nep-ban New Economics Papers
on Banking
Issue of 2014‒08‒28
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Higher bank capital requirements and mortgage pricing: evidence from the Counter-Cyclical Capital Buffer By Christoph Basten; Catherine Koch
  2. A Look at the Structural Bank Regulation Initiatives and a Discussion over Turkish Banking Sector? By Burçhan Sakarya
  3. Bank bonds: size, systemic relevance and the sovereign By Andrea Zaghini
  4. Banking, Liquidity and Bank Runs in an Infinite Horizon Economy By Mark Gertler; Nobuhiro Kiyotaki
  5. Managerial compensation, regulation and risk in banks: theory and evidence from the financial crisis By Vittoria Cerasi; Tommaso Oliviero
  6. Size and support ratings of US banks By Tigran Poghosyan; Charlotte Werger; Jakob de Haan
  7. Quantifying the components of the banks' net interest margin By Busch, Ramona; Memmel, Christoph
  8. Fair lending analysis of credit cards By Skanderson, David; Ritter, Dubravka
  9. Central Bank Purchases of Private Assets By Stephen Williamson
  10. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima
  11. Consumer cash usage: a cross-country comparison with payment diary survey data By Bagnall, John; Bounie, David; Huynh, Kim P.; Kosse, Anneke; Schmidt, Tobias; Schuh, Scott; Stix, Helmut
  12. Credit Procyclicality and Financial Regulation in South Africa By James Bernstein, Leroi Raputsoane and Eric Schaling
  13. Broker-dealer finance and financial stability By Rosengren, Eric S.

  1. By: Christoph Basten; Catherine Koch
    Abstract: We examine mortgage pricing before and after Switzerland was the first country to activate the Counter-Cyclical Capital Buffer of Basel III. Observing multiple mortgage offers per request, we obtain three core findings. First, capitalconstrained and mortgage-specialized banks raise their rates relatively more. Second, risk-weighting schemes supposed to discriminate against more risky borrowers do not amplify the effect of higher capital requirements. Third, CCB-subjected banks and CCB-exempt insurers raise mortgage rates, but insurers raise rates by on average 8.8 bp more. To conclude, lenders welcome the opportunity to increase mortgage rates, but stricter capital requirements do not discourage banks from risky mortgage lending.
    Keywords: Bank lending, mortgage market
    JEL: G21 E51
    Date: 2014–07
  2. By: Burçhan Sakarya (BRSA (Banking Regulation and Supervision Agency), Strategy Development Department, Turkey)
    Abstract: Following the 2007-8 Global Crisis, a significant shift is observed towards the international regulatory approach about the banks. Apart from reform efforts from international institutions such as the IMF, G20 and BIS, several proposals are set forward in some advanced financial systems. Moreover, it is debated that, these so called structural bank reform efforts, also present a chance to indirectly solve the issue of “To-big-to-fail” problem, the SIFI-“systemically Important Financial Institution” problem by its new title. In this study the fundamental characteristics of globally known structural bank reform initiatives are compared and a panel data analysis conducted for the Turkish commercial banks for the 2002-2012 period to investigate the effect of risk diversification on profitability to test for diversification in bank activities.
    Keywords: : Structural Reforms in Banking, Turkish Banking Sector
    JEL: G21 G01 C23
    Date: 2013
  3. By: Andrea Zaghini (Bank of Italy)
    Abstract: I analyze the risk premium on bank bonds at origination with special focus on the role of implicit and explicit public guarantees and the systemic relevance of issuing institutions. Looking at the asset swap spread on 5,500 bonds, I find that explicit guarantees and sovereign creditworthiness have a substantial effect on the risk premium. In addition, while large institutions still enjoy lower issuance costs linked to the TBTF framework, I find evidence of enhanced market discipline for systemically important banks which have faced an increased premium on bond placements since the onset of the financial crisis.
    Keywords: Too-big-to-fail, market discipline, sovereign guarantees, G-SIFIs
    JEL: G21 G18 G01
    Date: 2014–07
  4. By: Mark Gertler (New York University (E-mail:; Nobuhiro Kiyotaki (Princeton University (E-mail:
    Abstract: We develop a variation of the macroeconomic model of banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates countercyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenous liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.
    Keywords: Financial Intermediation, Liquidity Mismatch, Financial Accelerator, Rollover Risk
    JEL: E44 G21
    Date: 2014–08
  5. By: Vittoria Cerasi; Tommaso Oliviero
    Abstract: This paper analyzes the relation between CEOs monetary incentives, financial regulation and risk in banks. We present a model where banks lend to opaque entrepreneurial projects to be monitored by managers; managers are remunerated according to a pay-for-performance scheme and their effort is unobservable to depositors and shareholders. Within a prudential regulatory framework that defines a capital requirement and a deposit insurance, we study the effect of increasing the variable component of managerial compensation on risk taking. We then test empirically how monetary incentives provided to CEOs in 2006 affected banks’ stock price and volatility during the 2007-2008 financial crisis on a sample of large banks around the World. The cross-country dimension of our sample allows us to study the interaction between CEO incentives and financial regulation. The empirical analysis suggests that the sensitivity of CEOs equity portfolios to stock prices and volatility has been indeed related to worse performance in countries with explicit deposit insurance and weaker monitoring by shareholders. This evidence is coherent with the main prediction of the model, that is, the variable part of the managerial compensation, combined with weak insiders’ monitoring, exacerbates the risk-shifting attitude by managers.
    Keywords: managerial compensation, risk taking, financial regulation, monitoring
    JEL: G21 G38
    Date: 2014–07
  6. By: Tigran Poghosyan; Charlotte Werger; Jakob de Haan
    Abstract: We examine whether Fitch support ratings of US banks depend on bank size. Using quarterly data for the period 2004:Q4 to 2012:Q4 and controlling for several factors that make large and small banks different, we find that bank size is positively related to support ratings. However, the effect is non-linear in line with the 'too-big-to-rescue' argument. After the failure of Lehman Brothers and the passing of Dodd-Frank the relation between size and potential support has become stronger.
    Keywords: support ratings; bank size; too-big-too-fail; financial crises
    JEL: G21 G32 L25
    Date: 2014–08
  7. By: Busch, Ramona; Memmel, Christoph
    Abstract: Using unique data sets on German banks, we decompose their net interest margin and quantify the different components by estimating the costs of the various functions they perform. We investigate three major functions: namely, liquidity and payment management for the customers, the bearing of credit risk, and term transformation. For the year 2012, the costs of liquidity and payment management correspond, in the median, to 47%, the bearing of credit risk to 16%, and earnings from term transformation to 35% of the net interest margin, respectively. However, looking at the period 2005-2012, earnings from term transformation seem to account for a much smaller share (about 20%) of the median bank's net interest margin. --
    Keywords: net interest margin,credit risk,term transformation,liquidity and payment management
    JEL: G21
    Date: 2014
  8. By: Skanderson, David (Charles River Associates); Ritter, Dubravka (Federal Reserve Bank of Philadelphia)
    Abstract: This paper discusses some of the key fair lending risks that can arise in various stages of the marketing, acquisition, and management of credit card accounts, and the analysis that can be employed to manage such risks. The Equal Credit Opportunity Act (ECOA) and its implementing Regulation B prohibit discrimination in all aspects of credit transactions and include specific provisions relating to processes that employ credit scoring models. This paper discusses some of the areas of credit card operations that may be assessed in an effort to manage the risk of noncompliance with fair lending laws and regulations. Particular attention is focused on approaches to testing for the risk of disparate impact on a prohibited basis in credit scoring models and model-intensive prescreened marketing campaigns, as well as in judgmental credit card underwriting. The paper concludes by discussing how the fair lending risks associated with credit scoring models may be managed by synchronizing compliance oversight with an institution's model governance framework. The methods discussed in this paper are also applicable to other consumer credit products that utilize credit scoring models.
    Keywords: ECOA; Regulation B; Discrimination; Fair lending; Consumer lending; disparate treatment; Disparate impact; Credit card; Scoring model; Model governance
    JEL: G21 G28 K23
    Date: 2014–08–18
  9. By: Stephen Williamson (Washington University in St. Louis)
    Abstract: A model is constructed in which consumers and banks have incentives to fake the quality of collateral. Conventional central banking policy can exacerbate these problems, in that lower nominal interest rates make asset prices higher, which makes faking collateral more profitable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages can increase welfare by bypassing incentive problems associated with private banks, increasing asset prices, and relaxing collateral constraints. However, this may exacerbate incentive problems in the mortgage market.
    Date: 2014
  10. By: Keiichiro Kobayashi; Tomoyuki Nakajima (Institute of Economic Research,Kyoto University and CIGS)
    Abstract: We develop a macroeconomic model in which liquidity plays an essential role in the production process, because _rms have a commitment problem regarding factor payments. A liquidity crisis occurs when _rms fail to obtain su_cient liquidity, and may be caused either by self-ful_lling beliefs or by fundamental shocks. Our model is consistent with the observation that the decline in output during the Great Recession is mostly attributable to the deterioration in the labor wedge, rather than in productivity. The government's commitment to guarantee bank deposits reduces the possibility of a self-fulfilling crisis, but it increases that of a fundamental crisis.
    Keywords: Liquidity crises; Systemic crises; Corporate liquidity demand; Limited commitment; Debt overhang.
    JEL: E30 G01 G21
    Date: 2014–03
  11. By: Bagnall, John (Reserve Bank of Australia); Bounie, David (Telecom ParisTech); Huynh, Kim P. (Bank of Canada); Kosse, Anneke (De Nederlandsche Bank); Schmidt, Tobias (Deutsche Bundesbank); Schuh, Scott (Federal Reserve Bank of Boston); Stix, Helmut (Oesterrichische Nationalbank)
    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 use 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: D12 D14 E41
    Date: 2014–05–08
  12. By: James Bernstein, Leroi Raputsoane and Eric Schaling
    Abstract: This study assesses the behaviour of credit extension over the economic cycle to determine its usefulness as a reference guide for implementing the countercyclical capital buffers for financial institutions in South Africa. The study finds that the common reference guide for implementing the countercyclical capital buffers, which is based on the gap between the ratio of aggregate private sector credit to gross domestic product and its long term trend, increases during the economic cycle busts, while such a relationship is broken during the economic cycle booms. The study also finds that this common reference guide decreases during the upturns in the economic cycle, while it increases during the periods of downturns in the economic cycle. Thus credit extension should be used with caution as a common reference guide to determine the level of the countercyclical capital buffers for financial institutions in South Africa.
    Keywords: Credit Procyclicality, Financial Regulation
    JEL: C32 E32 E61 G21
    Date: 2014
  13. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the Conference on the Risks of Wholesale Funding sponsored by the Federal Reserve Banks of Boston and New York, New York, New York, August 13, 2014.
    Date: 2014–08–13

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