Market Indicators, Bank Fragility, and Indirect Market Discipline
Reint E. Gropp, Jukka M. Vesala, Giuseppe Vulpes
Economic Policy Review,
No. 2,
2004
Abstract
A paper presented at the October 2003 conference “Beyond Pillar 3 in International Banking Regulation: Disclosure and Market Discipline of Financial Firms“ cosponsored by the Federal Reserve Bank of New York and the Jerome A. Chazen Institute of International Business at Columbia Business School.
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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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The Influence of a Heterogeneous Banking Sector on the Interbank Market Rate in the Euro Area
Ulrike Neyer, Jürgen Wiemers
Swiss Journal of Economics and Statistics,
2004
Abstract
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Why do banks hold capital in excess of regulatory requirements? A functional approach
Diemo Dietrich, Uwe Vollmer
IWH Discussion Papers,
No. 192,
2004
Abstract
This paper provides an explanation for the observation that banks hold on average a capital ratio in excess of regulatory requirements. We use a functional approach to banking based on Diamond and Rajan (2001) to demonstrate that banks can use capital ratios as a strategic tool for renegotiating loans with borrowers. As capital ratios affect the ability of banks to collect loans in a nonmonotonic way, a bank may be forced to exceed capital requirements. Moreover, high capital ratios may also constrain the amount a banker can borrow from investors. Consequently, the size of the banking sector may shrink.
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Softening Competition by Inducing Switching in Credit Markets
Jan Bouckaert, Hans Degryse
Journal of Industrial Economics,
No. 1,
2004
Abstract
We show that competing banks relax overall competition by inducing borrowers to switch lenders. We illustrate our findings in a two-period model with adverse selection where banks strategically commit to disclosing borrower information. By doing this, they invite rivals to poach their first-period market. Disclosure of borrower information increases the rival's second-period profits. This dampens competition for serving the first-period market.
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Information or Regulation: What Drives the International Activities of Commercial Banks?
Claudia M. Buch
Journal of Money Credit,
No. 6,
2003
Abstract
Information costs and regulatory barriers distinguish international financial markets from national ones. Using panel data on bilateral assets and liabilities of commercial banks, I empirically determine the impact of information, costs and regulations, and I isolate intra-EU financial linkages. I confirm that information costs and regulations are important factors influencing international asset choices of banks, but their relative importance differs among countries.
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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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Does Transparency of Central Banks Produce Multiple Equilibria on Currency Markets?
Axel Lindner
IWH Discussion Papers,
No. 178,
2003
Abstract
A recent strand of literature (see Morris and Shin 2001) shows that multiple equilibria in models of markets for pegged currencies vanish if there is slightly diverse information between traders. It is known that this approach works only if there is not too precise common knowledge in the market. This has led to the conclusion that central banks should try to avoid making their information common knowledge. We present a model in which more transparency of the central bank means better private information, because each trader utilizes public information according to her own private information. Thus, transparency makes multiple equilibria less likely.
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Markets for Bank Subordinated Debt and Equity in Basel Committee Member Countries
Reint E. Gropp, Jukka M. Vesala
BCBS Working Papers, No. 12,
No. 12,
2003
Abstract
This Basel Committee working paper is a study of the markets for banks' securities in ten countries (Belgium, France, Germany, Japan, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States). It aims at contributing to the assessment of the potential effectiveness of direct and indirect market discipline. This is achieved through collecting a rich set of data on the detailed characteristics of the instruments used by banks to tap capital markets, the frequency and size of their issuance activity, and the share of issuing banks in national banking systems. Further, information is collected on the amounts of debt and equity outstanding and about trading volumes and liquidity. Developments over the period from 1990-2001 are evaluated.
The paper focuses on subordinated bonds among banks' debt instruments, because they are the prime class of uninsured instruments suited to generate market discipline and have been proposed by some observers as a mandatory requirement for banks.
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Recent Developments and Risks in the Euro Area Banking Sector
Reint E. Gropp, Jukka M. Vesala
ECB Monthly Bulletin,
2002
Abstract
This article provides an overview of euro area banks’ exposure to risk and examines the effects of the cyclical downturn in 2001. It describes the extent to which euro area banks’ risk profile has changed as a result of recent structural developments, such as an increase in investment banking, mergers, securitisation and more sophisticated risk management techniques. The article stresses that the environment in which banks operated in 2001 was fairly complex due to the relatively weak economic performance of all major economies as well as the events of 11 September in the United States. It evaluates the effects of these adverse circumstances on banks’ stability and overall performance. The article provides bank balance sheet information as well as financial market prices, arguing that the latter may be useful when assessing the soundness of the banking sector in a forward-looking manner. It concludes with a review of the overall stability of euro area banks, pointing to robustness in the face of the adverse developments in 2001 and the somewhat improved forward-looking indicators of banks’ financial strength in early 2002.
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