SUMIT AGARWAL, Federal Reserve Bank of Chicago - Economic Research
Email: sagarwal@frbchi.org
ROBERT B. H. HAUSWALD, American University - Department of Finance and Real Estate
Email: hauswald@american.edu

Using a unique sample of comparable online and in-person loan transactions, we study the determinants of arm's-length and inside lending focusing on the di¿erential information content across debt types. We find that soft private information primarily underlies relationship lending whereas hard public information drives arm's-length debt. The bank's relative reliance on public or private information in lending decisions then determines trade-offs between the availability and pricing of credit across loan types. Consistent with economic theory, relationship debt leads to informational capture and higher interest rates but is more readily available whereas the opposite holds true for transactional debt. In their choice of loan type, lender switching, and default behavior firrms, however, anticipate the inside bank's strategic use of information and act accordingly.

DAVID RUTHENBERG, Bank of Israel
Email: druthenbe@boi.gov.il
YORAM LANDSKRONER, Hebrew University of Jerusalem - Department of Finance and Banking
Email: msdinah@mscc.huji.ac.il

The new Basel Capital Accord (Basel II), published in its final form in June 2006,established new and revised capital requirements for banks. In this paper we analyze and estimate the possible effects of the new rules on the pricing of bank loans. We do that for the two approaches for capital requirements (Internal and Standardized) available to banks and make a distinction between retail (mainly households) and corporate customers. Our loan equation is based on a model of a banking firm facing uncertainty operating in an imperfectly competitive loan market. We use Israeli economic data and data of a leading Israeli bank, including probability of default of its retail and corporate customers. The main results indicate that high quality corporates and retail customers will enjoy a reduction in loan interest rates in (large) banks which, most probably, will adopt the IRB approach. On the other hand high risk customers will benefit by shifting to(small) banks which, most probably, will that adopt the Standardized approach.

AQIB ASLAM, University of Cambridge - Faculty of Economics and Politics
Email: maa49@cam.ac.uk
EMILIANO SANTORO, University of Copenhagen - Department of Economics
Email: emiliano.santoro@econ.ku.dk

The framework presented in this paper takes its cue from recent financial events and attempts to develop a tractable framework for policy analysis of macro-linkages, in particular a first attempt at the integration of an independent profit-maximising banking sector that lends to and borrows from agents in the economy, and through which changes in the monetary policy rate by the central bank are transmitted. The inter-linkages between housing and the role of the banking sector in the transmission of monetary policy is emphasized. Two competing effects are highlighted: (i) a financial accelerator channel, due to the presence of collateralized borrowers, and (ii) a banking attenuator effect, which crucially arises from the spread in interest rates caused by the introduction of monopolistically competitive financial intermediaries. We show how the classical amplification mechanism explored in models of private borrowing between collaterally-constrained 'impatient' households and unconstrained 'patient' households, such as those put forward by Kiyotaki and Moore (1997) and Iacoviello (2005), is counteracted by the banking attenuator effect, given an endogenous steady state spread between loan and savings rates. Attenuation occurs therefore even under the assumption of flexible interest rates. This effect is further magnified when sluggishness in the interest rate-setting mechanism is introduced.

SUBRAMONIAM ARUMUGA PERUMAL, S.T. Hindu College
Email: premvish06@rediffmail.com

The fast development of network communication leads to the expansion of Information technology which in turn leads to the influence of access control system in IT sectors and banking sectors which sails in to the sea of Network security the most essential scenario in our daily life. So we are in a position to keep the company workers/customers knowledge base up-to-date on any new dangers that they should be cautious about. There are many technologies available to counteract intrusion, but currently no method is absolutely secured. The most dangerous frauds that causes in day to day banking activity is phishing, a criminal activity using social engineering techniques. Phishers attempt to fraudulently acquire sensitive information, such as usernames, passwords and credit card details, by masquerading as a trustworthy entity in an electronic communication. According to the latest research, 93 percent of phishing attack specifically involving attempts to rob customers of financial services companies. The aim of this paper is to discuss the various ways by which the phishing affects the internet banking and also discuss the implementation of safety security measures adopted by the users.

SOPHOCLES N. BRISSIMIS, Bank of Greece
Email: SBrissimis@bankofgreece.gr
MANTHOS D. DELIS, Athens University of Economics and Business
Email: delis@aueb.gr

The aim of this study is to provide an empirical methodology for the estimation of market power of individual banks. The new method employs the well-known model of Panzar and Rosse (1987) and proposes its estimation using the local regression technique. Thus, a number of restrictive assumptions regarding the properties of the production function of banks are relaxed, while the method proves successful in providing reasonable estimates of bank-level market power when applied to a large panel of banks of transition countries. The empirical results suggest that many banks in the sample deviate significantly from competitive practices and that market power varies substantially across banks in each country. Country averages of the bank-level results exhibit a very close relationship with standard, industry-level Panzar-Rosse estimates.

MICHIEL JANSSEN, University of Amsterdam, Netspar, Eureko/Achmea
Email: m.janssen@uva.nl

In this paper we address the problem of an investor optimising its portfolio of hedgeable risks. The investor faces an exogenously given Value at Risk constraint, comparable to the constraint the European insurance industry will face after the introduction of Solvency II. The optimisation problem is extended to the case the investor optimizes its portfolio of hedgeable risks in the presence of unhedgeable risks and the Value at Risk of the aggregate risks is constrained.

DAVID C. WHEELOCK, Federal Reserve Bank of St. Louis - Research Division
Email: wheelock@stls.frb.org

The Great Depression was the worst macroeconomic collapse in U.S. history. Sharp declines in household income and real estate values resulted in soaring mortgage delinquency rates. According to one estimate, as of January 1, 1934, fully one-half of U.S. home mortgages were delinquent and, on average, some 1000 home loans were foreclosed every business day. This paper documents the increase in residential mortgage distress during the Depression, and discusses actions taken by state governments and the federal government to reduce mortgage foreclosures and restore the functioning of the mortgage market. Many states imposed moratoria on both farm and nonfarm residential mortgage foreclosures. Although moratoria reduced farm foreclosure rates in the short run, they appear to have also reduced the supply of loans and made credit more expensive for subsequent borrowers. The federal government took a number of steps to relieve residential mortgage distress and to promote the recovery and growth of the national mortgage market. The Home Owners Loan Corporation (HOLC) was created in 1933 to purchase and refinance delinquent home loans as long-term, amortizing mortgages. Between 1933 and 1936, the HOLC acquired and refinanced one million delinquent loans totaling $3.1 billion. The HOLC refinanced loans on some 10 percent of all nonfarm, owner-occupied dwellings in the United States, and about 20 percent of those with an outstanding mortgage. The Great Depression experience suggests how foreclosures might be reduced during the present crisis.

ROBERT B. H. HAUSWALD, American University - Department of Finance and Real Estate
Email: hauswald@american.edu
VALENTINA BRUNO, American University - Department of Finance and Real Estate
Email: bruno@american.edu

Although foreign banks can act as catalysts for financial and economic development their role remains controversial because they might simply displace local lenders thereby tightening firms' overall access to credit. To settle this issue we study their effect on real economic activity in a large cross-section of developing and advanced countries whose industrial sectors differ in their external financing needs. We find that foreign banks alleviate the consequences of financial constraints and increase real growth. The greater their presence the less does external financial dependence impede firm performance. Foreign banks also mitigate the adverse consequences of banking crises on growth but do not significantly affect economic activity in advanced countries with well-functioning financial markets. Our results provide strong evidence that foreign entry alleviates financial constraints without hurting economic growth prospects, especially in developing countries whose companies often lack access to alternative sources of finance.