nep-ban New Economics Papers
on Banking
Issue of 2015‒07‒11
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Spectral Stress VaR (SSVaR) By Dominique Guegan; Bertrand K. Hassani; Kehan Li
  2. The determinants of banks lobbying activities By Rajna GIBSON BRANDON; Miret PADOVANI
  3. The Determinants of Household’s Bank Switching By Marianna Brunetti; Rocco Ciciretti; Ljubica Djordjevic
  4. Business Training Allocation and Credit Scoring: Theory and Evidence from Microcredit in France By Renaud Bourlès; Anastasia Cozarenco; Dominique Henriet; Xavier Joutard
  5. Get in with a Foreigner: Consumer Trust in Domestic and Foreign Banks By Werner Bönte; Ute Filipiak; Sandro Lombardo
  6. Risk or Regulatory Capital? Bringing distributions back in the foreground By Dominique Guegan; Bertrand Hassani
  7. Too Unexpected to Fail: Bail-Out Policy and Sudden Freezes By Arup Daripa
  8. Enforcing Repayment: Social Sanctions versus Individual Incentives By Arup Daripa
  9. Credit Reallocation in Japan (Japanese) By UESUGI Iichiro; SAKAI Koji
  10. Mortgage Finance and Technological Change By Robin Döttling; Enrico Perotti
  11. Reinsurance and securitisation of life insurance risk: the impact of regulatory constraints By Pauline BARRIEU; Henri LOUBERGE
  12. Coupling direction of the European Banking and Insurance sectors using inter-system recurrence networks By Peter Martey Addo

  1. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Bertrand K. Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Kehan Li (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: One of the key lessons of the crisis which began in 2007 has been the need to strengthen the risk coverage of the capital framework. In response, the Basel Committee in July 2009 completed a number of critical reforms to the Basel II framework which will raise capital requirements for the trading book and complex securitisation exposures, a major source of losses for many international active banks. One of the reforms is to introduce a stressed value-at-risk (VaR) capital requirement based on a continuous 12-month period of significant financial stress (Basel III (2011) [1]. However the Basel framework does not specify a model to calculate the stressed VaR and leaves it up to the banks to develop an appropriate internal model to capture material risks they face. Consequently we propose a forward stress risk measure “spectral stress VaR” (SSVaR) as an implementation model of stressed VaR, by exploiting the asymptotic normality property of the distribution of estimator of VaR p. In particular to allow SSVaR incorporating the tail structure information we perform the spectral analysis to build it. Using a data set composed of operational risk factors we fit a panel of distributions to construct the SSVaR in order to stress it. Additionally we show how the SSVaR can be an indicator regarding the inner model robustness for the bank.
    Date: 2015–06
  2. By: Rajna GIBSON BRANDON (University of Geneva and Swiss Finance Institute); Miret PADOVANI (Vienna University)
    Abstract: In this paper, we examine the relationship between banks' lobbying activities, their size, nancial strength, and sources of income. First, we nd that banks are more likely to lobby when they are larger, have more vulnerable balance sheets, are less creditworthy, and have more diversied business proles. We also nd that banks engaged in non-traditional businesses, e.g. securitization and trading, or in highly regulated businesses, e.g. insurance, hire more lobbyists and spend larger amounts on lobbying. Finally, we observe that the announcement of the Dodd-Frank bill led to increased lobbying by banks with higher trading revenues.
    Keywords: banking, lobbying, nancial regulatory reform, Dodd-Frank bill.
    JEL: G21 G28
  3. By: Marianna Brunetti (Department of Economics and Finance, University of Rome Tor Vergata, Italy); Rocco Ciciretti (Department of Economics and Finance, University of Rome Tor Vergata, Italy; The Rimini Centre for Economic Analysis, Italy); Ljubica Djordjevic (SAFE, Goethe University, Germany)
    Abstract: We investigate the determinants of households’ bank switching in 2006-2012 period exploiting a unique representative dataset from Bank of Italy Survey on Household Income and Wealth that follows the households and their bank(s) over time. Focusing on the features of the household-bank relationship, we find that exclusivity (using a single bank), intensity (number of services used), and scope (bank services used) of the relationship with the bank play a role in shaping the households’ decision to switch. Moreover, we find that this decision is strongly and positively correlated with both taking out and paying off a mortgage. We also find that the risk preferences, mobility and economic condition of the household are not associated with its propensity to switch, whereas education and financial literacy do matter for this decision, albeit with opposite effects. Cooperative and unlisted banks are significantly less likely to be discarded. As expected, competition plays a role increasing switching.
    Date: 2013–10
  4. By: Renaud Bourlès; Anastasia Cozarenco; Dominique Henriet; Xavier Joutard
    Abstract: The microcredit market, where inexperienced micro-borrowers meet experienced microfinance institutions (MFIs), is subject to reversed asymmetric information. Thus, MFIs' choices can shape borrowers' beliefs and their behavior. We analyze how this mechanism may influencemicrofinance institution decisions to allocate business training. By means of a theoretical model, we show that superior can lead the MFI not to train (or to train less) riskier borrowers. We then investigate whether this mechanism is empirically relevant, using data from a French MFI.Confirming our theoretical reasoning, we find a non-monotonic relationship between the MFI's decision to train and the risk that micro-borrowers represent.
    Keywords: microcredit; reversed asymmetric information; looking-glass self; bivariate probit; scoring model
    JEL: C34 C41 D82 G21
    Date: 2015–07–07
  5. By: Werner Bönte (University of Wuppertal); Ute Filipiak (Georg-August-University Göttingen); Sandro Lombardo (University of Wuppertal)
    Abstract: Prior research suggests that trust plays an important role for individuals' participation in stock markets. This paper focuses on potential customers in retail banking markets and empirically investigates their trust in foreign banks and domestic banks. Using a large survey on savings patterns of Indian households, we find that potential retail banking customers in India are less likely to trust foreign banks with their money than Indian private banks. However, our results also suggest that highly educated Indians using information sources tend to have more confidence in foreign banks than in Indian private banks.
    Keywords: Trust; Banking; India
    JEL: G2 D8 Z1
    Date: 2015–07–01
  6. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: This paper discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper make some recommendations to the supervisor and proposes alternative procedures to measure the risks.
    Date: 2015–05
  7. By: Arup Daripa (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: I present a mechanism that relies on the interaction of coordination and ambiguity (Knightian uncertainty) and makes precise how a loss of confidence can arise in loan markets, leading to a systemic liquidity crisis. The paper studies a simple global-game coordination model among lenders to a financial intermediary and shows how a market haircut arises in equilibrium. I show how the haircut responds to a variety of parameters. In particular, I show that coordination is non-robust to ambiguity in investor signals and becomes fragile in an environment with ambiguity. This leads to the haircut jumping up suddenly, possibly to 100% when enough lenders are ambiguity-sensitive. Further, I show that the fragility of coordination implies that in such an environment, policy itself becomes a systemic trigger. If the regulator fails to rescue an institution that the market expects to be saved, which in turn changes market expectation about policy for other institutions even slightly, an immediate systemic collapse of liquidity ensues. The results explain both the contagious run on liquidity markets at the advent of the recent crisis as well as the liquidity market freeze after the Lehman collapse. While what matters for the possibility run is whether an institution is too-unexpected-to-fail (TUTF), it is likely that institutions typically considered too-big-to-fail (TBTF) are also likely to be TUTF. The results then show that TBTF institutions limit the spread of crises, and breaking up a TBTF increases systemic vulnerability. Further, the results cast some doubt on the efficacy of the ring-fencing policy proposed by the UK banking commission.
    Keywords: Short-term debt, systemic liquidity crises, coordination, ambiguity, bail-out policy, liquidity policy.
    JEL: G2 C7 E5
    Date: 2015–04
  8. By: Arup Daripa (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We study repayment incentives generated through social sanctions and under pure in- dividual liability. In our model agents are heterogeneous, with differing degrees of risk aversion. We consider a simple setting in which agents might strategically default from a loan program. We remove the usual assumption of exogenous social penalties, and consider the endogenous penalty of exclusion from an underlying social cooperation game, modeled here as social risk-sharing. For some types of agents social risk-sharing can be sustained by the threat of exclusion from this arrangement. These types have social capital and can be given a loan that bootstraps on the risk-sharing game by using the threat of exclusion from social risk-sharing to deter strategic default. We show that the use of such sanctions can only cover a fraction of types participating in social risk sharing. Further, coverage is decreasing in loan duration. We then show that an individual loan programaugmented by a compulsory illiquid savings plan (such schemes are used by the Grameen Bank) can deliver greater coverage, and can even cover types excluded from social risk-sharing (i.e. types for whom social penalties are not available at all). Further, the coverage of an individual loan program has the desirable property of increasing with loan size as well as loan duration. Finally, we show that social cooperation enhances the performance of individual loans. Thus fostering social cooperation is beneficial under individual liability loans even though it has limited usefulness as a penalty under social enforcement of repayment. The results offer an explanation for the Grameen Bank’s adoption of individual liability replacing group liability in its loan programs since 2002.
    Keywords: Strategic default, social cooperation, social penalties, individual liability, loan coverage, loan duration, loan size.
    JEL: O12
    Date: 2015–03
  9. By: UESUGI Iichiro; SAKAI Koji
    Abstract: This paper examines the reallocation of credit among Japanese firms during the period FY1980-FY2014. We employ the quarterly Financial Statements Statistics of Corporations by Industry and apply the job reallocation measure proposed by Davis and Haltiwanger (1992) in order to gauge the extent of credit reallocation. Our findings are as follows: (1) there is a substantial amount of credit reallocation at any phase of the business cycle, indicating that firms' financial procurement behavior is inherently quite heterogeneous; (2) credit creation is less volatile than credit destruction since it incurs larger search and screening costs as predicted by the theories on informational asymmetry and search and matching; (3) the extent of credit reallocation declined sharply in the 1990s and remained stagnant thereafter presumably due to the impaired Japanese credit market during the period; (4) overall credit reallocation is procyclical to the business cycle in Japan as a result of strong procyclicality of credit creation and relatively weak countercyclicality of credit destruction; and (5) the credit creation and reallocation among SMEs is acyclical to the business cycle, while the destruction is countercyclical, indicating that the extent of credit increase is limited among small and medium-sized enterprises (SMEs) during the boom period.
    Date: 2015–06
  10. By: Robin Döttling (University of Amsterdam, the Netherlands); Enrico Perotti (University of Amsterdam, the Netherlands)
    Abstract: We explore how house prices evolve under technological progress, when housing serves for consumption as well as store of value. Technological change leads to human capital substituting physical capital and manual labor. Reduced use of physical capital implies that firms have less tangible collateral to pledge for external finance. This results in lower business demand for credit and a decline in interest rates. Over time, savings are redirected to mortgage credit, where houses serve as collateral. Under fixed land supply, house prices rise in real terms. The combination of growing wage inequality and mortgage credit leads to high household leverage for low-skill workers, increasing default rates and foreclosures. Restraining mortgage borrowing is more effective than subsidies to limit mortgage defaults, by containing both leverage and house price appreciation. It also leads to lower interest rates, supporting more corporate investment and higher wages.
    Keywords: Inequality; mortgage credit; housing; human capital; skill-biased technological change
    JEL: D33 E22 E44 R21
    Date: 2015–07–06
  11. By: Pauline BARRIEU (London School of Economics); Henri LOUBERGE (University of Geneva and Swiss Finance Institute)
    Abstract: Large systematic risks, such as those arising from natural catastrophes, climatic changes and uncertain trends in longevity increases, have risen in prominence at a societal level and, more particularly, have become a highly relevant issue for the insurance industry. Against this background, the combination of reinsurance and capital market solutions (insurance-linked securities) has received an accrued interest. In this paper, we develop a general model of optimal risk-sharing among three representative agents – an insurer, a reinsurer and a financial investor, making a distinction between systematic and idiosyncratic risks. We focus on the impact of regulation on risk transfer, by differentiating reinsurance and securitisation in terms of their impact on reserve requirements. Our results show that different regulatory prescriptions will lead to quite different results in terms of global risk-sharing.
    Keywords: Reinsurance, Risk sharing, Risk measures, Longevity risk, Insurance-Linked securities
    JEL: G22
  12. By: Peter Martey Addo (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: Modern financial systems exhibit a high degree of interdependence making it difficult in predicting. This has raise concerns on the correct identification of coupling direction in financial sectors of the economy. This study explores a “two-way” risk connection between the European banking and insurance sector based on geometrical closeness of observations. Specifically, the study looks at the inter-system recurrence networks in tracing dynamical transitions and detecting coupling direction between these sectors. The overall results shows that the banking sector is central in risk transmission compared to the insurance sector. A comprehensive discussion of the feasibility and relevance of the approach in studying systemic risk is provided.
    Abstract: Les systèmes financiers modernes présentent un degré élevé d'interdépendance rendant difficile la prédiction. Cela a soulevé des questions concernant l'identification correcte d'une direction de couplage dans les secteurs financiers de l'économie. Cette étude explore "en deux sens" la connexion des risques entre le système bancaire européen et le secteur de l'assurance, basée sur la proximité géométrique des observations. Plus précisément, l'étude se penche sur les réseaux de récurrence inter-système en traçant des transitions dynamiques et en détectant la direction de couplage entre ces secteurs. Les résultats globaux montrent que le secteur bancaire est un élément central dans la transmission de risque par rapport au secteur de l'assurance. Une discussion complète de la faisabilité et la pertinence de l'approche dans l'étude du risque systémique est fournie.
    Date: 2015–06

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