nep-ban New Economics Papers
on Banking
Issue of 2015‒02‒28
38 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank competition and credit booms By Phurichai Rungcharoenkitkul
  2. Insider bank runs: community bank fragility and the financial crisis of 2007 By Henderson, Christopher ; Lang, William W. ; Jackson, William E.
  3. The impact of the global financial crisis on banking globalization By Stijn Claessens ; Neeltje van Horen
  4. The Impact of Government Intervention on the Stabilization of Domestic Financial Markets and on U.S. Banks’ Asset Composition By Egly, Peter V. ; Escobari, Diego ; Johnk, David W.
  5. The Bank Capital Regulation (BCR) Model. By Hyejin Cho
  6. Cyclical adjustment of capital requirements: a simple framework By Rafael Repullo
  7. Optimal capital requirements over the business and financial cycles By Malherbe, Frédéric
  8. Taking Banks to Solow By Gersbach, Hans ; Rochet, Jean-Charles ; Scheffel, Martin
  10. Monetary Policy, Bank Bailouts and the Sovereign-Bank Risk Nexus in the Euro Area By Marcel Fratzscher ; Malte Rieth
  11. The Impact of Credit Default Swap Trading on Loan Syndication By Streitz, Daniel
  12. Gender Biases in Bank Lending: Lessons from Microcredit in France By Anastasia Cozarenco ; Ariane Szafarz
  13. Innovation and export in SMEs: the role of relationship banking By Serena Frazzoni ; Maria Luisa Mancusi ; Zeno Rotondi ; Maurizio Sobrero ; Andrea Vezzulli
  14. House prices, heterogeneous banks and unconventional monetary policy options By Smith, Andrew Lee
  15. Looking behind mortgage delinquencies By Sauro Mocetti ; Eliana Viviano
  16. Application of internal ratings-based methods on credit risk measurement By Alejandro Vargas Sanchez ; Saulo Mostajo Castelú
  17. Threadneedle: An Experimental Tool for the Simulation and Analysis of Fractional Reserve Banking Systems By Jacky Mallett
  18. Shareholding Network in the Euro Area Banking Market By Nicolò Pecora ; Alessandro Spelta
  19. Procyclical leverage and value-at-risk By Tobias Adrian ; Hyun Song Shin
  20. Does Banking Market Power Matter on Financial (In)Stability? Evidence from the Banking Industry MENA Region By Labidi, Widede ; Mensi, Sami
  21. Financial institution network and the certification value of bank loans By Christophe J. GODLEWSKI ; Bulat SANDITOV
  22. Forecasting Mortgages: Internet Search Data as a Proxy for Mortgage Credit Demand By Branislav Saxa
  23. Macro credit scoring as a proposal for quantifying credit risk By Sergio Edwin Torrico Salamanca
  24. Why did bank lending rates diverge from policy rates after the financial crisis? By Anamaria Illes ; Marco Lombardi ; Paul Mizen
  25. Model risk on credit risk By J. Molins ; E. Vives
  26. Efficiencies of Small Financial Cooperatives in Japan: Comparison of Estimation Methods By Kozo Harimaya ; Kei Tomimura ; Nobuyoshi Yamori
  27. Equilibrium Bank Runs Revisied By Ed Nosal ; Bruno Sultanum ; David Andolfatto
  28. Does contingent capital induce excessive risk-taking? By Berg, Tobias ; Kaserer, Christoph
  29. Securitization under Asymmetric Information over the Business Cycle By Martin Kuncl
  30. What Drives Bank-Intermediated Trade Finance? Evidence from Cross-Country Analysis By Jose Maria Serena Garralda ; Garima Vasishtha
  31. Networks, Shocks, and Systemic Risk By Daron Acemoglu ; Asuman Ozdaglar ; Alireza Tahbaz-Salehi
  32. Rating Agencies By Thomas Cooley ; Harold Cole
  33. Systemic Risk and the Macroeconomy: An Empirical Evaluation By Stefano Giglio ; Bryan T. Kelly ; Seth Pruitt
  34. Financial Distress and Endogenous Uncertainty By Francois Gourio
  35. Do restrictions on home equity extraction contribute to lower mortgage defaults? evidence from a policy discontinuity at the Texas’ border By Kumar, Anil
  36. Which financial stocks did short sellers target in the subprime crisis? By Hasan, Iftekhar ; Massoud , Nadia ; Saunders, Anthony ; Song, Keke
  37. Financial stability from a network perspective By Leon Rincon, C.E.
  38. Self-Fulfilling Credit Cycles By Yi Wen ; Leo Kaas ; Costas Azariadis

  1. By: Phurichai Rungcharoenkitkul
    Abstract: A model of imperfectly competitive banks is examined under asymmetric information about borrower quality. Greater bank competition and a lower risk-free rate raise the screening costs of lending, which can result in pooling Nash equilibria with credit booms. Such equilibria are characterised by sharp increases in credit supply and deteriorations in average loan quality, which are inefficient for banks. In the model, banks' incentives to make risky loans can vary despite unchanged capital structure, thus highlighting the role of a risk-taking mechanism. This approach helps explain the existing mixed empirical results on the relationship between bank competition and financial stability. The model can be used to define a neutral interest rate in the context of financial cycles, namely a finance-neutral interest rate, which is estimated in the case of the United States.
    Keywords: bank competition, credit booms, asymmetric information, optimal contract, coordination failure, finance-neutral rate of interest, monetary policy
    Date: 2015–02
  2. By: Henderson, Christopher (Federal Reserve Bank of Philadelphia ); Lang, William W. (Federal Reserve Bank of Philadelphia ); Jackson, William E. (University of Alabama )
    Abstract: From 2007 to 2010, more than 200 community banks in the United States failed. Many of these failed community banking organizations (CBOs) held less than $1 billion in total assets. As economic conditions worsen, banking organizations are expected to preserve capital to withstand unexpected losses. This study examines CBOs prior to failure or becoming problem institutions to understand if, on average, a run on capital by insiders via dividend payouts led to greater financial fragility at the onset of the crisis. We use a control group of similar-sized banks that did not fail or become problem institutions to compare our results and to draw statistical conclusions. We use standard control variables highlighting corporate governance and managerial ownership, such as S-corporation designation and bank complexity that might create incentives more conducive to insider enrichment than to the welfare of depositors or debtholders. Although the new Dodd-Frank legislation exempted smaller banks from many proposed requirements, our results show that capital distributions to insiders contributed to community bank weakness during the financial crisis.
    Keywords: Dividend policy; Financial crisis; Bank lending; Bank risk; Bank regulation; Risk management
    JEL: E44 G01 G21 G32 G35
    Date: 2015–01–01
  3. By: Stijn Claessens ; Neeltje van Horen
    Abstract: Although cross-border bank lending has fallen sharply since the crisis, extending our bank ownership database from 1995-2009 up to 2013 shows only limited retrenchment in foreign bank presence. While banks from OECD countries reduced their foreign presence (but still represent 89% of foreign bank assets), those from emerging markets and developing countries expanded abroad and doubled their presence. Especially advanced countries hit by a systemic crisis reduced their presence abroad, with far flung and relatively small investments more likely to be sold. Poorer and slower growing countries host fewer banks today, while large investments less likely expanded. Conversely, faster host countries' growth and closeness to potential investors meant more entry. Lending by foreign banks locally grew more than cross-border bank claims did for the same home-host country combination, and each was driven by different factors. Altogether, our evidence shows that global banking is not becoming more fragmented, but rather is going through some important structural transformations with a greater variety of players and a more regional focus.
    Keywords: foreign banks; financial globalization; global financial crisis; cross-border banking; financial fragmentation
    JEL: F21 F23 G21
    Date: 2015–02
  4. By: Egly, Peter V. ; Escobari, Diego ; Johnk, David W.
    Abstract: The 2007-2009 financial crisis that evolved from various factors including the housing boom, aggressive lending activity, financial innovation, and increased access to money and capital markets prompted unprecedented U.S. government intervention in the financial sector. We examine changes in banks’ balance sheet composition associated with U.S. government intervention during the crisis. We find that the initial round of quantitative easing positively impacts bank liquidity across all bank samples. Our results show a positive impact of repurchase agreement market rates on bank liquidity for small and medium banks. We conclude that banks have become more liquid in the post-crisis period, especially the larger banks (large and money center banks). We show that real estate loan portfolio exposures have reverted to pre-crisis levels for money center banks and remained flat for all other bank samples.
    Keywords: Bank Liquidity, Government Intervention, Quantitative Easing, Dynamic Panel Data Methods
    JEL: E44 G21
    Date: 2014–12–10
  5. By: Hyejin Cho (Centre d'Economie de la Sorbonne )
    Abstract: The motivation of this article is to induce the bank capital management solution for banks and regulation bodies on commercial banks. The goal of the paper is intended to mitigate the risk of a banking area and also provide the right incentive for banks to support the real economy.
    Keywords: Demand deposit, On-balance-sheet risks and off-balance-sheet risks, Portfolio composition, Minimum equity capital regulation.
    JEL: C62 C63 D01 G10 G21
    Date: 2015–02
  6. By: Rafael Repullo
    Abstract: We present a model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements.
    Keywords: Banking regulation; Basel II; Capital requirements; Procyclicality
    JEL: E44 G21 G28
    Date: 2013–09–27
  7. By: Malherbe, Frédéric
    Abstract: I propose a simple theory of intertwined business and financial cycles, where financial regulation both optimally responds to and influences the cycles. In this model, banks do not internalize the effect of their credit expansion on other banks’ expected bankruptcy costs, which leads to excessive aggregate lending. In response, the regulator sets a capital requirement to trade off expected output against financial stability. The capital requirement that ensures investment efficiency depends on the state of the economy and, because of a general equilibrium effect, its stringency increases with aggregate banking capital. A regulation that fails to take this effect into account would exacerbate economic fluctuations and result in excessive aggregate lending during a boom. It would also allow for an excessive build-up of risk in the financial sector, which implies that, at the peak of a boom, even a small adverse shock could trigger a banking sector collapse, followed by an excessively severe credit crunch.
    Keywords: Basel 3; capital requirement; costly default; counter-cyclical buffers; financial cycles; financial regulation
    JEL: E44 G01 G21 G28
    Date: 2015–02
  8. By: Gersbach, Hans ; Rochet, Jean-Charles ; Scheffel, Martin
    Abstract: We develop a simple integration of banks into the Solow model. The objective is to provide a tractable benchmark for analyzing the long-term impact of crises on economic activities and growth. A fraction of firms have to rely on banks for financing their investments while banks face themselves an endogenous leverage constraint. Informed lending by banks and uninformed lending through capital markets spur capital accumulation. The ensuing coupled accumulation rules for household wealth and bank equity yield a uniquely determined steady state. We highlight three properties when shocks to wealth, productivity or trust affect the economy. First, typically bond and loan financing react in opposite directions to such shocks. Second, negative temporary shocks to household wealth (financial crisis) or negative sectoral production shocks can surprisingly cause persistent booms of banking and even of the entire economy -- after an initial bust. Third, shocks to bank equity (banking crisis), however, lead to large and persistent downturns associated with high output losses.
    Keywords: economic activity and growth; financial intermediation; impact of banking and financial crises; Solow model
    JEL: E21 E32 F44 G21 G28
    Date: 2015–02
  9. By: Renata Karkowska (University of Warsaw, Faculty of Management )
    Abstract: We measure a systemic risk faced by European banking sectors using the CoVaR measure. We propose the conditional value-at-risk (CoVaR) for measuring a spillover risk which demonstrates the bilateral relation between the tail risks of two financial institutions. The aim of the study is to estimate the contribution systemic risk of the bank i in the analyzed banking sector of a country in conditions of its insolvency. The study included commercial banks from 8 emerging markets from Europe, which gave a total of 40 banks, traded on the public market, which provided a market valuation of the bank's capital. The conclusions are that the CoVaR seems to be a better measure for systemic risk in the banking sector than the VaR, which is more individual. And banks in developing countries in Europe do not provide significant risk for the banking sector as a whole. But it must be taken into account that some individuals that may find objectionable. Our results hence tend to a practical use of the CoVaR for supervisory purposes.
    Keywords: Systemic Risk, Value at Risk, Risk Spillovers, Banking Sector
    JEL: G01 G10 G20 G28 G38
    Date: 2015–02
  10. By: Marcel Fratzscher ; Malte Rieth
    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, but partly 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.
    Keywords: Credit risk, banks, sovereigns, monetary policy, bank bailout, heteroscedasticity, spillovers
    JEL: E52 G10 E60
    Date: 2015
  11. By: Streitz, Daniel
    Abstract: We analyze the impact of CDS trading on bank syndication activity. Theoretically,the effect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower’s debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.
    Keywords: Loan Sales; Credit Default Swaps; Syndicate Structure; Syndicated Loans
    JEL: G21 G32
    Date: 2015–02–02
  12. By: Anastasia Cozarenco ; Ariane Szafarz
    Abstract: The evidence on gender discrimination in lending remains controversial. To capture gender biases in banks’ loan allocations, we observe the impact on the applicants of a microfinance institution (MFI) and exploit the natural experiment of a regulatory change imposing a strict EUR 10,000 loan ceiling on microcredit. Descriptive statistics indicate that the presence of the ceiling is associated both with bank-MFI co-financing and with harsher treatment of female borrowers. To investigate causal links, we develop an econometric approach that addresses the concerns of selection biases, multicollinearity, and endogeneity. Our empirical findings suggest that the change in the MFI’s gender-related attitude was triggered by banks through co-financing. Hence, we speculate that co-financing pushes ceiling-constrained MFIs to import whatever biases in loan granting that the banks are prone to. Overall, this paper stresses that apparently benign regulations such as loan ceilings can significantly harm the women’s empowerment efforts made by MFIs.
    Keywords: Microcredit; bank; loan ceiling; gender; France
    JEL: G21 J16 M13 L51 G28 O52 I38
    Date: 2015–02–25
  13. By: Serena Frazzoni ; Maria Luisa Mancusi (Università Cattolica del Sacro Cuore ; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore ); Zeno Rotondi ; Maurizio Sobrero ; Andrea Vezzulli
    Abstract: This paper assesses the role of relationship lending in explaining simultaneously the innovation activity of Small and Medium Enterprises (SME), their probability to export (i.e. the extensive margin) and their share of exports on total sales conditional on exporting (i.e. the intensive margin). We adopt a measure of informational tightness based on the ratio of firm’s debt with its main bank to firm’s total assets. Our results show that the strength of the bank-firm relation has a positive impact on both SME’s probability to export and their export margins. This positive effect is only marginally mediated by the SME’s increased propensity to introduce product innovation. We further discuss the financial and non-financial channels through which the intensity of bank-firm relationship supports SMEs’ international activities.
    Keywords: margins of export, bank-firm relationships, innovation, localized knowledge spillovers
    JEL: F10 G20 G21 O30
    Date: 2014–11
  14. By: Smith, Andrew Lee (Federal Reserve Bank of Kansas City )
    Abstract: This paper develops a nancial mechanism which integrates housing and the real econ- omy through housing-secured debt. In this environment, movements in home prices are ampli ed through both borrowers and banks' balance sheets, leading to a self-reinforcing credit/liquidity crunch. When placed within a traditional business cycle model, this - financial structure quantitatively captures empirical relationships the traditional nancial accelerator mechanism struggles to explain and the qualitative predictions of the model are consistent with dynamic responses from a VAR. The model provides a framework to examine the ability of QE policies and equity injections into big banks to mitigate a housing bust. Although both are e ective, the nuances of the policies are important. A prolonged asset purchase program is preferable to a short-term equity injection; however, the model suggests the equity injections may have been necessary to prevent an economic collapse at the acute stage of the 2008 Financial Crisis.
    Keywords: Financial Crises; Financial Frictions; Unconventional Monetary Policy; Housing
    JEL: E32 E44 G01 G21
    Date: 2014–10–01
  15. By: Sauro Mocetti (Bank of Italy ); Eliana Viviano (Bank of Italy )
    Abstract: We examine the delinquency rate for mortgages originated before and after the 2008 financial crisis, using a novel and large representative panel obtained by merging data from tax records and credit registers. First, we estimate the selection into the mortgage market using an exogenous index of local credit supply as exclusion restriction. Second, controlling for selection we estimate the impact of income shocks on the probability of recording a delinquency. We find that since 2008 the selection process operated by banks has led to the halving of the delinquency rate. Conditional on mortgage origination, a job loss nearly doubles the delinquency risk. Estimates uncorrected for selection are subject to severe downward biased.
    Keywords: mortgage delinquency, income, selection, lending policies
    JEL: D12 E51 G01 G21
    Date: 2015–01
  16. By: Alejandro Vargas Sanchez ; Saulo Mostajo Castelú
    Abstract: This paper presents the concepts and methods used for credit risk measurement. The main objective was to explain Internal Ratings-Based Methods. The applicatin and analysis was performed on financial information for supposed business case loan, as well as a simulated banking transaction database used to develop a credit scoring model. The reults obtained form a Structural Model and Reduced Form Model showed significant differences in credit risk measures with respect to requirements established by applicable law for regulated financial entities in Bolivia. The study revealed that the application of advanced models for measuring credit risk requires adequate estimates of business volatility and credit scoring models that allow deeply analyse of a credit transaction.
    Keywords: Credit risk, Credit scoring, Structural models, Reduced form Models, Expected loss, Probability of default.
    JEL: C39
    Date: 2014–09
  17. By: Jacky Mallett
    Abstract: Threadneedle is a multi-agent simulation framework, based on a full double entry book keeping implementation of the banking system's fundamental transactions. It is designed to serve as an experimental test bed for economic simulations that can explore the banking system's influence on the macro-economy under varying assumptions for its regulatory framework, mix of financial instruments, and activities of borrowers and lenders. Support is provided for Basel Capital and central bank reserve regulatory frameworks, inter-bank lending and correct handling of loan defaults within the bank accounting framework. In this paper we provide an overview of the design of Threadneedle, and the rational for the double entry book keeping approach used in its implementation. We then provide evidence from a series of experiments using the simulation that the macro-economic behaviour of the banking system is in some cases sensitive to double entry book keeping ledger definitions, and in particular that loss provisions can be systemically affecting. We also show that credit and money expansion in Basel regulated systems is now dominated by the Basel capital requirements, rather than the older central bank reserve requirements. This implies that bank profitability is now the main factor in providing new capital to support lending, meaning that lowering interest rates can act to restrict loan supply, rather than increasing borrowing as currently believed. We also show that long term liquidity flows due to interest repayment act in favour of the bank making the loan, and do not provide any long term throttling effect on loan expansion and money expansion as has been claimed by Keynes and others.
    Date: 2015–02
  18. By: Nicolò Pecora (Università Cattolica del Sacro Cuore ); Alessandro Spelta (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore )
    Abstract: Analyzing the topological properties of the network of shareholding relationships among the Euro Area banks we evaluate the relevance of a bank in the ?nancial system respect to ownership and control of other banks. We ?nd that the degree distribution of the European banking network displays power laws in both the binary and the weighted case. We also ?nd that the exponents are linked by a scaling relation revealing a direct connection between an increase of control diversi?cation and an increase of market power. Results also reveal Single Supervisory Mechanism, recently introduced by the European Central Bank and based on banks? total assets is a good proxy for the systemic risk associated to a particular ?nancial institution. Moreover we study how control and wealth are structured and concentrated within the banking system. Interestingly, our analysis reveals that control is highly concentrated at banking level, namely, lying in the hands of very few important shareholders that have weak relationships between them. This means that each main holder controls approximately a separate subset of banks.
    Keywords: Shareholding network, European banking system, Weighted graph, Power law
    JEL: D85 E58 L14
    Date: 2014–06
  19. By: Tobias Adrian ; Hyun Song Shin
    Abstract: The availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries. Empirically, we find that intermediary leverage is negatively aligned with the banks’ value-at-risk (VaR). Motivated by the evidence, we explore a contracting model that captures the observed features. Under general conditions on the outcome distribution given by Extreme Value Theory (EVT), intermediaries maintain a constant probability of default to shifts in the outcome distribution, implying substantial deleveraging during downturns. For some parameter values, we can solve the model explicitly, thereby endogenizing the VaR threshold probability from the contracting problem.
    Keywords: financial intermediary leverage; procyclicality; collateralized borrowing
    JEL: G21 G32
    Date: 2013–09–05
  20. By: Labidi, Widede ; Mensi, Sami
    Abstract: The various financial crisis incidents during the two last decades and particularly since the 2007-2008 Global Financial Crisis has revealed the complexity of the interaction between bank market structure, regulation and the stability of the banking industry. Due to its effects on financial stability, banking market structure has been a focus of academic and policy debates of which we prefer the market power paradigm. More precisely, the impact of competition and market concentration on the probability of financial crisis emerges as a crucial topic. Despite their importance, little is known about the relationship between Banking Market Power and Bank Soundness from banks of MENA region. This paper tries to overcome the tradeoff between banking market power and financial (in)stability among 157 commercial banks chosen from 18 countries of MENA region between 2000 and 2008. The results indicate that although the banks operate in a competitive market, they suffer from financial instability. The results also revealed a non-significant negative relationship between the rather low degree of market power and financial instability. In other words, we concluded that financial instability is not affected by competition in the banking market in the MENA region.
    Keywords: market power, financial stability, competition, MENA.
    JEL: D4 G00
    Date: 2015–01–07
  21. By: Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg ); Bulat SANDITOV (Telecom Ecole de Management )
    Abstract: Social networks and reputation are believed to play important roles in mitigating informational frictions related to financial intermediation, in particular bank lending. We investigate the effect of the network and reputation of financial institutions on the certification value of bank loans using data on syndicated loans to European companies. We find that the presence of more central and reputable leaders in a syndicate substantially increases the stock market’s reaction to loan announcements. This certification value is reinforced when informational frictions are more important, but vanishes in case of severe disruptions in the functioning of financial markets, such as during the financial crisis of 2008.
    Keywords: bank loan, syndicated lending, reputation, social network analysis, betweenness centrality, event study, Europe.
    JEL: G21 G24 L14
    Date: 2015
  22. By: Branislav Saxa
    Abstract: This paper examines the usefulness of Google Trends data for forecasting mortgage lending in the Czech Republic. While the official monthly statistics on mortgage lending come with a publication lag of one month, the data on how often people search for mortgage-related terms on the internet are available without any lag on a weekly basis. Growth in searches for mortgages and growth in mortgages actually provided are strongly correlated. The lag between these two growth rates is two months. Evaluation of out-of-sample forecasts shows that internet search data improve mortgage lending predictions significantly. In addition to forecasting performance evaluation, an experimental indicator of restrictively tight mortgage credit standards and conditions is proposed. Nowadays many countries run bank lending surveys to monitor the tightness of bank lending standards and conditions. The proposed indicator represents a complementary tool to such a survey.
    Keywords: Credit demand, credit standards and conditions, credit supply, forecast evaluation, forecasting, Google econometrics, Internet search data, mortgage, smoothing
    JEL: C22 C82 E27 E51
    Date: 2014–12
  23. By: Sergio Edwin Torrico Salamanca
    Abstract: Credit scoring is a methodology used in finance to quantify the credit risk of individuals/firms. This article proposes the application of this technique as a tool to measure the aggregated risk of banks and the banking system. An application in the Bolivian commercial banking system is presented, in order to expose the proposed methodology, called Macro Credit Scoring. By applying this methodology, it is identified that the risk measure applied is greater than that needed in the Bolivian commercial banking system in the current situation. Finally, empirical evidence of the relationship between credit risk and economic variables (macro / micro) is presented.
    Keywords: Credit scoring, Risk Management, Credit Risk, Banking.
    JEL: C39
    Date: 2014–09
  24. By: Anamaria Illes ; Marco Lombardi ; Paul Mizen
    Abstract: The global finance crisis prompted central banks in many countries to cut short-term policy rates to near zero levels. Yet, lending rates did not fall as much as the decline in policy rates would have suggested. We argue that comparing lending rates to policy rates is misleading: banks do not obtain all their funds at policy rates, and after the crisis, costs of funding rose substantially. Comparing lending rates with a weighted average cost of funds suggests that banks did not substantially change their rate setting behaviour after the financial crisis: interest rate pass-through relationships across eleven countries in Europe appear to have remained stable.
    Keywords: lending rates, policy rates, panel cointegration, financial crisis
    Date: 2015–02
  25. By: J. Molins ; E. Vives
    Abstract: This paper develops the Jungle model in a credit portfolio framework. The Jungle model is able to model credit contagion, produce doubly-peaked probability distributions for the total default loss and endogenously generate quasi phase transitions, potentially leading to systemic credit events which happen unexpectedly and without an underlying single cause. We show the Jungle model provides the optimal probability distribution for credit losses, under some reasonable empirical constraints. The Dandelion model, a particular case of the Jungle model, is presented, motivated and exactly solved. The Dandelion model suggests contagion and macroeconomic risk factors may be understood under a common framework. We analyse the Diamond model, the Supply Chain model and the Noria model, which are particular cases of the Jungle model as well. We show the Diamond model experiences a quasi phase transition for a not unreasonable set of empirical parameters. We suggest how the Jungle model is able to explain a series of empirical stylized facts in credit portfolios, hard to reconcile by some standard credit portfolio models. We show the Jungle model can handle inhomogeneous portfolios with state-dependent recovery rates. We look at model risk in a credit risk framework under the Jungle model, especially in relation to systemic risks posed by doubly-peaked distributions and quasi phase transitions.
    Date: 2015–02
  26. By: Kozo Harimaya (College of Business Administration, Ritsumeikan University ); Kei Tomimura (Faculty of Business Administration, Aichi University ); Nobuyoshi Yamori (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan )
    Abstract: This study investigates the efficiency of Japanese credit cooperatives using a stochastic directional distance function approach and compares the results obtained from a slack-based data envelopment analysis model (SBM). Moreover, it focuses on the differences in the four groups classified by a type of common bond in a membership and considers the validity of small financial cooperatives. The findings reveal that ethnic minority-owned cooperatives that experienced a drastic consolidation in the last two decades are more efficient than the other groups and those owned through an industry-based membership are less efficient. Although the results slightly differ among alternative measures, this paper emphasizes the potential merger effects of small financial cooperatives in Japan.
    Keywords: Efficiency, Cooperative financial institutions, Consolidation
    JEL: C67 G21 G34
    Date: 2015–02
  27. By: Ed Nosal (Federal Reserve Bank of Chicago ); Bruno Sultanum (The Pennsylvania State University ); David Andolfatto (Federal Reserve Bank of St. Louis )
    Abstract: Peck and Shell (2003) show that equilibrium bank runs are possible in the Diamond and Dybvig (1983)environment. We show that their result is an artifact of their restriction to direct mechanisms. That is, their bank contract is not an optimal one. We show that an indirect mechanism eliminates the possibility of bank-run equilibria and implements the socially efficient outcome. The optimal mechanism can be interpreted as a form of deposit insurance.
    Date: 2014
  28. By: Berg, Tobias ; Kaserer, Christoph
    Abstract: In this paper, we analyze the effect of the conversion price of CoCo bonds on equity holders' incentives. First, we use an option-pricing context to show that CoCo bonds can magnify equity holders' incentives to increase the riskiness of assets and decrease incentives to raise new equity in a crisis in cases in which conversion transfers wealth from CoCo bond holders to equity holders. Second, we present a clinical study of the CoCo bonds issued so far. We show that i) almost all existing CoCo bonds are designed in a way that implies a wealth transfer from CoCo bond holders to equity holders at conversion and ii) this contractual design is reflected in traded prices of CoCo bonds. In particular, CoCo bonds are short volatility with a magnitude five times greater than that which can be observed for straight bonds. These results are robust and economically significant. We conclude that the CoCo bonds issued so far can create perverse incentives for banks' equity holders.
    Keywords: Contingent capital; banking regulation; risk-taking incentives; asset substitution; debt overhang; credit crunch
    Date: 2015
  29. By: Martin Kuncl
    Abstract: This paper studies the efficiency of financial intermediation through securitization in a model with heterogeneous investment projects and asymmetric information about the quality of securitized assets. I show that when retaining part of the risk, the issuer of securitized assets may credibly signal its quality. However, in the boom stage of the business cycle this practice is inefficient, information on asset quality remains private, and lower-quality assets accumulate on balance sheets of financial intermediaries. This prolongs and deepens a subsequent recession with an intensity proportional to the length of the preceding boom. In recessions, the model also produces amplification of adverse selection problems on resale markets for securitized assets. These are especially severe after a prolonged boom period and when securitized high-quality assets are no longer traded. The model also suggests that improperly designed regulation requiring higher explicit risk retention may become counterproductive due to a negative general-equilibrium effect; i.e., it may adversely affect both the quantity and the quality of investment in the economy.
    Keywords: Business fluctuations and cycles, Credit and credit aggregates, Economic models, Financial markets, Financial stability, Financial system regulation and policies
    JEL: E E3 E32 E4 E44 G G0 G01 G2 G20
    Date: 2015
  30. By: Jose Maria Serena Garralda ; Garima Vasishtha
    Abstract: Empirical work on the underlying causes of the recent dislocations in bank-intermediated trade finance has been limited by the poor availability of hard data. This paper analyzes the key determinants of bank-intermediated trade finance using a novel data set covering ten banking jurisdictions. It focuses on the role of global factors as well as country-specific characteristics in driving trade finance. The results indicate that country-specific variables, such as growth in trade flows and the funding availability for domestic banks, as well as global financial conditions and global imports growth, are important determinants of trade finance. These results are robust to different model specifications. Further, we do not find that trade finance is more sensitive to global financial conditions than other loans to non-bank entities.
    Keywords: International topics; International financial markets; Econometric and statistical methods
    JEL: F14 F19
    Date: 2015
  31. By: Daron Acemoglu ; Asuman Ozdaglar ; Alireza Tahbaz-Salehi
    Abstract: This chapter develops a unified framework for the study of how network interactions can function as a mechanism for propagation and amplification of microeconomic shocks. The framework nests various classes of games over networks, models of macroeconomic risk originating from microeconomic shocks, and models of financial interactions. Under the assumption that shocks are small, we provide a fairly complete characterization of the structure of equilibrium, clarifying the role of network interactions in translating microeconomic shocks into macroeconomic outcomes. This characterization enables us to rank different networks in terms of their aggregate performance. It also sheds light on several seemingly contradictory results in the prior literature on the role of network linkages in fostering systemic risk.
    JEL: D85 G01
    Date: 2015–02
  32. By: Thomas Cooley (New York University ); Harold Cole (University of Pennsylvania )
    Abstract: For decades credit rating agencies were viewed as trusted arbiters of creditworthiness and their ratings as important tools for managing risk. The common narrative is that the value of ratings has been compromised by the evolution of the industry to a form where issuers pay for ratings. In this paper we show how credit ratings have value in equilibrium and how reputation insures that, in equilibrium, ratings will re ect sound assessment of credit worthiness. There will always be an information distortion because of the fact that purchasers of ratings need not reveal them. We argue that that regulatory reliance on ratings and the increasing importance of risk-weighted capital in prudential regulation have more likely contributed to distorted ratings than the matter of who pays for them. In this respect, much of the regulatory obsession with the con ict created by issuers paying for ratings is misguided.
    Date: 2014
  33. By: Stefano Giglio ; Bryan T. Kelly ; Seth Pruitt
    Abstract: This article evaluates a large collection of systemic risk measures based on their ability to predict macroeconomic downturns. We evaluate 19 measures of systemic risk in the US and Europe spanning several decades. We propose dimension reduction estimators for constructing systemic risk indexes from the cross section of measures and prove their consistency in a factor model setting. Empirically, systemic risk indexes provide significant predictive information out- of-sample for the lower tail of future macroeconomic shocks.
    JEL: C31 C32 C38 C58 E44 G01 G2
    Date: 2015–02
  34. By: Francois Gourio (FRB Chicago )
    Abstract: What is the macroeconomic effect of having a substantial number of firms close to default? This paper studies financial distress costs in a model where customers, suppliers and workers suffer losses if their employer goes bankrupt. I show that this mechanism generates amplification of fundamental shocks through procyclical TFP and countercyclical labor wedge. Because the strength of this amplification depends on the share of firms that are in financial distress, it operates mostly in recessions, when equity values are low. This leads macroeconomic volatility to be endogenously countercyclical. The cross-sectional distribution of firms' equity values affects directly aggregate macroeconomic volatility. Empirical evidence consistent with the model is provided.
    Date: 2014
  35. By: Kumar, Anil (Federal Reserve Bank of Dallas )
    Abstract: Texas is the only US state that limits home equity borrowing to 80 percent of home value. This paper exploits this policy discontinuity around the Texas’ interstate borders and uses a multidimensional regression discontinuity design framework to find that limits on home equity borrowing in Texas lowered the likelihood of mortgage default by about 1 percentage point for all mortgages and 2-4 percentage points for nonprime mortgages. Estimated nonprime mortgage default hazards within 25 to 100 miles on either side of the Texas’ border are about 15 percent smaller as one crosses into Texas.
    Keywords: Home quity; mortgage default; negative equity
    JEL: G21 G28 R28
    Date: 2014–09–01
  36. By: Hasan, Iftekhar (Fordham University and Bank of Finland ); Massoud , Nadia (Melbourne Business School, University of Melbourne ); Saunders, Anthony (Stern School of Business, New York University ); Song, Keke (Rowe School of Business, Dalhousie University )
    Abstract: Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies’ risk exposures in the subprime crisis. The evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms’ stocks was not significantly greater than that of non-financial firms. When the short ban was in effect, the market quality of financial stocks without subprime asset exposure had deteriorated to a larger degree than that of financial companies with subprime asset exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also serve as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban.
    Keywords: short selling; subprime assets; financial crisis; short-sale ban; CDS spread
    JEL: G01 G14 G18 G28 G33
    Date: 2015–02–13
  37. By: Leon Rincon, C.E. (Tilburg University, School of Economics and Management )
    Abstract: This thesis consists of six chapters related to applications of network analysis’<br/>methods for financial stability. The first chapter introduces the network perspective as a new mapping technique for studying and understanding financial markets’architecture. The second chapter breaks down the Colombian sovereign securities market into different layers of interaction corresponding to distinct trading and registering platforms. The third chapter addresses an overlooked issue: How to measure the importance of financial market infrastructures within their corresponding network. The fourth chapter studies the connective and hierarchical structure of the Colombian non-collateralized money market, and uses an information retrieval algorithm for identifying those financial institutions that simultaneously excel at borrowing and lending central bank’s liquidity (i.e. superspreaders). The fifth chapter addresses –for the first time- the question regarding the presence of a modular hierarchy in financial networks, and discusses the main implications for financial stability. The sixth chapter explicitly models the role of financial market infrastructures as financial markets’ “plumbing”, and recognizes that traditional analysis of financial institutions networks is of a virtual or logical nature. The third chapter is published in the Journal of Financial Market Infrastructures (Vol.2 (3), 2014), whereas the fourth chapter is published in the Journal of Financial Stability (Vol.15, 2014).
    Date: 2015
  38. By: Yi Wen (Federal Reserve Bank of St. Louis ); Leo Kaas (University of Konstanz ); Costas Azariadis (Washington University in St Louis )
    Abstract: In U.S. data 1981-2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is at best acyclical. In this paper we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing constraints preventing an efficient capital allocation among heterogeneous firms. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation which is a forward-looking variable. We argue that self-fulfilling beliefs over future credit conditions naturally generate endogenously persistent business cycle dynamics. A dynamic complementarity between current and future borrowing limits permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. We show that sunspot shocks are quantitatively important, accounting for a substantial part of the volatility in firm credit and output.
    Date: 2014

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