nep-ban New Economics Papers
on Banking
Issue of 2014‒09‒29
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Friendship Between Banks: An Application of an Actor-Oriented Model of Network Formation on Interbank Credit Relations By Karl Finger; Thomas Lux
  2. Cross-border banking and global liquidity By Valentina Bruno; Hyun Song Shin
  3. Financial Business Cycles By Iacoviello, Matteo
  4. Financial Fire Sales: Evidence from Bank Failures By Ramcharan, Rodney; Rajan, Raghuram G.
  5. The Cascade Bayesian Approach for a controlled integration of internal data, external data and scenarios By Bertrand Hassani; Alexis Renaudin
  6. Housing finance in France in 2013. By Point E.; Le Quéau E.
  7. Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy By Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa
  8. Identifying SIFI Determinants for Global Banks and Insurance Companies: Implications for D-SIFIs in Russia By Maiya Anokhina; Henry Penikas; Victor Petrov
  9. How Would Hedge Fund Regulation Affect Investor Behavior? Implications for Systemic Risk By Minamihashi, Naoaki; Wakamori, Naoki
  10. What Caused the Great Recession? By Homburg, Stefan
  11. Illiquidity and its Discontents: Trading Delays and Foreclosures in the Housing Market By Aaron Hedlund
  12. Welfare Analysis of Policy Measures for Financial Stability By Ko Munakata; Koji Nakamura; Yuki Teranishi
  13. Mortgage Repayments after Permanent Modification By McGuinness, Anne
  14. Liquidity management strategies in the Czech banking sector By Jana Lastuvkova
  15. Managerial Optimism and Debt Contract Design: The Case of Syndicated Loans By Adam, Tim R.; Burg, Valentin; Scheinert, Tobias; Streitz, Daniel
  16. Risk shocks and divergence between the Euro area and the US By Thomas Brand; Fabien Tripier
  17. State Mandated Financial Education and the Credit Behavior of Young Adults By Brown, Alexandra; Collins, J. Michael; Schmeiser, Maximilian D.; Urban, Carly

  1. By: Karl Finger (Institute for Quantitative Business and Economic Research); Thomas Lux (Department of Economics, University Jaume I)
    Abstract: This paper investigates the driving forces behind banks’ link formation in the interbank market by applying the stochastic actor oriented model (SAOM) developed in sociology. Our data consists of quarterly networks constructed from the transactions on an electronic platform (e-MID) over the period from 2001 to2010. Estimating the model for the time before and after the global financial crisis (GFC), shows relatively similar behavior over the complete period. We find that past trades are a significant predictor of future credit relations which indicates a strong role for the formation of lasting relationships between banks. We also find strong importance of size-related characteristics, but little influence of past interest rates. The major changes found for the period after the onset of the financial crisis are that: (1) large banks and those identified as `core ´ intermediaries became even more popular and (2) indirect counterparty risk appears to be more of a concern as indicated by a higher tendency to avoid indirect exposure via clustering effects.
    Keywords: interbank market, network formation, financial crisis
    JEL: G21 G1 C35
    Date: 2014–10
  2. By: Valentina Bruno; Hyun Song Shin
    Abstract: We investigate global factors associated with bank capital flows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of financial conditions across borders through banking sector capital flows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and financial stability. In a panel study of 46 countries, we find support for the key predictions of our model.
    Keywords: Cross-border banking flows, bank leverage, global banks
    Date: 2014–08
  3. By: Iacoviello, Matteo (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using Bayesian methods, I estimate a DSGE model where a recession is initiated by losses suffered by banks and exacerbated by their inability to extend credit to the real sector. The event triggering the recession has the workings of a redistribution shock: a small sector of the economy -- borrowers who use their home as collateral -- defaults on their loans. When banks hold little equity in excess of regulatory requirements, the losses require them to react immediately, either by recapitalizing or by deleveraging. By deleveraging, banks transform the initial shock into a credit crunch, and, to the extent that some firms depend on bank credit, amplify and propagate the shock to the real economy. I find that redistribution and other financial shocks that affect leveraged sectors accounts for two-thirds of output collapse during the Great Recession.
    Keywords: Banks; DSGE models; collateral constraints; housing; Bayesian estimation
    JEL: E32 E44 E47
    Date: 2014–08–28
  4. By: Ramcharan, Rodney (Board of Governors of the Federal Reserve System (U.S.)); Rajan, Raghuram G. (Reserve Bank of India)
    Abstract: Theory suggests the reduction in financing capacity after the failure of a financial intermediary can reduce the value of financial assets. Forced sales of the intermediary's assets could consume liquidity, depressing the liquidation value of the assets of healthy intermediaries and causing contagious runs. These financial fire sales can both cause, and exacerbate, real fire sales, the focus of previous studies. This paper investigates the relevance of financial fire sales using new datasets covering bank failures during the farm depression in the United States just before the Great Depression, as well as bank failures during the Great Depression. Using differences in regulation as a means of identification, we find that the reduction in local financing capacity as a result of bank failures reduces the recovery rates on failed assets of nearby banks, depresses local land prices, renders land markets illiquid, and is associated with subsequent distress in nearby banks. All this indicates a rationale for why bank failures are contagious.
    Keywords: Bank failures; liquidity; fire sales
    Date: 2014–06–30
  5. By: Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, Santander UK - Santander UK); Alexis Renaudin (Aon GRC - Aon Global Risk Consulting -)
    Abstract: According to the last proposals of the Basel Committee on Banking Supervision, banks under the Advanced Measurement Approach (AMA) must use four different sources of information to assess their Operational Risk capital requirement. The fourth including "business environment and internal control factors", i.e. qualitative criteria, the three main quantitative sources available to banks to build the Loss Distribution are Internal Loss Data, External Loss Data, and Scenario Analysis. This paper proposes an innovative methodology to bring together these three different sources in the Loss Distribution Approach (LDA) framework through a Bayesian strategy. The integration of the different elements is performed in two different steps to ensure an internal data driven model is obtained. In a first step, scenarios are used to inform the prior distributions and external data informs the likelihood component of the posterior function. In the second step, the initial posterior function is used as the prior distribution and the internal loss data inform the likelihood component of the second posterior. This latter posterior function enables the estimation of the parameters of the severity distribution selected to represent the Operational Risk event types.
    Keywords: Operational Risk; Loss Distribution Approach; Bayesian inference; Marchov Chain Monte Carlo; Extreme Value Theory; non-parametric statistics; risk measures
    Date: 2013–02
  6. By: Point E.; Le Quéau E.
    Abstract: The French housing market showed some recovery in 2013 amid furthermoderate price falls in the Paris area, Île de France and the rest of the country,at -1.5%, -1.6% and -1.4% respectively, and as interest rates stabilised athistorically low levels. The volume of transactions for existing homes, the mainmarket segment, grew again (+2.1%) and housing loan production reboundedsharply (+56%). However, the latter trend reflects an unprecedented volume ofloan transfers, 1 which accounted for 18.1% of production in 2013. Against thisbackdrop, total outstanding loans showed a relatively small increase comparedto the long-term trend (+3.9%). In general, the market remains characterised by strong fundamentals,particularly borrower solvency, which is the main lending criterion, althoughsome risk indicators stabilised at high levels: - The initial maturity of new loans fell relative to 2012, to 19.1 years, and theaverage residual maturity declined from 15.4 years to 15.3 years; - The share of borrowers with a debt service ratio (i.e. the ratio of repayment costs to income) of 35% and above in total production fell again in 2013, as did the average debt service ratio: at 30%, it showed its sharpest decrease since 2001, while remaining significantly above that year’s level (27.6%); - The proportion of fixed-rate loans in total production rose again slightly to 92.8%, and they continued to make up the vast majority of outstanding loans (83.2%). Uncapped floating-rate loans, which entail the highest risk for borrowers, were no more than 4.8% of total loans at end-2013. Interest-only loans represent only a tiny proportion of production (0.3% in 2013); - Almost every home loan is covered by a mortgage or lender’s lien, or by a guarantee issued by a credit institution or an insurance company; - The cost of risk on housing loans, which had slightly increased in 2012, dipped slightly to 0.065% of outstanding loans. However, there are certain trends that deserve attention, although some ofthem seem to reflect a change in borrower structure in favour of those withrelatively higher than average income and/or assets: - The average loan amount continued to rise in 2013 despite falling propertyprices throughout France. In addition, the average loan-to-value (LTV) ratio at origination, i.e. the loan amount relative to the property purchase price, having contracted in 2012, rebounded by more than 4 percentage points to 84.1%, its highest level since 2001. However, these two trends have not been matched by a rise in the average debt service ratio (see above). Moreover, the sharp rise in the average LTV at origination partly reflects some banks’ inadequate recording of loan transfers (see below) and the average LTV after origination may be estimated at just over 56% at the end of 2013, which is roughly unchanged relative to 2012; - The ratio of gross non-performing housing loans continued to rise in 2013, but, at just under 1.5%, it remained significantly below the average ratio of non-performing loans overall (3.8%), which grew much more sharply relative to 2012. Nevertheless, delinquency rates vary significantly from one segment to another, with first-time buyers in particular now exhibiting the highest levels (2.8%); - At the same time, the average coverage ratio for housing loans stabilised at around 27%. This is still significantly lower than the ratio for all types of loans to customers (55.4%), but it seems appropriate given the substantial guarantees provided to banks; - While banks benefit from borrowers’ relatively good level of insurance against death or work disability, they are still exposed to prolonged unemployment risk as only a small fraction of their customers has taken out job-loss insurance; The strong growth in loan transfers is a major focal point in this context. Suchtransfers, whose underlying objective of retaining customers and increasingdeposit taking from individuals appears hard to sustain over the long run giventhe relatively finite total volume of savings, should not lead to theunderestimation of borrower default risk, which must be properly reflected inlending rates. In addition, the annual survey of the French PrudentialSupervision and Resolution Authority (Autorité de Contrôle Prudentiel et deRésolution - ACPR) reveals that some banks are not updating the valuation ofthe underlying properties when granting the new loans, which appearsinconsistent with a proper assessment of risk and should be corrected. Moregenerally, even though the aggregate value of financed property currentlyseems to comfortably exceed outstanding principal amounts, it is important thatbanks are able to regularly assess their tangible security throughout the life ofthe loans so that they are in a position to anticipate any sudden reversal in thehousing market Finally, while lower property prices and historically low lending rates havedriven some recovery in activity in the recent period, persistently difficultmacroeconomic conditions should encourage French banks to keep a closewatch on the development of risks within their housing loan portfolios.
    Keywords: housing loans, average loan amount, average loan maturity, loan-to-value ratio, debt-service ratio, non-performing loans and coverage, risk weighting.
    JEL: G21 R21 R31
    Date: 2014
  7. By: Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa
    Abstract: This paper investigates the transmission channel of macroprudential instruments in a closed economy DSGE model with a rich set of nancial frictions. Banks' decisions on risky retail loan concessions are based on borrowers' capacity to settle their debt with labor income. We also introduce frictions in banks' optimal choices of balance sheet composition to better reproduce banks'strategic reactions to changes in funding costs, in risk perception and in the regulatory environment.The model is able to reproduce not only price effects from macroprudential policies, but also quantity effects. The model is estimated with Brazilian data using Bayesian techniques. Unanticipated changes in reserve requirements have important quantitative effects, especially on banks' optimal asset allocation and on the choice of funding. This result holds true even for required reserves deposited at the central bank that are remunerated at the base rate. Changes in required core capital substantially impact the real economy and banks' balance sheet. When there is a lag between announcements and actual implementation of increased capital requirement ratios, agents immediately engage in anticipatory behavior. Banks immediately start to retain dividends so as to smooth the impact of higher required capital on their assets, more particularly on loans. The impact on the real economy also shifts to nearer horizons. Announcements that allow the new regulation on required capital to be anticipated also improve banks' risk positions, since banks achieve higher capital adequacy ratios right after the announcement and throughout the impact period. The effects of regulatory changes to risk weights on bank assets are not constrained to impact the segment whose risk was reassessed. We compare the model responses with those generated by models with collateral constraints traditionally used in the literature. The choice of collateral constraint is found to have important implications for the transmission mechanisms.
    Keywords: Collateral, productivity, small open economy
    Date: 2014–09
  8. By: Maiya Anokhina (National Research University Higher School of Economics, Moscow); Henry Penikas (National Research University Higher School of Economics, Moscow); Victor Petrov (National Research University Higher School of Economics, Moscow)
    Abstract: The increased role of financial institutions in the economy leads to a need to determine those that are systemically important. The bankruptcy of such institutions creates negative effects for the economy on the global scale. The aim of this article is to identify important financial coefficients that can be used in the methodology of identification of G-SIB and G-SII. Models of binary choice and models of ordered choice are used in this article, several models are highly predictive. Besides this paper has revealed several financial coefficients, that helped to find the probabilities of G-SIF for Russian banks and insurance companies.
    Keywords: Systemic importance; Basel committee, probability of default, financial coefficients; models of ordered choice, models of binary choice, global systemically important banks (G-SIB), insurance company.
    JEL: C70 E58 G21
    Date: 2014–09
  9. By: Minamihashi, Naoaki; Wakamori, Naoki
    Abstract: We estimate an investors’ demand model for hedge funds to analyze the potential impact of leverage limits in the industry. Our estimation results highlight the importance of heterogeneous investor preference for the use of leverage, i.e., 20% of investors prefer leverage usage while others do not. We then conduct a policy simulation in which regulators put a cap on allowable leverage, as proposed by the Financial Stability Board in 2012. Simulation results suggest that the 200% leverage limit would lower the total demand (assets under management) for hedge funds by 10%. In particular, the regulation would lead to lower investments in highly leveraged funds and to lower investments in risky strategies, which, in turn, would reduce systemic risk.
    Keywords: hedge funds; demand estimation; leverage; regulation; systemic risk
    JEL: G38 G23 L52
    Date: 2014–09–01
  10. By: Homburg, Stefan
    Abstract: This paper examines five possible explanations for the Great Recession of 2008 and 2009, using data for the United States and the eurozone. Of these five hypotheses, four are not supported by the data, while the fifth appears reasonable.
    Keywords: Financial crisis; Great Recession; wealth effect; credit crunch; money demand; central bank
    JEL: E3 E4 G1
    Date: 2014–09
  11. By: Aaron Hedlund (Department of Economics, University of Missouri-Columbia)
    Abstract: This paper investigates the macroeconomic effects of search risk in the housing market. To do so, I introduce a tractable directed search model of housing with mul- tidimensional buyer and seller heterogeneity. I incorporate this framework in an in- complete markets macroeconomic model with long-term mortgages and equilibrium default. I show that search risk spills over into higher foreclosure risk by creating a debt overhang problem. Heavily indebted sellers post high selling prices, take a long time to sell, and frequently end up in foreclosure. As a result, search risk increases mortgage default premia and tightens credit constraints, thus exacerbating the debt overhang problem by making refinancing more difficult. This mechanism establishes a novel link between housing and mortgage markets based on the illiquidity of housing.
    Keywords: housing, liquidity, search theory, credit constraints, household debt,foreclosure
    JEL: D31 D83 E21 E22 G11 G12 G21 R21 R31
    Date: 2014–09–12
  12. By: Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Bank of Japan)
    Abstract: We introduce the financial market friction through the search and matching in the loan market into a dynamic stochastic general equilibrium (DSGE) model. We reveal that the second order approximation of social welfare includes the terms relating credit, such as credit market tightness, the volume of credit, and a loan separation rate, in addition to the inflation rate and the output gap under the financial market friction. Our analytical result justifies the reason why the optimal policy should take the credit variation into account. We introduce a monetary policy and other policy measures for the financial stability into the model. The optimal outcome is achieved through the monetary and other policy measures by taking into account not only price stability but also financial stability.
    Date: 2013–03–01
  13. By: McGuinness, Anne (Central Bank of Ireland)
    Abstract: This Economic Letter analyses the performance of permanently modified mortgage loans, of which there were some 38,086 in the domestic Irish banks at end-2013. For modified loans with prior default history (18,740), 55 per cent met the modified repayment amount at end-2013, up from 28 per cent in 2011. The proportion of default borrowers meeting modified repayments after three and twelve months is converging, at 68 and 60 per cent, respectively for modifications issued in 2013q4. This could be due to better loan modification strategies or the improving economic backdrop. Positive trends are welcomed, however more work is needed to address the large number of loans still in default but which have not been modified (28,585 in the Irish domestic banks as at end-2013), and the high proportion of partial (29 per cent) and non-paying (11 per cent) modified loans.
    Date: 2014–08
  14. By: Jana Lastuvkova (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: This paper focuses on the evaluation of the liquidity development in the banking sector of the Czech Republic. The evaluation is carried out using specific method of measurement - gross liquidity flows and their overall reallocation. This method allows determining liquidity for the banking sector as well as for the individual groups. The method is also based on liquidity flows, in addition in two forms - positive and negative, is thus the dynamic assessment of the liquidity in a perspective of its creation and outflow. This takes into account current trends in requirements for measuring and monitoring liquidity risk. Evaluation of the flows is supplemented by a correlation analysis to determine the main factors of the liquidity development. The results suggest that the studied groups of banks have different characteristics and are influenced by different factors. Medium-sized group of banks, standing between the two other groups, does not show a clear strategy of its own, but takes elements from the other two groups of banks.
    Keywords: Czech banking sector, measurement of the bank liquidity, liquidity flows, liquidity strategies
    JEL: G21
    Date: 2014–08
  15. By: Adam, Tim R.; Burg, Valentin; Scheinert, Tobias; Streitz, Daniel
    Abstract: We examine the impact of managerial optimism on the inclusion of performance-pricing provisions in syndicated loan contracts (PSD). Optimistic managers may view PSD as a relatively cheap form of financing given their upwardly biased expectations about the firm’s future cash flow. Indeed, we find that optimistic managers are more likely to issue PSD, and choose contracts with greater performance-pricing sensitivity than rational managers. Consistent with their biased expectations, firms with optimistic managers perform worse than firms with rational managers after issuing PSD. Our results indicate that behavioral aspects can affect contract design in the market for syndicated loans.
    Keywords: Optimism Bias; Performance-Sensitive Debt; Debt Contracting; Syndicated Loans
    JEL: G02 G30 G31 G32
    Date: 2014–07–23
  16. By: Thomas Brand; Fabien Tripier
    Abstract: Why have the Euro area and the US diverged since 2011 while they were highly synchronized during the recession of 2008-2009? To explain this divergence, we provide a structural interpretation of these episodes through the estimation of a business cycle model with financial frictions for both economies. Our results show that risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector, have played a crucial role in the divergence with the absence of risk reversal in the Euro area. Risk shocks have stimulated US credit and investment growth since the trough of 2009 whereas they have been at the origin of the double-dip recession in the Euro area. A companion website is available at vergence.
    Keywords: Great recession;Business cycles;Uncertainty;Divergence;Risk Shocks
    JEL: E3 E4 G3
    Date: 2014–07
  17. By: Brown, Alexandra (Board of Governors of the Federal Reserve System (U.S.)); Collins, J. Michael (School of Public Affairs, University of Wisconsin-Madison); Schmeiser, Maximilian D. (Board of Governors of the Federal Reserve System (U.S.)); Urban, Carly (Montana State University)
    Abstract: In the U.S., a number of states have mandated personal finance classes in public school curricula to address perceived deficiencies in financial decision-making competency. Despite the growth of financial and economic education provided in public schools, little is known about the effect of these programs on the credit behaviors of young adults. Using a panel of credit report data, we examine young adults in three states where personal financial education mandates were implemented in 2007: Georgia, Idaho, and Texas. We compare the credit scores and delinquency rates of young adults in each of these states pre- and post-implementation of the education to those of students in a synthetic control state and then bordering states without financial education. We find that young people who are in school after the implementation of a financial education requirement have higher relative credit scores and lower relative delinquency rates than those in control states.
    Keywords: Financial literacy; financial education; credit score; delinquency
    Date: 2014–09–03

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.