nep-ban New Economics Papers
on Banking
Issue of 2015‒05‒09
thirty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Loan Sales and Bank Liquidity Risk Management: Evidence from a U.S. Credit Register By Irani, Rustom M.; Meisenzahl, Ralf R.
  2. The problem with government interventions: The wrong banks, inadequate strategies, or ineffective measures? By Hryckiewicz, Aneta
  3. Competition and Bank Risk Taking in a Differntiated Oligopoly By Kaniska Dam; Martín Basurto
  4. Was the Crisis due to a shift from stakeholder to shareholder finance? Surveying the debate By Giovanni Ferri; Angelo Leogrande
  5. Are ethical and social banks less risky? Evidence from a new dataset By Marlene Karl
  6. Bank risks, monetary shocks and the credit channel in Brazil: identification and evidence from panel data. By J. Ramos-Tallada
  7. Politicians' promotion incentives and bank risk exposure in China By Wang, Li; Menkhoff, Lukas; Schröder, Michael; Xu, Xian
  8. Asymmetric information and imperfect competition in lending markets By Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
  9. The universal bank model: Synergy or vulnerability? By Michael Brei; Xi Yang
  10. Clearinghouse Loan Certificates as a Lender of Last Resort By Christopher Hoag
  11. Correlated Default and Financial Intermediation By Gregory Phelan
  12. Asymmetric Information and Imperfect Competition in Lending Markets By Crawford, Gregory S.; Pavanini, Nicola; Schivardi, Fabiano
  13. Monitoring financial stability in developing and emerging economies : practical guidance for conducting macroprudential analysis By Dijkman,Miquel
  14. Downgrades of sovereign credit ratings and impact on banks CDS spread: does disclosure by banks improve stability? By Guillemin, François; Alexandre, Hervé; Refait-Alexandre, Catherine
  15. Bank’s choice of loan portfolio under high regulation – example of Croatia By Vidakovic, Neven
  16. Financial Intermediation, Leverage, and Macroeconomic Instability By Gregory Phelan
  17. Incentives and Competition in Microfinance By Kaniska Dam; Prabal Roy Chowdhuri
  18. Credit-Market Sentiment and the Business Cycle By Lopez-Salido, J. David; Stein, Jeremy C.; Zakrajsek, Egon
  19. Are the Borrowing Costs of Large Financial Firms Unusual? By Ahmed, Javed I.; Anderson, Christopher W.; Zarutskie, Rebecca
  20. Impact assessment of ATM on customer satisfaction of banks in Ghana:a case study of Kumasi,Ghana. By Boateng, Elliot; Amponsah, Mary; Serwaa-Adomako, Akosua
  21. Microcredit and Price Competition: standardize to differentiate By Paolo Casini
  22. Counting Processes for Retail Default Modeling By Nicholas M. Kiefer; C. Erik Larson
  23. Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms By Cull, Robert; Li, Wei; Sun, Bo; Xu, Lixin Colin
  24. Changing payment patterns at point-of-sale: their drivers By Carin van der Cruijsen; Mirjam Plooij
  25. Nudging credit scores in the field: the effect of text reminders on creditworthiness in the United States By Bracha, Anat; Meier, Stephan
  26. Challenges for Systemic Risk Assessment in Low-Income Countries By Catalan, Mario; Demekas, Dimitri
  27. Estonian banking regulation as a “world of ‘dead letters’” – the interplay of Europeanization process and national idiosyncrasies By Egert Juuse
  28. Toward Further Development of the Repo Market By Nobukazu Ono; Kouga Sawada; Akira Tsuchikawa
  29. Collateralized Borrowing and Increased Risk By Gregory Phelan
  30. Derivatives Pricing under Bilateral Counterparty Risk By Ghamami, Samim
  31. The Repeat Time-On-The-Market Index By Paul E. Carrillo; Benjamin Williams

  1. By: Irani, Rustom M. (University of Illinois at Urbana-Champaign); Meisenzahl, Ralf R. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We examine the impact of banks' liquidity risk management on secondary loan sales. We track the dynamics of bank loan share ownership in the secondary market using data from the Shared National Credit Program, a credit register of syndicated bank loans administered by U.S. regulators. We analyze the 2007-2009 financial crisis as a market-wide liquidity shock and control for loan demand using a loan-year fixed effects approach. We find that banks with greater reliance on wholesale funding at the onset of the crisis were more likely to exit loan syndicates during the crisis. Our analysis identifies the importance of bank liquidity risk management as a motivation for loan sales, in addition to the credit risk transfer motive emphasized in prior literature.
    Keywords: Bank risk management; financial crisis; loan sales; wholesale funding
    JEL: G01 G21 G23
    Date: 2015–01–01
  2. By: Hryckiewicz, Aneta
    Abstract: The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process.
    Keywords: Bank risk, business models, bank regulation, financial crisis, banking stability
    JEL: E58 G15 G21 G32
    Date: 2014–06–18
  3. By: Kaniska Dam; Martín Basurto (Division of Economics, CIDE)
    Abstract: We re-examine the relationship between the degree of deposit market competition and bank risk taking in a model where banks compete in differentiated deposit services. When banks invest their deposits directly, as has already been established in the extant literature, an increased degree of competition, measured either by greater degree of substitutability or by greater number of banks, induces the banks to take more risk in equilibrium. When banks invest their deposits in loans, and their borrowers choose the level of risk, the risk of bank failure is independent of the degree of competition in the deposit market.
    Keywords: Bank competition; risk taking; loan contracts.
    Date: 2015–03
  4. By: Giovanni Ferri (LUMSA, CERBE, MoFiR); Angelo Leogrande (Universit… di Bari)
    Abstract: We discuss the literature on the shift from stakeholder to shareholder finance behind the Great Financial Crisis (GFC). Traditional banks generally maximized stakeholder value (STV). But before the GFC also many of them started maximizing shareholder value (SHV). Moving from STV to SHV often meant shifting credit management from Originate-to-Hold (OTH) to Originate-to-Distribute (OTD). Moving from STV-OTH to SHV-OTD increased systemic risk damaging the common good of financial stability. STV-oriented banks seemed to weather the GFC relatively better with more heterogeneous systems proving more resilient. Heterogeneity in banking governanceorientations/ownership-structures seems to add value reducing the probability of financial crises.
    Keywords: Bank Governance, Financial Institutions and Organizations, Financial Regulation, Financial and Banking Crises
    JEL: G0 G01 G14 G15 G18 G20 G21 G24 G28 G30 G32
    Date: 2015–05
  5. By: Marlene Karl
    Abstract: This paper introduces a new and comprehensive dataset on “alternative” banks in EU and OECD countries. Alternative banks (e.g. ethical, social or sustainable banking) experienced a recent increase in media interest and have been hailed as an answer to the financial crisis but no research exists on their stability. This paper studies whether alternative banks differ from conventional banks in terms of riskiness. For this I construct a comprehensive dataset of alternative banks and compare their riskiness with an adequately matched control group of conventional banks using mean comparison and panel regression techniques. The main result is that alternative banks are significantly more stable (in terms of z-score) than their conventional counterparts. The results are robust to different estimation methods and data specifications. Alternative banks also have lower loan to asset ratios and higher customer deposit ratios than conventional banks.
    Keywords: Ethical banking, social banking, bank risk, financial crisis
    JEL: G21 G32 E44 M14
    Date: 2015–05
  6. By: J. Ramos-Tallada
    Abstract: Using a large database of bank financial statements, this paper investigates the determinants of the bank lending channel (BLC) of monetary transmission in Brazil between 1995 and 2012. I extend the standard empirical approach in two main ways. First, I apply a micro-founded strategy for disentangling demand from supply shifts in credit. Using this identification scheme, I show that lending supply is negatively correlated with the short-term market interest rate over the long period. The sensitivity of credit supply to monetary shocks is not related to the bank characteristics generally used in the empirical literature, whereas a proxy of the individual bank external finance premium (EFP) tends to capture financial constraints better than size, liquid assets or capitalization ratios. However, the patterns of the BLC have changed since the onset of the global financial crisis. In the post-crisis period, the money market rate does not affect the lending supply of the average bank anymore, while small banks and those lacking access to long-term funds appear more sensitive to monetary shocks in some estimations. Second, I check whether several types of uncertainty may drive the BLC, beyond liquidity risk. Over the long period, I find evidence that higher market risk borne by banks' securities portfolios (captured by a longer duration of public debt bonds) and lower uncertainty in the money market (captured by a lower volatility of rates) appear to consistently enhance the effectiveness of monetary policy through the BLC.
    Keywords: Risks, Monetary policy transmission, Bank lending channel, Identification of supply shifts, Panel data, Brazil.
    JEL: E44 E52 F4 G21
    Date: 2015
  7. By: Wang, Li; Menkhoff, Lukas; Schröder, Michael; Xu, Xian
    Abstract: This paper shows that politicians' pressure to climb the career ladder increases bank risk exposure in their region. Chinese local politicians are set growth targets in their region that are relative to each other. Growth is stimulated by debt-financed programs which are mainly financed via bank loans. The stronger the performance incentive the riskier the respective local bank exposure becomes. This effect holds primarily for local banks which are under a certain degree of control of local politicians and it has increased with the release of recent stimulus packages requiring local co-financing.
    Keywords: Bank Lending,Bank Risk Exposure,Local Politicians,Promotion Incentives
    JEL: G21 G23 H74
    Date: 2015
  8. By: Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
    Abstract: We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks' optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition.
    Keywords: Asymmetric information, imperfect competition, lending markets, Italian banking, adverse selection
    JEL: D82 G21 L13
    Date: 2015–04
  9. By: Michael Brei; Xi Yang
    Abstract: In this paper we examine empirically the relationship between banks’ income diversification, expansion into non-traditional activities and performance. Using detailed information on the U.S. banking sector over the period 2002-12, we investigate whether or not banks’ involvement in various business lines has been associated with higher accounting returns and risks. Over the long-term, we find robust evidence that banks’ expansion into non-traditional activities has lacked revenue and diversification benefits: overall risks of non-traditional banks have been higher, while returns were not. A higher degree of diversification across traditional and certain non-traditional activities, on the contrary, has been associated with important risk reduction benefits. The effects are non-linear and differ across business lines, which seems to suggest that an optimal mix of banking activities exists.
    Keywords: Banking, diversification, non-traditional activities, risk, profitability.
    JEL: G21
    Date: 2015
  10. By: Christopher Hoag (Department of Economics, Trinity College)
    Abstract: Which banks borrow from a lender of last resort? Looking across multiple panics of the nineteenth century, this paper treats borrowing of clearinghouse loan certificates as borrowing from a lender of last resort. We evaluate individual bank use of clearinghouse loan certificates in New York City using bank balance sheet data. Bank capital ratios do not predict borrowing. Lower pre-panic reserve ratios and greater reserve losses during the crisis increased the probability of positive net borrowing from a lender of last resort.
    Keywords: bank, lender of last resort, loan certificates
    JEL: G21 G28 N21
    Date: 2015–04
  11. By: Gregory Phelan (Williams College)
    Abstract: Financial intermediation naturally arises when borrowers' payoffs are correlated. I show this using a costly enforcement model in which lenders need ex post incentives to enforce payments from defaulted loans. When projects have correlated outcomes, learning the state of one project (via enforcement) provides information about the states of other projects. A large, correlated portfolio provides ex post incentives for enforcement and as a result borrowers default less frequently. Because borrowers behave differently with large lenders, intermediation dominates direct lending. Intermediaries are financed with risk-free deposits, earn positive profits, and hold systemic default risk.
    Keywords: Financial intermediation, systemic risk, default
    Date: 2015–04
  12. By: Crawford, Gregory S. (University of Zürich, CEPR and CAGE); Pavanini, Nicola (University of Zürich); Schivardi, Fabiano (Bocconi, EIEF and CEPR)
    Abstract: We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks’ optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition.
    Date: 2015
  13. By: Dijkman,Miquel
    Abstract: In the aftermath of the global financial crisis, interest in systemic risk has surged among academics and policy makers. The mitigation of systemic risk is now widely accepted as the fundamental underlying concept for the design of the post-crisis regulatory agenda. Effective mitigation requires the presence of a well-developed analytical methodology for monitoring systemic risk, so that policy makers can make informed policy choices. This remains a challenging area, particularly in developing and emerging economies characterized by rapid structural changes and gaps in data availability. This working paper aims to provide policy makers in developing and emerging economies with practical tools for the analysis of systemic risk, focusing on the identification of domestic, systemically important banks; analyzing interconnectedness within the financial In the aftermath of the global financial crisis, interest in systemic risk has surged among academics and policy makers. The mitigation of systemic risk is now widely accepted as the fundamental underlying concept for the design of the post-crisis regulatory agenda. Effective mitigation requires the presence of a well-developed analytical methodology for monitoring systemic risk, so that policy makers can make informed policy choices. This remains a challenging area, particularly in developing and emerging economies characterized by rapid structural changes and gaps in data availability. This working paper aims to provide policy makers in developing and emerging economies with practical tools for the analysis of systemic risk, focusing on the identification of domestic, systemically important banks; analyzing interconnectedness within the financial system; and analyzing the cyclical component of systemic risk. system; and analyzing the cyclical component of systemic risk.
    Keywords: Access to Finance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Emerging Markets
    Date: 2015–04–23
  14. By: Guillemin, François; Alexandre, Hervé; Refait-Alexandre, Catherine
    Abstract: This paper investigates the relationship between disclosure and bank CDS spread during the sovereign debt crisis over the period 2011-2013. We cumulated the evolution of the spread of CDS on 4 different timeframes. We modeled two transparency index: one global and one specifically dedicated to sovereign exposure. We obtained significant results on the impact of targetted sovereign disclosure on the evolution of the CDS spreads, while the global index have not significant impact on the evolution of the CDS spread.
    Keywords: Bank; Sovereign crisis; Disclosure; CDS;
    JEL: G14 G21
    Date: 2015–06
  15. By: Vidakovic, Neven
    Abstract: This paper creates a mathematical model in which the banks are faced with two optimization problems. The first optimization problem is how to optimize their behavior in order to maximize profits. The second optimization is how to optimize the structure of liabilities in order to have minimum regulation. The regulatory regime is imposed by the central bank. This paper investigates the behavior of banks when faced with high regulation and provides a theoretical framework for analysis of the impact of high regulation on the choice of the bank’s portfolio structure. The model shows the banks have a learning framework in which the banks learn the central bank’s true model and adjust their credit policies to existing regulatory regime. However this adjustment also creates changes in the choice of credit.
    Keywords: credit, central bank regulation, dynamic programming, bayesian learning
    JEL: C61 C73 E51 E58
    Date: 2015–03
  16. By: Gregory Phelan (Williams College)
    Abstract: This paper investigates how financial-sector leverage affects macroeconomic instability and household welfare. In the model, banks use leverage to allocate resources to productive projects and provide liquidity. When banks do not actively issue new equity, aggregate outcomes depend on the level of equity in the financial sector. Equilibrium is inefficient because agents do not internalize how their decisions affect volatility, aggregate leverage, and the returns on assets. Leverage creates systemic risk and macroeconomic instability, increasing the frequency and duration of crises. Regulating leverage changes asset-price volatility and the likelihood that the financial sector is undercapitalized.
    Keywords: Leverage, Macroeconomic Instability, Borrowing Constraints, Banks, Macroprudential Regulation, Financial Crises
    Date: 2015–04
  17. By: Kaniska Dam; Prabal Roy Chowdhuri (Division of Economics, CIDE)
    Abstract: We develop a model of competition among socially motivated microfinance institutions (MFIs), where the MFIs offer repayment-based incentive contracts to credit agents. The agents gather information regarding a borrower, and may, or may not collude with the borrower, taking bribes in return for not acting upon their information in case of collusion. We show that competition may either increase, or decrease incentives, with incentives becoming less high powered if the MFIs are not too motivated. Further, whenever either the moral hazard problem is relatively severe and/or the MFIs are not too motivated, competition increases default, thus providing a possible explanation for the recent episodes of crisis in the MFI sector. Interestingly, the effects of competition are linked to mission drift, i.e., whether the MFIs in the concerned countries are more, or less motivated. Further, default problems may worsen in case competition is accompanied by greater access to donor funds.
    Keywords: Microfinance; competition; collusion; staff incentive schemes; monitoring.
    Date: 2015–03
  18. By: Lopez-Salido, J. David (Board of Governors of the Federal Reserve System (U.S.)); Stein, Jeremy C. (Harvard University); Zakrajsek, Egon (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using U.S. data from 1929 to 2013, we show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t through t+2. Underlying this result is the existence of predictable mean reversion in credit-market conditions. That is, when our sentiment proxies indicate that credit risk is aggressively priced, this tends to be followed by a subsequent widening of credit spreads, and the timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t-2 also forecasts a change in the composition of external finance: net debt issuance falls in year t, while net equity issuance increases, patterns consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this paper suggests that time-variation in expected returns to credit market investors can be an important driver of economic fluctuations.
    Keywords: Business cycles; credit-market sentiment; financial stability
    JEL: E32 E44 G12
    Date: 2015–04–25
  19. By: Ahmed, Javed I. (Board of Governors of the Federal Reserve System (U.S.)); Anderson, Christopher W. (Harvard University); Zarutskie, Rebecca (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Estimates of investor expectations of government support of large financial firms are often based on large financial firms' lower borrowing costs relative to smaller financial firms. Using pricing data on credit default swaps (CDS) and corporate bonds over the period 2004 to 2013, however, we find that the CDS and bond spreads of financial firms are no more sensitive to borrower size than the spreads of non-financial firms. Outside of the financial crisis period, spreads are more sensitive to borrower size in several non-financial industries. We find that size-related differences in spreads are partially driven by higher liquidity and recovery rates of larger borrowers. Prior to the financial crisis, we also find that financial firms exhibited generally lower spreads that were less sensitive to size than spreads for several other industries. Our results suggest that estimates of implicit government guarantees to financial firms may overemphasize size-related borrowing cost differentials. However, our analysis also suggests that, prior to the financial crisis, investor expectations of government support, or generally reduced risk perceptions, may have reduced borrowing costs for the financial industry, as a whole.
    Keywords: Borrowing costs; credit default swaps; financial industry; implicit government guarantee; size effect; Too-Big-to-Fail
    JEL: G21 G22 G24 G28
    Date: 2015–03–12
  20. By: Boateng, Elliot; Amponsah, Mary; Serwaa-Adomako, Akosua
    Abstract: Bank customers are selective with the banks to transact with since everyone wants the best service for their money. Asa result, there is competition in the banking sector. Each bank wants to give quality services and products to keep up existing customers and broaden their customer base as well. The purpose of this study is to find out if customer needs for direct service transactions with bank employees in the banking halls has reduced due to Automated Teller Machines (ATM) provided for Ghanaians at customer service points. The essential dimensions of an ATM service quality and its effect on customer satisfaction is also examined. Questionnaires were administered to users and nonusers of Automated Teller Machines, as well as bank staffs, to source data for the study. An analysis of data was done with descriptive statistics and the chi-square test. About the scope of the study, the results showed that, the demand for direct service transactions with bank employees had reduced with the ATM introduced in Ghana. ATM service quality dimensions that produced an effect on customer satisfaction were the reduced time spent on transactions, delivery of renewed ATM cards on time as well as safety during withdrawals at ATM service points. In conclusion, when Banks in Ghana enhance on the ATM service quality dimensions that impact on customer satisfaction, they shall increase their customer base, cut workload on bank staff and increase their turnover.
    Keywords: automated teller machine, customer satisfaction, service quality
    JEL: G21
    Date: 2014–10–02
  21. By: Paolo Casini
    Abstract: Microfinance institutions, despite the presence of competition and informational asymmetries, typically offer a limited variety of contracts. Assuming price competition, we propose a simple theoretical explanation for this behavior and study its consequences in terms of strategic interaction and borrower welfare. We model an oligopolistic market in which Microfinance Institutions design their contracts and choose how many of them to offer. We find that when offering a menu is costly, MFIs always offer a single contract. Despite that, there exist equilibria in which MFIs coordinate and offer screening contracts, allowing them to extract a large fraction of the borrower welfare. We discuss the policy implications of our model in terms of price caps, market entry and outreach measurement.
    Keywords: Micronance, Competition, Altruism, Contract Menus, Credit Rationing
    JEL: G21 L13 L31 O16
    Date: 2014
  22. By: Nicholas M. Kiefer (Cornell University, Ithaca, and CREATES); C. Erik Larson (Promontory Financial Group, LLC)
    Abstract: Counting processes provide a very flexible framework for modeling discrete events occurring over time. Estimation and interpretation is easy, and links to more familiar approaches are at hand. The key is to think of data as "event histories," a record of times of switching between states in a discrete state space. In a simple case, the states could be default/non-default; in other models relevant for credit modeling the states could be credit scores or payment status (30 dpd, 60 dpd, etc.). Here we focus on the use of stochastic counting processes for mortgage default modeling, using data on high LTV mortgages. Borrowers seeking to finance more than 80% of a house's value with a mortgage usually either purchase mortgage insurance, allowing a first mortgage greater than 80% from many lenders, or use second mortgages. Are there differences in performance between loans financed by these different methods? We address this question in the counting process framework. In fact, MI is associated with lower default rates for both fixed rate and adjustable rate first mortgages.
    Keywords: Econometrics, Aalen Estimator, Duration Modeling, Mortgage Insurance, Loan-to-Value
    JEL: C51 C52 C58 C33 C35
    Date: 2015–04–28
  23. By: Cull, Robert; Li, Wei; Sun, Bo (Board of Governors of the Federal Reserve System (U.S.)); Xu, Lixin Colin (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We examine the role of firms' government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak government connections, likely the engine for innovation in the coming years in China, are especially financially constrained, due perhaps to the formidable hold that their state rivals have on financial resources after the 'grabbing-the-big-and-letting-go-the-small' privatization program in China. Our empirical results suggest that government connections play an important role in explaining Chinese firms' financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.
    Keywords: Financial constraints; investment; political connections; firm size; China; capital allocation; invest cash flow sensitivity
    JEL: G18 G21 G28 G38 O16
    Date: 2015–01–21
  24. By: Carin van der Cruijsen; Mirjam Plooij
    Abstract: Based on household surveys from 2004 and 2014 we show how payment patterns in the Netherlands have changed. This data is unique because it covers a long time span and includes detailed information on payment behaviour per point-of-sale (POS). In this period the usage of the debit card has increased sharply. Perceived characteristics of payment instruments have affected both their adoption and the intensity by which they are used. Of these, user-friendliness and safety are the most important drivers of the adoption of electronic payment instruments. Socio-demographic determinants of payment instrument adoption are quite robust over time. However, we find that the relevance of payment characteristics and socio-demographic characteristics for the intensity of use of payment instruments varies per POS and over time when instruments get generally adopted. Overall, user-friendliness is still the most important aspect and safety and speed remained relevant aspects, whereas costs are the least important aspect for the intensity by which payment instruments are used.
    Keywords: payment patterns; cash; debit card; credit card; households; survey data
    JEL: C25 D12
    Date: 2015–04
  25. By: Bracha, Anat (Federal Reserve Bank of Boston); Meier, Stephan (Columbia University)
    Abstract: Given the fundamental role that credit scores play in day-to-day life in the United States, it is very important to understand what can be done to help individuals improve their credit scores. This question is important in general, and especially important for the low-to-moderate-income (LMI) individuals who likely have a greater need for access to liquidity than higher-income individuals. In this paper the authors report results from a field experiment conducted between early 2013 and early 2014 in Boston, Massachusetts, with LMI taxpayers who were offered credit advising services. Taxpayers who opted into the advising sessions were randomized as to whether they received extra information on credit scores and the average APR (annual payment rate) on basic credit cards in their area (the "information" condition), and, independently, as to whether or not they received monthly text reminders (the "text" condition). These reminders included the individual's financial goal and credit score range, reminders to pay bills on time and to pay at least the minimum amount, and updated interest rate information on basic credit cards.
    Keywords: field experiment; credit score; creditworthiness; reminders; financial decisionmaking; low income
    JEL: C93 D14
    Date: 2014–11–01
  26. By: Catalan, Mario; Demekas, Dimitri
    Abstract: Assessing and monitoring systemic risk is a challenge for policy makers and supervisors in all countries. It is particularly challenging in low-income countries (LICs), owing to a number of characteristics shared to a greater or lesser extent by most of them. This paper discusses these common characteristics and how they shape the nature of systemic risk in LICs, and concludes with some practical lessons for policy makers and financial supervisors that can help improve the effectiveness of systemic risk assessment and mitigation in these countries.
    Keywords: financial stability, stress testing, systemic risk, low-income countries, macroprudential policy, IMF
    JEL: G01 G28 G32 O16
    Date: 2015
  27. By: Egert Juuse
    Abstract: Depolitization of public finances, majority foreign ownership of the banking industry and transition economy elements, accompanied by re-occurring banking crises in the 1990s have posed significant challenges for the regulatory framework in Estonia. Furthermore, the EU accession anchored the legislative development to external institutions and actors. Although banking regulation has been exemplary on paper, there have been significant weaknesses in implementation due to both internal incapacities and inadequacy of the formal EU law based regulatory principles for addressing the cross-border banking issues (accountability and responsibility for stability). Consequently, the established institutional setting in Estonia has not been able to address the division of two main functions of the banking sector between domestic and external actors: the functioning and safe payment systems by domestic actors and the financing of productive investments by external actors through foreign investments.
    Date: 2014–06
  28. By: Nobukazu Ono (Bank of Japan); Kouga Sawada (Bank of Japan); Akira Tsuchikawa (Bank of Japan)
    Abstract: In money markets both inside and outside Japan, repos have been a major instrument in both borrowing and lending of cash and securities. With the recent global financial crisis in mind, discussions are taking place at international forums such as the G20 and the Financial Stability Board (FSB) on how to further increase the stability and transparency of repos and securities lending. Within Japan, it is vital to improve the efficiency of repos and speed up settlement even further, since there is demand for a facility that allows the rapid execution of same-day settlement of repos to shorten the Japanese government bond (JGB) settlement cycle. The Bank of Japan has been participating actively in these discussions and will continue to contribute, as the central bank, to further improvement of the stability and efficiency of repos and development of the repo market.
    Keywords: repo; securities lending
    Date: 2015–04–28
  29. By: Gregory Phelan (Williams College)
    Abstract: This paper uses a general equilibrium model with collateralized borrowing to show that increases in risk can have ambiguous effects on leverage, loan margins, loan amounts, and asset prices. Increasing risk about future payoffs can lead to riskier loans with larger balances and lower spreads even when lenders are risk-averse and borrowers can default. As well, increasing endowment risk for either agent can have ambiguous consequences for equilibrium. Though the effects are ambiguous, two key determinants of how increased risk translate into changes in prices and allocations are the correlation of agents' endowments with the asset payoff and agents' risk-aversion, even when marginal utilities are exogenous. When lender's endowments become more risky in a restricted way, the effects on margins and prices depend asymmetrically on the likelihood of loan repayment. When borrowers' endowments become more risky in the tails, the effects depend asymmetrically on whether upside or downside states are affected.
    Keywords: Leverage, risk, collateral constraints, asset prices
    Date: 2015–04
  30. By: Ghamami, Samim (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We consider risk-neutral valuation of a contingent claim under bilateral counterparty risk in a reduced-form setting similar to that of Duffie and Huang [1996] and Duffie and Singleton [1999]. The probabilistic valuation formulas derived under this framework cannot be usually used for practical pricing due to their recursive path-dependencies. Instead, finite-difference methods are used to solve the quasi-linear partial differential equations that equivalently represent the claim value function. By imposing restrictions on the dynamics of the risk-free rate and the stochastic intensities of the counterparties' default times, we develop path-independent probabilistic valuation formulas that have closed-form solution or can lead to computationally efficient pricing schemes. Our framework incorporates the so-called wrong way risk (WWR) as the two counterparty default intensities can depend on the derivatives values. Inspired by the work of Ghamami and Goldberg [2014] on th e impact of WWR on credit value adjustment (CVA), we derive calibration-implied formulas that enable us to mathematically compare the derivatives values in the presence and absence of WWR. We illustrate that derivatives values under unilateral WWR need not be less than the derivatives values in the absence of WWR. A sufficient condition under which this inequality holds is that the price process follows a semimartingale with independent increments.
    Keywords: Basel III; Counterparty Risk; Credit Value Adjustment; Reduced-Form Modeling; Wrong Way Risk
    Date: 2015–04–12
  31. By: Paul E. Carrillo (Department of Economics/Institute for International Economic Policy, George Washington University); Benjamin Williams (Department of Economics/Institute for International Economic Policy, George Washington University)
    Abstract: We propose two new indices that measure the evolution of housing market liquidity. The key features of both indices are a) their ability to control for unobserved heterogeneity exploiting repeat listings, b) their use of censored durations (listings that are expired and/or withdrawn from the market), and c) their computational simplicity. The first index computes proportional displacements in the home sale baseline hazard rate. The second estimates the relative change in median marketing time. The indices are computed using about 1.8 million listings in 15 US urban areas. Results suggest that both accounting for censoring and controlling for unobserved heterogeneity are key to measure housing market liquidity.
    Keywords: Housing liquidity, non-parametric models, proportional hazard, repeat-sales
    JEL: C41 R31

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