http://repub.eur.nl/res/concept/jel-G21/ Recent publications classified by JEL Code G21 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/17699/ 2012-10-29T00:00:00Z The promotion and support of small and medium-sized enterprises (SMEs) forms an essential ingredient of the policies designed to help improve Europe’s economic performance. A key issue is whether SMEs face difficulty obtaining bank loans. Using pre-crisis survey data from 2005 and 2006 for nearly 3,500 SMEs (firms with fewer than 250 employees) in the European Union (EU), we investigate the determinants of perceived bank loan accessibility at the firm level and at the country level. Based on hierarchical (multi-level) binomial logit regressions, our findings show that the youngest and smallest SMEs have the worst perceptions regarding access to bank loans. The SMEs in nations with concentrated banking sectors are more positive about loan accessibility. In addition, a high fraction of foreign-owned banks is associated with improved perceptions regarding loan accessibility in the EU 15 but not in the EU 10. Canton, E.J.F. Grilo, I. Monteagudo, J. Zwan, P.W. van der http://repub.eur.nl/res/pub/37871/ 2012-10-25T00:00:00Z The promotion and support of small and medium-sized enterprises (SMEs) is an essential component of policies designed to help improve Europe's economic performance. A crucial issue is whether SMEs face difficulty obtaining bank loans. Using pre-crisis survey data from 2005 and 2006 for nearly 3,500 SMEs (firms with fewer than 250 employees) in the European Union (EU), we investigate the determinants of perceived bank loan accessibility at the firm level and at the country level. Based on hierarchical (multi-level) binomial logit regressions, our findings show that the youngest and smallest SMEs have the worst perception of access to bank loans. The SMEs in nations with concentrated banking sectors are more positive about loan accessibility. In addition, a high fraction of foreign-owned banks is associated with improved perception of loan accessibility in the EU 15 but not in the EU 10. Canton, E.J.F. Grilo, I. Monteagudo, J. Zwan, P.W. van der http://repub.eur.nl/res/pub/26036/ 2012-06-01T00:00:00Z Small- and medium-sized enterprises (SMEs) are informationally opaque and bank dependent. In SME lending, banks largely rely on soft information, because the scale and scope of hard information are limited. We analyze whether and how hard and soft information affects the borrower's bargaining power vis-à-vis its bank. We use the fact that, for a given credit rating, certain borrowers obtain better loan terms than others to define measures of relative bargaining power. Using SME loan data from the USA and Germany, we find that more favorable soft information (management skills and character) increases borrower bargaining power. We also show that more favorable soft than hard information improves borrower bargaining power. The results are not driven by manipulation or statistical limitations of the credit ratings. Our study suggests that soft information represents an important and direct determinant of borrower bargaining power, affecting the outcomes of the loan contracting process. Grunert, J. Norden, L. http://repub.eur.nl/res/pub/22277/ 2012-05-01T00:00:00Z This paper examines the ability of balanced pension plan managers to successfully time the equity and bond market and select the appropriate assets within these markets. In order to evaluate both market timing abilities in these balanced pension plans, we extend the traditional equity market timing models to also account for bond market timing. As far as we know, we are among the first to apply this multifactor timing model to investigate equity and bond market timing simultaneously. This performance evaluation has been conducted on two samples of Spanish balanced pension plans, one with Euro Zone and one with World investment focus. This allows us to decompose managers' skills into three components: selectivity, equity market timing, and bond market timing. Our findings suggest that the average stock-picking ability of pension plans is positive. World schemes tend to have positive bond timing skills, while Euro Zone pension plans are on average not able to time equity or bond markets. Andreu, L. Swinkels, L.A.P. http://repub.eur.nl/res/pub/20041/ 2010-12-01T00:00:00Z We investigate whether loan growth affects the riskiness of individual banks in 16 major countries. Using Bankscope data from more than 16,000 individual banks during 1997-2007, we test three hypotheses on the relation between abnormal loan growth and asset risk, bank profitability, and bank solvency. We find that loan growth leads to an increase in loan loss provisions during the subsequent three years, to a decrease in relative interest income, and to lower capital ratios. Further analyses show that loan growth also has a negative impact on the risk-adjusted interest income. These results suggest that loan growth represents an important driver of the riskiness of banks. Foos, D. Norden, L. Weber, M. http://repub.eur.nl/res/pub/21681/ 2010-12-01T00:00:00Z We analyze the impact of (alliance) network exposure on the speed and extent of adoption of the business model as being one explanatory factor for diffusion controlling for actor specific characteristics and embeddedness in the network. In order to explain how existing national regulation moderated this relationship and whether it succeeded in its risk-limiting mission by moderating global adoption patterns and risk-bearing behavior among financial institutions we estimate various history event analysis model i.e. standard Cox and extended frailty models. We find strong support for the role of network exposure rather than social learning, the impact of regulatory effort on patterns of adoption and the role of country clusters for diffusion in the financial sector. Cuntz, A.N. Blind, K. http://repub.eur.nl/res/pub/22275/ 2010-12-01T00:00:00Z We investigate the funding modes of German banks and the implications for lending and profitability during 1992–2002. We find that at many banks, deposits from customers decrease in relative terms while interbank liabilities increase as a source of funding. We cannot detect a negative impact of the relative decline in deposits on lending. The decreasing ability of banks to collect deposits and the substitution of deposits by interbank liabilities unfavorably affects the net interest result of banks that exhibit a deposit deficit, especially savings banks. Our findings indicate a structural lengthening of the intermediation chain, which has broader implications for the functioning and stability of the financial system. Norden, L. Weber, M. http://repub.eur.nl/res/pub/21081/ 2010-10-01T00:00:00Z Information on borrower quality is a fundamental issue in debt contracting, corporate and consumer finance, and financial intermediation. We investigate the link between account activity and information production on borrower risk. Based on a unique data set, we find that credit line usage, limit violations, and cash inflows exhibit abnormal patterns approximately 12 months before default events. Measures of account activity substantially improve default predictions and are especially helpful for monitoring small businesses and individuals. Furthermore, early warning indications result in higher loan spreads, and in a higher likelihood of limit reductions and complete write-offs. Our study shows that account activity provides a real-time window into the borrower's cash flows, thus explaining why banks have an advantage in providing certain types of debt financing. Norden, L. Weber, M. http://repub.eur.nl/res/pub/34945/ 2010-01-01T00:00:00Z Abstract This article analyzes the last financial crisis focussing on the recurrent dynamics of externalities in banking. It shows that two major determinants of the crisis were the uncertainty of a new form of financial intermediation and the failure of regulation to cope with its externalities. Differently from more standard explanations, which are based on opportunism and/or irrationality of financial institutions, this analysis suggests that regulation has not just been insufficient. Regulation has contributed to financial instability too, supporting fragile conventions to handle uncertainty and encouraging regulatory arbitrage through financial innovation. Three implications are derived from this analysis and contrasted with the ongoing reforms of financial regulation in the US and in the EU. First, regulatory arbitrage is better dealt with by protecting banking from disintermediation than by extending prudential regulation to non-banks. Maturity transformation should be defined functionally and reserved to banks. Second, a major danger with ratings is that they support false conventions of safety. To avoid this outcome, the relevance of ratings for regulatory purposes should be reduced and rating agencies should be deterred from rating without firm knowledge. Third, in order to reduce short-termism, regulation of banks’ corporate governance should rather question than reinforce managerial accountability to shareholders. Pacces, A.M. http://repub.eur.nl/res/pub/23434/ 2009-07-01T00:00:00Z Regulatory capital requirements for European banks have been put forward in the Basel II Capital Framework and subsequently in the capital requirements directive (CRD) of the EU. We provide a detailed discussion of the capital requirements for private equity investments under different approaches. For the internal model approach we present a structural model that we calibrate to a proprietary dataset. We modify the standard Merton structural model to make it applicable in practice and to capture stylized facts of private equity investments. We also implement the early default feature with a fast simulation algorithm. Our results support capital requirements lower than in Basel II, but not as low as in CRD, thereby giving adverse incentives to banks for using advanced risk models. A sensitivity analysis shows that this finding is robust to parameter uncertainty and stress scenarios. Bongaerts, D.G.J. Charlier, E. http://repub.eur.nl/res/pub/22276/ 2009-06-01T00:00:00Z We analyse the relationship between credit default swap (CDS), bond and stock markets during 2000–2002. Focusing on the intertemporal co-movement, we examine monthly, weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is more sensitive to the stock market than the bond market and the strength of the co-movement increases the lower the credit quality and the larger the bond issues. Finally, the CDS market contributes more to price discovery than the bond market and this effect is stronger for US than for European firms. Norden, L. Weber, M. http://repub.eur.nl/res/pub/10610/ 2007-10-25T00:00:00Z We study the impact of FOMC announcements of Federal funds target rate decisions on individual stock prices at the intraday level. We find that the returns, volatilities and correlations of the S&P100 index constituents only respond to the surprise component in the announcement, as measured by the change in the Federal funds futures rate. For example, an unexpected 25 basis points increase of the target rate leads on average to a 113 basis points negative market return within five minutes after the announcement. It also increases market volatility during the 60-minute window around the announcement with 147 basis points. Positive surprises, meaning bad news for stocks, provoke a stronger reaction than negative surprises. Market participants also respond differently to good and bad news. In case of bad news for stocks the fact that there is a surprise matters most, whereas in case of good news the magnitude of the surprise is more important. Across sectors, Financials and IT show the strongest response to target rate surprises. Chulia-Soler, H. Martens, M.P.E. Dijk, D.J.C. van http://repub.eur.nl/res/pub/10516/ 2007-09-13T00:00:00Z The contemporary rise of China in the new geo-economy is increasingly pressurising the spatial distribution of financial activity in mainland China and Hong Kong. With the re-emergence of Shanghai, many people foresee the furture demise of Hong Kong as the most important financial centre for the China mainland. This paper shows that conviction seems rather premature. Bases on the concepts of comparative advantage and market segmentation, the extent to which Shanghai and Hong Kong can be considered complementary financial centres is assessed. By using the listings of mainland China based companies on the stock exchange of each financial centre, it is shown that both cities do not only appear to have distinct hinterlands but they also differ strongly in terms of sectoral specialisation. Karreman, B. Knaap, G.A. van der http://repub.eur.nl/res/pub/8076/ 2006-08-31T00:00:00Z Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. The trade-off between the gains and the risks of being connected shapes banks ’incentives to form links. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0. Babus, A.M. http://repub.eur.nl/res/pub/7234/ 2006-01-12T00:00:00Z In 2004, the Basel Committee on Banking Supervision defined Operational Risk (OR) as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. After publication of the new capital accord containing this dfinition, statistical properties of OR losses have attracted considerable attention in the financial industry since financial institutions have to quantify their exposures towards OR events. One of the major topics related to loss data is the non-availability of a suficient amount of data within the Financial Institutions. This paper describes a way to circumvent the problem of data availability by proposing a scaling mechanism that enables an organization to put together data originating from several business units, each one having its specific characteristics like size and exposure towards operational risk. The same scaling mechanism can also be used to enable an institution to include external data originating from other institutions into their own exposure calculations. Using both internal data from different business units and publicly available data from other (anonymous) institutions, we show that there is a strong relationship between losses incurred in one business unit respectively institution, and a specific size driver, in this case gross revenue. We study an appropriate scaling power law as a mechanism that explains this relationship. Having properly scaled the data from different business units, we also show how the resulting aggregated data set can be used to calculate the Value-at-OR for each business unit and present the principles of calculating the value of the OR capital charge according the minimal capital requirements of the Basel committee. Na, H.S. Couto Miranda, L. Berg, J. van den Leipoldt, M. http://repub.eur.nl/res/pub/12372/ 2006-01-01T00:00:00Z Paper prepared for the NBER project on “Risks of Financial Institutions”. We benefited from suggestions and criticism by many participants in the NBER project on “Risks of financial institutions”, in particular by the organizers Mark Carey (also involving Dean Amel and Allen Berger) and Rene Stulz, by our discussant Tony Saunders and by Patrick de Fontnouvelle, Gary Gorton, Andy Lo, Jim O’Brien and Eric Rosengren. Furthermore, we are grateful for comments we received at the 2004 European Finance Association Meetings in Maastricht, in particular by our discussant Marco da Rin and by Christian Upper, at the 2004 Ottobeuren seminar in economics, notably the thoughts of our discussant Ernst Baltensberger, of Friedrich Heinemann and of Gerhard Illing, as well as at seminars of the Max Planck Institute for Research on Collective Goods, the Federal Reserve Bank of St. Louis, the ECB and the University of Frankfurt. Gabe de Bondt and David Marques Ibanez supported us enormously in finding yield spread data, Lieven Baele and Richard Stehle kindly made us aware of pitfalls in Datastream equity data. Very helpful research assistance by Sandrine Corvoisier, Peter Galos and Marco Lo Duca as well as editorial support by Sabine Wiedemann are gratefully acknowledged. Any views expressed only reflect those of the authors and should not be interpreted as the ones of the ECB or the Eurosystem. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. This paper derives indicators of the severity and structure of banking system risk from asymptotic interdependencies between banks’ equity prices. We use new tools available from multivariate extreme value theory to estimate individual banks’ exposure to each other (“contagion risk”) and to systematic risk. Moreover, by applying structural break tests to those measures we study whether capital markets indicate changes in the importance of systemic risk over time. Using data for the United States and the euro area, we can also compare banking system stability between the two largest economies in the world. Finally, for Europe we assess the relative importance of cross-border bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that systemic risk in the US is higher than in the euro area, mainly as cross-border risks are still relatively mild in Europe. On both sides of the Atlantic systemic risk has increased during the 1990s. Hartmann, P. Straetmans, S. Vries, C.G. de http://repub.eur.nl/res/pub/7426/ 2005-12-07T00:00:00Z We study the dependence between the downside risk of European banks and insurers. Since the downside risk of banks and insurers differs, an interesting question from a supervisory point of view is the risk reduction that derives from diversification within large banks and financial conglomerates. We discuss the limited value of the normal distribution based correlation concept, and propose an alternative measure which better captures the downside dependence given the fat tail property of the risk distribution. This measure is estimated and indicates better diversification benefits for conglomerates versus large banks. Slijkerman, J.F. Schoenmaker, D. Vries, C.G. de http://repub.eur.nl/res/pub/6725/ 2005-06-28T00:00:00Z We examine fees on bonds issued by Japanese corporations during the 1994-2002 period. We relate fees to firms’ membership of bank-led (financial) keiretsu. For the full sample of firms, we establish a positive relation between fees and risk factors. Over time, we find that fees have increased for those firms that are related to financial keiretsu, even after controlling for risk factors. But during the same period, fees have fallen for firms not belonging to keiretsu. It seems that, against the background of bond market deregulation and weaker banks, keiretsu membership has become a burden rather than an advantage. Jong, A. de Roosenboom, P.G.J. Schramade, W.L.J. http://repub.eur.nl/res/pub/12375/ 2005-04-01T00:00:00Z Banks are linked through the interbank deposit market, participations like syndicated loans and deposit interest rate risk. The similarity in exposures carries the potential for systemic breakdowns. This potential is either strong or weak, depending on whether the linkages remain or vanish asymptotically. It is shown that the linearity of the bank portfolios in the exposures, in combination with a condition on the tails of the marginal distributions of these exposures, determines whether the potential for systemic risk is weak or strong. We show that if the exposures have marginal normal distributions the potential for systemic risk is weak, while if e.g. the Student distributions apply the potential is strong. Vries, C.G. de http://repub.eur.nl/res/pub/1444/ 2004-08-06T00:00:00Z We study the restructuring process of small and medium-sized firms in financial distress. We have a unique dataset with firms in the Netherlands that are guided in their restructuring effort by banks. Part of our dataset consists of firms that successfully restructure their operations and obligations with the help of their bank. Another part consists of firms that, despite the assistance of their bank, did not succeed in reorganizing their operations and finances. Our empirical test predicts success and failure in restructuring. We find that banks guide firms in their restructuring effort and that their assistance is of crucial importance to the success of the restructuring. However, some firms do not benefit from this assistance, because firms need to be prepared to undertake radical operational changes before bank assistance is forthcoming. Jong, A. de