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on Banking |
| By: | Sebastiaan Pool; Leo de Haan; Jan Jacobs |
| Abstract: | This paper examines how credit risk affects bank lending and the business cycle. We estimate a panel Vector Autoregression model for an unbalanced sample of 12 OECD countries over the past two to three decades, consisting of the output gap, inflation, the short-term interest rate, bank lending, as well as loan loss provisioning by banks (as proxy for credit risk). Our main findings are that: (i) bank lending and loan loss provisioning are important drivers of business cycle fluctuations, (ii) loan loss provisioning decreases in relative terms as bank lending increases, and (iii) bank lending is primarily affected by output fluctuations. |
| Keywords: | loan loss provisioning; bank lending; business cycle |
| JEL: | E44 G21 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:445&r=ban |
| By: | vithyea, You |
| Abstract: | This research paper studies the relationship between bank net interest margin (NIM) and non-interest income (NII) using Cambodian banking data. The research focuses on the contribution of the NII, which is the non-traditional banking activity, to the banking profitability. The analysis runs a three-stage least square system to handle the NIM and NII employing 28 banks data from 2004-2010. For the growing period, there is a trade-off between interest margin and non-interest income. It is argued that banks increase non-traditional activities associates with the reduction in net interest margin and vice-versa. This paper also finds that the non-traditional activities have positive causal effect on net interest margin in the post financial crisis period. |
| Keywords: | Bank interest margin, non-interest income, Cambodian banking, bank risk |
| JEL: | G2 G21 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58230&r=ban |
| By: | Stephanie Chan (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam, the Netherlands) |
| Abstract: | CoCo’s (contingent convertible capital) are designed to convert from debt to equity when banks need it most. Using a Diamond-Dybvig model cast in a global games framework, we show that while the CoCo conversion of the issuing bank may bring the bank back into compliance with capital requirements, it will nevertheless raise the probability of the bank being run, because conversion is a negative signal to depositors about asset quality. Moreover, conversion imposes a negative externality on other banks in the system in the likely case of correlated asset returns, so bank runs elsewhere in the banking system become more probable too and systemic risk will actually go up after conversion. CoCo’s thus lead to a direct conflict between micro- and macroprudential objectives. We also highlight that ex ante incentives to raise capital to stave off conversion depend critically on CoCo design. In many currently popular CoCo designs, wealth transfers after conversion actually flow from debt holders to equity holders, destroying the latter’s incentives to provide additional capital in times of stress. Finally the link between CoCo conversion and systemic risk highlights the tradeoffs that a regulator faces in deciding to convert CoCo’s, providing a possible explanation of regulatory forbearance. |
| Keywords: | Contingent Convertible Capital, Contagion, Systemic Risk, Bank Runs, Global Games |
| JEL: | G01 G21 G32 |
| Date: | 2014–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140110&r=ban |
| By: | Hugo Rodríguez Mendizábal |
| Abstract: | This short paper presents a new stylized fact about bank nonperforming loans. According to the data for the US, the average of the ratio of noncurrent loans to total loans for large banks presents a very high negative correlation with the same ratio for small banks. This result remains valid for different measures of bank size as well as controlling for different bank characteristics such as charter class, specialization or geographical location. |
| Keywords: | bank size, nonperforming loans |
| JEL: | G21 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:789&r=ban |
| By: | Hasan, Iftekhar (Fordham University and Bank of Finland); Kim, Suk-Joong (University of Sydney); Wu , Eliza (University of Technology Sydney) |
| Abstract: | We investigate the effects of credit ratings-contingent financial regulation on foreign bank lending behavior. We examine the sensitivity of international bank flows to debtor countries’ sovereign credit rating changes before and after the implementation of the Basel 2 risk-based capital regulatory rules. We study the quarterly bilateral flows from G-10 creditor banking systems to 77 recipient countries over the period Q4:1999 to Q2:2013. We find direct evidence that sovereign credit re-ratings that lead to changes in risk-weights for capital adequacy requirements have become more significant since the implementation of Basel 2 rules for assessing banks’ credit risk under the standardized approach. This evidence is consistent with global banks acting via their international lending decisions to minimize required capital charges associated with the use of ratings-contingent regulation. We find evidence that banking regulation induced foreign lending has also heightened the perceived sovereign risk levels of recipient countries, especially those with investment grade status. |
| Keywords: | cross-border banking; sovereign credit ratings; Basel 2; rating-contingent financial regulation |
| JEL: | E44 F34 G21 H63 |
| Date: | 2014–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2014_025&r=ban |
| By: | Delis , Manthos D. (University of Surrey); Hasan, Iftekhar (Fordham University and Bank of Finland); Tsionas, Efthymios G. (Lancaster University Management School) |
| Abstract: | This paper reconsiders the formal estimation of bank risk using the variability of the profit function. In our model, point estimates of the variability of profits are derived from a model where this variability is endogenous to other bank characteristics, such as capital and liquidity. We estimate the new model on the entire panel of US banks, spanning the period 1985q1–2012q4. The findings show that bank risk was fairly stable up to 2001 and accelerated quickly thereafter up to 2007. We also establish that the risk of the relatively large banks and banks that failed in the subprime crisis is higher than the industry’s average. Thus, we provide a new leading indicator, which is able to forecast future solvency problems of banks. |
| Keywords: | estimation of risk; profit function; financial institutions; banks; endogenous risk; US banking sector |
| JEL: | C13 C33 E47 G21 G32 |
| Date: | 2014–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2014_018&r=ban |
| By: | Cao, Jin (Norges Bank); Chollete, Loran (UiS) |
| Abstract: | We present a framework for modelling optimum capital adequacy in a dynamic banking context. We combine the (static) capital adequacy framework of Repullo (2013) with a dynamic banking model similar to that of Corbae and D`Erasmo (2014), with the extra feature that the probability of systemic risk is endogenous. Unlike previous work, we examine frameworks to ameliorate bankruptcy using both capital adequacy and liquidity requirements. Since equity is costly, the social cost of regulation may be reduced if a regulatory capital requirement can be accompanied by other tools such as a liquidity buffer. |
| Keywords: | Keywords: Bankruptcy; Capital Adequacy; Endogenous Systemic Risk; Liquidity Requirement; Regulation Costs |
| JEL: | E50 G21 G28 |
| Date: | 2014–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:stavef:2014_016&r=ban |
| By: | Uluc Asyun (University of Central Florida); Ralf Hepp (Fordham University) |
| Abstract: | This paper finds that factors determined outside of a country are more closely related to the global bank loans she receives. These loans are more stable when global banks are less competitive and have a higher presence in the recipient country. We obtain our results by using data on the bilateral loans positions of 15 countries and a unique methodology to identify and compare the independent effects of external and internal factors. We find support for our empirical results and draw more detailed inferences for competition and global bank presence by solving a simple model of global banking. |
| Keywords: | Cross-country loans, global banks, competition, overlapping generations model. |
| JEL: | E44 F34 G15 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2014-08&r=ban |
| By: | Baldan, Cinzia; Geretto, Enrico; Zen, Francesco |
| Abstract: | We analyse the structural aspects of the banking Risk Appetite Framework (RAF), providing an operational application in the light of the detailed recommendations of the banking supervisors. We develop a quantitative approach that could be used to adapt to the requirements of these regulations and that might be useful for management purposes. This approach is empirically applied to the balance sheets of the Italian banking system. Our findings show that the Italian banks are generally underexposed in terms of credit risk and market risk, so there is room for shifting the risk profiles towards higher thresholds with a view to improving the credit institutions’ profitability while keeping their RAF consistent with the regulatory bodies’ requirements. The quantitative model can be applied effectively to all banks, for different types of risk, making the necessary adjustments according to the particular features of the profile being examined. |
| Keywords: | Banks; Risk Appetite Framework; Risk Management |
| JEL: | C43 G20 G21 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59504&r=ban |
| By: | Karkowska, Renata |
| Abstract: | The aim of this article is to identify systemically important banks on a European scale, in accordance with the criteria proposed by the supervisory authorities. In this study we discuss the analytical framework for identifying and benchmarking systemically important financial institutions. An attempt to define systemically important institutions is specified their characteristics under the existing and proposed regulations. In a selected group of the largest banks in Europe the following indicators ie.: leverage, liquidity, capital ratio, asset quality and profitability are analyzed as a source of systemic risk. These figures will be confronted with the average value obtained in the whole group of commercial banks in Europe. It should help finding the answer to the question, whether the size of the institution generates higher systemic risk? The survey will be conducted on the basis of the financial statements of commercial banks in 2007 and 2010 with the available statistical tools, which should reveal the variability of risk indicators over time. We find that the largest European banks were characterized by relative safety and without excessive risk in their activities. Therefore, a fundamental feature of increased regulatory limiting systemic risk should understand the nature and sources of instability, and mobilizing financial institutions (large and small) to change their risk profile and business models in a way that reduces the instability of the financial system globally. |
| Keywords: | banking, Systematically Important Financial Institutions, SIFI, systemic risk, liquidity, leverage, profitability |
| JEL: | C1 F36 G21 G32 G33 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58819&r=ban |
| By: | Ruja, Catalin |
| Abstract: | This report presents an application of a macro stress testing procedure on credit risk in the Romanian banking system. Macro stress testing, i.e. assessing the vulnerability of financial systems to exceptional but plausible macroeconomic scenarios, maintains a central role in macro-prudential and crisis management frameworks of central banks and international institutions around the globe. Credit risk remains the dominant risk challenging financial stability in the Romanian financial system, and thus this report analyses the potential impact of macroeconomic shocks scenarios on default rates in the corporate and household loan portfolios in the domestic banking system. A well-established reduced form model is proposed and tested as the core component of the modelling approach. The resulting models generally confirm the influence of macroeconomic factors on credit risk as documented in previous research including applications for Romania, but convey also specific and novel findings, such as inclusion of leading variables and construction activity level for corporate credit risk. Using the estimated model, a stress testing simulation procedure is undertaken. The simulation shows that under adverse shock scenarios, corporate default rates can increase substantially more than the expected evolution under the baseline scenario, especially in case of GDP shock, construction activity shock or interest rate shocks. Under the assumptions of these adverse scenarios, given also the large share of corporate loans in the banks’ balance sheet, the default rates evolution could have a substantial impact on banks’ loan losses. The households sector stress testing simulation show that this sector is more resilient to macroeconomic adverse evolutions, with stressed default rates higher than expected values under baseline scenario, but with substantially lower deviations. The proposed macro-perspective model and its findings can be incorporated by private banks in their micro-level portfolio risk management tools. Additionally, supplementing the authorities’ stress tests with independent approaches can enhance credibility of such financial stability assessment. |
| Keywords: | Stress Testing, Macro Stress Testing, Credit Risk, Banking Crisis, Monte Carlo simulation, Romania |
| JEL: | C01 C12 C13 C15 C32 C52 C53 C87 E58 G01 G21 |
| Date: | 2014–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58244&r=ban |
| By: | Feess, Eberhard; Wohlschlegel, Ansgar |
| Abstract: | Tighter capital requirements and mandatory deferral of compensation are among the most prominently advocated regulatory measures to reduce excessive risk-taking in the banking industry. We analyze the interplay of the two instruments in an economy with two heterogenous banks that can fund uncorrelated projects with fully diversifiable risk or correlated projects with systemic risk. If both project types are in abundant supply, we find that full mandatory deferral of compensation is beneficial as it allows for weaker capital requirements, and hence for a larger banking sector, without increasing the incentives for risk-shifting. With competition for uncorrelated projects, however, deferred compensation may misallocate correlated projects to the bank which is inferior in managing risks. Our findings challenge the current tendency to impose stricter regulations on more sophisticated institutes. |
| Keywords: | Bank capital requirements; deferred bonuses; risk-shifting; financial crisis; executive compensation |
| JEL: | D62 G21 G28 J33 |
| Date: | 2014–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59456&r=ban |
| By: | Choudhary, M. Ali; Jain, Anil |
| Abstract: | We exploit exogenous variation in the amount of public information available to banks about a firm to empirically evaluate the importance of adverse selection in the credit market. A 2006 reform introduced by the State Bank of Pakistan (SBP) reduced the amount of public information available to Pakistani banks about a firm’s creditworthiness. Prior to 2006, the SBP published credit information not only about the firm in question but also (aggregate) credit information about the firm’s group (where the group was defined as the set of all firms that shared one or more director with the firm in question). After the reform, the SBP stopped providing the aggregate group-level information. We propose a model with differentially informed banks and adverse selection, which generates predictions on how this reform is expected to affect a bank’s willingness to lend. The model predicts that adverse selection leads less informed banks to reduce lending compared to more informed banks. We construct a measure for the amount of information each lender has about a firm’s group using the set of firm-bank lending pairs prior to the reform. We empirically show those banks with private information about a firm lent relatively more to that firm than other, less-informed banks following the reform. Remarkably, this reduction in lending by less informed banks is true even for banks that had a pre-existing relationship with the firm, suggesting that the strength of prior relationships does not eliminate the problem of imperfect information. |
| Keywords: | Credit Markets; Asymmetric Information; Credit Registry; Developing Country |
| JEL: | D8 D82 G14 G18 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58917&r=ban |
| By: | Steven Ongena (University of Zurich, Swiss Finance Institute and CEPR); Ibolya Schindele (BI Norwegian Business School and Central Bank of Hungary); Dzsamila Vonnak (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences) |
| Abstract: | We analyze the differential impact of domestic and foreign monetary policy on the local supply of bank credit in domestic and foreign currencies. We analyze a novel, supervisory dataset from Hungary that records all bank lending to firms including its currency denomination. Accounting for time-varying firm-specific heterogeneity in loan demand, we find that a lower domestic interest rate expands the supply of credit in the domestic but not in the foreign currency. A lower foreign interest rate on the other hand expands lending by lowly versus highly capitalized banks relatively more in the foreign than in the domestic currency. |
| Keywords: | bank balance-sheet channel, monetary policy, foreign currency lending |
| JEL: | E51 F3 G21 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1424&r=ban |
| By: | Raffaella Calabrese; Silvia Osmetti |
| Abstract: | We propose a new methodology based on the Marshall-Olkin (MO) copula to model cross-border systemic risk. The proposed framework estimates the impact of the systematic and idiosyncratic components on systemic risk. Initially, we propose a maximum-likelihood method to estimate the parameter of the MO copula. In order to use the data on non-distressed banks for these estimates, we consider times to bank failures as censored samples. Hence, we propose an estimation procedure for the MO copula on censored data. The empirical evidence from European banks shows that the proposed censored model avoid possible underestimation of the contagion risk. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1411.1348&r=ban |
| By: | George J. Bratsiotis; William J. Tayler; Roy Zilberman |
| Abstract: | The global fi?nancial crisis in 2007 prompted policy makers to introduce a combination of bank regulation and macroprudential policies, including non-conventional monetary policies, such as interest on reserves and changes in required reserves. This paper examines how the combination of such policies can help stabilize the effects of real and ?financial shocks in economies where ?financial frictions are important. Although there is an extensive literature on ?financial regulation and macro-prudiential policy, and more recently some literature on the effects of interest on reserves, these policies are usually examined independently. The results point to the importance of coordination between ?financial regulation and monetary policy in minimizing welfare losses following such shocks. Interest on reserves is shown to be more effective in reducing welfare losses than changes in required reserves and to play a signi?cant role in making stabilization policy more effective. The results also suggest an easing of bank capital requirements during recessions, when output and loans are falling and the risk of default is high. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:196&r=ban |
| By: | Varelas, Erotokritos |
| Abstract: | Based on a traditional approach to the behavior of a bank which lends both private and public sector, and utilizing a typical expression for public debt accumulation, this paper concludes that the optimality of the number and size of banks depends heavily on the course of the public debt, ceteris paribus. If the intergenerational dimension of the public debt is assumed away, fiscal consolidation presupposes a limited number of banks under normal only profit, a sort of quasi-competitive banking. In the presence of intergenerational considerations, fiscal consideration requires a few efficient banks experiencing perhaps positive profit, which is consistent with the notion of workable competition. Consequently, the pre-consolidation size distribution of banks is immaterial policy-wise. |
| Keywords: | Optimum number of banks, Public debt accumulation, Perfect vs. workable competition, Commercial bank seigniorage |
| JEL: | E50 G20 L10 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58437&r=ban |