nep-ban New Economics Papers
on Banking
Issue of 2016‒09‒25
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Small Business Lending: Challenges and Opportunities for Community Banks By Jagtiani, Julapa; Lemieux, Catharine
  2. Analyzing Bank Efficiency: Are "Too-Big-to-Fail" Banks Efficient? By Inanoglu, Hulusi; Jacobs, Michael, Jr.; Liu, Junrong; Sickles, Robin
  3. Loss Sequencing in Banking Networks: Threatened Banks as Strategic Dominoes By Tran, Ngoc-Khanh; Vuong, Thao; Zeckhauser, Richard
  4. International Banking and Cross-border Effects of Regulation: Lessons from the United States By Jose Berrospide; Ricardo Correa; Linda Goldberg; Friederike Niepmann
  5. Optimal Credit Guarantee Ratio for Asia By Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad
  6. Banks Interconnectivity and Leverage By Barattieri, Alessandro; Moretti, Laura; Quadrini, Vincenzo
  7. Banks' Internal Capital Markets and Deposit Rates By Ben-David, Itzhak; Palvia, Ajay A.; Spatt, Chester S.
  8. The Structure of Banker's Pay By Bennett, Benjamin; Gopalan, Radhakrishnan; Thakor, Anjan V.
  9. More Accurate Measurement for Enhanced Controls: VaR vs ES? By Dominique Guegan; Bertrand Hassani
  10. Non-rating revenue and conflicts of interest By Baghai, Ramin; Becker, Bo
  11. A DGSE Model to Assess the Post-Crisis Regulation of Universal Banks. By O. de Bandt; M. Chahad
  12. Predicting US banks bankruptcy: logit versus Canonical Discriminant analysis By Zeineb Affes; Rania Hentati-Kaffel
  13. How Regulatory Capital Requirement Affect Banks' Productivity: An Application to Emerging Economies' Banks By Duygun, Meryem; Shaban, Mohamed; Sickles, Robin C.; Weyman-Jones, Thomas
  14. The Banking View of Bond Risk Premia By David Sraer; Valentin Haddad
  15. International Banking and Cross-Border Effects of Regulation: Lessons from the Netherlands By Jon Frost; Jakob de Haan and Neeltje van Horen; Neeltje van Horen
  16. German Landesbanks in the Post-guarantee Reality By Senkarcin, Matej
  17. Information sharing, credit booms, and financial stability By Samuel GUÉRINEAU; Florian LÉON
  18. Bailouts, Moral Hazard, and Banks’ Home Bias for Sovereign Debt By Ariel Zetlin-Jones; Gaetano Gaballo

  1. By: Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Lemieux, Catharine (Federal Reserve Bank of Chicago)
    Abstract: The recent decline in small business lending (SBL) among U.S. community banks has spurred a growing debate about the future role of small banks in providing credit to U.S. small businesses. This paper adds to that discussion in three key ways. First, our research builds on existing evidence that suggests that the decline in SBL by community banks is a trend that began at least a decade before the financial crisis. Larger banks and nonbank institutions have been playing an increasing role in SBL. Second, our work shows that in the years preceding the crisis, small businesses increasingly turned to mortgage credit--most notably, commercial mortgage credit--to fund their operations, exposing them to the property crisis that underpinned the Great Recession. Finally, our work illustrates how community banks face an increasingly dynamic competitive landscape, including the entrance of deep-pocketed alternative nonbank lenders that are using technology to find borrowers and underwrite loans, often using unconventional lending practices. Although these lenders may pose a competitive threat to community banks, we explore emerging examples of partnerships and alliances among community banks and nonbank lenders.
    JEL: G21 G23
    Date: 2016–03
  2. By: Inanoglu, Hulusi (Federal Reserve Board); Jacobs, Michael, Jr. (Pricewaterhouse Coopers LLC); Liu, Junrong (IFE Group); Sickles, Robin (Rice University)
    Abstract: Abstract This paper analyzes the provision of banking services--the multioutput/ multi-input technology that is utilized by banks in their role in the provision of banking services, including both balance-sheet financial intermediation businesses and off-balance-sheet activities. We focus on the largest financial institutions in the U. S. banking industry. We examine the extent to which scale efficiencies exist in this subset of banks in part to address the issue of whether or not there are economic justifications for the notion that these banks may be "too-big-to-fail." Our empirical study is based on a newly developed set data based on Call Reports from the FDIC for the period 1994-2013. We contribute to the post-financial crisis "too-big-to-fail" debate concerning whether or not governments should bail-out large institutions under any circumstances, risking moral hazard, competitive imbalances and systemic risk. Restrictions on the size and scope of banks may mitigate these problems, but may do so at the cost of reducing banks' scale efficiencies and international competitiveness. Our study also utilizes a suite of econometric models and assesses the empirical results by looking at consensus among the findings from our various econometric treatments and models in order to provide a robust set of inferences on large scale banking performance and the extent to which scale economies have been exhausted by these large financial institutions. The analyses point to a number of conclusions. First, despite rapid growth over the last 20 years, the largest surviving banks in the U.S. have decreased their level of efficiency. Second, we find no measurable returns to scale across our host of models and econometric treatments and in fact find negative correlation between bank size and the efficiency with which the banks take advantage of their scale of operations. In addition to the broad policy implications of our analysis our paper also provides an array of econometric techniques, findings from which can be combined to provide a set of robust consensus-based conclusions that can be a valuable analytical tool for supervisors and others involved in the regulatory oversight of financial institutions.
    JEL: C14 C21 C23 G28
    Date: 2015–03
  3. By: Tran, Ngoc-Khanh (Washington University in St Louis); Vuong, Thao (Washington University in St Louis); Zeckhauser, Richard (Harvard U)
    Abstract: We demonstrate in a stylized banking network that a single large loss has the potential to leave markedly different impacts on the financial system than does a sequence of moderate losses of the same cumulative magnitude. Loss sequencing matters because banks make strategic bailout decisions based on their myopic assessment of losses, yet these decisions are highly consequential to subsequent decisions and eventual losses at other banks in the network. In particular, the network mechanism enables banks to choose to bail out their creditors after every moderate loss incurred in a sequence, while walking away from the creditors should they experience a single large loss. Government policy can force threatened banks to liquidate or sell themselves or, at the opposite pole, can bail out some such banks or overlook their threatened status. The former policy would concentrate a string of losses into a single large event; the latter could prevent a massive single loss at the expense of multiple subsequent smaller losses. As this analysis shows, either policy could prove optimal depending on identifiable circumstances. These findings have important implications for on-going policy debates that emanated from the 2008 meltdown.
    JEL: G01 G21 G28 G33
    Date: 2016–08
  4. By: Jose Berrospide; Ricardo Correa; Linda Goldberg; Friederike Niepmann
    Abstract: Domestic prudential regulation can have unintended effects across borders and may be less effective in an environment where banks operate globally. Using U.S. micro-banking data for the first quarter of 2000 through the third quarter of 2013, this study shows that some regulatory changes indeed spill over. First, a foreign country’s tightening of limits on loan-to-value ratios and local currency reserve requirements increase lending growth in the United States through the U.S. branches and subsidiaries of foreign banks. Second, a foreign tightening of capital requirements shifts lending by U.S. global banks away from the country where the tightening occurs to the United States and to other countries. Third, tighter U.S. capital regulation reduces lending by large U.S. global banks to foreign residents.
    JEL: F3 F4 G15 G21
    Date: 2016–09
  5. By: Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute)
    Abstract: Difficulty in accessing finance is one of the critical factors constraining the development of small and medium-sized enterprises (SMEs) in Asia. Owing to their significance to national economies, it is important to find ways to provide SMEs with stable finance. One efficient way to promote SME financing is through credit guarantee schemes, where the government guarantees a portion (ratio) of a loan provided by a bank to an SME. This research provides a theoretical model and an empirical analysis of factors that determine optimal credit guarantee ratio. The ratio should be able to fulfill the government’s goal of minimizing the bank’s nonperforming loans to SMEs, and at the same time fulfill the government policies for supporting SMEs. Our results show that three categories of factors can determine the optimal credit guarantee ratio: (i) government policy, (ii) macroeconomic conditions, and (iii) banking behavior. It is crucial for governments to set the optimal credit guarantee ratio based on macroeconomic conditions and vary it for each bank or each group of banks based on their soundness, in order to avoid moral hazard and ensure the stability of lending to SMEs.
    Keywords: small and medium-sized enterprises; SME financing; credit guarantee scheme; government guarantee; nonperforming loan; NPLs; macroeconomics; financial soundness; moral hazard; loans
    JEL: G21 H81
    Date: 2016–09–20
  6. By: Barattieri, Alessandro; Moretti, Laura; Quadrini, Vincenzo
    Abstract: In the period that preceded the 2008 crisis, USfi nancial intermediaries have become more leveraged (measured as the ratio of assets over equity) and interconnected (measured as the share of liabilities held by other financial intermediaries). This upward trend in leverage and interconnectivity sharply reversed after the crisis. To understand the factors that could have caused this dynamic, we develop a model where banks make risky investments in the non-financial sector and sell part of their investments to other banks (diversifi cation). The model predicts a positive correlation between leverage and interconnectivity which we explore empirically using balance sheet data for over 14,000 financial intermediaries in 32 OECD countries. We enrich the theoretical model by allowing for Bayesian learning about the likelihood of a bank crisis (aggregate risk) and show that the model can capture the dynamics of leverage and interconnectivity observed in the data.
    Keywords: Interconnectivity; leverage; risk
    JEL: E21 G11 G21
    Date: 2016–09
  7. By: Ben-David, Itzhak (OH State University); Palvia, Ajay A. (US of American Office of the Comptroller of the Currency); Spatt, Chester S. (Carnegie Mellon University)
    Abstract: A common view is that deposit rates are determined primarily by supply: depositors require higher deposit rates from risky banks, thereby creating market discipline. An alternative perspective is that market discipline is limited (e.g., due to deposit insurance and/or enhanced capital regulation) and that internal demand for funding by banks determines rates. Using branch-level deposit rate data, we find little evidence for market discipline as rates are similar across bank capitalization levels. In contrast, banks' loan growth has a causal effect on deposit rates: e.g., branches' deposit rates are correlated with loan growth in other states in which their bank has some presence, suggesting internal capital markets help reallocate the bank's funding.
    JEL: G21
    Date: 2015–08
  8. By: Bennett, Benjamin (Ohio State University); Gopalan, Radhakrishnan (Washington University in Saint Louis); Thakor, Anjan V. (Washington University in Saint Louis and European Corporate Governance Institute)
    Abstract: While executive compensation is often blamed for the excessive risk taking by banks, little is known about the operating performance incentives used in the finance industry both prior to and subsequent to the recent crisis. We provide a comprehensive analysis of incentive design -- the link of compensation to operating performance -- in financial firms and compare incentive structures in financial firms to those in non-financial firms. Top executives in financial firms are paid less than their counterparts in non-financial firms of similar size and performance. Banks (and insurance firms) link a larger fraction of top executive pay to short-term accounting metrics like ROE and EPS and a smaller fraction to (long-term) stock price. Performance targets for bankers are not related to the risk of the bank, and ROE targets are not appropriately adjusted for leverage. Consequently, the design of executive compensation in banking may encourage both high leverage and risk-taking, and our evidence provides a potential explanation for the strong positive correlation that we document between the extent of short-term pay for bank CEOs and the risk of the bank before the financial crisis.
    JEL: F34 G32 G33 G38 K42
    Date: 2016–08
  9. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper analyses how risks are measured in financial institutions, for instance Market, Credit, Operational, etc with respect to the choice of the risk measures, the choice of the distributions used to model them and the level of confidence selected. We discuss and illustrate the characteristics, the paradoxes and the issues observed comparing the Value-at-Risk and the Expected Shortfall in practice. This paper is built as a differential diagnosis and aims at discussing the reliability of the risk measures as long as making some recommendations.
    Keywords: Risk measures,Marginal distributions,Level of confidence,Capital requirement
    Date: 2016–02
  10. By: Baghai, Ramin; Becker, Bo
    Abstract: Rating agencies produce ratings used by investors, but obtain most of their revenue from issuers, leading to a conflict of interest. We employ a detailed panel data set on the use of non-rating services, and the associated payments, in India, to test to what extent this conflict affects credit ratings. Rating agencies rate issuers that hire them for non-rating services 0.3 notches higher (than agencies that are not hired for such services). Also, within rating categories, default rates are higher for firms that have paid for non-rating services. Both these effects are larger the larger the amount paid for non-rating services is. These results suggest that issuers which hire agencies for consulting services receive higher ratings despite not having lower credit risk.
    Keywords: agency problems; Credit ratings; issuer-pays
    JEL: G20 G24 G28
    Date: 2016–09
  11. By: O. de Bandt; M. Chahad
    Abstract: The paper assesses the overall consistency and impact on both the financial sector and the real economy, of the numerous banking regulations that have been introduced in the aftermath of the Great Financial Crisis. For this purpose, we develop, within a multi-period asset framework, a large scale DSGE model with a real and a financial sector. Universal banks grant credit but invest also in corporate and sovereign bonds. Small companies are financed through bank loans only, while large corporate can also issue bonds. The main findings of the paper are that: (i) the implementation of liquidity regulation which affects private consumption dynamics has a less persistent effect than solvency regulation that affects loan distribution as well as investment; (ii) the model assesses to what extent the Liquidity Coverage Ratio may induce banks to substitute sovereign bonds to business loans; (iii) liquidity and solvency regulations appear to be complementary; (iv) while the implementation of the LCR has qualitatively similar results as the NSFR, even if, quantitatively, the latter has a more mMarrakech_14oderate effect.
    Keywords: Basel III, Solvency ratio, Liquidity ratios, Multi-period assets, Firms' heterogeneity.
    JEL: D58 E3 E44 G21
    Date: 2016
  12. 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: Using a large panel of US banks over the period 2008-2013, this paper proposes an early-warning framework to identify bank leading to bankruptcy. We conduct a comparative analysis based on both Canonical Discriminant Analysis and Logit models to examine and to determine the most accurate of these models. Moreover, we analyze and improve suitability of models by comparing different optimal cut-off score (ROC curve vs theoretical value). The main conclusions are: i) Results vary with cut-off value of score, ii) the logistic regression using 0.5 as critical cut-off value outperforms DA model with an average of correct classification equal to 96.22%. However, it produces the highest error type 1 rate 42.67%, iii) ROC curve validation improves the quality of the model by minimizing the error of misclassification of bankrupt banks: only 4.42% in average and exhibiting 0% in both 2012 and 2013. Also, it emphasizes better prediction of failure of banks because it delivers in mean the highest error type II 8.43%.
    Keywords: Bankruptcy prediction,Canonical Discriminant Analysis,Logistic regression,CAMELS,ROC curve,Early-warning system
    Date: 2016–02
  13. By: Duygun, Meryem (University of Hull); Shaban, Mohamed (University of Leicester); Sickles, Robin C. (Rice University); Weyman-Jones, Thomas (Loughborough University)
    Abstract: This paper presents a novel approach to measure efficiency and productivity decomposition in the banking systems of emerging economies with a special focus on the role of equity capital. We model the requirement to hold levels of a fixed input, i.e. equity, above the long run equilibrium level or, alternatively, to achieve a target equity-asset ratio. To capture the effect of this under-leveraging, we allow the banking system to operate in an uneconomic region of the technology. Productivity decomposition is developed to include exogenous factors such as policy constraints. We use a panel data set of banks in emerging economies during the financial upheaval period of 2005-2008 to analyse these ideas. Results indicate the importance of the capital constraint in the decomposition of productivity.
    JEL: C23 D24 G21
    Date: 2015–06
  14. By: David Sraer (UC Berkeley); Valentin Haddad (Princeton University)
    Abstract: Banks’ exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with a bank-centric view of the market for interest rate risk. Banks’ activities — accepting deposits and making loans — naturally exposes their balance sheets to changes in interest rates. In equilibrium, the bond risk premium compensates banks for bearing these fluctuations: for instance, when consumers demand for fixed rate mortgages increases, banks have to scale up their exposure to interest rate risk and are compensated by an increase in bond risk premium. A key insight is that the net exposure of banks, rather than quantities of particular types of loans or deposits, reveals the risk premium.
    Date: 2016
  15. By: Jon Frost; Jakob de Haan and Neeltje van Horen; Neeltje van Horen
    Abstract: The large and concentrated international activities of Dutch banks make the Netherlands particularly relevant for assessing the outward transmission of prudential policies. Analysis of the quarterly international claims of 25 Dutch banks in 63 countries over 2000-2013 indicates that Dutch banks increase lending in countries that tighten prudential regulation. This result is driven particularly by larger banks; banks with higher deposit ratios; by lending to advanced economies; and by lending in the post-crisis period. The result is not significant in most other sub-samples. These findings suggest that banks react to changes in local prudential regulation via foreign lending - which could come either from regulatory arbitrage, or from signaling effects of prudential policy on country risk. This contributes to the case for the reciprocation of macroprudential policy.
    Keywords: macroprudential policies; international banking; bank credit; spillovers
    JEL: F42 F44 G15 G21
    Date: 2016–09
  16. By: Senkarcin, Matej (University of Pennsylvania)
    Abstract: This paper investigates the topic of guaranteed debt of German Landesbanks during the phase-out of state guarantees in the last two decades. I use evidence from literature, as well as interviews with members of the management of Landesbanks and the European Central Bank to trace the historical origins of the guarantees, their benefits, and the reason for their cancellation. The core of the first part of the work lies in the analysis of effects of the transition period between 2001 and 2005, during which Landesbanks continued to issue guaranteed debt. I claim that a failed policy design has led Landesbanks to a hazardous strategy of taking on excessive leverage without implementing sustainable business plan changes. The excess funds raised during the transition period led Landesbanks to finance M&A expansion, venture into investing in mortgage derivatives, and induced risky lending behavior. Therefore, the transition period was the root of the vulnerability of Landesbanks to the global financial crisis. Furthermore, an analysis of the bailout packages for Landesbanks during the 2008-2009 financial crisis demonstrates that the lifeline from the state owners to Landesbanks did not end with the end of the transition period in 2005. In my thesis, I suggest an alternative design of the transition period. According to this design, the volume of unsecured liabilities maturing in each year of the transition period would limit the issuance of state-guaranteed debt. Such a constraint would prevent Landesbanks from excessive issuance of guaranteed debt and avert some of the issues related to irresponsible deployment of excess funds. In the second part of the thesis, I use historical bond prices to construct yield spreads of Landesbanks' unsecured debt above German government bonds and observe these spreads as they change over time. The analysis reveals that investors have required higher yield on Landesbank debt after the cancellation of guarantees, but spreads have remained lower for the bonds of Landesbanks with large state ownership relative to the bonds of Landesbanks without state owners. Investors seem to ascribe value to the implicit support of a state owner, even once explicit guarantees are not in place.
    Date: 2015–12
  17. By: Samuel GUÉRINEAU (Université d'Auvergne); Florian LÉON (Université du Luxembourg - CREA)
    Abstract: This paper analyzes the impact of credit information sharing on financial stability, drawing special attention to its interactions with credit booms. A probit estimation of financial vulnerability episodes – identified by jumps of the ratio of non-performing loans to total loans, is run for a sample of 159 countries dividing in two sub-samples according to their level of development: 80 advanced or emerging economies and 79 less developed countries. The results show that: i) credit information sharing reduces financial fragility for both groups of countries; ii) for less developed countries, the main effect is the direct effect (reduction of NPL ratio once credit boom is controlled), suggesting a portfolio quality effect; iii) for advanced and emerging countries, credit information sharing (IS) also mitigates the detrimental impact of credit boom on financial fragility, iv) the depth of IS has an negative impact on the likelihood of credit booms (but not the coverage of IS).Keywords: Information sharing, financial stability, credit booms
    Keywords: Information sharing, Financial Stability, credit booms
    JEL: G21 G28
    Date: 2016–07
  18. By: Ariel Zetlin-Jones (Carnegie Mellon University); Gaetano Gaballo (Banque de France)
    Abstract: We show that an increase in banks’ holdings of domestic sovereign debt decreases the ability of domestic Sovereigns to successfully enact bailouts. When Sovereigns finance bailouts with newly issued debt and the price of sovereign debt is sensitive to unanticipated debt issues, then bailouts dilute the value of banks’ sovereign debt holdings rendering bailouts less effective. We explore this feedback mechanism in a model of financial intermediation in which banks are subject to managerial moral hazard and ex ante optimality requires lenders to commit to ex post inefficient bank liquidations. A benevolent Sovereign may desire to enact bailouts to prevent such liquidations thereby neutralizing lenders’ commitment. In this context, home bias for sovereign debt may arise as a mechanism to deter bailouts and restore lenders’ commitment.
    Date: 2016

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