nep-ban New Economics Papers
on Banking
Issue of 2015‒07‒25
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Monitoring Vulnerability and Impact Diffusion in Financial Networks By Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Benjamin Miranda Tabak
  2. Profitability in the Greek Banking System: a Dual Investigation of Net Interest and Non-Interest Income By Dimitrios P. Louzis; Angelos T. Vouldis
  3. The Vulnerability of Europe's Small and Medium-Sized Banks By Ashoka Mody; Guntram B. Wolff
  4. Optimal Banking Contracts and Financial Fragility By Ennis, Huberto M.; Keister, Todd
  5. Banks' net interest margin and the level of interest rates By Busch, Ramona; Memmel, Christoph
  6. Business Training Allocation and Credit Scoring: Theory and Evidence from Microcredit in France By Renaud Bourlès; Anastasia Cozarenco; Dominique Henriet; Xavier Joutard
  7. The Supply Side of Household Finance By Gabriele Foà; Leonardo Gambacorta; Luigi Guiso; Paolo Emilio Mistrulli
  8. Contagion, bailouts and welfare impacts of Systemic Risk By Christoph Siebenbrunner
  9. The Shadow-Banking Network of Interpersonal Relations in Traditional China By Difan Qu
  10. Network Structure Analysis of the Brazilian Interbank Market By Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Benjamin Miranda Tabak
  11. Innovation, Deregulation, and the Life Cycle of a Financial Service Industry By Hayashi, Fumiko; Li, Grace; Wang, Zhu
  12. Patent collateral, investor commitment and the market for venture lending By Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis
  13. Endogenous Intermediation in Over-the-Counter Markets By Babus, Ana; Hu, Tai-Wei
  14. Facilitating SME Financing through Improved Credit Reporting By International Committee on Credit Reporting

  1. By: Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Benjamin Miranda Tabak
    Abstract: In this paper, we propose novel risk-related network measurements to identify the roles that financial institutions play as potential targets or sources of contagion. We derive theoretical properties and provide a clear systemic risk interpretation for the proposed measures. Devised upon the notion of communicability in networks, we introduce the impact susceptibility index, which indicates whether market participants are locally or remotely vulnerable. We show that this index can be used as a financial stability monitoring tool and apply it to analyze the Brazilian financial market. We find that non-banking institutions are potentially remote vulnerable in certain periods, while banking institutions are not susceptible to indirect impacts. To address the perspective of market participants as sources of contagion, we propose the impact diffusion influence index, which captures the potential influence of financial institutions on propagating impacts in the network. We unveil the presence of a portion of non-large banking institutions that is consistently more influential than large banks in potentially diffusing impacts throughout the network. Regarding financial system stability, regulators should identify the entities that play these two roles, as they can render the system more risky
    Date: 2015–07
  2. By: Dimitrios P. Louzis (Bank of Greece and Athens University of Economics and Business); Angelos T. Vouldis (Bank of Greece and European Central Bank)
    Abstract: This study examines in parallel the determinants of interest and non-interest income in the Greek banking system aiming to understand the primary drivers of overall profitability for Greek banks. Using dynamic panel data techniques and a unique data set, including supervisory data, covering the whole Greek commercial banking system from 2004 to 2011, we find that net interest income is primarily affected by the banks’ market power, their operating costs and their strategic choice to diversify their income sources by enhancing non-interest income. On the other hand, non-interest income is more persistent than net interest income, with the more efficient banks, possessing a strong deposit base, having greater leverage in boosting their non-interest income. Aggregate demand conditions and inflation can also affect both income components. Moreover, interest- and non-interest income are found to be substitutes rather than complements, with non-interest income used as an indirect competition instrument by efficient banks, instead of competing directly with their peers through prices in loans and deposits.
    Keywords: Profitability; Non interest income; Dynamic Panel data; Greek banking system
    JEL: G21 C23
    Date: 2015–02
  3. By: Ashoka Mody; Guntram B. Wolff
    Abstract: We study the vulnerability of 130 banks directly supervised by the European Central Bankâ??s Single Supervisory Mechanism. Illustrative stress tests using banksâ?? balance sheet data reveal that significant stress prevails in the euro areaâ??s smaller and medium-sized banks, many of them located in southern Europe. The banks we identify as stressed also have performed substantially worse on the stock market. The vulnerable banks are typically hobbled by non-performing loans to European businesses. Strengthening the banking system, therefore, is important to achieve sustainable recovery because it will revitalise credit to the healthier segments of the economy. But instead of emphasising bank recapitalisation, as in past years, we believe the task is to shrink the banking sector to a healthier core.
    Date: 2015–07
  4. By: Ennis, Huberto M. (Federal Reserve Bank of Richmond); Keister, Todd (Rutgers University)
    Abstract: We study a finite-depositor version of the Diamond-Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the constrained efficient allocation of resources in closed form and show that this allocation provides liquidity insurance to depositors. The contractual arrangement that decentralizes this allocation resembles a standard bank deposit in that it has a demand able debt-like structure. When withdrawals are unusually high, however,depositors who withdraw relatively late experience significant losses. This contractual arrangement can be fragile, admitting another equilibrium in which depositors run on the bank by withdrawing funds regardless of their liquidity needs.
    JEL: D82 G01 G21
    Date: 2015–07–20
  5. By: Busch, Ramona; Memmel, Christoph
    Abstract: An increase in the level of interest rates is said to have a negative impact on banks' net interest margins in the short run. Using a time series of more than 40 years for the German banking system, we show that the opposite effect exists in the long run, where an increase in the level of interest rates by 100 basis points leads to an estimated increase of 7 basis points in the banks' net interest margin. In addition, we analyze the consequences of the low-interest rate environment and find that banks' interest margins for retail deposits, especially for term deposits, have declined by up to 97 basis points.
    Keywords: net interest margin,level of interest rates
    JEL: G21
    Date: 2015
  6. By: Renaud Bourlès (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Anastasia Cozarenco (Université Libre de Bruxelles (ULB),SBS-EM, Centre Emile Bernheim and CERMi); Dominique Henriet (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Xavier Joutard (Université Lumière Lyon 2 and GATE Lyon Saint-Etienne)
    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 influence microfinance institution decisions to allocate business training. By means of a theoretical model, we show that superior information 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
    Date: 2015–07
  7. By: Gabriele Foà (Yale University); Leonardo Gambacorta (Bank for International Settlements); Luigi Guiso (EIEF); Paolo Emilio Mistrulli (Banca d'Italia)
    Abstract: We propose a new, data-based test for the presence of biased financial advice when households choose between fixed and adjustable rate mortgages. If households are wary, the relative cost of the two types should be a sufficient statistic for a household contract choice: the attributes of the bank that makes the loan should play no role. If households rely on banks'advice to guide their choice, banks may be tempted to bias their counsel to their own advantage. In this case bank-specific supply characteristics will play a role in the household's choice above any role they play through relative prices. Testing this hypothesis on a sample of 1.6 million mortgages originated in Italy between 2004 and 2010, we find that the choice between adjustable and fixed rates is signicantly affected by change in banks' supply factors, especially in periods during which banks do not change the relative price of the two mortgage types. This supports the view that banks are able to affect customers'mortgage choices not only by pricing but also through an advice channel.
    Date: 2015
  8. By: Christoph Siebenbrunner (Vienna University of Technology)
    Abstract: The aim of the paper is to study whether a private-sector bailout can emerge endogenously, when agents act rationally in the absence of a government intervention. I study a contagion model in which may prevent default cascades by bailing out defaulted. Using this model, I derive the conditions for social efficiency and individual rationality of bailouts. Bailouts are almost always socially efficient but hardly ever individually rational because of an interesting feature of contagion effects. There exists a solution that is both individually rational and socially efficient. However, it does not constitute a non-cooperative equilibrium. I conclude that a policy intervention in which are forced to contribute an amount proportional to the contagion losses received towards a bailout can provide a solution to this dilemma.
    Keywords: Systemic Risk; Financial Stability; Financial regulation
    JEL: G00 G01 G18
  9. By: Difan Qu (The University of Hong Kong)
    Abstract: Shadow-banking have often been regarded as those financial activities undertaken by non-commercial bank financial intermediaries or individuals that are often ill-regulated or not regulated at all. Shadow-banking in China has been a controversial concept, which has not been scientifically defined. On the global scale, the ill-regulation of shadow-banking has been regarded as a major cause of the financial crisis. Although to date China has not suffered significantly from shadow-banking activities as much compared with other jurisdiction such as the United States, the Chinese shadow-banking nevertheless has attracted wide attention from many practitioners, governmental officials, and academia. The attitude adopted by the Chinese government toward shadow-banking is ambiguous. While most shadow-banking related studies have been conducted under a modern financial context, little attention have been paid to the Chinese culture and histories in ancient China that might help to explain status quo of shadow-banking regulation in today’s China. In formulating an optimal financial regulatory structure that reduces systemic risks of the Chinese shadow-banking system, one inevitable prerequisite question that needs to be answered is that in China, what are the rationales that drive each individual in participating shadow-banking activities or formulating into small organizations to carry out such endeavour. Throughout the long history of China, financial tools by monetary measures have been largely suppressed. This has been largely contributed by the then dominant ideology Confucianism (Chen, 2009, p.10). However, this does not mean that financial activities are non-existent in ancient China, only that they are no longer monetary in nature. On the contrary, the medium of ancient Chinese financial activities are essentially personal, where the lower ranks of the hierarchical society have themselves been regarded as financial products that serve to be the intermediary of investment and return (Chen, 2009. p.10 – 11). This paper seeks to find the rationales that have formulated today’s Chinese shadow-banking system by exploring dis-financialized nature of the ancient Chinese society, and argues that many households are themselves de facto small personalized shadow-banking systems. The findings in this paper will contribute to the modern definition of shadow-banking in China, which will in turn shed lights in constructing an optimal financial regulatory structure that enhances the performance on shadow-banking regulation.
    Keywords: Shadow-banking, Legal regulation, Chinese culture, Chinese history, Finance in Ancient China
  10. By: Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Benjamin Miranda Tabak
    Abstract: In this paper, we provide a detailed analysis of the roles FIs play within the interbank market using a network-based approach. We investigate how the interbank network evolves with respect to different types of market participants. For this analysis, we employ several well-known complex network measures that extract topological characteristics of the interbank network. We use the weighted clustering coefficient to assess the substitutability of FIs for the lending and borrowing perspectives and find that large banking institutions are counterparties that are easily substitutable. In addition, we verify that the interbank network presents a high disassortative mixing pattern, suggesting that highly connected FIs are frequently connected to others with very few connections. This finding is in line with the fact that interbank networks often show a core-periphery structure. We also investigate the presence of the ``rich-club'' effect on the network and find that it is strongly present in the community comprising the large banking institutions, as they normally form near-clique structures. Since they often play the role of liquidity providers in the interbank market, this interconnectedness effectively endows the network with robustness, as participants that are with liquidity issues can easily substitute counterparties that are liquidity suppliers
    Date: 2015–06
  11. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City); Li, Grace (International Monetary Fund); Wang, Zhu (Federal Reserve Bank of Richmond)
    Abstract: This paper examines innovation, deregulation, and fi rm dynamics over the life cycle of the U.S. ATM and debit card industry. In doing so, we construct a dynamic equilibrium model to study how a major product innovation (introducing the new debit card function) interacted with banking deregulation drove the industry shakeout. Calibrating the model to a novel data set on ATM network entry,exit, size, and product offerings shows that our theory fits the quantitative pattern of the industry well. The model also allows us to conduct counterfactual analyses to evaluate the respective roles that innovation and deregulation played in the industry evolution.
    JEL: G2 L10 O30
    Date: 2015–07–20
    Abstract: This paper investigates the market for lending to technology startups (i.e. venture lending) and examines two mechanisms that facilitate trade within it: the ’saleability’ of patent collateral and financial intermediaries. We find that intensified trading in the secondary market for patent assets increases the annual rate of startup lending, particularly for startups with more re-deployable patent assets. Moreover, we show that the credibility of venture capitalist commitments to refinance and grow fledgling companies is vital for startup debt provision. Following a severe and unexpected capital supply shock for VCs, we find a striking flight to safety among lenders, who continue to finance startups whose investors are better able to credibly commit to refinancing their portfolio companies, but withdraw from otherwise promising projects that may have most needed their funds. The findings are consistent.
    Keywords: fi nancing innovation, patent collateral, venture capital, market for patents.
    JEL: L14 L26 G24 O16 O3
    Date: 2015–07
  13. By: Babus, Ana; Hu, Tai-Wei
    Abstract: We provide a theory of trading through intermediaries in OTC markets. The role of intermediaries is to sustain unsecured trade. When agents trade without collateral, total surplus can increase. In our model, traders are connected through a network. Agents observe their neighbors' actions, and can trade with their counterparty in a given period through a path of intermediaries in the network. If trade is unsecured, agents can renege on their obligations. We show that trading through a network is essential to support unsecured trade, when agents infrequently meet the same counterparty in the market. However, intermediaries must receive fees to have the incentive to implement unsecured trades. While trade without collateral can be sustained in many networks, the efficiency gains are higher in a star network. The center agent in a star can receive higher fees as well. Moreover, concentrated intermediation is a stable structure, when agents incur linking costs.
    Keywords: dynamic network formation; over-the-counter trading; strategic default
    JEL: D85 G14 G21
    Date: 2015–07
  14. By: International Committee on Credit Reporting
    Keywords: Finance and Financial Sector Development - Access to Finance Banks and Banking Reform Finance and Financial Sector Development - Financial Intermediation Finance and Financial Sector Development - Debt Markets Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress
    Date: 2014–05

This nep-ban issue is ©2015 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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