nep-ban New Economics Papers
on Banking
Issue of 2016‒12‒04
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Regulation of Microfinance Institutions in Developing countries: an incentives theory approach By Mathurin Founanou; Zaka Ratsimalahelo
  2. Business complexity and risk management: evidence from operational risk events in U. S. bank holding companies By Chernobai, Anna; Ozdagli, Ali K.; Wang, Jianlin
  3. Multiple Banking Relationships: Do SMEs Mistrust Their Banks? By Catherine Refait-Alexandre; Stéphanie Serve
  4. Bank efficiency and regional growth in Europe: new evidence from micro-data By Belke, Ansgar; Haskamp, Ulrich; Setzer, Ralph
  5. Economics of Regulation: Credit Rationing and Excess Liquidity By Hye-Jin Cho
  6. Collateral, Central Bank Repos, and Systemic Arbitrage By Fecht, Falko; Nyborg, Kjell G; Rocholl, Jorg; Woschitz, Jiri
  7. Public Development Banks and Credit Market Imperfections By Xavier Freixas; Marcela Eslava
  8. What impact does the ECB’s quantitative easing policy have on bank profitability? By Maria Demertzis; Guntram B. Wolff
  9. Disclosure, banks CDS spreads and the European sovereign crisis By Herve Alexandre; François Guillemin; Catherine Refait-Alexandre
  10. The Dynamic Factor Network Model with an Application to Global Credit-Risk By Falk Bräuning; Siem Jan Koopman
  11. Risk neutral versus real-world distribution on puclicly listed bank corporations By Michel Dacorogna; Juan-José Francisco Miguelez; Marie Kratz
  12. The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations By Marcelo Rezende; Mary-Frances Styczynski; Cindy M. Vojtech
  13. The Effect of Bank Recapitalization Policy on Corporate Investment: Evidence from a Banking Crisis in Japan By Hiroyuki Kasahara; Yasuyuki Sawada; Michio Suzuki
  14. Aggregate Liquidity Management By Keister, Todd; Sanches, Daniel R.
  15. Macro-economic factors in credit risk calculations: including time-varying covariates in mixture cure models By Lore Dirick; Tony Bellotti; Gerda Claeskens; Bart Baesens
  16. How does regulation affect the organizational form of banks' presence in developing and developed countries? By Annick Pamen Nyola; Alain Sauviat; Amine Tarazi

  1. By: Mathurin Founanou (Université Gaston Bergé (Saint-Louis, Sénégal)); Zaka Ratsimalahelo (UBFC - Université Bourgogne Franche-Comté, CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté)
    Abstract: We analyze the optimal policy of regulation of microfinance institutions in developing countries, where investment funds are insured by the government and customer deposits. We used a mixed model, combining adverse selection and moral hazard to characterize a class of optimal incentive schemes applied in presence of government funds and in non-government funded. We also analyse the effects of prudential regulation of deposits on the profitability of MFI and social welfare, and we compare prudential and non-prudential regulation. The incentive scheme that we propose can be regarded as a "smart subsidy" mechanism that contributes to the economic and social development.
    Keywords: Microfinance, adverse selection, moral hazard, incentive mechanisms, regulation, smart subsidy
    Date: 2016–01–01
  2. By: Chernobai, Anna (Syracuse University); Ozdagli, Ali K. (Federal Reserve Bank of Boston); Wang, Jianlin (Federal Reserve Bank of Boston)
    Abstract: How does business complexity affect risk management in financial institutions? The commonly used risk measures rely on either balance-sheet or market-based information, both of which may suffer from identification problems when it comes to answering this question. Balance-sheet measures, such as return on assets, capture the risk when it is realized, while empirical identification requires knowledge of the risk when it is actually taken. Market-based measures, such as bond yields, not only ignore the problem that investors are not fully aware of all the risks taken by management due to asymmetric information, but are also contaminated by other confounding factors such as implicit government guarantees associated with the systemic importance of complex financial institutions. To circumvent these problems, we use operational risk events as a risk management measure because (i) the timing of the origin of each event is well identified, and (ii) the risk events can serve as a direct measure of materialized failures in risk management without being influenced by the confounding factors that drive asset prices. Using the gradual deregulation of banks’ nonbank activities during 1996–1999 as a natural experiment, we show that the frequency and magnitude of operational risk events in U. S. bank holding companies have increased significantly with their business complexity. This trend is particularly strong for banks that were bound by regulations beforehand, especially for those with an existing Section 20 subsidiary, and weaker for other banks that were not bound and for nonbank financial institutions that were not subject to the same regulations to begin with. These results reveal the darker side of post-deregulation diversification, which in earlier studies has been shown to lead to improved stock and earnings performance. Our findings have important implications for the regulation of financial institutions deemed systemically important, a designation tied closely to their complexity by the Bank for International Settlements and the Federal Reserve.
    Keywords: operational risk; bank holding companies; financial deregulation; Glass-Steagall Act; business complexity
    JEL: G18 G20 G21 G32 L25
    Date: 2016–10–01
  3. By: Catherine Refait-Alexandre (UBFC - Université Bourgogne Franche-Comté, CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté); Stéphanie Serve (CSO - Centre de sociologie des organisations - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Université de Cergy Pontoise)
    Abstract: This article focuses on the use of multiple banking relationships by SMEs, a key issue given their strong dependence on bank financing in a context of increasing financial constraints and higher risk of credit rationing since the crisis. We investigate whether the use of multiple banking relationships is explained by firms’ characteristics or by the quality of the banking relationship. We exploit the results of an original survey conducted on a sample of French SMEs in December 2012. According to the traditional theoretical framework of multiple banking, we find that older, bigger, and betterperforming firms are more likely to access multiple banking relationships. We further find that innovative firms are more likely to engage in multiple banking relationships. We also highlight the explanatory power of an alternative model based on the quality of banking relationship: when the manager trusts its main bank, or when he is closer to his loan officer, the firm will be less likely to engage in multiple banking relationships.
    Keywords: multiple banking relationships, trust, credit rationing, financial crisis
    Date: 2016–01–01
  4. By: Belke, Ansgar; Haskamp, Ulrich; Setzer, Ralph
    Abstract: This paper examines whether European regions which incorporate banks with a higher intermediation quality grow faster and are more resilient to negative shocks than its less efficient peers. For this purpose, we measure a bank's intermediation quality by estimating its pro t and cost efficiency while taking the changing banking environment after the financial crisis into account. Next, we aggregate the efficiencies of all banks within a NUTS 2 region to obtain a regional proxy for fi nancial quality in twelve European countries. Our results show that relatively more pro t efficient banks foster growth in their region. The link between fi nancial quality and growth is valid both in the pre-crisis and post-crisis period. These results provide evidence to the importance of swiftly restoring bank pro tability in euro area crisis countries through addressing high non-performing loans ratios and decisive actions on bank recapitalization. JEL Classification: G21, O16, O47, O52
    Keywords: bank efficiency, Europe, financial development, regional growth
    Date: 2016–11
  5. By: Hye-Jin Cho (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In examining the global imbalance by the excess liquidity level, the argument is whether commercial banks want to hold excess reserves for the precautionary aim or expect to get better return through risky decision. By pictorial representations, risk preference in the Machina's triangle (1982, 1987) encapsulates motivation to hold excess liquidity. This paper introduces an endogenous liquidity model for the financial sector where the imbalance argument comes from credit rationing extended from outside liquidity (holmstrom and Tirole, 2011). We also conduct a stylistic analysis of excess liquidity in Jordan and Lebanon from 1993 to 2015. As such, the proposed model exemplifies the combination of credit, liquidity and regulation.
    Keywords: credit rationing, excess liquidity, inside liquidity, risk preference,machina triangle
    Date: 2016–11
  6. By: Fecht, Falko; Nyborg, Kjell G; Rocholl, Jorg; Woschitz, Jiri
    Abstract: Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks' liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.
    Keywords: banks; central bank; Collateral; collateral policy; financial fragmentation; financial stability; interbank market; liquidity; repo; systemic arbitrage
    JEL: E42 E51 E52 E58 G12 G21
    Date: 2016–11
  7. By: Xavier Freixas (Universitat Pompeu Fabra); Marcela Eslava (Universidad de Los Andes)
    Abstract: This paper is devoted to understanding the role of public development banks in alleviating financial market imperfections. We explore two issues: 1) which types of firms should be optimally targeted by public financial support; and 2) what type of mechanism should be implemented in order to efficiently support the targeted firms' access to credit. We model firms that face moral hazard and banks that have a costly screening technology, which results in a limited access to credit for some firms. Banks cannot fully appropriate the benefits of lending to successful projects. We show that a public development bank may alleviate the inefficiencies derived from this externality by lending to commercial banks at subsidized rates. Because the externality is stronger for high value firms, these are optimally targeted. The optimal policy may be implemented through subsidized ear-marked lending to the banks or through credit guarantees which we show to be equivalent in "normal times". Still, when banks are facing a liquidity shortage, lending is preferred, while when banks are undercapitalized, a credit guarantees program is best suited.
    Date: 2016
  8. By: Maria Demertzis; Guntram B. Wolff
    Abstract: Quantitative easing (QE) affects banks’ profitability in three main ways. First, as QE drives up bond prices, banks holding such bonds see their balance sheets strengthened. Second, QE reduces long-term yields and thereby reduces term spreads. With this, the lending-deposit ratio spread falls, making it harder for banks to generate net interest income on new loans. Last, QE improves the economic outlook, which should help banks exposed to the economy find new lending opportunities and should reduce problems with non-performing loans. The effects of QE on bank profitability are therefore not one directional. If anything, the immediate effect should be positive. Banks themselves have been quite negative about the impact of QE on their net interest income, but they have also acknowledged its positive impact on capital gains (ECB Bank Lending Survey). Lending-deposit spreads for new lending have fallen significantly. Looking at actual bank profits, net interest income has been stable. Moreover, bank profitability has increased mostly as a result of efforts to clean balance sheets of impaired assets (at least until the end of 2015). This is consistent with a reduction in non-performing loans (NPLs), particularly in countries where NPL levels were abnormally high. Moreover, we show that bank profitability in some countries has been a concern for many years now, starting well before the QE programme. The main drivers of low profitability have been non-performing loans, legal risks and other problems unrelated to net interest income, which has remained fairly stable. Overall, the authors cannot yet see any major bank profitability issue arising out of the ECB’s QE programme.
    Date: 2016–11
  9. By: Herve Alexandre (CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris-Dauphine); François Guillemin (CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté, UBFC - Université Bourgogne Franche-Comté); Catherine Refait-Alexandre (UBFC - Université Bourgogne Franche-Comté, CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté)
    Abstract: We investigate the impact of banks disclosure on the evolution of their CDS spreads during the European sovereign crisis. The disclosure of information helps investors in building expectations; disclosure may participate into the reduction of the information risk premium and may lead to a decrease of CDS spreads. We analyze the CDS spreads changes following the announcement of sovereign credit rating downgrades. We consider 16 dates in the period 2011-2013 and, for each one, we assess the cumulative abnormal CDS spread change (CASC). We build two disclosure indexes: one general and one specifically dedicated to sovereign exposure. We show that the bank exposure to sovereign risk has a positive impact on the CASC. Disclosure about sovereign exposure has a negative impact on CASC showing that information reduce risk premiums. However, the global disclosure increases the CASC; investors may disapprove the disclosure of too much abundant and broad information.
    Keywords: disclosure, sovereign crisis,bank, CDS
    Date: 2015–09–01
  10. By: Falk Bräuning (Federal Reserve Bank of Boston, United States); Siem Jan Koopman (VU University Amsterdam, The Netherlands)
    Abstract: We introduce a dynamic network model with probabilistic link functions that depend on stochastically time-varying parameters. We adopt the widely used blockmodel framework and allow the high-dimensional vector of link probabilities to be a function of a low-dimensional set of dynamic factors. The resulting dynamic factor network model is straightforward and transparent by nature. However, parameter estimation, signal extraction of the dynamic factors, and the econometric analysis generally are intricate tasks for which simulation-based methods are needed. We provide feasible and practical solutions to these challenging tasks, based on a computationally efficient importance sampling procedure to evaluate the likelihood function. A Monte Carlo study is carried out to provide evidence of how well the methods work. In an empirical study, we use the novel framework to analyse a database of significance-flags of Granger causality tests for pair-wise credit default swap spreads of 61 different banks from the United States and Europe. Based on our model, we recover two groups that we characterize as “local” and “international” banks. The credit-risk spillovers take place between banks, from the same and from different groups, but the intensities change over time as we have witnessed during the financial crisis and the sovereign debt crisis.
    Keywords: Network Analysis; Dynamic Factor Models; Blockmodels; Credit-Risk Spillovers
    JEL: C32 C58 G15
    Date: 2016–11–28
  11. By: Michel Dacorogna (SCOR SE - SCOR SE); Juan-José Francisco Miguelez (ESSEC Business School - Essec Business School); Marie Kratz (ESSEC Business School - Essec Business School, MAP5 - MAP5 - Mathématiques Appliquées à Paris 5 - UPD5 - Université Paris Descartes - Paris 5 - Institut National des Sciences Mathématiques et de leurs Interactions - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this study, we examine different quantitative methods to recover the risk neutral distribution function associated to the prices of option on bank shares. This is useful for a wide range of applications, such as determining the implicit State guarantee that systemic financial institutions benefit from the State, or looking if the market prices correctly the fat tails of financial returns. We assess the performance of these techniques in various ways, including comparing market option prices and historical Values-at-Risk to option prices and Value-at-Risk implied by the estimated risk neutral distribution. We find that, contrary to what is expected for a market composed of risk averse investors, the latter is much smaller than the one obtained from real data. We discuss our results with respect to the theory of risk neutral valuation and investor risk preference.
    Keywords: extremes, fat tail, option pricing, real world probability, risk neutral probability, SIFI, value-­at-­risk
    Date: 2016–07
  12. By: Marcelo Rezende; Mary-Frances Styczynski; Cindy M. Vojtech
    Abstract: We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of bank reserves. We identify these effects using variation in LCR requirements across banks and a change over time that allowed term deposits to count toward the LCR. Banks subject to the LCR submit tenders more often and submit larger tenders than exempt banks when term deposits qualify for the LCR. These results suggest that liquidity regulation affects bank demand in monetary policy operations.
    Keywords: Liquidity Coverage Ratio ; Term Deposit Facility ; Monetary Policy ; Excess Reserves ; Basel III
    JEL: E52 E58 G21 G28
    Date: 2016–10–24
  13. By: Hiroyuki Kasahara (University of British Columbia); Yasuyuki Sawada (University of Tokyo); Michio Suzuki (University of Tokyo)
    Abstract: This article examines the effect of government capital injections into financially troubled banks on corporate investment during the Japanese banking crisis of the late 1990s. By helping banks meet the capital requirements imposed by Japanese banking regulation, recapitalization enables banks to respond to loan demands, which could help firms increase their investment. To test this mechanism empirically, we combine the balance sheet data of Japanese manufacturing firms with bank balance sheet data and estimate a linear investment model where the investment rate is a function of not only firm productivity and size but also bank regulatory capital ratios. We find that the coefficient of the interaction between a firm's total factor productivity measure and a bank's capital ratio is positive and significant, implying that the bank's capital ratio affects more productive firms. Counterfactual policy experiments suggest that capital injections made in March 1998 and 1999 had a negligible impact on the average investment rate, although there was a reallocation effect, shifting investments from low- to high-productivity firms.
    Date: 2016–11
  14. By: Keister, Todd (Rutgers University); Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: It has been largely acknowledged that monetary policy can affect borrowers and lenders differently. This paper investigates whether the distributional effects of monetary policy are an inherent feature of monetary economies with private credit instruments. In our framework, both money and credit instruments can potentially be used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs have access to productive projects but face credit constraints due to limited pledgeability of their returns. Monetary policy affects the liquidity premium on private credit and thereby influences the cost of borrowing and the level of investment, but any attempt to ease borrowing constraints results in suboptimal decentralized-market trading activity. We show that this policy trade-off is not an inherent feature of monetary economies with private credit instruments. If we consider a richer set of aggregate liquidity management instruments, such as the payment of interest on inside money and capital requirements, it is possible to implement an efficient allocation.
    Keywords: monetary theory and policy; liquidity premium; Friedman rule; investment; bank lending channel
    Date: 2016–11–25
  15. By: Lore Dirick; Tony Bellotti; Gerda Claeskens; Bart Baesens
    Abstract: The prediction of the time of default in a credit risk setting via survival analysis needs to take a high censoring rate into account. This rate is due to the fact that default does not occur for the majority of debtors. Mixture cure models allow the part of the loan population that is unsusceptible to default to be modelled, distinct from time of default for the susceptible population. In this paper, we extend the mixture cure model to include time-varying covariates. We illustrate the method via simulations and by incorporating macro-economic factors as predictors for an actual bank data set.
    Keywords: Credit risk modeling, Mixture cure model, Time-varying covariates, Macroeconomic factors, Survival analysis
    Date: 2016–11
  16. By: Annick Pamen Nyola (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Alain Sauviat (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: Using a unique hand-collected dataset of 1,251 European Union banks and their 20,850 foreign affiliates hosted in 154 countries, this paper investigates how both host country and home country regulation affects their decision on how to go abroad to both developed and developing countries. Controlling for various factors, we find that host country banking regulation is an important factor in explaining organizational form (subsidiaries versus branches), but that such a factor is strongly influenced by the level of development of the host country. While banks are very careful in limiting their expansion to the relatively safest world countries, they are more likely to open branches rather than subsidiaries in countries with stringent activity restrictions and capital requirements; especially when they are relatively less efficient. Additionally, retail-oriented banks tend to prefer to operate subsidiaries in the most developed countries and competitive markets.
    Keywords: Banking regulation,EU banks,Internationalization,Foreign branch,Foreign subsidiary
    Date: 2016–09–21

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