Economia del Mercato Mobiliare

1
Liquidity risk exposure for specialized and
unspecialized real estate banks evidence from
the Italian market
Claudio Giannotti, University LUM Casamassima,
Bari giannotti_at_lum.it Lucia Gibilaro,
University of Bergamo lucia.gibilaro_at_unibg.it
Gianluca Mattarocci, University of Rome Tor
Vergata gianluca.mattarocci_at_uniroma2.it
Milano June 23td-26th , 2010
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Index

• Introduction
• Literature review
• Empirical analysis
• Sample
• Methodology
• Results
• Conclusions

3
Introduction

• Liquidity is the ability of a bank to fund
  increases in assets and meet obligations as they
  come due, without incurring unacceptable losses
  and the maturity transformation of short-term
  deposits into long-term loans makes banks
  inherently vulnerable to liquidity risk (Basel
  Committee on Banking Supervision, 2008).
• The vulnerability of banks toward liquidity risk
  is determined by the funding risk and the market
  risk (The Joint Forum, 2006). The funding
  liquidity risk is caused either by the maturity
  mismatch between inflows and outflows or the
  sudden and unexpected liquidity needs due to
  contingency conditions (Duttweiler, 2009). The
  market liquidity risk refers to the inability to
  sell assets at or near the fair value (Matz and
  Neu, 2007).

4
Introduction

• Research question
• Due to the characteristics of the service
  offered, is there any specific feature for the
  liquidity of the real estate banks (hereinafter
  REBs)?
• Regulatory provision considers the specific
  features of the REBs in constructing supervisory
  rules for the banking system?

5
Index

• Introduction
• Literature review
• Empirical analysis
• Sample
• Methodology
• Results
• Conclusions

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Literature review (1/2)
The behaviour toward liquidity is affected by
firms characteristics banks liquidity position
is affected by both the size, the status type and
the product type. The size affects the
attitude of the bank toward wholesale funding,
including the access opportunity (Allen et al.,
1989) and the price of the funds obtained (Nyborg
et al., 2002). The product type offered to the
counterparties, both on the assets and
liabilities side, are able to affect the
liquidity position banks that take on demand
deposits and offer loan commitments need to hold
higher liquid buffers that can be mitigated if a
non perfect correlation holds (Kashyap et al.,
2002).
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Literature review (2/2)
REBs invest in assets that at their origination
are illiquid even though real estates are liquid
in the sense of the market microstructure theory,
they can fail to provide liquidity when the firm
need it (Holmstroem and Tirole, 2000) and, such
illiquidity, is affected by the economic cycle
(Krainer, 1999). Beyond the illiquidity of the
assets at their origination, REBs show an average
maturity of assets that is higher than the one of
liabilities, even though they show better
maturity interest rate gaps than unspecialized
banks (Blasko and Sinkey, 2006).
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Index

• Introduction
• Literature review
• Empirical analysis
• Sample
• Methodology
• Results
• Conclusions

9
Empirical analysis Sample (1/2)
Database ABI banking data Time horizon
2000-2007 Frequency of data yearly
N of banks in the sample respect to the overall Italian banking sector Total assets managed by banks in the sample respect the overall Italian banking sector


Mean 92
Mean 85
Source Bank of Italy and ABI banking data
processed by the authors
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Empirical analysis Sample (2/2)
Following Blasko and Sinkey (2006), we identify
REBs on the basis of the ratio between real
estate loanS and total assets (threshold 40)
Number of REBS respect to the overall sample Number of years in which each bank is classified as REBS


Mean 47
gt 4 years 55
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Empirical analysis Methodology (1/3)
Threshold 100
Matz and Neu, 2007
The liquidity coverage ratio identifies the
amount of unencumbered, high quality liquid
assets an institution holds that can be used to
offset the net cash outflows it would encounter
under an acute short-term stress scenario
specified by supervisors.
Threshold 100
Duttweiler, 2009
The net stable funding ratio measures the amount
of longer-term, stable sources of funding
employed by an institution relative to the
liquidity profiles of the assets funded and the
potential for contingent calls on funding
liquidity arising from off-balance sheet
commitments and obligations.
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LR
Empirical analysis Methodology (2/3)
Item Implemented proxy Factor applied
Stock of high quality liquid assets
Cash Cash 100
Qualifying marketable securities from sovereigns, central banks, public sector entities, and multi-lateral development banks Government Bonds qualified for refinancing operations by the Central Bank 100
Qualifying central bank receivables Reserves above the minimum requirement by the Central Bank 100
Domestic sovereign or central bank debt in domestic currency Domestic sovereign or central bank debt in domestic currency 100
In addition, the Committee will gather data on the following instruments to analyse the impact of this standard on the financial sector Qualifying corporate bonds rated AA or higher Qualifying corporate bonds rated A- to AA-Qualifying covered bonds rated AA or higher Qualifying covered bonds rated A- to AA- No proxy implementation 80 60 80 60
Total value of stock of highly liquid assets
Cash Outflows
Retail deposits
- stable deposits Deposits minimum 7.5
- less stable retail deposits additional categories to be determined by jurisdiction Deposits minimum 15
Unsecured wholesale funding
- Stable, small business customers Deposits minimum 7.5
- Less stable, small business customers additional categories to be determined by jurisdiction Deposits minimum 15
- non-financial corporates, no operational relationship Deposits 75
Secured funding
Funding from repo of illiquid assets and securities lending/borrowing transactions illiquid assets are lent out No proxy implementation
Amounts receivable from retail counterparties Retail overdrafts
Amounts receivable from wholesale counterparties Bank overdrafts
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NSFR
Empirical analysis Methodology (3/3)
Available Stable Funding (Sources) Available Stable Funding (Sources) Implemented proxy Required Stable Funding (Uses) Required Stable Funding (Uses) Implemented proxy
Item Factor applied Implemented proxy Item Factor applied Implemented proxy
Tier 1 2 Capital Instruments Other preferred shares and capital instruments in excess of Tier 2 allowable amount having an effective maturity of one year or greater Other liabilities with an effective maturity of 1 year or greater 100 Tier 1 2 Capital Instruments Other preferred shares and capital instruments in excess of Tier 2 allowable amount having an effective maturity of one year or greater Other liabilities with an effective maturity of 1 year or greater Cash Short-term unsecured actively-traded instruments (lt 1 yr) Securities with exactly offsetting reverse repo Securities with remaining maturity lt 1 yr Non-renewable loans to financials with remaining maturity lt 1 yr 0 Cash Securities hold for trading
Stable deposits of retail and small business customers (non-maturity or residual maturity lt 1yr) 85 Retail deposits Debt issued or guaranteed by sovereigns, central banks, BIS, IMF, EC, non-central government, multilateral development banks 5 Governement securities
Less stable deposits of retail and small business customers (non-maturity or residual maturity lt 1yr) 70 Retail deposits Unencumbered non-financial senior unsecured corporate bonds (or covered bonds) rated at least AA, maturity 1 yr 20 Proxy not implemented
Wholesale funding provided by non-financial corporate customers (non-maturity or residual maturity lt 1yr) 50 Wholesale counterparties lines of credit Unencumbered listed equity securities or non-financial senior unsecured corporate bonds (or covered bonds) rated at least A-, maturity 1 yr Gold Loans to non-financial corporate clients having a maturity lt 1 yr 50 Proxy not implemented Gold Overdrafts
All other liabilities and equity not included above 0 All other liabilities and equity not included above Loans to retail clients having a maturity lt 1 yr 85 Overdrafts
All other assets 100 All other assets
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Empirical analysis Results (1/3)
Table 1. The relationship between numerator and
the denominator of the LR
Overall Others REBs
2000 0.5021852 0.48819 0.733977
2001 0.6454966 0.642017 0.514405
2002 0.7204958 0.721337 0.329857
2003 0.6330587 0.637834 0.516824
2004 0.6799326 0.679066 0.68357
2005 0.360547 0.792391 0.888516
2006 0.7816827 0.770818 0.916589
2007 0.4262781 0.390197 0.87259
Mean correlation No REBs 64 REBS 68
Table 2. The relationship between numerator and
the denominator in the NFSR
Overall Others REBs
2000 0.9878589 0.988648 0.87805
2001 0.8834786 0.881602 0.900698
2002 0.9640367 0.973604 0.410565
2003 0.9416667 0.953117 0.763558
2004 0.8333647 0.81503 0.981694
2005 0.7017364 0.94508 0.657008
2006 0.9452888 0.946085 0.938186
2007 0.8810365 0.881283 0.905621
Mean correlation No REBs 92 REBS 80
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Empirical analysis Results (2/3)
Table 3. LR statistics for REBs and other banks
2007 2007 2006 2006 2005 2005 2004 2004
Others REBs Others REBs Others REBs Others REBs
Obs. 480 201 501 173 60 52 274 417
Mean 0.041742 0.949895 -0.050091 -0.029173 -0.07065 -2.528212 -0.274128 -1.055678
Dev. St. 4.002711 14.39675 0.423905 0.375364 0.182969 18.11419 28.01242 1.999414
Min -28.2635 -0.46581 -1.52095 -0.73525 -1.35221 -130.631 -177.177 -25.2574
Max 82.16451 204.0404 7.461202 3.298246 0.152333 1.218638 235.5864 16.10463
Z Prob (Z) Z Prob (Z) Z Prob (Z) Z Prob (Z)
Wilcoxon H0 REBsOthers 0.337 0.7365 0.439 0.6609 1.202 0.2294 1.656 0.0977

2003 2003 2002 2002 2001 2001 2000 2000
Others REBs Others REBs Others REBs Others REBs
Obs. 295 396 394 327 435 307 406 324
Mean -0.779914 -1.037483 -2.709711 -0.940388 -18.00083 -2.822106 -7.18094 -1.169203
Dev. St. 22.52245 -1.578356 18.78792 1.235592 332.4167 32.92222 55.89433 -.657854
Min -96.7952 18.6258 -211.225 -6.3373 -6909.37 -577.442 -759.539 -19.5909
Max 292.0024 5.325306 109.9227 8.247646 379.5905 4.947193 157.8445 3.772888

Z Prob (Z) Z Prob (Z) Z Prob (Z) Z Prob (Z)
Wilcoxon H0 REBsOthers -1.304 0.1922 -0.462 0.6439 -1.327 0.1845 -2.799 0.0051
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Empirical analysis Results (3/3)
Table 4 NSFR statistics for REBs and other
banks
2007 2007 2006 2006 2005 2005 2004 2004
Others REBs Others REBs Others REBs Others REBs
Obs. 490 204 513 176 63 59 277 417
Mean 0.156246 0.198587 0.026239 0.026075 0.168163 0.243124 4.333631 1.103696
Dev. St. 0.154231 0.674863 0.073279 0.074239 0.13683 0.176268 31.12509 0.341244
Min -0.01469 0 0 -0.00066 -4.2E-07 0 0 0.058694
Max 1.128477 9.558944 0.524784 0.438073 0.493425 0.949356 441.6486 3.083993

Z Prob (Z) Z Prob (Z) Z Prob (Z) Z Prob (Z)
Wilcoxon H0 REBsOthers -0.667 0.5051 0.135 0.8928 -2.411 0.0159 0.369 0.7121

2003 2003 2002 2002 2001 2001 2000 2000
Others REBs Others REBs Others REBs Others REBs
Obs. 301 396 401 328 445 307 410 324
Mean 1.345172 1.57536 2.802334 1.654038 2.04268 1.085733 1.244891 1.158526
Dev. St. 21.54399 9.140028 29.12589 10.26566 20.75772 0.316148 3.92765 0.366567
Min -283.895 0.046824 -11.8329 0.049221 -60.0217 0.050401 -73.85 0.05041
Max 236.989 182.8631 582.6147 186.9272 434.0665 2.024204 15.108 2.542183

Z Prob (Z) Z Prob (Z) Z Prob (Z) Z Prob (Z)
Wilcoxon H0 REBsOthers 1.471 0.1412 -0.055 0.956 -0.537 0.591 1.269 0.2043
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Index

• Introduction
• Literature review
• Empirical analysis
• Sample
• Methodology
• Results
• Conclusions

18
Conclusions

• Even though REBs bank hold illiquid assets and
  are featured by an average assets maturity higher
  than the average liabilities maturity, they do
  not show to hold a lower level of liquidity with
  respect to other banks
• Especially for REBs that securitize real estate
  loans, measure to evaluate the liquidity degree
  of the bank should deserve more relevance to the
  off balance sheet exposures that are able to
  drain the liquidity obtained through the sale of
  the assets and to re allocate transferred risks
  back to the originator but potentially under
  different environment conditions.

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Contact information
Claudio Giannotti University of LUM
Casamassima e-mail giannotti_at_lum.it Lucia
Gibilaro University of Bergamo e-mail
lucia.gibilaro_at_unibg.it Gianluca
Mattarocci University of Rome Tor Vergata e-mail
gianluca.mattarocci_at_uniroma2.it