nep-ban New Economics Papers
on Banking
Issue of 2015‒11‒15
27 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Essays on banking and financial innovation By Gong, Di
  2. Loan supply, credit markets and the euro area financial crisis By Altavilla, Carlo; Darracq Pariès, Matthieu; Nicoletti, Giulio
  3. The supply of long-term credit after a funding shock: evidence from 2007-2009 By Pierre Pessarossi; Frédéric Vinas
  4. International banking and liquidity risk transmission: lessons from the United Kingdom By Hills, Robert; Hooley, John; Korniyenko, Yevgeniya; Wieladek, Tomasz
  5. Lending Standards Over the Credit Cycle By Giacomo Rodano; Nicolas Serrano-Velarde; Emanuele Tarantino
  6. Essays in financial stability and public policy By Horváth, Bálint
  7. State-Aid, Stability and Competition in European Banking By Fiordelisi, Franco; Mare, Davide Salvatore; Molyneux, Philip
  8. Multinational Banks By Stefania Garetto; Martin Goetz; Jose Fillat
  9. Corporate investment and bank-dependent borrowers during the recent financial crisis By Buca, Andra; Vermeulen, Philip
  10. Envelope Condition Method with an Application to Default Risk Models By Viktor Tsyrennikov; Serguei Maliar; Lilia Maliar; Cristina Arellano
  11. Determinants of euro-area bank lending margins: financial fragmentation and ECB policies By Helen Louri; Petros M. Migiakis
  12. Foreign Competition and Banking Industry Dynamics By Dean Corbae; Pablo D'Erasmo
  13. How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  14. Essays in banking and international finance By Schäfer, Larissa
  15. Securities Trading by Banks and Credit Supply: Micro-Evidence By Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Francesc R. Tous
  16. The Economics of Debt Collection: Enforcement of Consumer Credit Contracts By Robert Hunt; Viktar Fedaseyeu
  17. Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment By Guillaume Arnould; Salim Dehmej
  18. Productivity Drivers of Efficiency in Banking: Importance of Model Specifications By Natalya Zelenyuk; Valentin Zelenyuk
  19. Do Large-Scale Refinancing Programs Reduce Mortgage Defaults? Evidence From a Regression Discontinuity Design: Working Paper 2015-06 By Gabriel Ehrlich; Jeffrey Perry
  20. A Simple Dynamic Theory of Credit Scores Under Adverse Selection By Andrew Glover; Dean Corbae
  21. Credit supply disruptions: from credit crunches to financial crisis By Peek, Joe; Rosengren, Eric S.
  22. Explaining adoption and use of payment instruments by U.S. consumers By Sergei Koulayev; Marc Rysman; Scott Schuh; Joanna Stavins
  23. Implementing Loan-to-Value and Debt Service-To-Income measures: A decade of Romanian experience By Neagu, Florian; Tatarici, Luminita; Mihai, Irina
  24. Shadow Banking, Relationship Banking, and the Economics of Depression By Antonio Bianco
  25. Risk governance and performance of the Italian banks: an empirical analysis By Elisa Cavezzali; Gloria Gardenal
  26. Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets By Hertrich, Markus
  27. Preaching water but drinking wine? Relative performance evaluation in international banking By Dragan Ilić; Sonja Pisarov; Peter S. Schmidt

  1. By: Gong, Di (Tilburg University, School of Economics and Management)
    Abstract: This dissertation consists of three chapters. Chapters 2 and 3 examine the ex-ante motivation and the ex-post impact of securitization. Departing from the traditional literature of bank-specific drivers for securitization, I investigate the tax incentive for securitization in a cross country setting. In addition, unlike the prior micro studies of the impacts of securitization, for instance, the adverse selection in the securitization market and so forth, I study the macro impact of<br/>securitization on real economy. Another strand of my research focuses on banking regulation, especially macroprudential regulation. I am particularly interested in the fact that banks may ex-ante take risk in anticipation of regulatory forbearance in a systemic banking crisis and its implication for macroprudential regulation. Consequently, chapter 4 analyzes systemic risk-taking at banks in the presence of “too-manyto-fail” bailout guarantee. In sum, shedding light on securitization and systemic risk-taking in the banking sector, this dissertation contributes to the policy debate on bank regulation. <br/>
    Date: 2015
  2. By: Altavilla, Carlo; Darracq Pariès, Matthieu; Nicoletti, Giulio
    Abstract: We use bank-level information on lending practices from the euro area Bank Lending Survey to construct a new indicator of loans’ supply tightening controlling for both macroeconomic and bank-specific factors. Embedding this information as external instrument in a Bayesian vector autoregressive model (BVAR), we find that tighter bank loan supply to non-financial corporations leads to a protracted contraction in credit volumes and higher bank lending spreads. This fosters firms’ incentives to substitute bank loans with market finance, producing a significant increase in debt securities issuance and higher bond spreads. We also show that loans’ tightening shocks explain a large fraction of the contraction in real activity and the widening of credit spreads especially over the recession which followed the euro area sovereign debt crisis. JEL Classification: E51, E44, C32
    Keywords: Bank Lending Survey, Credit Supply, External Instruments, Lending standards
    Date: 2015–10
  3. By: Pierre Pessarossi (ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution); Frédéric Vinas (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution)
    Abstract: We study banks supply of long-term credit after a negative funding shock. Thanks to a unique database at bank-firm level, we take advantage of the exogenous interbank market freeze in 2007-2008 to assess the causal relation between French banks' liquidity risk and their lending. We find that banks with higher funding risk and more maturity transformation provided a lower supply of long-term loans after the shock, even controlling for credit demand. Short-term lending supply is however unaffected. These findings help explain the severity of the recession that followed the liquidity crisis. And they support Basel III liquidity regulation. This regulation should have a stabilising effect on long-term lending in times of funding stress.
    Keywords: financial institutions,liquidity risk,loan maturity
    Date: 2015–09
  4. By: Hills, Robert (Bank of England); Hooley, John (International Monetary Fund); Korniyenko, Yevgeniya (International Monetary Fund); Wieladek, Tomasz (Bank of England)
    Abstract: This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the impact of liquidity shocks on banks’ lending behaviour, using proprietary bank-level data available to central banks. Specifically, we examine the impact of changes in funding conditions on UK-resident banks’ domestic and external lending from 2006–12. Our results suggest that, following a rise in the liquidity shock measure, UK-resident banks that grew their balance sheets quicker relative to their peers pre-crisis, decreased their external lending by more relative to other banks, and increased their domestic lending. When we account for country of ownership, we find that the same pattern was true for both UK-owned and foreign-owned banks, but more pronounced for UK-owned banks’ domestic and foreign-owned banks’ external lending. These results are robust to splitting the data into real and financial sector lending, the use of more granular bilateral country loan data and controlling for the various banking system interventions made by governments in 2008–09.
    Keywords: Liquidity shock; global financial crisis; cross-border and domestic lending.
    JEL: E44 E51 E52 G18 G21
    Date: 2015–11–06
  5. By: Giacomo Rodano; Nicolas Serrano-Velarde; Emanuele Tarantino
    Abstract: We empirically identify the lending standards applied by banks to small and medium firms over the cycle. We exploit an institutional feature of the Italian credit market that generates a sharp discontinuity in the allocation of comparable firms into credit risk categories. Using loan-level data, we show that during the expansionary phase of the cycle, banks relax lending standards by narrowing the interest rate spreads between substandard and performing firms. During the contractionary phase of the cycle, the abrupt tightening of lending standards leads to the exclusion of substandard firms from credit. These firms then report significantly lower production, investment, and employment. Finally, we find that the drying up of the interbank market is an important factor determining the change in bank lending standards. JEL classification: E32, E44, G21. Keywords: Credit Cycles; Financial Contracts; Credit Rationing; Real Activity.
    Date: 2015
  6. By: Horváth, Bálint (Tilburg University, School of Economics and Management)
    Abstract: This dissertation is a collection of essays in two areas of financial stability. The first part deals with systemic risk in the banking sector. First, it asks whether countercyclical macroprudential policy tools can be an effective way of reducing cyclicality in bank lending. The main finding is that these policies can be counterproductive and may incentivize more intertwined banks, and hence, endanger financial stability. The next paper investigates, and provides some evidence of, the possibility that banks actively change their portfolios in order to<br/>influence the likelihood of joint bank failure. <br/>The second part of this dissertation studies the connection between public finance and financial stability. Chapter 4 looks into the interaction between bank capital regulation and taxation and finds that banks trade off leverage risk against portfolio risk in response to a higher corporate income tax rates. Finally, Chapter 5 analyses banks’ excessive holdings of domestic government debt as one of the sources of the interrelatedness of public finance and bank stability. Two possible explanations of banks’ home bias are tested: voluntary government<br/>bond hoarding and government induced bond buying.<br/>
    Date: 2015
  7. By: Fiordelisi, Franco; Mare, Davide Salvatore; Molyneux, Philip
    Abstract: What is the relationship between bank fragility and competition during a period of market turmoil? Does market power in European banking involve extra-gains after discounting for the cost of government intervention? We answer these questions in the context of Eurozone banking over 2005-2012 and show that greater market power increases bank stability implying aggregate extra-gains of 57% of EU12 gross domestic product for the banking sector after discounting for the costs associated with government intervention. The negative influence of competition on bank stability is non-monotonic and reverses for lower degrees of competition. Capital injections, guarantees and asset relief measures elicit greater bank soundness.
    Keywords: Bank Stability, Prudential Regulation, Competition, Global Financial Crisis, European Banking Union, Government Bailouts
    JEL: C23 G21 G28
    Date: 2015–09
  8. By: Stefania Garetto (Boston University); Martin Goetz (Goethe University, Frankfurt am Main); Jose Fillat (Federal Reserve Bank of Boston)
    Abstract: This paper starts by establishing a set of stylized facts about global banks with operations in the United States. First, we show evidence of selection into foreign markets: the parent banks of global conglomerates tend to be larger than national banks. Second, selection by size is related to the mode of foreign operations: foreign subsidiaries of global banks are systematically larger than foreign branches, in terms of deposits, loans, and overall assets. Third, the mode of foreign operations affects the response of global banks to shocks and how those shocks are transmitted across countries. We develop a structural model of entry into global banking whose assumptions mimic the institutional details of the regulatory framework in the US. Heterogeneous, profit-maximizing banks decide whether and how to enter a foreign market. While shedding light on the relationship between market access, capital flows, regulation, and entry, the model rationalizes the observed stylized facts and can be used as a laboratory to perform counterfactual analysis.
    Date: 2015
  9. By: Buca, Andra; Vermeulen, Philip
    Abstract: We use the recent financial crisis period to analyse the effect of bank credit tightening on real firm investment. We derive a new set of credit tightening indexes from the ECB Bank Lending Survey. Combining these with annual balance sheet data from Germany, France, Italy, Spain, Belgium and Portugal, we exploit the heterogeneity in the dependence on bank finance of different industries to identify real effects of credit tightening. We show that in response to tightening, investment falls substantially more in bank-dependent industries. JEL Classification: E22, E44, G01
    Keywords: corporate investment, credit crunch, financial crisis
    Date: 2015–10
  10. By: Viktor Tsyrennikov (IMF); Serguei Maliar (Santa Clara University); Lilia Maliar (Stanford University); Cristina Arellano (Federal Reserve Bank of Minneapolis)
    Abstract: We develop an envelope condition method (ECM) for dynamic programming problems -- a tractable alternative to expensive conventional value function iteration. ECM has two novel features: First, to reduce the cost, ECM replaces expensive backward iteration on Bellman equation with relatively cheap forward iteration on an envelope condition. Second, to increase the accuracy of solutions, ECM solves for derivatives of a value function jointly with a value function itself. We complement ECM with other computational techniques that are suitable for high-dimensional problems, such as simulation-based grids, monomial integration rules and derivative-free solvers. The resulting value-iterative ECM method can accurately solve models with at least up to 20 state variables and can successfully compete in accuracy and speed with state-of-the-art Euler equation methods. We also use ECM to solve a challenging default risk model with a kink in value and policy functions, and we find it to be fast, accurate and reliable.
    Date: 2015
  11. By: Helen Louri (Athens University of Economics and Business and London School of Economics (EI/HO)); Petros M. Migiakis (Bank of Greece)
    Abstract: In the present paper we study the determinants of the margins paid by euro-area non-financial corporations (NFCs) for their bank loans on top of the rates they earn for their deposits (bank lending margins). We use panel VAR techniques, in order to test for causality relationships and produce impulse response functions for eleven euro-area countries from 2003:1 to 2014:12. The countries are separated to two groups (distressed and non-distressed), in order to examine for heterogeneities in the relationships between lending margins, the period is also separated with reference to the peak of the global financial crisis (before and after the collapse of Lehman in September 2008). We find that significant heterogeneities existed even before the global financial crisis and remained in its aftermath, although the magnitude and the direction of the effects exercised by the explanatory variables have changed. Furthermore, apart from finding that market concentration and the prudence of banks’ management increase the lending margins NFCs pay for their loans, there is evidence of substitution effects between financing obtained from banks and corporate bond markets. The provision of ample liquidity from the ECB, in the aftermath of the global financial crisis was found to be effective only for the core countries, suggesting that further policy actions are needed in order to reduce the fragmentation of bank lending and promote financial integration to the benefit of the euro-area real economy.
    Keywords: bank lending margins; euro area; financial fragmentation; global financial crisis; European Central Bank
    JEL: E44 E51 E58 F36 F42
    Date: 2015–10
  12. By: Dean Corbae (University of Wisconsin); Pablo D'Erasmo (FRB Philadelphia)
    Abstract: We develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. We apply the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given high concentration in the Mexican banking industry, domestic and foreign banks act strategically in our framework. After calibrating the model to Mexican data, we examine the welfare consequences of government policies which promote global competition. We find modest welfare gains for households and substantial gains for business.
    Date: 2015
  13. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.
    Keywords: euro-area financial crisis, sovereign-bank linkages, banks’ performance, banking stability.
    JEL: E3 G01 G14 G21
    Date: 2015–11
  14. By: Schäfer, Larissa (Tilburg University, School of Economics and Management)
    Abstract: This thesis consists of three chapters, two in banking and one in international finance. The first two chapters examine how bank business models and foreign ownership structures affect bank-firm lending relationships. In particular, the first chapter reveals that foreign banks can overcome their informational disadvantage and lend to the same clientele as domestic banks with asset-based lending, shorter maturities, and credit scoring models, while domestic banks rely on relationship lending. The second chapter presents empirical evidence that relationship lending serves as a liquidity insurance for firms in distress, tolerating temporary bad results, yet extracting rents in the long run. The last chapter provides a comprehensive and detailed analysis of Central and Eastern European equity markets from the mid-1990s until now and evaluates the value of investing in these markets for global investors.
    Date: 2015
  15. By: Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Francesc R. Tous
    Abstract: We analyze securities trading by banks and the associated spillovers to the supply of credit. Empirical analysis has been elusive due to the lack of securities register for banks. We use a unique, proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. Analyzing data at the security level for each bank in each period, we find that during the crisis, banks with higher trading expertise increase their overall investments in securities, especially in those that had a larger price drop. The quantitative effects are largest for trading-expertise banks with higher capital and in securities with lower rating and long-term maturity. In fact, there are no differential effects for triple-A rated securities. Moreover, banks with higher trading expertise reduce their overall supply of credit in crisis times – i.e., for the same borrower at the same time, trading-expertise banks reduce lending relative to other banks. This effect is more pronounced for trading-expertise banks with higher capital, and the credit reduction is binding at the firm level. Finally, these differential effects for trading-expertise banks are not present outside the crisis period.
    Keywords: banking, investments, bank capital, credit supply, risk-taking
    JEL: G01 G21 G28
    Date: 2015–11
  16. By: Robert Hunt (Federal Reserve Bank of Philadelphia); Viktar Fedaseyeu (Bocconi University)
    Abstract: In the U.S., third-party debt collection agencies employ more than 140,000 people and recover more than $50 billion each year, mostly from consumers. Informational, legal, and other factors suggest that original creditors should have an advantage in collecting debts owed to them. Then, why does the debt collection industry exist and why is it so large? Explanations based on economies of scale or specialization cannot address many of the observed stylized facts. We develop an application of common agency theory that better explains those facts. The model explains how reliance on an unconcentrated industry of third-party debt collection agencies can implement an equilibrium with more intense collections activity than creditors would implement by themselves. We derive empirical implications for the nature of the debt collection market and the structure of the debt collection industry. A welfare analysis shows that, under certain conditions, an equilibrium in which creditors rely on third-party debt collectors can generate more credit supply and aggregate borrower surplus than an equilibrium where lenders collect debts owed to them on their own. There are, however, situations where the opposite is true. The model also suggests a number of policy instruments that may improve the functioning of the collections market.
    Date: 2015
  17. By: Guillaume Arnould (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, LABEX Refi - ESCP Europe); Salim Dehmej (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, LABEX Refi - ESCP Europe)
    Abstract: The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements.
    Keywords: Basel III,Financial stability,stress tests,banking,financial regulation
    Date: 2015–07
  18. By: Natalya Zelenyuk (UQ Business School, The University of Queensland, Australia); Valentin Zelenyuk (School of Economics and Centre for Efficiency and Productivity Analysis (CEPA) at The University of Queensland, Australia)
    Abstract: We use nonparametric method with various specifications to estimate efficiency of banks and then use truncated regression with double-bootstrap (Simar and Wilson, 2007) to analyze how various bank-specific factors explain the differences in the estimated levels of inefficiency across the banks in Ukraine, with a particular focus on foreign ownership. We show that some results are very robust, yet others depend on the chosen Data Envelopment Analysis specification for the efficiency model. We also find that the efficiency of banks with foreign ownership is not distinguishable from the efficiency of the locally-owned banks if the degree of ownership control is not accounted for. On the other hand, when we account for degree of control, we find evidence that banks that were 100% foreign-owned were significantly more efficient than the locally owned banks, while the partially foreign-owned banks were significantly less efficient than the locally owned banks (on average and ceteris paribus), thus providing empirical support for the agency and corporate governance theories in economics.
    Keywords: Foreign ownership, Banking, Efficiency, DEA, Truncated regression, Double-bootstrap
    JEL: C1 C13 C14 G2
    Date: 2015–09
  19. By: Gabriel Ehrlich; Jeffrey Perry
    Abstract: In 2012, the Federal Housing Administration (FHA) reduced fees to refinance FHA-insured mortgages obtained before---but not after---a retroactive deadline. We use a natural experiment to study how reduced mortgage payments affect default rates. Using a regression discontinuity design, we find that reducing payment size by 1 percent lowers conditional default rates by 2.75 percent. Evidence suggests that those effects are larger for borrowers with negative equity and lower credit scores. We estimate that the policy will prevent more than 35,000 defaults of FHA-insured mortgages, saving FHA
    JEL: G18 G21 E65 H50
    Date: 2015–10–08
  20. By: Andrew Glover (University of Texas at Austin); Dean Corbae (University of Wisconsin)
    Abstract: We study a dynamic model of unsecured credit markets with adverse selection and an endogenous signal of a borrower's riskiness (modeled as a credit score). Credit contracts are statically constrained efficient in our environment, which is achieved by limiting the debt of low-risk borrowers while subsidizing the interest rate for the high-risk borrowers. A higher credit score (i.e. higher prior that the borrower is low risk) relaxes the constraint on low-risk borrowers and increases the subsidization for high-risk, which means that utility for both types increases with their credit scores. We calibrate the model to salient features of the unsecured credit market and consider the welfare consequences of different information regimes.
    Date: 2015
  21. By: Peek, Joe (Federal Reserve Bank of Boston); Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Events that transpired during the recent financial crisis highlight the important role that financial intermediaries still play in the economy, especially during economic downturns. While the breadth and severity of the financial crisis took most observers by surprise, it has renewed academic interest in understanding the effects on the real economy of both financial shocks and the changing nature of financial intermediation. This interest in the real effects of financial shocks highlights a literature that began more than 20 years ago associated with the bank credit crunch of the early 1990s. It is useful to reflect on what we thought we had learned from that research and how that research has helped to guide policy in the more recent crisis.
    Keywords: financial crisis; credit availability; financial intermediaries; liquidity; shadow banking; financial innovations
    JEL: E44 E51 G21 G23 G28
    Date: 2015–10–01
  22. By: Sergei Koulayev (Consumer Financial Protection Bureau); Marc Rysman (Boston University); Scott Schuh (Federal Reserve Bank of Boston); Joanna Stavins (Federal Reserve Bank of Boston)
    Abstract: Motivated by recent policy intervention into payments markets that can lead to changes to the prices that consumers face for dierent payment instruments, this paper develops and estimates a structural model of adoption and use of payment instruments by U.S. consumers. We utilize a cross-section from the Survey of Consumer Payment Choice, a new survey of consumer behavior. Our structural model emphasizes the distinction between the adoption and use of a payment instrument. We evaluate substitution among payment instruments, as well welfare implications. We nd that cash is the most signicant substitute to debit cards in retail settings, whereas checks are the most signicant in bill-pay settings. Furthermore, we nd low income consumers lose proportionally more than high income consumers when debit cards become more expensive, whereas the reverse is true when credit cards do.
    Date: 2015–05–26
  23. By: Neagu, Florian; Tatarici, Luminita; Mihai, Irina
    Abstract: We describe an example of designing, implementing and calibrating two macroprudential instruments – loan-to-value (LTV) and debt service-to-income (DSTI) – based on a decade of Romanian experience with these tools. We investigate LTV and DSTI effectiveness in trimming down excessive credit growth and in preserving the quality of banks’ loan portfolios. We find strong links between DSTI levels and the debtors’ capacity to repay their debt, underpinning the usefulness of caps for this instrument. We find that an approach based to a large extent on banks’ self-regulation produces suboptimal results, exacerbating the pro-cyclicality in the system. A one‑size-fits-all approach is less effective than tailoring the DSTI and LTV measures based on debtors’ disposable income, the currency of indebtedness and the destination of the loan
    Keywords: financial stability, macroprudential instruments, house prices, credit growth, debt service-to-income (DSTI), loan-to-value (LTV), Romania
    JEL: E44 E58 G21 G28
    Date: 2015
  24. By: Antonio Bianco (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome (Italy).)
    Abstract: A simple stock-flow consistent methodological account of the influence of financial markets over the real economy is here presented. The model is so devised as to allow a tidy comparison of relationship or shadow banking interpreted as alternative schemes of liquidity (not credit) risk management. The essential mechanism that is here at work is that fluctuations in the composition of property incomes lead to fluctuations in borrowing for non-financial purposes that, in their turn, drive fluctuations in spending. Having this in mind, the model emphasizes the interdependencies in entrepreneurs’ variations in animal spirits, financial institutions’ idiosyncratic liquidity risk management (ILRM), and households’ effective demand. The model key finding is that both relationship and shadow banking entail a pro-cyclical impact and that differences implied in the two cases can be reduced to the different ILRM aggregate cost functions. As for policy implications, the model suggests that securitisation is not per se leading to financial unsustainability, yet regulatory measures aimed at checking predatory lending and the CDO industry are needed: failing these, securitisation is likely to have a depressive impact on non-financial entrepreneurs’ confidence, and hence on the financial sustainability of a growth process.
    Keywords: animal spirits, endogenous money, liquidity risk management, securitisation, originate-to-hold, originate-to-distribute.
    JEL: B52 E12 E20 E44 M40
    Date: 2015–10
  25. By: Elisa Cavezzali (Dept. of Management, Università Ca' Foscari Venice); Gloria Gardenal (Dept. of Management, Università Ca' Foscari Venice)
    Abstract: The paper investigates the relation between the adoption of good practices in risk management and the level of performance and riskiness of banks. In particular, we aim at understanding if the application of the Enterprise Risk Management approach to banks helps increasing their stability. We test the hypothesis that those banks using an integrated risk management approach have, ceteris paribus, a lower level of risk and a higher performance. Our analysis focuses on 21 Italian listed banking groups, in the time period 2005-2013. Our preliminary results show that the risk management function influences the risk and performance of the bank; however, it is not possible from our data to define an optimal model of risk governance.
    Keywords: Irisk management, risk governance, enterprise risk management, banking system
    Date: 2015–10
  26. By: Hertrich, Markus
    Abstract: During the recent financial crisis that erupted in mid-2007, credit default swap spreads increased by several hundred basis points, accompanied by a liquidity shortage in the U.S. financial sector. This period has both evidenced the importance that liquidity has for investors and underlined the need to understand the linkages between credit markets and liquidity. This paper sheds light on the dynamic interactions between credit and liquidity risk in the credit Default swap market. Contrary to the common belief that illiquidity leads to a credit risk deterioration in financial markets, it is found that in a sample of German and Swiss companies, credit risk is more likely to be weakly endogenous for liquidity risk than vice versa. The results suggest that a negative credit shock typically leads to a subsequent liquidity shortage in the credit default swap market, in the spirit of, for instance, the liquidity spiral posited by Brunnermaier (2009), and extends our knowledge about how credit markets work, as it helps to explain the amplification mechanisms that severely aggravated the recent crisis and also indicates which macro-prudential policies would be suitable for preventing a similar financial crisis in the future.
    Keywords: financial crisis, credit default swap, credit risk, liquidity risk, endogeneity, macroprudential policy
    JEL: E37 E61 G14 G32 G38
    Date: 2015–09
  27. By: Dragan Ilić; Sonja Pisarov; Peter S. Schmidt
    Abstract: Relative performance evaluation (RPE) is, at least on paper, enjoying widespread popularity in determining the level of executive compensation. Yet existing empirical evidence of RPE is decidedly mixed. Two principal explanations are held responsible for this discord. A constructional challenge arises from intricacies of identifying the correct peers. And on a simpler note, corporate commitments to RPE could be mere exercises in empty rhetoric. We address both issues and test the use of RPE in a new sample of large international non-U.S. banks. Taken as a whole, the banks in our sample show moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of banks that disclose the use of peers in their compensation schemes. This finding lends support to the credibility and thus informational value of RPE commitments. Digging deeper, we conclude that RPE usage is driven by firm size and growth options.
    Keywords: Relative performance evaluation, executive compensation, peers, banks, disclosure
    JEL: J33 D86 G3 G21
    Date: 2015–10

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