nep-ban New Economics Papers
on Banking
Issue of 2015‒04‒25
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banking Unions: Distorted Incentives and Efficient Bank Resolution By Marius A. Zoican; Lucyna A. Górnicka
  2. Collateral and Local Lending: Testing the Lender-Based Theory By Andrea Bellucci; Alexander Borisov; Germana Giombini; Alberto Zazzaro
  3. Shadow Banking and Traditional Bank Lending: The Role of Implicit Guarantees By Lucyna Gornicka
  4. Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks By William R. Cline
  5. Does Competition make Banks more Risk-seeking? By Stefan Arping
  6. The Geographical Network of Bank Organizations: Issues and Evidence for Italy By Luca Papi; Emma Sarno; Alberto Zazzaro
  7. Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience By Philipp Ager; Fabrizio Spargoli
  8. The Effects of Liquidity Regulation on Bank Assets and Liabilities By Patty Duijm; Peter Wierts
  9. Shocks to Bank Lending, Risk-Taking, Securitization, and their Role for U.S. Business Cycle Fluctuations By Peersman, Gert; Wagner, Wolf
  10. Insecure Debt By Enrico Perotti; Rafael Matta
  11. How the credit cycle affects growth: the role of bank balance sheets By Bezemer, Dirk; Zhang, L
  12. The optimal supply of liquidity and the regulations of money substitutes: a Baumol-Tobin approach By Benjamin Eden
  13. From boom to bust in the credit cycle: the role of mortgage credit By Bezemer, Dirk; Zhang, L
  14. A Capital Adequacy Buffer Model By David Allen; Michael McAleer
  15. Measuring Credit Risk in a Large Banking System: Econometric Modeling and Empirics By Andre Lucas; Bernd Schwaab; Xin Zhang
  16. Capital Flows and Financial Intermediation: is EMU different? By Samarina, Anna; Bezemer, Dirk
  17. Predicting Covariance Matrices with Financial Conditions Indexes By Anne Opschoor; Dick van Dijk; Michel van der Wel
  18. Short-Selling, Leverage and Systemic Risk By Amelia Pais; Philip A. Stork
  19. Banks and Market Liquidity By Stefan Arping
  20. GFC-Robust Risk Management under the Basel Accord using Extreme Value Methodologies By Juan-Angel Jimenez-Martin; Michael McAleer; Teodosio Perez Amaral; Paulo Araujo Santos
  21. Agent-based mapping of credit risk for sustainable microfinance By Joung-Hun Lee; Marko Jusup; Boris Podobnik; Yoh Iwasa

  1. By: Marius A. Zoican (VU University Amsterdam); Lucyna A. Górnicka (University of Amsterdam)
    Abstract: A banking union limits international bank default contagion, eliminating inefficient liquidations. For particularly low short term returns, it also stimulates interbank flows. Both effects improve welfare. An undesirable effect arises for moderate moral hazard, as the banking union encourages risk taking by systemic institutions. If banks hold opaque assets, the net welfare effect of a banking union can be negative. Restricting the banking union mandate restores incentives, improving welfare. The optimal mandate depends on moral hazard intensity and expected returns. Net creditor countries should contribute most to the joint resolution fund, less so if a banking union distorts incentives.
    Keywords: banking, financial intermediation, risk shifting, banking union
    JEL: G15 G18 G21 G33
    Date: 2013–11–12
  2. By: Andrea Bellucci (Institute for Applied Economic Research (IAW) at the University of Tubingen); Alexander Borisov (University of Cincinnati); Germana Giombini (University of Urbino, Italy, and MoFiR, Ancona); Alberto Zazzaro (Polytechnic University of Marche, MoFiR and CSEF)
    Abstract: In this paper we empirically test the recent lender-based theory for the use of collateral in bank lending. Based on a proprietary dataset of loan contracts written by a local bank in competitive credit markets, we use the physical proximity between borrowers and the lending branch of the bank to capture its information advantage and the magnitude of collateral-related transaction costs. Overall, our results seem more consistent with several classic borrower-based explanations rather than with the lender-based view. We show that, conditional on obtaining credit from the local bank, more distant borrowers experience higher collateral requirements and lower interest rates. Moreover, competitive pressure from transaction lenders does not magnify the importance of lender-to-borrower distance. Our findings are also obtained with estimation techniques that allow for endogenous loan contract terms and joint determination of collateral and interest rates. JEL Classification: G21, G32, L11
    Keywords: Distance, Collateral, Interest Rate, Bank lending.
    Date: 2015–04–18
  3. By: Lucyna Gornicka (University of Amsterdam)
    Abstract: Bank holding companies (BHCs) invest in risky projects through bank entities or sell projects for a fee, thus engaging in shadow banking. BHCs can increase their fee income by guaranteeing sold projects with a recourse to the bank's balance sheet. When the expected guarantee repayments depend on total bank proceeds (high capital requirements), BHCs have incentives to increase their bank investments to raise the demand for offbalance projects. The amount of credit in the economy increases, bank defaults are more frequent, and the costs of deposit insurance increase. BHCs with large banks offer higher guarantees than BHCs with small banks, and they dominate the shadow banking sector.
    Keywords: shadow banking, implicit recourse, special purpose vehicles
    JEL: G21 G23 G28
    Date: 2014–03–12
  4. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Some advocates of far higher capital requirements for banks invoke the Modigliani-Miller theorem as grounds for judging that associated costs would be minimal. The M&M theorem holds that the average cost of capital to the firm is independent of capital structure, because any reduction in capital cost from switching to higher leverage using lower-cost debt is exactly offset by an induced increase in the unit cost of higher-cost equity capital as a consequence of the associated rise in risk. Statistical tests for large US banks in 2002–13 find that less than half of this M&M offset attains in practice. Higher capital requirements would thus impose increases in lending costs, with associated output costs from lower capital formation. These costs to the economy would need to be compared with benefits from lower risk of banking crises to arrive at optimal levels of capital requirements.
    Keywords: Financial Regulation, Bank Capital Requirements, Capital Structure
    JEL: E44 G21 G28 G32
    Date: 2015–04
  5. By: Stefan Arping (University of Amsterdam)
    Abstract: This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet, at the same time, banks become riskier. This is because the direct, destabilizing effect of lower margins outweighs the disciplining effect of competition; moreover, a substantial rise in competition reduces banks’ incentive to build precautionary capital buffers. A key implication is that the effects of competition on risk-taking and on failure risk can move in opposite directions.
    Keywords: Charter Value Hypothesis, Bank Franchise Value, Bank Competition, Financial Stability, Capital Requirements
    JEL: G2 G3
    Date: 2014–05–12
  6. By: Luca Papi (Università Politecnica delle Marche and Money and Finance Research Group (MoFiR)); Emma Sarno (Università di Napoli “L’Orientale”); Alberto Zazzaro (Università Politecnica delle Marche, MoFiR and CSEF)
    Abstract: The evolution of the banking industry has always been affected by recurrent waves of technological, regulatory and organizational changes. All such changes have significant effects on the spatial organization of banks, the interconnectedness of geographical credit markets and the core-periphery structure of banking industry. In this chapter, we review the literature on the effects of geographical distances between the key actors of the credit market (the borrowing firm, the lending branch, the lending bank, and rival banks) on lending relationships and interbank competition. Using the metrics and graph techniques for network analysis we then provide evidence concerning the evolving geographical network of bank organizations in Italy. JEL Classification: G2
    Keywords: Distances in credit markets; spatial organization of banks; network analysis.
    Date: 2015–04–20
  7. By: Philipp Ager (University of Southern Denmark, Odense); Fabrizio Spargoli (Rotterdam School of Management, Erasmus University Rotterdam, Rotterdam, The Netherlands)
    Abstract: We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic growth. As governments were not concerned about systemic stability in this period, we are able to isolate the effects of bank competition from those of state implicit guarantees. We find that the introduction of free banking laws stimulated the creation of new banks and led to more bank failures. Our empirical evidence indicates that states adopting free banking laws experienced an increase in output per capita compared to the states that retained state bank chartering policies. We argue that the fiercer bank competition following the introduction of free banking laws might have spurred economic growth by (1) increasing the money stock and the availability of credit; (2) leading to efficiency gains in the banking market. Our findings suggest that the more frequent bank failures occurring in a competitive banking market do not harm long-run economic growth in a system without public safety nets.
    Keywords: Bank Deregulation, Bank Competition, Economic Growth, Financial Development, Dynamic Efficiency, Free Banking
    JEL: G18 G21 G28 N21
    Date: 2013–12–20
  8. By: Patty Duijm (Duisenberg School of Finance, De Nederlandsche Bank, Amsterdam, the Netherlands); Peter Wierts (De Nederlandsche Bank, Amsterdam, the Netherlands)
    Abstract: Under Basel III rules, banks become subject to a liquidity coverage ratio (LCR) from 2015 onwards, to promote short-term resilience. We investigate the effects of such liquidity regulation on bank liquid assets and liabilities. Results indicate co-integration of liquid assets and liabilities, to maintain a minimum short-term liquidity buffer. Still, microprudential regulation has not prevented an aggregate liquidity cycle characterised by a pro-cyclical pattern in the size of balance sheets and risk taking. Our error correction regressions indicate that adjustment in the liquidity ratio is balanced towards the liability side, especially when the liquidity ratio is below its long-term equilibrium. This finding contrasts established wisdom that the LCR is mainly driven by changes in liquid assets. Policy implications focus on the need to complement microprudential regulation with a macroprudential approach. This involves monitoring of aggregate liquid assets and liabilities and addressing pro-cyclical behaviour by restricting leverage.
    Keywords: market liquidity, funding liquidity, liquidity regulation, liquidity coverage ratio, Basel III, banks, microprudential, macroprudential, co-integration, error correction models
    JEL: E44 G21 G28
    Date: 2014–02–06
  9. By: Peersman, Gert; Wagner, Wolf
    Abstract: Shocks to bank lending, risk-taking and securitization activities that are orthogonal to real economy and monetary policy innovations account for more than 30 percent of U.S. output variation. The dynamic effects, however, depend on the type of shock. Expansionary securitization shocks lead to a permanent rise in real GDP and a fall in inflation. Bank lending and risk-taking shocks, in contrast, have only a temporary effect on real GDP and tend to lead to a (moderate) rise in the price level. Furthermore, there is evidence for a strong search-for-yield effect on the side of investors in the transmission mechanism of monetary policy. These effects are estimated with a structural VAR model, where the shocks are identified using a model of bank risk-taking and securitization.
    Keywords: bank lending; risk taking; securitization; SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2015–04
  10. By: Enrico Perotti (University of Amsterdam, the Netherlands); Rafael Matta (University of Amsterdam, the Netherlands)
    Abstract: Does demand for safety create instability ? Secured (repo) funding can be made so safe that it never runs, but shifts risk to unsecured creditors. We show that this triggers more frequent runs by unsecured creditors, even in the absence of fundamental risk. This effect is separate from the liquidation externality caused by fire sales of seized collateral upon default. As more secured debt causes larger fire sales, it leads to higher haircuts which further increase the frequency of runs. While secured funding combined with high yield unsecured debt may reduce instability, the private choice of repo funding always increases it. Regulators need to contain its reinforcing effect on liquidity risk, trading off its role in expanding funding by creating a safe asset.
    Keywords: Secured credit, repo, bank runs, haircuts
    JEL: G21 G28
    Date: 2015–03–16
  11. By: Bezemer, Dirk; Zhang, L (Groningen University)
    Date: 2014
  12. By: Benjamin Eden (Vanderbilt University)
    Abstract: I use the Baumol-Tobin approach to examine the following propositions: (a) The optimal supply of liquidity requires a government loan program in addition to paying interest on reserves held by banks, (b) The adoption of the optimal policy will crowd out private credit arrangement and will thus shrink the financial sector and (c) regulations aimed at eliminating money substitutes may be redundant if the optimal policy is adopted but otherwise may improve welfare.
    JEL: E0 E5
    Date: 2014–01–10
  13. By: Bezemer, Dirk; Zhang, L (Groningen University)
    Date: 2014
  14. By: David Allen (University of South Australia, and University of Sydney, Australia); Michael McAleer (National Tsing Hua University Taiwan,)
    Abstract: In this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model which measures distance to default and the timeless capital asset pricing model (CAPM) which measures additional returns to compensate for additional share price risk.
    Keywords: Credit risk, Capital buffer, Distance to default, Conditional value at risk, Capital adequacy buffer model
    JEL: G01 G21 G28
    Date: 2013–10–15
  15. By: Andre Lucas (VU University Amsterdam); Bernd Schwaab (European Central Bank, Financial Markets Research); Xin Zhang (VU University Amsterdam, and Sveriges Riksbank, Research Division)
    Abstract: We develop a novel high-dimensional non-Gaussian modeling framework to infer conditional and joint risk measures for many financial sector firms. The model is based on a dynamic Generalized Hyperbolic Skewed-t block-equicorrelation copula with time-varying volatility and dependence parameters that naturally accommodates asymmetries, heavy tails, as well as non-linear and time-varying default dependence. We demonstrate how to apply a conditional law of large numbers in this setting to define risk measures that can be evaluated quickly and reliably. We apply the modeling framework to assess the joint risk from multiple financial firm defaults in the euro area during the 2008-2012 financial and sovereign debt crisis. We document unprecedented tail risks during 2011-12, as well as their steep decline after subsequent policy actions.
    Keywords: systemic risk; dynamic equicorrelation model; generalized hyperbolic distribution; Law of Large Numbers
    JEL: G21 C32
    Date: 2013–05–13
  16. By: Samarina, Anna; Bezemer, Dirk (Groningen University)
    Abstract: The share of domestic bank credit allocated to non-financial business declined significantly in EMU economies since 1990. This paper examines the impact of capital inflows on domestic credit allocation, taking account of (future) EMU membership. The study utilizes a novel data set on domestic credit allocation for 38 countriesover 1990?2011 and data on capital inflows into the bank and non-bank sectors. We estimate panel models controlling for initial financial development, income level, inflation, interest rate, credit market deregulation and current account positions. The results suggest that the decline in the share of credit to non-financial business was significantly larger in (future) EMU economies which experienced more capital inflows into their non-bank sectors. We discuss implications.
    Date: 2014
  17. By: Anne Opschoor (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam); Michel van der Wel (Erasmus University Rotterdam)
    Abstract: This discussion paper resulted in a publication in the <A HREF="">'Journal of Empirical Finance'</A> (2014). Volume 29, pages 435-447. <P> We model the impact of financial conditions on asset market volatility and correlation. We propose extensions of (factor-)GARCH models for volatility and DCC models for correlation that allow for including indexes that measure financial conditions. In our empirical application we consider daily stock returns of US deposit banks during the period 1994-2011, and proxy financial conditions by the Bloomberg Financial Conditions Index (FCI) which comprises the money, bond, and equity markets. We find that worse financial conditions are associated with both higher volatility and higher average correlations between stock returns. Especially during crises the additional impact of the FCI indicator is considerable, with an increase in correlations by 0.15. Moreover, including the FCI in volatility and correlation modeling improves Value-at-Risk forecasts, particularly at short horizons.
    Keywords: Dynamic correlations, Volatility modeling, Financial Conditions Indexes, Bank holding companies
    JEL: G17 G23 E44
    Date: 2013–08–09
  18. By: Amelia Pais (Massey University, College of Business, School of Economics and Finance, Auckland, New Zealand); Philip A. Stork (VU University Amsterdam, and Duisenberg School of Finance)
    Abstract: During the Global Financial Crisis, regulators imposed short-selling bans to protect financial institutions. The rationale behind the bans was that “bear raids”, driven by short-sellers, would increase the individual and systemic risk of financial institutions, especially for institutions with high leverage. This study uses Extreme Value Theory to estimate the effect of short-selling on financial institutions’ individual and systemic risks in France, Italy and Spain; it also analyses the relationship between financial institutions’ leverage and short-selling. The results show that short-sellers appear to specifically target institutions with lower capital levels. Furthermore, institutions’ risk-levels and changes in short-selling positions tend to move in tandem.
    Keywords: bear raids, short-selling bans, financial institutions’ risk, systemic risk, leverage capital requirements, Extreme Value Theory
    JEL: C14 G01 G15 G21
    Date: 2013–11–15
  19. By: Stefan Arping (University of Amsterdam)
    Abstract: I study a model of market-liquidity provision by levered intermediaries that, besides operating trading desks, run deposit-taking franchises. Levered intermediaries’ heightened incentive to absorb risk helps to counteract liquidity-provision frictions that, in an unlevered economy, would lead to price distortions and suppressed levels of asset origination ex ante. However, liquidity provision may also overshoot, leading to unhealthy price bubbles and causing asset origination to become excessive. Capital requirements are no panacea: They can spur risk taking and make bubbles bubblier. Ring fencing of trading activities can be, but is not necessarily, undesirable.
    Keywords: Market Liquidity, Capital Requirements, Volcker Rule, Ring Fencing
    JEL: G12 G14 G21 G24
    Date: 2015–02–10
  20. By: Juan-Angel Jimenez-Martin (Complutense University of Madrid, Spain); Michael McAleer (Complutense University of Madrid, Spain, Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands, and Kyoto University, Japan); Teodosio Perez Amaral (Complutense University of Madrid, Spain); Paulo Araujo Santos (University of Lisbon, Portugal)
    Abstract: See the publication in <I>Mathematics and Computers in Simulation (MATCOM)</I> (2013). Volume 94(C), pages 223-237.<P> In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.
    Keywords: Value-at-Risk (VaR), DPOT, daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel, global financial crisis
    JEL: G32 G11 G17 C53 C22
    Date: 2013–05–21
  21. By: Joung-Hun Lee; Marko Jusup; Boris Podobnik; Yoh Iwasa
    Abstract: Inspired by recent ideas on how the analysis of complex financial risks can benefit from analogies with independent research areas, we propose an unorthodox framework for mapping microfinance credit risk---a major obstacle to the sustainability of lenders outreaching to the poor. Specifically, using the elements of network theory, we constructed an agent-based model that obeys the stylised rules of microfinance industry. We found that in a deteriorating economic environment confounded with adverse selection, a form of latent moral hazard may cause a regime shift from a high to a low loan repayment probability. An after-the-fact recovery, when possible, required the economic environment to improve beyond that which led to the shift in the first place. These findings suggest a small set of measurable quantities for mapping microfinance credit risk and, consequently, for balancing the requirements to reasonably price loans and to operate on a fully self-financed basis. We illustrate how the proposed mapping works using a 10-year monthly data set from one of the best-known microfinance representatives, Grameen Bank in Bangladesh. Finally, we discuss an entirely new perspective for managing microfinance credit risk based on enticing spontaneous cooperation by building social capital.
    Date: 2015–04

This nep-ban issue is ©2015 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.