nep-ban New Economics Papers
on Banking
Issue of 2014‒10‒13
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk By B. Camara; L. Lepetit; A. Tarazi
  2. What drives heterogeneity of procyclicality of loan loss provisions in the EU? By Malgorzata Olszak; Mateusz Pipien; Iwona Kowalska; Sylwia Roszkowska
  3. Static and Dynamic Networks in Interbank Markets By Ethan Cohen-Cole; Eleonora Patacchini; Yves Zenou
  4. What Matters Most in the Design of Stress Tests? Evidence from U.S. and the Europe By Bertrand Candelon; Amadou N. R. Sy
  5. Banking regulation and supervision in the next 10 years and their unintended consequences By D. Nouy
  6. From Policy Rate to Bank Lending Rates: The Chilean Banking Industry By BERSTEIN Solange; FUENTES Rodrigo
  7. Estimating the risk of joint defaults: an application to central bank collateralized lending operations By Dariusz Gatarek; Juliusz Jabłecki
  8. Measuring Systemic Risk in a Post-Crisis World By O. de Bandt; J.-C. Héam; C. Labonne; S. Tavolaro
  9. Survey-Based Assessment of Household Borrowers' Financial Vulnerability By Mikus Arins; Nadezda Sinenko; Laura Laube
  10. Real options and bank bailouts: How uncertainty affects optimal bank bailout policy By VERMEULEN, Glen; KORT, Peter
  11. Credit access after consumer bankruptcy filing: new evidence By Jagtiani, Julapa; Li, Wenli
  12. Is cooperative Banks' Reaction to Business Cycle Different? By Claudia GUAGLIANO; Juan LOPEZ

  1. By: B. Camara; L. Lepetit; A. Tarazi
    Abstract: We investigate the impact of changes in capital of European banks on their risk-taking behavior from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks' ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks? risk changes. We find that, for highly capitalized, adequately capitalized and strongly undercapitalized banks, an increase in equity or in subordinated debt positively affects risk. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital or subordinated debt. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.
    Keywords: Bank Risk, Bank Capital, Capital regulation, European banks.
    JEL: G21 G28
    Date: 2013
  2. By: Malgorzata Olszak (University of Warsaw, Faculty of Management); Mateusz Pipien (Cracow University of Economics, Economic Institute, National Bank of Poland); Iwona Kowalska (University of Warsaw, Faculty of Management); Sylwia Roszkowska (Faculty of Economic and Social Sciences, University of £ódŸ, National Bank of Poland)
    Abstract: This paper documents a large cross-bank and cross-country variation in the relationship between loan loss provisions and the business cycle and explores bank management specific, bank-activity specific and country specific (institutional and regulatory) features that explain this diversity in the European Union. Our results indicate that LLP in large, publicly traded and commercial banks, as well as in banks reporting in consolidated statements’ format, are more procyclical. Better investor protection and more restrictive bank regulations reduce the procyclicality of LLP. Additional evidence shows that moral hazard resulting from deposit insurance renders LLP more procyclical. We do not find support for the view that better quality of market monitoring mitigates the risk-taking behavior of banks. Our findings clearly indicate the empirical importance of earnings management for LLP procyclicality. Sensitivity of LLP to the business cycle seems to be limited in the case of banks which engage in more income smoothing and which apply prudent credit risk management.
    Keywords: loan loss provisions, procyclicality, earnings management, investor protection, bank regulation, bank supervision
    JEL: E32 E44 G21
    Date: 2014–05
  3. By: Ethan Cohen-Cole (Econ One Research); Eleonora Patacchini (Cornell University and EIEF); Yves Zenou (Stockholm University and IFN)
    Abstract: This paper proposes a model of network interactions in the interbank market. Our innovation is to model systemic risk in the interbank network as the propagation of incentives or strategic behavior rather than the propagation of losses after default. Transmission in our model is not based on default. Instead, we explain bank profitability based on competition incentives and the outcome of a strategic game. As competitors’ lending decisions change, banks adjust their own decisions as a result: generating a ‘transmission’ of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation. We also determine the key bank, which is the bank that is crucial for the stability of the financial network.
    Date: 2014
  4. By: Bertrand Candelon; Amadou N. R. Sy
    Abstract: In the aftermath of the global financial crisis, supervisors in Europe and the U.S. have undertaken a series of bank stress tests to restore market confidence. In this paper we use event study methods to compare the market impact of all U.S. and EU-wide stress tests performed from 2009 to 2013. We find that, typically, the publication of stress test results has a positive impact on stressed banks’ returns. However, while the 2009 U.S. stress test had a large and positive impact on stressed banks, the impact of subsequent U.S. exercises decreased over time. Contrary to anecdotal evidence, we find that the 2011 EU exercise is the only EU-wide stress test that resulted in a significant negative market reaction. Comparing EU-wide stress tests among themselves and with U.S. stress tests highlights the importance of the governance of the stress tests. Governance turns out to be more important for the success of stress tests than technical elements, such as the minimum capital adequacy threshold or the level of disclosure of bank-by-bank data.
    Keywords: financial stability, macro-prudential, stress tests, financial stability
    JEL: G21 G28 G20
    Date: 2014–09–30
  5. By: D. Nouy
    Abstract: In the paper, we deal with the unexpected effects of new regulations and supervision and provide recommendations to ensure their effectiveness. New regulations essentially aim at strengthening the solvency and the liquidity of financial institutions. However, some technical aspects of these regulations, particularly regarding the effect on deleveraging, the use of a non-risk weighted leverage ratio and regulatory arbitrage require continuous monitoring. In addition, banking supervision is evolving toward more intrusive approach, more stress test exercises and an increasing role of macro prudential supervision. These changes in supervisory approach also require an efficient management of communication in order to avoid market overreaction and banks? ex ante inefficient behaviour. Supervisors have to anticipate and manage these unintended effects. The European Banking Union will help address these challenges by setting a single supervisory mechanism, a single resolution mechanism and a single deposit insurance scheme.
    Keywords: Basel III, CRD IV, regulatory arbitrage, stress test, macro prudential supervision, Banking Union.
    JEL: G21 G23 G28
    Date: 2013
  6. By: BERSTEIN Solange; FUENTES Rodrigo
  7. By: Dariusz Gatarek (HVB Unicredit; Systems Research Institute, Polish Academy of Sciences); Juliusz Jabłecki (Faculty of Economic Sciences Warsaw University; Narodowy Bank Polski / Instytut Ekonomiczny)
    Abstract: Central bank lending to commercial banks is typically collateralized which reduces central bank’s credit risk exposure to “double default events” when the counterparty and the issuer of the underlying collateral asset both default in a short period of time. This paper presents a simple model for correlated defaults which are the key drivers of residual credit risk in central bank’s repo portfolios. In the model default times of counterparties and collateral issuers are determined by idiosyncratic and systematic factors, whereby a name defaults if it is struck by either factor for the first time. The novelty of our approach lies in representing systematic factors as increasing sequences of random variables. Such a setting allows to build a rich dependence structure that is free of the flaws inherent in the Gaussian copula-based approaches currently regarded as state of the art solutions for central banks.
    Keywords: joint defaults, collateralized lending, residual credit risk
    JEL: G12 G13
    Date: 2014
  8. By: O. de Bandt; J.-C. Héam; C. Labonne; S. Tavolaro
    Abstract: In response to the very large number of quantitative indicators that have been put forward to measure the level of systemic risk since the start of the subprime crisis, the paper surveys the different indicators available in the economic and financial literature. It distinguishes between (i) indicators related to institutions, based either on market data or regulatory/accounting data; (ii) indicators addressing risks in financial markets and infrastructures; (iii) indicators measuring interconnections and network effects - where research is currently very active-; and (iv) comprehensive indicators. All these indicators are critically assessed and ways forward for a better understanding of systemic risk are suggested.
    Keywords: systemic risk, market data, balance sheet data, regulatory data, financial network, funding liquidity.
    JEL: G2 G3 E44
    Date: 2013
  9. By: Mikus Arins; Nadezda Sinenko; Laura Laube
    Abstract: This Discussion Paper is an attempt to provide insight into the debt servicing capacity of Latvian households and its sustainability under the impact of different macroeconomic shocks based on individual household data obtained by surveying households with at least one loan for house purchase. To assess the financial situation of these households, changes in the household solvency are modelled under the impact of different economic shocks (shrinking employment income, rising interest rates, loss of jobs) and the obtained results are generalised to the aggregate portfolio of loans granted by Latvian credit institutions to households for house purchase. The results obtained lead to a conclusion that following the financial crisis household solvency is still fragile and possible negative shocks might contribute to higher potential losses of credit institutions. At the same time possible losses to lenders arising from such adverse shocks might be lower than two years ago since the value of collateral has increased with real estate prices moving up, while outstanding loans granted for house purchase have declined.
    Keywords: analysis of household solvency, stress tests, sensitivity analysis, financial margin, macroeconomic shock scenario, microdata
    JEL: C15 C35 D14 E21 G21
    Date: 2014–08–12
  10. By: VERMEULEN, Glen; KORT, Peter
    Abstract: This paper develops a real options consistent bailout decision rule that speci?es under which conditions it is optimal to liquidate or bail out a bank based on the amount of liquidity it creates. Due to its construction, the rule incorporates the option value of waiting stemming from the irreversibility of liquidation and bailout decisions and the possibility to delay. We apply the rule to various cases in order to evaluate the quality of bank bailout policy in the EU-15. The main contribution however lies in the ?first-ever application of real options analysis to the ?field of bank bailout policy.
    Date: 2014–09
  11. By: Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Li, Wenli (Federal Reserve Bank of Philadelphia)
    Abstract: Supersedes Working Paper No. 13-24 This paper uses a unique data set to shed new light on credit availability to consumer bankruptcy filers. In particular, the authors’ data allow them to distinguish between Chapter 7 and Chapter 13 bankruptcy filings, to observe changes in credit demand and credit supply explicitly, and to differentiate existing and new credit accounts. The paper has four main findings. First, despite speedy recovery in their risk scores after bankruptcy filing, most filers have much reduced access to credit in terms of credit limits, and the impact seems to be long lasting (well beyond the discharge date). Second, the reduction in credit access stems mainly from the supply side as consumer inquiries recover significantly after the filing, while credit limits remain low. Third, new lenders do not treat Chapter 13 filers more favorably than Chapter 7 filers. In fact, Chapter 13 filers are much less likely to receive new credit cards than Chapter 7 filers even after controlling for borrower characteristics and local economic environment. Finally, the authors find that Chapter 13 filers overall end up with a slightly larger credit limit amount than Chapter 7 filers (both after the filing and after discharge) because they are able to maintain more of their old credit from before bankruptcy filing. The authors’ results cast doubt on the effectiveness of the current bankruptcy system in providing relief to bankruptcy filers and especially its recent push to get debtors into Chapter 13.
    Keywords: Bankruptcy; Credit limit; Credit performance; Financial crisis; Bankruptcy reform
    JEL: G01 G02 G28 K35
    Date: 2014–08–07
  12. By: Claudia GUAGLIANO; Juan LOPEZ

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