nep-ban New Economics Papers
on Banking
Issue of 2016‒10‒09
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Is information diffusion a threat to market power for financial access? Insights from the African banking industry By Simplice Asongu; Enowbi Batuo; Jacinta Nwachukwu; Vanessa Tchamyou
  2. International Banking and Cross-Border Effects of Regulation : Lessons from the United States By Jose M. Berrospide; Ricardo Correa; Linda S. Goldberg; Friederike Niepmann
  3. Cross-border transmission of emergency liquidity By Kick, Thomas; Koetter, Michael; Storz, Manuela
  4. The Missed Opportunity and Challenge of Capital Regulation By Admati, Anat R.
  5. Dis-integrating credit markets: diversification, securitization, and lending in a recovery By Chavaz, Matthieu
  6. Do bank bailouts reduce or increase systemic risk? the effects of TARP on financial system stability By Roman, Raluca; Berger, Allen N.; Sedunov, John
  7. Essential Information Sharing Thresholds for Reducing Market Power in Financial Access: A Study of the African Banking Industry By Simplice Asongu; Sara Le Roux; Vanessa S. Tchamyou
  8. Monetary Policy and Macroprudential Policy: Rivals or Teammates? By Simona Malovana; Jan Frait
  9. The Spectral Stress VaR (SSVaR) By Dominique Guegan; Bertrand K. Hassani; Kehan Li
  10. The Bank Capital Regulation (BCR) Model By Hyejin Cho
  11. Moral Hazard and the Optimality of Debt By Hebert, Benjamin
  12. Coupling direction of the European Banking and Insurance sectors using inter-system recurrence networks By Peter Martey Addo
  13. Risk or Regulatory Capital? Bringing distributions back in the foreground By Dominique Guegan; Bertrand Hassani
  14. Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment By Guillaume Arnould; Salim Dehmej
  15. The Role of Rating and Loan Characteristics in Online Microfunding Behaviors By Gaurav Paruthi; Enrique Frias-Martinez; Vanessa Frias-Martinez
  16. Welcoming Remarks. Given at the Fourth Annual Community Banking in the 21st Century Research and Policy Conference, The Federal Reserve System and the Conference of State Bank Supervisors (CSBS), St. Louis, Mo. September 28, 2016. By Bullard, James B.
  17. A Comparison of Three Models to Predict Liquidity Flows between Banks Based on Daily Payments Transactions By Triepels, Ron; Daniels, Hennie
  18. Optimal Bailout of Systemic Banks By Charles Nolan; Plutarchos Sakellaris; John D. Tsoukalas
  19. Raising capital when the going gets tough: U.S. bank equity issuance from 2001 to 2014 By Sengupta, Rajdeep; Black, Lamont K.; Floros , Ioannis

  1. By: Simplice Asongu (Yaoundé/Cameroun); Enowbi Batuo (University of Westminster, UK.); Jacinta Nwachukwu (Coventry University, UK.); Vanessa Tchamyou (Yaoundé, Cameroon)
    Abstract: This study assesses how information diffusion dampens the adverse effect of market power on the price and quantity of loans provided by a panel of 162 banks from 39 African countries for the period 2001-2011. The empirical evidence is based on three endogenity-robust estimation techniques, namely: (i) Two Stage Least Squares (2SLS), (ii) Generalised Method of Moments (GMM) and (iii) Instrumental Variable Quantile Regressions (QR). Three key results emerge. First, from the GMM results, a mobile phone penetration rate of 54.29, rising to 57 per 100 people are predicted to neutralise the adverse effect of market power on the average loan price and quantity respectively. Second, from the QR, mobile phone penetration rates of 56.20, 52.04 and 42.76 per 100 people is needed to nullify the negative effect of market power on loan quantity at the 0.10th, 0.25th and 0.90th quintiles respectively. Third, a considerably lower internet penetration rate of 9.49 per 100 people is required to counteract the negative impact of market power on loan quantity at the 0.90th quintile.
    Keywords: Financial access; Market power; Information asymmetry; ICT; Africa
    JEL: G20 G29 L96 O40 O55
    Date: 2016–10
  2. By: Jose M. Berrospide; Ricardo Correa; Linda S. 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, 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.
    Keywords: Macroprudential policies ; International banking ; Bank credit ; Spillovers
    JEL: F42 F44 G15 G21
    Date: 2016–09–06
  3. By: Kick, Thomas; Koetter, Michael; Storz, Manuela
    Abstract: We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures of international banks, we can identify banks in Germany with access to U.S. facilities via internal capital markets. Using proprietary interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of German banks with access. Short-term loan rates charged to German corporates also decline, albeit with lags between two and four months. These spillover effects of U.S. monetary policy are confined to short-term rates.
    Keywords: monetary policy transmission,emergency liquidity,internal capital markets,interest rates
    JEL: E52 E58 F23 F38 G01 G21
    Date: 2016
  4. By: Admati, Anat R. (Stanford University)
    Abstract: Capital regulation is critical to address distortions and externalities from intense conflicts of interest in banking and from the failure of markets to counter incentives for recklessness. The approaches to capital regulation in Basel III and related proposals are based on flawed analyses of the relevant tradeoffs. The flaws in the regulations include dangerously low equity levels, complex and problematic system of risk weights that exacerbates systemic risk and adds distortions, and unnecessary reliance on poor equity substitutes. The underlying problem is a breakdown of governance and lack of accountability to the public throughout the system, including policymakers and economists.
    JEL: G21 G28 G32 G38 H81 K23
    Date: 2015–12
  5. By: Chavaz, Matthieu (Bank of England)
    Abstract: Using exogenous variation in exposure to hurricanes, this article explores how differently diversified US banks lend during the protracted recovery from a major downturn. Compared to diversified banks, local banks (i) originate a higher share of new mortgage and small business loans in affected areas, but (ii) sell a higher share of the new mortgages into the secondary market. These results suggest a pattern of specialization, whereby loans in affected areas are increasingly originated by banks with special abilities or incentives to seize opportunities in a distressed market, but increasingly transferred to agents which can better support the associated risk.
    Keywords: Bank lending; recovery; diversification; securitization; mortgage lending; Home Mortgage Disclosure Act (HMDA).
    JEL: G18 G21
    Date: 2016–09–23
  6. By: Roman, Raluca (Federal Reserve Bank of Kansas City); Berger, Allen N.; Sedunov, John
    Abstract: Theory suggests that bank bailouts may either reduce or increase systemic risk. This paper is the first to address this issue empirically, analyzing the U.S. Troubled Assets Relief Program (TARP). Difference-in-difference analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for larger and safer banks located in better local economies. This occurred primarily through a capital cushion channel. {{p}} Results are robust to additional tests, including accounting for potential endogeneity and selection bias. Findings yield policy conclusions about the wisdom of bailouts, which banks might be the best targets for future bailouts, and the form these bailouts might take.
    Keywords: Bailouts; Banks; Financial crises; Systemic risk; Troubled Assets Relief Program (TARP)
    JEL: G18 G21 G28
    Date: 2016–10–04
  7. By: Simplice Asongu (Yaoundé/Cameroun); Sara Le Roux (Oxford Brookes University, Oxford); Vanessa S. Tchamyou (Yaoundé/Cameroon)
    Abstract: This study investigates the role of information sharing offices (public credit registries and private credit bureaus) in reducing market power for financial access in the African banking industry. The empirical evidence is based on a panel of 162 banks from 42 countries for the period 2001-2011. Three simultaneity-robust empirical strategies are employed, namely: (i) Two Stage Least Squares with Fixed Effects in order to account for simultaneity and the observed heterogeneity; (ii) Generalised Method of Moments (GMM) to control for simultaneity and time-invariant omitted variables and (iii) Instrumental Variable Quantile regressions to account for simultaneity and initial levels of financial access. In order to ensure that information sharing offices influence market power for loan price (quantity) to decrease (increase), public credit registries should have between 3.156% and 3.3% coverage, while private credit bureaus should have between 1.443 and 18.4% coverage. The established thresholds are cut-off points at which information sharing offices completely neutralise the negative effect of market power on financial access. The thresholds are contingent on the dimension (loan price versus loan quantity) and distribution (conditional mean versus conditional distribution) of financial access.
    Keywords: Financial access; Market power; Information sharing
    JEL: G20 G29 L96 O40 O55
    Date: 2016–09
  8. By: Simona Malovana; Jan Frait
    Abstract: This paper sheds some light on situations in which monetary and macroprudential policies may interact (and potentially get into conflict) and contributes to the discussion about the coordination of those policies. Using data for the Czech Republic and five euro area countries we show that monetary tightening has a negative impact on the credit-to-GDP ratio and the non-risk-weighted bank capital ratio (i.e. a positive impact on bank leverage), while these effects have strengthened considerably since mid-2011. This supports the view that accommodative monetary policy contributes to a build-up of financial vulnerabilities, i.e. it boosts the credit cycle. On the other hand, the effect of the higher bank capital ratio is associated with some degree of uncertainty. For these and other reasons, coordination of the two policies is necessary to avoid an undesirable policy mix preventing effective achievement of the main objectives in the two policy areas.
    Keywords: Bayesian estimation, financial stability, macroprudential policy, monetary policy, time-varying panel VAR model
    JEL: E52 E58 E61 G12 G18
    Date: 2016–09
  9. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Bertrand K. Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Kehan Li (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: One of the key lessons of the crisis which began in 2007 has been the need to strengthen the risk coverage of the capital framework. In response, the Basel Committee in July 2009 completed a number of critical reforms to the Basel II framework which will raise capital requirements for the trading book and complex securitisation exposures, a major source of losses for many international active banks. One of the reforms is to introduce a stressed value-at-risk (VaR) capital requirement based on a continuous 12-month period of significant financial stress (Basel III (2011) [1]. However the Basel framework does not specify a model to calculate the stressed VaR and leaves it up to the banks to develop an appropriate internal model to capture material risks they face. Consequently we propose a forward stress risk measure “spectral stress VaR” (SSVaR) as an implementation model of stressed VaR, by exploiting the asymptotic normality property of the distribution of estimator of VaR p. In particular to allow SSVaR incorporating the tail structure information we perform the spectral analysis to build it. Using a data set composed of operational risk factors we fit a panel of distributions to construct the SSVaR in order to stress it. Additionally we show how the SSVaR can be an indicator regarding the inner model robustness for the bank.
    Keywords: risk measure,stress,value at risk,asymptotic theory,distribution,spectral analysis,regulation
    Date: 2015–06
  10. By: Hyejin Cho (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The motivation of this article is to induce the bank capital management solution for banks and regulation bodies on commercial banks. The goal of the paper is intended to mitigate the risk of a banking area and also provide the right incentive for banks to support the real economy.
    Keywords: demand deposit,On-balance-sheet risks and off-balance-sheet risks,portfolio composition,minimum equity capital regulation
    Date: 2015–02
  11. By: Hebert, Benjamin (Harvard University)
    Abstract: Why are debt securities so common? I show that debt securities minimize the welfare losses from the moral hazards of excessive risk-taking and lax effort. For any security design, the variance of the security payoff is a statistic that summarizes these welfare losses. Debt securities have the least variance, among all limited liability securities with the same expected value. The optimality of debt is exact in my benchmark model, and holds approximately in a wide range of models. I study both static and dynamic security design problems, and show that these two types of problems are equivalent. The models I develop are motivated by moral hazard in mortgage lending, where securitization may have induced lax screening of potential borrowers and lending to excessively risky borrowers. My results also apply to corporate finance and other principal-agent problems.
    Date: 2015–05
  12. By: Peter Martey Addo (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Modern financial systems exhibit a high degree of interdependence making it difficult in predicting. This has raise concerns on the correct identification of coupling direction in financial sectors of the economy. This study explores a “two-way” risk connection between the European banking and insurance sector based on geometrical closeness of observations. Specifically, the study looks at the inter-system recurrence networks in tracing dynamical transitions and detecting coupling direction between these sectors. The overall results shows that the banking sector is central in risk transmission compared to the insurance sector. A comprehensive discussion of the feasibility and relevance of the approach in studying systemic risk is provided.
    Abstract: Les systèmes financiers modernes présentent un degré élevé d'interdépendance rendant difficile la prédiction. Cela a soulevé des questions concernant l'identification correcte d'une direction de couplage dans les secteurs financiers de l'économie. Cette étude explore "en deux sens" la connexion des risques entre le système bancaire européen et le secteur de l'assurance, basée sur la proximité géométrique des observations. Plus précisément, l'étude se penche sur les réseaux de récurrence inter-système en traçant des transitions dynamiques et en détectant la direction de couplage entre ces secteurs. Les résultats globaux montrent que le secteur bancaire est un élément central dans la transmission de risque par rapport au secteur de l'assurance. Une discussion complète de la faisabilité et la pertinence de l'approche dans l'étude du risque systémique est fournie.
    Keywords: financial institutions,recurrence networks,systemic risk,recurrence plots,parcelles de récidive,réseaux de récurrence,risque systémique,institution financières
    Date: 2015–06
  13. 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 discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper make some recommendations to the supervisor and proposes alternative procedures to measure the risks.
    Keywords: risk measures,sub-additivity,level of confidence,extreme value distributions,financial regulation
    Date: 2015–05
  14. By: Guillaume Arnould (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LABEX Refi - ESCP Europe); Salim Dehmej (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LABEX Refi - ESCP Europe)
    Abstract: The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements.
    Keywords: Basel III,Financial stability,stress tests,banking,financial regulation
    Date: 2015–07
  15. By: Gaurav Paruthi (University of Michigan); Enrique Frias-Martinez (Telefonica Research); Vanessa Frias-Martinez (University of Maryland)
    Abstract: We propose an in-depth study of lending behaviors in Kiva using a mix of quantitative and large-scale data mining techniques. Kiva is a non-profit organization that offers an online platform to connect lenders with borrowers. Their site,, allows citizens to microlend small amounts of money to entrepreneurs (borrowers) from different countries. The borrowers are always affiliated with a Field Partner (FP) which can be a microfinance institution (MFI) or other type of local organization that has partnered with Kiva. Field partners give loans to selected businesses based on their local knowledge regarding the country, the business sector including agriculture, health or manufacture among others, and the borrower.Our objective is to understand the relationship between lending activity and various features offered by the online platform. Specifically, we focus on two research questions: (i) the role that MFI ratings play in driving lending activity and (ii) the role that various loan features have in the lending behavior. The first question analyzes whether there exists a relationship between the MFI ratings - that lenders can explore online - and their lending volumes. The second research question attempts to understand if certain loan features - available online at Kiva - such as the type of small business, the gender of the borrower, or the loan's country information might affect the way lenders lend.
    Date: 2016–09
  16. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: President James Bullard welcomed community bankers, regulators and researchers to the fourth annual Community Banking in the 21st Century research and policy conference, echoing what he's heard from bankers across the Eighth Federal Reserve District—that a strong banking system supports strong communities, leading to a strong economy. He lauded the achievements of the annual conference, which includes not only presentations of academic research on community banking but also a presentation of results from a national survey of community banks. The conference is co-sponsored by the Federal Reserve System and the Conference of State Bank Supervisors.
    Date: 2016–09–28
  17. By: Triepels, Ron (Tilburg University, Center For Economic Research); Daniels, Hennie (Tilburg University, Center For Economic Research)
    Abstract: The analysis of payment data has become an important task for operators and overseers of financial market infrastructures. Payment data provide an accurate description of how banks manage their liquidity over time. In this paper we compare three models to predict future liquidity flows from payment data: 1) a moving average model, 2) a linear dynamic system that links the inflow of banks with their outflow, and 3) a similar dynamic system but with a constraint that guarantees the conservation of liquidity. The error graphs of one-step-ahead predictions on real-world payment data reveal that the moving average model performs best, followed by the dynamic system with constraint, and finally the dynamic system without constraint.
    Keywords: large-value payment systems; predictive modeling; dynamic system; time-series analysis
    JEL: C32 C53 C61 E42 E44 E47
    Date: 2016
  18. By: Charles Nolan (University of Glasgow); Plutarchos Sakellaris (Athens University of Economics and Business); John D. Tsoukalas (University of Glasgow)
    Abstract: Following the recent global nancial crisis, there have been many significant changes to financial regulatory policies. These may have reduced the likelihood and future cost of the next crisis. However, they have not addressed the central dilemma in financial regulation which is that governments cannot commit not to bail out banks and other financial rms. We develop a simple model to reflect 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, Macroprudential policy
    JEL: E2 E3
    Date: 2016–09
  19. By: Sengupta, Rajdeep (Federal Reserve Bank of Kansas City); Black, Lamont K.; Floros , Ioannis
    Abstract: The authors studied bank equity issuance during 2001–14 by publicly traded U.S. banks through seasoned equity offerings (SEOs), private investment in public equity (PIPEs), and the Troubled Asset Relief Program (TARP). Results show that private investors were an active and important source of bank recapitalization in the United States as issuance through SEOs and PIPEs peaked in the recent crisis.
    Keywords: Bank equity; Financial crisis; Troubled Asset Relief Program (TARP); Equity issuance; Commercial banks
    JEL: G21 G28 G32
    Date: 2016–06–01

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