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on Banking |
| By: | PIERRET, Diane (Université catholique de Louvain, CORE& ISBA, Belgium; NYU Stern School of Business) |
| Abstract: | This paper highlights the empirical interaction between solvency and liquidity risks of banks that make them particularly vulnerable to an aggregate crisis. I find that banks lose their access to short-term funding when markets expect they will be insolvent in a crisis. Conversely, the expected amount of capital a bank should raise to remain solvent in a crisis (its capital shortfall) increases when the bank holds more short-term debt (has a larger exposure to funding liquidity risk). This solvency-liquidity nexus is found to be strong under many robustness checks and to contain useful information for forecasting the short-term balance sheet of banks. The results suggest that the solvency-liquidity interaction should be accounted for when designing liquidity and capital requirements, in contrast to Basel III regulation where solvency and liquidity risks are treated separately. |
| Keywords: | capital shortfall, funding liquidity risk, short-term funding |
| JEL: | G01 G21 G28 |
| Date: | 2014–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2014038&r=ban |
| By: | Behn, Markus; Haselmann, Rainer; Kick, Thomas; Vig, Vikrant |
| Abstract: | In this paper, we examine how the institutional design affects the outcome of bank bailout decisions. In the German savings bank sector, distress events can be resolved by local politicians or a state-level association. We show that decisions by local politicians with close links to the bank are distorted by personal considerations: While distress events per se are not related to the electoral cycle, the probability of local politicians injecting taxpayers' money into a bank in distress is 30 percent lower in the year directly preceding an election. Using the electoral cycle as an instrument, we show that banks that are bailed out by local politicians experience less restructuring and perform considerably worse than banks that are supported by the savings bank association. Our findings illustrate that larger distance between banks and decision makers reduces distortions in the decision making process, which has implications for the design of bank regulation and supervision. |
| Keywords: | political economy,bailouts,state-owned enterprises,elections |
| JEL: | G21 G28 D72 D73 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:86&r=ban |
| By: | Kenjiro Hori (Department of Economics, Mathematics & Statistics, Birkbeck); Jorge Martin Ceron (Department of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | This paper investigates three consequences of the new financial regulation: the agency costs, the monitoring costs and the effect on banks’ cost of capital. For the first, the shareholders’ behaviour is analysed as a trade-off between the value of the bank and its volatility by using an indifference curve model of the bank’s choice of optimal risk. While the first-best optimal risk maximises the value of the bank, the shareholders select suboptimally high risks under bail-in structures. This leads to both the wealth transfer and the value destruction agency costs. For the second, as a result of these consequences of the DAPR (Deviation from the Absolute Priority Rule) the bondholders are forced to closely monitor the bank behaviour. Requiring higher rate of return for higher risk, reflecting the costs of monitoring, is shown to alleviate the agency problems. Different types of covenants are proposed as an efficient way of implementing this solution. For the third, the impact of the new bail-in structure and the monitoring costs on the WACC of 16 largest European banks is estimated, and is shown to increase the cost of capital by between 75% and 110%. |
| Keywords: | Indifference curves, CoCo, Bail-in, Covenants, WACC. |
| JEL: | D82 G21 G28 G32 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1502&r=ban |
| By: | Mattana, Elena (Université catholique de Louvain, CORE, Belgium); Panetti, Ettore (Banco de Portugal, Economics and Research Department) |
| Abstract: | We study the macroeconomic effects of systemic bank runs in a neoclassical model with a microfounded banking system. In every period, the banks provide insurance against some idiosyncratic liquidity shocks, but the possibility of sunspot-driven bank runs distorts the equilibrium allocation. In a quantitative exercise, we find that the banks, when the probability of a run is sufficiently low, choose a contract that is not run-proof, and satisfy an equal service constraint. In equilibrium, a shock to the probability of a run leads to a maximum drop in GDP of 5.6 percent, and a maximum welfare loss of 0.17 percent.To what extent do income taxation systems decrease poverty? We raise this question under the assumption that well beings is defined in line with the ethics of responsibility. It requires considering that not all inequalities are unjust. Here, we do consider that inequalities stemming from labor time differences are not unjust. To compare households of different sizes, we introduce a labor time equivalence scale. We apply the resulting method to the Belgian tax system |
| Keywords: | financial intermediation, bank runs, welfare costs, calibration |
| JEL: | E21 E44 G01 G20 |
| Date: | 2014–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2014068&r=ban |
| By: | Nicholas Borst (Federal Reserve Bank of San Francisco); Nicholas Lardy (Peterson Institute for International Economics) |
| Abstract: | The banking system of the People's Republic of China (PRC) is now the largest in the world, and its capital markets are rapidly approaching the size of those in the advanced economies. This paper traces the evolution of the PRC's financial system away from a traditional bank-dominated and state-directed financial system toward a more complex, market-based system and analyzes the optimal sequence of financial reforms needed to manage the new risks accompanying this evolution. |
| Keywords: | financial development, government policy and regulation |
| JEL: | G18 G21 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp15-4&r=ban |
| By: | Sebastián Becerra; Gregory Claeys; Juan Francisco Martínez |
| Abstract: | The objective of this work is to construct an appropriate measure of liquidity risk for Chilean banks. There are already several measures of liquidity risk in the literature. Most of these metrics are based on specific assumptions and expert opinion. In order to overcome the potential problems associated with discretionary assumptions, and to exploit the information available, similar to the work of Drehman and Nikolaou (2012), we propose a metric based on the behavior of banks in the procurement operations Chilean open market (OMO). Due to the particularities of the implementation of monetary policy of the Chilean economy, we introduce an adaptation of the original metric. We calculate the liquidity indicator at an aggregate level and for a sample of groups of banks in a period that includes the recent crisis in the sub-prime. After that, we compare this indicator with a variety of standard metrics proposed in the literature. We find that our metric reasonably captures episodes of liquidity crises and therefore can be used as a complementary tool in the assessment of systemic risks. |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:746&r=ban |
| By: | Braione, Manuela (Université catholique de Louvain, CORE, Belgium); Scholtes, Nicolas K. (Université catholique de Louvain, CORE, Belgium) |
| Abstract: | Financial asset returns are known to be conditionally heteroskedastic and generally non-normally distributed, fat-tailed and often skewed. In order to account for both the skewness and the excess kurtosis in returns, we combine the BEKK model from the multivariate GARCH literature with different multivariate densities for the returns. The set of distributions we consider comprises the normal, Student, Multivariate Exponential Power and their skewed counterparts. Applying this framework to a sample of ten assets from the Dow Jones Industrial Average Index, we compare the performance of equally- weighted portfolios derived from the symmetric and skewed distributions in forecasting out-of-sample Value-at-Risk. The accuracy of the VaR forecasts is assessed by implementing standard statistical backtesting procedures. The results unanimously show that the inclusion of fat-tailed densities into the model specification yields more accurate VaR forecasts, while the further addition of skewness does not lead to significant improvements. |
| Keywords: | Dow Jones industrial average, BEKK model, maximum likelihood, value-at-risk |
| JEL: | C01 C22 C52 C58 |
| Date: | 2014–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2014059&r=ban |