nep-ban New Economics Papers
on Banking
Issue of 2016‒05‒21
ten papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Credit risk interconnectedness: What does the market really know? By Abbassi, Puriya; Brownlees, Christian; Hans, Christina; Podlich, Natalia
  2. Regulation and Bankers’ Incentives By Fabiana Gómez; Jorge Ponce
  3. A unfi ed view of systemic risk: detecting SIFIs and forecasting the fi nancial cycle via EWSs By Alessandro Spelta
  4. How Did the Introduction of Deposit Insurance Affect Chinese Banks? An Investigation of Its Wealth Effect By Jianjun Sun; Nobuyoshi Yamori
  5. Traditional banks, shadow banks and the US credit boom: Credit origination versus financing By Unger, Robert
  6. Short-Term Liquidity Contagion in the Interbank Market By Leon Rincon, C.E.; Martínez, Constanza; Cepeda, Freddy
  7. Bank Capital Structure and Financial Innovation: Antagonists or Two Sides of the Same Coin? By Lorenzo Sasso
  8. Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden By Jiaqian Chen; Francesco Columba
  9. Measuring expected time to default under stress conditions for corporate loans By Mariusz Górajski; Dobromił Serwa; Zuzanna Wośko
  10. Forecast bankruptcy using a blend of clustering and MARS model - Case of US banks By Zeineb Affes; Rania Hentati-Kaffel

  1. By: Abbassi, Puriya; Brownlees, Christian; Hans, Christina; Podlich, Natalia
    Abstract: We analyze the relation between market-based credit risk interconnectedness among banks during the crisis and the associated balance sheet linkages via funding and securities holdings. For identification, we use a proprietary dataset that has the funding positions of banks at the bank-to-bank level for 2006-13 in conjunction with investments of banks at the security level and the credit register from Germany. We find asymmetries both cross-sectionally and over time: when banks face difficulties to raise funding, the interbank lending affects market-based bank interconnectedness. Moreover, banks with investments in securities related to troubled classes have a higher credit risk interconnectedness. Overall, our results suggest that market-based measures of interdependence can serve well as risk monitoring tools in the absence of disaggregated high-frequency bank fundamental data.
    Keywords: Credit Risk,Networks,CDS,Interbank Lending,Portfolio Distance
    JEL: C33 C53 E44 F36 G12 G14 G18 G21
    Date: 2016
  2. By: Fabiana Gómez (University of Bristol); Jorge Ponce (Banco Central del Uruguay and Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: We formally compare the effects of minimum capital requirements, capital buffers, liquidity requirements and loan loss provisions on the incentives of bankers to exert effort and take excessive risk. We find that these regulations impact differently the behavior of bankers. In the case of investment banks, the application of capital buffers and liquidity requirements makes it more difficult to achieve the first best solution. In the case of commercial banks, capital buffers, reserve requirements and traditional loan loss provisions for expected losses provide adequate incentives to bank managers, although the capital buffer is the most powerful instrument. Counter-cyclical (so-called dynamic) loan loss provisions may provide bank managers with incentives to gamble. The results inform policy makers in the ongoing debate about the harmonization of banking regulation and the implementation of Basel III.
    Keywords: Banking regulation, minimum capital requirement, capital buffer, liquidity requirement, (counter-cyclical) loan loss provision, commercial banks, investment banks, bankers’ incentives, effort, risk.
    JEL: G21 G28
    Date: 2015–11
  3. By: Alessandro Spelta (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: Following the defi nition of systemic risk by the Financial Stability Board, the International Monetary Fund and the Bank for International Settlements, this paper proposes a method able to simultaneously address the two dimensions in which this risk materializes: namely the cross-sectional and the time dimension. The method is based on the W-TOPHITS algorithm, that exploits the connectivity information of an evolving network, and decomposes its tensor representation as the outer product of three vectors: borrowing, lending and time scores. These vectors can be interpreted as indices of the systemic importance of borrowing and lending associated with each fi nancial institution and of the systemic importance associated with each period, coherently with the realization of the whole network in that period. The time score, being able to simultaneously consider the temporal distribution of the whole traded volume over time as well as the spatial distribution of the transactions between players in each period, turns out to be a useful Early Warning Signal of the fi nancial crisis. The W-TOPHITS is tested on the e-MID interbank market dataset and on the BIS consolidated banking statistics with the aim of discovering Systemically Important Financial Institutions and to show how the time score is able to signal a change in the bipartite network of borrowers and lenders that heralds the fall of the traded volume that occurred during the 2007/2009 nancial crisis.
    Keywords: Systemic Risk, Tensor, Early Warning Signals, Evolving Networks.
    JEL: G01 G17 C63 C53
    Date: 2016–01
  4. By: Jianjun Sun (School of Economics and Management, Hainan University and College of Tourism, Hainan University); Nobuyoshi Yamori (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: Existing papers analyzing the link between deposit insurance and bank market values have usually been confined to investigating incremental regulatory shifts in the banking sector. The latest case on the introduction of deposit insurance occurred in China, and therefore it gives us a chance to explore the stock market reaction to the major regulatory policy change in banking. Although the introduction of deposit insurance is usually expected to be favorable news for banks, our results show that the average abnormal returns of all listed banks in China are statistically significantly negative on the announcement day. They indicate that investors believe the introduction of deposit insurance has an adverse effect on the banking industry in China. We also find that among bank characteristics such as asset size, z-score, and ROE, only size has a statistically significant positive impact on the abnormal returns of the Chinese listed banks on the announcement day. These results mean that although compulsory deposit insurance certainly enhances small banks’ credibility, China’s capital markets think that the adverse influence is lower for big banks than for small banks. Our results, which are not fully consistent with those previously found in the United States and Denmark, indicates that the difference in the financial regulatory environment prior to the introduction of deposit insurance leads to differential wealth transfer.
    Keywords: Deposit insurance, Announcement, Wealth effect, Event study, China
    JEL: G18 G21 G28 G38
    Date: 2016–05
  5. By: Unger, Robert
    Abstract: The US credit boom has been identified as one of the causes of the global financial crisis and the resulting debt overhang is seen as the primary reason for the weak economic recovery. Most of the existing literature links the credit boom to the emergence of the shadow banking system. This paper shows that the largest part of the shadow banking system merely transforms existing financial claims against ultimate borrowers that have been originated by traditional banks. Based on financial accounts data, it is estimated that, shortly before the onset of the financial crisis, just about 12% of loans to the non-financial private sector had been originated by shadow banks. Consequently, dampening credit creation by the traditional banking sector might be an additional policy instrument to reduce the build-up of systemic risk in the shadow banking system.
    Keywords: banks,credit boom,credit creation,financial crisis,shadow banks,systemic risk
    JEL: E40 E50 F30 G21 G23
    Date: 2016
  6. By: Leon Rincon, C.E. (Tilburg University, Center For Economic Research); Martínez, Constanza; Cepeda, Freddy
    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
    JEL: G21 L14 C63
    Date: 2016
  7. By: Lorenzo Sasso (National Research University Higher School of Economics)
    Abstract: This article examines the challenges to banking capital regulation posed by ongoing financial innovation through regulatory capital arbitrage. On the one hand, such practice undermines the quality of regulatory capital, eroding prudential capital standards, but most importantly it creates a distortion in the regulatory capital ratio measures, which prevents investors and regulators from identifying the bank’s real underlying risks. Opportunities for regulatory capital arbitrage arise as a consequence of the inherent mismatch of accounting goals, corporate law and prudential regulation – all interacting with the notion of capital for banks. On the other hand, financial innovation is the result of banks’ risk-management policies. In order to reduce the cost of capital and compliance banks engage in derivatives, structured finance and hybrid instruments, altering the risk/return of their cash flow and the information released to the market for disclosure. In a way, regulation is the solution but also part of the problem. For this reason, new regulation strategies for banks need to be implemented. Systemic risk and balance-sheet risk need to be tackled respectively with macro- and micro-prudential regulation. This would involve an international harmonization of the accounting standards and individualised capital adequacy requirements for banks. The regulation has to be functional for the market under examination. The regulator should therefore consider the adoption of prudential filters to make static variables such as accounting rules, which are normally focused on evaluation, more dynamic to give banks some financial flexibility in their risk-management policies.
    Keywords: Regulatory capital arbitrage; hybrid financial instruments; capital adequacy requirements; micro-prudential regulation; risk management; fair value accounting; IAS 32, IAS 39.
    JEL: Z
    Date: 2016
  8. By: Jiaqian Chen; Francesco Columba
    Abstract: We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households face a ceiling on their loan-to-value ratio and must amortize their mortgages. The government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that demand-side macroprudential measures are more effective in curbing household debt ratios than monetary policy, and they are less costly in terms of foregone consumption. A tighter macroprudential stance is also found to be welfare improving, by promoting lower consumption volatility in response to shocks, especially when using a combination of macroprudential instruments.
    Keywords: Housing;Sweden;Mortgages;Housing prices;Debt;Macroprudential Policy;Monetary policy;General equilibrium models;Macroprudential Policies; Monetary Policy; Collateral Constraints
    Date: 2016–03–23
  9. By: Mariusz Górajski; Dobromił Serwa; Zuzanna Wośko
    Abstract: We present a new measure of extreme credit risk in the time domain, namely the conditional expected time to default (CETD). This measure has a clear interpretation and can be applied in a straightforward way to the analyses of loan performance in time. In contrast to the probability of default, CETD provides direct information on the timing of a potential loan default under some stress scenarios. We apply a novel method to compute CETD using Markov probability transition matrices, a popular approach in survival analysis literature. We employ the new measure to the analysis of changing credit risk in a large portfolio of corporate loans.
    Keywords: credit risk, time to default, value at risk, conditional ETD
    JEL: G21 G32 C13 C18
    Date: 2016
  10. By: Zeineb Affes (Centre d'Economie de la Sorbonne); Rania Hentati-Kaffel (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we compare the performance of two non-parametric methods of classification, Regression Trees (CART) and the newly Multivariate Adaptive Regression Splines (MARS) models, in forecasting bankruptcy. Models are implemented on a large universe of US banks over a complete market cycle and running under a K-Fold Cross validation. A hybrid model which combines K-means clustering and MARS is tested as well. Our findings highlight that i) Either in training or testing sample, MARS provides, in average, better correct classification rate than CART model, ii) Hybrid approach significantly enhances the classification accuracy rate for both the training and the testing samples, iii) MARS prediction underperforms when the misclassification rate is adopted as a criteria, iv) Results proves that Non-parametric models are more suitable for bank failure prediction than the corresponding Logit model
    Keywords: Bankruptcy prediction; MARS; CART; K-means; Early-Warning System
    JEL: C14 C25 C38 C53 G17 G21 G28 G33
    Date: 2016–03

This nep-ban issue is ©2016 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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