nep-ban New Economics Papers
on Banking
Issue of 2016‒09‒18
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Concentration, Competition, and Financial Inclusion By Owen, Ann L.; Pereira, Javier
  2. Do Loan-to-Value Ratio Regulation Changes Affect Canadian Mortgage Credit? By Kronick, Jeremy
  3. Deposit Insurance in General Equilibrium By Hans Gersbach; Volker Britz; Hans Haller
  4. Can microcredit impact the activity of small and medium enterprises? New evidence from a Regression Discontinuity Design in Panama By Nènè Oumou; Jonathan Goyette
  5. Whose Balance Sheet is this? Neural Networks for Banks’ Pattern Recognition By Carlos León; José Fernando Moreno; Jorge Cely
  6. Optimal Monetary Policy in a Collateralized Economy By Gary Gorton; Ping He
  7. Information Asymmetry and Market Power in the African Banking Industry By Agyenim Boateng; Simplice Asongu; Raphael Akamavi; Vanessa Tchamyou
  8. A simple model of subprime borrowers and credit growth By Giorgio Primiceri; Andrea Tambalotti; Alejandro Justiniano
  9. How do people pay rent? By Zhang, David Hao
  10. A Welfare Analysis of Macroprudential Policy Rules in the Euro Area By Jean-Christophe Poutineau; Gauthier Vermandel
  11. Stress Testing in the Nigerian Banking Sector By FARAYIBI, Adesoji
  12. Mobile Collateral versus Immobile Collateral By Gary Gorton; Tyler Muir
  13. Credit cycles and real activity - the Swiss case By Gregor Bäurle; Rolf Scheufele
  14. Strategic Default Induced by Loan Modification Programs By Li, Xianghong; Zhao, Xinlei
  15. Commercial Bank Innovations in Small and Medium-Sized Enterprise Finance: Global Models and Implications for Thailand By Subhanij, Tientip
  16. Forecast bankruptcy using a blend of clustering and MARS model - Case of US banks By Zeineb Affes; Rania Hentati-Kaffel
  17. Optimal Bailout of Systemic Banks By Charles Nolan; Plutarchos Sakellaris; John D. Tsoukalas
  18. Nominal Rigidities in Debt and Product Markets By Carlos Garriga; Finn E. Kydland; Roman Šustek
  19. Measuring the Natural Rate of Interest : International Trends and Determinants By Holston, Kathryn; Laubach, Thomas; Williams, John C.

  1. By: Owen, Ann L.; Pereira, Javier
    Abstract: Expanding access to financial services holds the promise to help reduce poverty and foster economic development. However, little is still known about the determinants of the outreach of financial systems across countries. Our study is the first attempt to employ a large panel of countries, several indicators of financial inclusion and a comprehensive set of bank competition measures to study the role of banking system structure as a determinant of cross-country variability in financial outreach for households. We use panel data from 83 countries over a 10-year period to estimate models with both country and time fixed effects. We find that greater banking industry concentration is associated with more access to deposit accounts and loans, provided that the market power of banks is limited. We find evidence that countries in which regulations allow banks to engage in a broader scope of activities are also characterized by greater financial inclusion. Our results are robust to changes in sample, data, and estimation strategy and suggest that the degree of competition is an important aspect of inclusive financial sectors.
    Keywords: financial inclusion, bank concentration, market power
    JEL: G21 L11 O16
    Date: 2016–09–08
  2. By: Kronick, Jeremy
    Abstract: ABSTRACT: This paper investigates the relationship in the Canadian housing market between loan-to-value (“LTV”) ratios and residential mortgage credit over the 1981-2012 time period. More specifically, I look to determine whether LTV ratio regulation provides a mechanism with which to slow down the potentially overheated Canadian housing market. Due to the endogeneity of many macroeconomic variables, I use a structural vector autoregression (“SVAR”) to investigate this question. Results indicate that three of the four major LTV regulation changes that occurred during this timeframe either had insignificant effects on mortgage credit, or caused it to move contrary to expectations. Only the 2008 tightening of LTV was weakly significant. Therefore, regulation changes to LTV ratios are unlikely to be successful in slowing down the overheated housing market in Canada, which may force central bankers to use broader monetary policy or other forms of macroprudential regulation.
    Keywords: Mortgage credit, macroprudential regulation, loan-to-value, monetary policy, Canada
    JEL: E52 G21 G28
    Date: 2015–04–30
  3. By: Hans Gersbach (ETH Zurich, Switzerland); Volker Britz (ETH Zurich, Switzerland); Hans Haller (Virginia Polytechnic Institute)
    Abstract: We study the consequences and optimal design of bank deposit insurance in a general equilibrium model. The model involves two production sectors. One sector is financed by issuing bonds to risk-averse households. Firms in the other sector are monitored and financed by banks. Households fund banks through deposits and equity. Deposits are explicitly insured by a de- posit insurance fund. Any remaining shortfall is implicitly guaranteed by the government. The deposit insurance fund charges banks a premium per unit of deposits whereas the government finances any necessary bail-outs by lump-sum taxation of households. When the deposit insurance premium is actuarially fair or higher than actuarially fair, two types of equilibria emerge: One type of equilibria supports the socially optimal (Arrow-Debreu) allo- cation, and the other type does not. In the latter case, bank lending is too large relative to equity and the probability that the banking system collapses is positive. Next, we show that a judicious combination of deposit insurance and reinsurance eliminates all non-optimal equilibrium allocations.
    Keywords: Financial intermediation, deposit insurance, capital structure, general equilibrium, reinsurance
    JEL: D53 E44 G2
    Date: 2016–09
  4. By: Nènè Oumou (Département d'économique, Université de Sherbrooke); Jonathan Goyette (Département d'économique, Université de Sherbrooke)
    Abstract: In this paper, we conduct an impact analysis of microcredit on entrepreneurial activity using a new data-set collected among 740 entrepreneurs located in Panama. Our focus is on a new type of microfinance institution which grants loans to enterprises falling in what we call the financial missing middle, i.e., enterprises which are too big for traditional microcredit but not big enough for commercial banks. We collected an unbalanced panel of data on enterprise's business and credit history. Using our partner's rules of credit attribution, we build a regression discontinuity design to evaluate the effect of loan's obtainment on the activity of financed enterprises. Our results show a limited impact of access to credit on firm's revenues despite a significant impact on investment in equipment and immobilization. The magnitude of the positive effect is higher on micro-enterprises while auto-enterprises are negatively impacted by microcredit as is usually documented in the literature. We emphasize that the cost of credit is one of the major determinants of the limited impact of microcredit on entrepreneurial activity.
    Keywords: Microfinance Institutions, firm’s performance, Regression Discontinuity, Panama
    JEL: D22 G21 L26 O12 O16
    Date: 2016–08
  5. By: Carlos León (Banco de la República de Colombia); José Fernando Moreno (Banco de la República de Colombia); Jorge Cely (Banco de la República de Colombia)
    Abstract: The balance sheet is a snapshot that portraits the financial position of a firm at a specific point of time. Under the reasonable assumption that the financial position of a firm is unique and representative, we use a basic artificial neural network pattern recognition method on Colombian banks’ 2000-2014 monthly 25-account balance sheet data to test whether it is possible to classify them with fair accuracy. Results demonstrate that the chosen method is able to classify out-of-sample banks by learning the main features of their balance sheets, and with great accuracy. Results confirm that balance sheets are unique and representative for each bank, and that an artificial neural network is capable of recognizing a bank by its financial accounts. Further developments fostered by our findings may contribute to enhancing financial authorities’ supervision and oversight duties, especially in designing early-warning systems. Classification JEL: C45, C53, G21, M41
    Keywords: supervised learning, machine learning, artificial neural networks, classification
    Date: 2016–09
  6. By: Gary Gorton; Ping He
    Abstract: In the last forty or so years the U.S. financial system has morphed from a mostly insured retail deposit-based system into a system with significant amounts of wholesale short-term debt that relies on collateral, and in particular Treasuries, which have a convenience yield. In the new economy the quality of collateral matters: when Treasuries are scarce, the private sector produces (imperfect) substitutes, mortgage-backed and asset-backed securities (MBS). When the ratio of MBS to Treasuries is high, a financial crisis is more likely. The central bank’s open market operations affect the quality of collateral because the bank exchanges cash for Treasuries (one kind of money for another). We analyze optimal central bank policy in this context as a dynamic game between the central bank and private agents. In equilibrium, the central bank sometimes optimally triggers recessions to reduce systemic fragility.
    JEL: E02 E42 E44 E5 E52
    Date: 2016–09
  7. By: Agyenim Boateng (Glasgow Caledonian University, UK); Simplice Asongu (Yaoundé, Cameroon); Raphael Akamavi (Hull, UK); Vanessa Tchamyou (Yaoundé, Cameroon)
    Abstract: This study investigates the role of information sharing offices and its association with market power in the African banking industry. The empirical evidence is based on a panel of 162 banks from 42 countries for the period 2001-2011. Five simultaneity-robust estimation techniques are employed, namely: (i) Two Stage Least Squares; (ii) Instrumental Fixed effects to control for the unobserved heterogeneity; (iii) Instrumental Tobit regressions to control for the limited range in the dependent variable; (iv) Generalised Method of Moments (GMM) to control for persistence in market power and (v) Instrumental Quantile Regressions (QR) to account for initial levels of market power. The following findings have been established from non-interactive regressions. First, the effects of information sharing offices are significant in Two Stage Least Squares, with a positive effect from private credit bureaus. Second, in GMM, public credit registries increase market power. Third, from Quintile Regressions, private credit bureaus consistently increase market power throughout the conditional distributions of market power. Given that the above findings are contrary to theoretical postulations, we extended the analytical framework with interactive regressions in order to assess whether the anticipated effects can be established if information sharing offices are increased. The extended findings show a: (i) negative net effect from public credit registries on market power in GMM regressions and; (ii) negative net impacts from public credit registries on market power in the 0.25th and 0.50th quintiles of market power.
    Keywords: Financial access; Market power; Information asymmetry
    JEL: G20 G29 L96 O40 O55
    Date: 2016–09
  8. By: Giorgio Primiceri (Northwestern University); Andrea Tambalotti (Federal Reserve Bank of New York); Alejandro Justiniano (Federal Reerve Chicago)
    Abstract: Abstract. The surge in credit and house prices that preceded the Great Recession was particularly pronounced in ZIP codes with a higher fraction of subprime borrowers (Mian and Sufi, 2009). We present a simple model with prime and subprime borrowers distributed across geographic locations, which can reproduce this stylized fact as a result of an expansion in the supply of credit. Due to their low income, subprime households are constrained in their ability to meet interest payments and hence sustain debt. As a result, when the supply of credit increases and interest rates fall, they take on disproportionately more debt than their prime counterparts, who are not subject to that constraint.
    Date: 2016
  9. By: Zhang, David Hao (Harvard University)
    Abstract: Using data from the 2014 Boston Fed Bill Payment Experiment and the 2014 Survey of Consumer Payment Choice (SCPC), we investigate how households pay their rent. We find that the dominant methods for paying rent are cash (22 percent), check (42 percent), and money order (16 percent). Electronic methods are still rarely used, at 8 percent for bank account number payment and 7 percent for online banking bill payment, and less than 2 percent for debit and credit cards. Compared with other large bill payments of more than $200, rental payments are much more likely to be made with paper-based methods than with electronic methods and are much less likely to be automatic, despite the recent attempts by start-ups to make it easier for landlords to accept electronic payments. Check and electronic methods are more frequently used for higher-valued transactions and by those with higher income and education.
    Keywords: payment instrument choice; rental payment; rent
    JEL: D10 D19
    Date: 2016–06–13
  10. By: Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - UR1 - Université de Rennes 1 - Université de Caen Basse-Normandie - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (PSL - PSL Research University, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries.
    Keywords: Bayesian Estimation,DSGE Two-Country Model,Macroprudential policy,Euro Area,Financial Accelerator
    Date: 2016–05–12
  11. By: FARAYIBI, Adesoji
    Abstract: This paper examined stress testing in the Nigerian banking sector from 2004-2014 using error correction mechanism (ECM) and Ordinary Least Square (OLS) methodologies. The study adopted the bottom-up approach to stress management. Evidence from the analysis showed that stress testing is important to building a strong and viable financial system in the country. Bank’s going concern depends on profitability, solvency and liquidity whereas banks performance index depends on the behaviours of macroeconomic variables. The study found that Nigerian banking system is susceptible to various risks both within and outside the country. They are also exposed to macroeconomic risks as their performance index is based on these variables. The study concluded that how banks respond to risks determines the going concern and the viability of the nation’s financial system. Thus, a thorough credit risk management framework championed by the major stakeholders involved in the credit disbursement was recommended.
    Keywords: Stress Testing, Banking Sector, Credit Risk, Bottom-up Approach, Performance Index
    JEL: G2 G21 G24
    Date: 2016–09–06
  12. By: Gary Gorton; Tyler Muir
    Abstract: In the face of the Lucas Critique, economic history can be used to evaluate policy. We use the experience of the U.S. National Banking Era to evaluate the most important bank regulation to emerge from the financial crisis, the Bank for International Settlement's liquidity coverage ratio (LCR) which requires that (net) short-term (uninsured) bank debt (e.g. repo) be backed one-for-one with U.S. Treasuries (or other high quality bonds). The rule is narrow banking. The experience of the U.S. National Banking Era, which also required that bank short-term debt be backed by Treasury debt one-for-one, suggests that the LCR is unlikely to reduce financial fragility and may increase it.
    JEL: E02 E51 G01 N1
    Date: 2016–09
  13. By: Gregor Bäurle; Rolf Scheufele
    Abstract: The global Great Recession has sparked renewed interest in the relationships between financial conditions and real activity. This paper considers the Swiss experience, studying the impact of credit market conditions and housing prices on real activity over the last three decades through the lens of a medium-scale structural Bayesian vector autoregressive model (BVAR). From a methodological point of view, the analysis is challenging for two reasons. First, we must cope with a large number of variables which leads to a high-dimensional parameter space in our model. Second, the identification of economically interpretable shocks is complicated by the interaction among many different relevant factors. As to the first challenge, we use Bayesian shrinkage techniques to make the estimation of a large number of parameters tractable. Specifically, we combine a Minnesota prior with information from training observations to form an informative prior for our parameter space. The second challenge, the identification of shocks, is overcome by combining zero and sign restrictions to narrow the plausible range of responses of observed variables to the shocks. Our empirical analysis indicates that while credit demand and, in particular, credit supply shocks explain a large fraction of housing price and credit fluctuation, they have a limited impact on real activity.
    Keywords: Credit supply and demand, housing prices, SVARs, Bayesian shrinkage
    JEL: C11 C32 E30 E44 E51 E52
    Date: 2016
  14. By: Li, Xianghong; Zhao, Xinlei
    Abstract: We use the October 2008 Countrywide legal settlement as a natural experiment to investigate how borrowers may change their payment behavior to be eligible for loan modifications. We find that the Countrywide modification program induces strategic default among both borrowers current in their loan payments and those already in payment delinquency before the settlement. By January 2009, modification-induced strategic default is about nine percentage points, on a base default rate of 30 percent, and such strategic behavior is more severe among riskier loans. These findings have implications on designs of loan modification programs that are different from the existing literature.
    Keywords: Loan modification, mortgage modification program, strategic default, Countrywide legal settlement
    JEL: G18 G21
    Date: 2016–08–31
  15. By: Subhanij, Tientip (Asian Development Bank Institute)
    Abstract: In Thailand, the government has long recognized the importance of small and medium-sized enterprises (SMEs) to the economy and has given a large amount of financial support to this sector. Still, SMEs are not able to catch up with larger enterprises and the constraints to SME financing remain the main topic of policy discussion today. Against this background, the important issue for Thailand may not be about the lack of financial assistance per se but about how to design an appropriate market-friendly business model and supporting scheme to help SMEs gain access to credit on a sustainable basis. Given the success of microfinance around the world, a large number of commercial banks have made a profitable business out of this sector. This paper explores various business models by commercial banks in microfinance and provides policy implications for Thailand. By making use of commercial banks' competitive advantage, Thailand can create a more market-friendly environment for SME financing. This will also ensure that lending to small-business clients is not a burden to the government and is self-sustaining in the long run.
    Keywords: SME; Thailand; bank; financing; microfinance; loans; credit; MFI; SFI; financial institution; commercial banking; financial access
    JEL: E50 G21
    Date: 2016–09–12
  16. By: Zeineb Affes (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Rania Hentati-Kaffel (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    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
    Date: 2016–03
  17. By: Charles Nolan; Plutarchos Sakellaris; John D. Tsoukalas
    Abstract: Following the recent global nancial crisis, there have been many sig- ni cant changes to nancial regulatory policies. These may have re- duced the likelihood and future cost of the next crisis. However, they have not addressed the central dilemma in nancial regulation which is that governments cannot commit not to bail out banks and other - nancial rms. We develop a simple model to re ect this dilemma, and argue that some form of penalty structure imposed on key decision- makers post-bailout is necessary to address it.
    Keywords: Financial Crisis, Bank bail-outs, Systemic risk, Macropru- dential policy
    JEL: E2 E3
    Date: 2016–06
  18. By: Carlos Garriga; Finn E. Kydland; Roman Šustek
    Abstract: Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable.
    JEL: E32 E52 G21 R21
    Date: 2016–09
  19. By: Holston, Kathryn; Laubach, Thomas; Williams, John C.
    Abstract: U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies – Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.
    Keywords: Kalman filter; Monetary policy rules; Natural rate of output; Trend growth
    JEL: C32 E43 E52 O40
    Date: 2016–08–19

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