nep-ban New Economics Papers
on Banking
Issue of 2019‒01‒21
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financial Networks and Systemic Risk in China’s Banking System By Sun, Lixin
  2. Bank Size and Household Financial Sentiment: Surprising Evidence from the University of Michigan Surveys of Consumers By Berger, Allen N.; Irresberger, Felix; Roman, Raluca
  3. Systemic risk governance in a dynamical model of a banking system By Lorella Fatone; Francesca Mariani
  4. Some borrowers are more equal than others: Bank funding shocks and credit reallocation By Olivier De Jonghe; Hans Dewachter; Klaas Mulier; Steven Ongena; Glenn Schepens
  5. Differentiated Impact of Spread Determinants by Personal Loan Category: Evidence from the Brazilian Banking Sector By José Valente; Mário Augusto; José Murteira
  6. Trade and Credit Reallocation: How Banks Help Shape Comparative Advantage By Christian Keuschnigg; Michael Kogler
  7. Interbank Connections, Contagion and Bank Distress in the Great Depression By Calomiris, Charles W.; Jaremski, Matthew; Wheelock, David C.
  8. MobilePay versus Swipp - Main insights from a Nordic country for mobile payment apps By Moritz, Karl-Heinz; Stadtmann, Georg; Stadtmann, Tobias
  9. Borrowing in Excess of Natural Ability to Repay By Victor Filipe Martins da Rocha; Yiannis Vailakis
  10. Security-voting structure and equity financing in the Banking Sector: ‘One Head-One Vote’ versus ‘One Share-One Vote’ By Riccardo Ferretti; Pierpaolo Pattitoni; Alex Castelli
  11. Competition Policy and Sector-Specific Regulation in the Financial Sector By Martin F. Hellwig
  12. Identifying credit supply shocks with bank-firm data: methods and applications By Hans Degryse; Olivier De Jonghe; Sanja Jakovljevic; Klaas Mulier; Glenn Schepens

  1. By: Sun, Lixin
    Abstract: In this paper, using two alternative methods, we investigate the contagion effects and systemic risk in China’s commercial banks system based on the balance sheet data and the estimation on interbank exposures. First, we calculate various indicators in terms of the balance sheets of individual commercial banks to quantify contagiousness and vulnerability for China’s banking system without considering the detailed topology of interbank networks. Second, we estimate the detailed bilateral exposures matrix of the interbank network to examine the domino effects and snowball effects of financial contagion. The simulation results from two alternative approaches are consistent. Both suggest that the contagious risk arising from an assumed bank failure is trivial in Chinese banking system, whereas the amplification effects of the losses due to the financial interlinkage are non-trivial. In particular, we identify the systemic important banks in terms of a relative contagion index and the measures capturing the topological features of the interbank networks, respectively. Our study provides insights for the prevention of systemic risk and the implementation of macroprudential oversights in China’s banking system.
    Keywords: Balance Sheets; Interbank Networks; Financial Contagion; Systemic Risk; China’s Banking System
    JEL: D85 G21 G28
    Date: 2018–01–06
  2. By: Berger, Allen N. (University of South Carolina); Irresberger, Felix (University of Leeds); Roman, Raluca (Federal Reserve Bank of Philadelphia)
    Abstract: We analyze comparative advantages/disadvantages of small and large banks in improving household sentiment regarding financial conditions. We match sentiment data from the University Of Michigan Surveys Of Consumers with local banking market data from 2000 to 2014. Surprisingly, the evidence suggests that large rather than small banks have significant comparative advantages in boosting household sentiment. Findings are robust to instrumental variables and other econometric methods. Additional analyses are consistent with both scale economies and the superior safety of large banks as channels behind the main findings. These channels appear to more than offset stronger relationships with and greater trust in small banks.
    Keywords: households; financial sentiment; small banks; large banks; banking market structure
    JEL: G21 G28 G34
    Date: 2019–01–14
  3. By: Lorella Fatone; Francesca Mariani
    Abstract: We consider the problem of governing systemic risk in a banking system model. The banking system model consists in an initial value problem for a system of stochastic differential equations whose dependent variables are the log-monetary reserves of the banks as functions of time. The banking system model considered generalizes previous models studied in [5], [4], [7] and describes an homogeneous population of banks. Two distinct mechanisms are used to model the cooperation among banks and the cooperation between banks and monetary authority. These mechanisms are regulated respectively by the parameters $\alpha$ and $\gamma$. A bank fails when its log-monetary reserves go below an assigned default level. We call systemic risk or systemic event in a bounded time interval the fact that in that time interval at least a given fraction of the banks fails. The probability of systemic risk in a bounded time interval is evaluated using statistical simulation. A method to govern the probability of systemic risk in a bounded time interval is presented. The goal of the governance is to keep the probability of systemic risk in a bounded time interval between two given thresholds. The governance is based on the choice of the log-monetary reserves of a kind of "ideal bank" as a function of time and on the solution of an optimal control problem for the mean field approximation of the banking system model. The solution of the optimal control problem determines the parameters $\alpha$ and $\gamma$ as functions of time, that is defines the rules of the borrowing and lending activity among banks and between banks and monetary authority. Some numerical examples are discussed. The systemic risk governance is tested in absence and in presence of positive and negative shocks acting on the banking system.
    Date: 2018–12
  4. By: Olivier De Jonghe (National Bank of Belgium and CentER, Tilburg University); Hans Dewachter (National Bank of Belgium); Klaas Mulier (Ghent University and National Bank of Belgium); Steven Ongena (University of Zurich, SFI and CEPR); Glenn Schepens (European Central Bank)
    Abstract: This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank-firm level credit data, we show that banks reallocate credit within their loan portfolio in at least three different ways. First, banks reallocate to sectors where they have a high market share. Second, they also reallocate to sectors in which they are more specialized. Third, they reallocate credit towards low-risk _rms. These reallocation effects are economically large. A standard deviation increase in sector market share, sector specialization or firm soundness reduces the transmission of the funding shock to credit supply by 22, 8 and 10 %, respectively.
    Keywords: Credit reallocation, bank funding shock, bank credit, sector market share, sector specialization, firm risk
    JEL: G01 G21
    Date: 2018–12
  5. By: José Valente (Faculty of Economics, University of Coimbra); Mário Augusto (CeBER and Faculty of Economics, University of Coimbra); José Murteira (CeBER and Faculty of Economics, University of Coimbra, and CEMAPRE)
    Abstract: The present article studies the determinants of banking spreads, allowing for the possibility that the impact of some of these determinants on spreads may differ according to the particular loan type. This concern is fostered by both theoretical and empirical evidence supporting the general idea that the hetero-geneity of banks’ loan portfolios should be taken into account when studying the drivers of spread. This approach is distinct from previous work in the liter-ature, usually utilizing a single interest margin per bank, in order to measure the impact of its determinants. Using a dataset of observations on various per-sonal loan categories and the Difference GMM approach, the present study es-timates that marginal effects of, respectively, banks’ risk aversion, credit risk, and market share on spreads differ significantly according to whether the loan is a consumer loan, a paycheck-linked credit line or a revolving credit line for individuals. These findings suggest, accordingly, that central banks and regula-tory agencies should observe the composition of banks’ loans portfolios when writing their policies aiming at spread reduction.
    Keywords: Spread; Personal loans; Financial sector.
    JEL: G21 C23 E44
    Date: 2018–12
  6. By: Christian Keuschnigg; Michael Kogler
    Abstract: Trade and innovation cause structural change. Productive factors must flow from declining to growing industries. Banks play a major role in cutting credit to non-viable firms in downsizing sectors and in providing new credit to finance investment in expanding, innovative sectors. Structural parameters of a country’s banking system thus influence comparative advantage and trade, and can magnify the gains from trade liberalization. The analysis shows how insolvency laws, minimum capital standards, and cost of bank equity determine credit reallocation, sectoral expansion and trade patterns.
    Keywords: capital reallocation, banking, trade, comparative advantage
    JEL: F10 G21 G28
    Date: 2018
  7. By: Calomiris, Charles W. (Columbia University); Jaremski, Matthew (Utah State University); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks’ management of cash and capital buffers was less responsive to network risk, suggesting that banks expected the Fed to reduce network risk. Because the Fed’s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity risk, it likely contributed to the banking system’s vulnerability to contagion during the Depression.
    Keywords: Bank Contagion; Great Depression; Interbank Networks; Liquidity Risk; Federal Reserve System
    JEL: G21 L14 N22
    Date: 2019–01–01
  8. By: Moritz, Karl-Heinz; Stadtmann, Georg; Stadtmann, Tobias
    Abstract: We describe the development of the market for mobile payments in Denmark. In the first step, we explain the two main competing products as well as their underlying technologies. In the second step, we also analyze the competition within the Danish market from debit card companies and the competition which stems from outside of the banking industry (Apple Pay). Based on our analysis, we derive some managerial as well as policy implications.
    Keywords: FinTech,First-Mover Advantage,Open versus closed platforms,two sided markets,diffusion,market entry
    JEL: B52 G21 L86
    Date: 2018
  9. By: Victor Filipe Martins da Rocha (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro], CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique); Yiannis Vailakis (Adam Smith Business School - University of Glasgow)
    Abstract: The paper aims at improving our understanding of self-enforcing debt in competitive dynamic economies with lack of commitment when default induces a permanent loss of access to international credit markets. We show, by means of examples, that a sovereign's creditworthiness is not necessarily limited by the ability to repay out of its future resources. Self-enforcing debt grows at the same rate as interest rates. If a sovereign's endowment growth rates are lower than interest rates, then debt limits eventually exceed the natural debt limits. This implies that there is asymptotic borrowing in present value terms. We show that this can be compatible with lending incentives when credible borrowers facilitate inter-temporal exchange, acting as pass-through intermediaries that alleviate the lenders' credit restrictions.
    Keywords: Limited Commitment,Self-enforcing Debt,Natural Debt Limit
    Date: 2017–01–02
  10. By: Riccardo Ferretti; Pierpaolo Pattitoni; Alex Castelli
    Abstract: Using a unique dataset including all rights issues of new shares and other equity-like securities announced by Italian listed banks between 1989 and 2014, and exploiting the ideal setting provided by the Italian Banking Law, which allows for listed co-operative banks, we test if the ‘one head-one vote’ principle of co-operative banks and the ‘one share-one vote’ voting system of joint stock banks imply different agency costs of equity. Our empirical results, obtained using an event-study methodology, regressions and matching estimators, support our research hypothesis that co-operative banks have greater agency costs of equity compared to joint stock banks, and contribute to the literature on demutualization and cooperative hybrids.
    Keywords: Agency Costs, Banks, Corporate Governance, Corporate Control, Seasoned Equity Offering
    JEL: G21 G32
    Date: 2019–01
  11. By: Martin F. Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: Reforms of financial regulation after the crisis of 2007-2009 raise the question of what is the relation between financial regulators and competition authorities. Should competition authorities play a role in financial regulation? Should they co-operate with financial regulators? Or should they keep at a distance? The paper gives an overview over some of the issues that are involved in the discussion. Drawing on the experience of the network industries, the first part of the paper discusses the relation between competition authorities and sector-specific regulators more generally. Whereas competition policy involves the application of legal norms involving prohibitions that are formulated in abstract terms, sector-specific regulation involves authorities actually prescribing desired modes of behavior. The ongoing nature of relations makes regulators more prone to capture than competition authorities. In the financial sector, the potential for capture is particularly great because everyone is tempted by the idea that banks should fund their pet projects. Following an overview over the evolution of regulation and competition in the financial industry, the paper discusses various issues that are relevant for competition policy: Technological and regulatory barriers to entry, distortions of competition by explicit or implicit government guarantees, distortions of competition by bailouts making for artificial barriers to exit. Guarantees and bailouts in particular pose special challenges for merger control and for state aid control.
    Keywords: Financial Regulation, Competition Policy, Government Guarantees, Bank Bailouts, State Aid Control
    JEL: G28 K21 K23 L40 L50
    Date: 2018–07
  12. By: Hans Degryse (KU Leuven, Halle Institute for Economic Research, and CEPR); Olivier De Jonghe (National Bank of Belgium and Tilburg University); Sanja Jakovljevic (Lancaster University); Klaas Mulier (Ghent University and National Bank of Belgium); Glenn Schepens (European Central Bank)
    Abstract: Current empirical methods to identify and assess the impact of bank credit supply shocks rely strictly on multi-bank firms and ignore firms borrowing from only one bank. Yet, these single-bank firms are often the majority of firms in an economy and most prone to credit supply shocks. We propose and underpin an alternative demand control (using industry-location-size-time fixed effects) that allows identifying timevarying cross-sectional bank credit supply shocks using both single- and multi-bank firms. Using matched bank-firm credit data from Belgium, we show that firms borrowing from banks with negative credit supply shocks exhibit lower financial debt growth, asset growth, investments, and operating margin growth. Positive credit supply shocks are associated with bank risk-taking behaviour at the extensive margin. Importantly, to capture these effects it is crucial to include the single-bank firms when identifying the bank credit supply shocks.
    Keywords: credit supply identificationbank lendingcorporate investmentbank risk-taking
    JEL: G21 G32
    Date: 2018–10

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