nep-ban New Economics Papers
on Banking
Issue of 2016‒01‒03
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The impact of the global financial crisis on firms'capital structure By Demirguc-Kunt,Asli; Martinez Peria,Maria Soledad; Tressel,Thierry
  2. Insurance activities and systemic risk By Berdin, Elia; Sottocornolay, Matteo
  3. Short-Term Liquidity Contagion in the Interbank Market By Carlos León; Constanza Martínez; Freddy Cepeda
  4. Nonconsolidated subsidiaries, bank capitalization and risk taking By Gong, Di; Huizinga, Harry; Laeven, Luc
  5. Macro Credit Policy and the Financial Accelerator By Carlstrom, Charles T.; Fuerst, Timothy S.
  6. Choosing Expected Shortfall over VaR in Basel III Using Stochastic Dominance By Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Esfandiar Maasoumi; Michel McAleer; Teodosio Pérez-Amaral
  7. The Impact of Electronic Payments on Bank Cost Efficiency: Nonparametric Evidence By G. Ardizzi; F. Crudu; C. Petraglia
  8. Measuring the Instability of China’s Financial System: Indices Construction and an Early Warning System By Sun, Lixin; Huang, Yuqin
  9. The Competitive Effects of a Bank Megamerger on Access to Credit By H. Fraisse; J. Hombert; M. Le
  10. Efficiency in the highly market-segmented Chinese banking sector: A meta-frontier non-radial directional distance function approach By Dong Xiang; Ning Zhang; Andrew C Worthington
  11. The relation between sovereign credit default swap premium and banking sector risk in Poland By Åukasz GÄ…tarek; Marcin Wojtowicz
  12. Money in the equilibrium of banking By Jin Cao; Gerhard Illing
  13. Just Compensation for the Taking of Mortgage Loans By Katherine A. Pancak; Thomas J. Miceli
  14. On the Information Flow from Credit Derivatives to the Macroeconomy By Paul Mizen; Veronica Veleanu
  15. Macroprudential Policy in a DSGE Model: anchoring the countercyclical capital buffer By Leonardo Nogueira Ferreira; Márcio Issao Nakane
  16. An empirical analysis of competition in the Indian Banking Sector in dynamic panel framework By Sinha, Pankaj; Sharma, Sakshi; Ghosh, Sayan
  17. The Future of Large, Internationally Active Banks: Does Scale Define the Winners? By Joseph P. Hughes; Loretta J. Mester
  18. Salience of debt and homebuyers' credit decisions By Sumit Agarwal; Artashes Karapetyan

  1. By: Demirguc-Kunt,Asli; Martinez Peria,Maria Soledad; Tressel,Thierry
    Abstract: Using a data set covering about 277,000 firms across 79 countries over the period 2004-11, this paper examines the evolution of firms'capital structure during the global financial crisis and its aftermath in 2010-11. The study finds that firm leverage and debt maturity declined in advanced economies and developing countries, even in countries that did not experience a crisis. The deleveraging and maturity reduction were particularly significant for privately held firms, including small and medium enterprises. For small and medium-size enterprises, these effects were larger in countries with less efficient legal systems, weaker information-sharing mechanisms, shallower banking systems, and more restrictions on bank entry. In contrast, there is weaker evidence of a significant decline of leverage and debt maturity among firms listed on a stock exchange, which are typically much larger than other firms and likely benefit from the"spare tire"of easier access to capital market financing.
    Keywords: Access to Finance,Economic Theory&Research,Bankruptcy and Resolution of Financial Distress,Debt Markets,Emerging Markets
    Date: 2015–12–21
  2. By: Berdin, Elia; Sottocornolay, Matteo
    Abstract: This paper investigates systemic risk in the insurance industry. We first analyze the systemic contribution of the insurance industry vis-a-vis other industries by applying 3 measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, on 3 groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. We then analyze the determinants of the systemic risk contribution within the insurance industry by using balance sheet level data in a broader sample. Our evidence suggests that i) the insurance industry shows a persistent systemic relevance over time and plays a subordinate role in causing systemic risk compared to banks, and that ii) within the industry, those insurers which engage more in non-insurance-related activities tend to pose more systemic risk. In addition, we are among the first to provide empirical evidence on the role of diversification as potential determinant of systemic risk in the insurance industry. Finally, we confirm that size is also a significant driver of systemic risk, whereas price-to-book ratio and leverage display counterintuitive results.
    Keywords: Systemic Risk,Insurance Activities,Systemically Important Financial Institutions
    JEL: G01 G22 G28 G32
    Date: 2015
  3. By: Carlos León; Constanza Martínez; Freddy Cepeda
    Abstract: We implement a modified version of DebtRank, a measure of systemic impact inspired in feedback centrality, to recursively measure the contagion effects caused by the default of a selected financial institution. In our case contagion is a liquidity issue, measured as the decrease in financial institutions’ short-term liquidity position across the Colombian interbank network. Concurrent with related literature, unless contagion dynamics are preceded by a major –but unlikely- drop in the short-term liquidity position of all participants, we consistently find that individual and systemic contagion effects are negligible. We find that negative effects resulting from contagion are concentrated in a few financial institutions. However, as most of their impact is conditional on the occurrence of unlikely major widespread illiquidity events, and due to the subsidiary contribution of the interbank market to the local money market, their overall systemic importance is still to be confirmed.
    Keywords: Financial networks, contagion, default, liquidity, DebtRank.
    Date: 2015–12–24
  4. By: Gong, Di; Huizinga, Harry; Laeven, Luc
    Abstract: Bank holding companies may be effectively undercapitalized as a result of incomplete consolidation of minority ownership. Using two approaches -- consolidating the minority-owned subsidiaries into the parent or deducting equity investments in minority ownership from the parent’s capital -- we find that the effective capital ratios of US bank holding companies are substantially lower than the reported ratios. Empirical evidence suggests that the undercapitalization is associated with higher risk taking at the bank holding company level. These findings indicate that incomplete consolidation of minority-owned financial institutions constitutes a loophole in capital regulation.
    Keywords: bank leverage; capital regulation; organizational structure; risk taking; undercapitalization
    JEL: G21 G32
    Date: 2015–12
  5. By: Carlstrom, Charles T. (Federal Reserve Bank of Cleveland); Fuerst, Timothy S. (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies macro credit policies within the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The focus is on borrower-based restrictions on lending such as loan-to-value (LTV) ratios. We find that the efficacy of cyclical taxes on LTV ratios depends upon the nature of the underlying loan contract. If the loan contract contains equity-like features such as indexation to aggregate conditions, then there is little role for cyclical taxation. But if the loan contract is not indexed to aggregate conditions, then there are substantial gains to procyclical taxes on LTV ratios.
    Keywords: credit policy; loan-to-value ratios; borrower-based lending restrictions
    JEL: C68 E44 E61
    Date: 2015–12–21
  6. By: Chia-Lin Chang (National Chung Hsing University, Taichung, Taiwan); Juan-Ángel Jiménez-Martín (Complutense University of Madrid, Spain); Esfandiar Maasoumi (Emory University, USA); Michel McAleer (National TsingHua University, Taiwan; Erasmus School of Economics, Erasmus University Rotterdam, and Tinbergen Institute, the Netherlands; Complutense University of Madrid, Spain); Teodosio Pérez-Amaral (Complutense University of Madrid, Spain)
    Abstract: Bank risk managers follow the Basel Committee on Banking Supervision (BCBS) recommendations that recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The Basel Committee on Banking Supervision (2013, p. 3) noted that: “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk”. The proposed reform costs and impact on bank balances may be substantial, such that the size and distribution of daily capital charges under the new rules could be affected significantly. Regulators and bank risk managers agree that all else being equal, a “better” distribution of daily capital charges is to be preferred. The distribution of daily capital charges depends generally on two sets of factors: (1) the risk function that is adopted (ES versus VaR); and (2) their estimated counterparts. The latter is dependent on what models are used by bank risk managers to provide for forecasts of daily capital charges. That is to say, while ES is known to be a preferable “risk function” based on its fundamental properties and greater accounting for the tails of alternative distributions, that same sensitivity to tails can lead to greater daily capital charges, which is the relevant (that is, controlling) practical reference for risk management decisions and observations. In view of the generally agreed focus in this field on the tails of non-standard distributions and low probability outcomes, an assessment of relative merits of estimated ES and estimated VaR is ideally not limited to mean variance considerations. For this reason, robust comparisons between ES and VaR will be achieved in the paper by using a Stochastic Dominance (SD) approach to rank ES and VaR.
    Keywords: Stochastic dominance; Value-at-Risk; Expected Shortfall; Optimizing strategy; Basel III Accord
    JEL: G32 G11 G17 C53 C22
    Date: 2015–12–15
  7. By: G. Ardizzi; F. Crudu; C. Petraglia
    Abstract: This paper presents new evidence on the assessment of banks’ cost efficiency gains stemming from ICT adoption. With respect to the existing literature we introduce two novelties. First, a measure of banking operating costs is explained in terms of a commonly used measure of IT innovation (the relative diffusion of ATMs) and a new variable defined as automated payment transactions. Second, the results obtained via standard parametric estimation methods are compared with those obtained via nonparametric estimation techniques. Using an original dataset of Italian banks or banks operating in Italy observed in the period 2006-2010, we do not find clear cost efficiency enhancing effects due to ATMs diffusion. On the other hand, the diffusion of electronic payments shows a significant effect in terms of cost inefficiency reduction.
    Keywords: electronic payments, ATM, transaction technology, bank cost efficiency, nonparametric regression, cross-validation
    JEL: C14 C33 G2 L11 L8
    Date: 2015
  8. By: Sun, Lixin; Huang, Yuqin
    Abstract: In this paper, employing several econometric techniques, we construct a financial stress index (CNFSI) and a financial conditions index (CNFCI) to measure the instability of China’s financial system. The indices are based on the monthly data collected from China’s inter-bank markets, stock markets, foreign exchange markets and debt markets. Using two indices, we identify the episodes of systemic financial stress, and then evaluate the indices. The empirical results suggest that the CNFSI performs better than the CNFCI. Furthermore, we propose four leading indicators for monitoring China’s financial instability, and provide a primary early warning system for China’s macroprudential regulations.
    Keywords: financial stress index, financial conditions index, China’s financial system, leading indicators, early warning system
    JEL: C43 E44 G18
    Date: 2013
  9. By: H. Fraisse; J. Hombert; M. Le
    Abstract: This paper examines how the merger between two megabanks affects bank concentration and firms' access to credit. We find that in local markets in which the merger leads to a large increase in bank concentration, the merged bank decreases the supply of credit both to existing firms and to new firms. This reduction in credit supply is offset by non-merging banks which expand lending in markets in which the merging banks reduce lending. In some specifications, the substitution effect is strong enough to make the overall effect on credit supply statistically insignificant. Moreover, the substitution effect is at work even for small borrowers, risky borrowers, and new entrants.
    Keywords: Competition, Bank Lending.
    JEL: L40 G21
    Date: 2015
  10. By: Dong Xiang; Ning Zhang; Andrew C Worthington
    Keywords: Meta-frontier analysis, Non-radial directional distance function, Chinese banks, Efficiency determinants
    JEL: G21 D24 C23
    Date: 2015–11
  11. By: Åukasz GÄ…tarek; Marcin Wojtowicz
    Abstract: We investigate causality between returns on sovereign CDSs and bank equities for Poland between 2004 and 2014 to provide evidence on contagion between sovereign and banking sector risk pricing. We find some evidence of contagion from Polish sovereign CDS returns to bank equity returns during the crisis period. We benchmark the results for Poland against a sample ofWestern European countries. We document strong negative correlation between sovereign CDS and bank equity returns for individual countries as well as strong commonality of both sovereign and banking sector risks across different countries. We do not however find a clear pattern of contagion between these two markets across European countries. To further investigate drivers of CDS and bank equity returns, we conduct principal component analysis and we find that first three principal components explain as much as 97% of variation with the third principal component mostly associated with Polandspecific risk.
    Keywords: Contagion, sovereign CDS, bank equity returns, financial crisis.
    JEL: G01 G12 G14 G19 G21
    Date: 2015
  12. By: Jin Cao (The Central Bank of Norway); Gerhard Illing (Ludwig-Maximilians-Universität)
    Abstract: In most banking models, money is merely modeled as a medium of transactions, but in reality, money is also the most liquid asset for banks. Central banks do not only passively supply money to meet demand for transactions, as often assumed in these models, instead they also actively inject liquidity into market, taking banks’ illiquid assets as collateral. We examine both roles of money in an integrated framework, in which banks are subject to aggregate illiquidity risk. With fixed nominal deposit contracts, the monetary economy with an active central bank can replicate constrained efficient allocation. This allocation, however, cannot be implemented in market equilibrium without additional regulation: Due to moral hazard problems, banks invest excessively in illiquid assets, forcing the central bank to provide liquidity at low interest rates. We show that interest rate policy to reduce systemic liquidity risk on its own is dynamically inconsistent. Instead, the constrained efficient solution can be achieved by imposing an ex ante liquidity coverage requirement.
    Keywords: Central banking; liquidity facility; systemic liquidity risk
    JEL: G21 G28
    Date: 2015–12–31
  13. By: Katherine A. Pancak (University of Connecticut); Thomas J. Miceli (University of Connecticut)
    Abstract: Government seizure of residential mortgage loans by eminent domain is currently being discussed as a way to refinance loans where the debt owed exceeds the current value of the collateral. Given the broad judicial interpretation of public use, just compensation may be the sole viable constitutional check on this novel takings proposal. This article contributes to the present debate by providing a framework for thinking about compensation for mortgage loan takings. Legal precedent suggests a range of possible judicial findings based on either the value of the underlying real estate collateral or the value of the outstanding loan debt. An economic perspective shows that compensation should lie somewhere in the range suggested by the various legal theories, but exactly where depends on borrowers’ unobservable valuations of the underlying real estate.
    JEL: G21 K11 K35
    Date: 2015–10
  14. By: Paul Mizen; Veronica Veleanu
    Abstract: We investigate the information flow from credit default swap (CDS) spreads to macroeconomic activity in the United States and twelve European countries. We show that single-name CDS contracts across maturities and sectors provide significant information that anticipates future contractions. The more heavily traded 5-year maturity contracts and the iTraxx European/Markit North American CDS indexes show stronger results, indicating that these forward-looking and highly liquid instruments confer an economically and statistically significant financial signal for future economic activity. Focusing only on the most liquid CDS contracts, we then examine whether better liquidity in the CDS market is accompanied by a higher level of informed trading. A longer sample of US and previously unexplored European country-level data shows information flow intensifies as we approach credit events, and that the number of credit events provides a useful signal in itself of future economic downturns. Finally, we decompose the CDS premium into a liquidity and a residual component (proxying credit and other market risks), and find evidence that liquidity plays a greater role in explaining future macro outcomes over the sample period.
    Keywords: credit default swaps, liquidity, credit risk, economic activity
    Date: 2015
  15. By: Leonardo Nogueira Ferreira; Márcio Issao Nakane
    Abstract: The 2007-8 world financial crisis highlighted the deficiency of the regulatory framework in place at the time. Thenceforth many papers have been assessing the introduction of macroprudential policy in a DSGE model. However, they do not focus on the choice of the variable to which the macroprudential instrument must respond - the anchor variable. In order to fulfil this gap, we input different macroprudential rules into the DSGE with a banking sector proposed by Gerali et al. (2010), and estimate its key parameters using Bayesian techniques applied to Brazilian data. We then rank the results using the unconditional expectation of lifetime utility as of time zero as the measure of welfare: the larger the welfare, the better the anchor variable. We find that credit growth is the variable that performs best.
    Keywords: Macroprudential Policy; Basel III; Capital Buffer; Anchor Variable
    JEL: E3 E5
    Date: 2015–12–02
  16. By: Sinha, Pankaj; Sharma, Sakshi; Ghosh, Sayan
    Abstract: Competition has been regarded as a positive phenomenon for banks; it is perceived that competition makes banks more efficient, stimulates financial innovation and open up new markets For empirical assessment of the nature of competitive conditions amongst scheduled Indian commercial banks over a period of 15 years, we use the ‘Panzar-Rosser educed form revenue model’ to compute the so-called H statistic by estimating the factor price elasticities. In this study alternative estimation techniques have been used for comparing the dynamic H-statistic with static H-statistic. The static H-statistic was found to have a downward bias. However, dynamic as well as static H-statistic, both pointed to the presence of monopolistic competition. The hypotheses of perfect collusion as well as of perfect competition can be rejected using dynamic as well as fixed panel-econometric model estimations using micro data of banks’ balance sheets and profit & loss accounts for the years 2000-2014. The division of the entire period into two sub-samples, i.e. before and after 2007 revealed a decrease in competition levels across the two periods. Although, empirical analysis supported the assertion that the nature of competition among the Indian Banks is monopolistic.But it showed a decrease in the level of competitionmay be due to consolidation exercises of top few large banks with smaller banks and also because of the shift from traditional financial business to off-balance sheet activities, which might have lead to the convergence of competitive levels in the second sub-sample period, i.e. after 2007.The second sub-period also corresponds to the global financial crisis of 2008, a possible reason for the lower H-statistic values. The low persistence of profit values (in the sub-periods) should be associated with higher competition, It is also found that the values of competitive conduct (H-statistic), does not coincide with the classical concentration approach (CR5, CR10), for the Indian Banking Industry. The unit cost of funds, capital, and labour were found to be positive and statistically significant. The unit cost of funds was the highest contributor to the overall H statistic. The control variables, such as size and risk were found to be positively affecting the revenue. The findings arrived in this study; highlight the possible links between Indian banking sector competitiveness, profitability, intermediation and regulatory scenario.
    Keywords: Competition, Competitive Structure, Dynamic Model, Indian Banking Sector, Monopolistic Competition, Panzar-Rosse H-statistic, Profitability
    JEL: D4 D40 D41 D42 D5 D50 G2 G21
    Date: 2015–11–05
  17. By: Joseph P. Hughes (Rutgers University); Loretta J. Mester (Federal Reserve Bank of Cleveland and The Wharton School, University of Pennsylvania)
    Abstract: Our research as well as that by other authors has found scale economies at all sizes of banks and the largest scale economies at the largest banks – that is, larger banks are able to provide products at lower average cost than smaller banks. While the earlier literature found that scale economies are exhausted beyond a modest size – no larger than $100 billion and usually much smaller – a number of recent studies have found scale economies beyond this point, in fact, economies that increase with size. Based on a model that appropriately accounts for endogenous risk-taking and controls for any cost-of-funding advantages conferred on large banks, we find that technological factors, not advantages in funding costs, account for their scale economies. The literature does not indicate whether these benefits of larger size outweigh the potential costs in terms of systemic risk that large scale may impose on the financial system. However, if public policy considerations imply that society would be better off with smaller financial institutions, restrictions that limit the size of financial institutions, if effective, may put large banks at a competitive disadvantage in global markets where competitors are not similarly constrained. Moreover, size restrictions may not be effective since they work against market forces and create incentives for firms to avoid them. Avoiding the restrictions could thereby push risk-taking outside of the more regulated financial sector without necessarily reducing systemic risk. If such limits were imposed, intensive monitoring for such risks would be required. These factors need to be considered when evaluating policies concerning financial institution scale.
    Keywords: banking, efficiency, scale economies, regulation
    JEL: G21 G28
    Date: 2015–12–14
  18. By: Sumit Agarwal (National University of Singapore); Artashes Karapetyan (The Central Bank of Norway)
    Abstract: We show that salience of debt has a significant effect on homebuyers' borrowing outcome. In a setting where homebuyers need to combine several sources of debt, we show that they are biased towards less salient loans. The bias brings about a large mispricing in equilibrium: dwellings that are financed with a greater amount of salient debt are cheaper to buy. Matching the transaction data to individual-level administrative data, we show that young homebuyers, first-time homebuyers, and homebuyers with no investments in the financial markets are more likely to overpay for dwellings with hidden debt. We first quantify the effect of the bias on equilibrium prices. We then analyze a regulatory change that made hidden debt more salient and reduced the mispricing considerably, confirming that the lack of salience resulted in biased prices.
    Keywords: Salience, Housing, Cooperatives, Mortgage, Household Finance, Mispricing
    JEL: D12 G14 G21 G32
    Date: 2015–12–24

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