Bank Pricing and Risk Management

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Missouri
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Larry Wall, Federal Reserve Bank of Atlanta

The Pricing of Financial Products in Retail Banking: Competition, Geographic Proximity and Credit Limits

Santiago Carbo-Valverde
,
Bangor University, Funcas and CUNEF
Hector Perez-Saiz
,
Bank of Canada

Abstract

We quantify the effect that market competition and geographic proximity has on the provision of bank accounts, credit cards and lines of credit in the Canadian retail banking industry. We propose a methodology that models the strategic entry decision of the financial institutions in every market, which allows us to solve for potential endogeneity issues when estimating the effect of competition on the fees, rates and credit limits offered. Using a very detailed household-level database for rural markets in Canada, we find that competition reduces significantly the monthly fees paid for bank accounts and credit cards, and that geographic proximity also plays a role in reducing these fees. Our results show that a standard regression approach typically underestimates the effect of competition on the observed outcomes of competition in the retail banking industry.

Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending

Michael Koetter
,
Leibniz Institute for Economic Research
Felix Noth
,
Halle Institute for Economic Research
Oliver Rehbein
,
Halle Institute for Economic Research

Abstract

We test if and how banks adjust their lending in response to disaster risk in the form of a natural catastrophe striking its customers: the 2013 Elbe flooding. The flood affected firms in East and South Germany and we identify shocked banks based on bank-firm relationships gathered for more than a million firms. Banks with relationships to flooded firms lend 13-23% more than banks without such customers compared to the pre-flooding period. This lending hike is associated with higher profitability and reduced risk. Our results suggest that local banks are an effective mechanism to mitigate rare disaster shocks faced especially by small and medium firms.

Foreign Investment, Regulatory Arbitrage and the Risk of U.S. Financial Institutions

Scott Frame
,
Federal Reserve Bank of Atlanta
Atanas Mihov
,
Federal Reserve Bank of Richmond
Leandro Sanz
,
Federal Reserve Bank of Richmond

Abstract

This study investigates the extent to which cross-country differences in banking regulation and supervision are relevant for the international subsidiary locations of U.S. bank holding companies (BHCs). We find that U.S. BHCs are more likely to operate subsidiaries in countries with weak regulation and supervision. Further, financial institutions’ decisions to operate in locations with lax environments, while positively related to profitability, are associated with an increase in BHC risk and BHCs’ contribution to systemic risk. The quality of internal controls and risk management practices of financial institutions play an important role in such location choices and risk outcomes. Overall, our study suggests that financial institutions engage in regulatory arbitrage with potentially dangerous consequences.

Did TARP Reduce or Increase Systemic Risk? The Effects of TARP on Financial System Stability

Allen N. Berger
,
University of South Carolina
Raluca A. Roman
,
Federal Reserve Bank-Kansas City
John Sedunov
,
Villanova University

Abstract

Theory suggests that bank bailouts may either reduce or increase systemic risk. This paper is the first to
address this issue empirically, analyzing the U.S. Troubled Assets Relief Program (TARP). Difference-indifference
analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for
larger and safer banks located in better local economies. This occurred primarily through a capital cushion
channel. Results are robust to additional tests, including accounting for potential endogeneity and selection
bias. Findings yield policy conclusions about the wisdom of bailouts, which banks might be the best targets
for future bailouts, and the form these bailouts might take.
Discussant(s)
Michal Kowalik
,
Federal Reserve Bank of Boston
Wilko Bolt
,
Bank of the Netherlands
Mitchell Berlin
,
Federal Reserve Bank of Philadelphia
Santiago Carbo-Valverde
,
Bangor University, Funcas and CUNEF
JEL Classifications
  • G2 - Financial Institutions and Services