nep-ban New Economics Papers
on Banking
Issue of 2016‒01‒29
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Multiple banking relationships: do SMEs mistrust their banks? By Catherine Refait-Alexandre; Stéphanie Serve
  2. The Shape of Regulation to Come By José Jorge
  3. Regulation of Microfinance Institutions in Developing countries: an incentives theory approach By Mathurin FOUNANOU; Zaka RATSIMALAHELO
  4. Mortgage Choice Determinants: the Role of Risk and Bank Regulation By Dungey, Mardi; Tchatoka, Firmin Doko; Wells, Graeme; Yanotti, Maria Belen
  5. NManagement Board Composition of Banking Institutions and Bank Risk-Taking: The Case of the Czech Republic By Diana Zigraiova
  6. Changes in Funding Patterns by Latin American Banking Systems: How Large? How Risky? - Working Paper 420 By Liliana Rojas-Suarez and José María Serena
  7. Leverage, Bank Employee Compensation and Institutions By Bertay, Ata; Uras, Burak
  8. Effectiveness of Loan-To-Value Ratio Policy and Its Transmission Mechanism ¨C Empirical Evidence from Hong Kong By Eric Wong; Kelvin Ho; Andrew Tsang
  9. European lending channel: differences in transmission mechanisms due to the global financial crisis By Tomáš Heryán; Panayiotis G. Tzeremes; Roman Matousek
  10. High frequency characterization of Indian banking stocks By Sayaeed, Mohammad Abu; Dungey, Mardi; Yao, Wenying
  11. Surfing through the GFC: systemic risk in Australia By Dungey, Mardi; Luciani, Matteo; Matei, Marius; Veredas, David
  12. Bank Value and Geographic Diversification: Regional vs Global By Canan Yildirim; Georgios Efthyvoulou
  13. A Proposal to Eliminate the Distortions Caused by Bailouts By Chari, V. V.; Kehoe, Patrick J.
  14. Recourse and the Residential Mortgage Market: the Case of Nevada By Wenli Li; Florian Oswald
  15. A meta-analysis examining the nature of trade-offs in microfinance By Patrick Reichert
  16. Financial contracting with enforcement externalities By Drozd, Lukasz A.; Serrano-Padial, Ricardo
  17. Modelling Probability of Default of Russian Banks and Companies Using Copula Models By Ilya Khankov; Henry Penikas
  18. How Did Pre-Fed Banking Panics End? By Tallman, Ellis W.; Gorton, Gary
  19. Corporate governance and corporate debt issuance in Latin America: institutional investors, investment banks, rating agencies and new empirical evidence By Mendes de Paula, Germano; Sousa Ribeiro, Karem Cristina de; Silva de Almeida, Neirilaine
  20. Self-Selection into Credit Markets: Evidence from Agriculture in Mali - Working Paper 377 By Lori Beaman, Dean Karlan, Bram Thuysbaert, and Christopher Udry

  1. By: Catherine Refait-Alexandre (Université de Bourgogne Franche-Comté, CRESE); Stéphanie Serve (Université de Cergy-Pontoise, THEMA)
    Abstract: This article focuses on the use of multiple banking relationships by SMEs, a key issue given their strong dependence on bank financing in a context of increasing financial constraints and higher risk of credit rationing since the crisis. We investigate whether the use of multiple banking relationships is explained by firms’ characteristics or by the quality of the banking relationship. We exploit the results of an original survey conducted on a sample of French SMEs in December 2012. According to the traditional theoretical framework of multiple banking, we find that older, bigger, and betterperforming firms are more likely to access multiple banking relationships. We further find that innovative firms are more likely to engage in multiple banking relationships. We also highlight the explanatory power of an alternative model based on the quality of banking relationship: when the manager trusts its main bank, or when he is closer to his loan officer, the firm will be less likely to engage in multiple banking relationships.
    Keywords: multiple banking relationships, trust, credit rationing, financial crisis
    JEL: G21 G32
    Date: 2016–01
  2. By: José Jorge (Faculdade de Economia, Universidade do Porto, cef.up)
    Abstract: We identify the main changes in the global financial system over the last decade, pointing out the fragilities of the existing banking regulation. We then propose a variety of responses to the new challenges, like limiting banks’ non-core liabilities, introducing contingent capital and risk-weights that account for systemic risk, combining monetary policy with policies that promote financial stability, improving international cooperation regarding liquidity facilities, integrating regulation on deposit insurance and resolution of bank default. We point out some unexpected difficulties which threaten the reform agenda, and conclude with a warning: the business cycle matters when assessing the cost of new regulations, and imposing tighter rules that will create a credit crunch during a recession is questionable.
    Keywords: Keywords: Financial regulation
    JEL: G28
    Date: 2016–01
  3. By: Mathurin FOUNANOU (University Gaston Berger de Saint-Louis); Zaka RATSIMALAHELO (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: We analyze the optimal policy of regulation of microfinance institutions in developing countries, where investment funds are insured by the government and customer deposits. We used a mixed model, combining adverse selection and moral hazard to characterize a class of optimal incentive schemes applied in presence of government funds and in non-government funded. We also analyse the effects of prudential regulation of deposits on the profitability of MFI and social welfare, and we compare prudential and non-prudential regulation. The incentive scheme that we propose can be regarded as a "smart subsidy" mechanism that contributes to the economic and social development.
    Keywords: Microfinance, adverse selection, moral hazard, incentive mechanisms, regulation, smart subsidy.
    JEL: G10 G21 G28
    Date: 2016–03
  4. By: Dungey, Mardi (Tasmanian School of Business and Economics); Tchatoka, Firmin Doko (Tasmanian School of Business and Economics); Wells, Graeme (Tasmanian School of Business and Economics); Yanotti, Maria Belen (School of Business and Exonomics, University of Tasmania)
    Abstract: This paper sheds new light on the role of borrower characteristics in mortgage product choice, and how these are impacted by regulatory capital requirements. Using rich loan-level data from the Australian market we analyse the way in which these risk effects impact the choice between adjustable rate mortgages and a range of complex mortgages which provide reduced initial payments.For the first time we find that all three of income, wealth and mobility risks play a role in product choice. We also investigate the role of regulatory capital requirements in an environment where banks hold mortgage risk on their balance sheet and find that the Basel capital discounts based on loan-to-valuation ratios divide otherwise similar borrowers between ARM and CM product choices. Year:2014
    Keywords: Mortgage Choice Basel Banks
    JEL: G21 G18
    Date: 2014–02–12
  5. By: Diana Zigraiova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank)
    Abstract: The paper investigates how management board composition of banking institutions impacts their risk-taking behavior in the Czech Republic. More specifically, we examine the effect of average director age, proportion of female directors, non-national directors and proportion of their attained education on four different bank risk proxies. We build a unique data set comprising selected biographical information on management board members of the Czech financial institutions holding a banking license over 2001-2012 period. For the Czech banking sector overall, we find that higher proportions of non-national directors increase bank risk measured by profit volatility and decrease bank stability captured by Z-score. Similarly, a larger proportion of directors holding an MBA raises bank riskiness measured by profit volatility. On the other hand, the presence of directors holding a PhD on boards of large Czech banks enhances bank stability captured by Z-score. Moreover, we detect risk-enhancing implications of board size for the segments of building savings societies and small and midsized banks. As for average board tenure, its effect on risk-taking varies depending on bank characteristics. We find mixed evidence on the effect of female directors and do not find any strong effect of directors' age on risk in the Czech banking sector.
    Keywords: Management board composition, banks, risk-taking, panel data
    JEL: C33 G21 G34 J16
    Date: 2016–01
  6. By: Liliana Rojas-Suarez and José María Serena
    Abstract: This paper investigates the shifts in Latin American banks’ funding patterns in the post-global financial crisis period. To this end, we introduce a new measure of exposure of local banking systems to international debt markets that we term: International Debt Issuances by Locally Supervised Institutions. In contrast to well-known BIS measures, our new metric includes all entities that fall under the supervisory purview of the local authority. This is especially important in Latin America, where the participation of foreign banks that are established as independent, fullycapitalized entities is most substantial. Using this metric we found that all types of Latin American banking groups significantly and sharply increased their issuance of external debt securities during 2010-14. Owing to the low ratios of banks’ external debt to total liabilities in the pre-crisis period, solid solvency ratios and improved supervisory capacity, the increase in banks’ external indebtedness did not result in financial difficulties, and by mid-2015 banking systems remained strong. However, a preliminary analysis of risks based on this new trend reveals the emergence of several signs of increased vulnerability. Firstly, in some banking groups (particularly in Brazilian banks, domestic and foreign alike) the increased issuance of external debt was accompanied by a greater reliance on wholesale funding. In contrast, reliance on wholesale funding by Colombian banks remained low and stable. Secondly, rollover risks have significantly increased for Latin American banking groups. Maturing debt, which increased significantly in 2013-14, will continue at high levels in 2015-16 in the context of major uncertainties in international capital markets. This risk is especially noticeable in Brazil and Chile, whose ratios of maturing debt to total debt are high. Thirdly, in spite of a sizeable accumulation of international reserves, the large increase in banks’ external debt might have contributed to reducing the resilience of central banks to deal with severe adverse shocks.
    Keywords: emerging economies’ banks, locally supervised institutions, international debt, wholesale funding, Latin America, financial fragilities.
    JEL: G15 G21 F36
    Date: 2015–11
  7. By: Bertay, Ata (Tilburg University, Center For Economic Research); Uras, Burak (Tilburg University, Center For Economic Research)
    Abstract: This paper investigates the empirical relationship between financial structure and employee compensation in the banking industry. Using an international panel of banks, we show that well-capitalized banks pay higher wages to their employees. Our results are robust to changes in measurement, model specification and estimation methods. In order to account for the positive association between bank capital and employee compensation, we illustrate a stylized 3-period model and show that well-capitalized banks have incentives to pay higher wages to induce monitoring. Such monitoring rents of employees at capitalized banks are expected to be higher in societies with weak institutions. Further empirical analysis shows that the weaker is institutional quality of a country the stronger is the positive relationship between bank capital and wages - supporting our theoretical conjectures. High compensations in the financial industry received increasing criticism over the course of years following the great recession, whereas capitalization of banks has been encouraged. Our paper is the first to highlight that there is an empirically visible trade-off between the two and that institutions strongly interact with this relationship.
    Keywords: bank financial structure; wage determination; human capital
    JEL: G3 G21 J24 J31
    Date: 2016
  8. By: Eric Wong (Hong Kong Monetary Authority); Kelvin Ho (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority)
    Abstract: This paper provides a non-technical summary of two recent empirical studies to shed light on key important issues regarding the implementation of loan-to-value (LTV) policy as a macroprudential tool, including its effectiveness, potential drawbacks and its transmission mechanism to improve financial stability. Empirical evidence suggests that LTV policy is effective in reducing systemic risk associated with boom-and-bust cycles in property markets. Although the LTV policy may be associated with higher liquidity constraints on homebuyers, we show that the mortgage insurance programme (MIP) can mitigate this drawback without undermining the effectiveness of LTV policy. Thus, MIPs play an important role in enhancing the net benefits of LTV policy. Concerning the transmission mechanism, empirical evidence suggests that the policy pass-through to property market activities may be weak. By contrast, there is clear evidence that tightening LTV cap would reduce household leverage and credit growth, and that lower leverage plays a major role in strengthening banks¡¯ resilience to property price shocks. This finding supports the view that household leverage would be an optimal target of LTV policy.
    Keywords: Banking, Hong Kong, Loan-To-Value, Macroprudential Policy
    Date: 2015–10
  9. By: Tomáš Heryán (Department of Finance and Accounting, School of Business Administration, Silesian University); Panayiotis G. Tzeremes (Department of Economics, University of Thessaly); Roman Matousek (University of Kent, Kent Business School)
    Abstract: This study focuses on the bank lending channels and transmission mechanisms of monetary policy in European Union (EU) countries. In accordance with previous empirical studies, we deploy the generalized method of moments (GMM) with pooled annual data. We examine the period from 1999 to 2012. We extend the current research on the transmission mechanisms of monetary policy in the following way: first, we compare the differences between the ‘old’ Economic Monetary Union (EMU) and ‘new’ EU countries. Second, we examine the interaction terms between bank characteristics and both monetary policy indicators. In particular, we examine the impact of short-term interest rates and monetary aggregate M2 on bank behaviour. Assuming a more obvious transmission mechanism, we argue that, in the group of ‘old’ EMU countries, the lending channel is affected by smaller banks that are less liquid or are strongly capitalized. For ‘new’ EU countries, we find similar results, i.e., the lending channel affects smaller banks. However, in terms of liquidity and capital adequacy and assuming a more obvious transmission mechanism, we find an opposing result. Those countries’ lending channel is affected by smaller banks with higher levels of liquidity and lower bank capital. Third, we describe how transmission mechanisms changed during the crises period.
    Keywords: lending channel, transmission mechanism, crisis times, old EMU and new EU countries
    JEL: C58 G01 G21 G28
    Date: 2016–01–04
  10. By: Sayaeed, Mohammad Abu (Tasmanian School of Business & Economics, University of Tasmania); Dungey, Mardi (Tasmanian School of Business & Economics, University of Tasmania); Yao, Wenying (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: Using high-frequency stock returns in the Indian banking sector we find that the beta on jump movements substantially exceeds that on the continuous component, and that the majority of the information content for returns lies with the jump beta. We contribute to the debate on strategies to decrease systemic risk, showing that increased bank capital and reduced leverage reduce both jump and continuous beta - with slightly stronger effects for capital on continuous beta and stronger effects for leverage on jump beta. However, changes in these firm characteristics need to be large to create an economically meaningful change in beta.
    Keywords: CAPM, jump, high frequency, India
    JEL: C58 G21 G28
    Date: 2015–02–03
  11. By: Dungey, Mardi (Tasmanian School of Business & Economics, University of Tasmania); Luciani, Matteo (ECARES, Universite libre de Bruxelles); Matei, Marius (Tasmanian School of Business & Economics, University of Tasmania); Veredas, David (ECARES, Universite libre de Bruxelles)
    Abstract: We provide empirical evidence on the degree of systemic risk in Australia before, during and after the Global Financial Crisis. We calculate a daily index of systemic risk from 2004 to 2013 in order to understand how real economy firms influence the outcomes for the rest of the economy. This is done via a mapping of the interconnectedness of the financial and non-financial sectors. The financial sector is in general the home to the most consistently systemically risky firms in the economy. The mining sector becomes occasionally as systemically risky as the financial sector, reflecting the importance of understanding the interrelationships between the financial sector and the real economy in monitoring systemic risks.
    Keywords: banking, insurance, systemic risk
    JEL: G22 G21 G01 G28
    Date: 2015–04–22
  12. By: Canan Yildirim (Faculty of Economics, Administrative and Social Sciences, Kadir Has University); Georgios Efthyvoulou (Department of Economics, University of Sheffield)
    Abstract: This paper analyzes the impact of geographic diversification on bank value by employing a data set comprising the largest banks across the world, originating from both developed and emerging countries. The findings suggest that the value impact of international diversification depends on the financial development level of a bank’s home country: higher levels of diversification are associated with changes in valuations only for banks originating from emerging countries. In addition, the locus of internationalization matters for the direction of effects: while markets respond positively to the intra-regional expansion activities of emerging country banks, they seem to believe that these banks cannot benefit from diversifying into far away markets.
    Keywords: multinational banking; geographic diversification; bank value
    JEL: F23 G21 G32 L22
    Date: 2016–01
  13. By: Chari, V. V. (University of Minnesota); Kehoe, Patrick J. (University of Minnesota)
    Abstract: We argue that bailouts create tax distortions, subsidy distortions and debt-size externalities. We show that an orderly resolution provision as in the Dodd-Frank Act addresses the tax and subsidy distortions but not the debt-size externalities. A regulatory system that imposes limits on the debt-equity ratio of firms and imposes a Pigouvian tax on their size eliminates the distortions and completely corrects the externalities.
    Date: 2016–01–05
  14. By: Wenli Li (Federal Reserve Bank of Philadelphia); Florian Oswald (University College of London [London] (UCL))
    Abstract: The state of Nevada passed a legislature in 2009 that abolished deficiency judgments for purchase mortgage loans made after October 1, 2009 and collateralized by primary single family homes. In this paper, we study lenders’ mortgage lending and households’ mortgage application and subsequent default decisions in response to the law change. Using unique mortgage loan level application and performance data, we find strong evidence that lenders tightened their lending standards. In particular, lenders reduced approval rates and loan sizes for affected mortgages after the implementation of the law. Households, by contrast, did not delay their mortgage applications till after the law change. Furthermore, the law change does not appear to have affected borrowers’ default decisions. These results thus cast a cautionary note on the effectiveness of policy recommendations that intend to use deficiency laws to curb mortgage defaults.
    Keywords: Deficiency judgment; Default; Foreclosure; Approval; Interest rate; Nevada
    JEL: G21 K11 R20
    Date: 2014–10
  15. By: Patrick Reichert
    Abstract: Increasingly, microfinance institutions must balance both social and financial objectives, the so-called double bottom line. A growing number of studies have investigated the ability of MFIs to achieve both objectives simultaneously. From an initial sample of 3,299 articles, I synthesize 274 empirical findings from 61 studies to perform a meta-analysis on the relationship between financial and social performance. Findings suggest that studies using the Mix Market database are less likely to confirm trade-offs while articles that use efficiency indicators, employ an economic frontier methodology or are published in development journals are more likely to confirm evidence of performance trade-offs.
    Keywords: Microfinance; Performance; Outreach; Efficiency; Meta-analysis
    JEL: C12 G21 L25 L31
    Date: 2016–01–14
  16. By: Drozd, Lukasz A. (Federal Reserve Bank of Philadelphia); Serrano-Padial, Ricardo (Drexel University)
    Abstract: Contract enforceability in financial markets often depends on the aggregate actions of agents. For example, high default rates in credit markets can delay legal enforcement or reduce the value of collateral, incentivizing even more defaults and potentially affecting credit supply. We develop a theory of credit provision in which enforceability of individual contracts is linked to aggregate behavior. The central element behind this link is enforcement capacity, which is endogenously determined by investments in enforcement infrastructure. Our paper sheds new light on the emergence of credit crunches and the relationship between enforcement infrastructure, economic growth, and political economy distortions.
    Keywords: Enforcement; Credit rationing; Costly state verification; State capacity; Financial accelerator; Credit crunch; Global games; Heterogeneity
    JEL: D82 D84 D86 G21 O16 O17 O43
    Date: 2016–01–20
  17. By: Ilya Khankov (National Research University Higher School of Economics, Moscow); Henry Penikas (National Research University Higher School of Economics, Moscow)
    Abstract: Research is devoted to examination of the classifier, based on copula discriminant analysis (CODA). Performance of the classification of this algorithm was assessed. On samples, modelled with some typical features of corporate default data, sensitivity of the classifier was tested, to sample size, to default rate and to different patterns of variables’ interdependence. Alternative copula families’ selection method is proposed based on certain performance metric optimization. Difference in classification performance of different algorithms are investigated. On real data of Russian corporate defaults, CODA classifier was built. It was supported by single factor analysis, based on discriminant analysis too. Final model demonstrates better classification performance than Linear Discriminant Analysis and Random Forest algorithm, and is comparable to Quadratic Discriminant Analysis. Another experiment was set on data of Russian banks. Single factor analysis was assessed via standard procedure. CODA performance appeared to be lower than of Random Forest here, it was similar to QDA
    Date: 2015–12
  18. By: Tallman, Ellis W. (Federal Reserve Bank of Cleveland); Gorton, Gary (Yale University and NBER)
    Abstract: How did pre-Fed banking crises end? How did depositors’ beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility; that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.
    Keywords: Financial crisis; bank runs; banking panic; clearing house; bank-specific information; currency premium
    JEL: E44 E58 N21
    Date: 2016–01–14
  19. By: Mendes de Paula, Germano (Comisión Económica para América Latina y el Caribe (CEPAL) United Nations); Sousa Ribeiro, Karem Cristina de (Comisión Económica para América Latina y el Caribe (CEPAL) United Nations); Silva de Almeida, Neirilaine (Comisión Económica para América Latina y el Caribe (CEPAL) United Nations)
    Date: 2015–02
  20. By: Lori Beaman, Dean Karlan, Bram Thuysbaert, and Christopher Udry
    Abstract: We partnered with a micro-lender in Mali to randomize credit offers at the village level. Then, in no-loan control villages, we gave cash grants to randomly selected households. These grants led to higher agricultural investments and profits, thus showing that liquidity constraints bind with respect to agricultural investment. In loan-villages, we gave grants to a random subset of farmers who (endogenously) did not borrow. These farmers have lower – in fact zero – marginal returns to the grants. Thus we find important heterogeneity in returns to investment and strong evidence that farmers with higher marginal returns to investment self-select into lending programs.
    Keywords: credit markets; agriculture; returns to capital
    JEL: D21 D92 O12 O16 Q12 Q14
    Date: 2014–09

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