New Economics Papers
on Banking
Issue of 2014‒08‒16
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game By Karen Mills; Brayden McCarthy
  2. Preventing bank runs By Andolfatto, David; Nosal, Ed; Sultanum, Bruno
  3. Deconstructing Canada's Housing Markets: Finance, Affordability and Urban Sprawl By Calista Cheung
  4. Banks, Government Bonds, and Default: What do the Data Say? By Nicola Gennaioli; Alberto Martin; Stefano Rossi
  5. Financial Stability and Financial Inclusion By Peter J. Morgan; Victor Pontines
  6. What determines the composition of international bank flows? By Kerl, Cornelia; Niepmann, Friederike
  7. Foreign Bank Behavior during Financial Crises By Jonathon Adams-Kane; Julián Caballero; Jamus Lim
  8. Reserve Requirements, Liquidity Risk, and Credit Growth By Koray Alper; Mahir Binici; Selva Demiralp; Hakan Kara; Pinar Ozlu
  9. Mandatory Disclosure and Financial Contagion By Gadi Barlevy; Fernando Alvarez
  10. Liquidity Risk and U.S. Bank Lending at Home and Abroad By Correa, Ricardo; Goldberg, Linda; Rice, Tara
  11. Bank Competition and Credit Constraints in Developing Countries: New Evidence By Florian LEON
  12. Are Young Borrowers Bad Borrowers? Evidence from the Credit CARD Act of 2009 By Andra Ghent
  13. Consumer cash usage: A cross-country comparison with payment diary survey data By John Bagnall; David Bounie; Kim Huynh; Anneke Kosse; Tobias Schmidt; Scott Schuh; Helmut Stix
  14. Disaggregated Credit Extension and Financial Distress in South Africa By Leroi Raputsoane
  15. Resource Allocation and Inefficiency in the Financial Sector By Kinda Hachem
  16. The Economics of Collateral By Ronald W.Anderson; Karin Jõeveer
  17. Financial Innovation and Fragility By Kühnhausen, Fabian
  18. Bank loan application success by SMEs: the role of ownership structure and innovation By Peter van der Zwan

  1. By: Karen Mills (Harvard Business School, General Management Unit); Brayden McCarthy (Harvard Business School)
    Abstract: Small businesses are core to America's economic competitiveness. Not only do they employ half of the nation's private sector workforce - about 120 million people - but since 1995 they have created approximately two-thirds of the net new jobs in our country. Yet in recent years, small businesses have been slow to recover from a recession and credit crisis that hit them especially hard. This lag has prompted the question, "Is there a credit gap in small business lending?" This paper compiles and analyzes the current state of access to bank capital for small business from the best available sources. We explore both the cyclical impact of the recession on small business and access to credit, and several structural issues in that impede the full recovery of bank credit markets for smaller loans.
    Date: 2014–07
  2. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Nosal, Ed (Federal Reserve Bank of Chicago); Sultanum, Bruno (The Pennsylvania State University)
    Abstract: Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria. It has never been clear, however, whether bank-run equilibria in this framework are a natural byproduct of the economic environment or an artifact of suboptimal contractual arrangements. In the class of direct mechanisms, Peck and Shell (2003) demonstrate that bank-run equilibria can exist under an optimal contractual arrangement. The difficulty of preventing runs within this class of mechanism is that banks cannot identify whether withdrawals are being driven by psychology or by fundamentals. Our solution to this problem is an indirect mechanism with the following two properties. First, it provides depositors an incentive to communicate whether they believe a run is on or not. Second, the mechanism threatens a suspension of convertibility conditional on what is revealed in these communications. Together, these two properties can eliminate the prospect of bank-run equilibria in the Diamond-Dybvig environment.
    Keywords: bank runs; optimal deposit contract; financial fragility
    JEL: D82 E58 G21
    Date: 2014–08–04
  3. By: Calista Cheung
    Abstract: House prices have increased significantly in Canada over the past decade, driving household debt and residential construction activity to historical highs. Although macro-prudential tightening has slowed the pace of household borrowing in the last few years, house prices have continued to trend higher, and affordability remains a major challenge in urban centres. First-time home buyers must therefore spend more of their incomes to purchase a house and are vulnerable to future interest rate hikes. Overbuilding in the condominium sectors of some cities appears to be a source of risk, especially if a major price correction in these segments spills over into other markets. The country benefits from a sound and effective housing finance system, which performed well throughout the global financial crisis thanks to strong regulatory oversight and explicit government backing of the mortgage market. Nonetheless, the dominance of the crown corporation CMHC in the mortgage insurance market concentrates a significant amount of risk in public finances. Improving competitive conditions in the mortgage insurance market could help diversify these risks and reduce taxpayer contingent liabilities, while introducing coverage limits on loan losses would better align private and social interests. There may be a shortage of rental housing in several cities, especially in the range that low-income households can afford. Urban planning policies have resulted in low-density residential development which contributes to relatively high transport-related carbon emissions. Addressing these externalities requires stronger pricing signals for land development, road use, congestion and parking, combined with better integration of public transit planning. To prevent the marginalisation of low-income households, planning policies should support social mix and increase incentives for private-sector development of affordable housing. This Working Paper relates to the 2014 OECD Economic Review of Canada (
    Keywords: housing, financial regulation, household debt, macroprudential regulation, land use, affordability, compact growth, development charge, densification, social housing, housing finance, house prices, financial system risk, mortgage securitisation, mortgage markets, property tax, urban planning, urban sprawl, subprime, rental markets
    JEL: E02 E44 E61 G21 G22 G23 G28 H21 H42 H71 R14 R21 R31 R38 R48 R52 R58
    Date: 2014–07–21
  4. By: Nicola Gennaioli; Alberto Martin; Stefano Rossi
    Abstract: We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.
    Keywords: Banks;Government securities;Bonds;Sovereign risk;Return on investment;Sovereign debt defaults;Banking crisis;Sovereign Risk, Sovereign Default, Government Bonds
    Date: 2014–07–08
  5. By: Peter J. Morgan (Asian Development Bank Institute (ADBI)); Victor Pontines
    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, low-income households, non-performing loans
    JEL: G21 G28 O16
    Date: 2014–07
  6. By: Kerl, Cornelia (Deutsche Bundesbank); Niepmann, Friederike (Federal Reserve Bank of New York)
    Abstract: Several recent studies document that the extent to which banks transmit shocks across borders depends on the type of foreign activities these banks engage in. This paper proposes a model to explain the composition of banks’ foreign activities, distinguishing between international interbank lending, intrabank lending, and cross-border lending to foreign firms. The model shows that the different activities are jointly determined and depend on the efficiencies of countries’ banking sectors, differences in the return on loans across countries, and impediments to foreign bank operations. Specifically, the model predicts that international interbank lending increases and lending to foreign nonbanking firms declines when banks’ barriers to entry rise, a hypothesis supported by German bank-level data. This result suggests that policies that restrict the operations of foreign banks in a country may move activity onto international interbank markets, with the potential to make domestic credit overall less resilient to financial distress.
    Keywords: global banks; interbank market; international bank flows; transmission of shocks
    JEL: F21 F23 F30 G21
    Date: 2014–07–01
  7. By: Jonathon Adams-Kane; Julián Caballero; Jamus Lim
    Abstract: This paper studies whether lending by foreign banks is affected by financial crises. The paper pairs a bank-level dataset of foreign ownership with information on banking crises and examines whether the credit supply of majority foreignowned banks that underwent home-country crises differs systematically from that of other foreign banks. The baseline results show that banks exposed to homecountry crises in 2007 and 2008 exhibit changes in lending patterns that are lower by between 13 and 42 percent than their non-crisis counterparts. This finding is robust to potential alternative explanations and also holds, though less strongly, for the 1997-98 Asian crisis.
    Keywords: Financial Crises & Economic Stabilization, Foreign bank ownership, Financial crisis, Bank lending
    Date: 2014–07
  8. By: Koray Alper (Central Bank of Turkey); Mahir Binici (Central Bank of Turkey); Selva Demiralp (Department of Economics, Koc University); Hakan Kara (Central Bank of Turkey); Pinar Ozlu (Central Bank of Turkey)
    Abstract: Many central banks in emerging economies have used reserve requirements (RR) to alleviate the trade-off between financial stability and price stability in recent years. Notwithstanding their widespread use, transmission channels of RR have remained largely as a black-box. In this paper, we use bank-level data to explore the interaction between RR and bank lending behavior. Our empirical findings suggest that short-term borrowing from the central bank is not a close substitute for deposits for banks. Bank lending behavior responds significantly to reserve requirements and liquidity positions. Our analysis allows us to identify a new channel that we name as the “liquidity channel”. The channel works through a decline in bank liquidity and loan supply due to an increase in reserve requirements.
    Keywords: Monetary transmission mechanism; liquidity risk; bank lending channel; Turkey.
    JEL: E44 E51 E52
    Date: 2014–07
  9. By: Gadi Barlevy (Federal Reserve Bank of Chicago); Fernando Alvarez (University of Chicago)
    Abstract: The paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features "contagion," meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, banks in our model have protable investment projects that require outside funding, but which banks will only undertake if they have enough equity. Investors thus value information about which banks were hit by shocks. We find that when the extent of contagion is large, it is possible for no information to be disclosed in equilibrium but for mandatory disclosure to increase welfare by allowing investment that would not have occurred otherwise. Absent contagion, however, mandatory disclosure will not raise welfare, even if markets are otherwise frozen. Our findings provide insight on when contagion is likely to be a concern, e.g. when banks are highly leveraged against other banks, and thus on when mandatory disclosure is likely to be desirable.
    Date: 2014
  10. By: Correa, Ricardo (Board of Governors of the Federal Reserve System (U.S.)); Goldberg, Linda (Federal Reserve Bank of New York); Rice, Tara (Board of Governors of the Federal Reserve System (U.S.))
    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.
    Keywords: International banking; global banking; liquidity; transmission; internal capital market
    Date: 2014–05–29
  11. By: Florian LEON (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: Bank Competition and Credit Constraints in Developing Countries: New Evidence 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
  12. By: Andra Ghent (Arizona State University)
    Abstract: Young borrowers are the least experienced financially and, conventionally, thought to be most prone to financial mistakes. We study the relationship between age and financial problems related to credit cards. Our results challenge the notion that young borrowers are bad borrowers. We show that young borrowers are among the least likely to experience a serious credit card default. We then exploit the 2009 CARD Act to identify which individuals self-select into obtaining a credit card early in life. We find that individuals who choose early credit card use default less and are more likely to get a mortgage while young.
    Date: 2014
  13. By: John Bagnall; David Bounie; Kim Huynh; Anneke Kosse; Tobias Schmidt; Scott Schuh; Helmut Stix
    Abstract: We measure consumers' use of cash by harmonizing payment diary surveys from seven countries. The seven diary surveys were conducted in 2009 (Canada), 2010 (Australia), 2011 (Austria, France, Germany and the Netherlands), and 2012 (the United States). Our paper finds cross-country differences - for example, the level of cash usage differs across countries. Cash has not disappeared as a payment instrument, especially for low-value transactions. We also find that the use of cash is strongly correlated with transaction size, demographics, and point-of-sale characteristics such as merchant card acceptance and venue.
    Keywords: Money Demand; Payment Systems; Harmonization
    JEL: E41 D12 E58
    Date: 2014–04
  14. By: Leroi Raputsoane
    Abstract: This study analyses the relationship between disaggregated credit extension and financial distress in South Africa. It commences by constructing a composite indicator of financial distress and then examines its correlation with components of disaggregated credit extension. Of particular interest is to isolate the components of disaggregated credit extension that show a strong relationship with the measure of financial distress for financial stability purposes. The empirical results reveal that aggregate total domestic credit extension is robustly positively correlated with the composite indicator of financial distress, while there is a mixed relationship between the components of disaggregated credit extension and the composite indicator of financial distress. In particular, the study finds that total domestic credit extension, instalment sale credit, loans and advances to households, investments and total loans and advances are highly correlated with the composite indicator of financial distress and hence conjures that these components could be aggregated into a single measure of credit extension that could be used for financial stability purposes in South Africa.
    Keywords: Disaggregated credit extension, Financial distress
    JEL: C32 E44 E51 G21
    Date: 2014
  15. By: Kinda Hachem
    Abstract: I analyze whether banks are efficient at allocating resources across intermediation activities. Competition between lenders means that resources are needed to draw borrowers into credit matches. At the same time, imperfect information between lenders and borrowers means that resources are also needed for screening. I show that the privately optimal allocation of resources is constrained inefficient. In particular, too many resources are spent on getting rather than vetting borrowers but, once properly vetted, not enough matches are retained. Uninformed lending is thus inefficiently high, informed lending is inefficiently low, and a tax on matching activities helps remedy the situation.
    JEL: D62 D83 E44
    Date: 2014–08
  16. By: Ronald W.Anderson; Karin Jõeveer
    Abstract: In this paper we study how the use of collateral is evolving under the influence of regulatory reform and changing market structure. We start with a critical review of the recent empirical literature on the supply and demand of collateral which has focussed on the issue of ‘collateral scarcity’. We argue that while limited data availability does not allow a comprehensive view of the market for collateral, it is unlikely that there is an overall shortage of collateral. However, it is quite possible that there may be bottlenecks within the system which mean that available collateral is immobilized in one part of the system and unattainable by credit-worthy borrowers. We then describe how these problems sometimes can be overcome by improved information systems and collateral transformation. We discuss how collateral management techniques differ between banks and derivatives markets infrastructures including, in particular, CCPs. In order to assess the impact of alternative institutional arrangements on collateral demand, we introduce a theoretical model of an OTC derivatives market consisting of investors and banks arrayed in several regions or market segments. We simulate this model under alternative forms meant to capture the implications of moving to mandatory CCP clearing and mandatory initial margin requirements for non-cleared OTC derivatives.
    Date: 2014
  17. By: Kühnhausen, Fabian
    Abstract: In this paper, I evaluate the impact of innovative activity of financial agents on their fragility in a competitive framework. There exist a vast array of concerns about the interconnection of financial innovations, financial distress of firms and financial crises provided by theoretical arguments. I build on these and assess empirically the causal link between a financial agents' innovativeness and stability. Using a unique data set on financial innovations in the USA between 1990 and 2002, I show that a larger degree of innovation negatively (positively) affects firm stability (fragility) after controlling for the underlying firm characteristics. The results are robust against different modifications of innovation measures and against different fragility parameters indicating profitability, activity risk and risk of insolvency.
    Keywords: Incentives to Innovate; Financial Innovation; Fragility
    JEL: G01 G2 L11 O31
    Date: 2014–06–23
  18. By: Peter van der Zwan
    Abstract: This paper focuses on SMEs – firms with 250 employees at most – and the proportion of their requested loan that is granted by the bank. Financial data for SMEs in 38 European countries for 2011 are used (SMEs’ Access to Finance survey) to test the relationship between ownership structure and innovation on the one hand and loan application success on the other hand. The set of control variables includes firm age, firm size, past firm growth, expected firm growth, and sector orientation. Focusing on the determinants of access to finance is important because restricted access could hinder firm growth. It turns out that SMEs that are part of a business group and SMEs with a multiple ownership structure have higher probabilities of receiving the requested bank loan than SMEs with a single owner. There is some evidence that female owned business have more success regarding their loan applications than male owned businesses. Furthermore, SMEs that adopt product or process innovations are less likely to receive the requested loan than SMEs that do not display innovative behavior. The robustness of these findings across several model specifications is shown and the implications of the findings are discussed.
    Date: 2014–04–25

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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