nep-ban New Economics Papers
on Banking
Issue of 2015‒02‒22
twenty-six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Centrality-based Capital Allocations By Alter, Adrian; Craig, Ben R.; Raupach, Peter
  2. When Banks Strategically React to Regulation: Market Concentration as a Moderator for Stability By Schliephake, Eva
  3. Bilateral netting and contagion dynamics in financial networks By Edoardo Gaffeo; Lucio gobbi
  4. Bank Capital, Liquid Reserves, and Insolvency Risk By Hugonnier, Julien; Morellec, Erwan
  5. Has the Financial Crisis had an Adverse Effect on Bank Competition? By Ali Mirzaei; Tomoe Moore
  6. A Network View on Interbank Market Freezes By Silvia Gabrieli and Co-Pierre Georg
  7. The Internal Organization of Banks and the Transmission of Lending Shocks Across Borders By Radev, Deyan; Gropp, Reint
  8. Eurozone bank resolution and Bail-In - Intervention, triggers and writedowns By Thomas Conlon; John Cotter
  9. Absence Of Interbank Loan Market And Banking Short-Term Liquidity Management Mechanisms: The Most Pressing Problems Of The Islamic Finance Model By Magomet Yandiev
  10. Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area By Rieth, Malte; Fratzscher, Marcel
  11. On the role of the ECB's collateral framework in preventing fire sales By Podlich, Natalia
  12. Bank Competition and Financial Stability: Much Ado About Nothing? By Diana Zigraiova; Tomas Havranek
  13. A Model of Mortgage Losses and its Applications for Macroprudential Instruments By Hott, Christian
  14. Subprime borrowers, securitization and the transmission of business cycles By Grodecka, Anna
  15. Factors of Competitiveness of Islamic Banks in the New Financial Order By Jean-Michel Sahut; Mehdi Mili; Maroua Ben Krir; Frédéric Teulon
  16. Institutions and the Choice of Risky Assets: Bank Data Evidence from Germany By Luik, Marc-André; Berlemann, Michael
  17. Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies By Ramon Marimon; Gaetano Gaballo
  18. Sophisticated vs. Simple Systemic Risk Measures By Pankoke, David
  19. Making sense of the comprehensive assessment By Acharya, Viral V.; Steffen, Sascha
  20. Securitization: The Road Ahead By Miguel A. Segoviano Basurto; Bradley Jones; Peter Lindner; Johannes Blankenheim
  21. How important are hedge funds in a crisis? By Gropp, Reint
  22. Decision making with Conditional Value-at-Risk and spectral risk measures: The problem of comparative risk aversion By Brandtner, Mario; Kürsten, Wolfgang
  23. Liquidity and growth: the role of counter-cyclical interest rates By Philippe Aghion; Emmanuel Farhi; Enisse Kharroubi
  24. Consequences of Connection Failure - Centrality and the Importance for Cohesion By Belau, Julia
  25. Clearing, transparency, and collateral By Francesco Carli; Francesca Carapella; Gaetano Antinolfi
  26. By a Silken Thread : regional banking integration and pathways to financial development in Japan s Great Recession By Hoffmann, Mathias; Okubo, Toshihiro

  1. By: Alter, Adrian (International Monetary Fund); Craig, Ben R. (Federal Reserve Bank of Cleveland); Raupach, Peter (Federal Reserve Bank of Cleveland)
    Abstract: This paper looks at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of systemwide losses. Using the detailed German Credit Register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs.
    Keywords: interbank connectivity; credit exposures; capital requirements; banking system; bank contagion; network centrality measure; bankruptcy costs; systemic risk
    JEL: C15 C81 G21 G28
    Date: 2015–02–13
  2. By: Schliephake, Eva
    Abstract: Minimum capital requirement regulation forces banks to refund a substantial amount of their investments with equity. This creates a buffer against losses, but also in- creases the cost of funding. If higher refunding costs translate into higher loan interest rates, then borrowers are likely to become more risky, which may destabilize the lending bank. This paper argues that, in addition to the buffer and cost effect of capital regulation, there is a strategic effect. A binding capital requirement regulation restricts the lending capacity of banks, and therefore reduces the intensity of loan interest rate competition and increases the banks price setting power as shown in Schliephake and Kirstein (2013). This paper discusses the impact of this indirect effect from capital regulation on the stability of the banking sector. It is shown that the enhanced price setting power can reverse the net effect that capital requirements have under perfect competition.
    JEL: G21 K23 L13
    Date: 2014
  3. By: Edoardo Gaffeo; Lucio gobbi
    Abstract: he bilateral netting of mutual obligations is an institutional arrange- ment usually employed in payment systems to reduce settlement risks. In this paper we explore its advantages and pitfalls when applied to an inter- bank lending market, in which banks extend credit to ñand borrow from ñother banks to adjust their short-term liquidity needs. By recurring to computer simulations, we show that bilateral netting considerably reduce the potential for default cascades over an interbank network whenever the source of contagion is a negative shock to the assets of a randomly chosen bank. When the shock hits the liability side of the balance sheet ñas a run on deposits ñthe role of a bilateral netting agreement in mitigating the risk of a systemic liquidity crisis depends critically on the topological characteristics of the interbank network, however.
    Keywords: Bilateral netting, financial networks, contagion
    Date: 2015
  4. By: Hugonnier, Julien; Morellec, Erwan
    Abstract: We develop a dynamic model to assess the effects of liquidity and leverage requirements on banks' insolvency risk. The model features endogenous capital structure, liquid asset holdings, payout, and default decisions. In the model, banks face taxation, flotation costs of securities, and default costs. They are financed with equity, insured deposits, and risky debt. Using the model, we show that liquidity requirements have no long-run effects on default risk but may increase it in the short-run; leverage requirements reduce default risk but may significantly reduce bank value; mispriced deposit insurance fuels default risk while depositor preference in default decreases it.
    Keywords: banks; capital structure; insolvency risk; liquidity buffers; regulation
    JEL: G21 G28 G32 G33
    Date: 2015–02
  5. By: Ali Mirzaei; Tomoe Moore
    Abstract: This article investigates whether the recent financial crisis has had any adverse impact on bank competition for 24 emerging and 25 advanced countries with large and small-size banks over the sample period 2001-2010. The H-statistic advocated by Panzar and Rosse (1987) is employed as the measure of competition. We find that the adverse effect of the financial crisis on bank competition seems to be trivial and on the contrary, competition is marginally boosted during the crisis period. This applies to both types of economies, irrespective of bank size. This suggests that currently ongoing policies to avert further crises in the banking sector have not exerted so great an adverse effect on competition. In the individual countries’ study, the recent global financial crisis, however, led to a significant decline in competition in some countries.
    Keywords: Bank competition, Bank concentration, Financial crisis, Emerging banking system
    JEL: G01 D4 G21 L11
  6. By: Silvia Gabrieli and Co-Pierre Georg
    Abstract: We study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Eurosystem’s payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change in the network structure is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.
    Keywords: Interbank loans, network topology, Financial Stability
    JEL: D85 E5 G1 G21
    Date: 2015
  7. By: Radev, Deyan; Gropp, Reint
    Abstract: The internal organization of global banks potentially plays a vital role in the transmission of shocks both within and across borders. The analysis of this transmission is of importance for regulators and policy makers. In this paper, we investigate how solvency and wholesale funding shocks to 114 OECD parent banks affect the lending of 541 domestic and foreign subsidiaries. Our results suggest that wholesale shocks are more important than solvency shocks in governing the lending decisions of bank subsidiaries. We also find stronger negative effects of wholesale shocks on the lending of foreign subsidiaries relative to domestic subsidiaries. Furthermore, both types of shocks appear to be independent from each other. Finally, the foreign subsidiaries of banks that rely heavily on wholesale funding seem to be more vulnerable to wholesale shocks to their parents than their domestic counterparts. There is no significance difference in the lending practices of subsidiaries of undercapitalized versus well-capitalized parents. These findings suggest that regulatory capital requirements may have small impact on limiting the transmission of shocks across borders.
    JEL: G01 G21 G28
    Date: 2014
  8. By: Thomas Conlon (UCD School of Business, University College Dublin); John Cotter (UCD School of Business, University College Dublin)
    Abstract: The European Union has recently introduced the Single Resolution Mechanism (SRM) to provide a consistent set of rules concerning Eurozone bank resolution. In this study, we retrospectively examine the implications of the SRM for Euro- zone banks during the global nancial crisis. Empirical results indicate that large, systemically important Eurozone banks would have exclusively required equity writedowns to cover impairment losses. However, to ensure adequate capitaliza- tion post bail-in, the majority of large, listed banks would have required conversion to equity for all subordinated and some senior debt creditors. Depositors would not have experienced writedowns in any of the banks examined. Given the subjec- tive nature of resolution triggers outlined in the SRM, we also study the potential benets of market and balance sheet dependent triggers. While our ndings sug- gest some weak evidence of a capacity to dierentiate between failed and surviving banks, the results are indicative of the diculties in mandating predened quan- titative resolution triggers.
    Date: 2015–02–05
  9. By: Magomet Yandiev (Department of Economics, Lomonosov Moscow State University)
    Abstract: The Islamic finance model is sufficiently well specified at the “bank-to-client” level, but does not regulate the “central bank-to-bank” and “bank-to-bank” relationships. This paper proposes a concrete Shariah-compatible mechanism for setting up an Islamic interbank loan1 market and managing Islamic bank liquidity, which allows a segregation of Islamic and non-Islamic finance. Islamic banks should as a minimum delink from LIBOR and other traditional reference rates and come up with their own financial benchmarks.
    Keywords: Islamic banks, central bank, liquidity, interbank lending market, money market
    JEL: E5 G1 F3
    Date: 2015–02
  10. By: Rieth, Malte; Fratzscher, Marcel
    Abstract: The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms two-way causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced solvency risk in the banking sector mostly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries.
    JEL: E52 G10 E60
    Date: 2014
  11. By: Podlich, Natalia
    Abstract: In this paper, I analyze the impact of the extension of the ECB s collateral framework on securities sales. In addition, I evaluate the impact of different macroeconomic and bank-specific characteristics on banks selling behavior. At this, I distinguish between healthy banks and banks rescued from the German government hypothesizing that distressed banks manage sales of their assets differently. My analysis is based on quantile regressions for panel data containing securities holdings of 27 German banks, which allows an assessment of extremely large sales. Such selling behavior could cause a collapse of prices and lead to fire sales adversely impacting other financial institutions. I find clear evidence that the ECB s collateral framework has a stabilizing impact on sales of assets, especially for impaired banks and during the crisis the relationship is significant.
    JEL: B26 C21 E58
    Date: 2014
  12. By: Diana Zigraiova; Tomas Havranek
    Abstract: The theoretical literature gives conflicting predictions on how bank competition should affect financial stability, and dozens of researchers have attempted to evaluate the relationship empirically. We collect 598 estimates of the competition-stability nexus reported in 31 studies and analyze the literature using meta-analysis methods. We control for 35 aspects of study design and employ Bayesian model averaging to tackle the resulting model uncertainty. Our findings suggest that the definition of financial stability and bank competition used by researchers influences their results in a systematic way. The choice of data, estimation methodology, and control variables also affects the reported coefficient. We find evidence for moderate publication bias. Taken together, the estimates reported in the literature suggest little interplay between competition and stability, especially in developing and transition countries, even when corrected for publication bias and potential misspecifications.
    Keywords: Bayesian model averaging, bank competition, financial stability, publication selection bias, meta-analysis
    JEL: C83 C11 G21 L16
    Date: 2015–01–01
  13. By: Hott, Christian
    Abstract: We develop a theoretical model of mortgage loss rates that evaluates their main underlying risk factors. Following the model, loss rates are positively influenced by the house price level, the loan-to-value of mortgages, interest rates, and the unemployment rate. They are negatively influenced by the growth of house prices and the income level. The calibration of the model for the US and Switzerland demonstrates that it is able to describe the overall development of actual mortgage loss rates. In addition, we show potential applications of the model for different macroprudential instruments: stress tests, countercyclical buffer, and setting risk weights for mortgages with different loan-to-value and loan-to-income ratios.
    JEL: E51 G21 G28
    Date: 2014
  14. By: Grodecka, Anna
    Abstract: One of the roots of the recent global financial crisis has been seen in the design of subprime mortgage contract leading to high sensitivity of such type of loans to house price changes. The market of subprime loans, especially in the last years preceding the crisis, has been highly financed by securitization. The paper investigates how borrowers with subprime characteristics influence the transmission mechanism of business cycles in the economy and whether the securitization of subprime loans has a positive effect on the economy. The formal setup is a DSGE model with different types of borrowers and banks acting as financial intermediaries, in which households and entrepreneurs borrow against housing collateral. The economy is subject to four shocks: monetary, inflationary, preference and technology. It is shown that alone the existence of subprime borrowers does not make the economy more responsive to different shocks at the aggregate level (it has only redistributional effects) and that under certain circumstances the securitization of subprime loans (in form of residential mortgage backed securities) may lead to amplification of the business cycles.
    JEL: E32 E44 G21
    Date: 2014
  15. By: Jean-Michel Sahut; Mehdi Mili; Maroua Ben Krir; Frédéric Teulon
    Abstract: This paper studies the factor of competitive conditions of conventional and Islamic banks operating in the same market in the MENA region. We determine the level of competitiveness between the two types of banks by using the PR-H statistic of Panzar and Ross (1987) and the Lerner index. Our estimations show that banking sectors in MENA operate under monopolistic competition. Our results confirm that Islamic banks are significantly more competitive than conventional banks and they express a higher degree of market power. We show also that profitability significantly increases with market power, but this does not warrant higher profitability levels for Islamic banks.
    Keywords: Islamic banks, Market Structure, Bank Competition, profitability.
    JEL: D4 G21 L1 N25
    Date: 2015–02–10
  16. By: Luik, Marc-André; Berlemann, Michael
    Abstract: The determinants of portfolio choice have been studied extensively in the field of household finance. In this paper we study the determinants of the decision to hold risky assets based on a novel dataset of German bank data. Our primary focus is the question whether East Germans di er in their portfolio decisions from West Germans. While we find only slight di erences in the decision to invest in risky assets at the extensive margin, the di erences at the intensive margin turn out to be much larger and non-linear. We attribute this finding to the di erent institutional environments East and West Germans experienced throughout the period of German division.
    JEL: G21 O16 D14
    Date: 2014
  17. By: Ramon Marimon (European University Institute); Gaetano Gaballo (Banque de France)
    Abstract: We analyze an economy where banks are uncertain about firms' investment opportunities and, as a result, credit tightness can result in excessive risk-taking. In the competitive credit market, banks announce credit contracts and firms apply to them, as in a directed search model. We show that high-risk Self-Confirming Equilibria, with misperceptions, coexist with a low-risk Rational Expectations Equilibrium, in this competitive search economy. Lowering the Central Bank policy rate may not be effective, while a credit-easing policy can be an effective experiment, breaking the high-risk (low-credit) Self-Confirming Equilibrium. We emphasize the differences with a model of Self-Fulfilling credit freezes and the social value of experimentation.
    Date: 2014
  18. By: Pankoke, David
    Abstract: This paper evaluates whether sophisticated or simple systemic risk measures are more suitable in identifying which institutions contribute to systemic risk. In this investigation, DCoVaR, Marginal Expected Shortfall (MES), SRISK and Granger-Causality Networks are considered as sophisticated systemic risk measures. Market capitalization, total debt, leverage, the stock market returns of an institution, and the correlation between the stock market returns of an institution and the market, are considered as simple systemic risk measures. Systemic relevance is approximated by the receipt of financial support during the financial crisis and the classification, as a systemically important institution, by national or international regulators. The analyses are performed for all companies included in the S&P 500 composite index. The findings suggest that simple systemic risk measures have more explanatory power than sophisticated risk measures. In particular, total debt is found to be the most suitable indicator to detect institutions which contribute to systemic risk, according to the explanatory power and model fit. The most suitable sophisticated risk measure seems to be SRISK.
    Keywords: Systemic Risk, DCoVaR, Marginal Expected Shortfall, SRISK, Granger-Causality Networks
    Date: 2014–12
  19. By: Acharya, Viral V.; Steffen, Sascha
    Abstract: The European Central Bank (ECB) has finalized its comprehensive assessment of the solvency of the largest banks in the euro area and on October 26 disclosed the results of this assessment. In the present paper, Acharya and Steffen compare the outcomes of the ECB's assessment to their own benchmark stress tests conducted for 39 publically listed financial institutions that are also included in the ECB's regulatory review. The authors identify a negative correlation between their benchmark estimates for capital shortfalls and the regulatory capital shortfall, but a positive correlation between their benchmark estimates for losses under stress both in the banking book and in the trading book. They conclude that the regulatory stress test outcomes are potentially heavily affected by discretion of national regulators in measuring what is capital, and especially the use of risk-weighted assets in calculating the prudential capital requirement.
    Keywords: Asset Quality Review,Single Supervisy Mechanism,European Central Bankor
    Date: 2014
  20. By: Miguel A. Segoviano Basurto; Bradley Jones; Peter Lindner; Johannes Blankenheim
    Abstract: The discussion in this note seeks to preserve the beneficial features of securitization while mitigating those that may pose risks to financial stability. A comprehensive set of reforms—targeting both supply- and demand-side inefficiencies—will be needed to put securitization back on a sound, growth-supportive footing. The note departs from others in proposing a broad suite of principles applicable to various elements of the financial intermediation chain. After indentifying where policy makers have already made progress, we then propose measures to address remaining impediments to the rehabilitation of securitization markets. We also encourage more consistent industry standards for the classification of risk (albeit applied at a granular rather than overarching level). Finally, we introduce various initiatives that could aid in fostering the development of a diversified non-bank investor base for securitization in Europe.
    Keywords: Securities;Mortgages;Financial intermediation;Credit ratings;Transparency;Asset Backed Securities, Mortgage Backed Securities, Securitizations, Finance; Financial Crisis, Intermediation; Bank, Mortgages, Financial Instruments; Institutional Investors, Investment Banking, Rating, Rating Agencies, Regulation
    Date: 2015–01–26
  21. By: Gropp, Reint
    Abstract: Before the 2007-09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn't account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial conditions worsened in one type of institution, the effects spread to others. A new method that more accurately accounts for these spillover effects suggests that hedge funds may have been central in generating systemic risk during the crisis.
    Keywords: systemic risk analysis,statistical risk measurement,spillover effects
    Date: 2014
  22. By: Brandtner, Mario; Kürsten, Wolfgang
    Abstract: We analyze spectral risk measures with respect to comparative risk aversion following Arrow (1965) and Pratt (1964) on the one hand, and Ross (1981) on the other hand. The implications for two standard financial decision problems, namely the willingness to pay for insurance and portfolio selection, are studied. Within the framework of Arrow and Pratt, we show that the widely-applied spectral Arrow-Pratt-measure is not a consistent measure of Arrow-Pratt-risk aversion. A decision maker with a greater spectral Arrow-Pratt-measure may only be willing to pay less for insurance or to invest more in the risky asset than a decision maker with a smaller spectral Arrow-Pratt-measure. We further show how a proper measure of Arrow-Pratt-risk aversion should look like instead. Within the framework of Ross, we show that the popular subclasses of Conditional Value-at-Risk, and exponential and power spectral risk measures cannot be completely ordered with respect to Ross-risk aversion. As a consequence, these subclasses also exhibit counter-intuitive comparative static results. In the insurance problem, the willingness to pay for insurance may be decreasing with increasing risk parameter. In the portfolio selection problem, the investment in the risky asset may be increasing with increasing risk parameter. These shortcomings have to be considered before spectral risk measures can be applied for the purpose of optimal decision making and regulatory issues.
    JEL: D81 G11 G21
    Date: 2014
  23. By: Philippe Aghion; Emmanuel Farhi; Enisse Kharroubi
    Abstract: In this paper, we use cross-industry, cross-country panel data to test whether industry growth is positively affected by the interaction between the reaction of real short-term interest rates to the business cycle and industry-level measures of financial constraints. Financial constraints are measured, either by the extent to which an industry is prone to being "credit-constrained", or by the extent to which it is prone to being "liquidity-constrained". Our main findings are that: (i) the interaction between credit or liquidity constraints and the counter-cyclical real short-term interest rate has a positive, significant, and robust impact on the average annual growth rate of industry labor productivity; (ii) these interaction effects tend to be more significant in recessions than in expansions.
    Keywords: growth, tangibility, liquidity dependence, short-term interest rate, counter-cyclicality
    Date: 2015–02
  24. By: Belau, Julia
    Abstract: This paper suggests a new approach for centrality measures for general (weighted) networks taking into account the importance for cohesion and relative power of connections. While existing literature either ignores the importance for cohesion or measures it by analyzing consequences arising from the failure of whole nodes, this approach analyzes consequences of tie failures. Using cooperative game theory, we assign weights to every tie of the network where the cooperative game accounts for the cohesion of the network. These weights are combined with the weights of the original network where emphasis for the latter and for cohesion can be regulated individually. Then, the degree measure and Eigenvector measure are applied. This provides the first centrality approach accounting for cohesion and relative importance/power of connections. We provide axiomatic characterizations for the degreebased measures in the case of binary networks and discuss computational complexity. Furthermore, we give examples discussing the drawbacks of existing measures in contrast to our suggested one and as a political application, we show how our Approach can be used to forcast government formation by the case of the state parliament election in Hamburg, Germany.
    JEL: C71 D72 D85
    Date: 2014
  25. By: Francesco Carli (Universidade Catolica Portuguesa); Francesca Carapella (Federal Reserve Board); Gaetano Antinolfi (Washington University in Saint Louis)
    Abstract: In an environment of Over-The-Counter trading with adverse selection we study traders' incentives to screen their counterparties under different clearing arrangements. When the clearing arrangement is also a choice, traders decide which types of transactions to clear under each arrangement, with signicant consequences for transparency and collateral requirements. The key trade-off is between insurance and the value of information: on one hand risk averse traders want to smooth consumption and on the other hand they want to extract the largest feasible surplus from their counterparties. Choosing an arrangement that provides insurance, however, may prevent them from taking advantage of the private information they learn about their counterparty. In fact, any arrangement involving risk pooling in equilibrium is inconsistent with any costly screening. As a result, insurance comes at the cost of losing transparency: when clearing arrangements differ in the degree of risk sharing they implement, then they also differ in the degree of transparency arising in equilibrium. This has significant consequences on the role of collateral. In environ- ments with limited commitment, collateral plays two roles for risk averse traders: it is a means to discipline incentives and to self-insure at the same time. When insurance is provided by a clearing arrangement that imple- ments risk sharing, collateral is primarily used to discipline incentives, since risk sharing comes at the cost of less information about the limited commitment of the counterparty. The opposite is true in the equilibrium with a clearing arrangement that cannot provide risk sharing but gives traders sufficient incentives to screen their counterparties.
    Date: 2014
  26. By: Hoffmann, Mathias; Okubo, Toshihiro
    Abstract: Regional differences in banking integration determined how Japan s Great Recession after 1990 spread across the country. We explain these differences with the emergence of silk reeling as the main export industry after Japan s opening to trade in the 19th century. The silk-exporting prefectures developed a system of export finance centered on local, cooperative banks that preserved their dominant local position long after the decline of the silk industry. Our findings suggest that different pathways to financial development can lead to long-term differences in de facto financial integration, even if there are no formal barriers to capital mobility between regions.
    JEL: F15 F30 G01
    Date: 2014

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