nep-ban New Economics Papers
on Banking
Issue of 2016‒07‒09
nine papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Is Bigger Necessarily Better in Community Banking? By Hughes, Joseph P.; Jagtiani, Julapa; Mester, Loretta J.
  2. Credit Ratings, Private Information, and Bank Monitoring Ability By Nakamura, Leonard I.; Roszbach, Kasper
  3. From NGOs to banks: Does institutional transformation alter the business model of microfinance institutions? By Bert B. D'Espallier; Jann Goedecke; Marek Hudon; Roy Mersland
  4. Measuring Agency Costs and the Value of Investment Opportunities of U.S. Bank Holding Companies with Stochastic Frontier Estimation By Joseph P. Hughes; Loretta J. Mester; Choon-Geol Moon
  5. Government Default, Bonds, and Bank Lending Around the World: What do the Data Say? By Nicola Gennaioli; Alberto Martín; Stefano Rossi
  6. Banking Competition and Financial Stability: Evidence from CIS By Nabiyev, Javid; Musayev, Kanan; Yusifzada, Leyla
  7. What Determines the Composition of International Bank Flows? By Niepmann, Friederike; Kerl, Cornelia
  8. The effect of bank shocks on firm-level and aggregate investment By Amador, João; Nagengast, Arne J.
  9. Comments on the BCBS proposal for a New Standardized Approach for Operational Risk By Giulio Mignola; Roberto Ugoccioni; Eric Cope

  1. By: Hughes, Joseph P. (Rutgers University); Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: We investigate the relative performance of publicly traded community banks (those with assets less than $10 billion) versus larger banks (those with assets between $10 billion and $50 billion). A body of research has shown that community banks have potential advantages in relationship lending compared with large banks, although newer research suggests that these advantages may be shrinking. In addition, the burdens placed on community banks by the regulatory reforms mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the need to increase investment in technology, both of which have fixed-cost components, may have disproportionately raised community banks’ costs. We find that, on average, large banks financially outperform community banks as a group and are more efficient at credit-risk assessment and monitoring. But within the community bank segment, larger community banks outperform smaller community banks. Our findings, taken as a whole, suggest that there are incentives for small banks to grow larger to exploit scale economies and to achieve other scale-related benefits in terms of credit-risk monitoring. In addition, we find that small business lending is an important factor in the better performance of large community banks compared with small community banks. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.
    Keywords: Community Banking; Scale; Financial Performance; Small Business Lending
    JEL: G21 L25
    Date: 2016–06–10
  2. By: Nakamura, Leonard I. (Federal Reserve Bank of Philadelphia); Roszbach, Kasper (Sveriges Riksbank and University of Groningen)
    Abstract: In this paper, we use credit rating data from two large Swedish banks to elicit evidence on banks' loan monitoring ability. For these banks, our tests reveal that banks' internal credit ratings indeed include valuable private information from monitoring, as theory suggests. Banks' private information increases with the size of loans.
    Keywords: Monitoring; Banks; Credit Bureau; Private Information; Public Information; Ratings; Regulation; Supervision; Overconfidence
    JEL: D82 G18 G21 G24 G32 G33
    Date: 2016–06–16
  3. By: Bert B. D'Espallier; Jann Goedecke; Marek Hudon; Roy Mersland
    Abstract: Microfinance, which pledges to provide financial services to people without access to banking, is chiefly run by non-governmental organizations (NGOs). Little is known about the extent to which the transformation of these NGOs into shareholder-owned and, most often, regulated firms affects the way microfinance institutions (MFIs) conduct their business. By applying the event study methodology to 66 MFIs that have transformed, we quantify the effect that transformation has on the MFIs’ business models. Our results suggest that portfolio yield is driven down by 3.9 percentage points due to transformation, indicating that clients get more favorable interest rates. At the same time, MFIs are able to significantly cut down their operational expenses, of which 1.1 percentage points can be attributed to transformation. Other findings include a steep increase in commercial debt leverage and deposits, a significant decrease in the fluctuation of funding costs and a sharp rise in average loan size. Profitability goes down in the short and medium term, while return on equity is driven up in the medium to long run. By exploiting within-MFI data, our approach goes beyond previous studies that mainly relied on between-MFI data. Overall, the results suggest that transformed MFIs become an attractive environment for investors, potentially encouraging a more profit-seeking behavior among transformed MFIs.
    Keywords: Microfinance; transformation; business model; regulation
    JEL: O16 G21 D61 G32 F21
  4. By: Joseph P. Hughes (Rutgers University); Loretta J. Mester (Federal Reserve Bank of Cleveland); Choon-Geol Moon (Hanyang University)
    Abstract: By eliminating the influence of statistical noise, stochastic frontier techniques permit the estimation of the best-practice value of a firm’s investment opportunities and the magnitude of a firm’s systematic failure to achieve its best-practice market value – a gauge of the magnitude of agency costs. These frontiers are estimated from the performance of all firms in the industry and, thus, capture best-practice performance that is, unlike Tobin’s q ratio, independent of the managerial decisions of any particular firm. Using the frontier measure of performance applied to 2007 data on top-tier, publicly traded U. S. bank holding companies, we obtain evidence on market discipline: we find that higher managerial ownership at most banks tends to align the interests of insiders with those of outside owners and to be associated with improved financial performance; at most banks, higher blockholder ownership is associated with improved financial performance obtained from blockholders’ monitoring; and, at most banks, higher product-market concentration is associated with poorer financial performance and the so-called managerial quiet life. Using the frontier measure of investment opportunities, we find evidence that banks with relatively higher-valued investment opportunities achieve less of their potential market value, while banks with lower-valued opportunities achieve more of their potential value. In spite of their lower-valued opportunities, these banks, on average, achieve the same Tobin’s q ratio and, thus, appear better able to exploit their less valuable investment opportunities. Our results suggest that higher-valued opportunities may reduce managers’ performance pressure and provide a stronger incentive to consume agency goods.
    Keywords: banking, efficiency, ownership structure, competition
    JEL: C58 G21 G28
    Date: 2016–06–24
  5. By: Nicola Gennaioli; Alberto Martín; Stefano Rossi
    Abstract: We analyze holdings of government bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Relative to existing work, this dataset allows us to study – for both developed and emerging economies – not only the workings of the sovereign default-banking crisis nexus, but also how it comes into existence in the first place. Banks hold many government bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, exposure to government bonds increases, especially for large banks. At the bank level, bondholdings during sovereign default correlate negatively with subsequent lending, and this correlation is mostly due to bonds acquired in pre-default years. These results indicate that in many countries the sovereign default-banking crisis nexus originates in normal times.
    Keywords: sovereign risk, sovereign default, Government bonds
    JEL: F34 F36 G15 H63
    Date: 2016–07
  6. By: Nabiyev, Javid; Musayev, Kanan; Yusifzada, Leyla
    Abstract: The study provides empirical analysis of the cross-country relationship between a direct measure of competitive conduct of banking system and financial system in CIS countries during the period from 2001 to 2013. We determine the level of banking competition by using Panzar and Rosse H-statistic. Estimation results from Logit probability analysis reveal that the level of competition does not significantly affect the probability of banking crisis in such countries. However, a number of macroeconomic and institutional factors have a significant influence in financial stability. According to empirical results, higher inflation increases the probability of a banking crisis. On the other hand, credit growth decreases the probability of banking crisis in the investigated countries. These results are robust to the methodology when the interaction of concentration and h-statistic is used. The institutional factors have significant influence on preventing banking crises. Specifically, improvement in government effectiveness decreases the probability of banking crisis.
    Keywords: Banking competition, concentration, competition-stability, competition-fragility, h-statistics, financial stability
    JEL: D40 D41 G2 G21
    Date: 2016
  7. By: Niepmann, Friederike; Kerl, Cornelia
    Abstract: This paper studies how frictions to foreign bank operations affect the sectoral composition of banks’ foreign positions, their funding sources and international bank flows. It presents a parsimonious model of banking across borders, which is matched to bank-level data and used to quantify cross-border frictions. The counterfactual analysis shows how higher barriers to foreign bank entry alter the composition of international bank flows and may reverse the direction of net interbank flows. It also highlights that interbank lending and lending to non-banking firms respond differently to changes in foreign and domestic conditions. Ultimately, the analysis suggests that policies that change cross-border banking frictions and, thereby, the composition of banks’ foreign activities affect how shocks are transmitted across borders.
    Keywords: Global banks ; Interbank market ; International bank flows ; Cross-border banking
    JEL: F21 F23 F30 G21
    Date: 2016–06
  8. By: Amador, João; Nagengast, Arne J.
    Abstract: We show that credit supply shocks have a strong impact on firm-level as well as aggregate investment by applying the methodology developed by Amiti and Weinstein (2013) to a rich dataset of matched bank-firm loans in the Portuguese economy for the period 2005 to 2013. We argue that their decomposition framework can also be used in the presence of small firms with only one banking relationship as long as they account for only a small share of the total loan volume of their banks. The growth rate of individual loans in our dataset is decomposed into bank, firm, industry and common shocks. Adverse bank shocks are found to impair firm-level investment in all firms in our sample, but in particular for small firms and those with no access to alternative financing sources. For the economy as a whole, granular shocks in the banking system account for around 20-40% of aggregate investment dynamics. JEL Classification: E32, E44, G21, G32
    Keywords: banks, credit dynamics, firm-level data, investment, portuguese economy
    Date: 2016–06
  9. By: Giulio Mignola; Roberto Ugoccioni; Eric Cope
    Abstract: On March 4th 2016 the Basel Committee on Banking Supervision published a consultative document where a new methodology, called the Standardized Measurement Approach (SMA), is introduced for computing Operational Risk regulatory capital for banks. In this note, the behavior of the SMA is studied under a variety of hypothetical and realistic conditions, showing that the simplicity of the new approach is very costly on other aspects: we find that the SMA does not respond appropriately to changes in the risk profile of a bank, nor is it capable of differentiating among the range of possible risk profiles across banks; that SMA capital results generally appear to be more variable across banks than the previous AMA option of fitting the loss data; that the SMA can result in banks over- or under-insuring against operational risks relative to previous AMA standards. Finally, we argue that the SMA is not only retrograde in terms of its capability to measure risk, but perhaps more importantly, it fails to create any link between management actions and capital requirement.
    Date: 2016–07

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