nep-ban New Economics Papers
on Banking
Issue of 2016‒02‒23
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Hidden cost of better bank services: carefree depositors in riskier banks? By Choi, Dong Boem; Velasquez, Ulysses
  2. Information, Contract Design, and Unsecured Credit Supply: Evidence from Credit Card Mailings By Han, Song; Keys, Benjamin J.; Li, Geng
  3. Lobbying on Regulatory Enforcement Actions: Evidence from Banking By Lambert, Thomas
  4. Efficiency measures of the Chinese commercial banking system using an additive two-stage DEA By Ke Wang; Wei Huang; Jie Wu; Ying-Nan Liu
  5. Fundamentals matter: Idiosyncratic shocks and interbank relations By Bednarek, Peter; Dinger, Valeriya; von Westernhagen, Natalja
  6. Credit Scores and Committed Relationships By Dokko, Jane; Li, Geng; Hayes, Jessica
  7. Modèle d’alerte des crises bancaires basé sur une approche bayésienne By Zaghdoudi, Taha
  8. Financial Stability Paper No 24: The role of external balance sheets in the financial crisis By Al-Saffar, Yaser; Ridinger, Wolfgang; Whitaker, Simon
  9. QE and the Bank Lending Channel in the United Kingdom By Nick Butt; Rohan Churm; Michael McMahon; Arpad Morotz; Jochen Schanz
  10. CoRisk: measuring systemic risk through default probability contagion By Paolo Giudici; Laura Parisi
  11. Effective Cost of Borrowing from Microfinance Institutions By Tutlani, Ankur
  12. An Empirical Investigation of Cost Efficiency in the Banking Sector Pakistan By Muhammad Sadiq Ansari
  13. Financial Stability Paper 32: Estimating the extent of the ‘too big to fail’ problem – a review of existing approaches By Siegert, Casper; Willison, Matthew
  14. Endogenous information revelation in a competitive credit market and credit crunch By Yuanyuan Li; Bertrand Wigniolle
  15. How Collateral Laws Shape Lending and Sectoral Activity By Calomiris, Charles W.; Larrain, Mauricio; Liberti, José; Sturgess, Jason
  16. Bank Lending and Income Inequality: Evidence from Indonesia By Putra Pamungkas; Clovis Rugemintwari; Amine Tarazi; Irwan Trinugroho
  17. House price fluctuations and the business cycle dynamics By Girum D. Abate; Luc Anselin
  18. Credit Risk, Liquidity and Lies By King, Thomas B.; Lewis, Kurt F.

  1. By: Choi, Dong Boem (Federal Reserve Bank of New York); Velasquez, Ulysses (Federal Reserve Bank of New York)
    Abstract: Better customer service provisions by banks—such as more branches and ATMs, longer business hours, and more personalized services—help attract more core deposits and increase funding stickiness by raising depositors’ switching costs and enhancing their loyalty. Funding stickiness from depositor loyalty, however, could impair market discipline and lead to excessive risk taking or lax lending standards in banks. We find that, compared to banks that spend less on customer services, banks providing better services attract more core deposits, pay less for their funding, and are exposed to lower funding outflow risks. At the same time, these banks have worse loan quality and lower Z-scores. We argue that this contradictory finding of low asset quality and low funding cost stems from the lack of risk monitoring by carefree depositors, which exacerbates agency problems; funding cost is less sensitive to the risk characteristics of banks providing better services.
    Keywords: bank liability; funding cost; liquidity risk; risk taking; market discipline
    JEL: G20 G21
    Date: 2016–01–01
  2. By: Han, Song (Board of Governors of the Federal Reserve System (U.S.)); Keys, Benjamin J. (University of Chicago); Li, Geng (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: How do lenders of unsecured credit use screening and contract design to mitigate the risks of information asymmetry and limited commitment in the absence of collateral? To address this question, we take advantage of a unique dataset of over 200,000 credit card mail solicitations to a representative sample of households over the recent credit cycle--a period that includes the implementation of the CARD Act. We find that while lenders use credit scores as a prominent screening device, they also take into account a wide array of other information on borrowers' credit histories and financial and demographic characteristics. For instance, the likelihood of receiving an offer is sensitive to the exact timing of a prior bankruptcy filing. We also find that credit market conditions affect the marginal information used in lenders' offer decisions, as lenders sharply reduced credit supplied to subprime borrowers during the crisis and in response to the CARD Act. Finally, we document that lenders extend multiple distinct offers to the same consumers over a relatively short period, likely designed such that consumers reveal private information in their choice of contract.
    Keywords: Credit supply; information asymmetry; credit cards; mail solicitation; personal bankruptcy; CARD Act; household finance
    Date: 2015–11–16
  3. By: Lambert, Thomas
    Abstract: There is growing concern, but still little systematic evidence, about the incidence and drivers of lobbying efforts made by the U.S. banking industry. This paper documents the relationships between lobbying, regulatory oversight, and bank risk taking. Using a large sample of commercial and savings banks, I find that lobbying banks are less likely to be subject to a severe enforcement action, suggesting that banks engage in lobbying to gain preferential treatment. Among the lobbying dimensions studied, lobbyists with prior employment in public offices are more effective at reducing the probability of an action, especially in period of intense enforcement activity. These findings are robust to controlling for supervisory ratings and account for endogeneity concerns by employing instrumental variables strategies. I also show an increase in default and credit risk at lobbying banks. Overall, these results appear rather inconsistent with an information-based explanation of bank lobbying, but consistent with the capture theory of regulation.
    Keywords: Banking supervision, enforcement actions, lobbying, moral hazard, risk taking
    JEL: D72 G21 G28
    Date: 2015–06
  4. By: Ke Wang; Wei Huang; Jie Wu; Ying-Nan Liu
    Abstract: Measuring and improving the efficiency of the Chinese commercial banking system has recently attracted increasing interest. Few studies, however, have adopted the two-stage network DEA to explore this issue in the Chinese context. Because the entire operational process of the banking system could be divided into two sub-processes (deposit producing and profit earning), the evaluation of the sub-process efficiencies could be used to assist in identifying the sources of the inefficiency of the entire banking system. In this study, we utilize the network DEA approach to disaggregate, evaluate and test the efficiencies of 16 major Chinese commercial banks during the third round of the Chinese banking reform period (2003-2011) with the variable returns to scale setting and the consideration of undesirable/bad output. The main findings of this study are as follows: i) the two-stage DEA model is more effective than the conventional black box DEA model in identifying the inefficiency of banking system, and the inefficiency of the Chinese banking system primarily results from the inefficiency of its deposit producing sub-process; ii) the overall efficiency of the Chinese banking system improves over the study period because of the reform; iii) the state-owned commercial banks (SOBs) appear to be more overall efficient than the joint-stock commercial banks (JSBs) only in the pre-reform period, and the efficiency difference between the SOBs and the JSBs is reduced over the post-reform period; iv) the disposal of non-performing loans (NPLs) from the Chinese banking system in general explains its efficiency improvement, and the joint-equity reform of the SOBs specifically increases their efficiencies.
    Keywords: Chinese commercial banks, Data envelopment analysis (DEA), Efficiency decomposition, Two-stage DEA
    JEL: Q40 Q58
    Date: 2014–08–26
  5. By: Bednarek, Peter; Dinger, Valeriya; von Westernhagen, Natalja
    Abstract: Our results uncover a so far undocumented ability of the interbank market to distinguish between banks of different quality in times of aggregate distress. We show empirical evidence that during the 2007 financial crisis the inability of some banks to roll over their interbank debt was not due to a failure of the interbank market per se but rather to bankspecific shocks affecting banks' capital, liquidity and credit quality as well as revised banklevel risk perceptions. Relationship banking is not capable of containing these frictions, as hard information seems to dominate soft information. In detail, we explore determinants of the formation and resilience of interbank lending relationships by analyzing an extensive dataset comprising over 1.9 million interbank relationships of more than 3,500 German banks between 2000 and 2012.
    Keywords: financial stability,interbank market,aggregate and idiosyncratic shocks,relationship banking,risk perception,market discipline
    JEL: E50 G01 G10 G21
    Date: 2015
  6. By: Dokko, Jane (Brookings Institution); Li, Geng (Board of Governors of the Federal Reserve System (U.S.)); Hayes, Jessica (UCLA)
    Abstract: This paper presents novel evidence on the role of credit scores in the dynamics of committed relationships. We document substantial positive assortative matching with respect to credit scores, even when controlling for other socioeconomic and demographic characteristics. As a result, individual-level differences in access to credit are largely preserved at the household level. Moreover, we find that the couples' average level of and the match quality in credit scores, measured at the time of relationship formation, are highly predictive of subsequent separations. This result arises, in part, because initial credit scores and match quality predict subsequent credit usage and financial distress, which in turn are correlated with relationship dissolution. Credit scores and match quality appear predictive of subsequent separations even beyond these credit channels, suggesting that credit scores reveal an individual's relationship skill and level of commitment. We present ancillary evidence supporting the interpretation of this skill as trustworthiness.
    Keywords: Credit scores; Committed relationships; Assortative matching; Household finance; Trustworthiness
    JEL: D14 G21 J12
    Date: 2015–08–19
  7. By: Zaghdoudi, Taha
    Abstract: The succession of banking crises in which most have resulted in huge economic and financial losses, prompted several authors to study their determinants. These authors constructed early warning models to prevent their occurring. It is in this same vein as our study takes its inspiration. In particular, we have developed a warning model of banking crises based on a Bayesian approach. The results of this approach have allowed us to identify the involvement of the decline in bank profitability, deterioration of the competitiveness of the traditional intermediation, banking concentration and higher real interest rates in triggering bank crisis.
    Keywords: Banking crisis, bayesian model averaging
    JEL: C11 G01
    Date: 2014–05–19
  8. By: Al-Saffar, Yaser (Bank of England); Ridinger, Wolfgang (Bank of England); Whitaker, Simon (Bank of England)
    Abstract: Gross external balance sheets are important in explaining the incidence of the financial crisis across economies. Just as for banks, leverage of the national balance sheet was an indicator of subsequent vulnerability. Countries that also experienced strong domestic credit growth, in part fuelled by ‘savings glut’ net capital inflows, suffered particularly badly. And banks’ balance sheets were critical in the transmission mechanism: high gross external interbank debt — the ‘banking glut’ — and maturity and currency mismatches, contributed to foreign rollover risk.
    Keywords: financial crises; external balance sheets
    JEL: G01
    Date: 2015–10–25
  9. By: Nick Butt (Bank of England); Rohan Churm (Bank of England); Michael McMahon (Centre For Economic Policy Research; Centre For Macroeconomics (CFM); University of Warwick); Arpad Morotz (Bank of England); Jochen Schanz (Bank for International Settlements)
    Abstract: We test whether quantitative easing (QE), in addition to boosting aggregate demand and in ation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives `flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.
    Keywords: Monetary policy, bank lending channel, quantative easing
    JEL: E51 E52 G20
    Date: 2015–10
  10. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: We propose a novel systemic risk measurement model, based on stochastic processes, correlation networks and conditional probabilities of default.For each country we consider three different spread measures, one for each sector of the economy (sovereigns, corporates, banks), and we model each of them as a linear combination of two stochastic processes: a country-specific idiosyncratic component and a common systematic factor. We then build a partial correlation network model, and by combining it with the spread measures we derive the conditional default probabilities of each sector. Comparing them with the unconditional ones, we obtain the CoRisk, which measures the variation in the probability of default due to contagion effects. Our measurement model is applied to understand the time evolution of systemic risk in the economies of the European monetary union, in the recent period. The results show that, overall, the sovereign crisis has increased systemic risks more than the financial crisis. In addition, peripheral countries turn out to be exporters, rather than importers of systemic risk, and, conversely, core countries.
    Keywords: correlation networks, default probabilities, systemic risk, stochastic processes
    Date: 2016–02
  11. By: Tutlani, Ankur
    Abstract: It has been observed lately that the dependence on moneylenders for borrowing needs of poor borrowers remained stable despite the presence of MFIs, particularly in developing economies. This is surprising given the fact that MFIs charge relatively lower interest rate as compared to moneylenders. The paper explains this trend by arguing that the effective cost of borrowing from MFI is higher relative to the effective cost of borrowing from moneylender. It is due to the additional burden incurred in the form of transaction costs in case of MFI borrowing. Simulation results also support this phenomenon
    Keywords: Microfinance, Group lending, Informal finance, Transaction cost, Effective cost
    JEL: G21 O17
    Date: 2016–02–12
  12. By: Muhammad Sadiq Ansari (State Bank of Pakistan)
    Abstract: This study uses the distribution free approach to estimate levels of cost efficiency of individual banks operating in Pakistan. Furthermore, these levels of efficiency are analyzed under CAMELS indicators to provide micro insights of their financial standings to justify their prevailing positions. The results show that banks are significantly distinct at different efficiency levels ranging from 87 percent to 49 percent. Technology has played a significant role in reducing the cost of banking industry. However, the banking industry is still operating under diseconomies of scale. Moreover, non-performing loans have adversely impacted the cost structure of banking industry. CAMELS ratios indicate that the most efficient banks are those with lesser amount of non-performing loans, high capital adequacy, and lesser non-interest expenditure which leads to high profitability. Overall, there is great room in the banking industry to minimize cost by eliminating the inefficiency elements.
    Keywords: Cost efficiency, CAMELS indicators, financial soundness
    JEL: D61 G20 G21
  13. By: Siegert, Casper (Bank of England); Willison, Matthew (Bank of England)
    Abstract: How big is the ‘too big to fail’ (TBTF) problem? Different approaches have been developed to estimate the impact being perceived as TBTF might have on banks’ costs of funding. One approach is to look at how the values of banks’ equity and debt change in response to events that may have altered expectations that banks are TBTF. Another is to estimate whether debt costs vary across banks according to features that make them more or less likely to be considered TBTF. A third approach is to estimate a model of the expected value of government support to banks in distress. We review these different approaches, discussing their pros and cons. Policy measures are being implemented to end the TBTF problem. Approaches to estimating the extent of the problem could play a useful role in the future in evaluating the success of those policies. With that in mind, we conclude by outlining in what ways we think approaches need to develop and suggest ideas for future research.
    Keywords: bank regulation; too big to fail
    JEL: G28
    Date: 2015–02–13
  14. By: Yuanyuan Li (University of Bielefeld and Centre d'Economie de la Sorbonne); Bertrand Wigniolle (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: In this paper, we propose a new mechanism able to explain the occurrence of credit crunches. Considering a credit market with an asymmetry of information between borrowers and lenders, we assume that borrowers have to pay a cost to reveal information on the quality of their project. They decide to be transparent if it is necessary for getting a loan or for paying a lower interest rate. Two types of competitive equilibria may exist: an opaque equilibrium in which all projects receive funding without revealing information; a transparent one in which only the best projects reval information and receive funding. It is also possible to get multiple equilibria. Incorporating this microeconomic mechanism in an OLG model, the economy may experience fluctuations due to the change of regime, and indeterminacy may occur
    Keywords: Credit crunch; endogenous information revelation
    JEL: D82 D9 G14 O16 O41
    Date: 2016–01
  15. By: Calomiris, Charles W.; Larrain, Mauricio; Liberti, José; Sturgess, Jason
    Abstract: This paper investigates the effect of cross-country differences in collateral laws regarding movable assets on lending and sectoral allocation of resources. Using micro-level loan data for a sample of emerging market countries we show that loan-to-values of loans collateralized with movable assets are on average 21 percentage points higher in countries with strong-collateral laws relative to immovable assets. Further, stronger collateral laws tilt collateral composition away from immovable to movable assets. We also provide evidence of a collateral class, including bank guarantees, for which enforcement is independent of collateral law. To examine the effect of collateral laws on real activity we map the relationship of collateral laws and collateral composition to asset-composition and sectoral resource allocation using industry-level output and employment data. Weak collateralization laws that discourage the use of movables assets as collateral create distortions in the allocation of resources that favor immovable-based production. The results shed light on an important channel – collateral laws – through which legal institutions affect lending and real economic activity.
    Date: 2015–06
  16. By: Putra Pamungkas (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Clovis Rugemintwari (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Irwan Trinugroho (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: This paper investigates the relationship between financial development and income inequality by using a broad range of loan categories as proxies for financial development. Our unique data set allows us to identify loans to micro, small and medium-sized enterprises (MSMEs). It also allows us to distinguish business loans and consumer loans. Using panel data for 33 provinces in Indonesia during the 2007-2013 period, we find that lending to MSMEs reduces income inequality while businesses loans, either for working capital or investment purposes, but also consumer loans increase income inequality. Our results indicate that boosting loans to micro, small, and medium-sized enterprises could significantly contribute to reduce income inequality.
    Keywords: Income Inequality,Gini Index,Bank Lending,Indonesia
    Date: 2016–01–06
  17. By: Girum D. Abate (Aarhus University and CREATES); Luc Anselin (Arizona State University)
    Abstract: This paper investigates the impact of house price movements on output in a space-time dynamic framework. The transmission of house price fluctuations to the macroeconomy both across space and over time is explicitly considered through spatial econometric modeling techniques. Using 373 metropolitan areas in the US from 2001 to 2013, it is shown that house price fluctuations have detrimental effect on output growth and spillover from one location to another. The loss of output due to house price fluctuations is more pronounced during the recent financial crisis. The time varying recursive estimation of the space-time econometric model shows that the coefficient of spatial correlation has been increasing over time, reflecting an increasing trend in house price synchronization.
    Keywords: House price fluctuations, output growth, space-time modeling
    JEL: E30 E32
    Date: 2016–01–26
  18. By: King, Thomas B. (Chicago FED); Lewis, Kurt F. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We reexamine the relative effects of credit risk and liquidity in the interbank market using bank-level panel data on Libor submissions and CDS spreads. Our model synthesizes previous work by combining the fundamental determinants of interbank spreads with the effects of strategic misreporting by Libor-submitting firms. We find that interbank spreads were very sensitive to credit risk at the peak of the crisis. However, liquidity premia constitute the bulk of those spreads on average, and Federal Reserve interventions coincide with improvements in liquidity at short maturities. Accounting for misreporting, which is large at times, is important for obtaining these results.
    Keywords: Bank Funding; Credit Risk; LIBOR; Liquidity; Misreporting
    JEL: E43 G21 L14
    Date: 2015–12–18

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