nep-ban New Economics Papers
on Banking
Issue of 2015‒06‒13
28 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Mesuring Liquidity Mismatch in the Banking Sector By Bai, Jennie; Krishnamurthy, Arvind; Weymuller, Charles-Henri
  2. Securities trading by banks and credit supply: Micro-evidence By Abbassi, Puriya; Iyer, Rajkamal; Peydró, José-Luis; Tous, Francesc R.
  3. Are Ethical and Social Banks Less Risky? Evidence from a New Dataset By Marlene Karl
  4. Banking union as a shock absorber By Belke, Ansgar; Gros, Daniel
  5. The Relationship between Banking Competition and Stability in Developing Countries: The Case of Libya By Troug, Haytem Ahmed; Sbia, Rashid
  6. Do Banks Satisfy the Modigliani-Miller Theorem? By Aboura, Sofiane; Lépinette-Denis, Emmanuel
  7. Regulatory influence on market conditions in the banking union: The cases of macro-prudential instruments and the bail-in tool By Tröger, Tobias H.
  8. Multiplex interbank networks and systemic importance: An application to European data By Aldasoro, Iñaki; Alves, Iván
  9. Essays on the behavior fo foreign banks in Brazil By Nazar van Doornik, B.F.
  10. The Information in Systemic Risk Rankings By Federico Nucera; Bernd Schwaab; Siem Jan Koopman; André Lucas
  11. The Certification Role of Pre-IPO Banking Relationships: IPO Underpricing and Post-IPO Performance in Japan By Yoshiaki Ogura
  12. The Exposure of Mortgage Borrowers to Interest Rate Risk, Income Risk and House Price Risk – Evidence from Swiss Loan Application Data By Brown, Martin; Guin, Benjamin
  13. Defuse the Bomb: Rewiring Interbank Networks By Matteo Chinazzi; Stefano Pegoraro; Giorgio Fagiolo
  14. A Macroeconomic Framework for Quantifying Systemic Risk By He, Zhiguo; Krishnamurthy, Arvind
  15. Identifying interbank loans, rates, and claims networks from transactional data By León, C.; Cely, Jorge; Cadena, Carlos
  16. Relationship Lending: Do Banks Learn? By Botsch, Matthew; Vanasco, Victoria
  17. Social Capital and the Repayment of Microfinance Group Lending. A Case Study of Pro Mujer Mexico By Luminita Postelnicu; Niels Hermes; Roselia Servin Juarez
  18. Bankruptcy law and bank financing By Gicoamo Rodano; Nicolas Serrano-Velarde; Emanuele Tarantino
  19. Banks’ Risk Endogenous to Strategic Management Choices By Delis, Manthos; Hasan, Iftekhar; Tsionas, Efthymios
  20. Dynamics of innovation and efficiency in banking system: An application of SFA and meta-frontier method By Sanatkhani, Mahboobeh; Vasaf, Esmaeil
  21. Microfinanzas en el Perú: Solvencia y Rentabilidad en las Cajas Municipales de Ahorro y Crédito By Gambetta Podesta, Renzo
  22. How do fair value measurements of financial instruments affect investments in banks? By Bergheim, Ralf; Ernstberger, Jürgen; Roos, Michael W. M.
  23. The Impact of Treasury Supply on Financial Sector Lending and Stability By Krishnamurthy, Arvind; Vissing-Jorgensen, Annette
  24. Securities Transactions Taxes and Financial Crises By Benoît Carmichael; Jean Armand Gnagne; Kevin Moran
  25. Can community-based microfinance groups match savers with borrowers? Evidence from rural Malawi By Rachel Cassidy; Marcel Fafchamps
  26. The Role of Subsidy Uncertainty in Mission Drift of Microfinance Institutions of Asia By Muhammad Zubair; Attiya Yasmin Javid
  27. Corporate Leverage in China: Why has It Increased Fast in Recent Years and Where do the Risks Lie? By Wenlang Zhang; Gaofeng Han; Brian Ng; Steven Chan
  28. Household Risk Management and Actual Mortgage Choice in the Euro Area By Ehrmann, Michael; Ziegelmeyer, Michael

  1. By: Bai, Jennie (Georgetown University); Krishnamurthy, Arvind (Stanford University); Weymuller, Charles-Henri (French Treasury)
    Abstract: This paper expands on Brunnermeier, Gorton and Krishnamurthy (2011) and implements a liquidity measure, "Liquidity Mismatch Index (LMI)," to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities. We construct the LMIs for 2882 bank holding companies during 2002-2014 and investigate the time-series and cross-sectional patterns of banks' liquidity and liquidity risk. The aggregate banking sector liquidity worsens from +$5 trillion before the crisis to -$3 trillion in 2008, and reverses back to the pre-crisis level in 2009. We also show how a liquidity stress test can be conducted with the LMI metric, and that such a stress test as an effective macroprudential tool could have revealed the liquidity need of the banking system in the late 2007. In the cross section, we find that banks with more liquidity mismatch have a higher crash probability in the financial crisis and have a higher chance to borrow from the government during the financial crisis. Thus our LMI measure is informative regarding both individual bank liquidity risk as well as the liquidity risk of the entire banking system.
    JEL: G21 G28
    Date: 2015–03
  2. By: Abbassi, Puriya; Iyer, Rajkamal; Peydró, José-Luis; Tous, Francesc R.
    Abstract: We analyze securities trading by banks and the associated spillovers to the supply of credit.Empirical analysis has been elusive due to the lack of securities register for banks. We use a unique, proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. Analyzing data at the security level for each bank in each period, we find that during the crisis, banks with higher trading expertise increase their overall investments in securities, especially in those that had a larger price drop. The quantitative effects are largest for trading-expertise banks with higher capital and in securities with lower rating and long-term maturity. In fact, there are no differential effects for triple-A rated securities. Moreover, banks with higher trading expertise reduce their overall supply of credit in crisis times - i.e., for the same borrower at the same time, trading-expertise banks reduce lending relative to other banks. This effect is more pronounced for trading-expertise banks with higher capital, and the credit reduction is binding at the firm level. Finally, these differential effects for trading-expertise banks are not present outside the crisis period.
    Keywords: banking,investments,bank capital,credit supply,risk-taking
    JEL: G01 G21 G28
    Date: 2015
  3. 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
  4. By: Belke, Ansgar; Gros, Daniel
    Abstract: This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in the euro area. The extent to which the institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles is also discussed. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. Moreover, credit booms and bust leave a debt overhang and losses can materialise only via insolvencies, whereas equity flows absorb automatically losses in case of a bust and provide the cross border owner with incentives to continue to provide financing. It follows that cross-border banks can absorb regional shocks. But large banks pose the 'too big to fail' problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area.
    Keywords: banking union,currency union,default,shock absorber,two-tier reinsurance system
    JEL: E42 E50 F3 G21
    Date: 2015
  5. By: Troug, Haytem Ahmed; Sbia, Rashid
    Abstract: In our paper, we examined the relationship between non-performing loans, as a measure of stability, and concentration, as a measure of competition, in the Libyan banking sector. We used aggregate quarterly data for the 15 commercial banks in the country during the period 2002-2013. A broad set of tests were conducted to measure the relationship between the two variables, and alternative robustness tests were conducted to assure our core finding that less competition in the banking sector leads to a more resilient banking sector. Thus, our results offer empirical support against “competition–stability” theory and conform to the “competition–fragility” literature. We conclude by recommending the need to inspect in more detail (on a bank by bank level) the relationship between competition and fragility in developing countries in general and in Libya in particular.
    Keywords: Banking competition, Financial stability, developing countries, Oil exporting countries, Libya.
    JEL: C50 C58 G00 G21
    Date: 2015
  6. By: Aboura, Sofiane; Lépinette-Denis, Emmanuel
    Abstract: The capital structure of banks has become the focus of an extended debate among policy-makers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.
    Keywords: Modigliani-Miller; Banks; Leverage; Regulation;
    JEL: G3 G21 G28
    Date: 2015–04
  7. By: Tröger, Tobias H.
    Abstract: This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives. From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets - the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities. Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks' debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
    Keywords: banking union,macro-prudential supervision,real estate lending,bail-in,market discipline
    JEL: E44 G01 G18 G21 G28 K22 K23
    Date: 2015
  8. By: Aldasoro, Iñaki; Alves, Iván
    Abstract: Research on interbank networks and systemic importance is starting to recognise that the web of exposures linking banks balance sheets is more complex than the single-layer-of-exposure paradigm. We use data on exposures between large European banks broken down by both maturity and instrument type to characterise the main features of the multiplex structure of the network of large European banks. This multiplex network presents positive correlated multiplexity and a high similarity between layers, stemming both from standard similarity analyses as well as a core-periphery analyses of the different layers. We propose measures of systemic importance that fit the case in which banks are connected through an arbitrary number of layers (be it by instrument, maturity or a combination of both). Such measures allow for a decomposition of the global systemic importance index for any bank into the contributions of each of the sub-networks, providing a useful tool for banking regulators and supervisors. We use the dataset of exposures between large European banks to illustrate the proposed measures.
    Keywords: interbank networks,systemic importance,multiplex networks
    JEL: G21 D85 C67
    Date: 2015
  9. By: Nazar van Doornik, B.F. (Tilburg University, School of Economics and Management)
    Abstract: The thesis consists of three chapters that study the behavior of foreign banks in Brazil. The first chapter explores the Brazilian macro-prudential measures of the end of 2010 in a quasi-natural experiment to unfold the lending behavior of foreign banks. The second chapter evaluates the extent to which the international financial crisis that started in August 2007 induced more affected banks to act in a more pessimistic way on the creditworthiness of their commercial borrowers. The third chapter analyses how the strengthening of creditor rights affected corporate debt structure, collateral liquidity and collateralization rate, following the 2005 bankruptcy law in Brazil.
    Date: 2015
  10. By: Federico Nucera (Luiss Guido Carli University, Rome, Italy); Bernd Schwaab (European Central Bank, Frankfurt, Germany); Siem Jan Koopman (Faculty of Economics and Business Administration, VU University Amsterdam); André Lucas (Faculty of Economics and Business Administration, VU University Amsterdam)
    Abstract: We propose to pool alternative systemic risk rankings for financial institutions using the method of principal components. The resulting overall ranking is less affected by estimation uncertainty and model risk. We apply our methodology to disentangle the common signal and the idiosyncratic components from a selection of key systemic risk rankings that are recently proposed. We use a sample of 113 listed financial sector firms in the European Union over the period 2002-2013. The implied ranking from the principal components is less volatile than most individual risk rankings and leads to less turnover among the top ranked institutions. We also find that price-based rankings and fundamentals based rankings deviated substantially and for a prolonged time in the period leading up to the financial crisis. We test the adequacy of our newly pooled systemic risk ranking by relating it to credit default swap premia.
    Keywords: systemic risk contribution; risk rankings; forecast combination; financial regulation; banking supervision
    JEL: G01 G28
    Date: 2015–06–01
  11. By: Yoshiaki Ogura (School of Political Science and Economics, Waseda University, Japan)
    Abstract: We find empirical evidence that pre-IPO relationships with commercial banks through lending and investment via their venture capital subsidiaries significantly reduces IPO underpricing, whereas the affiliation between a lead underwriter and venture backing the IPO company does not. We also obtain evidence for lower post-IPO risk and return for firms with a pre-IPO banking relationship. These findings suggest that a pre-IPO banking relationship certifies the low risk of an IPO firm, whereas investorsf concerns about conflicts of interest are not significant. Given the fact that institutional investors are a minority in the allocation of IPO stocks in Japan, the former effect is expected to come mainly from reducing either the investorsf winnerfs curse or the signaling incentive of IPO firms, rather than from the reduction in the information rent for institutional investors participating in the book-building process.
    Keywords: IPO underpricing, winnerfs curse, information revelation, conflict of interests, relationship banking
    JEL: G21 L14 D82
    Date: 2015–03
  12. By: Brown, Martin; Guin, Benjamin
    Abstract: We study the exposure of mortgage borrowers in Switzerland to interest rate, income and house price risks and examine how the households’ choice of risky mortgages is related to individual interest rate expectations and risk-aversion. Our analysis is based on a unique data set of household mortgage applications from September 2012 until January 2014. Our assessment of risk exposure among mortgage borrowers in Switzerland is highly sensitive to the underlying assumptions on mortgage costs, household income and house value. Our main results suggest that the exposure of mortgage borrowers to interest rate and house price risks is limited in the medium-term. We further document that the choice of mortgage contract seems to be more influenced by affordability concerns than risk concerns. In particular, individual interest rate expectations hardly affect mortgage contract choice.
    Keywords: Mortgage Default, Mortgage Choice, Household Finance, Mortgage Risk
    JEL: G21 D14 R21 R31
    Date: 2014–12
  13. By: Matteo Chinazzi; Stefano Pegoraro; Giorgio Fagiolo
    Abstract: In this paper we contribute to the debate on macro-prudential regulation by assessing which structure of the nancial system is more resilient to exogenous shocks, and which conditions, in terms of balance sheet compositions, capital requirements and asset prices, guarantee the higher degree of stability. We use techniques drawn from the theory of complex networks to show how contagion can propagate under dierent scenarios when the topology of the nancial system, the characteristics of the nancial institutions, and the regulations on capital are let vary. First, we benchmark our results using a simple model of contagion as the one that has been popularized by Gai and Kapadia (2010). Then, we provide a richer model in which both short- and long-term interbank markets exist. By doing so, we study how liquidity shocks (de)stabilize the system under dierent market conditions. Our results demonstrate how connectivity, the topology of the markets and the characteristics of the nancial institutions interact in determining the stability of the system.
    Keywords: financial networks, systemic risk, contagion, regulation, network topology
    Date: 2015–03–06
  14. By: He, Zhiguo (University of Chicago); Krishnamurthy, Arvind (Stanford University)
    Abstract: Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from "normal" states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a macroeconomic "stress test" linking a stress scenario to the probability of systemic risk states.
    JEL: E44 G12 G20
    Date: 2015–03
  15. By: León, C.; Cely, Jorge; Cadena, Carlos
    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
  16. By: Botsch, Matthew (Bowdoin College); Vanasco, Victoria (Stanford University)
    Abstract: There is a vast empirical and theoretical literature that points to the importance of borrower-lender relationships for firms' access to credit. In this paper, we investigate one particular mechanism through which long-term relationships might improve access to credit. We hypothesize that while lending to a firm, a bank receives signals that allow it to learn and better understand the firm's fundamentals; and that this learning is private; that is, it is information that is not fully reflected in publicly-observable variables. We test this hypothesis using a dataset for 7,618 syndicated loans made between 1987 and 2003. We construct a variable that proxies for firm quality and is unobservable by the bank, so it cannot be priced when the firm enters our sample. We show that the loading on this factor in the pricing equation increases with relationship time, hinting that banks are able to learn about firm quality when they are in an established relationship with the firm. Our finding is robust to controlling for market-wide learning about firm fundamentals. This suggests that a significant portion of bank learning is private and is not shared by all market participants.
    Date: 2015–02
  17. By: Luminita Postelnicu; Niels Hermes; Roselia Servin Juarez
    Abstract: This paper investigates how social networks of group borrowers come into play in joint liability group lending. We use a large and original dataset containing 802 mapped social networks of borrowers from Pro Mujer Mexico. This is the first paper to look at external ties, i.e. social ties with individuals outside the borrowing group. Our main finding is that group lending with joint liability works when group borrowers use the informal risk insurance arrangement embedded in their external ties as guarantee for loan repayment. The extent to which this informal arrangement is used as guarantee is not decided by the borrower, but it is determined by the configuration of the group borrowers’ social networks, i.e. by their overlapping networks. These overlapping networks (or information channels) facilitate the diffusion of information into each other’s networks, and, thus, increases the credibility of the threat of losing one’s informal risk insurance arrangement in case of default. Our results show that the threat of losing the informal risk insurance arrangement embedded in one’s external ties matters for loan repayment even more than internal ties (i.e. ties between group members).
    Date: 2015–05–27
  18. By: Gicoamo Rodano (Bank of Italy); Nicolas Serrano-Velarde (Bocconi University); Emanuele Tarantino (University of Mannheim)
    Abstract: Exploiting the timing of the 2005-06 Italian bankruptcy law reforms, we disentangle the effects of reorganization and liquidation in bankruptcy on bank financing and firms’ investment. A 2005 reform introduces 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 address differently the tension in bankruptcy law between the continuation of viable businesses and the preservation of repayment incentives.
    Keywords: financial distress, financial contracting, renegotiation, multi-bank borrowing, bankruptcy courts
    JEL: G33 K22
    Date: 2015–06
  19. By: Delis, Manthos; Hasan, Iftekhar; Tsionas, Efthymios
    Abstract: Use of variability of profits and other accounting-based ratios in order to estimate a firm's risk of insolvency is a well-established concept in management and economics. This paper argues that these measures fail to approximate the true level of risk accurately because managers consider other strategic choices and goals when making risky decisions. Instead, we propose an econometric model that incorporates current and past strategic choices to estimate risk from the profit function. Specifically, we extend the well-established multiplicative error model to allow for the endogeneity of the uncertainty component. We demonstrate the power of the model using a large sample of U.S. banks, and show that our estimates predict the accelerated bank risk that led to the subprime crisis in 2007. Our measure of risk also predicts the probability of bank default both in the period of the default, but also well in advance of this default and before conventional measures of bank risk.
    Keywords: Endogenous bank risk; Strategic management choices
    JEL: C3 C30 G2 G21
    Date: 2015–06–01
  20. By: Sanatkhani, Mahboobeh; Vasaf, Esmaeil
    Abstract: Abstract One of the most important problems in innovation arguments is how to identify and measure innovation. In industry sector, the available measurements to identify innovation activities are number of patents, R&D expenditure and share of R&D workers. Unfortunately these measurements for service sector especially financial sector are problematic and not readily available. This paper, following Bos et al. (2009), proposes changes of Technology Gap Ratio (TGR) as innovation activity in banking system and investigates it for the US commercial banks in years 2000-2013. For this purpose, at first step, the annual cost frontier functions (as representative of technology set for each year) are estimated by applying Stochastic Frontier Analysis (SFA). Consequently, the efficiency scores for each year are calculated for banks which operate under the same frontier functions. Then, the meta-frontier analysis is employed to estimate the potentially available cost function for the whole period. In next step, the TGR which indicates the relative distance of annual cost frontier function to the most efficient cost function (meta-frontier cost function) for the whole period is calculated. Finally, changes of TGR as a proxy of financial innovation during the time are illustrated by proper Salter curves. Results show that the average of TGR for the period 2000 to 2011 was associated with 2.88% annual growth rate. In other words, commercial banks in this period demonstrated an increasing level of innovation in their activities including financial products and services. In contrast, the results show that in last two years (2012 and 2013) this ratio had a considerable reduction, even less than the initial year. Thus, it seems that they have been less involved in innovation activities during the recent years.
    Keywords: Technology Gap Ratio (TGR), Stochastic Frontier Analysis (SFA), Meta-frontier cost function, banking system, Efficiency.
    JEL: G21
    Date: 2014–10–29
  21. By: Gambetta Podesta, Renzo
    Abstract: This Report use a resampling based on Monte Carlo simulation techniques to calculate distribution for the losses observed in the loans portfolios during 2013 and 2014 for each of the Municipal Savings and Credit Loan Banks in Peru. With these results two key variables are analyzed; regulatory capital ratios are compared with the unexpected losses to verify levels of solvency and the income statements are used to achieve a differently measure of the commons accountant financial profitability ratios for better allocation to the adjusted returns of credit risk of each institution. The analysis was conducted with information from RCD (Reporte Crediticio de Deudores), regulatory report submitted for the SBS (Superintendencia de Banca y Seguros) where we can find detailed information for each debtor like debt amount granted by the financial system, delinquency indicators, guarantees, credit provisions, among others. Distributions of losses are computed repeatedly through the nonparametric bootstrap resampling method from the original population to calculate the desired statistics after each iteration. The results show that the simple profitability ratios differ from those calculated in the simulation because they would not take into account the real risks they face to achieve such returns. In terms of solvency the result is mixed, the regulatory capital requirement for credit risk in some Cajas would be underestimated even they would not be covering the legal minimum.
    Keywords: RARORAC, Credit Risk, Expected Shortfall, Montecarlo Simulation,Expected losses, Unexpected losses,Microfinances
    JEL: C14 C15 G21
    Date: 2015–03
  22. By: Bergheim, Ralf; Ernstberger, Jürgen; Roos, Michael W. M.
    Abstract: This paper experimentally investigates how fair value measurements of financial instruments affect the decision of nonprofessional investors to invest in a bank's shares. Specifically, we assess how investors respond to variations in net income resulting from fair value adjustments in trading assets and how the reliability of the fair value estimates affects their decision. We find that investment decreases as a result of transitions from the first to the third level and we even observe lower investments in case of positive changes in income. Investment decreases most if negative valuation adjustments are based on level 1 estimates suggesting that down pricing by the market is considered as a worse signal than model-based decreases in net income. For larger positive and negative adjustments the impact of valuation levels on investment turns out to be limited. Our results do not provide evidence that Fair Value Accounting per se induces pro-cyclical investment behavior.
    Abstract: Die experimentelle Studie untersucht, wie die Bewertung zum Fair Value die Investitionsentscheidung nicht-professioneller Investoren beeinflusst. Dabei wird die Entscheidung, in Aktien einer Bank zu investieren, in Reaktion auf verschieden hohe Bewertungsänderungen der Aktiva Position 'Wertpapiere' der Bank untersucht. Es erfolgt des Weiteren eine differenzierte Betrachtung der Auswirkungen der Fair Value Hierarchie (Level 1-3) auf die Investitionsbereitschaft. Die Resultate zeigen, dass die Investitionsbereitschaft sowohl für negative als auch positive Bewertungsänderungen abnimmt. Die geringste Investitionsbereitschaft wird im Fall von negativen Bewertungsänderungen auf Grundlage beobachtbarer Marktpreise beobachtet (Level 1).
    Keywords: banks,fair value accounting,nonprofessional investors,investment decision,experiment
    JEL: C91 G11 M41
    Date: 2014
  23. By: Krishnamurthy, Arvind (Stanford University); Vissing-Jorgensen, Annette (?)
    Abstract: We present a theory in which the key driver of short-term debt issued by the financial sector is the portfolio demand for safe and liquid assets by the non-financial sector. This demand drives a premium on safe and liquid assets that the financial sector exploits by owning risky and illiquid assets and writing safe and liquid claims against those. The central prediction of the theory is that government debt (in practice this is predominantly Treasuries) should crowd out financial sector lending financed by short-term debt. We verify this prediction in U.S. data from 1875-2014. We take a series of approaches to rule our "standard" crowding out via real interest rates and to address potential endogeneity concerns.
    Date: 2015–04
  24. By: Benoît Carmichael; Jean Armand Gnagne; Kevin Moran
    Abstract: This paper assesses the impact that a widely-based Securities Transaction Tax (STT) could have on the likelihood of systemic financial crises. We apply the methodology developed by Demirgüç-Kunt and Detragiache (1998) [IMF Staff Papers 45 (1)] to a panel dataset of 34 OECD countries for the sample 1973 – 2012, using a measure of a country’s average bid-ask spread in financial markets as a proxy for the likely effect of a STT on transactions costs. Our results indicate that the establishment of a STT could sizeably increase the risk of financial crises.
    Keywords: Securities Transaction Tax, Tobin Tax, Regulation, Financial Crises
    JEL: E13 G15 G17
    Date: 2015
  25. By: Rachel Cassidy; Marcel Fafchamps
    Abstract: This paper examines how members sort across community-based microfinance groups, specifically Village Savings and Loan Associations in rural Malawi. Our central question is to ask whether such groups allow savers (especially commitment savers) to match with potential borrowers, thereby promoting financial intermediation. We analyse novel data in the form of a census of all 3,800 members of 150 VSLA groups. We first develop predictions on sorting in terms of individual members’ occupation and present bias, and then test these predictions in a dyadic regression framework. We find evidence that whilst there is positive assortative matching on occupation, suggesting unrealised intermediation possibilities; there is negative assortative matching on present bias, indicating that these groups do at least create a degree of financial intermediation between commitment savers and borrowers. The latter may be welfare-enhancing for both commitment savers and borrowers, given the low access to commitments savings technologies and to credit in these communities.
    Date: 2015
  26. By: Muhammad Zubair (Pakistan Institute of Development Economics, Islamabad); Attiya Yasmin Javid (Pakistan Institute of Development Economics, Islamabad)
    Abstract: This study sheds light on the mission drift arguments for 149 MFIs working in continent Asia over the period 2003 to 2013. The mission drift is captured by average loan size, total number of borrowers and lending rate. The study finds positive and significant relationship of average loan size with average profit and cost. These results indicate that increase in loan size results in increase in cost and this reduces outreach. The result shows that high subsidy uncertainty increases the interest rate and reduces the outreach of MFIs suggesting that subsidy must be less uncertain to avoid mission drift. The study also finds that subsidy uncertainty increases the average loan size, therefore core poor are not served. The implications that emerged fro m findings are that cost efficiency is very important, as cost efficiency increases, loan size becomes small, which ultimately fulfil the promise of maximum outreach to the core poor clients. The findings suggest for subsidy donors and Government need to m ake more clear policies regarding the disbursement timing and amount of subsidy. This will reduce the ambiguity about subsidy in MFIs and let them work more confidently on their mission
    Keywords: Microfinance, Subsidy Uncertainty, Outreach, Mission Drift, Sustainability
    Date: 2015
  27. By: Wenlang Zhang (CITIC Securities Company Limited); Gaofeng Han (Hong Kong Monetary Authority); Brian Ng (Hong Kong Monetary Authority); Steven Chan (Hong Kong Monetary Authority)
    Abstract: Our analysis based on firm-level data indicates that China¡¦s corporate sector does not appear to be over-leveraged in aggregate despite rapid credit growth following the global financial crisis. However, some industries, particularly real estate developers and firms in industries with substantial over-capacity, have continued to increase leverage. By ownership, it is mainly state-owned enterprises (SOEs) that have increased leverage, while private enterprises have deleveraged in recent years. Using a corporate finance model, our research shows that SOEs¡¦ leveraging has been mainly driven by implicit government support amid lower funding costs than private enterprises. If SOEs, particularly the real estate developers and firms in overcapacity industries, had borrowed without such support, their leverage would have been much lower. Moreover, some SOEs did not use credit obtained via formal financing channels to expand their businesses, but instead conducted credit intermediation. Leveraging driven by government support has resulted in a weakening in fund-use efficiency and a deterioration in corporate debt-servicing capacity. Meanwhile, non-financial corporate credit intermediation activities not only add risks to banks¡¦ asset quality but also mislead policy makers. Specifically, headline figures of credit expansion would overstate credit allocated to the real economy and understate credit allocated to the financial sector. Our analysis suggests that, if corporate credit intermediation activities are taken into account, the credit intermediation chain would be longer than indicated by the headline figures. This also suggests quantity indicators, such as credit growth, may have become less informative of China¡¦s monetary conditions.
    Date: 2015–04
  28. By: Ehrmann, Michael; Ziegelmeyer, Michael (Munich Center for the Economics of Aging (MEA))
    Abstract: Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as one of household risk management: income volatlity reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income.
    JEL: D12 E43 E52 G21
    Date: 2014–04–14

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