nep-ban New Economics Papers
on Banking
Issue of 2017‒11‒05
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Size, Information Sharing and Financial Access in Africa By Simplice Asongu; Jacinta C. Nwachukwu
  2. Shadow Banking and Financial Stability under Limited Deposit Insurance By Voellmy, Lukas
  3. Bank Deposits and Liquidity Regulation: Evidence from Ethiopia By Nicola Limodio; Francesco Strobbe
  4. The two faces of interbank correlation By Schaeck, Klaus; Silva Buston, Consuelo; Wagner, Wolf
  5. Financial Firm Production of Inside Monetary and Credit Card Services: An Aggregation Theoretic Approach By Barnett, William; Su, Liting
  6. Mission Drift in Microcredit and Microfinance Institution Incentives By Sara Biancini; David Ettinger; Baptiste Venet
  7. Contingent convertibles: Can the market handle them? By Gera Kiewiet; Iman van Lelyveld; Sweder van Wijnbergen
  8. Credit Misallocation During the European Financial Crisis By Fabiano Schivardi; Enrico Sette; Guido Tabellini
  9. Retail credit scoring using fine-grained payment data By TOBBACK, Ellen; MARTENS, David
  10. How Do Banks and Households Manage Interest Rate Risk? Evidence from the Swiss Mortgage Market By Christoph Basten; Benjamin Guin; Cathérine Tahmee Koch
  11. Structure of P2P lending and investor protection: Analyses based on an international comparison of legal arrangements By Atsushi Samitsu
  12. Private-Sector Resolution of Contagion in Financial Networks: Capabilities, Incentives, and Optimal Interbank Networks By Zafer Kanık;
  13. Regulatory Learning: how to supervise machine learning models? An application to credit scoring By Dominique Guegan; Bertrand Hassani
  14. A Model of Collateral By Yu Awaya; Hiroki Fukai; Makoto Watanabe
  15. Banks in Tax Havens: First Evidence based on Country-by-Country Reporting By Vincent Bouvatier; Gunther Capelle; Anne-Laure Delatte
  16. Deposit Volatility, Liquidity and Long-Term Investment: Evidence from a Natural Experiment in Pakistan By M. Ali Choudhary; Nicola Limodio
  17. The Limits to Moral Erosion in Markets: Social Norms and the Replacement Excuse By Björn Bartling; Yagiz Özdemir
  18. Modeling the business and financial cycle in a multivariate structural time series model By Jasper de Winter; Siem Jan Koopman; Irma Hindrayanto; Anjali Chouhan

  1. By: Simplice Asongu (Yaoundé/Cameroun); Jacinta C. Nwachukwu (Coventry University, UK)
    Abstract: Purpose - This study investigates how bank size affects the role of information asymmetry on financial access in a panel of 162 banks in 39 African countries for the period 2001-2011. Design/methodology/approach - The empirical evidence is based on instrumental variable Fixed Effects regressions with overlapping and non-overlapping bank size thresholds to control for the QLH (Quiet Life Hypothesis). The QLH postulates that managers of large banks will use their privileges for private gains at the expense of making financial services more accessible to the general public. Financial access is measured with loan price and loan quantity whereas information asymmetry is implicit in the activities of public credit registries and private credit bureaus. Findings - The findings with non-overlapping thresholds are broadly consistent with those that are conditional on overlapping thresholds. First, public credit registries have a decreasing effect on the price of loans with the magnitude of reduction comparable across all bank size thresholds. Second, both public credit registries and private credit bureaus enhance the quantity of loans. Third, compared with public credit registries, private credit bureaus have a greater influence in increasing financial access because they have a significantly higher favourable effect on the quantity and price of loans Fourth, the QLH is not apparent because large banks are not associated with lower levels of financial access compared to small banks. Originality/value - Studies of public credit registries and private credit bureaus in Africa are sparse. This is one of the few to assess linkages between bank size, information asymmetry and financial access.
    Keywords: Public goods; Financial access; Bank size; Information sharing
    JEL: G20 G29 L96 O40 O55
    Date: 2017–01
  2. By: Voellmy, Lukas
    Abstract: This paper proposes a new theory of shadow banking that highlights the role of the cap on deposit insurance at traditional banks. Very risk averse investors with large endowments (institutional cash-pools) are looking for the best alternative to insured bank deposits. This is provided by shadow banks that invest exclusively in assets with very low credit risk. In equilibrium, investors face a trade-off between shadow banks with low fundamental risk and commercial banks with low run risk.
    JEL: G2
    Date: 2017
  3. By: Nicola Limodio; Francesco Strobbe
    Abstract: The regulation of bank liquidity can create a commitment device on repaying depositors in bad states, if deposit insurance is absent. A theoretical model shows that liquidity regulation can: 1) stimulate a deposit in flow, moderating the limited liability inefficiency; 2) promote lending and branching, if deposit growth exceeds the intermediation margin decline. Our empirical test exploits an unexpected policy change, which fostered the liquid assets of Ethiopian banks by 25% in 2011. Exploiting the cross-sectional heterogeneity in bank size and bank-level databases, we find an increase in deposits, loans and branches, with no decline in profits. JEL code: G21, G32, O16, O55 Keywords: Banking, Liquidity Risk, Financial Development, Ethiopia
    Date: 2017
  4. By: Schaeck, Klaus; Silva Buston, Consuelo; Wagner, Wolf
    Abstract: Correlations of stock returns across banks are an essential input into systemic risk measures. We demonstrate that such correlations can be decomposed into two parts: a systematic component arising from diversification activities, and a systemic component specific to banks. We find that at U.S. Banking Holding Companies correlations are to a large extent driven by the systematic component. However, applying the decomposition to the Marginal Expected Shortfall (MES), we show that it is the systemic component that predicts bank failure and risk during the Global Financial Crisis. The results suggest that it is important to distinguish between the two sources of correlations when measuring systemic risk at banks.
    Date: 2017–10
  5. By: Barnett, William; Su, Liting
    Abstract: A monetary-production model of financial firms is employed to investigate supply-side monetary aggregation, augmented to include credit card transaction services. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on microeconomic aggregation theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) have derived and applied the relevant aggregation theory applicable to measuring the demand for the joint services of money and credit cards. But because of the existence of required reserves and differences in taxation on the demand and supply side, there is a regulatory wedge between the demand and supply of monetary services. We derive theory needed to measure the supply of the joint services of credit cards and money, to estimate the output supply function, and to compute value added. The resulting model can be used to investigate the transmission mechanism of monetary policy. Earlier results on the monetary policy transmission mechanism based on the correlation between simple sum inside money and final targets are not likely to approximate or even be relevant to results that can be acquired by empirical implementation of this model or its extensions. Our financial-firm value-added measure and its supply function are fundamentally different from prior measures of inside money, shadow banking output, or money supply functions. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability (CFS) in New York City. We show that the now discredited conventional accounting-based measures of privately produced inside money can be replaced by our measures, based on microeconomic aggregation theory, to provide the information originally contemplated in the literature on monetary theory for over a century.
    Keywords: Inside money, aggregation theory, index number theory, financial firm production
    JEL: C5 C58 D2 D22 E4 E41 G2 G21
    Date: 2017–10–18
  6. By: Sara Biancini; David Ettinger; Baptiste Venet
    Abstract: We analyze the relationship between Microfinance Institutions (MFIs) and external donors, with the aim of contributing to the debate on “mission drift†in microfinance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Borrowers can be (very) poor or wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effort to identify the more valuable projects and to choose the right share of poorer borrowers (the optimal level of poor outreach). We first concentrate on hidden action. We show that asymmetric information can distort the share of very poor borrowers reached by loans, thus increasing mission drift. We then concentrate on hidden types, assuming that MFIs are characterized by unobservable heterogeneity on the cost of effort. In this case, asymmetric information does not necessarily increase the mission drift. The incentive compatible contracts push efficient MFIs to serve a higher share of poorer borrowers, while less efficient ones decrease their poor outreach.
    Keywords: microfinance, donors, poverty, screening
    JEL: O12 O16 G21
    Date: 2017
  7. By: Gera Kiewiet; Iman van Lelyveld; Sweder van Wijnbergen
    Abstract: The recent financial crisis has led to the introduction of contingent convertible instruments (CoCos) in the capital framework for banks. Although CoCos can provide benefits, such as automatic recapitalization of troubled banks, their inherent risks raise questions about whether they increase the safety of the banking system. We show that concerns about CoCos in just a single bank can result in the decline of an entire market, with investors apparently unable to distinguish safe from risky bonds. In times of market-panic, investors tend to rely on credit ratings instead of estimating the real risks of missing coupon payments. We provide several recommendations to improve the capital requirements regime for banks.
    Keywords: Contagion; Contingent Convertible Capital; Systemic Risk
    JEL: G01 G21 G32
    Date: 2017–09
  8. By: Fabiano Schivardi; Enrico Sette; Guido Tabellini
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were less likely to cut credit to non-viable firms. (ii) Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous inuential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
    Keywords: bank capitalization, zombie lending, capital misallocation
    JEL: D23 E24 G21
    Date: 2017
  9. By: TOBBACK, Ellen; MARTENS, David
    Abstract: In this big data era, banks (like any other large company) are looking for novel ways to leverage their existing data assets. A major data source that has not been used to the full extent yet, is the massive fine-grained payment data on their customers. In this paper, a design is proposed that builds predictive credit scoring models using the fine-grained payment data. Using a real-life data set of 183 million transactions made by 2.6 million customers, we show that our proposed design adds complementary predictive power to the current credit scoring models. Such improvement has a big impact on the overall working of the bank, from applicant scoring to minimum capital requirements.
    Date: 2017–10
  10. By: Christoph Basten; Benjamin Guin; Cathérine Tahmee Koch
    Abstract: We exploit a unique data set that features both un-intermediated mortgage requests and independent offers from multiple banks for each request. We show that households typically are not prudent risk managers but prioritize the minimization of current mortgage payments over the risk of possible hikes in future mortgage payments. We also provide evidence that banks do influence the contracted mortgage rate fixation periods, trading off their own exposure to interest rate risk against the borrowers’ affordability and credit risk. Our results challenge the implicit assumption of the existing mortgage choice literature whereby fixation periods are determined entirely by households.
    Keywords: Fixed-Rate Mortgage (FRM), Adjustable-Rate Mortgage (ARM), fixation period, maturity mismatch, interest rate risk, credit risk, duration
    JEL: D12 E43 G21
    Date: 2017
  11. By: Atsushi Samitsu (Bank of Japan)
    Abstract: P2P lending is direct lending between lenders and borrowers online without using traditional financial intermediaries such as banks. There has been a rapid increase in the amount of outstanding loans in P2P lending in recent years, mainly in the UK, the US, and China, since a major P2P lending platform in the UK was launched in 2005. In this paper, the structure of P2P lending and its characteristics are analysed using banks as a reference point. This paper also highlights the fact that the legal arrangements in P2P lending vary from country to country and those differences could affect the degree of investor protection. Samitsu (2017) explains that under the current legal arrangement in Japan, investors assume the credit risk of P2P lending platforms, and proposes utilising schemes such as specific purpose companies and specific trust companies to strengthen investor protection.
    Keywords: P2P lending; Financial intermediation; Banks; Systemic risk; Investor protection; FinTech
    JEL: K22
    Date: 2017–10–23
  12. By: Zafer Kanık (Boston College, Department of Economics.);
    Abstract: This paper develops a framework to analyze private-sector resolution of contagion in financial networks. Inefficiencies in rescue arise due to the network structure itself. The banks which are least affected from the contagion have the least incentives to prevent failures. Optimal networks minimize the realized bankruptcy costs, and are potentially contagious and evenly connected with intermediate integration (ratio of interbank liabilities to total assets per bank) and low diversification (number of counterparties per bank). The rescue capability and incentives endogenously arise in optimal networks, which encourage banks to borrow and lend in the interbank market with minimal concern about individual failure risk and no concern about contagion risk. In optimal networks, the government assists only the rescue of the first failure, and only for small enough shocks.
    Keywords: acquisition, contagion, financial network, merger, rescue, resolution, systemic risk.
    JEL: D85 E44 G01 G32 G33 G34 G38 H81
    Date: 2017–10
  13. By: Dominique Guegan (Centre d'Economie de la Sorbonne and LabEx ReFi); Bertrand Hassani (Group Capgemini and Centre d'Economie de la Sorbonne and LabEx ReFi)
    Abstract: The arrival of big data strategies is threatening the lastest trends in financial regulation related to the simplification of models and the enhancement of the comparability of approaches chosen by financial institutions. Indeed, the intrinsic dynamic philosophy of Big Data strategies is almost incompatible with the current legal and regulatory framework as illustrated in this paper. Besides, as presented in our application to credit scoring, the model selection may also evolve dynamically forcing both practitioners and regulators to develop libraries of models, strategies allowing to switch from one to the other as well as supervising approaches allowing financial institutions to innovate in a risk mitigated environment. The purpose of this paper is therefore to analyse the issues related to the Big Data environment and in particular to machine learning models highlighting the issues present in the current framework confronting the data flows, the model selection process and the necessity to generate appropriate outcomes.
    Keywords: Big Data; Credit scoring; machine learning; AUC; regulation
    Date: 2017–07
  14. By: Yu Awaya (University of Rochester); Hiroki Fukai (Kyushu University); Makoto Watanabe (Vrije Universiteit Amsterdam; Tinbergen Institute, The Netherlands)
    Abstract: This paper presents a simple equilibrium model in which collateralized credit emerges endogenously. Just like in repos, individuals cannot commit to the use of collateral as a guarantee of repayment, and both lenders and borrowers have incentives to renege. Our theory provides a micro-foundation to justify the borrowing constraints that are widely used in the existing macroeconomic models. We provide an explanation to the question of why assets are often used as collateral, rather than simply as a means of payment, why there is a tradeoff in assets between return and liquidity, and what kinds of assets are useful as collateral.
    Keywords: collateral; search; medium of exchange; voluntary separable repeated game
    JEL: C73
    Date: 2017–10–07
  15. By: Vincent Bouvatier; Gunther Capelle; Anne-Laure Delatte
    Abstract: Since the Great Financial Crisis, several scandals have exposed a pervasive light on banks' presence in tax havens. Taking advantage of a new database, this paper provides a quantitative assessment of the importance of tax havens in international banking activity. Using comprehensive individual country-by-country reporting from the largest banks in the European Union, we provide several new insights: 1) Tax havens attract large extra banking activity beyond the standard factors based on gravity equations; 2) For EU banks, the main tax havens are located within Europe: Luxembourg, Isle of Man and Guernsey rank at the top of the foreign affiliates; 3) Attractive low tax rates are not sufficient to drive extra activity; 4) High quality of governance is not a driver, but banks avoid countries with weakest governance; 5) Banks also avoid the most opaque countries; 6) The tax savings for EU banks is estimated between EUR 1 billion and EUR 3.6 billion.
    JEL: F3 G3 G21 H22 H3 L8
    Date: 2017–07
  16. By: M. Ali Choudhary; Nicola Limodio
    Abstract: Deposit volatility and costly bank liquidity increase the long-term lending rates offered by banks, which reduce loan maturities, long-term investment and output. We formalise this mechanism in a banking model and analyse exogenous variation in deposit volatility induced by a Sharia levy in Pakistan. Data from the credit registry and a firm-level survey show that deposit volatility and liquidity cost: 1) reduce loan maturities and lending rates; 2) leave loan amounts and total investment unchanged; 3) redirect investment from fixed assets towards working capital. A targeted liquidity program is quantified to generate yearly output gains between 0.042% and 0.205%. JEL: O12, G21, O16, E58 Keywords: Development, Banking, Investment, Central Banks
    Date: 2017
  17. By: Björn Bartling; Yagiz Özdemir
    Abstract: This paper studies the impact of a key feature of competitive markets on moral behavior: the possibility that a competitor will step in and conclude the deal if a conscientious market actor forgoes a profitable business opportunity for ethical reasons. We study experimentally whether people employ the argument “if I don’t do it, someone else will” to justify taking a narrowly self-interested action. Our data reveal a clear pattern. Subjects do not employ the “replacement excuse” if a social norm exists that classifies the selfish action as immoral. But if no social norm exists, subjects are more inclined to take a selfish action in situations where another subject can otherwise take it. By demonstrating the importance of social norms of moral behavior for limiting the power of the replacement excuse, our paper informs the long-standing debate on the effect of markets on morals.
    Keywords: replacement excuse, social norms, moral behavior, competition, markets, utilitarianism, deontological ethics
    JEL: C92 D02 D63
    Date: 2017
  18. By: Jasper de Winter; Siem Jan Koopman; Irma Hindrayanto; Anjali Chouhan
    Abstract: We consider a multivariate unobserved component time series model to disentangle the short-term and medium-term cycle for the G7 countries and the Netherlands using four key macroeconomic and financial time series. The novel aspect of our approach is that we simultaneously decompose the short-term and medium-term dynamics of these variables by means of a combination of their estimated cycles. Our results show that the cyclical movements of credit volumes and house prices are mostly driven by the medium-term cycle, while the macroeconomic variables are equally driven by the short-term and medium-term cycle. For most countries, the co-movement between the cycles of the financial and macroeconomic variables is mainly present in the medium-term. First, we find strong co-cyclicality between the medium-term cycles of house prices and GDP in all countries we analyzed. Second, the relation between the medium-term cycles of GDP and credit is more complex. We find strong concordance between both cycles in only three countries. However, in three other countries we find 'indirect' concordance, i.e. the medium-term cycles of credit and house prices share co-cyclicality, while in turn the medium-term cycles of house prices and GDP share commonality. This outcome might indicate that the house price cycle is -at least partly- driven by the credit cycle. Lastly, the cross-country concordance of both the short-term cycles and the medium-term cycles of GDP, house prices and credit is low. Hence, the bulk of the cyclical movements seem to be driven by domestic rather than global factors.
    Keywords: unobserved component time series model; Kalman filter; maximum likelihood estimation; short-term and medium-term cycles
    JEL: C32 E32 G01
    Date: 2017–10

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