nep-ban New Economics Papers
on Banking
Issue of 2015‒09‒11
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. A Cost System Approach to the Stochastic Directional Technology Distance Function with Undesirable Outputs: The Case of U.S. Banks in 2001-2010 By Malikov, Emir; Kumbhakar, Subal C.; Tsionas, Efthymios
  2. SME Credit Risk Analysis Using Bank Lending Data: An Analysis of Thai SMEs By Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad; Charoensivakorn, Phadet; Niraula, Baburam
  3. Crisis, contagion and international policy spillovers under foreign ownership of banks By Marcin Kolasa; Krzysztof Makarski; Michal Brzoza-Brzezina
  4. The Evolution of Scale Economies in U.S. Banking By Wheelock, David C.; Wilson, Paul W.
  5. Il securitisation framework di Basilea III e le garanzie pubbliche su portafogli di prestiti alle PMI By Luca Erzegovesi
  6. Internationalization and bank risk By Berger, Allen N.; El Ghoul, Sadok; Guedhami , Omrane; Roman, Raluca
  7. Does Basel Compliance Matter for Bank Performance? By Rym Ayadi; Sami Ben Naceur; Barbara Casu; Barry Quinn
  8. Liquidity creation without banks By Simas Kucinskas
  9. Payment Instruments and Collateral in the Interbank Payment System By Hajime Tomura
  10. Financial News, Banks and Business Cycles By Christopher M. Gunn; Alok Johri
  11. How Does Post-Crisis Bank Capital Adequacy Affect Firm Investment? By Yangfan Sun; Hui Tong
  12. The effects of Contingent Convertible (CoCo) bonds on insurers' capital requirements under Solvency II By Gründl, Helmut; Niedrig, Tobias
  13. The Macroeconomic Relevance of Credit Flows: An Exploration of U.S. Data By Alexander Herman; Deniz Igan; Juan Sole
  14. Innovation, Deregulation, and the Life Cycle of a Financial Service Industry By Fumiko Hayashi; Grace Bin Li; Zhu Wang
  15. Portfolio Rebalancing in Japan: Constraints and Implications for Quantitative Easing By Serkan Arslanalp; Dennis P. J. Botman

  1. By: Malikov, Emir; Kumbhakar, Subal C.; Tsionas, Efthymios
    Abstract: This paper offers a methodology to address the endogeneity of inputs in the directional technology distance function (DTDF) based formulation of banking technology which explicitly accommodates the presence of undesirable nonperforming loans --- an inherent characteristic of the bank's production due to its exposure to credit risk. Specifically, we model nonperforming loans as an undesirable output in the bank's production process. Since the stochastic DTDF describing banking technology is likely to suffer from the endogeneity of inputs, we propose addressing this problem by considering a system consisting of the DTDF and the first-order conditions from the bank's cost minimization problem. The first-order conditions also allow us to identify the "cost-optimal" directional vector for the banking DTDF, thus eliminating the uncertainty associated with an ad hoc choice of the direction. We apply our cost system approach to the data on large U.S. commercial banks for the 2001-2010 period, which we estimate via Bayesian MCMC methods subject to theoretical regularity conditions. We document dramatic distortions in banks' efficiency, productivity growth and scale elasticity estimates when the endogeneity of inputs is assumed away and/or the DTDF is fitted in an arbitrary direction.
    Keywords: Bad Outputs, Commercial Banks, Directional Distance Function, Endogeneity, MCMC, Nonperforming Loans, Productivity, Technical Change
    JEL: C11 C33 D24 G21
    Date: 2015
  2. By: Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Charoensivakorn, Phadet (Asian Development Bank Institute); Niraula, Baburam (Asian Development Bank Institute)
    Abstract: Small and medium-sized enterprises (SMEs) are the backbone of most Asian economies. The main obstacle to the development of the SME sector is the lack of stable finance. Considering the bank-dominated characteristic of economies in Asia, banks are the main source of financing, and the lack of a comprehensive credit rating database has been a bottleneck for SMEs. This paper examines how a credit rating scheme for SMEs can be developed, when access to other financial and non-financial ratios is not possible, by using data on lending by banks to SMEs. We employ statistical techniques on five variables from a sample of Thai SMEs and classify them into subgroups based on their financial health. By employing these techniques, banks could reduce information asymmetry and consequently set interest rates and lending ceilings for SMEs. This would ease financing to healthy SMEs and reduce the amount of non-performing loans to this important sector.
    Keywords: credit risk analysis; SMEs; bank lending; Thailand
    JEL: G21 G23 G24 G32
    Date: 2015–09–04
  3. By: Marcin Kolasa (National Bank of Poland); Krzysztof Makarski (National Bank of Poland); Michal Brzoza-Brzezina (National Bank of Poland)
    Abstract: This paper checks how international spillovers of shocks and polices are modified when banks are foreign owned. We build a two-country DSGE model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings we find that foreign ownership of banks amplifies spillovers from foreign shocks. Moreover, it also strenghtens the international transmission of monetary and macroprudential policies. Finaly, we replicate the financial crisis in the euro area and show how, by preventing bank capital outflow in 2009 Polish regulatory authorities managed to reduce its spillover to Poland. We also show that under foreign bank ownership such policy is strongly prefered to a recapitalization of domestic banks.
    Date: 2015
  4. By: Wheelock, David C. (Federal Reserve Bank of St. Louis); Wilson, Paul W. (Clemson University)
    Abstract: Continued consolidation of the U.S. banking industry and general increase in the size of banks has prompted some policymakers to consider policies to discourage banks from getting larger, including explicit caps on bank size. However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale. The extent of scale economies in banking remains unclear. This paper presents new estimates of returns to scale for U.S. commercial banks based on nonparametric, local-linear estimation of bank cost, revenue and profit functions. We present estimates for both 2006 and 2012 to compare the extent of scale economies in banking some four years after the financial crisis and two years after enactment of the Dodd-Frank Act with scale economies prior to the crisis. We find that most banks faced increasing returns to scale in cost in both years, though results for the very largest banks in 2012 are somewhat sensitive to specification. Further, most banks faced decreasing returns in revenue in both years, though nearly all banks could still increase revenue and profit by becoming larger.
    JEL: C12 C13 C14 G21 L11
    Date: 2015–08–01
  5. By: Luca Erzegovesi
    Abstract: The aim of this paper is twofold: (1) describe the new prudential regulatory framework on securitisation approved by the Basel Committee on Banking Supervision in December 2014 which will come into force from January 2018; (2) analyse the impact of the new rules on public guarantees to the benefit of securitised portfolios of SME loans, a policy tool which has grown in importance in Italy in programs fostering SME financing in the presence of a credit crunch. The rationale and principles behind the new framework are considered in the introductory sections. In the central section, the regulatory procedures for calculating minimum capital requirements are examined, with a focus on the two approaches that rely upon Òsupervisory formulasÓ, i.e. SECMIRBA (available to banks with an internal rating system approved by bank supervisors) and SECMSA (available to banks adopting the Standard Approach). In the final section, the impact of the new framework on the effectiveness of public guarantee programs is assessed by means of a simulation exercise where the capital absorption for some representative portfolios is computed and compared under the different regimes, old and new. The evidence obtained indicates that the Basel III framework on securitisation strongly reduces, or even eliminates completely, the capital saving effect of current public guarantee programs on SME portfolios. Therefore, banks and policy makers must design innovative guarantee structures which have a risk mitigation effect and, at the same time, make an efficient use of public resources in order to be ready for the phasing in of the new rules. It is also desirable that the planned review of the Basel III rules recognize guarantees on portfolios of loans to SMEs as eligibility granted to simple, transparent and standardized securitizations
    Keywords: securitisation framework, Basilea III
    Date: 2015
  6. By: Berger, Allen N.; El Ghoul, Sadok; Guedhami , Omrane; Roman, Raluca (Federal Reserve Bank of Kansas City)
    Abstract: This paper documents a positive relation between internationalization and bank risk. This is consistent with the empirical dominance of the market risk hypothesis – whereby internationalization increases banks' risk due to market-specific factors in foreign markets – over the diversification hypothesis – whereby internationalization allows banks to reduce risk through diversification of their operations. The results continue to hold following a variety of robustness tests, including endogeneity and sample selection bias. We also find that the magnitude of this effect is more pronounced during financial crises. The results appear to be at least partially explained by agency problems related to poor corporate governance.
    Keywords: Corporate governance; Financial crises; Internationalization; Risk
    JEL: G21 G28 L25
    Date: 2015–09–03
  7. By: Rym Ayadi; Sami Ben Naceur; Barbara Casu; Barry Quinn
    Abstract: The global financial crisis underscored the importance of regulation and supervision to a well-functioning banking system that efficiently channels financial resources into investment. In this paper, we contribute to the ongoing policy debate by assessing whether compliance with international regulatory standards and protocols enchances bank operating efficiency. We focus specifically on the adoption of international capital standards and the Basel Core Principles for Effective Bank Supervision (BCP). The relationship between bank efficiency and regulatory compliance is investigated using the (Simar and Wilson 2007) double bootstrapping approach on an international sample of publicly listed banks. Our results indicate that overall BCP compliance, or indeed compliance with any of its individual chapters, has no association with bank efficiency.
    Keywords: Bank supervision;Basel Core Principles;Banks;Bank compliance;Bank regulations;BCP, Efficiency, Regulatory Compliance, bank, bank performance, interest, banking, Truncated and Censored Models, Government Policy and Regulation,
    Date: 2015–05–05
  8. By: Simas Kucinskas
    Abstract: I revisit the Diamond-Dybvig model of liquidity insurance in the presence of hidden trades. The key result is that in this environment deposit-taking banks are not necessary for the efficient provision of liquidity. Mutual funds are constrained efficient when supplemented with the same government liquidity regulation that is required to make a banking system constrained efficient. However, whereas banks are potentially subject to costly panics, mutual funds are not run-prone and hence superior from a welfare perspective if runs happen with a non-zero probability.
    Keywords: liquidity creation; liquidity insurance; hidden trades; bank runs; mutual funds; narrow banking; financial stability
    JEL: D91 E61 G21 G23 G28
    Date: 2015–08
  9. By: Hajime Tomura (Graduate School of Economics, University of Tokyo)
    Abstract: This paper presents a three-period model to analyze why banks need bank reserves for interbank payments despite the availability of other liquid assets like Treasury securities. The model shows that banks need extra liquidity if they settle bank transfers without the central bank. In this case, each pair of banks sending and receiving bank transfers must determine the terms of settlement between them bilaterally in an overthe-counter transaction. As a result, a receiving bank can charge a sending bank a premium for the settlement of bank transfers, because depositors’ demand for timely payments causes a hold-up problem for a sending bank. In light of this result, the large value payment system operated by the central bank can be regarded as an interbank settlement contract to save liquidity. A third party like the central bank must operate this system because a custodian of collateral is necessary to implement the contract. This result implies that bank reserves are not independent liquid assets, but the balances of collateral submitted by banks to participate into a liquidity-saving contract. The optimal contract is the floor system. Whether a private clearing house can replace the central bank depends on the range of collateral it can accept.
    Date: 2015–08
  10. By: Christopher M. Gunn; Alok Johri
    Abstract: Can variations in the expected future return on a portfolio of sovereign bonds itself have real effects on a small open economy? We build a model where banks face a capital sufficiency requirement to demonstrate that news about a fall in the expected return on a portfolio of international long bonds held by the bank can lead to an immediate and persistent fall in economic activity. Even if the news never materializes, the model can generate several periods of below steady state investment, hours worked and production followed by a recovery. The presence of long bonds in bank portfolios enable the news to have an immediate impact on bank capital via an immediate fall in bond prices. The portfolio adjustment induced by the capital sufficiency requirements leads to a rise in loan rates and tighter credit conditions which trigger the fall in activity. The model contributes to the news-shock literature by showing that imperfect signals about future financial returns can create business cycles without relying on the usual suspects: variation in domestic fundamentals such as technology shocks, preference shocks and fiscal policy. It also contributes to the emerging economy business cycle literature in that disturbances in world financial markets can lead to domestic business cycles without relying on shocks to the world interest rate or to country spreads.
    Keywords: expectations-driven business cycles, financial news shocks,financial intermediation, business cycles, small open economy, capital adequacy requirements.
    JEL: E3 E44 F4 G21
    Date: 2015–08
  11. By: Yangfan Sun; Hui Tong
    Abstract: We examine the effect of bank capital levels on firm investment drawing on a sample of 11,106 non-financial firms from 2007 to 2013 in 16 advanced economies. We examine two measures of bank capital adequacy, the Tier 1 ratio and a simple leverage ratio, and find that firms with larger external financial needs invest relatively more when domestic financial systems have relatively high leverage ratios. This pattern is more pronounced for those firms that have sound fundamentals, suggesting that bank balance sheets and their willingness to extend credit can be an important factor in determining aggregate investment and growth outcomes. The empirical findings are robust to a range of specifications. Bank Tier 1 capital ratio does not appear to have a significant effect on corporate investment, possibly because a higher Tier 1 ratio also captures a high share of assets with low risk weights.
    Date: 2015–06–30
  12. By: Gründl, Helmut; Niedrig, Tobias
    Abstract: The Liikanen Group proposes contingent convertible (CoCo) bonds as instruments to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. The growing number of banks issuing CoCo bonds leads to a rising awareness of these hybrid securities among life insurers as they are increasingly looking for higher-yielding investments into bond-like asset classes during the current low interest rate period. Our contribution provides an insight for life insurance companies to understand the effects of holding CoCo bonds as implied by the Solvency II standards that will become effective by 2016.
    Keywords: Life insurance companies,Coco bonds,Solvency II
    Date: 2015
  13. By: Alexander Herman; Deniz Igan; Juan Sole
    Abstract: This paper exploits the Financial Accounts of the United States to derive long time series of bank and nonbank credit to different sectors, and to examine the cyclical behavior of these series in relation to (i) the long-term business cycle, (ii) recessions and recoveries, and (iii) systemic financial crises. We find that bank and nonbank credit exhibit different dynamics throughout the business cycle. This diverging cyclical behavior of output and bank and nonbank credit argues for placing greater emphasis on sector-specific macroprudential measures to contain risks to the financial system, rather than using interest rates to address any vulnerabilities. Finally, we examine the role of bank and nonbank credit in the creation of financial interconnections and illustrate a method to conduct macro-financial stability assessments.
    Keywords: Financial intermediation;United States;Macro-financial linkages, Liquidity transformation, Nonbank financial institutions, credit, banks, pension funds, bank, financial accounts, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–06–30
  14. By: Fumiko Hayashi; Grace Bin Li; Zhu Wang
    Abstract: This paper examines innovation, deregulation, and firm 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 dataset 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.
    Keywords: Financial services industry;United States;Industrial structure;Technological innovation;Equilibrium. Econometric models;Innovation; Deregulation; Industry Dynamics; Shakeout
    Date: 2015–08–18
  15. By: Serkan Arslanalp; Dennis P. J. Botman
    Abstract: Portfolio rebalancing is a key transmission channel of quantitative easing in Japan. We construct a realistic rebalancing scenario, which suggests that the BoJ may need to taper its JGB purchases in 2017 or 2018, given collateral needs of banks, asset-liability management constraints of insurers, and announced asset allocation targets of major pension funds. Nonetheless, the BoJ could deliver continued monetary stimulus by extending the maturity of its JGB purchases or by scaling up private asset purchases. We quantify the impact of rebalancing on capital outflows and discuss JGB market signals that can be indicative of limits being within reach.
    Keywords: Monetary policy;International financial markets;Capital outflows;Central bank policy;Japan;Asset management;Bond markets;quantitative easing, portfolio rebalancing, speed limits, portfolio, market, inflation, markets, General, Portfolio Choice, speed limits.,
    Date: 2015–08–03

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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