nep-ban New Economics Papers
on Banking
Issue of 2015‒03‒22
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Effects of Funding Portfolios on the Credit Supply of Canadian Banks By H. Evren Damar; Césaire Meh; Yaz Terajima
  2. Banks as patient fixed-income investors By Samuel Hanson; Andrei Shleifer; Jeremy C. Stein; Robert W. Vishny
  3. Dynamic Banking with Endogenous Risk Based Funding Cost: Value Maximization, Risk-taking, Responses to Regulation and Credit Contraction By Larsson, Bo; Wijkander, Hans
  4. Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model By Juliane M. Begenau
  5. Global Banks' Dynamics and the International Transmission of Shocks By Stefania Garetto; Martin Goetz; Jose Fillat
  6. Bank Equity and Macroprudential Policy By Keqing Liu
  7. Determinants of the Slovak bank liquidity flows By Jana Lastuvkova
  8. 'Sudden Floods, Macroprudential Regulation and Stability in an Open Economy' By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  9. The kiss of information theory that captures systemic risk By Peter Martey Addo; Philippe De Peretti; Hayette Gatfaoui; Jakob Runge
  10. A Comparative Study On Financial Performance Of Public Sector Banks In India: An Analysis On Camel Model By Kishore Meghani, Kishore Meghani; Hari Krishna Karri, Hari Krishna Karri; Bharti Meghani Mishra, Bharti Meghani Mishra
  11. The credit cycle and the business cycle in Canada and the U.S.: Two solitudes? By Pierre L. Siklos, Brady Lavender
  12. Credit Shocks in an Economy with Heterogeneous Firms and Default By Tatsuro Senga; Julia Thomas; Aubhik Khan
  13. New Evidence on the Impact of Financial Crises in Advanced Countries By Christina D. Romer; David H. Romer
  14. Financial Innovation, Collateral and Investment By Ana Fostel; John Geanakoplos
  15. Value-at-Risk in turbulence time By Genest, Benoit; Cao, Zhili

  1. By: H. Evren Damar; Césaire Meh; Yaz Terajima
    Abstract: This paper studies how banks simultaneously manage the two sides of their balance sheet and its implications for bank risk taking and real economic activity. First, we analyze how changes in funding affect the supply of bank loans. We then examine how the supply of credit by banks that rely more on wholesale funding changed during periods of low-for-long interest rates and during the recent financial crisis. The findings suggest that contemporaneous changes in wholesale funding are positively associated with large business loans. In addition, we find that banks that rely on wholesale funding tend to increase mortgage loans in a prolonged low rate environment. This is suggestive evidence that these banks may be taking on more liquidity risk by supplying long-term loans with short-term funding. We also find that mortgage lending by banks relying more on wholesale funding increased, a likely result of government policies to increase liquidity in the market during the crisis.
    Keywords: Financial Institutions, Financial stability, Financial system regulation and policies, Monetary policy implementation
    JEL: E52 G21
    Date: 2015
  2. By: Samuel Hanson; Andrei Shleifer; Jeremy C. Stein; Robert W. Vishny
    Date: 2015–03
  3. By: Larsson, Bo (Dept. of Economics, Stockholm University); Wijkander, Hans (Dept. of Economics, Stockholm University)
    Abstract: We develop a stochastic dynamic model of bank value maximization under limited liability and in which bankruptcy can occur. Main issues are banks’ optimal responses to regulation and credit-losses. We show that risk-neutral banks behave as if they were risk-averse when they are under-capitalized. Risk-taking is always below that of single period value maximization under limited liability. We also show that banking regulations often have significant and adverse second-order effects through banks’ dynamic adjustment to regulations. The model gives rise to endogenous capital buffers and shows that it takes time to re-build bank capital after a credit-loss. That makes the model suitable to analysis of situations as the current post financial crisis period with large macroeconomic disturbances and credit contraction.
    Keywords: Dynamic Banking; Banking regulation; Capital adequacy; Dividends; Incentive structure; Capital buffers; Bankruptcy
    JEL: C61 G21 G22
    Date: 2015–03–09
  4. By: Juliane M. Begenau (Harvard Business School, Finance Unit)
    Abstract: This paper develops a quantitative dynamic general equilibrium model in which households' preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benefit of higher capital requirements related to this channel significantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.
    Keywords: Capital Requirements, Bank Lending, Safe Assets, Macro-Finance
    JEL: E32 E41 E51 G21 G28
    Date: 2015–03
  5. By: Stefania Garetto (Boston University); Martin Goetz (Goethe University, Frankfurt am Main); Jose Fillat (Federal Reserve Bank of Boston)
    Abstract: 15% of the loans in the US are held by foreign banking institutions, headquartered in more than 50 countries. Using bank-level data, we present novel stylized facts describing characteristics of foreign institutions and compare them to the incumbent set of banks, distinguishing foreign banks by their mode of entry. We incorporate these facts into a structural model of entry in the banking sector where profit maximizing foreign banks decide whether and how to enter a foreign market. The model sheds light on the relationship between market access, capital flows, regulation, and entry, and has implications for the risk exposure that different organizational forms entail.
    Date: 2014
  6. By: Keqing Liu (Department of Economics, University of Exeter)
    Abstract: We investigate a new macroprudential policy in a DSGE model with fi?nancial frictions. As Gertler, Kiyotaki and Queralto (2012), we propose to subsidize bank equities. However, our tax rate is different from their policy. The tax rate in our macroprudential policy is proportional to capital ratio gap while it is proportional to the shadow price of bank deposit in Gertler et al. (2012). Our policy has two advantages: Firstly, because bank?s balance sheet structure is observable target for central bank, our policy is more applicable for practical policy design. Secondly, our policy makes individual banks choose to raise more capital. While it tightens the moral hazard constraint, the policy could raise the future value of investment and it shows the modi?fied policy is welfare dominant.
    Keywords: Macroprudential policy, Bank equity, Capital ratio, DSGE model
    JEL: C61 E61 G28
    Date: 2015
  7. By: Jana Lastuvkova (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: This paper discusses the possible determinants of liquidity flows in the Slovak banking sector. By these flows it is meant the outflow, the net changes and the total value of the liquidity. The flows are obtained according to a specific method of measuring liquidity risk – method of gross liquidity flows. Determinants are evaluated for size groups of the Slovak banking sector conducting panel regressions. Among the factors, there are involved macroeconomic factors, as well as, factors on the level of the market and individual banks, to cover all levels of determinants influencing bank liquidity. The regressions performed have shown that the factors may not only affect liquidity creation, often investigated by other authors, but also its outflow and net changes. From the results, it is also obvious, that banks reflect external environment, as well as, internal characteristics. It seems that Slovak banks create liquidity reserves during favourable economic development and are forced to use them in the time of crisis. On the other hand, for the final value of liquidity, which is a cumulative result of individual flows for more periods, it is more important for banks to reflect the internal factors to adjust the liquidity value.
    Keywords: Slovak banking sector, measurement of the bank liquidity, liquidity flows, liquidity determinants
    JEL: G21 G28
    Date: 2015–03
  8. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: The performance of a countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions, imperfect capital mobility, a managed float regime, and sterilized foreign exchange market intervention. Bank funding sources, domestic and foreign, are imperfect substitutes. The model is calibrated and used to study the effects of a temporary drop in the world risk-free interest rate. Consistent with stylized facts, the shock triggers an expansion in domestic credit and activity, asset price pressures, and a real appreciation. A credit-based reserve requirement rule helps to mitigate both macroeconomic and financial volatility, with the latter defined both in terms of a narrow measure based on the credit-to-output ratio, the ratio of capital flows to output, and interest rate spreads, and a broader measure that includes real asset prices as well. An optimal rule, based on minimizing a composite loss function, is also derived. Sensitivity tests, related to the intensity of sterilization, the degree of exchange rate smoothing, and the rule used by the central bank to set the cost of bank borrowing, are also performed, both in terms of the transmission process and the optimal rule.
    Date: 2015
  9. By: Peter Martey Addo (Centre d'Economie de la Sorbonne); Philippe De Peretti (Centre d'Economie de la Sorbonne); Hayette Gatfaoui (NEOMA Business School - Campus de Rouen); Jakob Runge (Postdam Institute for Climate Impact Research and Humboldt University Berlin)
    Abstract: We provide a new approach to understanding systemic risk by analysing complex linkages in finance and insurance sectors. The analysis is achieved by using a recently proposed method for quantifying causal coupling strength, which identifies the existence of causal dependencies between two components of a multivariate time series and assesses the strength of their association by defining a meaningful coupling strength. The measure of association is general, causal and lag-specific, reflecting a well interpretable notion of coupling strength and is pratically computable. A comprehensive analysis of the feasibility of this approach is provided via simulated and real data
    Keywords: Systemic risk, causal dependencies, financial institutions, linkages, Sovereign debt
    JEL: C40 C32 C51 G12 G29
    Date: 2014–10
  10. By: Kishore Meghani, Kishore Meghani; Hari Krishna Karri, Hari Krishna Karri; Bharti Meghani Mishra, Bharti Meghani Mishra
    Abstract: Banking sector is one of the fastest growing sectors in India. Today’s banking sector becoming more complex. The objective of this study is to analyze the Financial Position and Performance of the Bank of Baroda and Punjab National Bank in India based on their financial characteristics. This study attempts to measure the relative performance of Indian banks. For this study, we have used public sector banks. We know that in the service sector, it is difficult to quantify the output because it is intangible. We have chosen the CAMEL model and t-test which measures the performance of bank from each of the important parameter like capital adequacy, asset quality, management efficiency, earning quality, liquidity and Sensitivity.
    Keywords: CAMELS Model, Bank of Baroda, Punjab National Bank, Financial performance
    JEL: G0 G2 G21 M1 M2
    Date: 2015–03–05
  11. By: Pierre L. Siklos, Brady Lavender (Wilfrid Laurier University)
    Abstract: Recent events highlight the importance of understanding the relationship between credit availability and real economic activity. This paper estimates macroeconomic models for Canada to investigate the relationship between changes in non-price lending standards, business loans and output. We ask whether macroeconomic and financial market conditions in the U.S. affect Canadian macroeconomic and financial conditions. The answer seems to be less so than previous evidence suggests. Real time data are also found to have a significant impact on the results. The U.S. and Canada may indeed be likened to ‘two solitudes’ insofar as the impact of credit conditions is concerned. Differences in the quality of banking standards and supervision of financial institutions, as well differences in the effectiveness of monetary policies in the two countries may partially explain the results.
    Keywords: macro-financial linkages, credit standards, Loan Officer Survey
    JEL: E32 E5 G21
    Date: 2015–02–01
  12. By: Tatsuro Senga (The Ohio State University); Julia Thomas (The Ohio State University); Aubhik Khan (Ohio State University)
    Abstract: We consider business cycles driven by exogenous changes in total factor productivity and by credit shocks. The latter are financial shocks that worsen borrowers cash on hand and reduce the fraction of collateral lenders can seize in the event of default. Our nonlinear loan rate schedules drive countercyclical default risk and exit. Because a negative productivity shock raises default probabilities, it leads to a modest reduction in the number of firms and a deterioration in the allocation of capital that amplifies the effect of the shock. The recession following a negative credit shock is qualitatively different from that following a productivity shock. A rise in default alongside a substantial fall in entry causes a large decline in the number of firms. Measured TFP falls for several periods, as does employment, investment and GDP. The recovery following a credit shock is gradual given slow recoveries in TFP, aggregate capital, and the measure of firms.
    Date: 2014
  13. By: Christina D. Romer; David H. Romer
    Abstract: This paper examines the aftermath of financial crises in advanced countries in the four decades before the Great Recession. We construct a new series on financial distress in 24 OECD countries for the period 1967–2007. The series is based on assessments of the health of countries’ financial systems from a consistent, real-time narrative source; and it classifies financial distress on a relatively fine scale, rather than treating it as a 0-1 variable. We find that output declines following financial crises in modern advanced countries are highly variable, on average only moderate, and often temporary. One important driver of the variation in outcomes across crises appears to be the severity and persistence of the financial distress itself.
    JEL: E32 E44 G01 N10 N20
    Date: 2015–03
  14. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: Financial innovations that change how promises are collateralized can affect investment, even in the absence of any change in fundamentals. In C-models, the ability to leverage an asset always generates over-investment compared to Arrow Debreu. The introduction of CDS always leads to under-investment with respect to Arrow Debreu, and in some cases even robustly destroys competitive equilibrium. The need for collateral would seem to cause under-investment. Our analysis illustrates a countervailing force: goods that serve as collateral yield additional services and are therefore over-valued and over-produced. In models without cash flow problems there is never marginal under-investment on collateral.
    Keywords: Financial innovation, Collateral, Investment, Repayment enforceability problems, Cash flow problems, Leverage, CDS, Non-existence, Marginal efficiency
    JEL: D52 D53 E44 G01 G11 G12
    Date: 2013–07
  15. By: Genest, Benoit; Cao, Zhili
    Abstract: Value-at-Risk (VaR) has been adopted as the cornerstone and common language of risk management by virtually all major financial institutions and regulators. However, this risk measure has failed to warn the market participants during the financial crisis. In this paper, we show this failure may come from the methodology that we use to calculate VaR and not necessarily for VaR measure itself. we compare two different methods for VaR calculation, 1. by assuming the normal distribution of portfolio return, 2. by using a bootstrap method in a nonparametric framework. The Empirical exercise is implemented on CAC40 index, and the results show us that the first method will underestimate the market risk - the failure of VaR measure occurs. Yet, the second method overcomes the shortcomings of the first method and provides results that pass the tests of VaR evaluation.
    Keywords: Value-at-risk, GARCH model, Bootstrap, hit function, VaR evaluation.
    JEL: C0 C1 C5 G1
    Date: 2014–01–27

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