nep-ban New Economics Papers
on Banking
Issue of 2014‒11‒22
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banking Union Optimal Design under Moral Hazard By Marius Andrei Zoican; Lucyna Anna Gornicka
  2. Productivity and welfare: an application to the Spanish banking industry By Alfredo Martín Oliver; Sonia Ruano Pardo; Vicente Salas Fumás
  3. Modelling the Impact of New Capital Regulations on Bank Profitability By Swamy, Vighneswara
  4. Does the Policy Lending of the Government Financial Institution Substitute for the Private Lending during the Period of the Credit Crunch? Evidence from loan level data in Japan By SEKINO Masahiro; WATANABE Wako
  5. Bank Size, Risk Diversification and Money Markets By Hugo Rodríguez Mendizábal
  6. When arm’s length is too far. Relationship banking over the business cycle By Beck, Thorsten; Degryse, Hans; De Haas, Ralph; van Horen , Neeltje
  7. A Primer on Regulatory Bank Capital Adjustments By Lubberink, Martien
  8. Impact of credit default swaps on financial contagion By Yoshiharu Maeno; Kenji Nishiguchi; Satoshi Morinaga; Hirokazu Matsushima
  9. Bank regulation, supervision and efficiency during the global financial crisis By Swamy, Vighneswara
  10. Overlending and Macroprudential Tools By Natalie Tiernan; Pedro Gete
  11. Are banks’ below-par own debt repurchases a cause for prudential concern? By Lubberink, Martien
  12. Domestic Credit in Times of Supervision: An Empirical Investigation of European Countries By Thomas Jobert; Alexandru Monahov; Anna Tykhonenko
  13. Intermediation and Voluntary Exposure to Counterparty Risk By Maryam Farboodi
  14. Financial Stability and Interacting Networks of Financial Institutions and Market Infrastructures By Carlos León; Ron J. Berndsen; Luc Renneboog
  15. Shareholding Network in the Euro Area Banking Market By Nicolò Pecora; Alessandro Spelta
  16. How Subprime Borrowers and Mortgage Brokers Shared the Pie By Berndt, Antje; Hollifield, Burton; Sandås, Patrik
  17. Credit, bankruptcy, and aggregate fluctuations By Nakajima, Makoto; Rios-Rull, Jose-Victor
  18. Lender Banks' Provision of Overseas Market Information: Evidence from Japanese small and medium-sized enterprises' export dynamics By INUI Tomohiko; ITO Keiko; MIYAKAWA Daisuke
  19. The Determinants of CDS Bid-ask Spreads By Marcin Wojtowicz

  1. By: Marius Andrei Zoican; Lucyna Anna Gornicka
    Abstract: A banking union limits international bank default contagion, eliminating inefficient liquidations. For particularly low short-term returns, it also stimulates interbank flows. Both effects improve welfare. An undesirable effect arises for moderate moral hazard, since the banking union encourages risk taking by systemic institutions. If banks hold opaque assets, the net welfare effect of a banking union can be negative. Restricting the banking union mandate restores incentives, improving welfare. The optimal mandate depends on moral hazard intensity and expected returns. Net creditor countries should contribute most to a joint resolution fund, less so if a banking union distorts incentives.
    JEL: G15 G18 G21
    Date: 2014–10–29
  2. By: Alfredo Martín Oliver (Universitat de les Illes Balears); Sonia Ruano Pardo (Banco de España); Vicente Salas Fumás (Universidad de Zaragoza)
    Abstract: This paper examines the links between productivity and social welfare, with an application to the banking industry. It models spatial price competition between bank branches jointly with banks’ decisions on the opening or closing of branches based on profit expectations. The model predicts that more productive banks set lower (higher) interest rates on loans (deposits) and increase their market share through both higher demand per branch and a larger network of branches. Specifically, the paper i) uses a new measure of bank productivity; ii) provides a productivity differences-based explanation of the distance between bank branches and bank customers; and iii) shows how the intensity of market competition may be unaffected when the number of banks decreases, provided that banks continue expanding their branch network. The empirical implementation of the model uses Spanish banks over the period 1993-2007 and it confirms the theoretical predictions of the paper
    Keywords: banking spatial competition, bank branch productivity, interest rates, branch dynamics, bank economic profits.
    JEL: E43 G21 L11 O30 R32
    Date: 2014–10
  3. By: Swamy, Vighneswara
    Abstract: This study models the impact of new capital regulations proposed under Basel III on bank profitability by constructing a stylized representative bank’s financial statements. We show that the higher cost associated with a one-percentage increase in the capital ratio can be recovered by increasing lending spreads. The results indicate that in the case of scheduled commercial banks, one-percentage point increase in capital ratio can be recovered by increasing the bank lending spread by 31 basis points and would go upto an extent of 100 basis points for six-percentage point increase assuming that the risk weighted assets are unchanged. We also provide the estimations for the scenarios of changes in risk weighted assets, changes in return on equity (ROE) and the cost of debt.
    Keywords: Banks, Regulation, Basel III, Capital, Interest Income
    JEL: E44 E51 E61 G21 G28
    Date: 2014
  4. By: SEKINO Masahiro; WATANABE Wako
    Abstract: Using the data of individual loan contracts extended by the Japan Finance Corporation for Small and Medium Enterprise (JASME), which is one of the predecessor institutions of the Japan Finance Corporation (JFC) that aimed at lending to small and medium enterprises (SMEs), we examine whether the JASME's lending substituted for the reduced lending supply by private banks during the period of the credit crunch. We find that the JASME made larger loans to the firms whose main bank reduced more lending due to losses on their capital.
    Date: 2014–10
  5. By: Hugo Rodríguez Mendizábal
    Abstract: This paper presents a theoretical model based on risk diversification to rationalize the observed dichotomy in the federal funds market by which small banks are net providers of funds while large banks become net purchasers. As larger banks are more diversified they can raise a larger proportion of funds as equity and provide more loans. To finance these loans, they will need to obtain funds in the wholesale money market. In contrast, smaller banks will be less diversified and will find it harder to raise equity which means producing a lower amount of loans and supplying the extra funds in the wholesale money market. The model also produces a set of testable predictions about the performance of large and small banks that are in line with data for the US.
    Keywords: bank size, diversification, money market, bank solvency
    JEL: E4 E5 G21
    Date: 2014–09
  6. By: Beck, Thorsten (BOFIT); Degryse, Hans (BOFIT); De Haas, Ralph (BOFIT); van Horen , Neeltje (BOFIT)
    Abstract: Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect funding to SMEs over the business cycle. For 21 countries we link the lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at two contrasting points of the business cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.
    Keywords: relationship banking; credit constraints; business cycle
    JEL: F36 G21 L26 O12 O16
    Date: 2014–07–07
  7. By: Lubberink, Martien
    Abstract: To calculate regulatory capital ratios, banks have to apply adjustments to book equity. These regulatory adjustments vary with a bank’s solvency position. Low-solvency banks report values of Tier 1 capital that exceed book equity. They use regulatory adjustments to inflate regulatory solvency ratios such as the Tier 1 leverage ratio and the Tier 1 risk-based capital ratio. In contrast, highly solvent banks report Tier 1 capital that is lower than book equity. These banks adjust their solvency ratios downward for prudential reasons, despite their resilient solvency levels. These results weaken the case for regulatory adjustments. The decreasing relationship between regulatory adjustments and bank solvency reflects the cost of deleveraging, a cost that demonstrates the resistance of banks to substituting equity for debt.
    Keywords: Keywords: Banking, Regulatory Capital, Solvency, Accounting.
    JEL: G21
    Date: 2014–03–30
  8. By: Yoshiharu Maeno; Kenji Nishiguchi; Satoshi Morinaga; Hirokazu Matsushima
    Abstract: It had been believed in the conventional practice that the risk of a bank going bankrupt is lessened in a straightforward manner by transferring the risk of loan defaults. But the failure of American International Group in 2008 posed a more complex aspect of financial contagion. This study presents an extension of the asset network systemic risk model (ANWSER) to investigate whether credit default swaps mitigate or intensify the severity of financial contagion. A protection buyer bank transfers the risk of every possible debtor bank default to protection seller banks. The empirical distribution of the number of bank bankruptcies is obtained with the extended model. Systemic capital buffer ratio is calculated from the distribution. The ratio quantifies the effective loss absorbency capability of the entire financial system to force back financial contagion. The key finding is that the leverage ratio is a good estimate of a systemic capital buffer ratio as the backstop of a financial system. The risk transfer from small and medium banks to big banks in an interbank network does not mitigate the severity of financial contagion.
    Date: 2014–09
  9. By: Swamy, Vighneswara
    Abstract: In this study, using the World Bank’s Bank Regulation and Supervision Survey (BRSS) data, we draw insights about the bank regulatory/supervisory styles, illustrate the differences in regulation/supervision among crisis, non-crisis and BRICS countries, and highlight the ways in which bank regulation and supervision has changed during the crisis period. The study suggests that crisis-countries had weaker regulatory and supervisory frameworks compared to those in emerging countries during the crisis. BRICS countries as a distinct block has demonstrated uniqueness in the regulatory/supervisory styles which is neither similar to crisis-countries nor with the non-crisis countries.
    Keywords: Central Banks, Banking Regulation, Capital adequacy, Regulation, Risk, Supervision, Financial markets and governance, Crisis
    JEL: E58 G18 G20 G21 G32 G38 L51 O16
    Date: 2014
  10. By: Natalie Tiernan (Office of the Comptroller of the Currency); Pedro Gete (Georgetown University)
    Abstract: This paper is a quantitative study of two frictions that generate banks' underinvestment in screening borrowers and, thus, overlending: 1) Limited liability, and 2) Banks failing to internalize that their credit decisions alter the pool of borrowers faced by other banks. The resulting lax lending standards overexpose banks to negative economic shocks and amplify the effects of economic fluctuations. They generate excessive volatility in credit, banks' capital and output. We study a calibrated model whose predictions concerning the quantity and quality of credit are in line with recent U.S. business cycles. Quantitatively, limited liability is the friction that generates laxer lending standards. It induces 27% excess volatility in output relative to 8% from the other friction. Then we study three policy tools: capital requirements and taxes on banks' lending and borrowings. The three tools encourage banks to screen more and should be state-contingent because the frictions vary with macroeconomic conditions. In quantitative terms, we find that taxes are better tools than capital requirements because they do not reduce credit going to the more productive agents.
    Date: 2014
  11. By: Lubberink, Martien
    Abstract: In the lead-up to the implementation of Basel III, European banks bought back debt securities that traded at a discount. Banks engaged in these Liability Management Exercises (LMEs) to realize a fair value gain that the accounting and prudential rules exclude from regulatory capital calculations, this to safeguard the safety and soundness of the banking system. For a sample of 720 European LMEs conducted from April 2009 to December 2013, I show that banks lost about 9.3 billion euros in premiums to compensate investors for parting from their debt securities. This amount would have been recognized as Core Tier 1 regulatory capital, if regulation would accept the recognition of fair value gains on debt. The premiums paid are particularly high for the most loss absorbing capital securities. More importantly, the premiums increase with leverage and in times of stress, right when conserving cash is paramount to preserve the safety and soundness of the banking system. These results weaken the case of the exclusion from regulatory capital of unrealized gains that originate from a weakened own credit standing.
    Keywords: Banking, repurchases, subordinated debt.
    JEL: E58 G21 G28 G32 G35 M41
    Date: 2014–10–20
  12. By: Thomas Jobert (University of Nice Sophia Antipolis, France; GREDEG CNRS); Alexandru Monahov (University of Nice Sophia Antipolis, France; GREDEG CNRS); Anna Tykhonenko (University of Nice Sophia Antipolis, France; GREDEG CNRS)
    Abstract: We study the impact of prudential supervision on domestic credit in 27 countries throughout 1999-2012. We use the Empirical Iterative Bayes’ estimator to account for country heterogeneity. We find: (i) the interest rate not to be a fundamental variable in explaining domestic credit, (ii) negative relations between credit sensitivity to past investment and to financial dependence, (iii) the effects of supervision on credit differ by country, but (iv) without systematic negative impact of increased supervisory stringency. Our results are coherent with two interpretations: one encouraging regulatory set-ups where increased supervision positively affects credit, and another cautioning about the associated risks.
    Keywords: Prudential supervision, Supervision in the EU, Banking system supervision, Financial institution regulation, Bayesian shrinkage estimator
    JEL: C51 E65 G28
    Date: 2014–10
  13. By: Maryam Farboodi (University of Chicago)
    Abstract: I develop a model of the financial sector in which endogenous intermediation among debt financed banks generates excessive systemic risk. Financial institutions have incentives to capture intermediation spreads through strategic borrowing and lending decisions. By doing so, they tilt the division of surplus along an intermediation chain in their favor, while at the same time reducing aggregate surplus. I show that a core-periphery network -- few highly interconnected and many sparsely connected banks -- endogenously emerges in my model. The network is inefficient relative to a constrained efficient benchmark since banks who make risky investments "overconnect", exposing themselves to excessive counterparty risk, while banks who mainly provide funding end up with too few connections. The predictions of the model are consistent with empirical evidence in the literature.
    Date: 2014
  14. 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.
    Keywords: Multiplex networks, interacting networks, financial stability, contagion, financial market infrastructures.
    JEL: D85 D53 G20 L14
    Date: 2014–10–14
  15. By: Nicolò Pecora (Università Cattolica del Sacro Cuore); Alessandro Spelta (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: Analyzing the topological properties of the network of shareholding relationships among the Euro Area banks we evaluate the relevance of a bank in the ?nancial system respect to ownership and control of other banks. We ?nd that the degree distribution of the European banking network displays power laws in both the binary and the weighted case. We also ?nd that the exponents are linked by a scaling relation revealing a direct connection between an increase of control diversi?cation and an increase of market power. Results also reveal Single Supervisory Mechanism, recently introduced by the European Central Bank and based on banks? total assets is a good proxy for the systemic risk associated to a particular ?nancial institution. Moreover we study how control and wealth are structured and concentrated within the banking system. Interestingly, our analysis reveals that control is highly concentrated at banking level, namely, lying in the hands of very few important shareholders that have weak relationships between them. This means that each main holder controls approximately a separate subset of banks.
    Keywords: Shareholding network, European banking system, Weighted graph, Power law
    JEL: D85 E58 L14
    Date: 2014–06
  16. By: Berndt, Antje (Poole College of Management); Hollifield, Burton (Tepper School of Business); Sandås, Patrik (McIntire School of Commerce)
    Abstract: We develop an equilibrium model for origination fees charged by mortgage bro- kers and show how the equilibrium fee distribution depends on borrowers' valua- tion for their loans and their information about fees. We use non-crossing quantile regressions and data from a large subprime lender to estimate conditional fee dis- tributions. Given the fee distribution, we identify the distributions of borrower valuations and informedness. The level of informedness is higher for larger loans and in better educated neighborhoods. We quantify the fraction of the surplus from the mortgage that goes to the broker, and how it decreases as the borrower becomes more informed.
    Keywords: Mortgage broker compensation; Borrower Valuation; Borrower Informedness
    JEL: G21
    Date: 2014–07–01
  17. By: Nakajima, Makoto (Federal Reserve Bank of Philadelphia); Rios-Rull, Jose-Victor (Federal Reserve Bank of Philadelphia)
    Abstract: We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate consumption or aggregate hours worked, and if so, does it matter with respect to the nature of business cycles? No, it does not; in fact, consumption is 20 percent more volatile when credit is available. The interest rate premia increase in recessions because of higher bankruptcy risk discouraging households from using credit. This finding contradicts the intuition that access to credit helps households to smooth their consumption.
    Keywords: Consumer credit; Default; Bankruptcy; Debt; Business cycle; Heterogeneous agents; Incomplete markets
    JEL: D91 E21 E32 E44 K35
    Date: 2014–10–20
  18. By: INUI Tomohiko; ITO Keiko; MIYAKAWA Daisuke
    Abstract: This paper examines how Japanese firms' export decision is affected by the availability of information on export markets, focusing on whether the availability of such information has a different impact on the export decision between large firms and small and medium-sized enterprises (SMEs). In contrast to existing studies which solely focus on information sharing among firms, we are interested in the role of firms' lender banks as an additional source of information. Specifically, using a unique dataset containing information not only on firms' export activities but also on their lender banks' exposure to other exporting firms as well as the lender banks' own overseas activities, we find that information provisions by lender banks positively affect SMEs' decision to start exporting and the range of destinations to which they export. Such information provisions from lender banks also reduce the likelihood that exporter firms exit from export markets. The export-to-sales ratio of exporter firms, however, is not affected by such information provisions. We also find that the importance of the information provisions by lender banks on SMEs' export decision crucially depends on the type of products (i.e., differentiated or homogeneous) produced in the industries to which the firms belong. These results imply that information on foreign markets provided by lender banks substantially reduces the fixed entry costs associated with starting exporting and entering new export markets as well as firms' costs associated with continuing to export.
    Date: 2014–10
  19. By: Marcin Wojtowicz (VU University Amsterdam, the Netherlands)
    Abstract: We investigate the determinants of bid-ask spreads on corporate credit default swaps (CDSs). We find that proxies for dealer inventory costs such as variability of CDS premia and CDS trading volume explain as much as 80% of variation in CDS bid-ask spreads. We also analyze the influence of variables capturing systematic risk of reference entities, market-implied volatility, dealer funding costs and competition between dealers. Several of these variables are significant, but their explanatory power is moderate. Finally, we demonstrate that CDS bid-ask spreads do not widen preceding earnings announcement surprises, which suggests that private information does not hinder CDS liquidity.
    Keywords: Credit default swaps, Liquidity, Bid-ask spreads, Components of bid-ask spreads
    JEL: G10 G14 G19
    Date: 2014–10–20

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