Institutional development and bank stability: Evidence from transition countries

This paper takes advantage of the dynamic nature of institutional reforms in transition economies and explores the causal effects of those reforms on bank risk. Using a difference-in-difference approach, we show that banks’ financial stability increases substantially after these countries reform their legal institutions, liberalize banking, and restructure corporate governance. We also find that the effects of legal and governance reforms on bank risk may critically depend on the progress of banking reforms. A further examination of alternative risk measures reveals that the increases in financial stability among banks mainly come from the reduction of asset risk. Banks tend to have lower ROA volatility and fewer nonperforming loans after reforming the institutional environment. Finally, we split our sample into foreign and domestic banks and find that the enhancement of financial stability is more pronounced for domestic banks.     

Ability of accounting and audit quality variables to predict bank failure during the financial crisis

We examine the ability of selected accounting and audit quality variables measured in a period prior to the financial crisis (i.e., the four quarters of 2006), to predict banks that subsequently failed during the financial crisis. We employ two sets of samples from the US: a troubled banks sample that includes banks that failed in or after 2007 as well as banks classified as being troubled based on profitability, loan quality, and balance sheet position in 2007, and a full sample that includes all banks with available required data. Using the troubled banks sample, we identify six reliable predictors of bank failure: auditor type, auditor industry specialization, Tier 1 capital ratio, proportion of securitized loans, growth in loans, and loan mix. For the larger full sample of banks, we identify the following ten predictors of bank failure: auditor type, Tier 1 capital ratio, proportion of securitized loans, nonperforming loans, loan loss provisions, growth in commercial loans, growth in real estate loans, growth in overall loans, loan mix, and whether the bank is a public bank.     

Valuation and systemic risk consequences of bank opacity

We examine the effects of opacity on bank valuation and synchronicity in bank equity returns over the years 2000–2006 prior to the 2007 financial crisis. As expected, investments in opaque assets are more profitable than investments in transparent assets, and taking profitability into account, have larger valuation discounts relative to transparent assets. The valuation discounts on opaque asset investments decline over the 2000–2006 period only to be followed by a sharp reversal in 2007. The decline is coincident with a rise in bank equity share prices, decrease in transparent asset holdings by banks, and greater return synchronicity – evidence consistent with a feedback effect.     

COMMERCIAL BANK RISK: MARKET,INTEREST RATE,AND FOREIGN EXCHANGE

Because of recent structural changes in the balance sheets of banks, regulatory changes in the risk-based capital requirements, and the recent adoption of mark-to-market accounting changes, interest rate risk remains an important issue for commercial banks and an important regulatory concern. Market, interest rate, and foreign exchange risk are estimated for a sample of commercial banks using ordinary least squares from 1986 to 1991. Consistent with earlier studies, the estimated coefficients continue to be unstable. We find that interest rate risk decreases and foreign exchange risk increases. Moreover, the results differ depending on practices of the bank (money center, superregional, or regional). We find evidence consistent with earlier studies that theorize foreign exchange risk is explained by unhedged foreign loan exposure.     

The role of banks in the governance of nonfinancial firms: Evidence from Europe

The aim of our research is to investigate the important role of banks in the governance of companies listed in the Euronext 100 index. Primarily, this research seeks to examine the impact of a bank’s presence within a firm, as a creditor or shareholder, on firm performance, as well as the motivations of banks to acquire holdings, and whether the presence of a bank as a shareholder of a firm facilitates its access to bank loans. Empirical analyses are conducted with a sample of 86 nonfinancial institutions listed in the Euronext 100 index over the period 2008–2013 using the three-stage least squares method. The study shows, first, that the presence of a bank within a firm, as a creditor or shareholder, is positively related to firm performance. Moreover, the firm’s performance is an important determinant of the presence of bank shareholding. Finally, the presence of a bank as a shareholder of a firm does not facilitate its access to bank loans.     

Bank discrimination, holding bank ownership, and economic consequences: Evidence from China

This paper finds that compared with Chinese state-owned firms, non-state-owned firms have a greater propensity to hold significant ownership in commercial banks. These results are consistent with the notion that because non-state-owned firms are more likely to suffer bank discrimination for political reasons, they tend to address their financing disadvantages by building economic bonds with banks. We also find that among non-state-owned firms, those that hold significant bank ownership have lower interest expenses, and are less likely to increase cash holdings but more likely to obtain short-term loans when the government monetary policy is tight. These results suggest that the firms building economic bonds with banks can enjoy benefits such as lower financial expenses and better lending terms during difficult times. Finally, we find that non-state-owned firms with significant bank ownership have better operating performance. Overall, we find that firms can reduce discrimination through holding bank ownership.     

Unstable banking

We propose a theory of financial intermediaries operating in markets influenced by investor sentiment. In our model, banks make, securitize, distribute, and trade loans, or they hold cash. They also borrow money, using their security holdings as collateral. Banks maximize profits, and there are no conflicts of interest between bank shareholders and creditors. The theory predicts that bank credit and real investment will be volatile when market prices of loans are volatile, but it also points to the instability of banks, especially leveraged banks, participating in markets. Profit-maximizing behavior by banks creates systemic risk.     

Shareholder composition,share turnover,and returns in volatile markets: The case of international REITs

The shareholder composition of listed property companies has changed from the fragmented, retail ownership, to more concentrated, institutional ownership over the past decade. In this paper, we first document significant variation in the composition of the shareholder base across the world's five largest listed property markets. We then examine the relation between the composition of the shareholder base and stock market performance and share turnover during the turbulent trading days of 2008 and 2009. By directly relating the shareholder base of firms to excess returns and turnover on these volatile days, we are able to isolate the importance of shareholder composition during periods when trading behavior is most likely to vary across different types of shareholders. We find that both large block holdings and high levels of institutional ownership decrease trading volumes and moderate stock returns; however, the effects largely occur when stock prices move sharply downward. Moreover, these effects are strongest when ownership concentration and institutional ownership exceed 25 percent. We also find that the disaggregation of institutional investors into distinct categories (banks, pension funds, advisors, etc.) increases our understanding of stock trading and share price dynamics of listed property companies.     

Stopping contagion with bailouts: Micro-evidence from Pennsylvania bank networks during the panic of 1884

Using a newly constructed historical dataset on the Pennsylvania state banking system, detailing the amounts of “due-froms” on a debtor bank-by-debtor bank basis, we investigate the effects of the Panic of 1884 and subsequent private sector-orchestrated bailout of systemically important banks (SIBs) on the broader banking sector. We find evidence that Pennsylvania banks with larger direct interbank exposures to New York City changed the composition of their asset holdings, shifting from loans to more liquid assets and reducing their New York City correspondent deposits in the near-term. Over the long-term though, only the lower correspondent deposits effect persisted. Our findings show that the banking turmoil in New York City impacted more exposed interior banks, but that bailouts of SIBs by the New York Clearing House likely short-circuited a full-scale banking panic.     

Reprint of: Stopping contagion with bailouts: Micro-evidence from Pennsylvania bank networks during the panic of 1884

Using a newly constructed historical dataset on the Pennsylvania state banking system, detailing the amounts of “due-froms” on a debtor bank-by-debtor bank basis, we investigate the effects of the Panic of 1884 and subsequent private sector-orchestrated bailout of systemically important banks (SIBs) on the broader banking sector. We find evidence that Pennsylvania banks with larger direct interbank exposures to New York City changed the composition of their asset holdings, shifting from loans to more liquid assets and reducing their New York City correspondent deposits in the near-term. Over the long-term though, only the lower correspondent deposits effect persisted. Our findings show that the banking turmoil in New York City impacted more exposed interior banks, but that bailouts of SIBs by the New York Clearing House likely short-circuited a full-scale banking panic.     

Corporate cash holdings and CEO compensation incentives

We examine the effect of chief executive officer (CEO) compensation incentives on corporate cash holdings and the value of cash to better understand how compensation incentives designed to enhance the alignment of manager and shareholder interests could influence stockholder-bondholder conflicts. We find a positive relation between CEO risk-taking (vega) incentives and cash holdings, and we find a negative relation between vega and the value of cash to shareholders. The negative effect of vega on the value of cash is robust after controlling for corporate governance, is stronger in firms with high leverage, is reversed for unlevered firms, and is not present in financially constrained firms. We also find that the likelihood of liquidity covenants in new bank loans is increasing in CEO vega incentives. Our evidence primarily supports the costly contracting hypothesis, which asserts that bondholders anticipate greater risk-taking in high vega firms and, therefore, require greater liquidity.     

Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects

This paper examines the broader effects of the US financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany using a unique data set of German savings banks during the period 2006 through 2008 for which we have the universe of loan applications and loans granted. Our experimental setting allows us to distinguish between savings banks affected by the US financial crisis through their holdings in Landesbanken with substantial subprime exposure and unaffected savings banks. The data enable us to distinguish between demand and supply side effects of bank lending and find that the US financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down, it is not substantially different for the affected and nonaffected banks. More important, we find evidence of a significant supply side effect in that the affected banks reject substantially more loan applications than nonaffected banks. This result is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared with consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects.     

Association Between Borrower and Lender State Ownership and Accounting Conservatism

We examine the association between borrower (firm) and lender (bank) state ownership and accounting conservatism for a sample of Chinese firms. We hypothesize that state‐owned enterprises (SOEs) adopt less conservative accounting than non‐state‐owned enterprises (NSOEs) because lenders are less concerned with downside risk for SOEs than for NSOEs. We also hypothesize a negative relation between conservatism and the fraction of total loans a firm borrows from state‐owned banks (SBs) because SBs have weaker demand for assurance of sufficient net assets to cover loan repayments than non‐state‐owned banks (NSBs). We find support for both hypotheses. Further analyses reveal that: (1) firms that borrow from commercial SBs exhibit more conservative accounting than firms that borrow from policy SBs and (2) firms adopt more conservative accounting as they get more loans from banks with foreign ownership or exclusively foreign banks. However, the results of these additional analyses are to some extent sensitive to alternative measures of accounting conservatism.     

Bank competition and corporate financial asset holdings

This paper investigates how bank competition measured by the geographical distribution of bank branches impacts the financial asset holdings of nonfinancial firms. By using a sample of listed nonfinancial firms in China between 2007 and 2019, we find that intensified bank competition caused by the increase in the number of bank branches around firms significantly increases their noncash financial asset holdings, especially for the firms with a higher level of credit constraints or a greater degree of information asymmetry. The result implies that achieving higher yields is the underlying motive for firms to hold noncash financial assets. Moreover, the competition among non-state-owned banks shows a greater impact on corporate financial asset holdings, and the impact of bank competition on noncash financial asset holdings is more pronounced for non-state-owned firms. Our findings provide insight into the determinants of noncash financial asset holdings of firms in a transitional economy.     

DEBT FORGIVENESS AND STOCK PRICE REACTION OF LENDING BANKS: THEORY AND EVIDENCE FROM JAPAN

We provide a simple model for analyzing how debt forgiveness affects the stock price of a lending bank. Our model shows that although debt forgiveness increases shareholder wealth of a bank in healthy financial condition, it decreases shareholder wealth of a bank in unhealthy financial condition. We empirically investigate the announcement effect of debt forgiveness on bank stock prices in Japanese markets. On average, lending banks experience a significant negative announcement effect with respect to debt forgiveness. Consistent with the prediction of the model, we find a negative relation between the announcement effect and the net bad loan ratio as a proxy of the unhealthiness of the financial condition of the bank.     

Derivatives holdings and systemic risk in the U.S. banking sector

This paper studies the impact of the banks’ portfolio holdings of financial derivatives on the banks’ individual contribution to systemic risk over and above the effect of variables related to size, interconnectedness, substitutability, and other balance sheet information. Using a sample of 95 U.S. bank holding companies from 2002 to 2011, we compare five measures of the banks’ contribution to systemic risk and find that the new measure proposed in this study, Net Shapley Value, outperforms the others. Using this measure we find that banks’ aggregate holdings of five classes of derivatives do not exhibit a significant effect on the bank’s contribution to systemic risk. On the contrary, the banks’ holdings of certain specific types of derivatives such as foreign exchange and credit derivatives increase the banks contributions to systemic risk whereas holdings of interest rate derivatives decrease it. Nevertheless, the proportion of non-performing loans over total loans and the leverage ratio have much stronger impact on systemic risk than derivatives holdings. Therefore, the derivatives’ impact plays a second fiddle in comparison with traditional banking activities related to the former two items.     

Characteristics of failed U.S. commercial banks: an exploratory study

This study uses survival analysis to determine how early the indications of bank failure can be observed. We find that banks with high loan to asset and high personal loan to assets ratios are more likely to survive. Older banks and banks with high real estate and agricultural loans, loan loss allowance, loan charges off and non‐performing loans to assets ratio are more likely to fail. It is possible to predict survival functions of <50% for failed banks, 3 years or less before failure. Moreover, we find that most of the variables present a behaviour that departs from Benford’s Law.     

Portfolio rebalancing and the transmission of large-scale asset purchase programs: Evidence from the Euro area

The European Central Bank's large-scale asset purchase program targeted safe assets, but also aimed to impact prices of risky assets. The mechanism for this is the “portfolio rebalancing channel”, where financial institutions’ portfolio decisions impact financial prices more broadly. We examine this mechanism using cross-sectional heterogeneity in how the financial portfolios of different sectors of the European economy were affected around the purchase program. We find evidence of rebalancing. In vulnerable countries, where macroeconomic unbalances and relatively high risk premia remained, we document rebalancing towards riskier securities. In less vulnerable countries, based on granular information for large European banks, we document rebalancing toward bank loans.     

English commercial bank liquidity, 1860-1913

This article presents new half-yearly time series for the asset ratios of commercial banks in England and Wales, 1860-1913. The series reveal new evidence on the nature of the banks' business and are, therefore, relevant to the debate on the role of banks in British economic development. The new estimates are used to examine trends and short-term changes in bank liquidity. Analysis is concerned with the changing stability of bank asset structure and with substitutability across different asset ratios. The main finding is of a sharp, long-term increase in liquidity and a concomitant decline in bank credit to the non-bank, private sector. The article also highlights the significance of short-term shocks to the trend increase in bank liquidity. The new findings are supportive of the argument that, over time, English banks became less involved with the non-bank private sector. In general, the results confirm that the English and Welsh bank asset structure became more liquid over time. However, no detailed breakdown of bank loans to the non-bank, private sector (for example, between business loans and personal loans), is available for this period. Moreover, the current study offers no evidence as to the trend in financial provision to the business sector from institutions other than the commercial banks. Nevertheless, the results are clear in showing a strong upward trend in commercial bank liquidity and a relative decline in private sector credit provision by the commercial banks.     

后危机时代商业银行不良资产形成因素的实证研究——基于江西省数据的经验分析

2009年,我国信贷高增长引致未来银行不良资产大量积聚的潜在风险引起了各方关注。在后金融危机背景下,研究商业银行不良贷款的现状,发掘不良贷款存在的根源,对信贷风险管理具有重要的现实意义。本文在回顾以前研究成果的基础上,试图以更加全面的视角,从宏观经济金融环境、宏观调控政策以及银行业运行情况等三个方面深入分析商业银行不良资产的影响因素。文章运用协整分析、格兰杰因素检验和脉冲响应模型对资产价格、固定资产投资、通胀率、存款准备金率、基准利率、银行利润等指标与不良贷款率（或不良贷款余额）的因果关系、影响程度进行了实证分析。结果表明,宏观经济金融形势的变化和货币政策调整都是影响不良贷款变化的重要原因,而不良贷款率的变化对商业银行利润影响明显。