Bank funding structures and risk: Evidence from the global financial crisis

This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001–09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with pre-crisis bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border (Global) banks were more vulnerable to solvency risk due to excessive leverage. In fact, a 3.5 percentage point increase in the pre-crisis capital buffers of Global banks would have caused a 48 percentage point in their probability of failure during the crisis. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.     

How does deposit insurance affect bank risk? Evidence from the recent crisis

Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks which lead to excessive risk-taking. We examine the relation between deposit insurance and bank risk and systemic fragility in the years leading up to and during the recent financial crisis. We find that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. Our findings suggest that the “moral hazard effect” of deposit insurance dominates in good times while the “stabilization effect” of deposit insurance dominates in turbulent times. The overall effect of deposit insurance over the full sample we study remains negative since the destabilizing effect during normal times is greater in magnitude compared to the stabilizing effect during global turbulence. In addition, we find that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.     

Minimum capital requirements,bank supervision and special resolution schemes. Consequences for bank risk-taking

This paper analyzes the incentive effects of special bank resolution schemes which were introduced during the recent financial crisis. These schemes allow regulators to take control over a systemically important financial institution before bankruptcy. We ask how special resolution schemes influence banks’ risk-taking and whether regulators should combine them with minimum capital requirements. We model a single bank which is supervised by a regulator who receives an imperfect signal about the bank's probability of success. We find that capital requirements are better than resolution from a welfare point of view if the quality of the signal is low, if it is difficult for the bank to attract deposits, or if the project return is low.     

Enhancing bank transparency: Financial reporting quality,fraudulent peers and social capital

This study examines the role of social norms in financial markets by relating bank transparency to social capital. Using comprehensive data on commercial banks, we provide empirical evidence that high social capital contributes to more transparent financial reporting, thereby enabling more precise risk assessments and promoting financial stability. We find that the effect of social capital is more pronounced when commercial banks are more complex and disclosure incentives of bank managers are strong. Our results suggest that more opaque reporting by peers explains lower transparency but financial misreporting is less contagious when social capital is high. Our study suggests that social capital can effectively improve reporting transparency when other mechanisms are not effective, thus securing financial system stability.     

货币政策和银行风险承担：一种非线性关系

宽松的货币政策会通过估值、收入和现金流机制,追逐收益机制以及中央银行沟通和反应机制等渠道增加银行风险承担,通过风险转移机制降低银行风险承担,从而导致货币政策与银行风险承担之间可能存在复杂的非线性关系。本文使用面板阈值模型,基于我国银行业数据研究了货币政策对银行风险承担的影响,发现我国货币政策对银行风险承担的影响存在门限效应,即货币政策对银行风险承担的影响取决于货币政策基准利率偏离泰勒规则利率的程度。当这种偏离小于门限值时,宽松货币政策会增加银行风险承担;当这种偏离大于门限值时,宽松货币政策会降低银行风险承担。本文研究对更好地理解我国货币政策对银行风险承担及金融稳定的影响有一定参考意义。     

Financial liberalization and bank risk-taking: International evidence

This paper analyzes the channels through which financial liberalization affects bank risk-taking in an international sample of 4333 banks in 83 countries. Our results indicate that financial liberalization increases bank risk-taking in both developed and developing countries but through different channels. Financial liberalization promotes stronger bank competition that increases risk-taking incentives in developed countries, whereas in developing countries it increases bank risk by expanding opportunities to take risk. Capital requirements help reduce the negative impact of financial liberalization on financial stability in both developed and developing countries. However, official supervision and financial transparency are only effective in developing countries.     

Competition and financial stability in European cooperative banks

Cooperative banks are a driving force for socially committed business at the local level, accounting for around one fifth of the European Union (EU) bank deposits and loans. Despite their importance, little is known about the relationship between bank stability and competition for these small credit institutions. Does competition affect the stability of cooperative banks? Does the financial stability of banks increase/decrease when competition is higher? We assess the dynamic relationship between competition and bank soundness (both in the short and long run) among European cooperative banks between 1998 and 2009. We obtain three main results. First, we provide evidence in line with the competition-stability view proposed by Boyd and De Nicolò (2005). Bank market power negatively “Granger-causes” banks' soundness, meaning that there is a positive relationship between competition and stability. Second, we find that this fundamental relationship does not change during the 2007–2009 financial crisis. Third, we show that increased homogeneity in the cooperative banking sector positively affects bank soundness. Our findings have important policy implications for designing and implementing regulations that enhance the overall stability of the financial system and in particular of the cooperative banking sector.     

Capital ratios and bank lending: A matched bank approach

This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2011, that the relationship between capital ratios and bank lending was significant during and shortly following the recent financial crisis but not at other times. We find that the relationship between capital ratios and loan growth is stronger for banks where loans are contracting than where loans are expanding. We also show that the elasticity of bank lending with respect to capital ratios is higher when capital ratios are relatively low, suggesting that the effect of capital ratio on bank lending is nonlinear. In addition, we present findings on the relationship between bank capital and lending by bank size and loan type.     

Do bank regulation,supervision and monitoring enhance or impede bank efficiency?

The recent global financial crisis has spurred renewed interest in identifying those reforms in bank regulation that would work best to promote bank development, performance and stability. Building upon three recent world-wide surveys on bank regulation (,  and ), we contribute to this assessment by examining whether bank regulation, supervision and monitoring enhance or impede bank operating efficiency. Based on an un-balanced panel analysis of 4050 banks observations in 72 countries over the period 1999–2007, we find that tighter restrictions on bank activities are negatively associated with bank efficiency, while greater capital regulation stringency is marginally and positively associated with bank efficiency. We also find that a strengthening of official supervisory power is positively associated with bank efficiency only in countries with independent supervisory authorities. Moreover, independence coupled with a more experienced supervisory authority tends to enhance bank efficiency. Finally, market-based monitoring of banks in terms of more financial transparency is positively associated with bank efficiency.     

Bank risk,competition and bank connectedness with firms: A literature review

The outbreak of the 2007–2009 financial crisis and of the European sovereign debt crisis again raised questions about the vulnerability and the behaviour of banking institutions. The unconventional monetary policies that followed have flattened the yield curve and created a low interest rates environment. This can give rise to risk-taking behaviour from banks and can therefore undermine the stability of the banking system with negative impact of the credit supply, corporate investment and real economy. This article proposes a literature review on the main determinants of bank lending and risk-taking decisions, going through the competition in the banking market, the bank connectedness with firms and the role of monetary and banking authorities. The systemic risk concept is also discussed as well as its drivers and potential measures that should be monitored by prudential authorities in order to preserve financial stability.     

The impact of opacity on bank valuation during the global financial crisis: A channel analysis

Prior literature suggests that opacity in the banking industry is mainly caused by a lack of informativeness in the assessment of the quality of bank assets. Examining a sample of bank holding companies in the United States, we find that there is a negative relationship between opacity and bank valuation during the 2007–2009 global financial crisis. We further attempt to identify two potential channels through which opacity negatively affects bank valuation during the financial crisis: a cash flow channel and an expected return channel. We show that one channel flows from bank profitability, measured by return on equity and return on assets, confirming a cash flow channel, whereas an expected return channel, proxied by the implied cost of capital, only works for small banks. Overall, this study sheds light on the relationship between in-transparency and bank value discount during a global recession.     

National culture and bank risk-taking

We investigate the relation between national cultural values and bank risk. Despite the rigid transnational regulatory oversight of systemic European banks, we find evidence of an economically significant association between cultural values and domestic bank risk. Specifically, we report a positive (negative) association between the cultural values of individualism and hierarchy (trust) and domestic bank risk-taking. Consistent with our predictions, this relation weakened during the recent financial crisis and does not hold for global banks, regardless of the period under investigation. Our findings are robust to endogeneity tests that mitigate concerns regarding reverse causality and confounding effects affecting our conclusions.     

The Determinants of Bank Capital Ratios in a Developing Economy

This paper reports new findings on the determinants of bank capital ratios. The results are from an unbalanced panel data set spanning eight years around the period of the 1997–1998 Asian financial crisis. Test results suggest a strong positive link between regulatory capital and bank management’s risk-taking behaviour. The risk-based capital standards of the regulators did not have an influence on how regulatory capital is adjusted by low-capitalized banks, perhaps due to the well-documented banking fragility during the test period. Finally, bank capital decisions seem not to be driven by bank profitability, which finding is inconsistent with developed country literature that has for long stressed the importance of banks’ earnings as driving capital ratios. Although the study focuses only on one developing economy, these findings may help to identify the correlates of bank capital ratios in both developed and developing economies since this topic has received scant attention of researchers. These findings are somewhat consistent with how banks engaging in risky lending across the world could have brought on the 2007–2008 banking liquidity and capital erosion crisis.     

结售汇如何影响银行风险承担水平?——基于银行资产负债表的视角

本文构建了一个基于银行资产负债表的理论模型,研究了结售汇对银行风险承担水平的影响机制,并采用结售汇报表数据进行实证检验。结果表明,为实现利润最大化,银行会将外汇流入创造的流动性用于投放较高风险的贷款,导致净结汇对银行风险承担水平有正向影响,异质性分析结果显示大型银行受影响程度高于中小银行。本文结论意味着,当考虑结售汇波动可能进一步加剧时,有必要出台更多结构性政策,补足外汇流入减少带来的货币缺口,优化存款市场结构,稳定金融机构流动性预期,以缓冲外需冲击可能带来的影响,并激励银行服务重心进一步下沉,为小微企业提供更多信贷支持,完成好金融服务实体经济的重要使命。     

The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.     

Bank accounting conservatism and bank loan pricing

This paper studies the effects of bank accounting conservatism on the pricing of syndicated bank loans. We provide evidence that banks timelier in loss recognition charge higher spreads. We go onto consider what happens to the relationship between spreads and timeliness in loss recognition during the financial crisis. During the crisis, banks timelier in loss recognition increase their spreads to a lesser extent than banks less timely in loss recognition. These findings are broadly consistent with the argument that conditional accounting conservatism serves a governance role. The policy implication is that banks timelier in loss recognition exhibit more prudent and less pro-cyclical loan pricing behaviour.     

Chair-CEO generation gap and bank risk-taking

Poor bank governance has disastrous consequences for economies as the 2007–2009 financial crisis has shown. In the aftermath, board diversity is identified as an effective mechanism to enhance bank governance. Diversity, creating cognitive conflict between board members, is expected to enhance board's independence of thought to better perform monitoring and advising functions. Age is a key demographic measure and age dissimilarity between the chair and the CEO in non-financial firms leads to better economic outcomes (Goergen, Limbach, & Scholz, 2015). In this paper, we examine whether chair-CEO age dissimilarity can mitigate banks' excessive risk-taking behaviour. Using a unique sample of 100 listed banks in Europe between 2005 and 2014, we find that age difference between the chair and the CEO reduces bank risk-taking. A chair-CEO generational gap –defined as a minimum of 20 years' age difference– has a larger impact in reducing risk-taking.     

The influence of accounting enforcement on earnings quality of banks: Implications of bank regulation and the global financial crisis

We study the effects of country-level accounting enforcement on earnings quality of banks and whether bank regulation substitutes or complements the effect of accounting enforcement on bank earnings quality. We also examine whether the influence of accounting enforcement on bank earnings quality changed after the global financial crisis. Using a sample of listed banks from 40 countries between 2001 and 2014, and abnormal loan loss provisions (ALLP) as our main proxy for earnings quality, we document a consistent and strong association between accounting enforcement and bank earnings quality. More specifically, an increase in accounting enforcement decreases the level of ALLP and decreases the propensity to manage earnings to avoid losses. Furthermore, we provide empirical evidence that bank regulation complements the effect of accounting enforcement on bank earnings quality. Finally, unlike in the pre-crisis period, we find a positive association between accounting enforcement and income-decreasing ALLP in the post-crisis period, which indicates that stronger accounting enforcement is associated with more conservative earnings and higher loan loss reserves. Overall, our results indicate that accounting enforcement reduces opportunistic earnings management.     

Bank credit risk and macro-prudential policies: Role of counter-cyclical capital buffer

This paper investigates the impact of macro-prudential policy (proxied by the counter-cyclical capital buffer (CCyB)) on bank credit risk during uncertain times, as banking sector stability is crucial in promoting financial intermediation. Using a unique daily data set consisting of 4939 credit default swaps (CDS) of 70 banks from 25 countries over the period 2010–2019, we find that CCyB tightening decreases bank-level CDS spreads, while CCyB loosening increases CDS spreads. This heterogeneous effect of CCyB arises due to its asymmetric effect on the capital ratio (i.e., the equity-to-total assets ratio) of banks. Tightening CCyB significantly increases capital, whereas loosening CCyB does not impact capital. Thus, the risks that emanate from the banking sector during periods of heightened uncertainty and financial distress can be significantly dampened when CCyB regulation is enabled. Consequently, macro-prudential policies for banks to hold higher levels of capital during good times are justified to contain financial market risks during downturns.     

National culture and bank performance: Evidence from the recent financial crisis

We examine whether the prevailing national culture has been material in determining bank performance during the recent financial crisis. In this paper, we focus on three particular national culture dimensions: uncertainty avoidance, individualism/collectivism, and power distance. We expect banks from high uncertainty avoidance and power distance societies to perform relatively better during the recent financial crisis. On the other hand, banks in individualistic (collectivist) societies are likely to perform worse (better) during the crisis. Using an international sample of 3438 banks from 48 countries, we find support for our main conjectures. Specifically, we establish that uncertainty avoidance, collectivism, and power distance have a first order impact on bank performance during the crisis. Our results are robust to a battery of additional checks, including additional variables, alternative samples, and correcting for potential endogeneity.