nep-ban New Economics Papers
on Banking
Issue of 2016‒06‒09
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Credit default swaps and bank loan sales: evidence from bank syndicated lending By Hasan, Iftekhar; Wu, Deming
  2. Anticipating the Financial Crisis: Evidence from Insider Trading in Banks By Marin, Jose; Ozlem Akin, Ozlem; Peydró, José Luis
  3. Bank capital, adjustment and ownership: Evidence from China By Molyneux, Philip; Liu, Hong; Jiang, Chunxia
  4. Saving Wall Street or main street By Haavio, Markus; Ripatti, Antti; Takalo, Tuomas
  5. The net stable funding ratio requirement when money is endogenous By Kauko, Karlo
  6. Reserve requirements and the bank lending channel in China By Fungáčová, Zuzana; Nuutilainen, Riikka; Weill, Laurent
  7. Social capital and debt contracting: evidence from bank loans and public bonds By Hasan, Iftekhar; Hoi, Chun-Keung (Stan); Wu, Qiang; Zhang, Hao
  8. Innovation and competition in Internet and mobile banking: an industrial organization perspective By Mariotto, Carlotta; Verdier, Marianne
  9. Factors Affecting Either the Voluntary Exit or Forced Eviction of Borrowers from Microfinance Loan Networks By Rusiana, Hofner D.; Escalante, Cesar L.
  10. Heterogeneous Credit Union Production Technologies with Endogenous Switching and Correlated Effects By Malikov, Emir; Restrepo-Tobon, Diego A; Kumbhakar, Subal C.
  11. Leading indicators of systemic banking crises: Finland in a panel of EU countries By Lainà, Patrizio; Nyholm, Juho; Sarlin, Peter
  12. A little skin in the microfinance game: reducing moral hazard in joint liability group lending through a mandatory collateral requirement By Flatnes, Jon Einar; Carter, Michael R.
  13. The Run for Safety: Financial Fragility and Deposit Insurance By Rajkamal Iyer; Thais Jensen,; Niels Johannesen; Adam Sheridan
  14. Trust in banks By Fungáčová, Zuzana; Hasan, Iftekhar; Weill, Laurent
  15. Does one size fit all at all times? The role of country specificities and state dependencies in predicting banking crises By Stijn Ferrari; Mara Pirovano
  16. On the Nexus of Monetary Policy and Financial Stability: Is the Financial System More Resilient? By Patricia Palhau Mora; Michael Januska
  17. Do Rising Top Incomes Lead to Increased Borrowing in the Rest of the Distribution? By Thompson, Jeffrey P.
  18. Bank ownership and cost efficiency in Russia, revisited By Mamonov, Mikhail; Vernikov, Andrei
  19. The ECB’s latest gimmick: Cash for loans By Gros, Daniel; Valiante, Diego; De Groen, Willem Pieter

  1. By: Hasan, Iftekhar; Wu, Deming
    Abstract: Do banks use credit default swap hedging to substitute for loan sales? By tracking banks’ lending exposures and CDS positions on individual firms, we find that banks use CDS hedging to complement rather than to substitute for loan sales. Consequently, bank loan sales are higher for firms that are actively traded in the CDS market. In addition, we find evidence that suggests that banks sell CDS protection as credit enhancements to facilitate loan sales. This study employs identification strategies similar to the “twin study” design to separate the effects of borrower-side and lender-side factors, and to minimize the omitted-variables bias.
    Keywords: loan sales, hedging, credit enhancement, regulatory capital relief, banking
    JEL: G14 G21 G23 G28 G32
    Date: 2016–04–28
  2. By: Marin, Jose; Ozlem Akin, Ozlem; Peydró, José Luis
    Abstract: Banking crises are recurrent phenomena, often induced by ex-ante excessive bank risk-taking, which may be due to behavioral reasons (over- optimistic banks neglecting risks) and to agency problems between bank shareholders with debt-holders and taxpayers (banks understand high risk-taking). We test whether US banks' stock returns in the 2007-08 crisis are related to bank insiders' sale of their own bank shares in the period prior to 2006:Q2 (the peak and reversal in real estate prices). We find that top-five executives' ex-ante sales of shares predicts the cross-section of banks returns during the crisis; interestingly, effects are insignificant for independent directors' and other officers' sale of shares. Moreover, the top-five executives' significant impact is stronger for banks with higher ex-ante exposure to the real estate bubble, where an increase of one standard deviation of insider sales is associated with a 13.33 percentage point drop in stock returns during the crisis period. The informational content of bank insider trading before the crisis suggests that insiders understood the risk-taking in their banks, which has important implications for theory, public policy and the understanding of crises.
    Keywords: agency problems in firms; Banking; Financial crises; insider trading; risk-taking
    JEL: G01 G02 G21 G28
    Date: 2016–05
  3. By: Molyneux, Philip; Liu, Hong; Jiang, Chunxia
    Abstract: We investigate ownership effects on capital and adjustments speed to the target capital ratio in China from 2000 to 2012 and find that state-owned banks hold higher levels of capital than banks of other ownership types. Foreign banks are more highly capitalized than local non-state banks but under-capitalized compared with the bigger non-state banks with nationwide presence. Foreign banks adjust risk-weighted capital towards their optimal targets at a slower speed than domestic banks, while foreign minority ownership results in a faster adjustment process. Capital is positively influenced by profitability, asset diversification and liquidity risk, but negatively influenced by bank market power. Capital ratios typically co-move with the business cycle although this relationship is reversed during the crisis period due to active government intervention. Our results are robust to various modelling specifications and have important policy implications. Publication keywords: banking, capital, adjustment, ownership, China
    JEL: G21 G28 C32
    Date: 2014–09–15
  4. By: Haavio, Markus; Ripatti, Antti; Takalo, Tuomas
    Abstract: ​We build a dynamic stochastic general equilibrium model, where the balance sheets of both banks and non-financial firms play a role in macro-financial linkages. We show that in equilibrium bank capital tends to be scarce, compared with firm capital. We study public funding of banks and firms in times of crisis. Government capital injections can be useful as a shock cushion, but they distort incentives. Small capital injections benefit banks more than firms but the relative benefit is declining in the injection size. Government should first recapitalize banks, and if resources are large enough, lend to firms too.
    Keywords: financial frictions, bank capitalization, public funding of non-financial firms
    JEL: E44 G21 G28 G38
    Date: 2016–05–10
  5. By: Kauko, Karlo
    Abstract: The NSFR regulation reduces banks’ liquidity risks by encouraging the use of deposit funding. Deposit money is created by lending, but the requirement restricts possibilities to grant loans. This contradiction may be destabilising if there is a substantial foreign debt. Keywords: net stable funding ratio; endogenous money; liquidity regulation
    JEL: E51 G21 G28
    Date: 2015–01–26
  6. By: Fungáčová, Zuzana; Nuutilainen, Riikka; Weill, Laurent
    Abstract: This paper examines how reserve requirements influence the transmission of monetary policy through the bank lending channel in China while also taking into account the role of bank ownership. The implementation of Chinese monetary policy is characterized by the reliance on the reserve requirements as a regular policy tool with frequent adjustments. Using a large dataset of 170 Chinese banks for the period 2004–2013, we analyze the reaction of loan supply to changes in reserve requirements. We find no evidence of the bank lending channel through the use of reserve requirements. We observe, nonetheless, that changes in reserve requirements influence loan growth of banks. The same findings hold true for other monetary policy instruments. Further, we show that the bank ownership format influences transmission of monetary policy.
    Keywords: Chinese banks, bank lending channel, bank ownership
    JEL: E52 G21 P52
    Date: 2015–09–21
  7. By: Hasan, Iftekhar; Hoi, Chun-Keung (Stan); Wu, Qiang; Zhang, Hao
    Abstract: We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social-capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarter relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer bonds over loans. We conclude that debt holders perceive social capital as providing environmental pressure constraining opportunistic firm behaviors in debt contracting.
    Keywords: social capital, cooperative norm, moral hazard, cost of bank loans, public bonds
    JEL: G21 G32 Z13
    Date: 2015–11–20
  8. By: Mariotto, Carlotta; Verdier, Marianne
    Abstract: Over the recent years, the development of Internet banking and mobile banking has had a considerable impact on competition in the retail banking industry. In some countries, the regulatory framework has been adapted to allow non-banks to operate in retail payments and compete with banks for deposits. Several platforms or large retailers have started to offer innovative financial products to their customers. In this paper, we survey the issues related to innovation and competition in Internet banking and mobile banking and discuss some perspectives for future research.
    Keywords: bank competition, bank regulation, non-banks, payment systems, Internet banking, mobile banking, platform markets
    JEL: E42 G21 L96
    Date: 2015–11–25
  9. By: Rusiana, Hofner D.; Escalante, Cesar L.
    Abstract: This paper seeks to analyse the issue of loan repayment in microfinance institutions and examine the factors that affect the exit of borrowers from microfinance borrowing networks. This paper presents the analysis of the borrower-level data of agricultural microfinance household borrowers in the Philippines from 2000 to 2010. Results show varied set of reasons to explain both the continued, sustained relationship of MFI borrowers with their lenders as well as the strained relationship with some borrowers who were inevitably evicted from the MFI system or had voluntarily exited the system. The study also indicates that MFI borrowers’ poor repayment records and eventual exit from the MFI system are attributed to borrowers’ weaknesses and uncontrollable circumstances.
    Keywords: microfinance, MFI, loans, Agricultural Finance,
    Date: 2016
  10. By: Malikov, Emir; Restrepo-Tobon, Diego A; Kumbhakar, Subal C.
    Abstract: Credit unions differ in the types of financial services they offer to their members. This paper explicitly models this observed heterogeneity using a generalized model of endogenous ordered switching. Our approach captures the endogenous choice that credit unions make when adding new products to their financial services mix. The model that we consider also allows for the dependence between unobserved effects and regressors in both the selection and outcome equations and can accommodate the presence of predetermined covariates in the model. We use this model to estimate returns to scale for U.S. retail credit unions from 1996 to 2011. We document strong evidence of persistent technological heterogeneity among credit unions offering different financial service mixes, which, if ignored, can produce quite misleading results. Employing our model, we find that credit unions of all types exhibit substantial economies of scale.
    Keywords: Credit Unions, Correlated Effects, Ordered Choice, Panel Data, Production, Returns to Scale, Switching Regression
    JEL: C33 C34 D24 G21
    Date: 2016–05
  11. By: Lainà, Patrizio; Nyholm, Juho; Sarlin, Peter
    Abstract: This paper investigates leading indicators of systemic banking crises in a panel of 11 EU countries, with a particular focus on Finland. We use quarterly data from 1980Q1 to 2013Q2, in order to create a large number of macro-financial indicators, as well as their various transformations. We make use of univariate signal extraction and multivariate logit analysis to assess what factors lead the occurrence of a crisis and with what horizon the indicators lead a crisis. We find that loans-to-deposits and house price growth are the best leading indicators. Growth rates and trend deviations of loan stock variables also yield useful signals of impending crises. While the optimal lead horizon is three years, indicators generally perform well with lead times ranging from one to four years. We also tap into unique long time-series of the Finnish economy to perform historical explorations into macro-financial vulnerabilities.
    JEL: E44 F30 G01 G15 C43
    Date: 2014–06–16
  12. By: Flatnes, Jon Einar; Carter, Michael R.
    Abstract: Both collateralized individual loan contracts and joint liability group lending contracts have received much attention in the microfinance literature, yet neither contract has been found to be optimal from a welfare perspective. On the one hand, a heavily collateralized individual loan contract is very risky for borrowers, resulting in low levels of credit market participation. On the other hand, while joint liability contracts are designed to harness the social collateral among community members, numerous studies have shown that such contracts are prone to moral hazard, free-riding, and collusion. This paper analyzes an alternative contract which combines joint liability with a modest collateral requirement. Using a simple theoretical framework, we show that adding a collateral requirement to a joint liability contract reduces moral hazard but has an ambiguous effect on credit market participation. To test the predictions of the model, we conduct a unique framed field experiment among active credit group members in Tanzania. The results demonstrate that adding a collateral requirement reduces moral hazard among borrowers and helps increase repayments without compromising the effect of the social collateral in the groups. Moreover, we find evidence that a collateral requirement leads to a modest reduction in credit market participation.
    Keywords: Credit Rationing, Moral Hazard, Collateral, Field Experiments, Joint Liability, Agricultural Finance, Financial Economics, Institutional and Behavioral Economics, Risk and Uncertainty, D82, G21, O16, Q14,
    Date: 2016
  13. By: Rajkamal Iyer (MIT Sloan, Cambridge); Thais Jensen,; Niels Johannesen; Adam Sheridan (Department of Economics, University of Copenhagen)
    Abstract: We study a run on uninsured deposits in Danish banks triggered by a reform that limited deposit insurance coverage. Using a unique dataset with information about all individual accounts in Danish banks, we show that the reform caused a 50% decrease in deposits above the insurance limit in non-systemic banks, but a much smaller decrease in systemic banks which experienced less withdrawals from uninsured accounts, but also more openings of new uninsured accounts. Our results highlight the significant risks from a differential reallocation of uninsured deposits across banks and, in turn, the need for high insurance limits during a crisis.
    Date: 2016–05–18
  14. By: Fungáčová, Zuzana; Hasan, Iftekhar; Weill, Laurent
    Abstract: ​Trust in banks is considered essential for an effective financial system, yet little is known about what determines trust in banks. Only a handful of single-country studies discuss the topic, so this paper aims to fill the gap by providing a cross-country analysis on the level and determinants of trust in banks. Using World Values Survey data covering 52 countries during the period 2010–2014, we observe large cross-country differences in trust in banks and confirm the influence of several sociodemographic indicators. Our main findings include: women tend to trust banks more than men; trust in banks tends to increase with income, but decrease with age and education; access to television enhances trust, while internet access erodes trust; and religious, political, and economic values may affect trust in banks. Notably, religious individuals tend to put greater trust in banks, but differences are observed across denominations. The holding of pro-market economic views is also associated with greater trust in banks.
    Keywords: banking, trust, institutions, religion
    JEL: G21 O16 Z1
    Date: 2016–05–13
  15. By: Stijn Ferrari; Mara Pirovano (Prudential Policy and Financial Stability, National Bank of Belgium)
    Abstract: Given the indisputable cost of policy inaction in the run-up to banking crises as well as the negative side effects of unwarranted policy activation, policymakers would strongly benefit from earlywarning thresholds that more accurately predict crises and produce fewer false alarms. This paper presents a novel yet intuitive methodology to compute country-specific and state-dependent thresholds for early-warning indicators of banking crises. Our results for a selection of early-warning indicators for banking crises in 14 EU countries show that the benefits of applying the conditional moments approach can be substantial. The methodology provides more robust signals and improves the early-warning performance at the country-specific level, by accounting for country idiosyncrasies and state dependencies, which play an important role in national supervisory authorities’ macroprudential surveillance.
    Keywords: Banking crises, Early warning systems, Country-specific thresholds, State-dependent thresholds
    JEL: C40 E44 E47 E61 G21
    Date: 2016–05
  16. By: Patricia Palhau Mora; Michael Januska
    Abstract: Monetary policy and financial stability are closely intertwined, and the resilience of the financial system carries weight in this relationship. This paper explores whether the financial system is more resilient as a result of the G20’s post-crisis agenda for financial regulatory reform. It summarizes the agenda’s key measures and implementation schedules, both internationally and in Canada, reviews the effectiveness of the reform measures in preventing and addressing financial imbalances, and outlines outstanding issues. It finds that, to date, there is evidence that the G20’s reform measures are increasing financial system resilience globally, especially in the banking sector. Yet, implementation is still ongoing, and it may be too early to judge how the reform measures are interacting with one another. In Canada, the resilience of the financial system is being enhanced by the ongoing implementation of more-rigorous global regulatory and supervisory standards. Consequently, the likelihood and impact of severe financial stress in the future should be reduced, supporting the primary focus of monetary policy on achieving its 2 per cent inflation target.
    Keywords: Financial stability, Financial system regulation and policies, Monetary policy framework
    JEL: E52 G01 G21 G23 G28
    Date: 2016
  17. By: Thompson, Jeffrey P.
    Abstract: One potential consequence of rising concentration of income at the top of the distribution is increased borrowing, as less affluent households attempt to maintain standards of living with less income. This paper explores the “keeping up with the Joneses” phenomenon using data from the Survey of Consumer Finances. Specifically, it examines the responsiveness of payment-to-income ratios for different debt types at different parts of the income distribution to changes in the income thresholds at the 95th and 99th percentiles. The analysis provides some evidence indicating that household debt payments are responsive to rising top incomes. Middle and upper-middle income households take on more housing-related debt and have higher housing debt payment to income ratios in places with higher top income levels. Among households at the bottom of the income distribution there is a decline in non-mortgage borrowing and debt payments in areas with rising top-income levels, consistent with restrictions in the supply of credit. The analysis also consistently shows that 95th percentile income has a greater influence on borrowing and debt payment across in the rest of the distribution than the more affluent 99th percentile level.
    Keywords: Inequality ; Debt ; Consumption
    JEL: D63 D14
    Date: 2016–05–02
  18. By: Mamonov, Mikhail; Vernikov, Andrei
    Abstract: This paper considers the comparative efficiency of public, private, and foreign banks in Rus-sia, a transition economy with several unusual features. We perform stochastic frontier anal-ysis (SFA) of Russian bank-level quarterly data over the period 2005–2013. The method of computation of comparative cost efficiency is amended to control for the effect of revalua-tion of foreign currency items in bank balance sheets. Public banks are split into core and other state-controlled banks. Employing the generalized method of moments, we estimate a set of distance functions that measure the observed differences in SFA scores of banks and bank clusters (heterogeneity in risk preference and asset structure) to explain changes in bank efficiency rankings. Our results for comparative Russian bank efficiency show higher efficiency scores, less volatility, and narrower spreads between the scores of different bank types than in previous studies. Foreign banks appear to be the least cost-efficient market participants, while core state banks on average are nearly as efficient as private domestic banks. We suggest that foreign banks gain cost-efficiency when they increase their loans-to-assets ratios above the sample median level. Core state banks, conversely, lead in terms of cost efficiency when their loans-to-assets ratio falls below the sample median level. The presented approach is potentially applicable to analysis of bank efficiency in other dollarized emerging markets.
    Keywords: banks, comparative efficiency, SFA, state-controlled banks, Russia
    JEL: G21 P23 P34 P52
    Date: 2015–07–27
  19. By: Gros, Daniel; Valiante, Diego; De Groen, Willem Pieter
    Abstract: Among several important monetary policy initiatives decided by the European Central Bank on 10 March 2016 was the launch of a new set of targeted longer-term refinancing operations (TLTRO II), expanding on the previous TLTRO. In assessing this scheme, which might cost up to €24 billion, this Policy Brief finds that while it could become important, it is questionable whether it will achieve its goal of encouraging the extension of credit for new investment, as banks can easily window dress their loan book.
    Date: 2016–03

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