New Economics Papers
on Banking
Issue of 2014‒08‒02
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Lessons from the European Financial Crisis By Marco Pagano
  2. Bank Capital Adjustment Process and Aggregate Lending. By T. Duprey; M. Lé
  3. Financial Integration and Spatial Linkages in Housing Markets By Milcheva, Stanimira; Zhu, Bing
  4. Are Real Estate Banks More Affected by Real Estate Market Dynamics? Evidence from the Main European Countries By Gibilaro, Lucia; Mattarocci, Gianluca
  5. The impact of Basel II Adoption on the Financing of European Real Estate Companies By Porumb, Vlad Andrei; Anghel, Ion
  6. On modeling banking risk By Efthymios G. Tsionas
  7. Valuation and Lending Policies in Germany and Sweden By Anop, Sviatlana
  8. Competitive Search Equilibrium in the Credit Market under Asymmetric Information and Limited Commitment By Song, Jae Eun
  9. The Macroeconomics of Shadow Banking By Alan Moreira; Alexi Savov
  10. Outsourcing Corporate Real Estate Asset Management (CREAM) services as part of supporting cost-efficiency in the banking sector: Does it work? By Multescu, Gheorghe Petru; Eder, Jeannine
  11. Banking crises and sovereign defaults in emerging markets: exploring the links By Irina Balteanu; Aitor Erce
  12. Home ownership and housing costs Between dream and nightmare By Havermans, D.W.Q.; Leussink, M.I.K.; Smeets, J.J.A.M.
  13. The Swedish Case: Mortgage Preferences Among Home Owners By Hullgren, Maria; Söderberg, Inga-Lill

  1. By: Marco Pagano (Università di Napoli Federico II CSEF, EEIF, CEPR and ECGI)
    Abstract: This paper distils three lessons for bank regulation from the experience of the 2009-12 euro-area financial crisis. First, it highlights the key role that sovereign debt exposures of banks have played in the feedback loop between bank and fiscal distress, and inquires how the regulation of banks’ sovereign exposures in the euro area should be changed to mitigate this feedback loop in the future. Second, it explores the relationship between the forbearance of non-performing loans by European banks and the tendency of EU regulators to rescue rather than resolving distressed banks, and asks to what extent the new regulatory framework of the euro-area “banking union” can be expected to mitigate excessive forbearance and facilitate resolution of insolvent banks. Finally, the paper highlights that capital requirements based on the ratio of Tier-1 capital to banks’ risk-weighted assets were massively gamed by large banks, which engaged in various forms of regulatory arbitrage to minimize their capital charges while expanding leverage. This argues in favor of relying on a set of simpler and more robust indicators to determine banks’ capital shortfall, such as book and market leverage ratios. JEL Classification: G01, G21, G28, G33.
    Keywords: bank regulation, euro, financial crisis, sovereign exposures, forbearance, bank resolution, bank capital requirements.
    Date: 2014–07–24
  2. By: T. Duprey; M. Lé
    Abstract: This paper proposes a new micro-founded measure to quantify the aggregate capitalisation of banking sectors taking into account both market discipline and regulatory constraints. It allows studying the connection between micro capital shortfalls from an implicit bank specific capital target and macro impacts of capital shortages on aggregate lending. (i) Our quantitative country-wide index of bank capitalisation is consistent with the qualitative reports of the ECB Bank Lending Survey. (ii) This index correlates with future fluctuations in aggregate lending,especially when a banking system is under-capitalised. (iii) The adjustment of capital constrained banks mostly impact loans to domestic non-financial agents. Thus our measure suggests that (a) countercyclical capital requirements may be less effective if market constraints are more important, and (b) slow moving balance sheet variables can help detect vulnerabilities and reversals in the lending cycle.
    Keywords: implicit bank capital target, dynamic panel model, bank lending survey, aggregate lending, early-warning indicator.
    JEL: C23 E51 G01 G21
    Date: 2014
  3. By: Milcheva, Stanimira; Zhu, Bing
    Abstract: This study investigates whether an increase in cross-border bank lending can lead to spillover effects among housing markets of developed countries using a dynamic spatial panel model. Variations in house prices in one country can spill over house prices in other countries by transmitting counterparty risks through a foreign-bank lending channel. Foreign banks intermediate wholesale bank funding and can affect domestic credit supply and asset prices by transmitting financial conditions across borders. Cross-border bank flows transmit financial risks such as currency, maturity, credit and funding risks which may be associated with a change in either global financial conditions or country-specific factors. While controlling for country-level and global risk factors, we find stronger co-movement among house prices between countries with stronger financial integration. Our findings have implications for international portfolio diversification based merely on geographic factors. While other studies find that economic integration drives cross-country correlations in property returns, we show that the fact that the major global institutional markets are highly linked through the financial markets also can lead to increased inter-linkages with hosing markets and a reduction in the attractiveness of real estate in a mixed-asset context.
    Date: 2014
  4. By: Gibilaro, Lucia; Mattarocci, Gianluca
    Abstract: Real estate market trend could affect the value of both the direct exposures in property loans and the real estate collaterals of loans, therefore banks' performance and/or risk could change significantly in the case of real estate market collapse or expansion (i.a. Wheaton, 1999). Indeed, during the recent financial crisis, the real estate was features by a strong decrease in loans with respect to the before crisis period (Ivashina and Sharfstein, 2010). Literature focuses the attention prevalently on the effect of a change in the property prices on the macro-variables and the monetary aggregates (Quigley, 1999). Only few studies look at the effect of the real estate market trend on the banks'lending policy and bank's performance (Davis and Zhu, 2004) taking into account bank's characteristics . In the analysis of the banking features, no evidence is provided on the relationship between real estate market trend and the bank's performance and risk . Moreover, the evidences provided by such studies do not control for the type the bank and the loan purpose.Considering a representative sample of European banks and using the BIS property index for the reference country of the bank, we study the relationship between the property market trend and the bank performance / risk exposure, considering also lagged relationships and testing for any relevant causality relationship.. Following the approach proposed by Eisenbeis and Kwast (1991), we identify real estate banks in our sample and we test for the existence of any significant difference respect to other banks. Moreover, we control the evidences for the pre and post financial crisis period. Results demonstrate that real estate banks do not perform always the worse (the better) during a real estate market downturn (upturn) and the reaction to the market trend is driven also by other features of the bank.
    Date: 2013
  5. By: Porumb, Vlad Andrei; Anghel, Ion
    Abstract: In this paper we analyze the impact of the Basel II adoption on the ability of European real estate companies to access bank loans. The Basel Committee on Banking Supervision (BSBS) adjusted their regulatory recommendations to answer the potentially problematic concentration of loans in the real estate industry. Relative to the former Basel I Capital Accord, the new banking regulation introduces a more detailed categorization of real estate lending categories, with more sensitive credit risk weights. In all classes of Basel II application, Standardized, IRB and A-IRB, credit risk exposure significantly evolved relative to Basel I’s dichotomous residential mortgage/commercial real estate loans categorization. The more sophisticated and risk-sensitive classification is likely to have influenced the borrowing capacity of real estate companies in the post-Basel II adoption period. We focus on the enlarged EU countries because the adoption of Basel II was mandated in 2008 for all listed firms. This homogeneous setting allows us to better assess the impact of the new banking regulation on the lending of real estate companies. To our knowledge we are the first to document the impact of a change in banking regulation on the lending in the real estate industry.
    Date: 2014
  6. By: Efthymios G. Tsionas (Athens University of Economics and Business)
    Abstract: The paper develops new indices of financial stability based on an explicit model of expected utility maximization by financial institutions subject to the classical technology restrictions of neoclassical production theory. The model can be estimated using standard econometric techniques, like GMM for dynamic panel data and latent factor analysis for the estimation of covariance matrices. An explicit functional form for the utility function is not needed and we show how measures of risk aversion and prudence (downside risk aversion) can be derived and estimated from the model. The model is estimated using data for Eurozone countries and we focus particularly on (i) the use of the modeling approach as an “early warning mechanism”, (ii) the bank- and country-specific estimates of risk aversion and prudence (downside risk aversion), and (iii) the derivation of a generalized measure of risk that relies on loan-price uncertainty.
    Keywords: Financial Stability; Banking; Expected Utility Maximization; Sub-prime crisis; Financial Crisis; Eurozone; PIIGS.
    JEL: G20 G21 C51 C54 D21 D22
    Date: 2014–05
  7. By: Anop, Sviatlana
    Abstract: Purpose - Similar development of economic fundamentals in Germany over the last fifteen years did not lead to dramatic house price increases as in Sweden. What can explain this house price stability over a long period? This paper attempts to find the answer this question. Design/methodology/approach - A comparative analysis approach is used to examine the differences in the banking sector policies on mortgage financing and approaches to valuing the mortgage properties in two case countries – Germany and Sweden. Findings - The extreme rise in Swedish house prices above the long-term trend was created by expanding bank lending policies. Excessive bank lending was not a sole reason for increase in prices, but was supported by the general macroeconomic factors and regulation environment determining supply and demand on the housing market. Banks should implement mortgage lending value as a base for mortgage lending together with amortization requirement for mortgage loans. Lending limits based on mortgage lending value will contribute to the stability in house prices in the long term period and it will create a safe lending environment on the housing market. Originality/value - The paper contributes to a better understanding of necessary conditions for the house prices to rise in the long run above the fundamentals level and suggests policy solutions that can reduce the risks of housing bubbles and increase financial stability.
    Date: 2013
  8. By: Song, Jae Eun
    Abstract: This paper develops a model of a competitive search credit market under hidden information and limited commitment. Using the model, it provides a theoretical account that links time delays and costs in financial intermediation as well as lack of collateral to the distribution of credit supply and interest rate spreads. The link sheds light on and explains the possibility of pure credit rationing due to the credit frictions. This paper also demonstrates the possibility of contract dispersion among homogeneous borrowers.
    Keywords: credit frictions, competitive search, contract, market tightness
    JEL: D82 E43 E51 G21
    Date: 2014–07
  9. By: Alan Moreira; Alexi Savov
    Abstract: We build a macroeconomic model that centers on liquidity transformation in the financial sector. Intermediaries maximize liquidity creation by issuing securities that are money-like in normal times but become illiquid in a crash when collateral is scarce. We call this process shadow banking. A rise in uncertainty raises demand for crash-proof liquidity, forcing intermediaries to delever and substitute toward safe, collateral- intensive liabilities. Shadow banking shrinks, causing the liquidity supply to contract, discount rates and collateral premia spike, prices and investment fall. The model produces slow recoveries, collateral runs, and flight to quality and it provides a framework for analyzing unconventional monetary policy and regulatory reform proposals.
    JEL: E44 E52 G01 G21 G23
    Date: 2014–07
  10. By: Multescu, Gheorghe Petru; Eder, Jeannine
    Abstract: The 2008-9 financial crisis left its mark on the European banking sector. States had to intervene in many cases in order to rescue banking institutions struggling with increasing levels of bad loans. Adopted solutions included the creation of vehicles for bad assets alongside the creation of strategies for luring property investors. At the same time banks were faced with internal restructuring in an attempt to cut costs and comply with new European financial regulations. In dealing with Corporate Real Estate Asset Management, cost-efficiency led to the selection of a number of main drivers in aligning strategic business objectives with the Corporate Real Estate Strategy. Against this background outsourcing of CREAM services regained senior management’s attention: however what is the best practice and how can this process meet the core strategic business objectives? The paper examines the implications of the banking sector restructuring process in Germany, with a particular emphasis on the centralisation of real estate competencies in a wholly owned subsidiary (WOS). The challenges of using this vehicle as a catalyst for aligning strategic business objectives with the bank’s Corporate Real Estate Strategy are also critically appraised. A case study approach is used, involving mainly qualitative data analysis of one of the German Landesbanks. The effects of the specific model of outsourcing are analysed from a ‘client’s perspective’. Main findings emphasise the importance of retaining control over CREAM and solutions to the ‘dilemma’ of reconciling divergent interests of shareholders and third parties involved.
    Date: 2014
  11. By: Irina Balteanu (Banco de España); Aitor Erce (Banco de España)
    Abstract: This paper provides a set of stylised facts on the mechanisms through which banking and sovereign distress feed into each other, using a large sample of emerging economies over three decades. We first define “twin crises” as events where banking crises and sovereign defaults combine, and further distinguish between those banking crises that end in sovereign debt crises, and vice-versa. We then assess what differentiates “single” episodes from “twin” ones. Using an event analysis methodology, we study the behaviour around crises of variables describing the balance sheet interconnection between the banking and public sectors, the characteristics of the banking sector, the state of public finances and the macroeconomic context. We find that there are systematic differences between “single” and “twin” crises across all these dimensions. Additionally, we find that “twin” crises are heterogeneous events: taking into account the proper time sequence of crises within “twin” episodes is important for understanding their drivers, transmission channels and economic consequences. Our results shed light on the mechanisms surrounding feedback loops of sovereign and banking stress
    Keywords: banking crises, sovereign defaults, feedback loops, balance sheets
    JEL: E44 F34 G01 H63
    Date: 2014–07
  12. By: Havermans, D.W.Q.; Leussink, M.I.K.; Smeets, J.J.A.M.
    Abstract: The housing costs of households are diverse. During the stages of the lifecycle the living costs of households vary substantially. Especially the costs for home-owners fluctuate considerably during their lifecycle. The house of a lot of older households is completely paid for, their loan to value ratio is zero and their remaining housing costs are low. On the other hand, younger households have high costs for mortgages, a high loan to value – even more than 1 – beside their remaining costs.The paper deals with this variation of housing costs among owner occupiers in several life stages and explores the consequences for the housing market. It focuses on the situation of younger households. As a consequence of the long lasting Dutch crisis the selling price of dwellings has gone down and a lot of these households potentially have a residual debt, because the value of their house is lower than their mortgage.This paper explores the extent of the problem, the consequences for the housing market and the possible solutions.
    Date: 2014
  13. By: Hullgren, Maria; Söderberg, Inga-Lill
    Abstract: The purpose of this paper is to investigate consumer characteristics that influence Swedish consumers' mortgage rate decisions, such as the choice between an adjustable rate mortgage (ARM) and a fixed rate mortgage (FRM). Data were collected in a randomised survey of the Swedish population in 2012. Through binary logistic regression, the effects of loan-to-value (LTV), age, education, income and risk aversion on household mortgage decisions are investigated. In addition, consumers' ability to handle sudden mortgage rate increases are examined together with five attitudinal questions on factors influencing the mortgage decision.The results show that higher LTV, a lower level of education, higher age, lower income, high risk averseness influence Swedish consumers to choose FRMs, while having trouble handling interest rate increases promotes the choice of ARMs. Four of the five attitudinal statements that was tested non-directional did make a statistically significant contribution to the model.This paper tests a number of characteristics in predicting consumers' mortgage choices, emphasises the importance of loan takers' ability to cope with sudden mortgage rate increases, highlights the importance of attitudes in understanding consumers' financial choices and elucidates the Swedish case.
    Date: 2013

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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