nep-ban New Economics Papers
on Banking
Issue of 2014‒08‒25
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Critical Evaluation of Basel III as Prudential Regulation and its Consequences in Developing Countries’ Credit Needs By Dawa Sherpa
  2. Assessing Targeted Macroprudential Financial Regulation: The Case of the 2006 Commercial Real Estate Guidance for Banks By Bassett, William F.; Marsh, Blake
  3. A comparison of the internal and external determinants of global bank loans: Evidence from bilateral cross-country data By Uluc Aysun; Ralf Hepp
  4. Limited Deposit Insurance Coverage and Bank Competition By Shy, Oz; Stenbacka, Rune; Yankov, Vladimir
  5. The Determinants of Household's Bank Switching By Marianna Brunetti; Rocco Ciciretti; Ljubica Djordjevic
  6. Contagious Synchronization and Endogenous Network Formation in Financial Networks By Christoph Aymanns and Co-Pierre Georg
  7. Unveiling Sovereign Effects in European Banks CDS Spreads Variations By Marc Peters; Hugues Pirotte
  8. Diversification and Endogenous Financial Networks By Jean-Cyprien H\'eam; Erwan Koch
  9. Trade Credit and Financial Distress By Garcia-Appendini, Emilia; Montoriol-Garriga, Judit
  10. Business to Business Credit to Small Firms By Mach, Traci L.
  11. Determinants of the real impact of banking crises: A review and new evidence By Philip Wilms; Job Swank; Jakob de Haan
  12. Information Asymmetry in SME Credit Guarantee Schemes: Evidence from Japan By SAITO Kuniyoshi; TSURUTA Daisuke
  13. Stochastic Intensity Models of Wrong Way Risk: Wrong Way CVA Need Not Exceed Independent CVA By Ghamami, Samim; Goldberg, Lisa R.
  14. Simplicity and complexity in capital regulation By Rosengren, Eric S.

  1. By: Dawa Sherpa (Centre for Economic Studies, Jawaharlal Nehru University, New Delhi, India)
    Abstract: This paper seeks to critically evaluate the nature and motivation for the regulatory frame sought in the Basel III norms and its consequences on the credit needs of developing countries. After the failure of previous two Basel accords (I and II), to act as the effective prudential regulation of large financial institutions operating on global scale, the new Basel III accord is hailed as the new regulatory rule which has successfully taken into consideration of all the lacunas of earlier accord. But structurally all Basel accords are market mediated regulation, which tries to contain systemic crisis of financial institution by imposing better liquidity and capital requirements on financial institutions. It was unable to deal with strong elements of regulatory capture, which virtually makes it ineffective. All Basel accords at best tries to stop bank insolvency issues during crisis period but it does not prevent the crisis from occurring altogether (like Glass Steagall act, at 1933 in US). Not only it is micro prudential in nature, it also ignores endogenous evolution of risk of underlying assets of financial institutions. Also non-binding character and ‘one size fit for all’ approach of the recommendation makes it very hard to implement. And for developing nations new Basel III has the potential to make flow of credit more volatile and pro-cyclical and additionally it raises the cost of financing and reduces the level of credit available for developmental purposes. It is unable to deal with the issue of regulatory arbitrage and consequent rise of shadow banking activities in developing countries which are raising serious concern of systemic risk in financial system of these countries.
    Keywords: Basel III, Macro Prudential Regulation, Shadow Banking, Structural Regulation
    JEL: G1 G2
    Date: 2013
  2. By: Bassett, William F. (Board of Governors of the Federal Reserve System (U.S.)); Marsh, Blake (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In the mid-2000s, federal bank regulatory agencies became alarmed by steadily increasing concentrations of commercial real estate (CRE) loans at many banks, particularly loans used to finance construction and land development (CLD). In January 2006, they issued guidance that required banks with specific high concentrations in those asset classes to tighten managerial controls. This paper shows that banks with concentrations in excess of the thresholds set in the guidance subsequently experienced slower growth in their CRE and CLD portfolios than can be explained by changes in the health of their balance sheets and economic conditions. Moreover, banks that were above the CRE thresholds also tended to have slower growth in C&I loans but faster growth in loans to households after the guidance was issued. The results highlight the potential for this type of macroprudential regulation to have a significant and broad influence on bank behavior.
    Keywords: Credit channel; government regulation; bank lending; real estate
    JEL: E44 G21 G28
    Date: 2014–06–12
  3. By: Uluc Aysun (University of Central Florida, Orlando, FL); Ralf Hepp (Fordham University, Bronx, NY)
    Abstract: This paper finds that factors determined outside of a country are more closely related to the global bank loans she receives. These loans are more stable when global banks are less competitive and have a higher presence in the recipient country. We obtain our results by using data on the bilateral loans positions of 15 countries and a unique methodology to identify and compare the independent effects of external and internal factors. We find support for our empirical results and draw more detailed inferences for competition and global bank presence by solving a simple model of global banking.
    Keywords: Cross-country loans, global banks, competition, overlapping generations model
    JEL: E44 F34 G15 G21
    Date: 2014–08
  4. By: Shy, Oz (Federal Reserve Bank of Boston); Stenbacka, Rune (Hanken School of Economics); Yankov, Vladimir (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Deposit insurance schemes in many countries place a limit on the coverage of deposits in each bank. However, no limits are placed on the number of accounts held with different banks. Therefore, under limited deposit insurance, some consumers open accounts with different banks to achieve higher or full deposit insurance coverage. We compare three regimes of deposit insurance: No deposit insurance, unlimited deposit insurance, and limited deposit insurance. We show that limited deposit insurance weakens competition among banks and reduces total welfare relative to no or unlimited deposit insurance.
    Keywords: Limited deposit insurance coverage; deposit rates; bank competition
    JEL: G21
    Date: 2014–08–06
  5. By: Marianna Brunetti (DEF and CEIS, Università di Roma "Tor Vergata"); Rocco Ciciretti (DEF and CEIS, Università di Roma "Tor Vergata"); Ljubica Djordjevic (Department of Finance, Tilburg University)
    Abstract: Using a unique panel dataset from 2006-2012 Bank of Italy Survey on Household Income and Wealth that links households to their main bank, we are able to investigate the determinants of bank switching by households. Household-bank relationship matters crucially in terms of exclusivity, intensity, and scope of the relationship. Specifically, we find that what really drives switching is mortgage, both taking out and paying off, besides confirming that switching costs reduce the probability of switching. We also find robust evidence that neither risk preferences, mobility nor economic condition of the household play any role, while education and financial literacy do matter, albeit with opposite effects. Last but not least, changing bank is less frequent for cooperative bank and more frequent for listed banks, after controlling for bank competition.
    Keywords: household-bank relationship, switching, bank specialization, mortgage
    JEL: G21 D14
    Date: 2014–08–06
  6. By: Christoph Aymanns and Co-Pierre Georg
    Abstract: When banks choose similar investment strategies the financial system becomes vulnerable to common shocks. We model a simple financial system in which banks decide about their investment strategy based on a private belief about the state of the world and a social belief formed from observing the actions of peers. Observing a larger group of peers conveys more information and thus leads to a stronger social belief. Extending the standard model of Bayesian updating in social networks, we show that the probability that banks synchronize their investment strategy on a state non-matching action critically depends on the weighting between private and social belief. This effect is alleviated when banks choose their peers endogenously in a network formation process, internalizing the externalities arising from social learning.
    Keywords: social learning, endogenous financial networks, multi-agent simulations, systemic risk
    JEL: G21 C73 D53 D85
    Date: 2014
  7. By: Marc Peters; Hugues Pirotte
    Abstract: Starting from the structural model developed by Merton (1974) and the derived notion of distance-to-default, we study the determinants of credit default swap (CDS) spreads for a sample of European banks over a period from January 2006 to December 2011. In particular, we test variables that are specific to the banking industry and look at the possible interaction with CDS spreads for the related sovereigns. We confirm findings from the literature review regarding the low significance of the structural model and its breakdown in times of stress. We confirm the importance of macro-economic components such as the general level of interest rates and the general state of the economy, particularly in times of stress. We find that before the crisis period the micro- and macro-components are generally predominant in the determination of CDS spread variations while the influence of sovereigns’ CDS become more important when entering further into the crisis period. Interestingly, southern European countries are the first to become significant at the start of the crisis. Progressively, all CDS countries become increasingly significant, overweigh all other explanatory variables and remain so even after the crisis period, thereby suggesting the focused attention of market participants for the sovereign dimension.
    Keywords: Credit default swaps; CDS spreads; structural model; distance to default; banking debt; sovereign debt
    JEL: G12 G21 G33
    Date: 2014–08–18
  8. By: Jean-Cyprien H\'eam; Erwan Koch
    Abstract: We propose to test the assumption that interconnections across financial institutions can be explained by a diversification motive. This idea stems from the empirical evidence of the existence of long-term exposures that cannot be explained by a liquidity motive (maturity or currency mismatch). We model endogenous interconnections of heterogenous financial institutions facing regulatory constraints using a maximization of their expected utility. Both theoretical and simulation-based results are compared to a stylized genuine financial network. The diversification motive appears to plausibly explain interconnections among key players. Using our model, the impact of regulation on interconnections between major banks -currently discussed at the Basel Committee on Banking Supervision- is analyzed.
    Date: 2014–08
  9. By: Garcia-Appendini, Emilia; Montoriol-Garriga, Judit
    Abstract: Using a sample of firms matched with their suppliers, we study the evolution of the suppliers’ provision of trade credit to distressed firms as they approach a default event. We show that, in the extensive margin, suppliers withdraw their financial support from distressed relationships, and they provide less financial support than banks, consistently with stronger incentives of uncollateralized, junior suppliers to exit from distressed relationships. However, we find a positive effect on the intensive margin as those firms with suppliers that continue the relationship increase their accounts payable. Finally, we show that suppliers of differentiated goods, suppliers located close to their distressed clients, suppliers that sell large proportions to the distressed clients, and suppliers selling to clients in a concentrated market are more likely to be held up in a distressed relationship.
    Keywords: Trade credit, financial distress, lines of credit, hold up
    JEL: G01 G30 G32
  10. By: Mach, Traci L. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Following the financial crisis, total outstanding loans to businesses by commercial banks dropped off substantially. Large loans outstanding began to rebound by the third quarter of 2010 and essentially returned to their previous growth trajectory while small loans outstanding continued to decline. Anecdotal evidence suggests that firms used trade credit to smooth over cash flow problems. The current paper looks at recent trends in trade credit use by small businesses based on a recent poll done by the Credit Research Foundation. The results highlight the importance of business to business credit for small businesses. They show an increase in demand over the past year as well as a slowdown in payment that may signal a decline in the ability to pay.
    Keywords: Small business; business to business spending; trade credit
    Date: 2014–07–30
  11. By: Philip Wilms; Job Swank; Jakob de Haan
    Abstract: We examine which variables are robust in explaining cross-country differences in the real impact of systemic banking crises. Based on a meta-analysis, we identify 21 variables frequently used as determinants of the severity of crises. Employing nine proxies for crisis severity, we find that large current account imbalances are the most robust determinant of the real impact of banking crises. Countries with a high GDP per capita have more prolonged downfalls after the occurrence of a banking crisis. Exchange rate developments and pre-crisis GDP growth are related to the peak-to-trough impact of a banking crisis.
    Keywords: banking crises; real impact of crises; duration of crises
    JEL: F3 G01 G18
    Date: 2014–08
  12. By: SAITO Kuniyoshi; TSURUTA Daisuke
    Abstract: In this paper, we investigate whether adverse selection and/or moral hazard can be detected in credit guarantee schemes for small and medium enterprises (SMEs). Using bank-level data, we analyzed whether the subrogation rate is positively associated with the ratio of guaranteed loans to total loans, and found that the data are consistent with an adverse selection and/or moral hazard hypothesis. Further analyses show that the relationship is stronger for 100% coverage than for 80% coverage, indicating that "20% self-payment" mitigates the problem, but is not enough to eliminate it.
    Date: 2014–07
  13. By: Ghamami, Samim (Board of Governors of the Federal Reserve System (U.S.)); Goldberg, Lisa R. (University of California, Berkely)
    Abstract: Wrong way risk can be incorporated in Credit Value Adjustment (CVA) calculations in a reduced form model. Hull and White [2012] introduced a CVA model that captures wrong way risk by expressing the stochastic intensity of a counterparty's default time in terms of the financial institution's credit exposure to the counterparty. We consider a class of reduced form CVA models that includes the formulation of Hull and White and show that wrong way CVA need not exceed independent CVA. This result is based on some general properties of the model calibration scheme and a formula that we derive for intensity models of dependent CVA (wrong or right way). We support our result with a stylized analytical example as well as more realistic numerical examples based on the Hull and White model. We conclude with a discussion of the implications of our findings for Basel III CVA capital charges, which are predicated on the assumption that wrong way risk increases CVA.
    Keywords: Credit value adjustment; stochastic intensity modeling; wrong way and right way risk; Basel III; counterparty credit risk
    Date: 2014–07–30
  14. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Eric called the increased attention on sufficient high-quality capital for banking organizations extremely important, and a "lesson learned and applied" from the financial crisis.
    Date: 2013–11–18

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