nep-ban New Economics Papers
on Banking
Issue of 2015‒08‒07
eight papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The influence of risk-taking on bank efficiency : Evidence from Colombia By Sarmiento, M.; Galán, Jorge E.
  2. Dynamic Incentives in Microfinance – What about the Farmers? By Hering, Imke; Musshoff, Oliver
  3. Optimal Organization of Financial Intermediaries By Spiros Bougheas; Tianxi Wang
  4. Why Did Bank Lending Rates Diverge from Policy Rates After the Financial Crisis? By Anamaria Illes; Marco Lombardi; Paul Mizen
  5. Changes in funding patterns by Latin American banking systems:how large? how risky? By Liliana Rojas-Suárez; José María Serena
  6. Global Collateral: How Financial Innovation Drives Capital Flows and Increases Financial Instability By Ana Fostel; John Geanakoplos; Gregory Phelan
  7. Optimal Time-Consistent Macroprudential Policy By Enrique Mendoza; Javier Bianchi
  8. Counterparty Risk in Material Supply Contracts By Anna Costello; Nina Boyarchenko

  1. By: Sarmiento, M.; Galán, Jorge E.
    Abstract: We present a stochastic frontier model with random inefficiency parameters<br/>which is able to capture the influence of risk-taking on bank efficiency and that<br/>distingues those effects among banks with different characteristics. Cost and profit efficiency are found to be over- and underestimated when risk measures are not accurately modeled. We find that more capitalized banks are more cost and profit efficient, while banks assuming more credit risk are less cost efficient but more profit efficient. The magnitude of these effects vary with bank's size and affiliation. Liquidity is found to affect cost efficiency only for domestic banks. Large and foreign banks benefit more from higher credit and market risk exposures, while small and domestic banks find more advantageous to be more capitalized. We identify some channels that explain these differences and provide insights for macroprudential regulation.
    Keywords: bank efficiency; Bayesian inference; Heterogeneity; random parameters; risk-taking; stochastic frontier models
    JEL: C11 C23 C51 D24 D21 G32
    Date: 2015
  2. By: Hering, Imke; Musshoff, Oliver
    Abstract: Dynamic incentives have become a common measure in microfinance institutions (MFI) to counteract the risk of default and to strengthen the borrower’s identification with his microlender. This study focuses on relaxation in loan volume rationing in the course of the bank-borrower relationship. More particularly, we consider the differentiation in lending politics faced by farmers and non-farmers and match our findings with the repayment performances of both client groups. By means of a rich data set for the years 2007 until 2013 provided by a MFI in Azerbaijan, we demonstrate that farmers face a higher degree of loan volume rationing but outperform the non-farmers with respect to loan repayments. Moreover, our results reveal that relaxation in loan volume rationing works as a tool for risk management in MFIs. In conclusion, we deduce that MFIs have still not recognized the full business potential of their farming clients.
    Keywords: Microfinance, Risk management, Dynamic incentives, Lending relationships, Azerbaijan, Agricultural Finance, Community/Rural/Urban Development, G21, O16, Q14,
    Date: 2015–05
  3. By: Spiros Bougheas; Tianxi Wang
    Abstract: This paper provides a unified framework for endogenizing two distinct organizational structures of financial intermediation. In one structure, called Bank, the intermediary is financed by issuing debt contracts to investors, and thus resembles commercial banks. In the other structure, called Fund, the intermediary is financed by issuing equity contracts to investors, thus resembling private-equity funds. The paper finds that in the former incentives can be provided in a less costly way, but the latter is more robust to negative shocks on the asset side. Our model predicts that relative to banks, private equity funds are more involved in the running of the firms that they finance, contribute more to the success of these firms, and provide funds to higher-risk, higher-return firms.
    Keywords: Financial Intermediation; Bank; Equity Funds
    Date: 2015
  4. By: Anamaria Illes; Marco Lombardi; Paul Mizen
    Abstract: After the global finance crisis short-term policy rates were cut to near-zero levels, yet, bank lending rates did not fall as much as the decline in policy rates would have suggested. If the crisis represents a structural break in the relationship between policy rates and lending rates, how should central banks view the post-crisis transmission of policy to lending rates? This poses a major puzzle for monetary policymakers. Using a new weighted average cost of liabilities to measure banks’ effective funding costs we show a model of interest rate pass-through with dynamic panel data methods solves this puzzle, and has many other advantages over policy rates. It suggests central banks should focus on the cost of bank liabilities more broadly to understand the dynamics of lending rates.
    Keywords: Keywords: lending rates, policy rates, panel cointegration, financial crisis
    Date: 2015
  5. By: Liliana Rojas-Suárez (Centre for global development); José María Serena (Banco de España)
    Abstract: This paper investigates the shifts in Latin American banks’ funding patterns in the postglobal financial crisis period. To this end we introduce a new measure of exposure of local banking systems to international debt markets that we term: International Debt Issuances by Locally Supervised Institutions. In contrast to well-known BIS measures, our new metric includes all entities that fall under the supervisory purview of the local authority. This is especially important in Latin America, where the participation of foreign banks that are established as independent, fully-capitalized entities is most substantial. Using this metric we found that all types of Latin American banking groups increased significantly and sharply their issuance of external debt securities. Owing to the low ratios of banks’ external debt to total liabilities in the pre-crisis period, solid solvency ratios and improved supervisory capacity, the recent increase in banks’ external indebtedness has not resulted in financial difficulties and banking systems remain strong. However, a preliminary analysis of risks based on this new trend reveals the emergence of several signs of increased vulnerability. First, in some banking groups (particularly in Brazilian banks, domestic and foreign alike) the increased issuance of external debt has been accompanied by a greater reliance on wholesale funding. In contrast, reliance on wholesale funding by Colombian banks has remained low and stable. Second, rollover risks have significantly increased for Latin American banking groups. Maturing debt, which increased significantly in 2013-14, will continue at high levels in 2015-16 in the context of major uncertainties in international capital markets. This risk is especially noticeable in Brazil and Chile, whose ratios of maturing debt to total debt are high. Third, in spite of a sizeable accumulation of international reserves, the large increase in banks’ external debt might have contributed to reducing the resilience of central banks to deal with a severe adverse shock.
    Keywords: emerging economies´ banks, locally supervised institutions, international debt, wholesale funding, Latin America and financial fragilities
    JEL: G15 G21 F36
    Date: 2015–07
  6. By: Ana Fostel (University of Virginia); John Geanakoplos (Yale University); Gregory Phelan (Williams College)
    Abstract: We show that cross-border financial flows arise when levels of financial innovation differ across countries. Financial integration is a way of sharing scarce collateral. The ability of one country to leverage and tranche assets provides attractive financial contracts to investors in the other country, and general equilibrium effects on prices create opportunities for investors in the sophisticated country to invest abroad. Foreign demand for collateral and for collateral-backed financial promises increases the collateral value of domestic assets, and cheap foreign assets provide attractive returns to investors who do not demand collateral to issue promises. Gross global flows respond dynamically to fundamentals, exporting and amplifying financial volatility.
    Date: 2015–07
  7. By: Enrique Mendoza (University of Pennsylvania); Javier Bianchi (Federal Reserve Bank of Minneapolis)
    Abstract: Collateral constraints widely used in models of financial crises feature a pecuniary externality, because agents do not internalize how collateral prices respond to collective borrowing decisions, particularly when binding collateral constraints trigger a crisis. We study a production economy in which physical assets serve as collateral for debt and working capital loans, and show that agents in a competitive equilibrium borrow ``too much" during credit expansions compared with a financial regulator who internalizes this externality. Under commitment, however, this regulator faces a time inconsistency problem: It promises low future consumption to prop up current asset prices when collateral constraints bind, but this is not optimal ex post. Instead, we examine the optimal, time-consistent policy of a regulator who cannot commit to future policies. Quantitative analysis shows that this policy reduces the incidence and magnitude of crises, removes fat tails from the distribution of returns and reduces risk premia. A key element of this policy is a state-contingent macro-prudential debt tax (i.e. a tax imposed in normal times when a financial crisis has positive probability next period) of about 1 percent on average. Constant debt taxes also reduce the frequency of crises but are less effective at reducing their severity and reduce welfare when credit constraints bind.
    Date: 2015
  8. By: Anna Costello (Massachusetts Institute of Technology); Nina Boyarchenko (Federal Reserve Bank of New York)
    Abstract: This paper explores the sources of counterparty risk in material supply relationships. Using long-term supply contracts collected from SEC filings, we test whether three sources of counterparty risk -- financial exposure, product quality risk, and redeployability risk -- are priced in the equity returns of linked firms. Our results show that equity holders require compensation for exposure to all three sources of risk. Specifically, offering trade credit to counterparties and investing in relationshipspecific assets increase a firm’s exposure to counterparty risk. Further, we show that contracts with protective financial covenants and product warranties mitigate the transmission of risk. Overall, we provide evidence on the channels of supply-chain risk and show that shareholders recognize the role of contractual features in mitigating counterparty risk.
    Date: 2015

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