nep-ban New Economics Papers
on Banking
Issue of 2015‒02‒16
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Lenders on the storm of wholesale funding shocks: Saved by the central bank? By Leo de Haan; Jan Willem van den End; Philip Vermeulen
  2. Risk weights, lending, and financial stability: Limits to model-based capital regulation By Behn, Markus; Haselmann, Rainer; Vig, Vikrant
  3. Credit Valuation Adjustment Modelling During a Global Low Interest Rate Environment By Petr Macek; Petr Teply
  4. Centrality-based capital allocations By Alter, Adrian; Craig, Ben; Raupach, Peter
  5. Cross-border liquidity, relationships and monetary policy: Evidence from the Euro area interbank crisis By Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis
  6. Incomplete Information and Financial Networks By Alireza Tahbaz-Salehi; Jennifer La'O
  7. Bank Risk Taking, Credit Booms and Monetary Policy By Afanasyeva, Elena; Guentner, Jochen
  8. Credit supply and the housing boom By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  9. Bank Credit and Trade: Evidence from Germany By Nitsch, Volker; Goldbach, Stefan
  10. Too many to fail - How bonus taxation prevents gambling for bailouts By Hilmer, Michael
  11. Risk-Based Capital Requirements for Banks and International Trade By Michalski , Tomasz; Ors , Evren
  12. Capital Management and Leverage of Foreign Bank Subsidiaries in a Host Country: A Case in Hong Kong By Kelvin Ho; Cho-Hoi Hui; Ka-Fai Li; Jim Wong
  13. Unbanked Households: Evidence of Supply-Side Factors By Matray , Adrien; Celerier , Claire
  14. What drives the demand of monetary financial institutions for domestic government bonds? Empirical evidence on the impact of Basel II and Basel III By Lang, Michael; Schröder, Michael
  15. Systemic Risk with Exchangeable Contagion: Application to the European Banking System By Umberto Cherubini; Sabrina Mulinacci
  16. Banking market structure and macroeconomic stability: Are low-income countries special? By Bremus, Franziska; Buch, Claudia M.
  17. U.S. Banking Integration and State-Level Exports By Michalski , Tomasz; Ors , Evren
  18. Banking in Africa By Thorsten Beck; Robert Cull
  19. Surveillance of peer to peer payment systems and peer to peer lending platforms By Faia, Ester
  20. Macro-prudential measures and the housing market By Kennedy, Gerard; Stuart, Rebecca
  21. Japan’s financial crises and lost decades By Hirakata, Naohisa; Sudo, Nao; Takei, Ikuo; Ueda, Kozo
  22. How is credit scoring used to predict default in China? By Ha-Thu Nguyen
  23. The Efficiency of Private E-Money-Like Systems: The U.S. Experience with National Bank Notes By Warren E. Weber
  24. A New Methodology for Estimating Internal Credit Risk and Bankruptcy Prediction under Basel II Regime By M. Naresh Kumar; V. Sree Hari Rao

  1. By: Leo de Haan; Jan Willem van den End; Philip Vermeulen
    Abstract: We provide empirical evidence on banks' responses to shocks in wholesale funding, using data of 181 euro area banks over the period August 2007 to June 2013. Banks' adjustments of loan volumes and lending rates in response to funding liquidity shocks are analysed in a panel VAR framework. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries. Central bank liquidity has mitigated this effect. Lending to non-financial corporations is more sensitive to wholesale funding shocks than lending to households. Moreover, bank characteristics matter for monetary transmission: loan growth of large banks that are typically more dependent on wholesale funding and of banks with large exposure to government bonds shows relatively stronger responses to wholesale funding shocks.
    Keywords: banking/financial intermediation; financial crisis
    JEL: G21 G32
    Date: 2015–01
  2. By: Behn, Markus; Haselmann, Rainer; Vig, Vikrant
    Abstract: Model-based capital regulation is considered to be one of the key innovations of Basel II. The objective of this innovation was to make capital charges more sensitive to risk. Using data from the German credit register, and employing a difference-indifference identification strategy, we empirically investigate how the introduction of this regulation affected the quantity and the composition of bank lending. We find that credit supplied by banks that introduced the model-based approach exhibits a higher sensitivity to model-based PDs as compared with credit supplied by banks that remained under the traditional approach. Interestingly, however, we find that risk models used for regulatory purposes tend to underpredict actual default rates. There is no such prediction error in PDs for loans under the traditional approach.
    JEL: G01 G28 G21
    Date: 2014
  3. By: Petr Macek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic); Petr Teply (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: The 2008/2009 global crisis highlighted the vulnerabilities and inter-dependencies in the financial system including the global over-the-counter (OTC) derivatives markets, where significant counterparty credit risk prevails. In this paper, we deal with risk under Basel III banking regulation and provide credit valuation adjustment (CVA) modelling, which is a measure of the market value of counterparty credit risk. We use simulated data to develop a stress test model to determine the impact of counterparty credit risk on bank capital regulatory requirements. We developed six scenarios of different interest rate levels and from these scenarios we computed the exposure levels and CVA. Consequently, based on CVA modelling, we estimate the impact of an interest rate hike on portfolios of the top 3 Czech banks (Èeská spoøitelna, ÈSOB and Komerèní banka) and top 3 US banks (Bank of America, Citibank and JP Morgan). We conclude that i) the analyzed Czech banks report sufficient capital buffers to withstand increase of interest rates in any scenario; ii) the observed US banks with high exposure to derivatives would face significant capital shortfalls if the interest rates increase rapidly.
    Keywords: bank capital, Basel III, counterparty credit risk, credit valuation adjustment, market risk
    JEL: G21 G28 G32 G33
    Date: 2015–01
  4. By: Alter, Adrian; Craig, Ben; Raupach, Peter
    Abstract: We look at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. The rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of system-wide losses. Using the detailed German Credit Register for estimation, we find capital rules based on eigenvectors to dominate any other centrality measure, followed by closeness. Compared to the baseline case, capital reallocation based on the Adjacency Eigenvector saves 14.6% in system losses as measured by expected bankruptcy costs.
    Keywords: Capital Requirements,Centrality Measures,Contagion,Financial Stability
    JEL: G21 G28 C15 C81
    Date: 2015
  5. By: Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis
    Abstract: We analyze the impact of financial crises and monetary policy on the supply of wholesale funding liquidity, and also on the compositional supply effects through cross-border and relationship lending. For empirical identification, we draw on the proprietary bank-to-bank European interbank dataset extracted from Target2 and also exploit the Lehman and sovereign crisis shocks as well as the main Eurosystem non-standard monetary policy measures. The robust results imply that the crisis shocks lead to worse access, volumes and spreads (in both the overnight and longer-term maturities). The quantitative impact on interbank access and volume is stronger than on spreads. Liquidity supply restrictions are exacerbated for cross- border lending after the Lehman failure; for banks headquartered in periphery countries, the impact is quantitatively stronger in the sovereign debt crisis. Moreover, the interbank market - unlike other credit markets - allows to exploit the price dispersion from different lenders on identical credit contracts, i.e. overnight uncollateralized loans in the same morning for the same borrower. This price dispersion increases massively with the crisis, and even more for riskier borrowers. Cross-border and previous relationship lenders charge higher prices for identical contracts in the crisis. Importantly, this price dispersion substantially decreases when the Eurosystem promises unlimited access to liquidity at a fixed price in October 2008 and announces the 3-year LTRO in December 2011, with economically stronger effects for borrowers in weaker countries.
    Keywords: interbank liquidity,financial crises,monetary policy,credit supply,credit rationing,information asymmetry,euro area,financial globalization
    JEL: E44 E58 G01 G21 G28
    Date: 2014
  6. By: Alireza Tahbaz-Salehi (Columbia Business School); Jennifer La'O (Columbia University)
    Abstract: This paper studies the effect of incomplete information within a banking network. Banks are arranged in a network of claims. Claims are held either by other banks in the network or outside depositors. Within this framework, we analyze how incomplete information about the viability of bank assets affects the fragility of the banking system. In particular, we show that fluctuations in expectations and higher-order beliefs can be amplified and lead to systemic risk. Fragility depends both on the topology of the network as well as the structure of higher-order beliefs. Our results have implications for banking policy as well as the social value of stress tests.
    Date: 2014
  7. By: Afanasyeva, Elena; Guentner, Jochen
    Abstract: This paper investigates the risk-taking channel of monetary policy on the asset side of banks' balance sheets. We use a factor-augmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, e.g. their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract, embed it in a dynamic general equilibrium model, and show that - consistent with our empirical finding - a monetary easing implies an expansion of bank lending for a given amount of borrower collateral. The model also predicts a delayed increase in borrowers' default risk.
    JEL: E44 E52 E32
    Date: 2014
  8. By: Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: The housing boom that preceded the Great Recession was the result of an increase in credit supply driven by looser lending constraints in the mortgage market. This view on the fundamental drivers of the boom is consistent with four empirical observations: the unprecedented rise in home prices, the surge in household debt, the stability of debt relative to home values, and the fall in mortgage rates. These facts are difficult to reconcile with the popular view that attributes the housing boom to looser borrowing constraints associated with lower collateral requirements. In fact, a slackening of collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust.
    Keywords: housing and credit boom; house prices; collateral constraints; leverage restrictions
    JEL: E32 E44
    Date: 2015–02–01
  9. By: Nitsch, Volker; Goldbach, Stefan
    Abstract: The massive decline in international trade in 2008/09 is often attributed to the global deterioration in financial conditions after the bankruptcy of a US investment bank, Lehman Brothers. This paper examines the association between external finance and firm activity in Germany in more detail. In particular, we explore a novel data set that matches a full sample of quarterly bank-firm lending data with detailed information on borrowers and lenders. Our results indicate that foreign sales are insensitive to variations in external finance. While German banks affected by the crisis have significantly reduced their credit supply, exporting firms seem to be particularly good borrowers, which have been offered alternative financing options.
    JEL: F40 E44 G21
    Date: 2014
  10. By: Hilmer, Michael
    Abstract: Using a simple symmetric principal-agent model of two banks, this paper studies the effects of both bailouts and bonus taxes on risk taking and managerial compensation. In contrast to existing literature, we assume financial institutions to be systemic only on a collective basis, implying support only if they collectively fail. This too-many-to-fail assumption generates incentives for herding and collective moral hazard. If banks can anticipate bailouts, they can coordinate on equilibrium where they collectively incentivize higher risk-taking. A bonus tax can prevent this market failure, even if it is implemented unilaterally: proper bonus taxation reduces risk-taking of the taxed bank and, consequentially, rules out the equilibrium with high risk-taking of both banks. In preventing market failure due to banks collective moral hazard, bonus taxation reestablishes market discipline.
    JEL: H24 M52 G38
    Date: 2014
  11. By: Michalski , Tomasz; Ors , Evren
    Abstract: The authors provide the first evidence that changes in risk-based capital requirements for banks affect the real economy through international trade. Using a natural experiment – mandatory Basel II adoption in its Standardized Approach by all banks in Turkey on July 1, 2012 – they investigate the impact of new risk-weights applied to commercial letters of credit (CLC) on that country’s exports to 174 countries. The authors estimate the resulting payment-term-cost elasticity of CLC-financed trade to be between -0.5 and -1 while the overall trade elasticity to be between -0.032 and -0.179. Calculations suggest that both CLC-related bank pricing and rationing channels are involved.
    Keywords: commercial letters of credit; international trade finance; exports; risk-weights; Basel II
    JEL: F14 G21 G28
    Date: 2014–10–28
  12. By: Kelvin Ho (Hong Kong Monetary Authority); Cho-Hoi Hui (Hong Kong Monetary Authority); Ka-Fai Li (Hong Kong Monetary Authority); Jim Wong (Hong Kong Monetary Authority)
    Abstract: The large presence of global banks in Hong Kong offers a well suited empirical setting to study the capital management of foreign bank subsidiaries from a host country perspective. Specifically, this paper uses the trade-off theory of leverage to investigate whether the leverage dynamics of foreign bank subsidiaries in the host country would behave differently to domestic banks. Similar to the behavior uncovered empirically of non-financial firms, we find that the standard determinants of leverage are applicable to banks in Hong Kong. In particular, there is a mean-reverting force which acts as a self-correcting mechanism for their leverage, with over-leveraged banks having a tendency to decrease their leverage, and vice versa. However, the self-correcting mechanism of banks' leverage may in times be unduly disturbed by abundant global liquidity, with the effect on foreign bank subsidiaries tangibly higher than that on domestic banks. The externality generated by current abundant global liquidity affecting foreign bank subsidiaries may require the implementation of macro-prudential policies in the host country to contain the risks stemming from the high leverage of banks and external liquidity shocks.
    Keywords: Bank Leverage, Global Banks¡¦ Subsidiaries, Speed of Adjustment, Global Liquidity, Trade-Off Theory
    JEL: E44 F36 G21 G32
    Date: 2015–01
  13. By: Matray , Adrien; Celerier , Claire
    Abstract: This paper provides evidence that supply-side factors significantly drive the high share of unbanked households. Using interstate branching deregulation in the U.S. after 1994 as an exogenous shock, the authors show that an increase in bank competition is associated with a large drop in the share of unbanked households. The authors find that the effect is even stronger for populations that are more likely to be rationed by banks, such as black households living in "high racial bias'' states. The improved access to bank accounts leads to higher savings rates but does not translate to higher levels of indebtedness.
    Keywords: Banks; Regulation; Imperfect Competition; Household Finance; Discrimination
    JEL: D14 D43 G21 G28 J15
    Date: 2014–02–07
  14. By: Lang, Michael; Schröder, Michael
    Abstract: This paper examines the treatment of sovereign debt exposure within the Basel framework and measures the impact of bank regulation on the demand of Monetary Financial Institutions (MFI) for marketable sovereign debt. Our results suggest that bank regulation has a significant positive impact on MFI demand for domestic government securities. The results are representative for the MFI in the euro zone. They remain highly robust and significant after controlling for other influential factors and potential endogeneity.
    Keywords: Monetary Financial Institutions,Financial sector regulation,Sovereign bond holdings,Investment incentives
    JEL: G11 G21 G28
    Date: 2015
  15. By: Umberto Cherubini; Sabrina Mulinacci
    Abstract: We propose a model and an estimation technique to distinguish systemic risk and contagion in credit risk. The main idea is to assume, for a set of $d$ obligors, a set of $d$ idiosyncratic shocks and a shock that triggers the default of all them. All shocks are assumed to be linked by a dependence relationship, that in this paper is assumed to be exchangeable and Archimedean. This approach is able to encompass both systemic risk and contagion, with the Marshall-Olkin pure systemic risk model and the Archimedean contagion model as extreme cases. Moreover, we show that assuming an affine structure for the intensities of idiosyncratic and systemic shocks and a Gumbel copula, the approach delivers a complete multivariate distribution with exponential marginal distributions. The model can be estimated by applying a moment matching procedure to the bivariate marginals. We also provide an easy visual check of the good specification of the model. The model is applied to a selected sample of banks for 8 European countries, assuming a common shock for every country. The model is found to be well specified for 4 of the 8 countries. We also provide the theoretical extension of the model to the non-exchangeable case and we suggest possible avenues of research for the estimation.
    Date: 2015–02
  16. By: Bremus, Franziska; Buch, Claudia M.
    Abstract: Does the structure of banking markets affect macroeconomic volatility and, if yes, is this link different in low-income countries? Banking markets in low-income countries differ from those in developed market economies. Banking systems in lower-income countries are typically smaller and less open. In this paper, we explore the channels through which the structure of banking markets affects macroeconomic volatility. Our research has three main findings. First, we study the relevance of granular effects: if the degree of market concentration in the banking sector is sufficiently high, idiosyncratic volatility at the bank-level can impact aggregate volatility. We find weak evidence for a link between granular banking sector volatility and macroeconomic fluctuations. Second, a higher share of domestic credit to GDP coincides with higher volatility in the short run. Third, a higher level of cross-border asset holdings, i.e. a higher degree of de facto financial integration, increases volatility in low-income countries.
    Keywords: bank market structure,financial integration,granularity,macroeconomic volatility,low-income countries
    JEL: G21 E32
    Date: 2014
  17. By: Michalski , Tomasz; Ors , Evren
    Abstract: Using inter-state banking deregulation in the U.S. as an exogenous experiment, the authors find that a 1% increase in banking integration between U.S. states caused a 0.164-0.184% increase in the foreign exports/domestic shipments ratio for U.S. state level exports in the years 1992-1996. They can ascribe these effects to the integration by banks with foreign assets: a 1% increase in banking integration through such banks caused the exports/domestic shipments ratio to increase by 0.22-0.41% while the expansion of banks with purely domestic assets appears to have no impact. Given the empirical specification, this increase in openness can be attributed to an increase in capital to cover variable and fixed export costs relative to domestic shipping costs and a higher provision of trade finance services. Serving new destinations (the extensive margin defined at the state-country level) accounts for 22% to 28% of the banking integration effect that the authors observe.
    Keywords: exports; financial depth; inter-state banking deregulation
    JEL: F10 F15 G21 G28
    Date: 2014–11–15
  18. By: Thorsten Beck; Robert Cull
    Abstract: This chapter takes stock of the current state of banking systems across Sub-Saharan Africa and discusses recent developments including innovations that might help Africa leapfrog more traditional banking models.  Using an array of different data, we document that African banking systems are shallow but stable.  African banks are well capitalized and over-liquid, but lend less to the private sector than banks in non-African developing countries.  African enterprises and households are less likely to use financial services than their peers in other developing countries.  We also describe a number of financial innovations acrosst he continent that can help overcome different barriers to financial inclusion and have helped to expand the bankable and the banked population.
    Keywords: Sub-Saharan Africa, Banking, Financial Inclusion, Financial Innovation
    JEL: G2 G3
    Date: 2013–11–01
  19. By: Faia, Ester
    Abstract: Financial innovation is, as usual, faster than regulation. New forms of speculation and intermediation are rapidly emerging. Largely as a result of the evaporation of trust in financial intermediation, an exponentially increasing role is being played by the so-called peer to peer intermediation. The most prominent example at the moment is Bitcoin. If one expects that shocks in these markets could destabilize also traditional financial markets, then it will be necessary to extend regulatory measures also to these innovations.
    Keywords: financial innovation,peer to peer payment systems,Bitcoin,regulation
    Date: 2014
  20. By: Kennedy, Gerard (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: The Central Bank recently published a Consultation document on macro-prudential policy for residential mortgage lending including limits on loan-to-value and loan-to-income ratios. The consultation process highlighted a number of potential implications of these measures for the housing market, particularly for the rental market and for housing supply. This Letter rst discusses some of the underlying economics of the housing market in a simple analytical framework. It then considers the potential implications of the proposed macro-prudential measures on the rental market and on housing supply in more detail, including possible policy options to counteract negative aspects.
    Date: 2015–01
  21. By: Hirakata, Naohisa (Bank of Japan); Sudo, Nao (Bank of Japan); Takei, Ikuo (Bank of Japan); Ueda, Kozo (Waseda University)
    Abstract: In this paper we explore the role of financial intermediation malfunction in macroeconomic fluctuations in Japan. To this end we estimate, using Japanese data, a financial accelerator model in which the balance sheet conditions of entrepreneurs in a goods-producing sector and those of a financial intermediary affect macroeconomic activity. We find that shocks to the balance sheets of the two sectors have been quantitatively playing important role in macroeconomic fluctuations by affecting lending rates and aggregate investments. Their impacts are prominent in particular during financial crises. Shocks to the entrepreneurs balance sheets have played a key role in lowering investment in the bubble burst during the early 1990s and in the global financial crisis during the late 2000s. Shocks to the financial intermediaries balance sheets have persistently lowered investment throughout the 1990s.
    JEL: E31 E44 E52
    Date: 2014–12–01
  22. By: Ha-Thu Nguyen
    Abstract: In this paper, we carry out a review of literature for both traditional and sophisticated credit assessment techniques, with a particular focus on credit scoring which is broadly used as a costeffective credit risk management tool. The objective of the paper is to present a set-up of an application credit-scoring model and to estimate such a model using an auto loan data-set of one of the largest automobile manufacturers in China. The logistic regression approach, which is widely used in credit scoring, is employed to construct our scorecard. A detailed step-by-step development process is provided, as are discussions about specific modeling issues. The paper finally shows that “married”, “house owner”, “female”, age in years, “working in public institutions, foreign, or joint venture companies”, down payment rate, and maximum months on book of current accounts negatively impact the probability of default.
    Keywords: Credit Risk, Credit Scoring, Auto Loans, Logistic Regression.
    JEL: G3 C51 C52
    Date: 2015
  23. By: Warren E. Weber
    Abstract: Beginning in 1864, in the United States notes of national banks were the predominant medium of exchange. Each national bank issued its own notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with national bank notes. It examines historical evidence on how well the bank notes - a privately-issued currency system with multiple issuers - functioned with respect to ease of transacting, counterfeiting, safety, overissuance and par exchange (a uniform currency). It finds that bank notes made transacting easier and were not subject to overissuance. National bank notes were perfectly safe because they were insured by the federal government. Further, national bank notes were a uniform currency. Notes of different banks traded at par with each other and with greenbacks. This paper describes the mechanism that was put in place to achieve uniformity. The U.S. experience with national bank notes suggests that a privately-issued e-money system can operate efficiently but will require government intervention, regulation, and supervision to minimize counterfeiting, promote safety and provide the mechanism necessary for different media of exchange to exchange at par with each other.
    Keywords: Bank notes, E-Money, Financial services
    JEL: E41 E42 E58
    Date: 2015
  24. By: M. Naresh Kumar; V. Sree Hari Rao
    Abstract: Credit estimation and bankruptcy prediction methods have been utilizing Altman's $z$ score method for the last several years. It is reported in many studies that $z$ score is sensitive to changes in accounting figures. Researches have proposed different variations to conventional $z$ score that can improve the prediction accuracy. In this paper we develop a new multivariate non-linear model for computing the $z$ score. In addition we develop a new credit risk index by fitting a Pearson type-III distribution to the transformed financial ratios. The results from our study have shown that the new $z$ score can predict the bankruptcy with an accuracy of $98.6\%$ as compared to $93.5\%$ by the Altman's $z$ score. Also, the discriminate analysis revealed that the new transformed financial ratios could predict the bankruptcy probability with an accuracy of $93.0\%$ as compared to $87.4\%$ using the weights of Altman's $z$ score.
    Date: 2015–02

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