nep-ban New Economics Papers
on Banking
Issue of 2014‒08‒20
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Competition and Credit Control By C.A.E. Goodhart
  2. Risk Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia using Dynamic OLS and Two-step Dynamic System GMM Estimators By Abdul Wahab, Hishamuddin; Rosly, Saiful Azhar; Masih, Abul Mansur M.
  3. Bank Capital and Lending: An Analysis of Commercial Banks in the United States By Sudipto Karmakar; Junghwan Mok
  4. Do Banks Price Discriminate Spatially? Evidence from Small Business Lending in Local Credit Markets By Andrea Bellucci; Alexander Borisov; Alberto Zazzaro
  5. The Determinants Of Commercial Bank Profitability In Indonesia By Arief Putranto; Aldrin Herwany; Erman Sumirat
  6. Network Risk and Key Players: A Structural Analysis of Interbank Liquidity By Edward Denbee; Christian Julliard; Ye Li; Kathy Yuan
  7. The revolving door and worker flows in banking regulation By Lucca, David O.; Seru, Amit; Trebbi, Francesco
  8. 'Sudden Floods, Macroprudential Regulation and Stability in an Open Economy' By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  9. Stability and Identification with Optimal Macroprudential Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  10. The effect of state pension cut legislation on bank values By Cohen, Lee; Cornette, Marcia Millon; Mehran, Hamid; Tehranian, Hassan
  11. Regulating Consumer Financial Products: Evidence from Credit Cards By Johannes Stroebel
  12. The Analysis Of Factors That Influence Relative Efficiency Of General Banks After The Implementation Of Indonesia Banking Architecture By Bertha Elizabeth; Nanny Dewi; Aldrin Herwany
  13. Financial Shocks and Optimal Monetary Policy Rules By Fabio Verona; Manuel M. F. Martins; Inês Drumond

  1. By: C.A.E. Goodhart
    Abstract: The Bank of England’s ‘consultative document’ on Competition and Credit Control was published on May 14th, 1971. It was a landmark occasion, representing a decisive break with the prior system of maintaining direct controls over the, main components of the, UK banking system; the intention was now to achieve the monetary authorities’ objectives of policy via the operation of market mechanisms, notably adjustments in interest rates and open market operations. Although the ‘credit control’ aspect was, over the next few years, notably less successful than the encouragement of competition amongst the banks, (where the London Clearing Banks previously had maintained a restrictive cartel with the support of the authorities), nevertheless the direction of travel towards a more liberal, market based system, remained, despite a partial reversion towards a partial direct control system in the guise of the ‘corset’, introduced at the end of 1973, and finally laid to rest in June 1980.
    Date: 2014
  2. By: Abdul Wahab, Hishamuddin; Rosly, Saiful Azhar; Masih, Abul Mansur M.
    Abstract: The financial and banking crises around the world have prompted the regulators to revise, among others, the capital level of the banks to deal with the excessive risks taken by the banks, both conventional and Islamic. This study is the first attempt to investigate the relationship between risky assets and capital level in a mixed banking system applying the panel VECM and dynamic GMM estimators. The Malaysian mixed banking system is used as a case study taking panel data covering the period from December 2006 to October 2013. Our statistical results based on dynamic OLS (DOLS) tend to indicate that there is a positive relationship between the capital ratio (CAR) and risk weighted asset ratio (RWA) in the long run and also, the causality analysis based on panel VECM and two-step dynamic System GMM tends to indicate unidirectional causality in that the RWA is positively driven by CAR. Our results appear to suggest that higher capital buffer (excess capital above regulatory capital requirement) might have opened up more space for bank managers to taking risky positions while assisted by increasing domestic demand for credit facilities under favorable economic condition of Malaysia. In other words, high capital growth and capital buffer provides an extra cushion for Malaysian banks to pursue relatively riskier financing activities. For the full-fledge Islamic banks (IB) and Islamic bank subsidiaries (IBS), the existence of a cointegrating relationship between RWA and CAR suggests that the way the managers of Islamic banks behave towards risky assets follows the conventional practice.
    Keywords: Risk-taking, DOLS, Panel VECM, two-step dynamic System GMM
    JEL: C58 G21 G28
    Date: 2014–06–29
  3. By: Sudipto Karmakar; Junghwan Mok
    Abstract: This paper empirically evaluates the impact of bank capital on lending patterns of commercial banks in the United States. We construct an unbalanced quarterly panel of around seven thousand medium sized commercial banks over sixty quarters, from 1996 to 2010. Using two different measures of capital namely the capital adequacy ratio and tier 1 ratio, we find a moderate relationship between bank equity and lending. We also use an innovative instrumenting methodology which helps us overcome the endogeneity issues that are common in such analyses. Our results are broadly consistent with some other recent studies that have analyzed US banking data.
    JEL: G21 G28 G32
    Date: 2013
  4. By: Andrea Bellucci (University of Naples Federico II); Alexander Borisov (University of Cincinnati); Alberto Zazzaro (Polytechnic University of Marche, Money and Finance Research group (MoFiR, Ancona) and CASMEF (Rome))
    Abstract: In this paper we explore the effects of bank-borrower physical proximity on price and non-price aspects of small business lending in local credit markets. Along the price dimension, our analysis reveals that interest rates increase with bank-borrower distance and decrease with the distance between borrower and other competing banks. Along the quantity dimension, we observe that more distant borrowers are more likely to experience binding credit limits. We also show that the quantity effects of bank-borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.
    Keywords: Distance, Bank lending, Pricing, Interest rate, Credit availability.
    JEL: G21 G32 L11
    Date: 2013
  5. By: Arief Putranto (Department of Management and Business, Padjadjaran University); Aldrin Herwany (Department of Management and Business, Padjadjaran University); Erman Sumirat (Department of Management and Business, Padjadjaran University)
    Abstract: This thesis seeks to examine the determinants of bank profitability in Indonesia. The sample used is a panel data of 25 publicly traded Indonesian commercial banks in 2007-2012 period. This research used Return on Assets (ROA) and Return on Equity (ROE) as proxies of profitability and analyze how variables from three categories that is internal, external, and market share variable affects them. We found some intriguing findings from this study, namely, the effect of CAR that we found to be negative towards profitability,which indicated that the capitals of Indonesian banks are beyond their optimal level. Then we found that Loan to Deposit ratio and Market Share of Credit, contrary to common sense, also demonstrated a negative effect, which appears to be caused by the 2008-2010 Global Financial Crisis. Last, we also found that Inflation positively affect profitability, which seemingly caused by a demand-pull type of inflation.
    Keywords: Return on Assets, Return on Equity, Loan to Deposit Ratio, Credit Market Share
    JEL: M0
    Date: 2012–12
  6. By: Edward Denbee; Christian Julliard; Ye Li; Kathy Yuan
    Abstract: We model banks’ liquidity holding decision as a simultaneous game on an interbank borrowing network. We show that at the Nash equilibrium, the contributions of each bank to the network liquidity level and liquidity risk are distinct functions of its indegree and outdegree Katz-Bonacich centrality measures. A wedge between the planner and the market equilibria arises because individual banks do not internalize the effect of their liquidity choice on other banks’ liquidity benefit and risk exposure. The network can act as an absorbent or a multiplier of individual banks’ shocks. Using a sterling interbank network database from January 2006 to September 2010, we estimate the model in a spatial error framework, and find evidence for a substantial, and time varying, network risk: in the period before the Lehman crisis, the network is cohesive and liquidity holding decisions are complementary and there is a large network liquidity multiplier; during the 2007-08 crisis, the network becomes less clustered and liquidity holding less dependent on the network; after the crisis, during Quantitative Easing, the network liquidity multiplier becomes negative, implying a lower network potential for generating liquidity. The network impulse-response functions indicate that the risk key players during these periods vary, and are not necessarily the largest borrowers.
    Date: 2014
  7. By: Lucca, David O. (Federal Reserve Bank of New York); Seru, Amit (Federal Reserve Bank of New York); Trebbi, Francesco (Federal Reserve Bank of New York)
    Abstract: Drawing on a large sample of publicly available curricula vitae, this paper traces the career transitions of federal and state U.S. banking regulators and provides basic facts on worker flows between the regulatory and private sectors resulting from the revolving door. We find strong countercyclical net worker flows into regulatory jobs, driven largely by higher gross outflows into the private sector during booms. These worker flows are also driven by state-specific banking conditions as measured by local banks’ profitability, asset quality, and failure rates. The regulatory sector seems to experience a retention challenge over time, with shorter regulatory spells for workers, and especially those with higher education. Evidence from cross-state enforcement actions of regulators shows that gross inflows into regulation and gross outflows from regulation are both higher during periods of intense enforcement, though gross outflows are significantly smaller in magnitude. These results appear inconsistent with a “quid pro quo” explanation of the revolving door but consistent with a “regulatory schooling” hypothesis.
    Keywords: banking regulation; revolving door; inter-industry worker flows
    JEL: G21 G28
    Date: 2014–06–01
  8. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: A dynamic stochastic model of a small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility is developed. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to a premium. A sudden flood in capital flows generates an expansion in credit and activity, as well as asset price pressures. Countercyclical capital regulation, in the form of a Basel III-type rule based on credit gaps, is effective at promoting macro stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of three measures based on asset prices, the credit-to-GDP ratio, and the ratio of bank foreign borrowing to GDP). However, because the gain in terms of reduced economic volatility exhibit diminishing returns, in practice a countercyclical regulatory capital rule may need to be supplemented by other, more targeted macroprudential instruments when shocks are large and persistent.
    Date: 2014
  9. 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, UP1 - Université Paris 1, Panthéon-Sorbonne - Université Paris I - Panthéon-Sorbonne - PRES HESAM); 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; Optimal Policy under Commitment; Augmented Taylor rule; Monetary Policy.
    Date: 2014–04–12
  10. By: Cohen, Lee (Federal Reserve Bank of New York); Cornette, Marcia Millon (Federal Reserve Bank of New York); Mehran, Hamid (Federal Reserve Bank of New York); Tehranian, Hassan (Federal Reserve Bank of New York)
    Abstract: This study provides an empirical analysis of the impact of Wisconsin and Ohio pension cut legislation on values of banks operating in Wisconsin and Ohio, banks operating in other states in which pension cut legislation was being considered as Wisconsin and Ohio went through its legislative process, and all publicly traded U.S. banks. We find that banks doing business in Wisconsin and Ohio experience positive (negative) stock price reactions to announcements that indicate an increased (a decreased) probability of pension cut legislation. The stock price reactions are positively related to the extent to which banks operate in Wisconsin and Ohio. Stock price reactions are rarely evident for banks in the other thirteen states that were considering pension cut legislation during the period of analysis. We also find municipal bond spreads tighten and bank credit supply increases with pension cut legislation. Overall, the findings suggest states’ budget cuts affect bank values and credit supply through their municipal bond holdings.
    Keywords: financial institutions; municipal debt; public pensions
    JEL: G11 G21 H72 H75
    Date: 2014–06–01
  11. By: Johannes Stroebel (New York University)
    Abstract: Card Accountability Responsibility and Disclosure (CARD) Act in the United States. Using a unique panel data set covering over 150 million credit card accounts, we find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 2.8% of average daily balances, with a decline of more than 10% for consumers with the lowest FICO scores. Consistent with a model of low fee salience and limited market competition, we find no evidence of an offsetting increase in interest charges or a reduction in access to credit. Taken together, we estimate that the CARD Act fee reductions have saved U.S. consumers $20.8 billion per year. We also analyze the CARD Act requirement to disclose the interest savings from paying off balances in 36 months rather than only making minimum payments. We find that this “nudge†increased the number of account holders making the 36-month payment value by 0.5 percentage points, with a similarly sized decrease in the number of account holders paying less than this amount.
    Date: 2014
  12. By: Bertha Elizabeth (Department of Management and Business, Padjadjaran University); Nanny Dewi (Department of Management and Business, Padjadjaran University); Aldrin Herwany (Department of Management and Business, Padjadjaran University)
    Abstract: One of implementations that is done by Bank Indonesia to reach the vision of Arsitektur Perbankan Indonesia (API) is by determining anchor bank criteria and good performance bank criteria. Those criterias are determined from various aspects such as some ratios that consist of CAR, NPL, LDR, ROA, and the banking assets. These determinations are expected to be an encouragement for banks in Indonesia to improve the banking efficiency. The measurement and the efficiency analysis are done by implementing Data Envelopment Analysis (DEA) method through the approach of efficiency intermediation that is oriented toward output. This efficiency value will be the dependent variable in analysing the next regression that is done by applying the tobit regression. The independent variables that are applied in the regression are CAR, NPL, LDR, ROA, asset, SBI rate, inflation, and the Rupiah exchange toward Dollar. This research involves 108 conventional banks during 2004-2011 in Indonesia. The result of the efficiency measurement showed that Indonesia banking is not efficient in doing its function as the financial intermediator. The hypothesis testing result from tobit regression showed that the variables that influence the bank efficiency with 5% signification are CAR, NPL, the exchange rate, SBI rate, and inflation. Macro variables has bigger and more significant influence toward the intermediation efficiency compared with micro variables. Among micro variables CAR, LDR, NPL, ROA, and total asset, only CAR and NPL have significant influence in affecting intermediation efficiency. It happens because the measurement that is used in efficiency inputs ouputs are partial finance ratio where banks can manage it, so that the real bank performance can not reflected well.
    Keywords: Efficiency, Data Envelopment Analysis, Tobbit, and Indonesia Banking Architecture
    JEL: M0
    Date: 2012–12
  13. By: Fabio Verona (Bank of Finland, Monetary Policy and Research Department, and University of Porto, cef.up); Manuel M. F. Martins (University of Porto, Faculty of Economics and cef.up); Inês Drumond (Banco de Portugal, Financial Stability Department, and University of Porto, cef.up)
    Abstract: We assess the performance of optimal Taylor-type interest rate rules, with and without reaction to financial variables, in stabilizing the macroeconomy following financial shocks. We use a DSGE model that comprises both a loan and a bond market, which best suits the contemporary structure of the U.S. financial system and allows for a wide set of financial shocks and transmission mechanisms. Overall, we find that targeting financial stability – in particular credit growth, but in some cases also financial spreads and asset prices – improves macroeconomic stabilization. The specific policy implications depend on the policy regime, and on the origin and the persistence of the financial shock.
    Keywords: financial shocks, optimal monetary policy, Taylor rules, DSGE models, bond market, loan market
    JEL: E32 E44 E52
    Date: 2014–07

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