nep-ban New Economics Papers
on Banking
Issue of 2015‒01‒09
twenty-six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Essays on banking By Mosk, T.C.
  2. Large banks, loan rate markup and monetary policy By Vincenzo Cuciniello; Federico M. Signoretti
  3. Using bankruptcy to reduce foreclosures: does strip-down of mortgages affect the supply of mortgage credit? By Li, Wenli; Tewari, Ishani; White, Michelle J.
  4. Incentive Pay and Bank Risk-Taking:Evidence from Austrian, German, and Swiss Banks By Efing, Matthias; Hau, Harald; Kampkötter, Patrick; Steinbrecher, Johannes
  5. International Banking: the Isolation of the Euro Area By Bouvatier, Vincent; Delatte, Anne-Laure
  6. Assessing Interbank Connectedness Using Transmission Decomposition Techniques: an Application to Eurozone SIFIs By C.A.F. Muijsson
  7. A detailed analysis of fulfilling and delinquency of payments on loan By Voloshyn, Ihor
  8. Do Interconnections Matter for Bank Efficiency? By Solange Maria Guerra; Benjamin Miranda Tabak; Rodrigo Cesar de Cesar de Castro Miranda
  9. Optimal Joint Liability Lending and with Costly Peer Monitoring By Carli, Francesco; Uras, R.B.
  10. How much of bank credit risk is sovereign risk? Evidence from the eurozone By Junye Li; Gabriele Zinna
  11. Financial Stability and Interacting Networks of Financial Institutions and Market Infrastructures By Léon, C.; Berndsen, R.J.; Renneboog, L.D.R.
  12. Crisis performance of European banks – does management ownership matter? By Westman, Hanna
  13. Active Risk Management and Banking Stability By Silva Buston, C.F.
  14. Euro-Area and US Banks Behavior, and ECB-Fed Monetary Policies during the Global Financial Crisis: A Comparison By Cukierman, Alex
  15. The Two Faces of Interbank Correlation By Schaeck, K.; Silva Buston, C.F.; Wagner, W.B.
  16. The Politics of Related Lending By Michael Halling; Pegaret Pichler; Alex Stomper;
  17. The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies By Carlson, Mark A.; Duygan-Bump, Burcu; Natalucci, Fabio M.; Nelson, William R.; Ochoa, Marcelo; Stein, Jerome L.; Van den Heuvel, Skander J.
  18. Corporate Debt Structure and the Financial Crisis By Fiorella De Fiore; Harald Uhlig
  19. Bank Liabilities Channel By Quadrini, Vincenzo
  20. Shocks to Bank Lending, Risk-Taking, Securitization, and Their Role for U.S. Business Cycle Fluctuations By Peersman, G.; Wagner, W.B.
  21. Banking Competition and Stability: The Role of Leverage By Freixas, Xavier; Ma, Kebin
  22. How does Corporate Governance Affect Bank Capitalization Strategies? By Anginer, D.; Demirgüc-Kunt, A.; Huizinga, H.P.; Ma, K.
  23. Detection and quantification of causal dependencies in multivariate time series: a novel information theoretic approach to understanding systemic risk. By Peter Martey Addo; Philippe De Peretti
  24. Bank leverage and return on equity targeting: intrinsic procyclicality of short-term choices By Spyros Pagratis; Eleni Karakatsani; Helen Louri
  25. Advertising, Consumer Awareness and Choice: Evidence from the U.S. Banking Industry By Maria Ana Vitorino; Ali Hortacsu; Elisabeth Honka
  26. The Evolution of Payment Costs in Australia By Chris Stewart; Iris Chan; Crystal Ossolinski; David Halperin; Paul Ryan

  1. By: Mosk, T.C. (Tilburg University, School of Economics and Management)
    Abstract: This dissertation studies how banks collect and process information. The first chapter studies how the organizational structure of banks affects the processing of information. The second chapter studies how banks use private information collected over the lending relationship in credit negotiations. The last chapter is joint work with Hans Degryse, Jose Liberti and Steven Ongena and studies how banks use ‘soft information’ to monitor small firms. This dissertation uses hand collected internal bank data which opens the black box on how banks communicate internally, negotiate and monitor small firms. The dissertation shows that a change in the organizational structure of a bank affects the incentives of loan officers to manipulate information and that the private information of a bank about small firms affects their bargaining power in credit negotiations and explains discretionary lending decisions of loan officers.
    Date: 2014
  2. By: Vincenzo Cuciniello (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: This paper studies the implications of introducing large monopolistic banks, which can affect macroeconomic outcomes and thus the response of monetary policy to inflation, in a model with a collateral constraint linking the borrowers� credit capacity to the value of their durable assets. First, we find that strategic interaction generates a countercyclical loan spread, which amplifies the impact of monetary and technology shocks on the real economy. This type of financial accelerator adds up to the one due to financial frictions and is crucially related to the existence of non-atomistic banks. Second, the level of the spread and the degree of amplification are positively related to the level of entrepreneurs� leverage, reflecting the fact that higher leverage implies greater elasticity of the policy rate to changes in loan rates, which in turn increases banks� market power. Third, we find that amplification is stronger the more aggressive the central bank�s response to inflation, as measured by the inflation coefficient in the Taylor rule.
    Keywords: large banks, bank markup, monetary policy
    JEL: E51 E52 G21
    Date: 2014–10
  3. By: Li, Wenli (Federal Reserve Bank of Philadelphia); Tewari, Ishani (Yale School of Management); White, Michelle J. (University of California at San Diego, Cheung Kong Graduate School of Business, and National Bureau of Economic Research)
    Abstract: We assess the credit market impact of mortgage “strip-down” — reducing the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 7 or Chapter 13 bankruptcy. Strip-down of mortgages in bankruptcy was proposed as a means of reducing foreclosures during the recent mortgage crisis but was blocked by lenders. Our goal is to determine whether allowing bankruptcy judges to modify mortgages would have a large adverse impact on new mortgage applicants. Our identification is provided by a series of U.S. Court of Appeals decisions during the late 1980s and early 1990s that introduced mortgage strip-down under both bankruptcy chapters in parts of the U.S., followed by two Supreme Court rulings that abolished it throughout the U.S. We find that the Supreme Court decision to abolish mortgage strip-down under Chapter 13 led to a reduction of 3% in mortgage interest rates and an increase of 1% in mortgage approval rates, while the Supreme Court decision to abolish strip-down under Chapter 7 led to a reduction of 2% in approval rates and no change in interest rates. We also find that markets react less to circuit court decisions than to Supreme Court decisions. Overall, our results suggest that lenders respond to forced renegotiation of contracts in bankruptcy, but their responses are small and not always in the predicted direction. The lack of systematic patterns evident in our results suggests that introducing mortgage strip-down under either bankruptcy chapter would not have strong adverse effects on mortgage loan terms and could be a useful new policy tool to reduce foreclosures when future housing bubbles burst.
    Keywords: Mortgage credit; Strip-down; Creditor protection; Bankruptcy
    JEL: G14 G18 K10
    Date: 2014–12–01
  4. By: Efing, Matthias; Hau, Harald; Kampkötter, Patrick; Steinbrecher, Johannes
    Abstract: We use payroll data on 1.2 million bank employee years in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 66 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income particularly for the pre-crisis period 2003-7 for which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital markets divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal trade-off between trading income and risk which maximizes the NPV of trading income.
    Keywords: Bank Risk; Bonus Payments; Incentive Pay; Trading Income
    JEL: D22 G20 G21
    Date: 2014–10
  5. By: Bouvatier, Vincent; Delatte, Anne-Laure
    Abstract: We assess the evolution of international banking integration at the light of gravity equations on banks’ bilateral consolidated foreign claims data. Our estimates on a panel of 14 reporting countries and their 186 partners between 1999 and 2012 reveal: 1) the forward march of banking integration has reversed only as far as euro area countries are concerned as source or destination countries. 2) Euro area banks have reduced their international exposure inside and outside the euro area to a similar extent. 3) This decline is not a correction of previous overshooting but a marked desintegration. 4) In the rest of the world, the banking integration has strengthened since the financial crisis.
    Keywords: banking integration; gravity model; international banking
    JEL: F34 F36
    Date: 2014–11
  6. By: C.A.F. Muijsson
    Abstract: This paper aims to disentangle the impact of multiple transmission channels in interbank connectedness. We use the identification properties of a structural vector autoregression with a multivariate GARCH-in-mean structure (SVAR-MGARCH-M) to model the dynamics in equity returns of the Eurozone systemically important financial institutions (SIFIs). We can identify the impacts of multiple transmission channels such as asset communality, interbank deposits, and information contagion. Asset communality is both a factor in the transmission of shocks and a means of diversification: heightened connectedness results in an increase in shock spillovers, which are countered by risk sharing benefits. We show that connectedness increased during the financial crisis with a major role for common exposures. Institutions move from being a net recipient to a net transmitter of shocks when the asset communality channel is taken into account, suggesting that we need to evaluate the systemic importance of an institution using all transmission components.
    Keywords: Banking Integration; Financial Connectedness; Systemic Risk.
    JEL: C32 F36 F37 G21
    Date: 2014–11–28
  7. By: Voloshyn, Ihor
    Abstract: A new model for predicting the future expected cash flows from a loan is developed. It is based on a detailed analysis of the events of fulfilling, delinquency and default of each individual payment on the loan. The proposed model has significantly less uncertainty compared with the Markov chain model with the same detailing. The model is expected to have greater predictive power in comparison to the traditional models, and its usage will allow reducing the interest rate on the loan. The results of estimation of the probabilities of payments over time and the future expected cash flows from the loan with monthly equal principal repayment are given.
    Keywords: loan, payment, delinquency, default, cash flow, present value, interest rate, credit spread, credit risk, liquidity risk, Markov chain, soft collection
    JEL: G12 G21
    Date: 2014–12–03
  8. By: Solange Maria Guerra; Benjamin Miranda Tabak; Rodrigo Cesar de Cesar de Castro Miranda
    Abstract: This paper addresses the issue of how individual bank interconnectivity and the interbank network topology impact on Brazilian banking efficiency between 2007 and 2013. We use several network measures to analyze the effects of bank interconnections on cost, profit and risk-taking efficiency. The results suggest that interconnections matter for bank efficiency. We find that interconnectivity can increase cost and risk-taking inefficiency levels. We also find that the density of the network topology can reduce profit and risk-taking inefficiency levels
    Date: 2014–12
  9. By: Carli, Francesco; Uras, R.B. (Tilburg University, Center For Economic Research)
    Abstract: This paper characterizes an optimal group loan contract with costly peer monitoring. Using a fairly standard moral hazard framework, we show that the optimal group lending contract could exhibit a joint-liability scheme. However, optimality of joint-liability requires the involvement of a group leader, who heavily takes care of the partner's repayment share in bad states and gets compensated in expected terms. This key result holds even for a group of borrowers, which exhibits homogeneous characteristics in productivity, risk aversion and monitoring costs. Our work rationalizes the widely-applied group-leadership concept of microfinance programmes as an outcome of an optimal contract.
    Keywords: Micro finance; Joint-liability; Group leader.
    JEL: G21 O12 O16
    Date: 2014
  10. By: Junye Li (ESSEC Business School); Gabriele Zinna (Bank of Italy)
    Abstract: We develop a multivariate credit risk model for the term structures of sovereign and bank credit default swaps. First, we separate the probability of joint defaults of large Eurozone sovereigns (systemic risk) from that of sovereign-specific defaults (country risk). Then, we quantify individual banks' exposures to each type of sovereign risk, as well as bank-specific credit risk. Banks� sovereign risk exposures vary with banks� size, their holdings of sovereign debt, and expected government support. On average, 45% of French and Spanish banks' credit risk consists in sovereign risk, compared with only 30% for Italian and 23% for German banks. Furthermore, short- to medium-term contracts are particularly informative on sovereign systemic risk.
    Keywords: Sovereign and Bank Credit Risk; Credit Default Swaps; Distress Risk Premia; Bayesian Estimation.
    JEL: F34 G12 G15
    Date: 2014–10
  11. By: Léon, C.; Berndsen, R.J. (Tilburg University, TILEC); Renneboog, L.D.R. (Tilburg University, TILEC)
    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 enhances 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
  12. By: Westman, Hanna (Bank of Finland Research)
    Abstract: Failure in bank corporate governance has been seen as a contributing factor to excessive risk-taking pre-crisis with devastating implications as risks realised during the financial crisis. Unfortunately, the empirical evidence on the impact of managerial incentives on bank crisis performance is scarce. Moreover, bank strategy has not previously been accounted for. Hence, this paper presents novel findings on drivers for risk-taking and crisis performance. Specifically, I find a positive impact of management ownership in small diversified banks and non-traditional banks, the monitoring of which is challenging due to their opacity. The impact is negative in traditional banks and large diversified banks, indicating that shareholders induce managers to take risk where the safety net creates incentives for risk-shifting to debt holders and taxpayers. These findings have implications for both academic research as well as policy making particularly in the domain of corporate governance.
    Keywords: banks' crisis performance; management ownership; traditional vs. nontraditional banking; diversification; safety net; bank opacity and complexity
    JEL: G01 G21 G28 G32 L25
    Date: 2014–11–26
  13. By: Silva Buston, C.F. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper analyzes the net impact of two opposing effects of active risk management at banks on their stability: higher risk-taking incentives and better isolation of credit supply from varying economic conditions. We present a model where banks actively manage their portfolio risk by buying and selling credit protection. We show that anticipation of future risk management opportunities allows banks to operate with riskier balance sheets. However, since they are better insulated from shocks than banks without active risk management, they are less prone to insolvency. Empirical evidence from US bank holding companies broadly supports the theoretical predictions. In particular, we fi nd that active risk management banks were less likely to become insolvent during the crisis of 2007-2009, even though their balance sheets displayed higher risktaking. These results provide an important message for bank regulation, which has mainly focused on balance-sheet risks when assessing fi nancial stability.
    Keywords: Financial innovation; credit derivatives; financial stability; financial crisis
    Date: 2013
  14. By: Cukierman, Alex
    Abstract: This paper compares the behavior of Euro-Area (EA) banks’ credit and reserves with those of US banks following respective major crisis triggers (Lehman’s collapse in the US and the 2009 admission by Papandreou, that Greece’s deficit was substantially higher than previously believed, in the EA). The paper shows that, although the behavior of banks’ credit following those widely observed crisis triggers is similar in the EA and in the US, the behavior of their reserves is quite different. In particular, while US banks’ reserves have been on an uninterrupted upward trend since Lehman’s collapse, those of EA banks fluctuated markedly in both directions. The paper argues that, at the source, this is due to differences in the liquidity injections procedures between the Eurosystem and the Fed. Those different procedures are traced, in turn, to differences in the relative importance of banking credit within the total amount of credit intermediated through banks and bond issues in the EA and the US as well as to the higher institutional aversion of the ECB to inflation relatively to that of the Fed.
    Keywords: credit; crisis; Euro Area; monetary policy; reserves; US
    JEL: E51 E52 E58 G1
    Date: 2014–12
  15. By: Schaeck, K.; Silva Buston, C.F. (Tilburg University, Center For Economic Research); Wagner, W.B. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: We decompose the correlation of bank stock returns into a systemic risk component and a component arising from diversi cation activities. Estimation for U.S. Bank Holding Companies (BHCs) shows the diversification component to be large and positively related to BHC performance during the crisis of 2007-2009. This suggests that it is important to distinguish between the two sources of interbank correlations when quantifying systemic risk at banks. Our decomposition also permits us to estimate the marginal gains from diversfication, which turn out to be rapidly declining with bank size. Since large banks are additionally found to display high levels of the systemic risk component, they are hence predominantly exposed to the undesirable source of interbank correlation.
    Keywords: systemic risk; interbank correlation; diversification
    Date: 2013
  16. By: Michael Halling; Pegaret Pichler; Alex Stomper;
    Abstract: We analyze the profitability of government-owned banks’ lending to their owners, using a unique data set of relatively homogeneous government-owned banks; the banks are all owned by similarly structured local governments in a single country. Making use of a natural experiment that altered the regulatory and competitive environment, we find evidence that such lending was used to transfer revenues from the banks to the governments. Some of the evidence is particularly pronounced in localities where the incumbent politicians face significant competition for reelection.
    Keywords: politics and finance, bank regulation, related lending
    JEL: G21 G38 L32
    Date: 2014–11
  17. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)); Duygan-Bump, Burcu (Board of Governors of the Federal Reserve System (U.S.)); Natalucci, Fabio M. (Board of Governors of the Federal Reserve System (U.S.)); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.)); Ochoa, Marcelo (Board of Governors of the Federal Reserve System (U.S.)); Stein, Jerome L. (Board of Governors of the Federal Reserve System (U.S.)); Van den Heuvel, Skander J. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: A number of researchers have recently argued that the growth of the shadow banking system in the years preceding the recent U.S. financial crisis was driven by rising demand for "money-like" claims--short-term, safe instruments (STSI)--from institutional investors and nonfinancial firms. These instruments carry a money premium that lowers their yields. While government securities are an important part of the supply of STSI, financial intermediaries also take advantage of this money premium when they issue certain types of low-risk, short-term debt, such as asset-backed commercial paper or repo. In this paper, we take the demand for STSI as given and consider the extent to which central banks can improve financial stability and manage maturity transformation by the private sector through their ability to affect the public supply of STSI. The first part of the paper provides new evidence that complements the existing literature on two key ingredients that are necessary for there to be a role for policy: the extent to which public short-term debt and private short-term debt might be substitutes, and the relationship between the money premium and the supply of STSI. The second part of the paper then builds on this evidence and discusses potential ways a central bank could use its balance sheet and monetary policy implementation framework to affect the quantity and mix of short-term liquid assets that will be available to financial market participants.
    Keywords: Financial stability; safe assets; money-like instruments; central bank policies
    Date: 2014–11–25
  18. By: Fiorella De Fiore; Harald Uhlig
    Abstract: We present a DSGE model where firms optimally choose among alternative instruments of external finance. The model is used to explain the evolving composition of corporate debt during the financial crisis of 2008-09, namely the observed shift from bank finance to bond finance, at a time when the cost of market debt rose above the cost of bank loans. We show that the flexibility offered by banks on the terms of their loans and firm's ability to substitute among alternative instruments of debt finance are important to shield the economy from adverse real effects of a financial crisis.
    JEL: E22 E32 E44 E5
    Date: 2014–12
  19. By: Quadrini, Vincenzo
    Abstract: The financial intermediation sector is important not only for channeling resources from agents in excess of funds to agents in need of funds (lending channel). By issuing liabilities it also creates financial assets held by other sectors of the economy for insurance purpose. When the intermediation sector creates less liabilities or their value falls, agents are less willing to engage in activities that are individually risky but desirable in aggregate (bank liabilities channel). The paper studies how financial crises driven by self-fulfilling expectations are transmitted, through this channel, to the real sector of the economy.
    Keywords: Banking crises; Macroeconomic volatility; Transmission channel
    JEL: E32 E44 G01
    Date: 2014–11
  20. By: Peersman, G. (Tilburg University, Center For Economic Research); Wagner, W.B. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: Shocks to bank lending, risk-taking and securitization activities that are orthogonal to real economy and monetary policy innovations account for more than 30 percent of U.S. output variation. The dynamic effects, however, depend on the type of shock. Expansionary securitization shocks lead to a permanent rise in real GDP and a fall in inflation. Bank lending and risktaking shocks, in contrast, have only a temporary effect on real GDP and tend to lead to a (moderate) rise in the price level. Furthermore, there is evidence for a strong search-for-yield effect on the side of investors in the transmission mechanism of monetary policy. These effects are estimated with a structural VAR model, where the shocks are identified using a model of bank risk-taking and securitization.
    Keywords: Bank lending; risk-taking; securitization; SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2014
  21. By: Freixas, Xavier; Ma, Kebin
    Abstract: This paper reexamines the classical issue of the possible trade-o s 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
  22. By: Anginer, D.; Demirgüc-Kunt, A.; Huizinga, H.P. (Tilburg University, Center For Economic Research); Ma, K. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper examines how corporate governance and executive compensation affect bank capitalization strategies for an international sample of banks over the 2003-2011 period. ‘Good’ corporate governance, which favors shareholder interests, is found to give rise to lower bank capitalization. Boards of intermediate size, separation of the CEO and chairman roles, and an absence of anti-takeover provisions, in particular, lead to low bank capitalization. However, executive options and stock wealth invested in the bank is associated with better capitalization except just before the crisis in 2006. In that year stock options wealth was associated with lower capitalization which suggests that potential gains from taking on more bank risk outweighed the prospect of additional loss. Banks’ tendency to continue payouts to shareholders after experiencing negative income shocks are shown to reflect executive risk-taking incentives.
    Keywords: Bank capital; Dividend payouts; Corporate governance; Executive compensation
    JEL: G21 M21
    Date: 2013
  23. By: Peter Martey Addo (Centre d'Economie de la Sorbonne); Philippe De Peretti (Centre d'Economie de la Sorbonne)
    Abstract: The recent financial crisis has lead to a need for regulators and policy makers to understand and track systemic linkages. We provide a new approach to understanding systemic risk tomography in finance and insurance sectors. The analysis is achieved by using a recently proposed method on quantifying causal coupling strength, which identifies the existence of causal dependencies between two components of a multivariate time series and assesses the strength of their association by defining a meaningful coupling strength using the momentary information transfer (MIT). The measure of association is general, causal and lag-specific, reflecting a well interpretable notion of coupling strength and is practically computable. A comprehensive analysis of the feasibility of this approach is provided via simulated data and then applied to the monthly returns of hedge funds, banks, broker/dealers, and insurance companies.
    Keywords: Systemic risk, financial crisis, Coupling strength, financial institutions
    JEL: G12 C40 C32 G29
    Date: 2014–10
  24. By: Spyros Pagratis (Athens University of Economics and Business); Eleni Karakatsani (Bank of Greece); Helen Louri (Athens University of Economics and Business,Bank of Greece and London School of Economics)
    Abstract: We find evidence that banks target return on equity (RoE) and make active use of leverage to affect the speed of adjustment towards RoE targets. That holds for both the pre- and post-2007 periods and especially for banks that tend to operate with above median leverage among their peer group. As a result, RoE targeting could affect leverage dynamics and amplify cyclical fluctuations as banks take on more leverage to achieve high returns when risk premia are low, while ‘rush for the exit’ and delever to contain losses when the cycle turns. Therefore, recent proposals that aim to align executive pay with long-term performance by restricting the use of profitability metrics such as RoE from remuneration schemes seem to be in the right direction.
    Keywords: Banks; Return on Equity; Target; Leverage; Procyclicality
    JEL: G21 G28 G32 G38
    Date: 2014–11
  25. By: Maria Ana Vitorino (University of Minnesota); Ali Hortacsu (University of Chicago); Elisabeth Honka (The University of Texas at Dallas)
    Abstract: Does advertising serve to (i) increase awareness of a product, (ii) increase the likelihood that the product is considered carefully, or (iii) does it shift consumer utility conditional on having considered it? We utilize a detailed data set on consumers' shopping behavior and choices over retail bank accounts to investigate advertising's eect on product awareness, consideration, and choice. Our data set has information regarding the entire purchase funnel, i.e. we observe the set of retail banks that the consumers are aware of, which banks they considered, and which banks they chose to open accounts with. We formulate a structural model that accounts for each of the three stages of the shopping process: awareness, consideration, and choice. Advertising is allowed to aect each of these separate stages of decision-making. Our model also endogenizes the choice of consideration set by positing that consumers undertake costly search. Our results indicate that advertising in this market is primarily a shifter of awareness, as opposed to consideration or choice. Along with advertising, branch density, marital status, race and income are very signicant drivers of awareness. We also find that consumers face non-trivial search/consideration costs that lead the average consumer to consider only 2.2 banks out of the 6.7 they are aware of. Conditional on consideration, branch density, the consumer's current primary bank (i.e. inertia), interest rates and education are the primary drivers of the final choice.
    Date: 2014
  26. By: Chris Stewart (Reserve Bank of Australia); Iris Chan (Reserve Bank of Australia); Crystal Ossolinski (Reserve Bank of Australia); David Halperin (Reserve Bank of Australia); Paul Ryan (Reserve Bank of Australia)
    Abstract: This paper examines the costs borne by financial institutions, merchants, and consumers in making, facilitating and accepting consumer-to-business payments. It examines the resource costs incurred by these sectors, how these have changed since 2006, and how fees and other transfers determine which sectors ultimately bear these costs. It also examines how resource costs vary at different transaction sizes and, for merchants, how costs differ between small and large entities. The results suggest that the resource costs of the payments system have fallen as a per cent of GDP since 2006. On a per transaction basis, direct debit remains the lowest-cost payment instrument while cheques remain the most expensive. At the point of sale, payments using cash, eftpos and contactless MasterCard & Visa debit cards have broadly similar costs for transactions under about $20; above $20, eftpos is the lowest-cost payment method. The results indicate that the relationship between resource and private costs varies significantly across instruments. The greater share of the overall cost is borne by merchants. The consumer undertaking a transaction typically pays a small proportion of its cost; consumers face a similar cost for credit card payments as for debit card payments despite the higher cost of credit cards to the economy. Finally, the results suggest that small businesses incur higher costs than large merchants.
    Keywords: banks; consumers; financial institutions; merchants; retail payments; surcharging
    JEL: E4 G2 L2
    Date: 2014–12

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