nep-ban New Economics Papers
on Banking
Issue of 2015‒05‒02
38 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Estimating the effects of a credit supply restriction: is there a bias in the Bank Lending Survey? By Andrea Nobili; Andrea Orame
  2. Dynamic Interaction Between Asset Prices and Bank Behavior: A Systemic Risk Perspective By Aki-Hiro Sato; Paolo Tasca
  3. The bank lending channel of unconventional monetary policy: the impact of the VLTROs on credit supply in Spain By Miguel García-Posada; Marcos Marchetti
  4. Government Guarantees and Financial Stability By Allen, Franklin; Carletti, Elena; Goldstein, Itay; Leonello, Agnese
  5. On the welfare properties of fractional reserve banking By Sanches, Daniel R.
  6. The effects of contingent convertible (CoCo) bonds on insurers' capital requirements under Solvency II By Niedrig, Tobias; Gründl, Helmut
  7. The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises. By S. Avouyi-Dovi; G. Horny; P. Sevestre
  8. No Lending Relationships and Liquidity Management of Small Businesses during a Financial Shock By TSURUTA Daisuke
  9. Extending access to the formal financial system: the banking correspondent business model By Noelia Camara; David Tuesta; Pablo Urbiola Ortun
  10. How Does Foreign Bank Entry Affect Financial Inclusion in Emerging and Developing Economies? By Sasidaran Gopalan; Ramikishen S. Rajan
  11. Optimal asset allocation for interconnected life insurers in the low interest rate environment under solvency regulation By Niedrig, Tobias
  12. Banking Union and the governance of credit institutions: A legal perspective By Binder, Jens-Hinrich
  13. Social capital and the cost of credit: evidence from a crisis By Paolo Emilio Mistrulli; Valerio Vacca
  14. A theory of the boundaries of banks with implications for financial integration and regulation By Fecht, Falko; Inderst, Roman; Pfeil, Sebastian
  15. Modelling bank asset quality and profitability: An empirical assessment By Swamy, Vighneswara
  16. Funding Liquidity Risk From a Regulatory Perspective By Gouriéroux, Christian; Héam, Jean-Cyprien
  17. Is Rationing in the Microfinance Sector Determined by the Microfinance Type? Evidence from Ghana By Diaz-Serrano, Luis; Sackey, Frank Gyimah
  18. Banking Innovations and New Income Streams: Impact on Banks’ Performance By Roy Trivedi, Smita
  19. Identifying Interbank Loans, Rates, and Claims Networks from Transactional Data By Carlos León; Jorge Cely; Carlos Cadena
  20. Does Foreign Bank Entry Affect Monetary Policy Effectiveness?: Exploring the Interest Rate Pass-Through Channel By Sasidaran Gopalan; Ramikishen S. Rajan
  21. Identifying Interbank Loans, Rates, and Claims Networks from Transactional Data By Carlos León; Jorge Cely; Carlos Cadena
  22. A Varying-Coefficient Panel Data Model with Fixed Effects: Theory and an Application to U.S. Commercial Banks By Guohua Feng; Jiti Gao; Bin Peng; Xiaohui Zhang
  23. Banking concentration and financial stability: Evidence from developed and developing countries By Ben Ali, Mohamed Sami; Intissar, Timoumi; Zeitun, Rami
  24. Information Acquisition and Excessive Risk: Impact of Policy Rate and Market Volatility By Volha Audzei
  25. Does Foreign Bank Entry Contribute to Financial Depth?: Examining The Role of Income Thresholds By Sasidaran Gopalan
  26. Financial Intermediation and Deposit Contracts: A Strategic View By Vittorio Larocca
  27. Operational risk modeled analytically II: the consequences of classification invariance By Vivien Brunel
  28. An holistic approach to ECB asset purchases, the Investment Plan and CMU By Natacha Valla; Jesper Berg; Laurent Clerc; Olivier Garnier; Erik Nielsen
  29. Does a public campaign influence debit card usage? Evidence from the Netherlands By Nicole Jonker; Mirjam Plooij; Johan Verburg
  30. Countercyclical Capital Buffers: bayesian estimates and alternatives focusing on credit growth By Rodrigo Barbone Gonzalez; Joaquim Lima; Leonardo Marinho
  31. Intermediaries as information aggregators: an application to U.S. treasury auctions By Boyarchenko, Nina; Lucca, David O.; Veldkamp, Laura
  32. Bankruptcy Law and Bank Financing By Giacomo Rodano; Nicolas Serrano-Velarde; Emanuele Tarantino
  33. Business and Financial Cycles: an estimation of cycles’ length focusing on Macroprudential Policy By Rodrigo Barbone Gonzalez; Joaquim Lima; Leonardo Marinho
  34. Efficiency vs. Stability in a Mixed Network Formation Model By Olaizola Ortega, María Norma; Valenciano Llovera, Federico
  35. Structural and cyclical determinants of bank interest rate pass-through in Eurozone By Aurélien Leroy; Yannick Lucotte
  36. An Assignment Model of Monitored Finance By Arturo Antón-Sarabia; Kaniska Dam
  37. Network Structure and Counterparty Credit Risk By Alexander von Felbert
  38. Insolvency After the 2005 Bankruptcy Reform By Albanesi, Stefania; Nosal, Jaromir

  1. By: Andrea Nobili (Bank of Italy); Andrea Orame (Bank of Italy)
    Abstract: In this paper we test for the potential bias in the estimated contribution of a supply restriction on lending to enterprises, as captured by the assessment of credit standards provided by the banks participating in the Eurosystem Bank Lending Survey (BLS banks). For Italy, we combine the information provided by the relatively small panel of large banking groups participating in the Eurosystem survey with the replies obtained from the non-overlapping and wider group of banks participating in the Regional Bank Lending Survey (non-BLS banks) carried out by the Bank of Italy. We find evidence of a limited upward bias in the estimated contribution of a tightening in credit standards from using the information for the BLS-only banks. This outcome mainly reflects a lower estimated sensitivity of lending growth to the considered indicators of a supply restriction for the non-BLS banks. The Eurosystem Bank Lending Survey, therefore, continues to be a timely and important source of information over the credit cycle for policymakers.
    Keywords: supply of credit, banks, Eurosystem BLS, Regional Bank Lending Survey
    JEL: G21 E51 E58
    Date: 2015–04
  2. By: Aki-Hiro Sato; Paolo Tasca
    Abstract: Systemic risk in banking systems is a crucial issue that remains to be completely addressed. In our toy model, banks are exposed to two sources of risks, namely, market risk from their investments in assets external to the system and credit risk from their lending in the interbank market. By and large, both risks increase during severe financial turmoil. Under this scenario, the paper shows how both the individual and the systemic default tend to coincide.
    Date: 2015–04
  3. By: Miguel García-Posada (Banco de España); Marcos Marchetti (Banco de España)
    Abstract: We assess the impact on the credit supply to non-financial corporations of the two verylong-term refinancing operations (VLTROs) conducted by the Eurosystem in December 2011 and February 2012 for the case of Spain. To do so we use bank-firm level information from a sample of more than one million lending relationships over two years. Our methodology tackles the two main identification challenges: (i) how to disentangle credit supply from demand; and (ii) the endogeneity of VLTRO bids, as banks with more deteriorated funding conditions were more likely both to ask for a large amount of funds and to restrict credit supply. First, we exploit the fact that many firms simultaneously borrow from several banks to effectively control for firm-specific credit demand. Second, we exhaustively control for banks’ funding difficulties by constructing several measures of balance-sheet strength and by including bank fixed effects. Our findings suggest that the VLTROs had a positive moderately-sized effect on the supply of bank credit to firms, providing evidence of a bank lending channel in the context of unconventional monetary policy. We also find that the effect was greater for illiquid banks and that it was driven by credit to SMEs, as there was no impact on loans to large firms.
    Keywords: unconventional monetary policy, VLTRO, credit supply, bank lending channel.
    JEL: E52 E58 G21
    Date: 2015–04
  4. By: Allen, Franklin; Carletti, Elena; Goldstein, Itay; Leonello, Agnese
    Abstract: Government guarantees to financial institutions are intended to reduce the likelihood of runs and bank failures, but are also usually associated with distortions in banks’ risk taking decisions. We build a model to analyze these trade-offs based on the global-games literature and its application to bank runs. We derive several results, some of which against common wisdom. First, guarantees reduce the probability of a run, taking as given the amount of bank risk taking, but lead banks to take more risk, which in turn might lead to an increase in the probability of a run. Second, guarantees against fundamental-based failures and panic-based runs may lead to more efficiency than guarantees against panic-based runs alone. Finally, there are cases where following the introduction of guarantees banks take less risk than would be optimal.
    Keywords: bank moral hazard; fundamental runs; government guarantees; panic runs
    JEL: G21 G28
    Date: 2015–04
  5. By: Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: Supersedes Working Paper 13-32/R. Monetary economists have long recognized a tension between the benefits of fractional reserve banking, such as the ability to undertake more profitable (long-term) investment opportunities, and the difficulties associated with it, such as the risk of in-solvency for each bank and the associated losses to bank liability holders. I show that a specific banking arrangement (a joint-liability scheme) provides an effective mechanism for ensuring the ex-post transfer of reserves from liquid banks to illiquid banks, so it is possible to select a socially efficient reserve ratio in the banking system that preserves the safety of bank liabilities as a store of value and maximizes the rate of return paid to bank liability holders.
    Keywords: Fractional reserve banking; Reserve management; Risk sharing
    JEL: E42 G21
    Date: 2015–04–14
  6. By: Niedrig, Tobias; Gründl, Helmut
    Abstract: The Liikanen Group proposes contingent convertible (CoCo) bonds as a potential mechanism to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. We develop a stylized model with a direct financial connection between banking and insurance and study the effects of various types of bonds such as non-convertible bonds, write-down bonds and CoCos on banks' and insurers' risk situations. In addition, we compare insurers' capital requirements under the proposed Solvency II standard model as well as under an internal model that ex-ante anticipates additional risks due to possible conversion of the CoCo bond into bank shares. In order to check the robustness of our findings, we consider different CoCo designs (write-down factor, trigger value, holding time of bank shares) and compare the resulting capital requirements with those for holding nonconvertible bonds. We identify situations in which insurers benefit from buying CoCo bonds due to lower capital requirements and higher coupon rates. Our results highlight how the Solvency II standard model can mislead insurers in their CoCo investment decision due to economically irrational incentives.
    Keywords: Contingent Convertible Capital,CoCo Bond,Basel III,Solvency II,Life Insurance,Interconnectedness
    JEL: G11 G21 G22 G28 G32
    Date: 2015
  7. By: S. Avouyi-Dovi; G. Horny; P. Sevestre
    Abstract: We analyse the dynamics of the pass-through of banks’ marginal cost to bank lending rates over the 2008 crisis and the euro area sovereign debt crisis in France, Germany, Greece, Italy, Portugal and Spain. We measure banks’ marginal cost by their rate on new deposits, contrary to the literature that focuses on money market rates. This allows us to account for banks’ risks. We focus on the interest rate on new short-term loans granted to non-financial corporations in these countries. Our analysis is based on an error-correction approach that we extend to handle the time-varying long-run relationship between banks’ lending rates and banks’ marginal cost, as well as stochastic volatility. Our empirical results are based on a harmonised monthly database from January 2003 to October 2014. We estimate the model within a Bayesian framework, using Markov Chain Monte Carlo methods (MCMC).We reject the view that the transmission mechanism is time invariant. The long-run relationship moved with the sovereign debt crises to a new one, with a slower pass-through and higher bank lending rates. Its developments are heterogeneous from one country to the other. Impediments to the transmission of monetary rates depend on the heterogeneity in banks marginal costs and therefore, its risks. We also find that rates to small firms increase compared to large firms in a few countries. Using a VAR model, we show that overall, the effect of a shock on the rate of new deposits on the unexpected variances of new loans has been less important since 2010. These results confirm the slowdown in the transmission mechanism.
    Keywords: bank interest rates, error-correction model, structural breaks, stochastic volatility, Bayesian econometrics.
    JEL: E43 G21
    Date: 2015
  8. By: TSURUTA Daisuke
    Abstract: We investigate the determinants of the end of lending relationships with banks using small business data. We also investigate how small businesses without lending relationships financed credit demand during the global financial shock. First, we find that firms with high internal cash holdings, lower growth, and low working capital were more likely to end lending relationships with banks. Supply-side effects on the determinants of the end of relationships are insignificant. Second, when firms experienced credit demand during the financial shock, those with lending relationships increased bank borrowings while those without lending relationships reduced internal cash. However, if we examine cash-rich firms, both firms with and without relationships reduced cash holdings to finance working capital during the shock period. Third, firm performance (in terms of profitability) was neither lower nor higher for firms that did not have lending relationships with banks during the shock period.
    Date: 2015–04
  9. By: Noelia Camara; David Tuesta; Pablo Urbiola Ortun
    Abstract: New ways of understanding banking, technological improvements, and regulation yield new means of interaction between customers and banks through outsourcing agreements. This paper provides the first harmonised database with information on the number of banking correspondents by country, which helps in measuring access to the formal financial system.
    JEL: G21 O16 L23
    Date: 2015–04
  10. By: Sasidaran Gopalan (Institute for Emerging Market Studies, Hong Kong University of Science and Technology); Ramikishen S. Rajan (School of Policy, Government and International Affairs (SPGIA), George Mason University)
    Abstract: An important dimension of the effects of foreign bank entry on financial sector development relates to that of financial inclusion. Despite its policy significance, the empirical literature offers little evidence on the impact of bank competition generally or foreign bank entry specifically on financial inclusion. This paper examines the relationship between foreign bank entry and financial inclusion for a panel of 57 emerging and developing economies over the period 2004-2009. The empirical findings suggest that foreign banks have a positive impact in furthering financial inclusion, though the relationship turns negative when foreign bank entry is followed by greater banking concentration.
    Keywords: foreign bank entry, financial liberalization, financial inclusion, financial development, banking concentration
    JEL: F21 G00 G21 O16
    Date: 2015–02
  11. By: Niedrig, Tobias
    Abstract: I assess how Basel III, Solvency II and the low interest rate environment will affect the financial connection between the bank and insurance sector by changing the funding patterns of banks as well as the investment strategies of life insurance companies. Especially for life insurance companies, the current low interest rate environment poses a key risk since declining returns on investments jeopardize the guaranteed return on life insurance contracts, a core component of traditional life insurance contracts in several European countries. I consider a contingent claim framework with a direct financial connection between banks and life insurers via bank bonds. The results indicate that life insurers' demand for bank bonds increases over the mid-term but ultimately declines in the long-run. Since life insurers are the largest purchasers of bank bonds in Europe, banks could lose one of their main funding sources. In addition, I show that shareholder value driven life insurers' appetite for risk increases when the gap between asset return and liability growth diminishes. To check the robustness of the findings, I calibrate a prolonged low interest rate scenario. The results show that the insurer's risk appetite is even higher when interest rates remain persistently low. A sensitivity analysis regarding industry-specific regulatory safety levels reveals that contagion between bank and life insurer is driven by the insurers' demand for bank bonds which itself depends on the regulatory safety level of banks.
    Keywords: Basel III,Solvency II,Life Insurance,Interest Rate Guarantees,Asset Allocation,Contagion,Interconnectedness
    JEL: G11 G18 G22 G28
    Date: 2015
  12. By: Binder, Jens-Hinrich
    Abstract: The creation of the Banking Union is likely to come with substantial implications for the governance of Eurozone banks. The European Central Bank, in its capacity as supervisory authority for systemically important banks, as well as the Single Resolution Board, under the EU Regulations establishing the Single Supervisory Mechanism and the Single Resolution Mechanism, have been provided with a broad mandate and corresponding powers that allow for far-reaching interference with the relevant institutions' organisational and business decisions. Starting with an overview of the relevant powers, the present paper explores how these could - and should - be exercised against the backdrop of the fundamental policy objectives of the Banking Union. The relevant aspects directly relate to a fundamental question associated with the reallocation of the supervisory landscape, namely: Will the centralisation of supervisory powers, over time, also lead to the streamlining of business models, corporate and group structures of banks across the Eurozone?
    Keywords: Banking Union,Single Supervisory Mechanism,Single Resolution Mechanism,Banking Regulation,Bank Corporate Governance
    JEL: G15 G21 G28 K22 K23
    Date: 2015
  13. By: Paolo Emilio Mistrulli (Bank of Italy); Valerio Vacca (Bank of Italy)
    Abstract: Social capital is a key factor affecting the functioning of financial markets (Guiso, Sapienza and Zingales, 2004). However, the estimation of the effect of social capital on credit markets is notoriously difficult. In this paper we exploit the recent Lehman Brothers crisis and a rich dataset to investigate whether social capital shields firms from the tightening of credit conditions. We mainly focus on lending to small Italian firms that rely almost exclusively on banks’ credit and we compare the level of loan interest rates before (June 2008) and after (June 2010) Lehman’s default for a balanced sample of bank-firm relationships. We find that for firms headquartered in provinces where social capital is higher, the rise in the loan spreads following Lehman’s default was milder compared to firms located in low-social capital communities. The benefits were larger for small firms borrowing from more than one bank and for uncollateralised credit but did not extend to larger firms. Moreover, different measures of social capital provide slightly different results, suggesting a more ambiguous role for particularistic networking (e.g. having a wide network of friends) than for altruistic behaviour rooted in universalistic ethics. Finally, the propensity of a community to cooperate in the credit market, a kind of credit-specific measure of networking, did not always have an impact comparable to that for more general measures of social capital.
    Keywords: social capital, trust, SME finance, credit cooperation, financial crises
    JEL: A13 G01 G2
    Date: 2015–04
  14. By: Fecht, Falko; Inderst, Roman; Pfeil, Sebastian
    Abstract: We offer a theory of the "boundary of the firm" that is tailored to banking, as it builds on a single inefficiency arising from risk-shifting and as it takes into account both interbank lending as an alternative to integration and the role of possibly insured deposit funding. Amongst others, it explains both why deeper economic integration should cause also greater financial integration through both bank mergers and interbank lending, albeit this typically remains inefficiently incomplete, and why economic disintegration (or "desychronization"), as currently witnessed in the European Union, should cause less interbank exposure. It also suggests that recent policy measures such as the preferential treatment of retail deposits, the extension of deposit insurance, or penalties on "connectedness" could all lead to substantial welfare losses.
    Date: 2015
  15. By: Swamy, Vighneswara
    Abstract: The determinants of default risk of banks in emerging economies have so far received inadequate attention in the literature. This paper seeks to study the determinants of bank asset quality and profitability using panel data techniques and robust data sets for the period between 1997 and 2009. The study findings reveal some interesting results that run contrary to established perceptions. Priority sector credit has been found to be not significant in affecting NPAs; this is contrary to the general perception. Similarly, with regard to rural bank branches, the results reveal that aversion to rural credit is a falsely founded perception. Bad debts are dependent more on the performance of industry than on other sectors of the economy. Public sector banks have shown significant performance in containing bad debts. Private banks have continued to be stable in containing bad debts, as they have better risk management procedures and technology, which definitely allows them to finish with lower levels of NPAs. Further, this study investigates the effect of determinants on profitability, and establishes that while capital adequacy and investment activity significantly affect the profitability of commercial banks, apart from other accepted determinants of profitability, asset size has no significant impact on profitability.
    Keywords: banks,risk management,ownership structure,financial markets,non-performing assets,lending policy,macro-economy,central banks,banking regulation,financial system stability
    JEL: G21 G28 G32 E44 E58
    Date: 2015
  16. By: Gouriéroux, Christian; Héam, Jean-Cyprien
    Abstract: In the Basel regulation the required capital of a financial institution is based on conditional measures of the risk of its future equity value such as Value-at-Risk, or Expected Shortfall. In Basel 2 the uncertainty on this equity value is captured by means of changes in asset prices (market risk) and default of borrowers (credit risk), and mainly concerns the asset component of the balance-sheet. Our paper extends this analysis by taking also into account the funding and market liquidity risks. The latter risks are consequences of changes in customers or investors’ behaviors and usu- ally concern the liability component of the balance sheet. In this respect our analysis is in the spirit of the most recent Basel 3 and Solvency 2 regulations. Our analysis highlights the role of the different types of risks in the total required capital. Our analysis leads to clearly distinguish defaults due to liquidity shortage and defaults due to a lack of solvency and, in a regulatory perspective, to introduce two reserve accounts, one for liquidity risk, another one for solvency risk. We explain how to fix the associated required capitals.
    Keywords: Regulation; Funding Liquidity Risk; Liquidity Shortage; Solvency 2; Value-at-Risk; Asset/Liability Management;
    JEL: D81 G32
    Date: 2014–07
  17. By: Diaz-Serrano, Luis (Universitat Rovira i Virgili); Sackey, Frank Gyimah (Universitat Rovira i Virgili)
    Abstract: This study sets out to examine the extent to which access to credit and credit rationing are influenced by the microfinance type based on the major factors determining micro, small and medium enterprises' access to credit from microfinance institutions in the era of financial liberalization. The data for the study were gleaned from fourteen microfinance institutions' credit and loan records consisting of borrowers and credit characteristics. Our results are puzzling and show that credit rationing is not influenced by the microfinance types but by the individual microfinance institutions.
    Keywords: microfinance, Ghana, credit rationing
    JEL: G21
    Date: 2015–04
  18. By: Roy Trivedi, Smita
    Abstract: Banks in India have focused on non-interest income streams to complement their income from traditional interest earning activities for some years now. This move to innovation adoption and new income streams has been more pronounced for new private and foreign banks, while there appears to have been certain hesitation on the part of public sector and old private banks. This article studies the impact of the move to new income streams and the consequent rising diversification on performance (as measured by profitability and stability of income) for Indian banks. A comparative analysis of income generated from these income streams for different bank groups in India shows that new private banks and foreign banks in India have been more successful than public sector banks in generating a greater proportion of their income from non-interest and fee-based sources. However, this increasing diversification cannot be linked to better risk-adjusted performance in the Indian context. Using multiple regression analysis, the impact of diversification and increasing share of fee-based income on profitability and risk-adjusted profitability is questioned for all banks in India over the period 2005–2012. The article finds that the rising share of fee-based income and non-interest income in total income and diversification has a positive impact on profitability, but the impact on risk-adjusted performance and hence stability is not statistically significant. While the results show a positive impact of diversification on profitability, the article underlines that the impact direction of diversification measures may be negative, which is in agreement to what many studies have shown in the US, European, Australian and Indian contexts. This article considers the impact of diversification in non-interest income separately from diversification in total income. This diversification score helps to know if the banks are generating their non-interest income from only fee income or only their own investments or have they diversified the non-interest income generation by focusing on both. Importantly, there is a positive impact of increasing share of ‘fee income’ in both total income and non-interest income on profitability as well as risk-adjusted measures. The results underscore that while public sector banks need to generate more income from fee-based activities, it would be imperative to choose sources of fee-based income that remain stable and have a positive impact on risk-adjusted measures.
    Keywords: Banking Innovation; Diversification; New Income Streams; Profitability
    JEL: C10 G21
    Date: 2015–01
  19. By: Carlos León; Jorge Cely; Carlos Cadena
    Abstract: We identify interbank (i.e. non-collateralized) loans from the Colombian large-value payment system by implementing Furfine’s method. After identifying interbank loans from transactional data we obtain the interbank rates and claims without relying on financial institutions’ reported data. Contrasting identified loans with those consolidated from financial institutions’ reported data suggests the algorithm performs well, and it is robust to changes in its setup. The weighted average rate implicit in transactional data matches local interbank rate benchmarks strictly. From identified loans we also build the interbank claims network. The three main outputs (i.e. the interbank loans, the rates, and the claims networks) are valuable for examining and monitoring the money market, for contrasting data reported by financial institutions, and as inputs in models of financial contagion and systemic risk.
    Keywords: Furfine’s method, interbank, IBR, TIB.
    JEL: E42 E44
    Date: 2015–04–17
  20. By: Sasidaran Gopalan (Institute for Emerging Market Studies, Hong Kong University of Science and Technology); Ramikishen S. Rajan (School of Policy, Government and International Affairs (SPGIA), George Mason University)
    Abstract: This paper explores the impact of foreign bank entry on interest-rate-pass-through for a panel of 57 emerging and developing economies over 1995-2009. The paper tests for possible thresholds in terms of foreign bank presence that differentially impact interest-rate passthrough. The empirical results suggest that there are strong threshold effects in that foreign bank entry tends to enhance interest rate pass-through only in countries with greater degree of foreign bank presence compared to those with limited entry. The paper also finds that when foreign bank entry leads to greater banking concentration, it significantly lowers the extent of interest rate transmission.
    Keywords: foreign bank entry, financial liberalization, financial inclusion, financial development, banking concentration, interest rates
    JEL: F21 G00 G21 O16
    Date: 2015–02
  21. By: Carlos León (Banco de la República de Colombia and Tilburg University); Jorge Cely (Banco de la República de Colombia); Carlos Cadena (Banco de la República de Colombia)
    Abstract: We identify interbank (i.e. non-collateralized) loans from the Colombian large-value payment system by implementing Furfine’s method. After identifying interbank loans from transactional data we obtain the interbank rates and claims without relying on financial institutions’ reported data. Contrasting identified loans with those consolidated from financial institutions’ reported data suggests the algorithm performs well, and it is robust to changes in its setup. The weighted average rate implicit in transactional data matches local interbank rate benchmarks strictly. From identified loans we also build the interbank claims network. The three main outputs (i.e. the interbank loans, the rates, and the claims networks) are valuable for examining and monitoring the money market, for contrasting data reported by financial institutions, and as inputs in models of financial contagion and systemic risk. Classification JEL: E42, E44
    Keywords: Furfine’s method, interbank, IBR, TIB.
    Date: 2015–04
  22. By: Guohua Feng; Jiti Gao; Bin Peng; Xiaohui Zhang
    Abstract: In this paper, we propose a panel data semiparametric varying-coefficient model in which covariates (variables affecting the coefficients) are purely categorical. This model has two features: first, fixed effects are included to allow for correlation between individual unobserved heterogeneity and the regressors; second, it allows for cross-sectional dependence through a general spatial error dependence structure. We derive a semiparametric estimator for our model by using a modified within transformation, and then show the asymptotic and finite properties for this estimator. Finally, we illustrate our model by analysing the effects of state-level banking regulations on the returns to scale of commercial banks in the U.S. Our empirical results suggest that returns to scale is higher in more regulated states than in less regulated states.
    Keywords: Categorial variable; estimation theory; nonlinear panel data model; returns to scale.
    JEL: C23 C51 D24 G21
    Date: 2015
  23. By: Ben Ali, Mohamed Sami; Intissar, Timoumi; Zeitun, Rami
    Abstract: In this paper, the authors analyze the relationship between banking concentration and financial stability for a sample of 173 developed and developing countries over the period 1980-2011. First, they empirically examined the direct effect of banking concentration on financial stability by using a panel logit model. Second, the authors investigated the indirect effect through which concentration may affect stability. Their findings provide support for the existence of both concentration-stability and concentration-fragility channels. However, the authors report the absence of any direct effect of banking concentration on the occurrence of financial stability in our sample. When considering heterogeneity across countries, their results help confirm the stabilizing effect of concentration on financial stability for developing countries. However, the concentration-fragility hypothesis does not hold for these countries. They also confirm the existence of both effects regarding concentration: the stabilizing and destabilizing effect of concentration on financial stability.
    Keywords: Banking structure,Financial stability,Panel logit,GMM model
    JEL: E31 E3 C33 P44
    Date: 2015
  24. By: Volha Audzei
    Abstract: Excessive risk-taking of financial agents drew a lot of attention in the aftermath of the financial crisis. Low interest rates and subdued market volatility during the Great Moderation are sometimes blamed for stimulating risk-taking and leading to the recent financial crisis. In recent years, with many central banks around the world conducting the policy of low interest rates and mitigating market risks, it has been debatable whether this policy contributes to the building up of another credit boom. This paper addresses this issue by focusing on information acquisition by the financial agents. We build a theoretical model which captures excessive risk- taking in response to changes in policy rate and market volatility. This excessive risk takes the form of an increased risk appetite of the agents, but also of decreased incentives to acquire information about risky assets. As a result, with market risk being reduced, agents tend to acquire more risk in their portfolios then they would with the higher market risk. The same forces increase portfolio risk when the safe interest rate is falling. The robustness of the results is considered with different learning rules.
    Keywords: rational inattention; interest rates; financial crisis; risk-taking;
    JEL: E44 E52 G14 D84
    Date: 2015–03
  25. By: Sasidaran Gopalan (Institute for Emerging Market Studies, Hong Kong University of Science and Technology)
    Abstract: This paper examines the relationship between foreign bank entry and financial depth for 57 emerging and developing economies (EMDEs) over 1995-2009. Using various measures of financial depth, the paper also explores the degree to which the relationship between foreign bank entry and financial sector deepening varies by different income thresholds of EMDEs. The empirical findings suggest that while foreign banks positively further financial depth, the marginal effects of foreign bank entry diminish over time with greater levels of economic development. That is, the impact of foreign bank entry tends to become smaller as the per-capita income of the country rises.
    Keywords: foreign bank entry, financial depth, financial development, income thresholds
    JEL: F21 G00 G21 O16
    Date: 2015–02
  26. By: Vittorio Larocca (ETH Zurich, Switzerland)
    Abstract: This paper investigates competition among financial intermediaries in a finite-trader version of the Diamond and Dybvig (1983) economy under no aggregate uncertainty. The economy is populated by self-interested financial intermediaries that compete strategically over deposit contracts offered to consumers. Both exclusive and nonexclusive competition perspective are considered, in both cases multiple equilibria arise if banks do not have an initial endowment. When financial intermediaries have a sufficient level of endowment, regardless the competition perspective adopted, the first best allocation is the unique equilibrium allocation.
    Keywords: financial intermediation; deposit contracts.
    JEL: D82 G21
    Date: 2015–04
  27. By: Vivien Brunel
    Abstract: Most of the banks' operational risk internal models are based on loss pooling in risk and business line categories. The parameters and outputs of operational risk models are sensitive to the pooling of the data and the choice of the risk classification. In a simple model, we establish the link between the number of risk cells and the model parameters by requiring invariance of the bank's loss distribution upon a change in classification. We provide details on the impact of this requirement on the domain of attraction of the loss distribution, on diversification effects and on cell risk correlations.
    Date: 2015–04
  28. By: Natacha Valla; Jesper Berg; Laurent Clerc; Olivier Garnier; Erik Nielsen
    Abstract: To stimulate and finance investment in Europe the three “policy stars” of Europe need to be aligned: the Capital Markets Union initiative, the €315bn Investment Plan, and the ECB’s €1,100bn asset purchase scheme. They jointly face a unique set of issues. First, the resilience and the cyclical performance of the European bank based system needs to be improved. Second, the “right” markets need to be developed for banks to outsource risks without jeopardising financial stability. Third, cross-border risk-sharing urgently needs to be rebalanced, because it has become, in the wake of the Great Recession, overly reliant on debt instruments as opposed to equity. We argue that to achieve alignment between initiatives, an overall strategic vision could: ? Set an explicit, holistic strategy, ensuring that the instruments in the Investment Plan receive appropriate regulatory treatment within the CMU, and are eligible to the ECB’s purchase programme and collateral. ? Set a strategic objective for the euro area financial structure. It could be a “spare wheel” model where (i) banks would remain predominant (with capital markets as a countercyclical “spare wheel”), and (ii) banks would outsource risk through covered bonds (with untranched securitisation acting as the “spare wheel”). ? Proactively promote equity instruments in all three policy initiatives for more sustainable cross border risk sharing. ? Promote a new business model for “credit assessment” with a value chain featuring the credit information collected by commercial and central banks. ? Re-orientate the ECB’s purchases away from sovereign debt instruments towards the instruments that will finance the Investment Plan, those of the so-called “agencies”, and private sector assets. ? Formally involve NPBs in the Investment Plan, preferably in the equity of the EFSI Fund. ? Improve the governance of public investment ex ante via independent, supra-national investment committees, and ex post via strict disciplinary measures. ? Be pragmatic but tangible in the objectives set for the Capital Markets Union (focus on cross-border insolvencies and improve national business environments).
    Keywords: ECB;Capital Markets Union;cross-border capital flows;policy strategy;securitization;covered bonds;financial structure;Quantitative Easing
    JEL: E42 E44 E52 E58 E61
    Date: 2015–04
  29. By: Nicole Jonker; Mirjam Plooij; Johan Verburg
    Abstract: Do consumers change their payment behaviour after being exposed to a public campaign that encourages them to use their debit cards more often? We analyse the impact of such a campaign that started in 2007, using weekly debit card transaction data between 2005 and 2013. The overall results show positive effects of a national campaign to promote debit card usage, both in the short and in the long run. Debit card usage increased by 2%. The effects are the most significant at the early stages of the campaign, while appearing to wear off after a few years of interventions. The results suggest that high campaign intensity had a positive impact, as did a focus on certain large retail chains.
    Keywords: debit cards; payment behaviour; social marketing; cost efficiency; safety
    JEL: D24 E42 G21 M31 M37
    Date: 2015–04
  30. By: Rodrigo Barbone Gonzalez; Joaquim Lima; Leonardo Marinho
    Abstract: We re-evaluate the proposed framework of the Basel Committee on Banking Supervision (BCBS) to look into the credit-to-GDP gap as a leading indicator related to the Countercyclical Capital Buffer (CCB) and propose an alternative approach focusing at credit-to-GDP growth. We follow earlier work that the Hodrick-Prescott (HP) filter, especially with the proposed smoothing factor calibration, HP(400k), could possibly create spurious cycles. Moreover, it would not properly fit short credit series. With that in mind, we estimate Bayesian STMs for 34 countries and evaluate on-line (one-sided) estimates of their state components as well as other variables derived from their joint posterior distributions to anticipate crisis. The probabilities associated with the slope of the credit-to-GDP estimated using a one-sided STM have lower noise-to-signal ratios (NS) than the credit-to-GDP gap, especially considering a robustness exercise comprise of short series. The slope of the one-sided HP(150), which is simpler but closely related to our STM in its gain function, also performs better in anticipating crisis both in short and long series when compared to the credit-to-GDP gap. Finally, we put forward an exercise of CCB using the last available data point and our five leading indicators in all 34 countries
    Date: 2015–04
  31. By: Boyarchenko, Nina (Federal Reserve Bank of New York); Lucca, David O. (Federal Reserve Bank of New York); Veldkamp, Laura
    Abstract: According to most theories of financial intermediation, intermediaries diversify risk, transform maturity or liquidity, and screen or monitor borrowers. In U.S. Treasury auctions, none of these rationales apply. Intermediaries submit their customer bids without transforming liquidity or maturity, and they do not screen or monitor borrowers or diversify fiscal policy risk. Yet most end investors place their Treasury auction bids through an intermediary rather than submit them directly. Motivated by this evidence, we explore a new information aggregation model of intermediation. Intermediaries observe each client’s order flow, aggregate that information across clients, and use it to advise their clients as a group. In contrast to underwriting theories in which intermediaries, by acting as gatekeepers, extract rents but reduce revenue variance, information aggregators increase expected auction revenue but also make the revenue more sensitive to changes in asset value. We use the model to examine current policy questions, such as the optimal number of intermediaries, the effect of non-intermediated bids, and minimum bidding requirements.
    Keywords: Treasury auction; primary dealers; financial intermediation; information aggregation
    JEL: D04 G24 G28
    Date: 2015–04–01
  32. By: Giacomo Rodano; Nicolas Serrano-Velarde; Emanuele Tarantino
    Abstract: Exploiting the timing of the 2005-2006 Italian bankruptcy law reforms, we disentangle the effects of reorganization and liquidation in bankruptcy on bank financing nd firm investment. A 2005 reform introduces reorganization procedures facilitating loan renegotiation. The 2006 reform subsequently strengthens creditor rights in liquidation. The first reform increases interest rates and reduces investment. The second reform reduces interest rates and spurs investment. Our results highlight the importance of identifying the distinct effects of liquidation and reorganization, as these procedures differently address the tension in bankruptcy law between the continuation of viable businesses and the preservation of repayment incentives. JEL classification: G33, K22. Keywords: Financial Distress, Financial Contracting, Renegotiation, Multi-bank Borrowing, Bankruptcy Courts.
    Date: 2015
  33. By: Rodrigo Barbone Gonzalez; Joaquim Lima; Leonardo Marinho
    Abstract: Business and financial cycles are important to Monetary and Macroprudential Policies. The Countercyclical Capital Buffer (CCB) proposed by the Basel Committee on Banking Supervision (BCBS) assumes that the financial cycle is four times longer than the business one with direct impacts over its main indicator, the credit-to-GDP gap. This paper addresses the issue of estimating credit and business cycles’ length using Bayesian Structural Time Series Models (STM) and Singular Spectrum Analysis (SSA) followed by Fourier-based Spectral Analysis. The results, considering 28 countries, suggest that financial cycles, measured by the credit-to-GDP, could indeed be longer than the business one, but definitely shorter than the one implied in the cut-off frequency used by the BCBS. We find that most countries in the sample have financial cycles between 13 and 20 years, but there is a smaller group of countries whose estimates are close to those of the business cycle, i.e., 3 to 7 years. Finally, we estimate q-ratios objectively using STM and find that a HP smoothing factor that closely relates to the gain functions of our estimated state space form is in the trend component of HP(150) and not in the gap of HP(400k)
    Date: 2015–04
  34. By: Olaizola Ortega, María Norma; Valenciano Llovera, Federico
    Keywords: network formation, unilateral link-formation, bilateral link-formation, stability, efficiency, cost share
    JEL: A14 C72 D20 J00
    Date: 2015–03–26
  35. By: Aurélien Leroy; Yannick Lucotte
    Abstract: This paper empirically investigates the evolution and the sources of interest rate pass-through heterogeneity in the Eurozone for a sample of 11 euro area countries over the period 2003M1-2011M12. Considering two harmonized bank retail rates, we first estimate single equation error correction models (ECM) and find an important pass-through heterogeneity, both for household and firm rates, even if results suggest that heterogeneity is not a new phenomenon. On the basis of this result, we then extend our analysis by studying the role played by a large number of structural and cyclical factors on monetary policy transmission. Findings based on a panel ECM approach and a panel interaction VAR framework indicate that financial tensions and fragile economic activity following the crisis are not the only factors that explain the heterogeneous monetary transmission in the euro. The differences of financial market structures across countries, in terms of banking competition and financial market development, also explain a part of this heterogeneity. In terms of policy implications, this means that future reforms promoting a more efficient and homogeneous monetary policy transmission should not only focus on risk factors, but also try to consolidate financial integration.
    Keywords: Interest rate pass-through; Monetary policy transmission; Eurozone; Error correction model; Interacted panel VAR
    JEL: C23 D40 E43 E44 E58
    Date: 2015
  36. By: Arturo Antón-Sarabia (Division of Economics, CIDE); Kaniska Dam (Division of Economics, CIDE)
    Abstract: We develop an incentive contracting model of firm formation. Entrepreneurs of private equity firms who differ in net worth are required to borrow from institutional investors in order to finance start up projects. Investors, who differ in monitoring efficiency, may choose to monitor their borrowers at a cost. Non-verifiability of both entrepreneurial effort and monitoring gives rise to double-sided moral hazard problems, and leads to market failure. Individuals with high monitoring efficiency invest in lownet worth firms following a negatively assortative matching pattern since monitoring efficiency and net worth are strategic substitutes in mitigating incentive problems. The equilibrium debt obligation of the entrepreneur and expected firm value are in general non-monotone with respect to net worth. We solve the model numerically in order to analyze the effects of changes in the distributions of monitoring efficiency and net worth on the equilibrium loan contracts.
    Keywords: Monitored finance; negatively assortative matching; debt contract
    JEL: H55 I38 J26 O40
    Date: 2015–03
  37. By: Alexander von Felbert
    Abstract: In this paper we offer a novel type of network model, which is capable of capturing the precise structure of a financial market based, for example, on empirical findings. With the attached stochastic framework it is further possible to study how an arbitrary network structure and its expected counterparty credit risk are analytically related to each other. This allows us, for the first time, to model and to analytically analyse the precise structure of a financial market. It further enables us to draw implications for the study of systemic risk. We apply the powerful theory of characteristic functions and Hilbert transforms, which have not been used in this combination before. We then characterise Eulerian digraphs as distinguished exposure structures and we show that considering the precise network structures is crucial for the study of systemic risk. The introduced network model is then applied to study the features of an over-the-counter and a centrally cleared market. We also give a more general answer to the question of whether it is more advantageous for the overall counterparty credit risk to clear via a central counterparty or classically bilateral between the two involved counterparties. We then show that the exact market structure is a crucial factor in answering the raised question.
    Date: 2015–04
  38. By: Albanesi, Stefania (FRBNY and CEPR); Nosal, Jaromir (Columbia University)
    Abstract: Using a comprehensive panel data set on U.S. households, we study the effects of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the most substantive reform of personal bankruptcy in the United States since the Bankruptcy Reform Act of 1978. The 2005 legislation introduced a means test based on income to establish eligibility for Chapter 7 bankruptcy and increased the administrative requirements to file, leading to a rise in the opportunity cost and, especially, the financial cost of filing for bankruptcy. We study the effects of the reform on bankruptcy, insolvency, and foreclosure. We find that the reform caused a permanent drop in the Chapter 7 bankruptcy rate relative to pre-reform levels, due to the rise in filing costs associated with the reform, which can be interpreted as resulting from liquidity constraints. We find that the decline in bankruptcy filings resulted in a rise in the rate and persistence of insolvency as well as an increase in the rate of foreclosure. We find no evidence of a link between the decline in bankruptcy and a rise in the number of individuals who are current on their debt. We document that these effects are concentrated at the bottom of the income distribution, suggesting that the income means tests introduced by BAPCPA did not serve as an effective screening device. We show that insolvency is associated with worse financial outcomes than bankruptcy, as insolvent individuals have less access to new lines of credit and display lower credit scores than individuals who file for bankruptcy. Since bankruptcy filings declined much more for low-income individuals, our findings suggest that, for this group, BAPCPA may have removed an important form of relief from financial distress.
    Date: 2015–04

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