New Economics Papers
on Banking
Issue of 2014‒07‒28
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Risk Within and Across Equilibria By Itai Agur
  2. Carrying the (Paper) Burden: A Portfolio View of Systemic Risk and Optimal Bank Size By JAAP W.B. BOS; MARTIEN LAMERS; VICTORIA PURICE
  3. International Banking and Liquidity Risk Transmission: Lessons from Across Countries By Claudia M. Buch; Linda S. Goldberg
  4. Franchise value and risk-taking in modern banks By Natalya Martynova; Lev Ratnovski; Razvan Vlahu
  5. A Model of Shadow Banking By Gennaioli, Nicola; Shleifer, Andrei; Vishny, Robert W.
  6. Does Money Buy Credit? Firm-Level Evidence on Bribery and Bank Debt By Zuzana Fungácová; Anna Kochanova; Laurent Weill
  7. Measuring the Performance of Banks: Theory, Practice, Evidence, and Some Policy Implications By Joseph P. Hughes; Loretta J. Mester
  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. Contagion Risk in the Interbank Market: A Probabilistic Approach to cope with Incomplete Structural Information By Mattia Montagna; Thomas Lux
  10. Market concentration and competition in Vietnamese banking sector. By Le, Trung H.
  11. Shocks to Bank Lending, Risk-Taking, Securitization, and their Role for U.S. Business Cycle Fluctuations By G. PEERSMAN; W. WAGNER
  12. Loans on Sale: Credit Market Seasonality, Borrower Need, and Lender Rent Seeking By Justin Murfin; Mitchell Petersen
  13. Households credits and financial stability By Cécile Bastidon
  14. Deposit Insurance Database By Asli Demirgüç-Kunt; Edward Kane; Luc Laeven
  15. Financial Stability and Financial Inclusion By Morgan, Peter; Pontines, Victor
  16. Bank rebranding and depositor loyalty By M. DISLI; K. SCHOORS
  17. Bailouts and Financial Fragility By Todd Keister
  18. Bank-firm credit network in Japan. An analysis of a bipartite network By Luca Marotta; Salvatore Miccich\`e; Yoshi Fujiwara; Hiroshi Iyetomi; Hideaki Aoyama; Mauro Gallegati; Rosario N. Mantegna
  19. Understanding Financial Inclusion in China By Zuzana Fungácová; Laurent Weill

  1. By: Itai Agur
    Abstract: The global financial crisis highlighted that the financial system can be most vulnerable when it seems most stable. This paper models non-linear dynamics in banking. Small shocks can lead from an equilibrium with few bank defaults straight to a full freeze. The mechanism is based on amplification between adverse selection on banks' funding market and moral hazard in bank monitoring. Our results imply trade-offs between regulators' microprudential desire to shield individual weak banks and the macroprudential consequences of doing so. Moreover, limiting bank reliance on wholesale funding always reduces systemic risk, but limiting the correlation between bank portfolios does not.
    Date: 2014–07–02
    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: Systemic risk; Modern Portfolio Theory; U.S. banking
    Date: 2014–05
  3. By: Claudia M. Buch; Linda S. Goldberg
    Abstract: Activities of international banks have been at the core of discussions on the causes and effects of the international financial crisis. Yet we know little about the actual magnitudes and mechanisms for transmission of liquidity shocks through international banks, including the reasons for heterogeneity in transmission across banks. The International Banking Research Network, established in 2012, brings together researchers from around the world with access to micro-level data on individual banks to analyze issues pertaining to global banks. This paper summarizes the common methodology and results of empirical studies conducted in eleven countries to explore liquidity risk transmission. Among the main results is, first, that explanatory power of the empirical model is higher for domestic lending than for international lending. Second, how liquidity risk affects bank lending depends on whether the banks are drawing on official-sector liquidity facilities. Third, liquidity management across global banks can be important for liquidity risk transmission into lending. Fourth, there is substantial heterogeneity in the balance sheet characteristics that affect banks’ responses to liquidity risk. Overall, balance sheet characteristics of banks matter for differentiating their lending responses, mainly in the realm of cross-border lending.
    JEL: F3 F42 G21 G28 G38
    Date: 2014–07
  4. By: Natalya Martynova; Lev Ratnovski; Razvan Vlahu
    Abstract: Traditional theory suggests that high franchise value limits bank risk-taking incentives. Then why did many banks with exceptionally valuable franchises get exposed to new financial instruments, resulting in significant losses during the crisis? This paper attempts to reconcile theory and evidence. We consider a setup where a bank takes risk by levering up, to invest in risky market-based instruments. High franchise value allows the bank to borrow more, so it can take risk on a larger scale. This offsets lower incentives to take risk of given size. As a result, a bank with a higher franchise value may have higher risk-taking incentives. The proposed effect is stronger when a bank can expand the balance sheet using inexpensive senior funding (such as repos), and when it can achieve high leverage thanks to better institutional environment (with more protection of creditor rights). This framework captures well the stylized patterns of bank risk-taking in the run-up to the crisis.
    Keywords: Banks; Risk-taking; Franchise value; Bank capital; Repo markets; Crises
    JEL: G21 G24 G28
    Date: 2014–07
  5. By: Gennaioli, Nicola; Shleifer, Andrei; Vishny, Robert W.
    Abstract: We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors ignore tail risks.
    Date: 2013
  6. By: Zuzana Fungácová (Bank of Finland); Anna Kochanova (Max Planck Institute for Research on Collective Goods); Laurent Weill (LaRGE Research Center, Université de Strasbourg)
    Abstract: This study examines how bribery influences bank debt ratios for a large sample of firms in 14 transition countries. We combine information on bribery practices from the BEEPS survey with firm-level accounting data from the Amadeus database. Bribery is measured by the frequency of extra unofficial payments to officials to “get things done”. We find that bribery is positively related to firms’ total bank debt ratios, which provides evidence that bribing bank officials facilitates firms’ access to bank loans. This impact varies with the maturity of the bank debt, as bribery contributes to higher short-term bank debt ratios but lower long-term bank debt ratios. Finally, we find that the institutional characteristics of the banking industry influence the relation between bribery and firms’ bank debt ratios. Higher levels of financial development constrain the positive effects of bribery, whereas larger market shares of state-owned banks have the opposite effect. The presence of foreign banks also affects the impact of bribery, although this effect depends on the maturity of firms’ bank debt.
    Keywords: bank lending, bribery, corruption, Eastern Europe
    JEL: G32 K4 P2
    Date: 2014
  7. By: Joseph P. Hughes (Rutgers University); Loretta J. Mester (Federal Reserve Bank of Philadelphia)
    Abstract: The unique capital structure of commercial banking – funding production with demandable debt that participates in the economy’s payments system – affects various aspects of banking. It shapes banks’ comparative advantage in providing financial products and services to informationally opaque customers, their ability to diversify credit and liquidity risk, and how they are regulated, including the need to obtain a charter to operate and explicit and implicit federal guarantees of bank liabilities to reduce the probability of bank runs. These aspects of banking affect a bank’s choice of risk vs. expected return, which, in turn, affects bank performance. Banks have an incentive to reduce risk to protect the valuable charter from episodes of financial distress and they also have an incentive to increase risk to exploit the cost-of-funds subsidy of mispriced deposit insurance. These are contrasting incentives tied to bank size. Measuring the performance of banks and its relationship to size requires untangling cost and profit from decisions about risk versus expected-return because both cost and profit are functions of endogenous risk-taking. This chapter gives an overview of two general empirical approaches to measuring bank performance and discusses some of the applications of these approaches found in the literature. One application explains how better diversification available at a larger scale of operations generates scale economies that are obscured by higher levels of risk-taking. Studies of banking cost that ignore endogenous risk-taking find little evidence of scale economies at the largest banks while those that control for this risk-taking find large scale economies at the largest banks – evidence with important implications for regulation.
    Keywords: efficiency
    JEL: G1
    Date: 2013–08–01
  8. By: Thorsten Beck; Hans Degryse; Ralph de Haas; Neeltje van Horen
    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: Mattia Montagna; Thomas Lux
    Abstract: Banks have become increasingly interconnected via interbank credit and other forms of liabilities. As a consequence of the increased interconnectedness, the failure of one node in the interbank network might constitute a threat to the survival of large parts of the entire system. How important this effect of “too-big-too-fail” and “too-interconnected-too-fail” is, depends on the exact topology of the network on which the supervisory authorities have typically very incomplete knowledge. We propose a probabilistic model to combine some important known quantities (like the size of the banks) with a realistic stochastic representation of the remaining structural elements. Our approach allows us to evaluate relevant measures for the contagion after default of one unit (i.e. number of expected subsequent defaults, or their probabilities). For some quantities we are able to derive closed form solutions, others can be obtained via computational mean-?eld approximations
    Keywords: contagion, Interbank market, Network models
    JEL: D85 G21 D83
    Date: 2014–07
  10. By: Le, Trung H.
    Abstract: Vietnamese banking system has been playing a vital role in the development and economic growth since the economic renewal campaign namely “Doi Moi” in 1986. However, since the global financial crisis, financial and banking system has been under stress, exposing much weaknesses, severely affecting the whole economy. Additionally, the wave of financial liberalization raise questions about the competitiveness of Vietnamese commercial banks in the competition with the foreigners. The main purpose of this paper is to measure the market concentration using Hirschman-Herfindahl index (HHI) and test for the market competition in Vietnamese banking sector under Panzar – Rossse approach by an unbalanced panel data of 33 commercial banks for the period from 2004 to 2013. Vietnamese banking sector is found to be high-concentration although it is experiencing a decreasing trend. The test for market competition indicate a monopolistic behavior of Vietnamese commercial banks. No surprising, the state-owned commercial banks and foreign banks are found to be superior in the competition with joint-stock commercial banks and domestic banks respectively. In addition, the foreign investment in banks seem to increase competitiveness of a commercial bank.
    Keywords: Market concentration, bank competition, commercial banks
    JEL: G21
    Date: 2014–07–15
  11. By: G. PEERSMAN; W. WAGNER (-)
    Abstract: Shocks to bank lending, risk-taking and securitization activities that are orthogonal to real economy and monetary policy innovations account for more than 30 percent of U.S. output variation. The dynamic effects, however, depend on the type of shock. Expansionary securitization shocks lead to a permanent rise in real GDP and a fall in inflation. Bank lending and risktaking shocks, in contrast, have only a temporary effect on real GDP and tend to lead to a (moderate) rise in the price level. Furthermore, there is evidence for a strong search-for-yield effect on the side of investors in the transmission mechanism of monetary policy. These effects are estimated with a structural VAR model, where the shocks are identified using a model of bank risk-taking and securitization.
    Keywords: Bank lending, risk-taking, securitization, SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2014–02
  12. By: Justin Murfin; Mitchell Petersen
    Abstract: The market for corporate credit is characterized by significant seasonal variation, both in interest rates and the volume of new lending. Firms borrowing from banks during seasonal “sales” in late spring and fall issue at 19 basis points cheaper than winter and summer borrowers. Issuers during cheap seasons appear to have less immediate or uncertain needs, but are enticed by low rates to engage in precautionary borrowing. High interest rate periods capture borrowers with unanticipated, non-deferrable investment needs. Consistent with models of intertemporal price discrimination, seasonality is strongly associated with market concentration among a few large banks with repeated interactions.
    JEL: G21 G32 L1
    Date: 2014–07
  13. By: Cécile Bastidon (LEAD - Laboratoire d'Économie Appliquée au Développement - Université de Toulon : EA3163)
    Abstract: This paper develops a theoretical model of financial intermediation with three original features: first, consideration of all sectors within total outstanding credits, including households; second, the possibility of a non monotic relationship between prices and funding supply volumes in periods of high financial strains; last, the link between interbank credit rationing and other sectors funding rationing. The central bank conducts an unconventional type monetary policy. We show that the intermediation chain characteristics then determine the conditions of transmission of a shock on financing costs and the modalities for the resulting monetary policy.
    Keywords: Financial intermediation model, households credits, Central Banks
    Date: 2014–06–04
  14. By: Asli Demirgüç-Kunt; Edward 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.
    Date: 2014–07–03
  15. By: Morgan, Peter (Asian Development Bank Institute); Pontines, Victor (Asian Development Bank Institute)
    Abstract: Developing economies are seeking to promote financial inclusion, i.e., greater access to financial services for low-income households and firms, as part of their overall strategies for economic and financial development. This raises the question of whether financial stability and financial inclusion are, broadly speaking, substitutes or complements. In other words, does the move toward greater financial inclusion tend to increase or decrease financial stability? A number of studies have suggested both positive and negative ways in which financial inclusion could affect financial stability, but very few empirical studies have been made of their relationship. This partly reflects the scarcity and relative newness of data on financial inclusion. This study contributes to the literature on this subject by estimating the effects of various measures of financial inclusion (together with some control variables) on some measures of financial stability, including bank non-performing loans and bank Z scores. We find some evidence that an increased share of lending to small and medium sized enterprises (SMEs) aids financial stability, mainly by reducing non-performing loans (NPLs) and the probability of default by financial institutions. This suggests that policy measures to increase financial inclusion, at least by SMEs, would have the side-benefit of contributing to financial stability as well.
    Keywords: financial stability; financial inclusion; SMEs; bank z-scores; non-performing loans
    JEL: G21 G28 O16
    Date: 2014–07–09
  16. By: M. DISLI; K. SCHOORS (-)
    Abstract: We analyze how rebranding affects depositor discipline in a sample of Turkish banks. Depositor discipline refers to the empirical regularity that banks with higher capitalization attract more deposits at lower cost. Bank rebranding tends to increase depositor discipline, especially when there is only a small cosmetic change to the name. Rebranding a Turkish named bank into a foreign named one is associated with increased depositor discipline. In a similar manner, depositor discipline tends to decrease in the short-run if the bank rebrands from a foreign name to a Turkish one. These results suggest the presence of depositor ethnocentrism. Our main findings are robust to controls for major ownership changes and for selection effects.
    Keywords: depositor discipline; rebranding; banks
    JEL: G2 M3
    Date: 2013–12
  17. By: Todd Keister (Rutgers University)
    Abstract: Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by using public resources to augment the private consumption of those investors facing losses. The anticipation of such a “bailout” distorts ex ante incentives, leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility. Prohibiting bailouts is not necessarily desirable, however: while it induces intermediaries to become more liquid, it may nevertheless lower welfare and leave the economy more susceptible to a crisis. A policy of taxing short-term liabilities, in contrast, can both improve the allocation of resources and promote financial stability.
    Keywords: bank runs, bailouts, moral hazard, financial regulation
    JEL: G28
    Date: 2014–01–29
  18. By: Luca Marotta; Salvatore Miccich\`e; Yoshi Fujiwara; Hiroshi Iyetomi; Hideaki Aoyama; Mauro Gallegati; Rosario N. Mantegna
    Abstract: We present an analysis of the credit market of Japan. The analysis is performed by investigating the bipartite network of banks and firms which is obtained by setting a link between a bank and a firm when a credit relationship is present in a given time window. In our investigation we focus on a community detection algorithm which is identifying communities composed by both banks and firms. We show that the clusters obtained by directly working on the bipartite network carry information about the networked nature of the Japanese credit market. Our analysis is performed for each calendar year during the time period from 1980 to 2011. Specifically, we obtain communities of banks and networks for each of the 32 investigated years, and we introduce a method to track the time evolution of these communities on a statistical basis. We then characterize communities by detecting the simultaneous over-expression of attributes of firms and banks. Specifically, we consider as attributes the economic sector and the geographical location of firms and the type of banks. In our 32 year long analysis we detect a persistence of the over-expression of attributes of clusters of banks and firms together with a slow dynamics of changes from some specific attributes to new ones. Our empirical observations show that the credit market in Japan is a networked market where the type of banks, geographical location of firms and banks and economic sector of the firm play a role in shaping the credit relationships between banks and firms.
    Date: 2014–07
  19. By: Zuzana Fungácová (Bank of Finland); Laurent Weill (LaRGE Research Center, Université de Strasbourg)
    Abstract: We use data from the World Bank Global Findex database for 2011 to analyze financial inclusion in China, including comparisons with the other BRICS countries. We find a high level of financial inclusion in China manifested by greater use of formal account and formal saving than in the other BRICS. Financial exclusion, i.e. not having a formal account, is mainly voluntary. The use of formal credit is however less frequent in China than in the other BRICS. Borrowing through family or friends is the most common way of obtaining credit in all the BRICS countries, but other channels for borrowing are not very commonly used by individuals in China. We find that higher income, better education, being a man, and being older are associated with greater use of formal accounts and formal credit in China. Income and education influence the use of alternative sources of borrowing. Overall financial inclusion does not constitute a major problem in China, but such limited use of formal credit can create a challenge for further economic development.
    Keywords: financial inclusion, financial institutions, China
    JEL: G21 O16 P34
    Date: 2014

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