Informational Efficiency of the Banking Sector: A Behavioral Model of the Credit Boom

In numerous Central and Eastern European (CEE) countries, the global financial crisis as well as the unpegging of the foreign exchange rate of the Swiss franc (CHF) against the euro amplified the repayment troubles of households with the outstanding CHF-linked debt. In Croatia, the CHF loans were approved mainly as mortgages to unprotected and subprime household borrowers without sufficient credit capacity for long-term euro-linked loans, which also contained a possibility of an incremental interest rate change, i.e., the so-called administrative interest rate. This article aims to disclose the reasons behind the credit boom of these loans, the unsustainable CHF debt hardship that the household sector consequently faced, and how it was/could have been resolved, with the Croatian banking sector at the center of the research. Although the CHF case of Croatia has some specificities concerning the prudential regulation and government-sponsored loan conversion, the findings about the supply and demand determinants of the CHF credit boom, as well as a critical assessment of the Croatian government and central bank interventions, might be useful for timely noticing universal threats from the exotic currency-linked loans for the systemic risk and financial stability, and for minimizing the negative externalities from probable debt relief measures. Based on the descriptive and univariate statistics conducted on Bloomberg and the Croatian National Bank (CNB) data, it was found that interest rate differentials and carry trading behavior were the main reasons for the rapid CHF credit growth in Croatia. Nevertheless, according to the financial experts’ opinions obtained via a questionnaire survey, and the court verdicts reached since, the financial consumer protection when contracting these loans was severely violated, which implies that the central bank must enhance its consumer protection role. By adopting a single-country and holistic approach, this is the first paper that deals with the socioeconomic dynamic of the CHF credit default issues in Croatia, which might be interesting as a case study or for making comparison with other CEE countries that have been coping with negative consequences of Swiss francization.

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A Dynamic Behavioral Model of the Credit Boom

Journal of Economic Issues ◽

10.1080/00213624.2015.1105043 ◽

2015 ◽

Vol 49 (4) ◽

pp. 1077-1099 ◽

Cited By ~ 1

Author(s):

David Peón ◽

Manel Antelo ◽

Anxo Calvo

Keyword(s):

Behavioral Model ◽

Credit Boom

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Banking in China

The Oxford Handbook of Banking ◽

10.1093/oxfordhb/9780198824633.013.35 ◽

2019 ◽

pp. 1112-1131

Author(s):

Leora Klapper ◽

María Soledad Martínez Pería ◽

Bilal Zia

Keyword(s):

Rapid Growth ◽

Financial Services ◽

Banking Sector ◽

Financial Sector ◽

Shadow Banking ◽

The World ◽

Consumer Access ◽

And Performance ◽

Credit Boom

The Chinese financial sector has grown at an impressive pace over the last decade, and its banking sector is now the largest in the world. China has also experienced a credit boom, which makes the need to better understand how the Chinese financial sector functions even more important. In this chapter, we first describe the structure and performance of the financial sector in China, focusing largely on banks. Next, we discuss how regulators’ efforts to slow the growth of bank intermediation have been accompanied by rapid growth in shadow-banking products, as banks try to circumvent limits on their ability to grow. Finally, we document China’s progress in expanding consumer access to formal financial services and track the recent expansion of FinTech, especially digital payment products.

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Should The Paradigms of Banking Theory be Redefined Based on Banking Practice? (Thoughts on The Polarity of Opinion Concerning The Polish Banking Sector)

e-Finanse ◽

10.1515/fiqf-2016-0145 ◽

2016 ◽

Vol 12 (3) ◽

pp. 1-26

Author(s):

Jan Szambelańczyk ◽

Monika Marcinkowska

Keyword(s):

Risk Premium ◽

Financial Stability ◽

Banking Sector ◽

Cognitive Structure ◽

Practical Experience ◽

Theory And Practice ◽

Informational Efficiency ◽

Homo Oeconomicus ◽

Academic Field ◽

Disciplinary Matrix

Abstract In accordance with the principles of best academic practice, a research community is identified through an internalised paradigm comprising notions and theories that form the foundations of a given academic field or discipline. This paper aims to provide a selective overview of differing opinions with respect to solutions, phenomena or processes concerning the Polish banking sector, as an example of the degree of development of banking theory and practice.In view of the analysis a question arises as to whether finance and socio-economic practice holds a paradigm that would prove adequate in terms of the level of development of such practice, i.e. the so-called disciplinary matrix, involving symbolic generalisations, informational efficiency of financial markets hypothesis), methodological assumptions (reflecting the cognitive structure of the phenomena, processes or structures researched) or, finally, models for resolving scientific problems (handbooks, monographs, research reports) and practical experience (e.g. methods of arbitration valuation, estimating the risk premium). Or perhaps, as G. Kołodko would put it, the finance paradigm is really based on the fact that “things happen the way they do, because many things are happening all at once”. It cannot be ruled out that what finance needs is a change similar to the economics of complexity, defined by A. Wojtyna as the incorporation of a behavioral concept (reconstructing the homo oeconomicus concept) and challenging the traditional understanding of economic system equilibrium and dynamics.It is also worth considering whether the triad of finance categories (money, risk, time) is not lacking a fourth component, namely trust, essential for financial stability and the balance between finance capital and social capital, serving as the basis for efficient financial intermediation (including the development of an unselfish advisory function, especially with regard to financial products securing the customers’ day-to-day existence in the post-employment period).

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FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: PANEL CROSS - COUNTRY STUDY

Jinnah Business Review ◽

10.53369/qjsk7221 ◽

2016 ◽

Vol 04 (01) ◽

pp. 09-21

Author(s):

Syed Fareed Ullah ◽

◽

Shahid Mansoor Hashmi ◽

Keyword(s):

Economic Growth ◽

Financial Development ◽

Banking Sector ◽

Panel Cointegration ◽

Credit Recovery ◽

Economic Growth Rate ◽

Credit Booms ◽

Private Credit ◽

Credit Boom ◽

Efficiency Indicators

This study aimed to examine the effect of financial development (FD) and private credit booms on economic growth. This study used the data of 58 countries (27 DCs and 31 LDCs), from the period 1973 to 2012, by applying the method of Panel Cointegration. This study involved the FD index made of four indicators of banking sector depth, activity, and efficiency indicators. The estimation results showed that LDCs gave more positively significant response to FD than DCs. This is because the LDCs’ financial systems are dominantly Bank based or their banking sector is more developed than other institutions and markets. Whereas, the credit boom to private sector (which is taken as indicator of FD) inversely affect the economic growth rate. Such relation can be caused by lack of credit recovery, more defaulting loans, insolvency, and huge public debt, that hence leads to a financial crash like that of 2008 financial crisis.

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Effects of Bank Regulation and Lender Location on Loan Spreads

Journal of Financial and Quantitative Analysis ◽

10.1017/s002210901200052x ◽

2012 ◽

Vol 47 (6) ◽

pp. 1247-1278 ◽

Cited By ~ 7

Author(s):

Li Hao ◽

Debarshi K. Nandy ◽

Gordon S. Roberts

Keyword(s):

Information Asymmetry ◽

Market Power ◽

Agency Costs ◽

Banking Sector ◽

Market Concentration ◽

Theoretical Research ◽

Informational Efficiency ◽

High Concentration ◽

Loan Spreads ◽

Levels Of Integration

AbstractWe investigate how differences in regulation regarding banking-commerce integration and banking sector concentration influence loan spreads across 29 countries. Theoretical research posits conflicting effects based on agency costs, information asymmetry costs, and market power. Increased integration is associated with lower loan spreads in countries with low concentration, but moving to high levels of integration increases spreads in countries with high concentration. Starting from lower levels, an increase in integration is associated with an increase in informational efficiency that disappears at higher levels of integration. We also show that market concentration affects loan spreads differently under high-, medium-, and low-integration regimes.

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On informational efficiency of the banking sector: a behavioral model of the credit boom

Studies in Economics and Finance ◽

10.1108/sef-04-2013-0050 ◽

2015 ◽

Vol 32 (2) ◽

pp. 158-180 ◽

Cited By ~ 6

Author(s):

David Peon ◽

Anxo Calvo ◽

Manel Antelo

Keyword(s):

Banking Sector ◽

Banking Industry ◽

Credit Markets ◽

Efficient Market Hypothesis ◽

Banking Regulation ◽

Behavioral Approach ◽

Informational Efficiency ◽

Content Type ◽

Behavioral Biases ◽

Retail Credit

Purpose – This paper aims to examine the informational efficiency in retail credit markets to test whether behavioral biases (excessive optimism) by some participants in the banking industry might explain how credit booms are fueled by the banking sector. Design/methodology/approach – This paper analyzes the conditions for the efficient market hypothesis approach to be extended to bank-based systems. A simple model of herding and limits of arbitrage that follows a three-step behavioral approach is presented (Shleifer, 2000). The model is based on duopolistic Cournot competition, where one bank is unbiased and the other is boundedly rational in terms of excessive optimism. Findings – The paper shows why solely behavioral biases by participants in the banking industry explain how it feeds a credit bubble. According to the presented model, optimistic banks would lead the industry, while it would be rational for unbiased banks to herd under conditions that the authors derive. An important finding is the role of limits of arbitrage in the banking sector: there would be no incentives for rational banks to correct the misallocations of their biased competitors. Practical implications – It might be a valid contribution to the current debate on macroprudential regulation. Should tests of rationality and correlated behavior provide evidence on the pervasiveness of behavioral biases in the banking industry suggested by our model, then banking regulation should account for it. Originality/value – This paper introduces an alternative approach to analyze informational efficiency in the banking industry that, to the best of our knowledge, had not been raised so far. The model shows how behavioral biases might guide retail credit markets and why limits of arbitrage would be more pervasive in bank-based financial systems than in market-based ones.

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