nep-ban New Economics Papers
on Banking
Issue of 2016‒06‒25
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Regulation and Bankers' Incentives By Fabiana Gómez; Jorge Ponce
  2. Banks' Credit-Portfolio Choices and Risk-Based Capital Regulation By Nielsen, Caren Yinxia
  3. Equity is Cheap for Large Financial Institutions: The International Evidence By Priyank Gandhi; Hanno Lustig; Alberto Plazzi
  4. Theoretical Paradigm on Bank Capital Regulation and its Impact on Bank-Borrower Behavior By Gunakar Bhatta, Ph.D.
  5. Optimal payments to connected depositors in turbulent times-a Markov chain approach By David Csercsik; Hubert Janos Kiss
  6. Interest rates, corporate lending and growth in the Euro Area By Gabriele Tondl
  7. Risky Banks and Macroprudential Policy for Emerging Economies By Nuguer Victoria; Cuadra Gabriel
  8. Do foreign banks take more risk? Evidence from emerging economies By Jeon, Bang; Wu, Ji; Chen, Minghua; Wang, Rui
  9. 'Growth and Welfare Effects of Macroprudential Regulation' By Pierre-Richard Agénor
  10. Sovereign Risk, Bank Funding and Investors' Pessimism By Faia, Ester
  11. 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
  12. Development of the Institutional Framework for Regulation and Supervision of Credit Cooperation of the Russian Market to Increase Its Effectiveness By Mamuta, Mikhail; Sorokina, O.S.
  13. Financing ?exibility: the case of outsourcing By Luca Di Corato; Michele Moretto; Gianpaolo Rossini

  1. By: Fabiana Gómez (University of Bristol); Jorge Ponce (Banco Central del Uruguay)
    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, (countercyclical) loan loss provision, commercial banks, investment banks, bankers' incentives, effort, risk; Regulación bancaria, requerimiento mínimo de capital, colchones de capital, requerimientos de liquidez, provisiones (contracíclicas), bancos comerciales, bancos de inversión, incentivos del banquero, esfuerzo, riesgo
    JEL: G21 G28
    Date: 2015
  2. By: Nielsen, Caren Yinxia (Department of Economics, Lund University)
    Abstract: To address banks’ risk taking during the recent financial crisis, we develop a model of credit-portfolio optimization and study the impact of risk-based capital regulation (Basel Accords) on banks’ asset allocations. The model shows that, when a bank’s capital is constrained by regulation, regulatory cost (risk weightings in the Basel Accords) alters the risk and value calculations for the bank’s assets. The model predicts that the effect of a tightening of the capital requirements – for banks for which these requirements are (will become) binding – will be to skew the risky portfolio towards high-risk, high-earning assets (low-risk, low-earning assets), provided that the asset valuation – i.e., reward-to-regulatory-cost ratio – of the high-risk asset is higher than that of the low-risk asset. Empirical examination of U.S. banks supports the predictions applicable to the dataset. In addition, our tests show the characteristics of banks with different levels of risk taking. In particular, the core banks that use the internal ratings-based approach under Basel II invest more in high-risk assets.
    Keywords: Banks; asset risk; credit risk; portfolio choice; risk-based capital regulation
    JEL: G11 G18 G21 G28
    Date: 2016–06–13
  3. By: Priyank Gandhi; Hanno Lustig; Alberto Plazzi
    Abstract: Equity is a cheap source of funding for a country's largest financial institutions. In a large panel of 31 countries, we find that the stocks of a country's largest financial companies earn returns that are significantly lower than stocks of non-financials with the same risk exposures. In developed countries, only the largest banks' stock earns negative risk-adjusted returns, but, in emerging market countries, other large non-bank financial firms do. Even though large banks have high betas, these risk-adjusted return spreads cannot be attributed to the risk anomaly. Instead, we find that the large-minus-small, financial-minus-nonfinancial, risk-adjusted spread varies across countries and over time in ways that are consistent with stock investors pricing in the implicit government guarantees that protect shareholders of the largest banks. The spread is significantly larger for the largest banks in countries with deposit insurance, backed by fiscally strong governments, and in common law countries that offer shareholders better protection from expropriation. Finally, the spread predicts large crashes in that country's stock market and output.
    JEL: G12 G18 G2 G21
    Date: 2016–06
  4. By: Gunakar Bhatta, Ph.D. (Nepal Rastra Bank)
    Abstract: Bank equity plays an important role in the credit allocation process of financial intermediaries. Financial institutions with higher level of equity are in better position to absorb losses and repay deposits in a timely manner. This relates to the bank capital channel of monetary policy transmission mechanism stating that banks having sound financial health could contribute significantly in transmitting monetary impulses to the real sector. Considering the important role that bank equity plays in shaping the risk taking behavior of financial intermediaries, central banks set the minimum paid-up capital requirement for banks and financial institutions. Though this regulatory requirement is aimed at ensuring the smooth financial intermediation, this could become costlier in extending loans particularly in the times of business cycle fluctuations. A higher capital requirement might also constrain the lending capacity of a bank. Given the conflicting theoretical assumptions on the role of equity capital on financial stability and economic growth, this paper develops a theoretical model examining the relationship between bank equity and its effect on bank-borrower behavior. The theoretical model recommends that higher level of bank equity might be helpful in ensuring financial stability by altering the behavior of the bank and borrower.
    Keywords: Bank, Credit, Capital, Regulation, Stability
    JEL: E51 G00 G21 G32 G38
    Date: 2015–09
  5. By: David Csercsik (Pázmány Péter Catholic University - Faculty of Information Technology); Hubert Janos Kiss (Institute of Economics - Momentum (LD-004/2010) Game Theory Research Group Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Eötvös Loránd University - Department of Economics)
    Abstract: We propose a discrete time probabilistic model of depositor behavior which takes into account the information flow among depositors. In each time period each depositors’ current state is determined in a stochastic way, based on its previous state, the state of other connected depositors and the strategy of the bank. The bank offers payment to impatient depositors who accept or decline them with certain probability, depending on the offered amount. The connections between depositors affect the evolution of the state trajectory as well: the more other connected depositors demand money from the bank, the larger is the probability that the depositor turns also impatient. Our principal aim is to see how are the optimal offers of the bank if it wants to keep the expected chance of a bank run under a certain level and minimize its expected payments, while taking into account the connection structure of the depositors. We show that in the case of the proposed model this question results in a nonlinear optimization problem with nonlinear constraints, and that the method is capable of accounting for time-varying resource limits of the bank. Optimal offers increase a) in the degree of the depositor; b) in the probability of being hit by a liquidity shock, and c) the effect of a neighboring impatient depositor.
    Keywords: Bank runs, Markov chains, Network, Optimization
    JEL: C61 C63 G21
    Date: 2016–05
  6. By: Gabriele Tondl (Department of Economics, Vienna University of Economics and Business)
    Abstract: The sluggish development of corporate lending has remained the central concern of EU monetary policy makers as it is considered to hinder seriously the resurgence of growth. This paper looks at the development of loans to large corporations vs SMEs in the pre-crisis and post-crisis period and wishes to answer: (i) to which extent do allocated loan volumes actually contribute to output growth? (ii) which factors determine the development of loans, considering above all loan interest rates? and (iii) what causes differences in loan interest levels across the EA? The results indicate that different loan developments in the EA explain very well differences in output development, loans to SMEs contribute even more to output growth than those for large corporations. Loan development itself is negatively influenced by the interest level which differs significantly across EA members, with small loans in addition always being charged an interest premium over large loans. The capitalization of banks, the size of banks and their internationalization play a role as well. A part of the sluggish growth of loans can be explained by the increasing use of alternative financial instruments by large firms. Interest rates in turn are following the ECB interest rate, - but this link has become looser in the post-crisis period, and long term government bond rates. Different risks faced by banks and different bank structures have become important explanatories of interest rates in the post-crisis period.
    Keywords: Corporate lending, Credit market fragmentation, Interest pass-through, Bank lending rates, Finance and growth, Euro Area
    JEL: E40 E43 E44
    Date: 2016–06
  7. By: Nuguer Victoria; Cuadra Gabriel
    Abstract: We develop a two-country DSGE model with global banks to analyze the role of cross-border banking flows on the transmission of a quality of capital shock in the United States to emerging market economies (EMEs). Banks face a moral hazard problem for borrowing from households. EME's banks might be risky: they can also be constrained to borrow from U.S. banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macroprudential policy that targets non-core liabilities makes the domestic economy resilient to the volatility of cross-border banking flows and makes EME's households better-off.
    Keywords: Global banking; emerging market economies; financial frictions; macroprudential policy.
    JEL: G28 E44 F42 G21
    Date: 2016–06
  8. By: Jeon, Bang (School of Economics Drexel University); Wu, Ji (Southwestern University of Finance and Economics); Chen, Minghua (Southwestern University of Finance and Economics); Wang, Rui (Southwestern University of Finance and Economics)
    Abstract: This paper addresses the impact of foreign ownership on the risk-taking behavior of banks. Using bank-level panel data of more than 1,300 commercial banks in 32 emerging economies during 2000-2013, we find that foreign owned banks take on more risk than their domestic counterparts. We further examine several factors that may potentially contribute to foreign banks’ differentiated riskiness from four perspectives, namely, foreign banks’ informational disadvantages, agency problems, the contagious effect of parent banks’ financial conditions and the disparity between home and host markets. We find supportive evidence that these factors play a significant role in affecting foreign banks’ risk-taking.
    Keywords: Foreign banks; Bank risk-taking; Emerging economies
    JEL: F65 G15 G21
    Date: 2016–05–14
  9. By: Pierre-Richard Agénor
    Abstract: This paper studies the growth and welfare effects of macroprudential regulation in an overlapping generations model of endogenous growth with banking and agency costs. Indivisible investment projects combine with informational imperfections to create a double moral hazard problem à la Holmström-Tirole and a role for bank monitoring. When the optimal monitoring intensity is endogenously determined, an increase in the reserve requirement rate (motivated by systemic risk considerations) has conflicting effects on investment and growth. The trade-off between ensuring financial stability and promoting economic growth can be internalized by choosing the reserve requirement rate that maximizes growth and welfare. However, the risk of disintermediation means that financial supervision may also need to be strengthened, and the perimeter of regulation broadened, if the optimal required reserve ratio is too high.
    Date: 2016
  10. By: Faia, Ester
    Abstract: Data show that sovereign risk reduces liquidity, increases funding cost and risk of banks highly exposed to it. A feedback loop exists between sovereign and bank risk. I build a model that rationalizes those links. Banks act as delegated monitors and invest in risky projects and in risky sovereign bonds. As investors hear rumors of increased sovereign risk, they run the bank (via global games). Banks could rollover liquidity in repo market using government bonds as collateral, but as sovereign risk raises collateral values shrink. Overall banks' liquidity falls (its cost increases) and so does banks' credit. In this context noisy news (announcements with signal extraction) of consolidation policy are recessionary in the short run, as they contribute to investors and banks pessimism, and mildly expansionary in the medium run. The banks liquidity channel plays a major role in the fiscal transmission.
    Keywords: banks' funding costs; feedback loops; liquidity risk; repo freezes.; sovereign risk
    JEL: E5 E6 G3
    Date: 2016–06
  11. 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: 2016–06
  12. By: Mamuta, Mikhail (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Sorokina, O.S. (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: This paper deals with determination of the existing approaches to the regulation and supervision of credit cooperatives in the world, in particular, the components of effective regulation of credit cooperatives and the main recommendations on the application of proportionate risk-based model to regulation and supervision of non-bank financial institutions.
    Keywords: financial inclusion, microfinance, credit cooperation, non-banking lenders, regulation, supervision, prudential regulation
    Date: 2016–05–04
  13. By: Luca Di Corato (University of Uppsala); Michele Moretto (University of Padova); Gianpaolo Rossini (University of Bologna)
    Abstract: We investigate the relationship between the extent and timing of vertical fl?exibility and the fi?nancial choices of a fi?rm. By vertical fl?exibility we mean partial/total and reversible outsourcing of a necessary input. A fi?rm simultaneously selects its vertical setting and how to fi?nance it. We examine debt and venture capital. Debt is provided by a lender that requires the payment of a fi?xed coupon over time and, as a collateral, an option to buy out the fi?rm in certain circumstances. Debt leads to the same level of fl?exibility which would be acquired by an unlevered ?firm. Yet investment occurs earlier. With venture capital less outsourcing may be is adopted with respect to the unlevered case and the ?firm invests mostly later. Hence, as the injection of venture capital may reduce the need of vertical fl?exibility, a novel relationship can be established for the substitutability between a real and a fi?nancial variable.
    Keywords: vertical integration, fl?exible outsourcing, debt, equity and venture capital, real options.
    JEL: C61 G31 G32 L24
    Date: 2016–05

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