Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System
Hans Degryse, Grégory Nguyen
International Journal of Central Banking,
No. 2,
2007
Abstract
Robust (cross-border) interbank markets are important for the proper functioning of modern financial systems. However, a network of interbank exposures may lead to domino effects following the event of an initial bank failure. We investigate the evolution and determinants of contagion risk for the Belgian banking system over the period 1993–2002 using detailed information on aggregate interbank exposures of individual banks, large bilateral interbank exposures, and cross-border interbank exposures. The "structure" of the interbank market affects contagion risk. We find that a change from a complete structure (where all banks have symmetric links) toward a "multiplemoney-center" structure (where money centers are symmetrically linked to otherwise disconnected banks) has decreased the risk and impact of contagion. In addition, an increase in the relative importance of cross-border interbank exposures has lowered local contagion risk. However, this reduction may have been compensated by an increase in contagion risk stemming from foreign banks.
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Bank Lending, Bank Capital Regulation and Efficiency of Corporate Foreign Investment
Diemo Dietrich, Achim Hauck
IWH Discussion Papers,
No. 4,
2007
Abstract
In this paper we study interdependencies between corporate foreign investment and the capital structure of banks. By committing to invest predominantly at home, firms can reduce the credit default risk of their lending banks. Therefore, banks can refinance loans to a larger extent through deposits thereby reducing firms’ effective financing costs. Firms thus have an incentive to allocate resources inefficiently as they then save on financing costs. We argue that imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs. However, the Basel II framework is shown to miss this potential.
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Signaling Currency Crises in South Africa
Tobias Knedlik
IWH Discussion Papers,
No. 19,
2006
Abstract
Currency crises episodes of 1996, 1998, and 2001 are used to identify common country specific causes of currency crises in South Africa. The paper identifies crises by the use of an Exchange Market Pressure (EMP) index as introduced by Eichengreen, Rose and Wyplosz (1996). It extends the Signals Approach introduced by Kaminsky and Reinhart (1996, 1998) by developing a composite indicator in order to measure the evolution of currency crisis risk in South Africa. The analysis considers the standard suspects from international currency crises and country specifics as identified by the Myburgh Commission (2002) and current literature as potentially relevant indicators.
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Excess Volatility in European Equity Style Indices - New Evidence
Marian Berneburg
IWH Discussion Papers,
No. 16,
2006
Abstract
Are financial markets efficient? One proposition that seems to contradict this is Shiller’s finding of excess volatility in asset prices and its resulting rejection of the discounted cash flow model. This paper replicates Shiller’s approach for a different data set and extends his analysis by testing for a long-run relationship by means of a cointegration analysis. Contrary to previous studies, monthly data for an integrated European stock market is being used, with special attention to equity style investment strategies. On the basis of this analysis’ results, Shiller’s findings seem questionable. While a long-run relationship between prices and dividends can be observed for all equity styles, a certain degree, but to a much smaller extent than in Shiller’s approach, of excess volatility cannot be rejected. But it seems that a further relaxation of Shiller’s assumptions would completely eliminate the finding of an overly strong reaction of prices to changes in dividends. Two interesting side results are, that all three investment styles seem to have equal performance when adjusting for risk, which by itself is an indication for efficiency and that market participants seem to use current dividend payments from one company as an indication for future dividend payments by other firms. Overall the results of this paper lead to the conclusion that efficiency cannot be rejected for an integrated European equity market.
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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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Deposit Insurance, Moral Hazard and Market Monitoring
Reint E. Gropp, Jukka M. Vesala
Review of Finance,
No. 4,
2004
Abstract
The paper analyses the relationship between deposit insurance, debt-holder monitoring, and risk taking. In a stylised banking model we show that deposit insurance may reduce moral hazard, if deposit insurance credibly leaves out non-deposit creditors. Testing the model using EU bank level data yields evidence consistent with the model, suggesting that explicit deposit insurance may serve as a commitment device to limit the safety net and permit monitoring by uninsured subordinated debt holders. We further find that credible limits to the safety net reduce risk taking of smaller banks with low charter values and sizeable subordinated debt shares only. However, we also find that the introduction of explicit deposit insurance tends to increase the share of insured deposits in banks' liabilities.
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Are European Equity Style Indexes Mean Reverting? Testing the Validity of the Efficient Market Hypothesis
Marian Berneburg
IWH Discussion Papers,
No. 193,
2004
Abstract
The article tests for a random walk in European equity style indexes. After briefly
introducing the efficient market hypothesis, equity styles in general and the used
statistical techniques (Variance Ratio Test and modified Rescaled Range Test) it is
shown that a random walk in European equity style indexes cannot be rejected. At least in the period since the mid 70s, for which this research has been conducted, the weak form efficient market hypothesis seems to hold.
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Bank Market Discipline and Indicators of Banking System Risk: The European Evidence
Reint E. Gropp
Market Discipline Across Countries and Industries,
2004
Abstract
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Measurement of Contagion in Banks' Equity Prices
Reint E. Gropp, G. Moerman
Journal of International Money and Finance,
No. 3,
2004
Abstract
This paper uses the co-incidence of extreme shocks to banks’ risk to examine within-country and across country contagion among large EU banks. Banks’ risk is measured by the first difference of weekly distances to default and abnormal returns. Using Monte Carlo simulations, the paper examines whether the observed frequency of large shocks experienced by two or more banks simultaneously is consistent with the assumption of a multivariate normal or a student t distribution. Further, the paper proposes a simple metric, which is used to identify contagion from one bank to another and identify “systemically important” banks in the EU.
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Why do we have an interbank money market?
Jürgen Wiemers, Ulrike Neyer
IWH Discussion Papers,
No. 182,
2003
Abstract
The interbank money market plays a key role in the execution of monetary policy. Hence, it is important to know the functioning of this market and the determinants of the interbank money market rate. In this paper, we develop an interbank money market model with a heterogeneous banking sector. We show that besides for balancing daily liquidity fluctuations banks participate in the interbank market because they have different marginal costs of obtaining funds from the central bank. In the euro area, which we refer to, these cost differences occur because banks have different marginal cost of collateral which they need to hold to obtain funds from the central bank. Banks with relatively low marginal costs act as intermediaries between the central bank and banks with relatively high marginal costs. The necessary positive spread between the interbank market rate and the central bank rate is determined by transaction costs and credit risk in the interbank market, total liquidity needs of the banking sector, costs of obtaining funds from the central bank, and the distribution of the latter across banks.
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