) weaker pass-through from changes in the central bank.s policy rate to market interest rates; and(v) a binding .zero lower well as a rationale for unconventional monetary policy.
    Keywords: Bank lending, .financial crises, interbank market, interest rate pass-through, liquidity channel, loan-to-deposit ratio, loss leader, monetary policy, zero lower bound.
    JEL: D40 E43 E52 G21
    Date: 2014–06–05
  4. By: Samuel G. Hanson; Andrei Shleifer; Jeremy C. Stein; Robert W. Vishny
    Abstract: We examine the business model of traditional commercial banks in the context of their co-existence with shadow banks. While both types of intermediaries create safe “money-like” claims, they go about this in different ways. Traditional banks create safe claims by relying on deposit insurance, supported by costly equity capital. This structure allows bank depositors to remain “sleepy”: they do not have to pay attention to transient fluctuations in the mark-to-market value of bank assets. In contrast, shadow banks create safe claims by giving their investors an early exit option that allows them to seize collateral and liquidate it at the first sign of trouble. Thus traditional banks have a stable source of funding, while shadow banks are subject to runs and fire-sale losses. These different funding models in turn influence the kinds of assets that traditional banks and shadow banks hold in equilibrium: traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk, but are relatively illiquid and have substantial transitory price volatility.
    JEL: G2 G21 G23
    Date: 2014–07
  5. By: José María Serena (Banco de España); Eva Valdeolivas (Ernst&Young)
    Abstract: Cross-border bank flows are experiencing a protracted contraction after the global financial crisis, in stark contrast with the recovery of other capital flows. The process can be driven by ongoing shifts in global banks international funding patters. Banks net issuances in international markets are contracting, on aggregate terms. Global banks are also obtaining less wholesale funding from their branches in key financial centers. These trends are to some extent driven by regulatory measures aimed at achieving more stable funding patterns. They are also consequence of the financial crisis on advanced economies banking systems. Financial integration could experience a structural change in these trends persist. Before the crisis, it was defined by large cross-border bank flows. The current trend could imply a growing relevance of banks’ international expansion through independent banking subsidiaries. As a side effect, banks cross-border retrenchment could foster financial disintermediation in international markets. Large international issuances by non-financial corporations could be incipient signs of such process.
    Keywords: financial integration, global banks, funding models
    JEL: F36 G15 G21
    Date: 2014–05
  6. By: Asli Demirgüç-Kunt; Edward J. Kane; Luc Laeven
    Abstract: This paper provides a comprehensive, global database of deposit insurance arrangements as of 2013. We extend our 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. We 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.
    JEL: G01 G21 G28
    Date: 2014–07
  7. By: Ricardo Correa; Linda S. Goldberg; Tara Rice
    Abstract: While the balance sheet structure of U.S. banks influences how they respond to liquidity risks, the mechanisms for the effects on and consequences for lending vary widely across banks. We demonstrate fundamental differences across banks without foreign affiliates versus those with foreign affiliates. Among the nonglobal banks (those without a foreign affiliate), cross-sectional differences in response to liquidity risk depend on the banks’ shares of core deposit funding. By contrast, differences across global banks (those with foreign affiliates) are associated with ex ante liquidity management strategies as reflected in internal borrowing across the global organization. This intra-firm borrowing by banks serves as a shock absorber and affects lending patterns to domestic and foreign customers. The use of official-sector emergency liquidity facilities by global and nonglobal banks in response to market liquidity risks tends to reduce the importance of ex ante differences in balance sheets as drivers of cross-sectional differences in lending.
    JEL: F3 G21 G38
    Date: 2014–07
  8. By: Thorsten Beck (Cass Business School); Hans Degryse (Faculty of Economics and Business, KU Leuven); Ralph De Haas (EBRD); Neeltje van Horen (De Nederlandsche Bank)
    Abstract: Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect funding to SMEs over the business cycle. For 21 countries we link the lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at two contrasting points of the business cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.
    Keywords: Relationship banking, credit constraints, business cycle
    JEL: F36 G21 L26 O12
    Date: 2014–07
  9. By: Óscar Arce (Banco de España); Sergio Mayordomo (University of Navarra)
    Abstract: We examine the effect of the short-selling ban in 2011 on Spanish stocks on the level of risk in the banking sector. Before the ban, short positions were found to be positive and significantly related to the creditworthiness of medium-sized banks, these being generally less internationally diversified and more reliant on official support. We show that the ban helped stabilise the credit risk of medium-sized banks, especially those more exposed to short-sellers’ activity, but not that of large banks and non-financial corporations. This stabilising effect came at the cost of a significantly sharp decline in liquidity, trading and price efficiency of medium-sized banks’ stocks relative to other stocks.
    Keywords: G01, G12, G14, G18
    Date: 2014–06
  10. By: Giovanni Melina (City University London); Stefania Villa (University of Foggia)
    Abstract: Using a dynamic stochastic general equilibrium model with banking, this paper first provides evidence that, during the Great Moderation, monetary policy leaned against the wind blowing from the loan market in the US. It then shows that the extent to which this occurred delivers a small welfare loss relative to the optimised simple interest-rate rule that features only a response to inflation. The source of business cycle fluctuations is crucial for the optimality of a leaning-against-the-wind policy. In fact, the pro-cyclical nature of lending creates a trade-off between inflation and financial stabilisation when supply shocks are prevalent.
    Keywords: lending relationships, augmented Taylor rule, Bayesian estimation, optimal policy.
    JEL: E32 E44 E52
    Date: 2014–07
  11. By: Shanti Chakravarty (Bangor University, UK); Jonathan Williams (Bangor University, UK)
    Abstract: The Mexican programme of bank privatisation in the early 1990s was dictated not just by a desire for distancing government from the running of the economy but also by the need to raise money by selling public assets in favour of a particular fiscal stance. The conflict of objectives entailed in this liberalisation process contributed to the subsequent financial crisis entailing the re-nationalisation of banks after a short period of three years at a cost to the exchequer which was five times greater than the money raised at privatisation.
    Keywords: Mexico; Privatisation; Financial Liberalisation; Banking
    JEL: G21 G28
    Date: 2013–11
  12. By: Adrien Béranger; Jézabel Couppey Soubeyran; Jézabel Laurence Scialom
    Abstract: This paper reviews the various mechanisms and rules that has been proposed to build a banking union in Europe. We argue that the banking union is a promising solution to the Eurozone crisis because it completes the unification of the Euro currency, forms a solution to both the financial and monetary fragmentation of the Euro area financial markets and helps breaking the vicious circle created by domestic banking system impairments and the sovereign debt crisis. We underline not only the shortcomings and hurdles to reach a fully-fledged banking union, and the hazards created by the inconsistencies between their phasing-in in the sequential schedule decided by states. To reduce the loopholes induced by the sequential approach, we propose to implement a rule of shared-bailout during the transition period that consist in a loss-sharing rule among countries hosting an entity of a bank group and indicted in the living wills of the systemic banking companies.
    Keywords: Eurozone, banking union, bank supervision, resolution
    JEL: G21 G28 H12 E58
    Date: 2014
  13. By: John Goddard (Bangor University, UK); Phil Molyneux (Bangor University, UK); Jonathan Williams (Bangor University, UK)
    Abstract: This paper contributes to the bank efficiency literature through an application of recently developed random parameters models for stochastic frontier analysis. We estimate standard fixed and random effects models, and alternative specifications of random parameters models that accommodate cross-sectional parameter heterogeneity. A Monte Carlo simulations exercise is used to investigate the implications for the accuracy of the estimated inefficiency scores of estimation using either an under-parameterized, over-parameterized or correctly specified cost function. On average, the estimated mean efficiencies obtained from random parameters models tend to be higher than those obtained using fixed or random effects, because random parameters models do not confound parameter heterogeneity with inefficiency. Using a random parameters model, we analyse the evolution of the average rank cost efficiency for Latin American banks between 1985 and 2010. Cost efficiency deteriorated during the 1990s, particularly for state-owned banks, before improving during the 2000s but prior to the subprime crisis. The effects of the latter varied between countries and bank ownership types
    Keywords: Efficiency; stochastic frontier; random parameters models; bank ownership; Latin America
    JEL: C23 D24 G21
    Date: 2013–09
  14. By: Timothy King (Leeds University); Jonathan Williams (Bangor University, UK)
    Abstract: We investigate whether handsomely rewarding bank executives’ realizes superior efficiency by determining if executive remuneration contracts produce incentives that offset potential agency problems and lead to improvements in bank efficiency. We calculate executive Delta and Vega to proxy executives’ risk-taking following changes in their compensation contracts and estimate their relationship with alternative profit efficiency. Our study uses novel instruments to account for the potentially endogenous relationship between efficiency and Delta and Vega whilst controlling for the structure of executive compensation, board structure, and bank-level characteristics. Our main results demonstrate that shareholders use executive Vega to incentivise executives into taking risks that improve bank efficiency, and also that executive perquisites can be used to attract and retain executives which ex post deliver efficiency gains.
    Keywords: Banks, corporate governance, executive remuneration, efficiency, stochastic frontier.
    JEL: C2 G21 G3
    Date: 2013–09
  15. By: Francis, William (Bank of England)
    Abstract: While the financial crisis took a large toll on the UK banking industry overall, some institutions were forced to undertake more intensive efforts to deal with the economic downturn and onset of financial difficulties. This study examines whether and how the characteristics of these institutions leading up to and during the crisis differed from those of institutions that dealt with the turmoil using less intensive efforts. I find that, under the regulatory environment existing before the crisis, institutions that ultimately resorted to more intensive efforts (ie debt-equity swaps, mergers with/acquisitions by stronger competitors and outright closure) to deal with financial difficulties had significantly weaker financial profiles as measured by a set of attributes reflecting capital adequacy, asset quality, management skills, earnings performance and liquidity. This study’s framework is useful for characterising financial vulnerability in a regulatory regime similar to that in place before the crisis and, in that respect, is helpful for highlighting weaknesses of the previous regime and for understanding the recent regulatory emphasis on, among other things, a non risk-based capital requirement.
    Keywords: Regulation; leverage ratio; bank failure; vulnerability; logit
    JEL: G21 G28 G38
    Date: 2014–06–27
  16. By: Briglevics, Tamas (Federal Reserve Bank of Boston); Schuh, Scott (Federal Reserve Bank of Boston)
    Abstract: U.S. consumers' demand for cash is estimated with new panel micro data for 2008-2010 using econometric methodology similar to Mulligan and Sala-i-Martin (2000); Attanasio, Guiso, and Jappelli (2002); and Lippi and Secchi (2009). We extend the Baumol-Tobin model to allow for credit card payments and revolving debt, as in Sastry (1970). With interest rates near zero, cash demand by consumers using credit cards for convenience (without revolving debt) has the same small, negative, interest elasticity as estimated in earlier periods and with broader money measures. However, cash demand by consumers using credit cards to borrow (with revolving debt) is interest inelastic. These findings may have aggregate implications for the welfare cost of inflation because then nontrivial share of consumers who revolve credit card debt are less likely to switch from cash to credit. In the 21st century, consumers get cash from bank and nonbank sources with heterogeneous transactions costs, so withdrawal location is essential to identify cash demand properly.
    Keywords: cash demand; Baumol-Tobin model; Survey of Consumer Payment Choice; SCPC
    JEL: E41 E42
    Date: 2013–12–01
  17. By: Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE)
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non-predetermined variables.
    Keywords: Identification; financial stability; monetary policy; optimal policy under Commitment; augmented Taylor rule
    Date: 2014–04
  18. By: Juergen Huber (University of Innsbruck, Austria); Martin Shubik (Cowles Foundation, Yale University); Shyam Sunder (School of Management & Cowles Foundation, Yale University)
    Abstract: We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.
    Keywords: Experimental gaming, Bank, Fiat money, Outside bank, General equilibrium
    JEL: C73 C91
    Date: 2014–07
  19. By: Shy, Oz (Federal Reserve Bank of Boston); Stavins, Joanna (Federal Reserve Bank of Boston)
    Abstract: This paper seeks to discover whether U.S. merchants are using their recently granted freedom to offer price discounts and other incentives to steer customers to pay with methods that are less costly to merchants. Using evidence of merchant steering based on the 2012 Diary of Consumer Payment Choice, we find that only a very small fraction of transactions received a cash or debit card discount, and even fewer were subjected to a credit card surcharge. Transactions at gasoline stations were more likely to receive either cash discounts or credit card surcharges than transactions in other sectors. Larger-value transactions were somewhat more likely to receive a discount, although the effect is small when controlling for merchant sector. There is little evidence that merchants have started taking advantage of their new flexibility to influence consumers' payment choice by either discounting or surcharging based on the payment method.
    Keywords: Payment choice; merchant steering; cash and debit discount; credit card surcharge
    JEL: D14
    Date: 2014–05–12

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