Bank Risk Within And Across Equilibria

Author: Mr. Itai Agur
Publisher: International Monetary Fund
ISBN: 1498345131
Size: 27.53 MB
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The global financial crisis highlighted that the financial system can be most vulnerable when it seems most stable. This paper models non-linear dynamics in banking. Small shocks can lead from an equilibrium with few bank defaults straight to a full freeze. The mechanism is based on amplification between adverse selection on banks' funding market and moral hazard in bank monitoring. Our results imply trade-offs between regulators' microprudential desire to shield individual weak banks and the macroprudential consequences of doing so. Moreover, limiting bank reliance on wholesale funding always reduces systemic risk, but limiting the correlation between bank portfolios does not.

The Industrial Organization Of Banking

Author: David VanHoose
Publisher: Springer
ISBN: 3662543265
Size: 14.76 MB
Format: PDF, ePub
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This book aims to provide a thoroughly updated overview and evaluation of the industrial organization of banking. It examines the interplay among bank behavior, market structure, and regulation from the perspective of a variety of public policy issues, including bank competition and risk, market discipline, antitrust issues, and capital regulation. New to this edition are discussions of the economic foundations of international banking, macroprudential regulation, and international coordination of banking policies. The book can serve as a learning tool and reference for graduate students, academics, bankers, and policymakers with interests in the industrial organization of the banking sector and the impacts of banking regulations.

Financial Opening Deposit Insurance And Risk In A Model Of Banking Competition

Author: Mr. Tito Cordella
Publisher: International Monetary Fund
ISBN: 1451897790
Size: 23.83 MB
Format: PDF, Docs
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This paper studies the impact of competition on the determination of interest rates and banks’ risk-taking behavior under different assumptions about deposit insurance and the dissemination of financial information. It finds that lower entry costs foster competition in deposit rate sand reduce banks’ incentives to limit risk exposure. Although higher insurance coverage amplifies this effect, two alternative arrangements (risk-based contributions to the insurance fund and public disclosure of financial information) help to reduce it. Moreover, uninsured but fully informed depositors and risk-based full deposit insurance yield the same equilibrium risk level, which is independent of entry costs. The welfare implications of the different arrangements are also explored.

Bank Capitalization As A Signal

Author: Mr. Daniel C. Hardy
Publisher: International Monetary Fund
ISBN: 1475586426
Size: 71.39 MB
Format: PDF
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The level of a bank‘s capitalization can effectively transmit information about its riskiness and therefore support market discipline, but asymmetry information may induce exaggerated or distortionary behavior: banks may vie with one another to signal confidence in their prospects by keeping capitalization low, and banks‘ creditors often cannot distinguish among them - tendencies that can be seen across banks and across time. Prudential policy is warranted to help offset these tendencies.

Bank Ownership Market Structure And Risk

Author: Gianni De Nicoló
Publisher: International Monetary Fund
Size: 70.71 MB
Format: PDF, Mobi
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This paper presents a model of a banking industry with heterogeneous banks that delivers predictions on the relationship between banks' risk of failure, market structure, bank ownership, and banks' screening and bankruptcy costs. These predictions are explored empirically using a panel of individual banks data and ownership information including more than 10,000 bank-year observations for 133 non-industrialized countries during the 1993-2004 period. Four main results obtain. First, the positive and significant relationship between bank concentration and bank risk of failure found in Boyd, De Nicolò and Al Jalal (2006) is stronger when bank ownership is taken into account, and it is strongest when state-owned banks have sizeable market shares. Second, conditional on country and firm specific characteristics, the risk profiles of foreign (state-owned) banks are significantly higher than (not significantly different from) those of private domestic banks. Third, private domestic banks do take on more risk as a result of larger market shares of both state-owned and foreign banks. Fourth, the model rationalizes this evidence if both state-owned and foreign banks have either larger screening and/or lower bankruptcy costs than private domestic banks, banks' differences in market shares, screening or bankruptcy costs are not too large, and loan markets are sufficiently segmented across banks of different ownership.

Bank Risk Taking And Competition Revisited

Author: Mr. Gianni De Nicoló
Publisher: International Monetary Fund
ISBN: 145191010X
Size: 67.55 MB
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This paper studies two new models in which banks face a non-trivial asset allocation decision. The first model (CVH) predicts a negative relationship between banks'' risk of failure and concentration, indicating a trade-off between competition and stability. The second model (BDN) predicts a positive relationship, suggesting no such trade-off exists. Both models can predict a negative relationship between concentration and bank loan-to-asset ratios, and a nonmonotonic relationship between bank concentration and profitability. We explore these predictions empirically using a cross-sectional sample of about 2,500 U.S. banks in 2003 and a panel data set of about 2,600 banks in 134 nonindustrialized countries for 1993-2004. In both these samples, we find that banks'' probability of failure is positively and significantly related to concentration, loan-to-asset ratios are negatively and significantly related to concentration, and bank profits are positively and significantly related to concentration. Thus, the risk predictions of the CVH model are rejected, those of the BDN model are not, there is no trade-off between bank competition and stability, and bank competition fosters the willingness of banks to lend.

Regulatory Capture In Banking Epub

Author: International Monetary Fund
Publisher: International Monetary Fund
ISBN: 1452781435
Size: 72.54 MB
Format: PDF, ePub, Docs
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Banks will want to influence the bank regulator to favor their interests, and they typically have the means to do so. It is shown that such "regulatory capture" in banking does not imply ineffectual regulation; a "captured" regulator may impose very tight, costly prudential requirements to reduce negative spillovers of risk-taking by weaker banks. In these circumstances, differences in the regulatory regime across jurisdictions may persist because each adapts its regulations to suit its dominant incumbent institutions.