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This section contains information about articles under review and waiting for publication in next issues of the journal.
The lending channel in emerging economies: are foreign banks different?
Marco Arena, World Bank, USA
Carmen Reinhart, University of Maryland, School of Public Affairs and Department of Economics, and NBER, USA
Francisco Vázquez, Senior Economist, European Department, International Monetary Fund, USA
Abstract. This paper assembles a dataset comprising 1,565 banks in 20 Asian and Latin American countries during 1989-2001 and compares the response of the volume of loans, deposits, and bank-specific interest rates on loans and deposits, to various measures of monetary conditions, across domestic and foreign banks. It also looks for systematic differences in the behavior of domestic and foreign banks during periods of financial distress and tranquil times. Using differences in bank ownership as a proxy for financial constraints on banks, the paper finds weak evidence that foreign banks have a lower sensitivity of credit to monetary conditions relative to their domestic competitors, with the differences driven by banks with lower asset liquidity and/or capitalization. At the same time, the lending and deposit rates of foreign banks tend to be smoother during periods of financial distress, albeit the differences with domestic banks do not appear to be strong. These results provide weak support to the existence of supply-side effects in credit markets and suggest that foreign bank entry in emerging economies may have contributed somewhat to stability in credit markets.
Banks' great bailout of 2008-2009
Michele Fratianni, Indiana University, Kelley School of Business, Bloomington, USA, Università Politecnica delle Marche and MoFiR, Italy
Francesco Marchionne, Università Politecnica delle Marche and MoFiR, Italy
Abstract. This paper examines government policies aimed at rescuing banks from the effects of the financial crisis of 2007-2009. To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman's failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event study methodology to estimate the benefits of government interventions on banks and their shareholders.
Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods. General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the "normal" information flow. The opposite takes place in the turbulent crisis sub-period when announcements are frequent and markets mistrust the "normal" information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance.
Are Spanish commercial banks rationing credit: the dynamics of the loan-deposit gap
Emilio Congregado, Department of Economics, University of Huelva, Spain
De la Vega, J.J., University of Huelva, Spain
García-Machado, J.J., University of Huelva, Spain
Golpe, A.A, University of Huelva, Spain
Abstract. Are banks denying credit to firms and households, in Spain? A positive answer to this question seem to be a well installed presumption between analysts and politicians who demand and motivate government intervention in several forms, including direct public finance, publicly loan guarantee schemes and even interest rates subsidization. This paper presents a brief overview of the theoretical and empirical arguments for or against credit rationing and of the Spanish Bank System practices as a previous step to provide new empirical evidence of the commercial bank system practices during and before of the current crisis in Spain, analyzing the long run relationship between loans and deposits. Our results suggest that this relationship is time varying, supporting the view that a new commercial bank practice emerged a few quarters before to the starting of the current crisis leading it, a new phenomenon with negative potential effects over firms and households.
Measuring the stability of the demand for money function in Egypt
Ibrahim L. Awad, Institute of Economic Studies, Faculty of Social Science, Charles University, Prague, Czech Republic
Abstract. This paper intends to answer the following question; can the CBE achieve the goal of price stability under the currently applied monetary targeting regime? The answer depends on whether or not the demand for money function is stable in Egypt. Using quarterly data on the period 1995-2007, the study estimated the long run demand for money function in Egypt. By testing its stability for structural change, the demand for money function was found unstable. Thus, the study concludes that the central bank of Egypt cannot achieve price stability under the currently applied monetary targeting regime.
The leading effects of Fed funds target interest rate
Sadullah Çelik, Assistant Professor, Marmara University, Faculty of Economics and Administrative Sciences, Department of Economics, Turkey
Pınar Deniz, University, Faculty of Economics and Administrative Sciences, Department of Economics, Turkey
Abstract. It has been a long debate whether Fed Funds target interest rate (FFTR) has significant explanatory power on interest rates in other countries. In this paper, we analyze the effects of FFTR on Bank of England (BOE) bank rate and European Central Bank (ECB) key interest rate employing-the rather new and trustworthy technique of-Bounds testing developed by Pesaran (2001). Our empirical results are consistent with a priori expectations as BOE and ECB interest rates are highly dependent on FFTR. This finding can be interpreted as a clear signal of how globally tight-knit the world currencies have been. Moreover, it emphasizes the importance of US dollar as the world currency and rather serves as an argument against alternative global currency propositions.
The financial services reform act and Australian bank risk
Bernard Bollen, Senior Lecturer in Finance, Department of Accounting and Finance, Monash University, Australi
Michael Skully, Professor of Banking, Department of Accounting and Finance, Monash University, Australia
Ms Xiaoting Wei, Research student, Department of Accounting and Finance, Australia
Abstract. This paper examines changes in the risk of eight Australian banks following the introduction of the Financial Services Reform Act of 2001 in Australia. This legislation introduced a new licensing regime into Australian finance and extended it to cover all financial services providers. It among other things required specialized staff training for specific positions of customer interaction as well as the mandatory and continuous disclosure of all fees and charges as well as the risks associated with financial products offered to the public. Using daily prices and the market model over a five year sample period (2001 to 2006) we found different reactions between the larger and smaller banks. It provides some evidence that the larger banks may have reduced their level of systematic risk. In contrast, the smaller banks either experienced no change, or in one case perhaps a slight increase. These differences may reflect the degree of change required with their complying with the Act. The larger banks, which already had extensive staff training operations in place, were better placed to meet these new requirements whereas the smaller banks required a greater relative investment in their initial and ongoing compliance. These results remain robust to the impact of the 2002 dot com stock market downturn.
Market structure, efficiency and performance of banking industry in Sri Lanka
Lalith Seelanatha, Ph.D., Lecturer, School of Accounting, Victoria University, Australia
Abstract. During the period of 1977-2005, reforms in the financial-services sector, development in information and communication technologies (ICT) and globalisation of the industry have drastically changed the market structure of banking industry in Sri Lanka. Financial reforms commenced in late 1970s were the main driving force of those changes. The reforms aimed to enhance both the productivity and efficiency and the degree of competition of banking market as a way of improving overall operational performance of the financial services sector in Sri Lanka. This paper reviewed how the banks' efficiency and market structure affect to the overall performance of the banking firms measured in term of profitability and net interest margin using structure conduct performance literature. The study findings suggests that traditional structure conduct performance argument are not hold in the banking industry in Sri Lanka and the banks performance are depend on not either on market concentration or market power of individual firms but on the level of efficiency of the banking units.
Adjustment costs, errors in risk weights, and banks' balance sheets: the 1988 Basel accord revisited
Kevin Jacques, Boynton D. Murch Chair in Finance, Associate Professor, Baldwin-Wallace College, USA
John Thornton, Associate Professor of Finance, Kent State University, USA
Elva Coadari, Risk Analyst, KeyBank Corp, USA
Abstract. Following implementation of the 1988 Basel Accord, U.S. banks altered their balance sheets in a variety of different ways including reallocating assets, reducing lending, and increasing capital. While much of the existing empirical research recognizes that fact, it fails to answer the question of why. In the context of a profit-maximization model that recognizes both non-homogeneous adjustment costs and errors in risk weights, this paper examines the question of why different banks exhibited different responses to implementation of the 1988 Accord. The results suggest that banks with different loan and capital adjustment costs exhibited very different responses to implementation of the 1988 Accord. Furthermore, errors in calibrating the risk weights played a significant role in banks' balance sheet changes. The results are sufficiently robust to explain the sometimes contradictory findings of other researchers.
The inflation-unemployment trade-off and the significance of the interest rate: some evidence from United Kingdom data
Chen Tao Toro, PhD, ASA, CPA, Lecturer, Lee Shau Kee School of Business & Administration, The Open University of Hong Kong, China
Paul F. Gentle, Assistant Professor, Department of Economics and Finance, City University of Hong Kong, China
Kamal P. Upadhyaya, Professor, Department of Economics and Finance, University of New Haven, USA
Abstract. Banking practices of variable loan rates are an important consideration in macroeconomics. This article argues that any empirical study on the inflation-unemployment trade-off requires the inclusion of the real interest rate in the model as any changes in the interest rate affects the capital use by the firms leading to an effect on the level of employment in the economy. To test the validity of this argument an empirical model is developed which includes the real interest rate as one of the explanatory variables in addition to inflation and real wages. The model is estimated using the annual time series data from the United Kingdom for the period from 1961 to 2005. The estimated results indicate that the interest rate variable is indeed significant in explaining the inflation-unemployment trade-off. A Wald test conducted also suggests that exclusion of real interest rate leads to a misspecification problem.
What is the importance of regulation and transparency in the subprime crisis?
Helder Ferreira de Mendonça, Fluminense Federal University, Department of Economics and National Council for Scientific and Technological Development (CNPq), Brazil
Délio José Cordeiro Galvão, Central Bank of Brazil and Fluminense Federal University, Department of Economics, Brazil
Renato Falci Villela Loures, Fluminense Federal University, Department of Economics, Brazil
Abstract. The subprime crisis put in doubt the actual rules of regulation and demands the necessity of a search for mechanisms capable of reducing the occurrence of crisis. Particularly the lack of transparency of information among financial market agents is an important element in the causes of crisis and its dissemination. This study makes an evaluation from 37 countries of accountability of big financial institutions regarding the Basel principles, as well as concerning respective regulatory agencies. The findings denote that countries with greater transparency and regulation of their financial sector experienced a lower effect due to the subprime crisis. Furthermore, there exists a greater concern with transparency and banking regulation in developed economies than developing economies. Hence, political transparency matters in developed economies while the economic transparency regarding bank risk is relevant in developing economies. Finally, an increase in accountability of the regulatory authority can imply less vulnerability of its financial markets.
Italian deposits time series forecasting via functional data analysis
Gabriella Piscopo, Department of Mathematics and Statistics, University of Napoli Federico II, Italy
Abstract. In this paper we develop a Functional Data Model for forecasting Italian Deposits Time Series. Bank deposits play an important role in ensuring the banks borrowing capacity and for this reason its correct modeling and forecasting represents an interesting task for policy makers. As it is well know, deposit series are affected by seasonality. In the Central Banks and other research institutions the standard procedure applied to this kind of monetary time series is to operate a preliminary seasonal adjustment in order to filter out typical calendar effect and within-year fluctuations. We assume a different starting point in modeling and forecasting seasonal time series, taking into account how the seasonality evolves across the years and trying to incorporate this feature in the model via functional data analysis. We utilize the Phase Plane Plot in order to show the evolution of the seasonality of the Italian Deposits from 1998 to 2008, working on a monthly time series and producing different plots for each year. We fit the data on the historical values using principal component techniques and construct forecast intervals projecting the model components with ARIMA process. The empirical results are presented using a range of graphical analysis.
Modeling value at risk of financial holding company: time varying vs. traditional models
Yong-chern Su, Department of Finance, National Taiwan University, Taipei, Taiwan
Serena Wang, Reuters Limited, Taiwan Branch
Han-ching Huang, Department of Finance, Chung Yuan Christian University, Chung Li, Taiwan
Abstract. This paper models value at risk of financial holding company. We form two portfolios and compute the daily profit and loss(P&L) and document that only Historical Simulation and GARCH (1,1)-AR (1) produce the number of the failures are within the non-rejection region of BASLE while all others are failed, for both portfolios and confidence levels. At 99 percent confidence level, the performance for both models on both portfolios performed equally well with only one failure for an out sample test of 217 observations. While at a 95 percent confidence level, we observe that Historical Simulation slightly outperforms GARCH (1, 1)-AR (1).
For a new system of international payments
Alvaro Cencini, Full Professor of Monetary Economics, Department of Economics, University of Lugano, Switzerland
Abstract. World-wide economic turmoil and international uncertainty are threatening the development of our economies, and experts increasingly evoke the ghost of recession. The aim of this paper is to show that the present system of international payments is in a disarray, and that a reform is needed to replace it with a system respectful of the principles of money and banking. The reform advocated here calls for the institution of a world central bank designed to provide monetary stability without forcing countries to give up monetary sovereignty, and without the need for any kind of monetary policy intervention.
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