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

  1. Loan Monitoring and Bank Risk By Norvald INSTEFJORD; NAKATA Hiroyuki
  2. Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System By Charles W. Calomiris; Matthew Jaremski; Haelim Park; Gary Richardson
  3. Systemic Loops and Liquidity Regulation By Aldasoro, Iñaki; Faia, Ester
  4. The e¤ects of global bank competition and presence on local business cycles: The Goldilocks principle does not apply to global banking By Uluc Aysun
  5. Phasing Out the GSEs By Vadim Elenev; Tim Landvoigt; Stijn Van Nieuwerburgh
  6. Psychometrics as a Tool to Improve Screening and Access to Credit By Irani Arráiz; Miriam Bruhn; Rodolfo Stucchi
  7. Analyzing and Comparing Basel's III Sensitivity Based Approach for the interest rate risk in the trading book By Mabelle Sayah
  8. Credit Distribution and Exports: Microeconomic Evidence from China By Yao Amber Li; Albert Park; Chen Zhao
  9. A Dynamic Model of Functioning of a Bank By Oleg Malafeyev; Achal Awasthi
  10. Bank Efficiency and Interest Rate Pass-Through: Evidence from Czech Loan Products By Tomas Havranek; Zuzana Irsova; Jitka Lesanovska

  1. By: Norvald INSTEFJORD; NAKATA Hiroyuki
    Abstract: We study two issues: the relationship between loan monitoring and loan risk and the effects of regulations on banks' incentives for investments in loan monitoring systems. We describe dynamic monitoring of loans as an optimal stopping problem where the bank stops monitoring loans when it has become sufficiently certain that the loan is of good or bad quality. This process increases the incentive to hold risky loans, which in turn increases the cost of regulatory compliance when the regulator seeks to limit the risk taken by banks. The profitability of improved monitoring must be balanced against the increase in the cost of regulation, and we show that the trade off is always negative. This can explain the trend in banking of switching away from the monitoring of existing loans and instead investing in credit scoring systems, which can improve the initial lending decision, but eliminates certain classes of borrowers.
    Date: 2015–10
  2. By: Charles W. Calomiris; Matthew Jaremski; Haelim Park; Gary Richardson
    Abstract: Reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the Federal Reserve System. Existing evidence on the post-Federal Reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission. Nevertheless, less than 8 percent of state-chartered banks joined the Federal Reserve in its first decade. Some have speculated that nonmembers could avoid higher costs of the Federal Reserve’s reserve requirements while still obtaining access indirectly to the Federal Reserve discount window through contacts with Federal Reserve members. We find that individual bank attributes related to the extent of banks’ ability to mitigate seasonal loan demand variation predict banks’ decisions to join the Federal Reserve. Consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers, we find that a bank’s position within the interbank network (as a user or provider of liquidity) predicts the timing of its entry into the Federal Reserve System and the effect of Federal Reserve membership on its lending behavior. We also find that indirect access to the Federal Reserve was not as good as direct access. Federal Reserve member banks saw a greater increase in lending than nonmember banks.
    JEL: G21 G28 N22
    Date: 2015–10
  3. By: Aldasoro, Iñaki; Faia, Ester
    Abstract: Risk contagion in the banking sector occurs through interconnections on the asset side or through liquidity spirals affecting the liability side. We build a network model of optimizing banks featuring contagion on both sides of banks’ balance sheets. To already existing asset side channels (liquidity hoarding, interbank exposures and fire sales of common assets) we add a critical liability side channel of contagion, namely bank runs triggered by information coordination akin to global games. The model is calibrated to the network of large European banks by a simulated method of moments approach and by using the real-world interbank matrix as a prior for the maximum entropy estimation of the model-based interbank matrix. We use the model to study the effects of phase-in increases of liquidity coverage ratios. Interestingly we find that the systemic risk profile of the system is not improved and might even deteriorate. Based on those insights we propose an alternative approach: differential (across banks) increases in coverage ratios based on systemic importance rankings help to mitigate the externalities and deliver a much more stable system.
    Keywords: bank runs; contagion; interconnections; liquidity scarcity; phase-ins
    JEL: C63 D85 G21 G28 L14
    Date: 2015–11
  4. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: I solve a two-country real business cycle model that includes Cournot competitive global and local banks to investigate the impact of banking competition and global bank presence on local business cycles. Simulations reveal an inverted U-shaped relationship between the two factors and the volatility of output when global banks face portfolio adjustment costs. This relationship is determined by the asymmetric degree of diminishing returns to lending that global banks face in each economy. SpeciÂ…cally, when global banks have a larger presence or are less competitive in one of the economies than the other, the cross-country mobility of loanable funds and the local responses to domestic shocks are smaller compared those obtained when the two economies are more symmetric.
    Keywords: Global banks, Cournot competition, real business cycles, bank size
    JEL: E32 E44 F33 F44
    Date: 2015–10
  5. By: Vadim Elenev; Tim Landvoigt; Stijn Van Nieuwerburgh
    Abstract: We develop a new model of the mortgage market where both borrowers and lenders can default. Risk tolerant savers act as intermediaries between risk averse depositors and impatient borrowers. The government plays a crucial role by providing both mortgage guarantees and deposit insurance. Underpriced government mortgage guarantees lead to more and riskier mortgage originations as well as to high financial sector leverage. Mortgage crises occasionally turn into financial crises and government bailouts due to the fragility of the intermediaries' balance sheets. Increasing the price of the mortgage guarantee "crowds in" the private sector, reduces financial fragility, leads to fewer but safer mortgages, lowers house prices, and raises mortgage and risk-free interest rates. Due to a more robust financial sector, consumption smoothing improves and aggregate welfare increases. While borrowers are nearly indifferent to a world with or without mortgage guarantees, savers are substantially better off. While aggregate welfare increases, so does wealth inequality.
    JEL: E0 E21 E62 G00 G12 G18 G21 G28
    Date: 2015–10
  6. By: Irani Arráiz; Miriam Bruhn; Rodolfo Stucchi
    Abstract: This paper studies the use of psychometric tests, designed by the Entrepreneurial Finance Lab (EFL), as a tool to screen out high credit risk and potentially increase access to credit for small business owners in Peru. We use administrative data covering the period from June 2011 to April 2014 to compare debt accrual and repayment behavior patterns across entrepreneurs who were offered a loan based on the traditional credit-scoring method versus the EFL tool. We find that the psychometric test can lower the risk of the loan portfolio when used as a secondary screening mechanism for already banked entrepreneurs---i.e., those with a credit history. For unbanked entrepreneurs---i.e., those without a credit history---using the EFL tool can increase access to credit without increasing portfolio risk.
    Keywords: Credit, SME, Asymmetric information, Psychometric tests, Credit risk, Access to credit
    Date: 2015–10
  7. By: Mabelle Sayah (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1, ISFA - Institut des Science Financière et d'Assurances - PRES Université de Lyon, Faculte des Sciences - Universite Saint Joseph - USJ - Université Saint-Joseph de Beyrouth)
    Abstract: A bank's capital charge computation is a widely discussed topic with new approaches emerging continuously. Each bank is computing this figure using internal methodologies in order to reflect its capital adequacy; however, a more homogeneous model is recommended by the Basel committee to enable judging the situation of these financial institutions and comparing different banks among each other. In this paper, we compare different numerical and econometric models to the sensitivity based approach (SBA) implemented by BCBS under Basel III in its February 2015 publication in order to compute the capital charge, we study the influence of having several currencies and maturities within the portfolio and try to define the time horizon and confidence level implied by Basel s III approach through an application on bonds portfolios. By implementing several approaches, we are able to find equivalent VaRs to the one computed by the SBA on a pre-defined confidence level (97.5 %). However, the time horizon differs according to the chosen methodology and ranges from 1 month up to 1 year.
    Keywords: Sensitivity Based approach,Capital charge,GARCH,Basel III,PCA,bonds portfolio,Dynamic Nelson Siegel,ICA,interest rate risk,trading book
    Date: 2015–10–23
  8. By: Yao Amber Li (Department of Economics, Hong Kong University of Science and Technology; Institute for Emerging Market Studies, Hong Kong University of Science and Technology); Albert Park (Department of Economics, Hong Kong University of Science and Technology; Institute for Emerging Market Studies, Hong Kong University of Science and Technology); Chen Zhao (Department of Economics, Hong Kong University of Science and Technology)
    Abstract: This paper explores how the distribution of credit supply within an industry affects that industry's export intensity (the export-to-sales ratio) and export propensity (the ratio of the number of exporters to the total number of firms). Using a heterogeneous firm trade model, we derive two opposing hypotheses: for industries with relatively low (high) foreign market penetration costs, a more dispersed credit distribution decreases (increases) the industry's export intensity and the number of exporters. The empirical results using Chinese firm-level data and bank loan data support both hypotheses and confirm the significant heterogeneous impacts of credit distribution on exports across industries.
    Keywords: credit constraints, credit supply, financial development, credit distribution, heterogeneous firms, international trade, liquidity
    JEL: F14 G20 L60
    Date: 2015–11
  9. By: Oleg Malafeyev; Achal Awasthi
    Abstract: In this paper, we analyze dynamic programming as a novel approach to solve the problem of maximizing the pro?ts of a bank. The mathematical model of the problem and the description of a bank's work is described in this paper. The problem is then approached using the method of dynamic programming. Dynamic programming makes sure that the solutions obtained are globally optimal and numerically stable. The optimization process is set up as a discrete multi-stage decision process and solved with the help of dynamic programming.
    Date: 2015–11
  10. By: Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Czech National Bank); Zuzana Irsova; Jitka Lesanovska (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: An important component of monetary policy transmission is the pass-through from financial market interest rates, directly influenced or targeted by central banks, to the rates that banks charge firms and households. Yet the available evidence on the strength and speed of the pass-through is mixed and varies across countries, time periods, and even individual banks. We examine the pass-through mechanism using a unique data set of Czech loan and deposit products and focus on bank-level determinants of pricing policies, especially cost efficiency, which we estimate employing both stochastic frontier and data envelopment analysis. Our main results are threefold: First, the long-term pass-through was close to complete for most products before the financial crisis, but has weakened considerably afterward. Second, banks that provide high rates for deposits usually charge high loan markups. Third, cost-efficient banks tend to delay responses to changes in the market rate, smoothing loan rates for their clie nts.
    Keywords: Monetary transmission, cost efficiency, bank pricing policies, stochastic frontier analysis, data envelopment analysis
    JEL: E43 E58 G21
    Date: 2015–10

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