nep-ban New Economics Papers
on Banking
Issue of 2014‒09‒25
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. A Simple Interest Rate Model with Unobserved Components: The Role of the Interbank Reference Rate By Ichiro Muto
  2. Are Banks Less Likely to Issue Equity When They Are Less Capitalized? By Valeriya Dinger; Francesco Vallascas
  3. Banks' Stockholdings and the Correlation between Bonds and Stocks: A Portfolio Theoretic Approach By Yoshiyuki Fukuda; Kazutoshi Kan; Yoshihiko Sugihara
  4. Benchmarking the financial performance, growth, and outreach of greenfield microfinance institutions in Sub-Saharan Africa By Cull, Robert; Harten, Sven; Nishida, Ippei; Bull, Greta
  5. Credit and Business Cycles: An Empirical Analysis in the Frequency Domain By Juan Sebastián Amador; Celina Gaitán-Maldonado; José Eduardo Gómez-González; Mauricio Villamizar-Villegas; Héctor Manuel Zárate
  6. Credit spread variability in U.S. business cycles: the Great Moderation versus the Great Recession By Hylton Hollander; Guangling Liu
  7. Default contagion risks in Russian interbank market By A. V. Leonidov; E. L. Rumyantsev
  8. Does Banking System Transparency Enhance Bank Competition? Cross-Country Evidence By Irina Andrievskaya; Maria Semenova
  9. Financial crises and the composition of cross-border lending By Cerutti, Eugenio; Hale, Galina; Minoiu, Camelia
  10. How does credit supply respond to monetary policy and bank minimum capital requirements? By Aiyar, Shekhar; Calomiris, Charles; Wieladek, Tomasz
  11. Macroprudential Regulation and the Role of Monetary Policy By William Tayler; Roy Zilberman
  12. Making the Banking Sector More Resilient and Reducing Household Debt in the Netherlands By Rafał Kierzenkowski; Olena Havrylchyk; Pierre Beynet
  13. Network Efficiency and the Banking System By Nicola Giocoli
  14. New Financial Activity Indexes: Early Warning System for Financial Imbalances in Japan By Yuichiro Ito; Tomiyuki Kitamura; Koji Nakamura; Takashi Nakazawa
  15. Systemic importance of financial institutions: from a global to a local perspective? A network theory approach By Michele Bonollo; Irene Crimaldi; Andrea Flori; Fabio Pammolli; Massimo Riccaboni
  16. The international monetary and financial system: its Achilles heel and what to do about it By Claudio Borio
  17. Who Holds Credit Cards and Bank Accounts in Uruguay? Evidence from Survey of Uruguayan Households Finances By Graciela Sanromán; Guillermo Santos

  1. By: Ichiro Muto (Bank of Japan)
    Abstract: In this study, we theoretically investigate the potential role of the reference rate in stabilizing or destabilizing an interbank market with an environment where individual banks cannot fully identify the nature of underlying shocks affecting their interbank transactions. We show that a noise-free reference rate based on a sufficient number of sample transactions can help to make the market interest rate less volatile, whereas the stabilizing effects of the reference rate are significantly reduced if the reported interest rates contain some noisy components. Nevertheless, by increasing the number of sample transactions reflected in the reference rate, the adverse effects of the noise can be mitigated (or eliminated) provided the noise is idiosyncratic to individual transactions. However, if the noise is common to multiple transactions, then the adverse effects of the noisy reference rate cannot be reduced simply by increasing the number of sample transactions. This suggests that the noise in the interest rates reported by just a few of large banks can end up making the entire market more volatile, thereby impairing the transmission mechanism of monetary policy.
    Keywords: Interbank Market; Reference Rate; LIBOR; Imperfect Information; Financial Stability; Transmission Mechanism of Monetary Policy
    JEL: E43 E44 G14
    Date: 2012–12–10
  2. By: Valeriya Dinger (University of Osnabrueck); Francesco Vallascas (University of Leeds)
    Abstract: Debt overhang and moral hazard related to risk-shifting opportunities predict that low capitalized banks have a lower likelihood to issue equity. In contrast to this view, for an international sample of bank Seasoned Equity Offerings (SEOs), we show that the likelihood of issuing an SEO is generally higher in low capitalized banks. We provide a series of tests exploring the variation of capital regulation, systemic conditions and market discipline to understand the driving forces behind this result. We find that market mechanisms rather than capital regulation are the primary, key driver of the decision to issue by low capitalized banks.
    Keywords: SEOs, Banking Regulation, Banking Crises, Counter-cyclical capital regulation
    JEL: G21 G28 G32
  3. By: Yoshiyuki Fukuda (Bank of Japan); Kazutoshi Kan (Bank of Japan); Yoshihiko Sugihara (Bank of Japan)
    Abstract: In this paper, we analyze the optimal asset composition ratio of stocks and bonds for a bank taking into consideration the correlation between the interest rate risk and equity risk in the financial capital market using a portfolio model. The analysis reveals that in determining the asset composition ratio in Japan, the correlation coefficient between the interest rate and stock prices as well as the stock price volatility plays a more important role than the interest rate volatility. We also show that in the present circumstances, the stockholding ratios of most financial institutions in Japan are higher than the levels calculated from the model. It is suggested that when the market is exposed to severe stress such as a surge in stock price volatility or reversal of the correlation between the interest rate and stock prices, the stockholding ratios would be even more excessive than the levels obtained from the model.
    Date: 2013–03–25
  4. By: Cull, Robert; Harten, Sven; Nishida, Ippei; Bull, Greta
    Abstract: In recent years there has been a rapid increase in the presence and growth of greenfield microfinance institutions in Sub-Saharan Africa. This paper uses regressions to benchmark those African greenfields relative to other microfinance providers and finds that greenfields grew faster in terms of deposits and lending, improved their profitability to levels comparable to the top microfinance institutions, and substantially increased their lending to women. The effects were especially strong for greenfields that followed a consultant-led model to establish a deep retail banking presence spanning multiple countries, including the creation of extensive branch networks. Although their loan sizes are somewhat larger than those of most African microfinance institutions, indicating less outreach to the poorest market segments, greenfields have achieved rapid gains in financial inclusion on a broad scale.
    Keywords: Access to Finance,Banks&Banking Reform,Debt Markets,Corporate Law,Bankruptcy and Resolution of Financial Distress
    Date: 2014–09–01
  5. By: Juan Sebastián Amador; Celina Gaitán-Maldonado; José Eduardo Gómez-González; Mauricio Villamizar-Villegas; Héctor Manuel Zárate
    Abstract: The history of economic recessions has shown that every deep downturn has been accompanied by disruptions in the financial sector. Paradoxically, up until the financial world crisis of 2007-2009, little attention was given to macroeconomic and financial interdependence. And, in spite of a renewed interest on the matter, significant effort is still warranted in order to attain a comprehensive understanding of the causal links between the financial sector and the rest of the economy. In this paper we study the relationship between financial and real business cycles for a sample of thirty-three countries in the frequency domain. Specifically, we characterize the interdependence of credit and output cycles and conduct Granger-type causality tests in the frequency domain. We also perform cluster analysis to analyze groups of countries with similar cyclical dynamics. Our main findings indicate that: (i) on average, credit cycles are larger and longer-lasting than output cycles, (ii) the likelihood of cycle interdependence is highest when considering medium-term frequencies (we find that that Granger causality runs in both directions), and (iii) emerging markets tend to have cycles of shorter duration but are more profound than those exhibited in developed economies. Classification JEL: E32, E44, C38.
    Date: 2014–09
  6. By: Hylton Hollander (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch)
    Abstract: This paper establishes the prevailing financial factors that influence credit spread variability, and its impact on the U.S. business cycle over the Great Moderation and Great Recession periods. To do so, we develop a dynamic general equilibrium framework with a central role of financial intermediation and equity assets. Over the Great Moderation and Great Recession periods, we find an important role for bank market power (sticky rate adjustments and loan rate markups) on credit spread variability in the U.S. business cycle. Equity prices exacerbate movements in credit spreads through the financial accelerator channel, but cannot be regarded as a main driving force of credit spread variability. Both the financial accelerator and bank capital channels play a significant role in propagating the movements of credit spreads. We observe a remarkable decline in the influence of technology and monetary policy shocks over three recession periods. From the demand-side of the credit market, the influence of LTV shocks has declined since the 1990 - 91 recession, while the bank capital requirement shock exacerbates and prolongs credit spread variability over the 2007 - 09 recession period. Across the three recession periods, there is an increasing trend in the contribution of loan markup shocks to the variability of retail credit spreads.
    Keywords: financial intermediation, credit spreads, financial frictions, great recession
    JEL: E32 E43 E44 E51 E52
    Date: 2014
  7. By: A. V. Leonidov; E. L. Rumyantsev
    Abstract: A model of contagion propagation in the Russian interbank market based on the real data is developed.
    Date: 2014–09
  8. By: Irina Andrievskaya (National Research University Higher School); Maria Semenova (National Research University Higher School)
    Abstract: There seems to be a consensus among regulators and scholars that in order to improve the functioning of a banking system and to stimulate bank competition, it is necessary to raise the level of bank information transparency. However, empirical studies which examine the determinants of competition in the financial sector, the effect of competition on financial stability, or the relationship between transparency and bank stability, leave aside the link between transparency and competition. The aim of this paper is to fill this gap in the literature. To test the hypothesis that greater bank information disclosure is associated with lower market power and lower concentration in the banking system, we use country-level data covering 213 countries. The years under consideration are 1998, 2001, 2005 and 2010, which correspond to the years of the World Bank's Banking Regulation and Supervision Survey rounds. Our findings do not always support the conventional wisdom: countries with higher levels of transparency have lower levels of bank concentration, while the link between transparency and competition is less pronounced. The effect from information disclosure grows – for both concentration and market power – with an increase of bank credit risks
    Keywords: Banking system, transparency, competition, concentration.
    JEL: F01 G21 G28
    Date: 2014
  9. By: Cerutti, Eugenio (International Monetary Fund); Hale, Galina (Federal Reserve Bank of San Francisco); Minoiu, Camelia (International Monetary Fund)
    Abstract: We examine the composition and drivers of cross-border bank lending between 1995 and 2012, distinguishing between syndicated and non-syndicated loans. We show that on-balance sheet syndicated loan exposures, which account for almost one third of total cross-border loan exposures, increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis. Our empirical analysis of the drivers of cross-border loan exposures in a large bilateral dataset leads to three main results. First, banks with lower levels of capital favor syndicated over other kinds of cross-border loans. Second, borrower country characteristics such as level of development, economic size, and capital account openness, are less important in driving syndicated than non-syndicated loan activity, suggesting a diversification motive for syndication. Third, information asymmetries between lender and borrower countries became more binding for both types of cross-border lending activity during the recent crisis.
    Keywords: cross-border banking; syndicated loans; global financial crisis; BIS international banking statistics; Dealogic Loan Analytics
    JEL: F30 G15
    Date: 2014–08–29
  10. By: Aiyar, Shekhar (International Monetary Fund); Calomiris, Charles (Columbia Business School); Wieladek, Tomasz (Bank of England)
    Abstract: We use data on UK banks’ minimum capital requirements to study the interaction of monetary policy and capital requirement regulation. UK banks were subject to both time-varying capital requirements and changes in interest rate policy. Tightening of either capital requirements or monetary policy reduces the supply of lending. Lending by large banks reacts substantially to capital requirement changes, but not to monetary policy changes. Lending by small banks reacts to both. There is little evidence of interaction between these two policy instruments. The differences in the responses of small and large banks, and the lack of interaction between capital requirement changes and monetary policy, have important policy implications. Our results confirm the theoretical consensus view that monetary policy should focus on price stability objectives and that capital requirement changes are a more effective tool to achieve financial stability objectives related to loan supply. We also identify important distributional consequences within the financial system of these two policy instruments. Finally, our findings do not corroborate theoretical models that raise concerns about complex interactions between monetary policy and macroprudential variation in capital requirements.
    Keywords: loan supply; capital requirements; monetary policy; macroprudential regulation
    JEL: E44 E51 E52 G18 G21
    Date: 2014–09–05
  11. By: William Tayler; Roy Zilberman
    Abstract: We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.
    Date: 2014
  12. By: Rafał Kierzenkowski; Olena Havrylchyk; Pierre Beynet
    Abstract: Dutch banks were put under heavy strains early in the global downturn and have comparatively weak financial buffers to cope with new shocks. Falling house prices have increased the share of households with negative home equity to nearly 35% for home-owning households and 40% for mortgage holders. Even though defaults have so far been limited, mortgage amortisation is low and risks are concentrated among younger borrowers who often do not have sufficient resources to cope with adverse shocks. Banks are very large relative to the size of the domestic economy, have sizeable cross-border exposures and rely significantly on wholesale funding. Resolution procedures should be strengthened to reduce the potential cost for the taxpayer and the regulator’s tools available to reduce risks should be expanded. In particular, banks should set aside sufficient provisions for expected losses and problem loans, which requires some harmonisation of the definition of non-performing loans across banks. Higher capital buffers would bolster financial stability and help ensure access to market funding while lowering its cost. Welcome measures have been taken to encourage household deleveraging, but deeper and broader steps are needed to bolster financial stability and improve consumer protection when the housing market starts to recover durably and over the medium term. The stock of existing mortgages should be gradually converted into amortising mortgages, the cap on the loanto- value ratio reduced significantly below 100% and housing subsidies to homeownership cut more decisively. This Working Paper relates to the 2014 OECD Economic Survey of the Netherlands ( Renforcer la capacité de résistance du secteur bancaire et réduire la dette des ménages aux Pays-Bas Les banques néerlandaises ont été mises à rude épreuve au début de la récession mondiale et sont dotées de réserves financières relativement modestes pour faire face à de nouveaux chocs. La baisse des prix immobiliers a fait augmenter la proportion de ménages ayant un patrimoine en logements négatif, qui s'établissait à près de 35 % pour les ménages propriétaires de leur habitation et 40 % pour les titulaires d'un emprunt hypothécaire. Même si les défauts de paiement ont été limités jusqu'ici, l'amortissement des prêts hypothécaires est faible et les risques sont concentrés dans la catégorie des emprunteurs les plus jeunes, qui n'ont souvent pas des ressources suffisantes pour absorber des chocs négatifs. Les banques sont de très grande taille au regard de celle de l'économie néerlandaise, sont très exposées à des risques extérieurs et sont fortement tributaires des financements de marché. Il faudrait renforcer les procédures de résolution des défaillances bancaires afin de réduire leur coût potentiel pour les contribuables, et la palette d'instruments dont dispose l'autorité de régulation pour réduire les risques devrait être élargie. Il conviendrait en particulier que les banques constituent des provisions suffisantes au regard des pertes attendues et des prêts à problème, ce qui passe par une harmonisation de la définition des créances improductives entre les banques. Une augmentation des volants de fonds propres renforcerait la stabilité financière et contribuerait à garantir l'accès aux financements de marché tout en réduisant leur coût. Des mesures bienvenues ont été prises pour encourager les ménages à se désendetter, mais des initiatives plus ambitieuses et de portée plus générale seront nécessaires pour renforcer la stabilité financière et améliorer la protection des consommateurs dès que le marché du logement sera entré dans une phase de redressement durable et à moyen terme. Il faudrait que l'encours de crédits hypothécaires soit converti progressivement en prêts à amortissement régulier, que la quotité de financement maximale soit abaissée à un taux nettement inférieur à 100 %, et que les aides au logement dont bénéficient les propriétaires occupants soient réduites de manière plus décisive. Ce Document de travail se rapporte à l’Étude économique de l’OCDE des Pays Bas, 2014 ( ).
    Keywords: house prices, Netherlands, household, non-performing loans, capital, banks, amortisation, mortgages, deleveraging, financial stability, banques, fonds propres, créances improductives, amortissement, désendettement, Pays-Bas, ménages, stabilité financière, prêts hypothécaires
    JEL: D14 D18 G21 G28
    Date: 2014–08–28
  13. By: Nicola Giocoli
    Abstract: Inspired by the Coasean “market vs firm” dichotomy, we offer a new definition of efficiency by applying the notions of network cost and network efficiency as developed in complex network theory. Network analysis is relevant for every system of interconnected exchanging agents. One such system is the banking sector. It is showed that the notions hereby presented may improve upon the predictions of Allen & Gale’s standard model, where agents exchange liquidity and where troubles in a local area of the network may lead to systemic collapse.
    Date: 2014–06–10
  14. By: Yuichiro Ito (Bank of Japan); Tomiyuki Kitamura (Bank of Japan); Koji Nakamura (Bank of Japan); Takashi Nakazawa (Bank of Japan)
    Abstract: This paper describes Financial Activity Indexes (FAIXs), early warning system for financial imbalances in Japan. We introduced the first version of FAIXs in 2012 and revise FAIXs this time. First, we sort the candidate financial indicators into 14 categories. Second, in each category, we examine the usefulness of candidate indicators from two perspectives: (a) whether the indicator can detect the overheating of financial activities in the Japan's Heisei bubble period, which occurred around the late 1980s and had a major impact on Japan's economy and financial activities; and (b) whether the indicator successfully minimizes various statistical errors involved in forecasting future events. In the examination, multiple possibilities are explored with respect to methods used for extracting trends from indicators and thresholds employed for assessing that the deviation of an indicator from its trend constitutes overheating. As a result of choosing the one indicator considered most useful in each category, two of the ten financial indicators comprising the existing FAIXs are abandoned, one is retained, three are revised in terms of trend extraction methods, and four are revised in terms of data processing methods. The 14 indicators, including these eight and six newly selected, now constitute the new FAIXs.
    Date: 2014–04–23
  15. By: Michele Bonollo (Credito trevigiano); Irene Crimaldi (IMT Lucca Institute for Advanced Studies); Andrea Flori (IMT Lucca Institute for Advanced Studies); Fabio Pammolli (IMT Lucca Institute for Advanced Studies); Massimo Riccaboni (IMT Lucca Institute for Advanced Studies)
    Abstract: After the systemic effects of bank defaults during the recent financial crisis, and despite a huge amount of literature over the last years to detect systemic risk, no standard methodologies have been set up until now. We aim to build a concise but comprehensive picture of the state of the art, illustrating the open issues, and outlining pathways for future research. In particular, we propose the analysis of some examples of local systems that attract the attention of the financial sector. This work is directed to both academic researchers and practitioners.
    Keywords: Systemic Risk, Counterparty Risk, Financial Networks, Basel Regulations, European Market Infrastructure Regulation
    JEL: G01 G18 G21
    Date: 2014–09
  16. By: Claudio Borio
    Abstract: This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the “excess financial elasticity” of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets – the "excess saving" and "excess demand for safe assets" views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.
    Keywords: Interbank markets, networks, entropy, intermediation, systemic risk
    Date: 2014–08
  17. By: Graciela Sanromán (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Guillermo Santos (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: In this paper we analyze households access to financial services such as credit cards and bank accounts. We use data available from the first stage of Survey of Uruguayan Households Finance (SUHF1) and ECH 2012. We estimate univariate and bivariate probit models for bank account and credit cards holdings. Evidence indicates that households' income, education level and working status are the main determinants of the probability of holding credit cards and bank accounts in Uruguay. In addition, we perform a counterfactual exercise which allows us to predict the effect of making compulsory to pay salaries through the financial system. Our prediction is that bank account and credit card holdings would increase at around 6 and 4 percentage points, respectively.
    Keywords: financial inclusion, household finances, bivariate probit estimation
    JEL: C25 D12 D14
    Date: 2014–07

This nep-ban 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.