nep-ban New Economics Papers
on Banking
Issue of 2014‒11‒01
thirty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Does the capital structure affect banks’ profitability? Pre- and post financial crisis evidence from significant banks in France By 0. De Bandt; B. Camara; P. Pessarossi; M. Rose
  2. Banking competition and stability: The role of leverage By Xavier Freixas; Kebin Ma
  3. Interbank Lending and Distress: Observables, Unobservables, and Network Structure By Craig, Ben R.; Koetter, Michael; Kruger, Ulrich
  4. Bank lending and capital By Gerbert Hebbink; Mark Kruidhof; Jan Willem Slingenberg
  5. Tying loan interest rates to borrowers' CDS spreads By Ivanov, Ivan T.; Santos, Joao A. C.; Vo, Thu
  6. Financial Regulation in Italy By Pietro Vozzella; Giampaolo Gabbi; Massimo Matthias
  7. Macro-prudential Tools and Credit Risk of Property Lending at Irish banks By Hallissey, Niamh; Kelly, Robert; O'Malley, Terry
  8. Managerial Compensation, Regulation and Risk in Banks: Theory and Evidence from the Financial Crisis By Vittoria Cerasi; Tommaso Oliviero
  9. Who is to Blame: Foreign Ownership or Foreign Funding? By Inessa Love; Roberto Rocha; Erik Feyen; Samuel Munzele Maimbo; Raquel Letelier
  10. The Great Mortgaging: Housing Finance, Crises, and Business Cycles By Oscar Jorda; Moritz Schularick; Alan M. Taylor
  11. Sovereign Defaults, Bank Runs, and Contagion By Stephan Luck; Paul Schempp
  12. Bank asset reallocation and sovereign debt By Michele Fratianni; Francesco Marchionne
  13. Why do firms switch banks? Evidence from China By Yin, Wei; Matthews, Kent
  14. EU bank deleveraging By Pierluigi Bologna; Marianna Caccavaio; Arianna Miglietta
  15. Is There a Credit Crunch in the Czech Republic? By Lucie Reznakova; Svatopluk Kapounek
  16. A Systemic Stress Test Model in Bank-Asset Networks By Nima Dehmamy; Sergey V. Buldyrev; Shlomo Havlin; H. Eugene Stanley; Irena Vodenska
  17. Consumer credit during the crisis: evidence from contracts By Pierpaolo Cristaudo; Silvia Magri; Raffaella Pico; Maria Giovanna Zavallone
  18. QE and the bank lending channel in the United Kingdom By Butt, Nick; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
  19. Euro Area (cross-border?) banking By Pierluigi Bologna; Marianna Caccavaio
  20. A Comparative Analysis of Macroprudential Policies By Yaprak Tavman
  21. What is the information content of the SRISK measure as a supervisory tool? By S. Tavolaro; F. Visnovsky
  22. The optimal supply of liquidity and the regulations of money substitutes: a Baumol-Tobin approach By Benjamin Eden
  23. Variations in liquidity provision in real-time payment systems By Denbee, Edward; Garratt, Rodney; Zimmerman, Peter
  24. Housing Mortgage Lending in Russia in 2013 By Georgy Zadonsky
  25. China's Banking: How Reforms Lost Momentum By Leo F. Goodstadt
  26. Measuring Financial Inclusion: A Multidimensional Index By Noelia Camara; David Tuesta
  27. Does diversity of bank board members affect performance and risk? Evidence from an emerging market By Bowo Setiyono; Amine Tarazi
  28. Financial Stability and Interacting Networks of Financial Institutions and Market Infrastructures By Carlos León; Ron J. Berndsen; Luc Renneboog
  29. Portfolio Rebalancing Following the Bank of Japan's Government Bond Purchases: Empirical Analysis Using Data on Bank Loans and Investment Flows By Masashi Saito; Yoshihiko Hogen
  30. An initial approach to Risk Management of Funding Costs By Damiano Brigo; Cyril Durand

  1. By: 0. De Bandt; B. Camara; P. Pessarossi; M. Rose
    Abstract: This paper studies the effect of banks’ capitalization on banks’ Return on Equity (ROE). A debate has emerged on the costs for banks of the increase in capital requirements under Basel III. We bring empirical evidence on this issue by analyzing the effect of different capitalization measures on banks’ ROE on a sample of large French banks over the period 1993-2012, controlling for risk-taking as well as a range of variables including the business model. We find that an increase in capital leads to a significant increase in ROE, albeit the economic effect is modest. Furthermore, the method chosen by a bank to increase capitalization (i.e. raising equity) does not alter the result. Over the period, we find some evidence of a negative relationship between the share of credit activities and ROE, which is driven by the 2002-2007 sub-period, characterized by a significant increase in other business line activities. Looking at revenue and cost components, the positive effect of capital on the ROE appears to be driven by an increase in efficiency.
    Keywords: ROE, solvency ratios, capital, banking regulation, Basel III.
    JEL: G21 G28
    Date: 2014
  2. By: Xavier Freixas; Kebin Ma
    Abstract: This paper reexamines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. By means of a simple model we show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on banks' liability structure, on whether banks are financed by insured retail deposits or by uninsured wholesale debts, and on whether the indebtness is exogenous or endogenous. In particular we suggest that, while in a classical originate-to-hold banking industry competition might increase financial stability, the opposite can be true for an originate-to-distribute banking industry of a larger fraction of market short-term funding. This leads us to revisit the existing empirical literature using a more precise classification of risk. Our theoretical model therefore helps to clarify a number of apparently contradictory empirical results and proposes new ways to analyze the impact of banking competition on financial stability.
    Keywords: Banking Competition, Financial Stability, Leverage
    JEL: G21 G28
    Date: 2014–08
  3. By: Craig, Ben R. (Federal Reserve Bank of Cleveland); Koetter, Michael (Frankfort School of Financial Management); Kruger, Ulrich (Deutsche Bundesbank)
    Abstract: We provide empirical evidence on the relevance of systemic risk through the interbank lending channel. We adapt a spatial probit model that allows for correlated error terms in the cross-sectional variation that depend on the measured network connections of the banks. The latter are in our application observed interbank exposures among German bank holding companies during 2001 and 2006. The results clearly indicate significant spillover effects between banks’ probabilities of distress and the financial profiles of connected peers. Better capitalized and managed connections reduce the banks own risk. Higher network centrality reduces the probability of distress, supporting the notion that more complete networks tend to be more stable. Finally, spatial autocorrelation is significant and negative. This last result may indicate too-many-to-fail mechanics such that bank distress is less likely if many peers already experienced distress.
    Keywords: Spatial Autoregression; interbank connections; bank risk
    JEL: E31 G21
    Date: 2014–10–02
  4. By: Gerbert Hebbink; Mark Kruidhof; Jan Willem Slingenberg
    Abstract: The capital rules that banks have to comply with have become much more stringent since the financial crisis. The financial crisis brought home the fact that the capital buffers of banks were too small to absorb shocks. Financial aid from the state was required on a white scale to avoid more serious consequences for the financial system. In reaction to the crisis, the Basel Committee developed a new regulatory framework to make the banking system more resilient (Basel III). In Europa Basel III is being implemented through the CRD-IV/CRR legislative package. At the heart of the reforms, which should prevent new problems arising at banks, are the stricter rules governing bank capital.
    Date: 2014–04
  5. By: Ivanov, Ivan T. (Board of Governors of the Federal Reserve System (U.S.)); Santos, Joao A. C. (Federal Reserve Bank of New York); Vo, Thu (Amherst Securities Group)
    Abstract: We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected borrowing costs. We find that CDS-based loans are associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.
    Keywords: Market-based pricing; loan spreads; loan covenants; CDS spreads
    JEL: G10 G21 G30
    Date: 2014–06–11
  6. By: Pietro Vozzella (Universita degli Studi di Siena); Giampaolo Gabbi (Universita degli Studi di Siena); Massimo Matthias (Universita degli Studi di Siena)
    Abstract: The evolution of the Italian regulatory system is based on five basic principles: (i) maintenance of trust in the financial system; (ii) investors protection; (iii) stability and wellfunctioning of the financial system; (iv) financial system competitiveness; (v) compliance of financial rules. For banks, capital regulation has been a focus since the introduction of the first Basel Accord, with a strong impact on the financial structure with many M&As cases and the exit of the public sector from the industry. The crisis has been faced with the enhancement of the prudential supervisory style.
    Keywords: Italy, financial sector, banking, capital requirement, harmonization, deposit protection, remuneration policy
    JEL: G01 G21 G28 G33
    Date: 2014–09–01
  7. By: Hallissey, Niamh (Central Bank of Ireland); Kelly, Robert (Central Bank of Ireland); O'Malley, Terry (Central Bank of Ireland)
    Abstract: The high level of mortgage arrears in the Irish financial system and the associated overhang on economic growth underlines the importance of prudent lending standards throughout the property cycle. Macro-prudential tools such as loan-to-value (LTV) ratio caps and loan-to-income (LTI) ratio caps improve the resilience of the banking system by reducing the credit risk on new lending. Loan-level data are used to analyse the relationship between originating levels of these ratios and mortgage defaults. We find that there is a positive relationship between originating LTV and LTI ratios and subsequent defaults, with the strength of the relationship dependent on the point of the property cycle at which a loan is originated. Default rates on loans issued near the peak of the cycle to first-time buyers are particularly sensitive to LTV at origination while those issued to non first-time buyers are sensitive to both LTV and LTI at origination. In addition, there is a sharp increase in the losses on defaulted loans for loans issued above 85 per cent LTV. Although lending at higher LTI ratios has decreased signficantly, 50 per cent of new lending to owner occupiers was at LTV levels above 80 per cent in 2013.
    Date: 2014–10
  8. By: Vittoria Cerasi (Università di Milano Bicocca); Tommaso Oliviero (CSEF, Università di Napoli Federico II)
    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: Executive Compensation, Risk Taking, Financial Regulation, Monitoring.
    JEL: G21 G38
    Date: 2014–10–08
  9. By: Inessa Love (University of Hawai‘i at Manoa); Roberto Rocha (World Bank's Financial System Department); Erik Feyen (World Bank's Financial Systems Department); Samuel Munzele Maimbo (World Bank's Europe and Central Asia Department); Raquel Letelier (World Bank's Europe and Central Asia Department)
    Abstract: We investigate whether the credit contraction that followed the global financial crisis is due to high foreign ownership or high reliance on foreign finding. We apply panel vector autoregressions to quarterly data for 41 countries and find that domestic credit growth is highly sensitive to cross-border funding shocks around the world. However, high foreign ownership per se does not appear to increase the sensitivity of credit to foreign funding shocks. Rather, the sensitivity is higher in countries with high reliance on foreign funding and high loan-to-deposit ratios. These findings have important policy implications for many countries involved in cross-border funding.
    Keywords: Global financial crisis, bank credit, foreign banks, funding models
    JEL: G01 G21 F36
    Date: 2014–09
  10. By: Oscar Jorda (Federal Reserve Bank of San Francisco and University of California, Davis); Moritz Schularick (University of Bonn and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Alan M. Taylor (University of California, Davis and National Bureau of Economic Research and Centre for Economic Policy Research)
    Abstract: This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks' balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.
    Keywords: Leverage, Recessions, Mortgage Lending, Financial Crises, Business Cycles, Local Projections
    JEL: C14 C38 C52 E32 E37 E44 E51 G01 G21 N10 N20
    Date: 2014–09
  11. By: Stephan Luck (Max Planck Institute for Research on Collective Goods, Bonn); Paul Schempp (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We provide a model that unifies the notion of self-fulfilling banking crises and sovereign debt crises. In this model, a bank run can be contagious by triggering a sovereign default, and vice versa. A deposit insurance scheme can eliminate the adverse equilibrium only if the government can repay its debt and credibly insure deposits irrespective of the performance of the financial sector. Moreover, we analyze how banking crises and sovereign defaults can be contagious across countries. We give conditions under which the implementation of a banking union is effective and costless. Finally, we discuss the current proposals for a banking union in the euro area and argue that it should be extended by a supranational Deposit Guarantee Scheme.
    Keywords: bank run, financial crisis, sovereign default, vicious cycle, financial contagion, banking union, deposit insurance
    JEL: G21 G28 H81 H63
    Date: 2014–09
  12. By: Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR); Francesco Marchionne (Nottingham Trent University, Division of Economics)
    Abstract: This paper examines how banks around the world have resized and reallocated their earning assets in response to the subprime and sovereign debt crises. We focus especially on the interaction between sovereign debt and the bank asset allocation process. After the crisis we observe a general substitution away from loans and in favor of securities. Our econometric findings corroborate that banks have readjusted the composition of their assets and the overall regulatory credit risk by substituting securities for loans. Banks, furthermore, have also been sensitive to those variables that are of direct interest to the regulator. The picture that emerges is a mutual protection pact regime, in which high-debt governments exert pressure on banks-- either through the regulatory system or through moral suasion-- to privilege the purchase of government securities over credit to the private sector in exchange for receiving protection against default.
    Keywords: crisis, loans, mutual protection pacr, regulator, securities
    JEL: G01 G11 G21 G28
    Date: 2014–09
  13. By: Yin, Wei (Cardiff Business School); Matthews, Kent (Cardiff Business School)
    Abstract: This paper uses a sample of matched data of firms-banks in China over the period 1999-2012 to determine the drivers of firms switching behaviour from one bank relationship to another. The findings conform to the extant literature and therefore indicate that the switching behaviour of Chinese firms is no different to firms elsewhere. The results show that the principal driver of a switching action is the credit needs of the firm and a mixture of firm and bank characteristics. The findings support the extant literature that less opaque firms are able to switch more readily than opaque firms. The results also suggest that banks that develop there fee income services are more effective in locking-in their borrowers.
    Keywords: Switching behaviour; Chinese firms; Chinese banks
    JEL: G21 L22
    Date: 2014–09
  14. By: Pierluigi Bologna (Banca d'Italia); Marianna Caccavaio (Banca d'Italia); Arianna Miglietta (Banca d'Italia)
    Abstract: We analyse the deleveraging process with reference to a sample of European banks from December 2011 to June 2013 and find that the leverage ratio (measured as assets to equity) has declined on average from 28.6 to 25.0. Its standard deviation fell from 8.2 to 6.5. About 2/3 of the deleveraging has been achieved by raising common equity while 1/3 took place by reducing balance sheet assets. The deleveraging has been more “good” (raising capital and reducing non-core assets) than “ugly” (indiscriminate asset sales) even though only a few banks in our sample managed to pursue it also through a reduction in bad assets. Based on the US experience, we argue that European banks have not yet completed their deleveraging, although what has been done to date is more substantive that it appears prima facie given the generalized increase in banks’ sovereign exposure.
    Keywords: leverage, deleveraging, European banks, financial stability
    JEL: G21 G01 G28
    Date: 2014–09
  15. By: Lucie Reznakova (Department of Finance, Faculty of Business and Economics, Mendel University in Brno); Svatopluk Kapounek (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: We apply a disequilibrium model of credit demand and supply to test the credit crunch hy- pothesis. We suppose that firms face credit rationing and a realised outstanding loan will be the minimum desired level of commercial bank loans and bank limit for the firm. We adopted the disequilibrium model which consists of credit supply and credit demand equations. We sug- gest that actual observed credit growth rate at time t lies on the supply curve (excess demand), or on the demand curve (excess supply), or on both (equilibrium). Our model is estimated by the full-information maximum likelihood approach with a numerical maximization of the like- lihood function. Our basic findings show that significant decrease in credits after the financial crisis in the year 2007 was caused by low economic and investment activity and reject the hy- pothesis that there is a credit crunch in the Czech Republic.
    Keywords: money supply, money demand, maximum likelihood approach, credit, financial crisis, credit crunch, disequilibrium
    JEL: G21 G28
    Date: 2014–10
  16. By: Nima Dehmamy; Sergey V. Buldyrev; Shlomo Havlin; H. Eugene Stanley; Irena Vodenska
    Abstract: Financial networks are dynamic and to assess systemic importance and avert losses we needs models which take the time variations of the links and nodes into account. We develop a model that can predict the response of the financial network to a shock and propose a measure for the systemic importance of the banks, which we call BankRank. Using the European Bank Authority 2011 stress test exposure data, we apply our model to the bipartite network of the largest institutional holders of troubled European countries (Greece, Italy, Portugal, Spain, and Ireland). Simulation of the states in our model reveal that it has "calm" state, where shocks do not cause very major losses, and "panicked" states, in which devastating damages occur. Fitting the parameters to Eurocrisis data shows that, before the crisis, the system was mostly in the "calm" regime while during the Eurocrisis it went into the "panicked" regime. The numerical solutions of the our model fit to a good degree to what really happened in the crisis. We also find that, while the largest holders are usually more important, sometimes smaller holders also exhibit systemic importance. In addition, we observe that asset diversification has no clear correlation with our BankRank. Thus diversification is neither reducing systemic, nor necessarily providing routes for contagion. These suggest that our model may provide a useful tool for determining the vulnerability of banks and assets to shocks and for simulating shared portfolio networks in general.
    Date: 2014–10
  17. By: Pierpaolo Cristaudo; Silvia Magri; Raffaella Pico; Maria Giovanna Zavallone (Bank of Italy)
    Abstract: The study analyses trends in the market for consumer credit during the crisis, relying on data by CRIF referring to demand for personal and special-purpose loans and to contracts signed between 2007 and 2013 in Italy (55 and 37 million respectively). The analysis shows how the sharp reduction in durable consumption has been associated with a decrease in demand for loans, with the exception of contracts for small amounts (<1000 euro). These were more widespread among the youngest customers, whose relative importance has therefore increased. Banks and financial companies have supported the repositioning towards loans for small amounts and contracts with low monthly installments (<100 euro). Moreover, the average amount of loans has decreased more for banks, whose activity has become increasingly similar to that of financial companies. Loans for medium-large amounts have been taken out by a much lower number of people; moreover, the maturity of these loans has been lengthened to reduce the installments. Risk indicators have improved.
    Keywords: consumer credit, supply and demand, risk indicators
    JEL: D12 D91 G21
    Date: 2014–09
  18. By: Butt, Nick (Bank of England); Churm, Rohan (Bank of England); McMahon, Michael (University of Warwick); Morotz, Arpad (Bank of England); Schanz, Jochen (Bank for International Settlements)
    Abstract: We test whether quantitative easing (QE) provided a boost to bank lending in the United Kingdom, in addition to the effects on asset prices, demand and inflation focused on in most other studies. Using a data set available to researchers at the Bank, we use two alternative approaches to identify the effects of variation in deposits on individual banks' balance sheets and test whether this variation in deposits boosted lending. We find no evidence to suggest that QE operated via a traditional bank lending channel (BLC) in the spirit of the model due to Kashyap and Stein. We show in a simple BLC framework that if QE gives rise to deposits that are likely to be short-lived in a given bank (‘flighty’ deposits), then the traditional BLC is diminished. Our analysis suggests that QE operating through a portfolio rebalancing channel gave rise to such flighty deposits and that this is a potential reason that we find no evidence of a BLC. Our evidence is consistent with other studies which suggest that QE boosted aggregate demand and inflation via portfolio rebalancing channels.
    Keywords: Monetary policy; bank lending channel; quantitative easing
    JEL: E51 E52 G20
    Date: 2014–09–19
  19. By: Pierluigi Bologna (Bank of Italy); Marianna Caccavaio (Bank of Italy)
    Abstract: This paper presents stylized facts of the segmentation of the Euro Area (EA) banking system and investigates cross-border banking dynamics. Results show that the determinants of cross-border banking change substantially over-time: (i) in the pre-crisis period of financial integration the physical distance and the financial distance between countries were the main drivers; (ii) during the global financial crisis banks reduced the concentration in their foreign claims portfolio and retrenched from the more externally vulnerable countries but kept on investing in the still profitable countries with a sound fiscal position; and (iii) during the EA sovereign tensions, while portfolio diversification and the pull-back from externally vulnerable countries continued, foreign claims were also driven by the deteriorating sovereign conditions, the bank-sovereign link, and opportunities for flight-to-quality. During the crisis the structure of banks’ international organization also mattered as banks retrench more when they do not operate through foreign branches and subsidiaries.
    Keywords: Euro Area; Cross-border banking; Foreign claims; Financial stability
    JEL: F36 G01 G21
    Date: 2014–09
  20. By: Yaprak Tavman
    Abstract: The global financial crisis has clearly shown that macroeconomic stability is not sufficient to guarantee the stability of the financial system. Hence, the recent policy debate has focused on the effectiveness of macroprudential tools and their interaction with monetary policy. This paper aims to contribute to the macroprudential policy literature by presenting a formal comparative analysis of three macroprudential tools: (i) reserve requirements, (ii) capital requirements and (iii) a regulation premium. Utilizing a New Keynesian general equilibrium model with Önancial frictions, we find that capital requirements are the most effective macroprudential tool in mitigating the negative effects of the financial accelerator mechanism. Deriving welfare-maximizing monetary and macroprudential policy rules, we also conclude that irrespective of the type of the shock affecting the economy, use of capital requirements generates the highest welfare gains.
    Keywords: financial crises, monetary policy, macroprudential tools, financial system regulation
    JEL: E44 E58 G21 G28
    Date: 2014–06
  21. By: S. Tavolaro; F. Visnovsky
    Abstract: The SRISK measure is advertised as measuring the recapitalization needed by a financial institution in the event of a financial crisis. It is computed from the estimated reaction of the institution’s share price in the event of a sharp drop in market prices. This indicator relies both on an economic analysis and an econometric model. It is applied to a large set of international and domestic financial institutions, updated regularly and made available online. Although innovative, it stirred naturally debates among academics, supervisors and professionals, highlighting some limitations, in particular when considering the SRISK measure as a supervisory tool. First, the SRISK is based on market return data: consequently, it applies only to listed institutions and is exposed to criticisms as to which extent it can mirror fundamentals. Second, the SRISK seems to lack sound foundations for policy analysis: with a reduced-form approach, conclusions regarding causality are not obvious from an economic point of view. Moreover the SRISK is a conditional measure to an event whose likelihood is not integrated in the framework. Third, empirical analyses of SRISK as a supervisory tool, used for instance to identify systemic financial institutions (SIFIs) or as an early-warning indicator, have shown some limited perspectives.
    Keywords: Systemic Risk Measures, Market Data, Financial Monitoring.
    JEL: D81 L51 G01 G21 G28
    Date: 2014
  22. By: Benjamin Eden (Vanderbilt University)
    Abstract: I use the Baumol-Tobin approach to examine the following propositions: (a) The optimal supply of liquidity requires a government loan program in addition to paying interest on reserves held by banks, (b) The adoption of the optimal policy will crowd out private credit arrangement and will thus shrink the financial sector and (c) regulations aimed at eliminating money substitutes may be redundant if the optimal policy is adopted but otherwise may improve welfare.
    JEL: E0 E5
    Date: 2014–01–10
  23. By: Denbee, Edward (Bank of England); Garratt, Rodney (Federal Reserve Bank of New York); Zimmerman, Peter (Bank of England)
    Abstract: We describe methods for measuring liquidity provision that can be applied to real-time gross settlement payment systems. Using data from CHAPS, the UK large-value payment system, we find that smaller banks tend to provide more liquidity than larger banks, relative to their payment flows. We use a Gini coefficient to measure these variations in liquidity provision between banks, and observe that the variations increase following the collapse of Lehman Brothers. It can be difficult to tell whether the variations are intentional or whether they occur due to external factors that are beyond the control of the individual banks. We use a recombinant approach to detect instances where observed patterns of liquidity provision are unlikely to have occurred absent of some behavioural or structural factors, such as differences in banks’ business models. Our results suggest that the variations in liquidity provision are larger than would be expected from truly random payment flows.
    Keywords: Liquidity; payment systems; Gini coefficient
    JEL: E42
    Date: 2014–10–17
  24. By: Georgy Zadonsky (Gaidar Institute for Economic Policy)
    Abstract: This paper deals with a wide range of issues related to housing mortgage lending in Russia.
    Keywords: Russian economy, mortgage
    JEL: G21 K11 L74 L85 R14 R21 R31
    Date: 2014
  25. By: Leo F. Goodstadt (Hong Kong Institute for Monetary Research and Hong Kong Institute for the Humanities and Social Sciences and University of Dublin)
    Abstract: This paper investigates China's pattern of decade-plus delays in implementing banking reforms. It identifies the ideological factors involved, particularly the persistent suspicion of 'market forces' as the economy's driving force. The dependence on the banks to finance the economic and social costs of the retreat from state planning is traced, together with the costs to the banks of funding such urgent national programmes as the 2008 economic stimulus package and the current affordable housing drive. The paper argues that liberalisation of the banking industry will continue to be limited because of the banks' role as the national leadership's last surviving lever of control over policy implementation after the demise of the command economy.
    Keywords: China, Banking, Reforms, Ideology, Market Forces, State Intervention
    Date: 2014–10
  26. By: Noelia Camara; David Tuesta
    Abstract: We rely on demand and supply-side information to measure the extent of financial inclusion at country level for eighty-two developed and less-developed countries. We postulate that the degree of financial inclusion is determined by three dimensions: usage, barriers and access to financial inclusion. Weights assigned to the dimensions are determined endogenously by employing a two-stage Principal Component Analysis. Our composite index offers a comprehensive measure of the degree of financial inclusion, easy to understand and compute.
    Keywords: financial inclusion, , Principal Component Analysis, inclusion barriers
    JEL: C43 G21 O16
    Date: 2014–09
  27. By: Bowo Setiyono (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: This study investigates the influence of background diversity of bank board members on performance and risk. Using data from Indonesian banks from 2001 to 2011 covering 4200 individual year observations and 21 ethnic groups, we estimate the degree of diversity by considering various aspects (gender, citizenship, age, experience, tenure, ethnicity, nationality, education level and type) and find significant impacts on bank performance. On the whole, diversity is in general positively associated with performance except when it relates to ethnicity. It not only reduces performance per se but also increases risk. Female presence and professional diversity reduce risk but nationality and ethnicity diversities are associated with higher risk. Education diversity generally leads to higher income volatility and leverage risk. Our results are generally robust to various alternative performance measures, including risk adjusted returns, and estimation methods.
    Keywords: Bank Board; Performance; Risk, Diversity; Ethnicity; Emerging Market
    Date: 2014–09–04
  28. By: Carlos León; Ron J. Berndsen; Luc Renneboog
    Abstract: An interacting network coupling financial institutions’ multiplex (i.e. multi-layer) and financial market infrastructures’ single-layer networks gives an accurate picture of a financial system’s true connective architecture. We examine and compare the main properties of Colombian multiplex and interacting financial networks. Coupling financial institutions’ multiplex networks with financial market infrastructures’ networks removes modularity, which augments financial instability because the network then fails to isolate feedbacks and limit cascades while it retains its robust-yet-fragile features. Moreover, our analysis highlights the relevance of infrastructure-related systemic risk, corresponding to the effects caused by the improper functioning of FMIs or by FMIs acting as conduits for contagion. Classification JEL: D85, D53, G20, L14.
    Date: 2014–10
  29. By: Masashi Saito (Bank of Japan); Yoshihiko Hogen (Bank of Japan)
    Abstract: This paper organizes facts and conducts an empirical analysis related to the portfolio rebalancing effect of government bond purchases by the Bank of Japan (BOJ). Our analysis uses data on bank loans and investment flows that are classified by type of entity, primarily taken from the Flow of Funds Accounts Statistics. Following the introduction of Quantitative and Qualitative Monetary Easing (QQE) by the BOJ in April 2013, entities other than the BOJ, as a group, have increased loans and investment in equities, mutual funds, and corporate bonds in Japan, while reducing their holdings of Japanese government bonds. Such portfolio rebalancing is mainly led by domestic banks and nonresidents. Meanwhile, so far, insurance companies, corporate pension funds, and public pensions have not reduced government bond holdings when the BOJ purchased government bonds. In addition to changes in financial and economic conditions, such as the balance sheet conditions of domestic banks and loan demand faced by domestic banks, purchases of government bonds with a longer remaining maturity by the BOJ have played a role in the increase in bank loans observed during the QQE period.
    Keywords: portfolio rebalancing; government bond purchases; Quantitative and Qualitative Monetary Easing (QQE); Flow of Funds Accounts Statistics
    JEL: E52 E58 G11 G2 H63
    Date: 2014–06–19
  30. By: Damiano Brigo; Cyril Durand
    Abstract: In this note we sketch an initial tentative approach to funding costs analysis and management for contracts with bilateral counterparty risk in a simplified setting. We depart from the existing literature by analyzing the issue of funding costs and benefits under the assumption that the associated risks cannot be hedged properly. We also model the treasury funding spread by means of a stochastic Weighted Cost of Funding Spread (WCFS) which helps describing more realistic financing policies of a financial institution. We elaborate on some limitations in replication-based Funding / Credit Valuation Adjustments we worked on ourselves in the past, namely CVA, DVA, FVA and related quantities as generally discussed in the industry. We advocate as a different possibility, when replication is not possible, the analysis of the funding profit and loss distribution and explain how long term funding spreads, wrong way risk and systemic risk are generally overlooked in most of the current literature on risk measurement of funding costs. As a matter of initial illustration, we discuss in detail the funding management of interest rate swaps with bilateral counterparty risk in the simplified setup of our framework through numerical examples and via a few simplified assumptions.
    Date: 2014–10

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