nep-ban New Economics Papers
on Banking
Issue of 2014‒09‒08
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Linkages and International Trade By Galina Hale; Christopher Candelaria; Julian Caballero; Sergey Borisov
  2. The impact of credit information sharing reforms on firm financing? By Peria, Maria Soledad Martinez; Singh, Sandeep
  3. Measuring Contagion Risk in High Volatility State between Major Banks in Taiwan by Threshold Copula GARCH Model By Su, EnDer
  4. A Leverage-Based Measure of Financial Instability By Tepper, Alexander; Borowiecki, Karol Jan
  5. Basel III, Clubs and Eurozone Asymmetries By Michele Fratianni; John Pattison
  6. Sequential lending with dynamic joint liability in micro-finance By Shyamal Chowdhury; Prabal Roy Chowdhury; Kunal Sengupta
  7. Yes Virginia, There is a European Banking Union! But It May Not Make Your Wishes Come True By Martin F. Hellwig
  8. Key Borrowers Detected By The Intensities Of Their Short-range Interactions By Fuad Aleskerov; Irina Andrievskaya; Elena Permjakova
  9. The Interaction of Mortgage Credit and Housing Prices in the US By Fabian Lindner
  10. Financial Intermediation, House Prices and the Welfare Effects of the U.S. Great Recession By Dominique Menno; Tommaso Oliviero
  11. Macroprudential Policy Tools in Norway: Strengthening Financial System Resilience By Yosuke Jin; Patrick Lenain; Paul O'Brien
  12. Influence of External Funding on Microfinance Performance By Janda, Karel; Van Tran, Quang; Zetek, Pavel
  13. Welcoming remarks at Workshop on the Risks of Wholesale Funding By Dudley, William
  14. Access to Credit and the Size of the Formal Sector in Brazil By Pablo D`Erasmo
  15. Hypnosis Before Wake-up Call? The Revival of Sovereign Credit Risk Perception in the EMU-Crisis By Ingo G. Bordon; Kai Daniel Schmid; Michael Schmidt

  1. By: Galina Hale; Christopher Candelaria; Julian Caballero; Sergey Borisov
    Abstract: This paper shows that bank linkages have a positive effect on international trade. A global banking network (GBN) is constructed at the bank level, using individual syndicated loan data from Loan Analytics for 1990-2007. Network distance between bank pairs is computed and aggregated to country pairs as a measure of bank linkages between countries. Data on bilateral trade from IMF DOTS are used as the subject of the analysis and data on bilateral bank lending from BIS locational data are used to control for financial integration and financial flows. Using a gravity approach to modeling trade with country-pair and year fixed effects, the paper finds that new connections between banks in a given country-pair lead to an increase in trade flow in the following year, even after controlling for the stock and flow of bank lending between the two countries. It is conjectured that the mechanism for this effect is that bank linkages reduce export risk, and four sets of results that support this conjecture are presented.
    JEL: F10 F15 F34 F36
    Date: 2013–12
  2. By: Peria, Maria Soledad Martinez; Singh, Sandeep
    Abstract: This paper analyzes the impact of introducing credit information-sharing systems on firms'access to finance. The analysis uses multi-year, firm-level surveys for 63 countries covering more than 75,000 firms over the period 2002-13. The results reveal that credit bureau reforms, but not credit registry reforms, have a significant and robust effect on firm financing. After the introduction of a credit bureau, the likelihood that a firm has access to finance increases, interest rates drop, maturity lengthens, and the share of working capital financed by banks increases. The effects of credit bureau reforms are more pronounced the greater the coverage of the credit bureau and the scope and accessibility of the credit information-sharing scheme. Credit bureau reforms also have a greater impact on firms'access to finance in countries where contract enforcement is weaker. Finally, there is some evidence that the effects of credit bureau reform are more pronounced for smaller, less experienced, and more opaque firms.
    Keywords: Access to Finance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Financial Intermediation
    Date: 2014–08–01
  3. By: Su, EnDer
    Abstract: This paper aims to study the structural tail dependences and risk magnitude of contagion risk during high risk state between domestic and foreign banks. Empirically, volatility of stock returns has the properties of persistence, clustering, heteroscedasticity, and regime switchs. Thus, the threshold regression model having piecewise regression capability is used to classify the volatility index of influential foreign banks as “high” and “low” of two volatility states to further estimate Kendall taus i.e. structural tail dependences between banks using three models: Gaussian, t, and Clay copula GARCH. Using fuzzy c-means method, both domestic and foreign banks are categorized into 10 groups. Through the groups, 5 domestic and 7 foreign representative banks are identified as the research objects. Then, the in-sample data of daily banks’ stock prices covering 01/03/2003 ~06/30/2006 are used to estimate the parameters of threshold copula GARCH model and Kendall taus. The out-of-sample data covering 07/01/2006~03/25/2014 are used to estimate the Kendall taus gradually using rolling window technique. Several research findings are described as follows. In high state, the tail dependences are two times much larger than in low state and most of them have up-trend property after sub-prime crisis and reach the peak during Greek debt. It implies that the volatility is high in risk event and the contagion is high after risk event. In high state, HNC has the highest tail dependences with foreign banks but its value at risk is the lowest. It can be considered as an international attribute bank with lower risk. On the contrary, YCB and FCB have the lower tail dependences with foreign banks but their value at risks are quite high. They are viewed as a local attribute bank with higher risk. The Bank of American, Citigroup, and UBS AG have the relatively higher value at risk. Citigroup has been tested to Granger cause ANZ and all domestic banks. It is necessary to beware the contagion risk from Citigroup. Among three models, in low state, Gaussian and t copula models have the better significance of estimation than Clay copula model. However in high state, Clay copula model has the same acceptable estimation and more capability to uncover the instant nonlinear jumps of tail dependences while Gaussian and t copula models reveal the linear changes of tail dependences as a curve.
    Keywords: Contagion Risk, Threshold GARCH, Copula, Tail Dependences
    JEL: C00 G10
    Date: 2014–08–26
  4. By: Tepper, Alexander (Federal Reserve Bank of New York); Borowiecki, Karol Jan (Department of Business and Economics)
    Abstract: We employ a model of leverage-induced explosive behavior in financial markets to develop a measure of financial market instability. Specifically, we derive a quantitative condition for how large levered investors can become relative to the whole market before the demand curve for securities suddenly becomes upward-sloping and small price declines cascade as levered investors are forced to liquidate. The size and leverage of all levered investors and the elasticity of demand of unlevered investors define the minimum market size for stability (or MinMaSS), the smallest market size that can support a given group of levered investors. The ratio of actual market size to MinMaSS is termed the instability ratio, and can give regulators and policymakers advance warning of financial crises. We apply the instability ratio in an investigation of the 1998 demise of the hedge fund Long-Term Capital Management. We find that a forced liquidation of the fund threatened to destabilize some financial markets, particularly for bank funding and equity volatility.
    Keywords: Leverage; financial crisis; financial stability; minimum market size for stability (MinMass); instability ratio; Long-Term Capital Management (LTCM)
    JEL: E58 G01 G10 G20 G21
    Date: 2014–08–26
  5. By: Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); John Pattison (Independent)
    Abstract: Financial regulation has shifted from a system managed as an oligopoly dominated by the G2/G5 to expanded club membership like the Basel Committee for Banking Supervision (BCBS). Expansive clubs have to agree to terms that are closer to the preferences of softregulation members. Yet, once a global agreement on minimum standards, such as Basel III, is reached, the implementation is left to national or regional regulators. Deviations from the Basel III standards are bound to occur; the complexity of the agreement will facilitate an asymmetric implementation of national regulation and supervision. On the high side, countries like the US, UK, Australia, some Scandinavian countries and Canada have chosen higher standards. On the low side, we expect deviations to take place in those member countries of the Eurozone that are heterogeneous, have different preferences and tradeoffs between regulatory stringency and economic activity. The requirements of both global clubs and the EU regional club for transparency, monitoring and a level playing field will cause a collision between the interests of the clubs and their members, threatening to undermine global standard setting at the BCBS.
    Keywords: Basel III, clubs, financial regulation, Eurozone, asymmetries
    JEL: F33 F36 F42
    Date: 2014–08
  6. By: Shyamal Chowdhury; Prabal Roy Chowdhury; Kunal Sengupta
    Abstract: This paper develops a theory of sequential lending in groups in micro-finance that centers on the notion of dynamic incentives, in particular the simple idea that default incentives should be relatively uniformly distributed across time. In a framework that allows project returns to accrue over time (rather than at a single point), as well as strategic default, we show that sequential lending can help resolve problems arising out of coordinated default, thus improving project efficiency vis-a-vis individual lending. Inter alia, we also provide a justification for the use of frequent repayment schemes, as well as demonstrate that, depending on how it is manifested, social capital has implications for project efficiency and borrower default. We then examine the optimal choices for the MFI, demonstrating that the MFI opts for higher project sizes under group lending with limited collusion, and also provide a plausible explanation of the transition from group to individual lending.
    Keywords: collusion; coordinated default; dynamic incentives; group-lending; micro- finance; sequential financing; social capital; social sanctions
    Date: 2014–08
  7. By: Martin F. Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: The paper discusses the prospects for European Banking Union as they appear in the summer of 2014. The first part gives an overview over the problems that gave rise to the Banking Union initiative, the second part discusses the legislative measures that have been taken towards this objective. The euro area is currently suffering from low growth, high indebtedness of private households and firms, banks, and governments, and the weakness of financial institutions. Weakness of financial institutions affects the economy not only in countries with outright banking crises and sovereign debt crises, but also in some of the core countries that so far have seemed more stable. ECB policies have so far stabilized the system without solving the underlying problems. At the national level, political will to solve the underlying problems is missing; most governments prefer procrastination over cleanups, some governments do not have the funds to recapitalize the banks of their countries, and some governments like their banks to borrow from the ECB and lend to them. The European Banking Union comes with a promise of reducing cross-border externalities in dealing with banks. However, the Single Supervisory Mechanism is hampered by the need to apply national laws that implement European directives; this makes for fragmentation even if the ECB is in charge. Moreover, procedures for the recovery and resolution of institutions in difficulties are problematic: If banks with systemically important operations in several countries enter into resolution, there is no way to prevent the breakdown of these operations and to limit the resulting systemic damage. Further, the legislation makes no provisions for the liquidity needed for maintaining systemically important operations at least temporarily. Finally, there is no fiscal backstop. Because of the deficiencies, the “too-big-to-fail” syndrome is still present. In view of the many legacy problems, this issue is critical. If the European Banking Union is to work, further reforms will be needed shortly.
    Keywords: European Central Bank, Banking Supervision, bank resolution, European Banking Union, too-big-to-fail, sovereign debt
    JEL: G21 G28 E58 H63 F55
    Date: 2014–08
  8. By: Fuad Aleskerov (National Research University Higher School); Irina Andrievskaya (National Research University Higher School); Elena Permjakova (National Research University Higher School)
    Abstract: The issue of systemic importance has received particular attention since the recent financial crisis when it came to the fore that an individual financial institution can disturb the whole financial system. Interconnectedness is considered as one of the key drivers of systemic importance. Several measures have been proposed in the literature in order to estimate the interconnectedness of financial institutions and systems. However, most of them lack an important dimension of this characteristic: intensities of agent interaction. This paper proposes a novel method that solves this issue. A distinctive feature of our approach is that it takes into consideration not just the interconnectedness of agents but also their interaction intensities. The approach is based on the power index and centrality analysis and is employed to find a key borrower in a loan market. To illustrate the feasibility of our methodology we apply it at the European Union level and find key countries-borrowers.
    Keywords: Power index, key borrower, systemic importance, interconnectedness, centrality
    JEL: C7 G2
    Date: 2014
  9. By: Fabian Lindner
    Abstract: This paper looks at the relation between mortgage credit and housing values. It has become conventional wisdom in policy circles that credit growth led to the housing bubble in the US. However, this statement has not been empirically tested as of yet. The paper uses the Johansen procedure to estimate a long run relationship between mortgage credit and housing prices between 1984 and 2012 and analyzes the interactions between the variables. To this effect, two models with two different housing price variables are estimated. It is found that mortgage credit is weakly exogenous. Impulse-response functions, variance decompositions and out of sample forecast also show that mortgage credit drives housing prices and not vice versa. The paper also looks at the effect of short-term and long-term interest rates and does not find important influences of both on housing prices or mortgage credit. The role of monetary policy is not likely to have been very strong in the built-up of the housing bubble.
    Keywords: Housing Prices, Mortgage Markets, Monetary Policy
    JEL: E22 E44 E52 G21
    Date: 2014
  10. By: Dominique Menno; Tommaso Oliviero (CSEF, University of Naples Federico II.; CSEF, University of Naples)
    Abstract: This paper quantifies the welfare effects of the aggregate house price collapse during the U.S. Great Recession for leveraged and un-leveraged U.S. households. We calibrate a dynamic general equilibrium model to the U.S. economy and simulate the 2007-2009 Great Recession as a contemporaneous shock to interest rate spread and aggregate income that quantitatively account for the observed collapse in house prices. As a consequence of the loss in housing wealth, our estimates show that borrowers lost significantly more than savers in terms of welfare. The worsened conditions in the financial intermediation sector in the Great Recession forced borrowers to de-leverage, and generated a pure redistribution from savers to borrowers. This amplified the welfare losses of borrowers while caused a relative welfare gain for savers.
    Keywords: Housing Wealth, Heterogeneous Agents, Welfare, Leverage
    JEL: D31 D58 D90 E21 E30 E44
    Date: 2014–08–28
  11. By: Yosuke Jin; Patrick Lenain; Paul O'Brien
    Abstract: In Norway house prices have risen to high levels, associated with very strong credit growth, in a context of low interest rates. Such a combination was in many countries a contributory factor to the 2008- 09 crisis. The Norwegian authorities have been well aware of the problem. Below-target inflation and low interest rates abroad have kept policy interest rates low. “Macro-prudential” tools have been developed as additional policy instruments with a view to strengthen the banking system’s resilience to possible shocks and dampen systemic risk. This chapter notes that although authorities seem to have succeeded in containing over-heating pressures in the housing market, high levels of household indebtedness persist, a phenomenon which was an important factor in the last major Norwegian recession. The chapter also provides some longer run considerations on resource allocation in the housing market. This Working Paper relates to the 2014 OECD Economic Survey of Norway ( Les instruments macroprudentiels en Norvège : Renforcer la résilience du système financier En Norvège, les prix des logements ont atteint des niveaux élevés ; parallèlement, le crédit a connu une très forte hausse, sur fond de taux d’intérêt faibles. Dans de nombreux pays, cette conjonction a contribué à la crise de 2008-09. Les autorités norvégiennes sont bien conscientes de ce problème. L’inflation étant inférieure à l’objectif et les taux d’intérêt étant modestes à l’étranger, les taux directeurs sont restés à un niveau très bas. Les pouvoirs publics ont élaboré, en plus de leur panoplie traditionnelle, des instruments « macroprudentiels » visant à renforcer la résilience du système bancaire face à des chocs éventuels et à atténuer le risque systémique. On verra dans le présent chapitre que si les autorités ont semble-t-il réussi à contenir les risques de surchauffe sur le marché de l’immobilier, l’endettement des ménages reste très élevé ; or, ce phénomène avait joué un rôle important lors de la dernière grande récession qu’a connue la Norvège. Le présent chapitre contient également des considérations à plus long terme concernant l’affectation des ressources sur le marché de l’immobilier. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de Norvège 2014 ( ique-norvege.htm).
    Keywords: Norway, financial stability, macroprudential policy, real estate market, marché de l'immobilier, politique macroprudentielle, Norvège, stabilité financière
    JEL: E51 G18 G21 G28 H2 R31 R38
    Date: 2014–06–11
  12. By: Janda, Karel; Van Tran, Quang; Zetek, Pavel
    Abstract: The aim of paper is to determine whether macroeconomic development and the size of banking sector affect the range of external funding and consequently the importance of these debt sources for microfinance performance. Our findings reveal that the growth of external sources is positively influenced by economic grow, level of corruption, unemployment or under certain conditions by the development of banking sector, as well. Likewise, their presence can have a positive impact on the number of clients, portfolio quality, margin or cost policy of MFIs. The opposite effect can appear if the ratio of external funding to total assets increases over time.
    Keywords: microfinance; macroeconomic indicators; banking sector; external funding
    JEL: G21 H25 O11 O17
    Date: 2014–08–29
  13. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Workshop on the Risks of Wholesale Funding, Federal Reserve Bank of New York, New York City.
    Keywords: short-term wholesale funding; tri-party repo; Federal Reserve liquidity facilities
    JEL: D53 E51
    Date: 2014–08–13
  14. By: Pablo D`Erasmo
    Abstract: This paper studies the link between credit conditions and formalization in Brazil, as both credit and the rate of formalization have notably increased in the last decade. A firm dynamics model with endogenous formal and informal sectors is developed to quantitatively evaluate how much of the change in corporate credit and the size of the formal sector can be attributed to a reduction in the cost of financial intermediation. The model predicts that the observed reduction in intermediation costs generates an increase in the credit-to-output ratio and in the share of formal workers, in line with the data. It is found that -by affecting the corporate interest rate, the allocation of capital and the entry and exit rates- the change in credit conditions has important effects on firm size distribution and aggregate productivity.
    JEL: D24 E26 L11 O16 O17
    Date: 2013–04
  15. By: Ingo G. Bordon; Kai Daniel Schmid; Michael Schmidt
    Abstract: This paper qualifies the view of pronounced overpricing of sovereign bonds for the so-called GIIPS countries during the nancial crisis. We use annual data for 21 OECD countries from 1980 to 2012. As opposed to related studies, our data set allows us to contrast the pricing of macroeconomic fundamentals between three distinct phases: The period before the signing of the Maastricht treaty, the EMUconvergence era, and the financial crisis. In detail, we find: (i) Since the 1980s the role of public debt for the pricing of government bonds has changed twice: Firstly following the signing of the Maastricht treaty, and again with the wake-up call due to the onset of the financial crisis. (ii) Before the financial crisis EMU member countries had - de facto - been perceived as a homogenous group with regard to the role of public debt for sovereign risk pricing. (iii) With the reconsideration of country-specfic fundamentals the role of public debt has not only been revived but its impact upon bond yield spreads has become comparable to the time before the Maastricht treaty.
    Keywords: EMU, GIIPS, Public Debt, Risk Perception, Sovereign Bond Yields
    JEL: E44 E62
    Date: 2014

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