nep-ban New Economics Papers
on Banking
Issue of 2015‒08‒25
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Competition, financial intermediation and riskiness of banks: Evidence from the Asia-Pacific region By Wahyoe Soedarmono; A Tarazi
  2. From banks’ strategies to financial (in)stability By Simone Berardi; Gabriele Tedeschi
  3. Banking union a solution to the euro zone crisis By Maylis Avaro; Henri Sterdyniak
  4. Financial Protectionism: Further Evidence By Tomasz Wieladek; Andrew Rose; Anya Kleymenova
  5. Systemic risk measures and macroprudential stress tests. An assessment over the 2014 EBA exercise By Chiara Pederzoli; Costanza Torricelli
  6. Basel III and SME access to credit : Evidence from France By Thomas Humblot
  7. How Insurers Differ from Banks: A Primer on Systemic Regulation By Christian Thimann
  8. Disclosure of stress test results By Berlin, Mitchell
  9. Does the presence of institutional investors in family banks affect profitability and risk? Evidence from an emerging market By Bowo Setiyono; Amine Tarazi
  10. Optimal Return in a Model of Bank Small-business Financing By Oana Peia; Radu Vranceanu
  11. External Balance Sheets as Countercyclical Crisis Buffers By Joyce, Joseph
  12. Nonlinear pricing with competition: the market for settling payments By Copeland, Adam; Garratt, Rod
  13. Sovereign and corporate credit risk: Evidence from the Eurozone By Mascia Bedendo; Paolo Colla
  14. "Bank Centrality" and Money Creation By François-Xavier Dudouet; Eric Grémont; Antoine Vion
  15. What do we know about the role of bank competition in Africa? By Florian LEON
  16. The stabilising properties of a European Banking Union in case of financial shocks in the Euro Area By Fritz Breuss; Werner Roeger; Jan in ’t Veld
  17. Interest rates, debt and intertemporal allocation: evidence from notched mortgage contracts in the United Kingdom By Best, Michael Carlos; Cloyne, James; Ilzetzki, Ethan; Kleven, Henrik Jacobsen
  18. Precautionary saving and aggregate demand By Xavier Ragot; Julien Matheron; Juan Rubio-Ramirez; Edouard Challe

  1. By: Wahyoe Soedarmono (Universitas Siswa Bangsa Internasional, Faculty of Business / Sampoerna School of Business); A Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - unilim - Université de Limoges - Institut Sciences de l'Homme et de la Société)
    Abstract: From a sample of commercial banks in the Asia-Pacific region over the 1994-2009 period, this study highlights that banks in less competitive markets exhibit lower loan growth and higher instability. Such instability is further followed by a decline in deposit growth, suggesting that Asian banks are also subject to indirect market discipline mechanisms through bank competition. This study therefore sheds light on the importance of enhancing bank competition to overcome bank risk and strengthen financial intermediation. Likewise, this study advocates the importance of strengthening market discipline to reduce bank riskiness regardless of the degree of competition in the banking industry.
    Date: 2015–02–02
  2. By: Simone Berardi (Economics Department, Universitat Jaume I, Castellón, Spain); Gabriele Tedeschi (Economics Dept-U. Jaume I & Dip. di Scienze Economiche e Sociali-U. Politecnica delle Marche)
    Abstract: This paper aims to shed light on the emergence of systemic risk in credit systems. By developing an interbank market with heterogeneous financial institutions granting loans on different network structures, we investigate what market architecture is more resilient to liquidity shocks and how the risk spreads over the modeled system. In our model, credit linkages evolve endogenously via a fitness measure based on different banks’ strategies. Each financial institution, in fact, applies a strategy based on a low interest rate, a high supply of liquidity or a combination of them. Interestingly, the choice of the strategy influences both the banks’ performance and the network topology. In this way, we are able to identify the most effective tactics adapt to contain contagion and the corresponding network topology. Our analysis shows that, when financial institutions combine the two strategies, the interbank network does not condense and this generates the most efficient scenario in case of shocks.
    Keywords: Interbank market, dynamic network, fitness model, network resilience, bank strategy
    JEL: G01 G02 D85
    Date: 2015
  3. By: Maylis Avaro (ENS Cachan - École normale supérieure - Cachan); Henri Sterdyniak (OFCE - OFCE - Sciences Po)
    Abstract: The banking union emerged from the June 2012 European Council as a new project expected to help and solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? The banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, establishing common mechanisms to solve banking crises, and encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme. Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other are related to the EU specificity (is the banking union a step towards more federalism?), the more stringent are related to structural choices regarding the European banking system. The banks' solvency and their ability to lend would primarily depend on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionnable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking activity from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed because they would not be allowed to run risky activity. Can European peoples leave such strategic choices in the hands of the ECB?
    Date: 2013–09
  4. By: Tomasz Wieladek (Bank of England); Andrew Rose (University of California, Berkeley); Anya Kleymenova (University of Chicago)
    Abstract: Using data from large British and American banks, we provide three pieces of empirical evidence for financial protectionism. First, we examine whether a bank's preference for domestic, as opposed to external, lending changes when it is subjected to a large public intervention, such as bank nationalization; we also repeat our analysis for domestic and external funding. Our results suggest that, following nationalization, non-British banks allocate their lending away from the UK and also increase their external funding. Second, we find that nationalized banks from the same country tend to have portfolios of foreign assets that are spread across countries in a way that is far more similar than either private banks or nationalized banks from different countries. Third, we examine the impact of the Troubled Asset Relief Program (TARP) on the growth of American banks' domestic and foreign lending. Upon entry into the TARP, foreign, unlike domestic, lending declines significantly; however, this effect disappears upon TARP exit. These three pieces of evidence suggest that banks' behavior following large government interventions is consistent with financial protectionism.
    Date: 2015
  5. By: Chiara Pederzoli; Costanza Torricelli
    Abstract: The European Banking Authority (EBA) stress tests, which aim to quantify banks’ capital shortfall in a potential future crisis (adverse economic scenario), further stimulated an academic debate over systemic risk measures and their predictive/informative content. Focusing on marked based measures, Acharya et al. (2010) provides a theoretical background to justify the use of Marginal Expected Shortfall (MES) for predicting the stress test results, and verify it on the first stress test conducted after the 2007-2008 crises on the US banking system (SCAP, Supervisory Capital Assessment Program). The aim of this paper is to further test the goodness of MES as a predictive measure, by analysing it in relation to the results of the 2014 European stress tests exercise conducted by EBA. Our results are strongly dependent on index used to capture the systemic distress event, whereby MES, based on a global market index, does not show association with EBA stress test, by contrast to F-MES, which is based on a financial market index, and has a significant information and predictive power. Our results may carry useful regulatory implication for the stress test exercises.
    Keywords: systemic risk, stress test, macroprudential regulation
    JEL: G01 G10 G28
    Date: 2015–07
  6. By: Thomas Humblot (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Abstract: This paper investigates Basel III potential effects on SME access to bank credit. In an innovative empirical framework, French small firms are studied using microdata over the 2008-2013 periods. We conclude that the new regulation will have an M-shaped impact. Eventually, Basel III eliminates low profitable exposures regardless of their regulatory charge alleviations, restricts risky positions despite of their profitability and digs SME funding gap. Only regulatory adjusted dominant risk/return profiles are funded. On average, no reduction in credit matu-rity nor in volume is observable. The overall effect ultimately depends on banks' initial position.
    Date: 2014
  7. By: Christian Thimann (PSE - Paris-Jourdan Sciences Economiques - CNRS - Institut national de la recherche agronomique (INRA) - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), Axa - AXA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the maturity transformation combined with leverage, the prevalence of liquidity risk and the operation of the payment system. The paper also draws attention to three salient features in insurance that need to be taken account in systemic regulation: the quasiabsence of leverage, the fundamentally different role of capital and the ‘built-in bail-in’ of a significant part of insurance liabilities through policy-holder participation. Based on these considerations, the paper argues that if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate.
    Date: 2014–10–16
  8. By: Berlin, Mitchell (Federal Reserve Bank of Philadelphia)
    Abstract: Should regulatory bank examinations be made public? Regulators have argued that the confidentiality of the examination process promotes frank exchanges between bankers and examiners and that public disclosure of examination results could have a chilling effect. I examine the tradeoffs in a world in which examination results can be kept confidential, but regulatory interventions are observable by market participants, as they typically are for stress tests. Inducing banks to communicate truthfully requires regulators to engage in forbearance, which is priced into banks’ uninsured debt and raises the costs of inducing truthful communication. Regulators that disclose exam results bear higher monitoring costs and impose excessive capital requirements because interventions are not as sensitive to underlying risks. My model predicts that disclosure is optimal when the regulator’s model is relatively inaccurate.
    Keywords: Stress tests; Disclosure; Bank regulation
    JEL: G2 G21 G28
    Date: 2015–08–13
  9. By: Bowo Setiyono (LAPE - Laboratoire d'Analyse et de Prospective Economique - unilim - Université de Limoges - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - unilim - Université de Limoges - Institut Sciences de l'Homme et de la Société)
    Abstract: This study aims to investigate whether the presence of institutional investors in family-controlled banks impacts their performance and risk. Using detailed data on Indonesian banks from 2001 to 2008 and controlling for various factors, our results first show that family-controlled banks are less profitable and more risky than other banks. Specifically, family presence, either under the form of direct ownership, pure single majority, or family directors, is related to higher default risk, income variability, and loan risk. However, the presence of institutional investors as a second stage block holder in family controlled banks tends to mitigate and even reverse such behavior by reducing risk-taking and improving performance. Our results are generally robust with regard to endogeneity issues and alternative specifications.
    Date: 2014–10–23
  10. By: Oana Peia (ESSEC Business School - Essec Business School, THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS); Radu Vranceanu (ESSEC Business School and THEMA (UMR 8184) - THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Economics Department - Essec Business School)
    Abstract: This paper develops a simple model showing how banks can increase the access to finance of small, risky firms by mitigating coordination problems among investors. If investors observe a biased signal about the true implementation cost of real sector projects, the model can be solved for a switching equilibrium in the classical global games approach. We show that the socially optimal interest rate that maximizes the probability of success of the firm is higher than the risk-free rate. Yet if banks maximize investors' expected return, they would choose an interest higher than the socially optimal one. This gives rise to a form of credit rationing, which stems from the funding constraints of the banks.
    Abstract: Nous étudions le financement des PME par les banques dans un modèle de type "global games". Il apparait que le taux d'intérêt d'équilibre dans une économie décentralisée avec secteur bancaire concurrentiel est supérieur au taux d'intérêt qui assure le plus grand taux de réussite des projets.
    Date: 2014–02–27
  11. By: Joyce, Joseph
    Abstract: The external balance sheets of many emerging market countries are distinguished by their holdings of assets primarily in the form of foreign debt and foreign exchange reserves, while their liabilities are predominantly equity, either FDI or portfolio. In this paper we investigate the claim that this composition served as a buffer for the emerging markets during the global financial crisis of 2008-09. We use data from a sample of 67 emerging market and advanced economies, and several indicators of the crisis are utilized: GDP growth rates in 2008-09, the occurrence of bank crises and the use of IMF credit. Our results show that those countries that issued FDI liabilities had higher growth rates, fewer bank crises and were less likely to borrow from the IMF. Countries with debt liabilities, on the other hand, had more bank crises and were more likely to use IMF credit. We conclude that the “long debt, short equity” strategy of emerging markets did mitigate the effects of the global financial crisis.
    Keywords: external balance sheet, foreign assets and liabilities, FDI, portfolio equity, debt
    JEL: F3 F4
    Date: 2015–08
  12. By: Copeland, Adam (Federal Reserve Bank of New York); Garratt, Rod (Federal Reserve Bank of New York)
    Abstract: The multiple payments settlement systems available in the United States differ on several dimensions. The Fedwire Funds Service, a utility that operates a U.S. large-value payments-settlement service, offers the fastest speed of settlement. Recognizing that payments differ in the urgency with which they need to be settled, Fedwire offers banks a decreasing block-price schedule. This approach allows Fedwire to price discriminate, charging high fees for urgent payments and low fees for less urgent ones. We analyze banks’ demand for Fedwire Funds given this nonlinear scheme, taking into account competing settlement systems. We show that how banks respond to Fedwire’s pricing depends crucially on the need to settle payments quickly. If the urgency for immediate settlement is great enough, banks will respond to marginal price; otherwise, they will respond to average price. We test whether banks respond to marginal or to average price. Our identification comes from exogenous variation in Fedwire’s pricing, which results in differential changes in marginal and average price for comparable banks. We find that banks respond to average price.
    Keywords: nonlinear pricing; marginal versus average pricing
    JEL: E42 L11 L51 L97
    Date: 2015–08–01
  13. By: Mascia Bedendo (Audencia Recherche - Audencia); Paolo Colla (Bocconi University - Bocconi University)
    Abstract: We study the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign credit spreads is associated with a statistically and economically significant increase in corporate spreads and, hence, firms' borrowing costs. A deterioration in a country's credit quality affects more adversely firms that are more likely to benefit from government aid, those whose sales are more concentrated in the domestic market, and those that rely more heavily on bank financing. Our findings suggest that government guarantees, domestic demand, and credit markets are important credit risk transmission mechanisms.
    Date: 2015–08
  14. By: François-Xavier Dudouet (IRISSO - Institut de Recherche Interdisciplinaire en Sciences Sociales - Université Paris IX - Paris Dauphine - CNRS); Eric Grémont (OpesC - Observatoire politico-économique des structures du Capitalisme); Antoine Vion (LEST - Laboratoire d'économie et de sociologie du travail - AMU - Aix-Marseille Université - CNRS - Université de Provence - Aix-Marseille 1 - Université de la Méditerranée - Aix-Marseille 2)
    Abstract: For more than one century, interlocking directorate studies have provided evidence of bank centrality in corporate networks. Many interpretations of this phenomenon have been elaborated, but none of them was conclusive. In this paper, we assume that theoretical and methodological limits have affected this literature. Firstly, two usual confusions have been to assimilate bank centrality to bank control and to study corporate networks from the perspective of a sum of links rather than the one of a whole structure. Secondly, scholars have paid attention to immediate financial relations between bank and industry, such as credit and shareholding, but not to financial intermediation and money creation. We think that economic theory of money creation is worth bringing back in. From such a theoretical perspective, bank centrality seems to be better understood as a form of collegial regulation of money creation, while the absence of such a phenomenon indicates the rise of bureaucratic regulation by central banks and global financial institutions.
    Abstract: Depuis plus d'un siècle, les analyses de réseaux appliquées aux conseils d'administration des grandes entreprises (interlocking directorate studies) ont régulièrement observé la tendance qu'ont les banques à occuper une position plus centrale que les autres entreprises. Cette observation a donné lieu à de nombreuses interprétations, dont aucune n'est parvenue à s'imposer. Nous soutenons que l'absence de consensus repose en premier lieu sur une question de méthode, celle qui consiste, d'une part, à confondre « centralité » et « contrôle » et d'autre part à étudier les réseaux inter-firmes d'après la somme de leurs parties et non comme un tout. En second lieu, les sociologues se sont intéressés à des formes immédiates de relations financières entre banques et industrie, essentiellement sous les rapports de dette et d'actionnariat, en négligeant tout ce que la théorie économique pouvait apporter sur le rôle joué par les banques dans l'émission monétaire et l'intermédiation financière. Or, ces deux derniers aspects sont fondamentaux pour saisir les rapports structurels qui lient les entreprises financières et non financières. En nous appuyant sur la longue tradition des intrerlocking directorate studies, d'une, part et certains économistes de la monnaie et des marchés financiers d'autre part, nous souhaitons montrer que ce que l'on appelle la « centralité bancaire » repose avant tout sur le rôle prééminent des institutions financières dans le circuit de l'argent.
    Date: 2014–12
  15. By: Florian LEON (CERDI - Centre d'études et de recherches sur le developpement international - Université d'Auvergne - Clermont-Ferrand I - CNRS)
    Abstract: This paper reviews the literature regarding the consequences of interbank competition. The literature has identified three reasons why competition in the financial sector is important: firstly, for efficient functioning of financial intermediaries and markets, secondly, for firms and households access to financial services and thirdly, for stability of the financial system. While special attention is dedicated to empirical papers focusing on African banking systems, this review also considers works on other developing and developed economies.
    Date: 2015–06–18
  16. By: Fritz Breuss; Werner Roeger; Jan in ’t Veld
    Abstract: This paper analyses the stabilising properties of a European Banking Union in case of financial shocks in the euro area.
    JEL: C54 E12 E32 E42 E63 F41 G21
    Date: 2015–06
  17. By: Best, Michael Carlos (Stanford University); Cloyne, James (Bank of England); Ilzetzki, Ethan (London School of Economics); Kleven, Henrik Jacobsen (London School of Economics)
    Abstract: Using a novel source of quasi-experimental variation in interest rates, we study the response of household debt and intertemporal consumption allocation to interest rates. We also develop a new approach to structurally estimate the Elasticity of Intertemporal Substitution (EIS). In the United Kingdom, the mortgage interest rate schedule features discrete jumps — notches — at thresholds for the loan-to-value (LTV) ratio, creating strong incentives for bunching below those thresholds. We document large and sharp bunching below every notch, which translates into sizable interest elasticities of mortgage debt, between 0.1 and 1.4 across different LTV levels. We develop a dynamic model that links these reduced-form responses to the underlying structural EIS. The EIS is much smaller and less heterogeneous than the reduced-form elasticities, between 0.05-0.25 across LTV levels and household types. We show that our structural approach is robust to a wide range of assumptions on beliefs about the future, uncertainty, risk aversion, discount factors and present bias. Our findings have implications for the numerous calibration studies in economics that rely on larger values of the EIS.
    Keywords: Interest rates; mortgage debt; elasticity of intertemporal substitution; notches.
    JEL: D14 D91 E21 E43 G21 R22
    Date: 2015–08–14
  18. By: Xavier Ragot (Paris School of Economics); Julien Matheron (Banque de France); Juan Rubio-Ramirez (Duke University); Edouard Challe (Ecole Polytechnique)
    Abstract: We formulate and estimate a tractable macroeconomic model with time-varying precautionary savings. We argue that the latter affect aggregate fluctuations via two main channels: a stabilizing aggregate supply effect working through the supply of capital; and a destabilizing aggregate demand effect generated by a feedback loop between unemployment risk and consumption demand. Using the estimated model to measure the contribution of precautionary savings to the propagation of recent recessions, we find strong aggregate demand effects during the Great Recession and the 1990-1991 recession. In contrast, the supply effect at least offset the demand effect during the 2001 recession
    Date: 2015

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