Banks’ Internationalization Strategies: The Role of Bank Capital Regulation
Diemo Dietrich, Uwe Vollmer
IWH Discussion Papers,
No. 18,
2006
Abstract
This paper studies how capital requirements influence a bank’s mode of entry into foreign financial markets. We develop a model of an internationally operating bank that creates and allocates liquidity across countries and argue that the advantage of multinational banking over offering cross-border financial services depends on the benefit and the cost of intimacy with local markets. The benefit is that it allows to create more liquidity. The cost is that it causes inefficiencies in internal capital markets, on which a multinational bank relies to allocate liquidity across countries. Capital requirements affect this trade-off by influencing the degree of inefficiency in internal capital markets.
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Measurement Matters — Alternative Input Price Proxies for Bank Efficiency Analyses
Michael Koetter
Journal of Financial Services Research,
No. 2,
2006
Abstract
Most bank efficiency studies that use stochastic frontier analysis (SFA) employ each bank’s own implicit input price when estimating efficient frontiers. But at the same time, most studies are based on cost and/or profit models that assume perfect input markets. Traditional input price proxies therefore contain at least substantial measurement error. We suggest here two alternative input market definitions to approximate exogenous input prices. We have access to Bundesbank data, which allows us to cover virtually all German universal banks between 1993 and 2003. The use of alternative input price proxies leads to mean cost efficiency that is significantly five percentage points lower compared to traditional input prices. Mean profit efficiency is hardly affected. Across models, small cooperative banks located in large western states perform best while large banks and those located in eastern states rank lowest.
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Money and Credit Market Integration in an enlarging Euro Zone: Methodological Issues
Johannes Stephan, Jens Hölscher
European Economic Policies - Alteratives to Orthodox Analysis and Policy Concepts,
2006
Abstract
“The chapter discusses methodological issues of money and credit market integration within the context of an enlarging Euro area. Common methods of interest parity tests are rejected in favour of a comparison of nominal interest rates. Hölscher and Stephan find that from an institutional point of view the new EU member countries look under-banked, whereas interest rates are converging. As policy implication the paper argues for a Euro adoption of the new EU members rather sooner than later.“
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The Effects of Shared ATM Networks on the Efficiency of Turkish Banks
H. Evren Damar
Applied Economics,
No. 6,
2006
Abstract
This study investigates whether forming shared ATM networks has yielded positive benefits for banks in Turkey by increasing their productive efficiency. Using a Data Envelopment Analysis (DEA) approach, pure technical and scale efficiency scores of Turkish banks are estimated and analysed for the period 2000–2003. The results suggest that although it is possible to realize positive effects through ATM sharing arrangements, there are multiple factors that determine which banks realize such benefits. The geographical distribution of shared ATMs between urban and rural markets and the level of competition between banks within urban areas are shown to be important determinants of differences in bank efficiency. This discrepancy between the gains associated with ATM sharing may have important implications concerning the adoption and sharing of new technology by banks in developing countries.
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Entry and Strategic Information Display in Credit Markets
Jan Bouckaert, Hans Degryse
Economic Journal,
No. 513,
2006
Abstract
In many countries, lenders voluntarily provide information about their borrowers to private credit registries. A recent World Bank survey reveals that the display of a lender's own borrower information is often not reciprocated. That is, access to these registries does not require the prior provision of proprietary data. We argue that incumbent lenders release information about a portion of their profitable borrowers for strategic reasons. The reasoning is that the pool of unreleased borrowers becomes characterised by a severe adverse selection problem. This prevents the entrants from bidding for all the incumbent's profitable borrowers and reduces their scale of entry.
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Does Transparency of Central Banks produce Multiple Equilibria on Currency Markets?
Axel Lindner
Scandinavian Journal of Economics,
No. 1,
2006
Abstract
A recent strand of literature shows that multiple equilibria in models of markets for pegged currencies vanish if there is slightly diverse information among traders; see Morris and Shin (2001). It is known that this approach works only if the common knowledge in the market is not too precise. This has led to the conclusion that central banks should try to avoid making their information common knowledge. We develop a model in which more transparency of the central bank implies better private information, because each trader utilises public information according to her own private information. Thus, transparency makes multiple equilibria less likely.
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Equity and Bond Market Signals as Leading Indicators of Bank Fragility
Reint E. Gropp, Jukka M. Vesala, Giuseppe Vulpes
Journal of Money, Credit and Banking,
No. 2,
2006
Abstract
We analyse the ability of the distance to default and subordinated bond spreads to signal bank fragility in a sample of EU banks. We find leading properties for both indicators. The distance to default exhibits lead times of 6-18 months. Spreads have signal value close to problems only. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators. We also examine the interaction of the indicators with other information and find that their additional information content may be small but not insignificant. The results suggest that market indicators reduce type II errors relative to predictions based on accounting information only.
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Distance and International Banking
Claudia M. Buch
Review of International Economics,
No. 4,
2005
Abstract
This paper asks how important distance is as a determinant of international banking and whether distance has become less important over time. If technological progress has lowered information costs and if information costs increase in distance, the importance of distance should have declined. I use data on assets and liabilities of commercial banks from five countries (France, Germany, Italy, UK, and US) in 50 host countries for the years 1983–99 to test this hypothesis. Generally, I find that banks hold significantly lower assets in distant markets and that the importance of distance for the foreign asset holdings of banks has not changed.
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Bank Market Discipline
Reint E. Gropp, M. Schleicher
ECB Monthly Bulletin,
2005
Abstract
This article reviews the conceptual issues surrounding market discipline for banks and describes to what extent market discipline could complement supervisory activities. The potential of market discipline has been explicitly recognised in the New Basel Accord. In addition to capital requirements (Pillar I) and supervisory review (Pillar II), the Accord provides for a greater role of financial markets in complementing traditional supervisory activities by asking banks for increased transparency with regard to their operations (Pillar III). This article puts Pillar III in the broader context of direct and indirect market discipline. It is argued that both direct and indirect market discipline should be enhanced by the transparency requirements of the New Capital Accord, but that other conditions may also need to be met in order for market discipline to become more effective. Nevertheless, the article also shows that aggregated market prices can play a useful role in monitoring banking sector stability.
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Cross-border Banking and Transmission Mechanisms in Europe: Evidence from German Data
Claudia M. Buch
Applied Financial Economics,
No. 16,
2004
Abstract
International activities of commercial banks play a potential role for the transmission of shocks across countries. This paper presents stylized facts of the integration of European banking markets and analyses the potential of banks to transmit shocks across countries. Although the openness of banking systems has increased, bilateral financial linkages among EU countries are relatively small. The exceptions are claims of German banks on a number of smaller countries. These data are used for an analysis of the determinants of cross-border lending patterns.
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