Banks’ capital,regulation and the financial crisis

This paper investigates whether regulatory capital requirements play an important role in determining banks’ equity capital. We estimate equity capital regressions using panel data of a sample of 560 banks for 2004–2010. Our results suggest that regulatory capital requirements are not first order determinants of banks’ capital structure. We document differences on the effect of most factors on banks’ share of equity according to the type of bank and to the region of the bank. Finally, we show that the determinants of this share are sensitive to the recent international financial crisis and to a set of regulatory country factors.     

Partial cross-quantilogram networks: Measuring quantile connectedness of financial institutions

We propose partial cross-quantilogram networks for measuring the connectedness of 30 China’s financial institutions at different quantiles. We find that networks at the extreme quantiles are more closely connected than those at the median quantile. The network density and centrality show that the systemically important financial institutions vary across different quantiles. We observe an asymmetric effect in quantile connectedness during the period of “2015–16 Chinese stock market turbulence;” that is, the network connectedness at the lower quantile (i.e., 0.05 quantile) is higher than that at the upper and median quantiles (i.e., 0.95 and 0.50 quantiles). By analyzing the similarity of networks across quantiles, we find that the similarity index is relatively high in the crisis period. Our study provides useful information on connectedness of financial institutions for regulators and investors.     

Spillovers and diversification potential of bank equity returns from developed and emerging America

We examine the network spillovers, portfolio allocation characteristics and diversification potential of bank returns from developed and emerging America. We draw our results by applying a directional spillover index, the tail-event driven network (TENET) and nonlinear portfolio optimization methods on bank returns. We find that the spillovers and connectedness among banks from emerging America are noticeably smaller than those among banks from developed America. The largest emerging market spillover transmitters and receivers are the banks from Brazil, followed by the banks from Chile. The largest developed market spillover transmitter is JP Morgan Chase. The connectedness among banks from developed America is dominated by the banks from the USA, relative to those from Canada. The total connectedness of the emerging market banks is more intensified than that of the banks from developed America due to the effect of the COVID-19 pandemic. The portfolio optimization shows that in developed America, the largest banks from the USA are the largest risk contributors to total portfolio risk, whereas the banks from Canada contribute the least risk. In emerging America, the banks from Brazil contribute the most risk to total portfolio risk while the banks from Peru and one bank from Colombia contribute the least risk. The portfolio of banks from emerging America offers greater diversification potential and lower total portfolio allocation risk.     

Accounting enlightenment in the age of reason

We scrutinize the role financial reporting for fair values, asset securitizations, derivatives and loan loss provisioning played in the Financial Crisis. Because banks were at the center of the Financial Crisis, we focus our discussion and analysis on the effects of financial reporting by banks. We conclude fair value accounting played little or no role in the Financial Crisis. However, transparency of information associated with asset securitizations and derivatives likely was insufficient for investors to assess properly the values and riskiness of bank assets and liabilities. Although the FASB and IASB have taken laudable steps to improve disclosures relating to asset securitizations, in our view, the approach for accounting for securitizations in the IASB's Exposure Draft that would require banks to recognize whatever assets and liabilities they have after the securitization is executed better reflects the underlying economics of the securitization transaction. Regarding derivatives, we recommend disclosure of more disaggregated information, disclosure of the sensitivity of derivatives' fair values to changes in market risk variables, and implementing a risk-equivalence approach to enable investors to understand better the leverage inherent in derivatives. We also conclude that because the objectives of bank regulation and financial reporting differ, changes in financial reporting needed to improve transparency of information provided to the capital markets likely will not be identical to changes in bank regulations needed to strengthen the stability of the banking sector. We discuss how loan loss provisioning may have contributed to the Financial Crisis through its effects on procyclicality and on the effectiveness of market discipline. Accounting standard setters and bank regulators should find some common ground. However, it is the responsibility of bank regulators, not accounting standard setters, to ensure the stability of the financial system.     

International Variation in Bank Accounting Information Content

This study explores the cross‐country impact of financial system and banking regulations on the information content of bank earnings and book value. Test results provide empirical evidence that financial system and banking regulations have a joint effect on the association of equity price with earnings and book value components in Germany, France, the United Kingdom and United States. This effect is explainable by the objective bank function, which shows that earnings of the period determine the terminal book value, thus consistent with the clean surplus accounting approach. Cross‐country variation in bank accounting information content calls for caution in interpreting international bank financial and operating ratios.     

Why do Japanese firms prefer multiple bank relationship? Some evidence from firm-level data

We explore the determinants of the number of long-term bank relations of listed Japanese firms using a unique data set covering the sample period of 1982–1999. Japanese listed firms have about seven long-term bank loan relations on average, but show a large variation around the mean. We use data on loan and equity ownership to address the impact of the Japan-specific bank–firm relations and bank control on the number of loans decision. We find that having a relation with a top-equity holding bank increases the number of bank relations and debt-rich and cash-poor firms have more bank relations.     

Measuring the Connectedness of the Global Economy

We develop a technique to exploit forecast error variance decompositions to evaluate the macroeconomic connectedness embedded in any multi-country macroeconomic model with an approximate vector autoregressive (VAR) representation. We apply our technique to a large global VAR model covering 25 countries and derive vivid representations of macroeconomic connectedness. We find that the US exerts a dominant influence in the global economy and that Brazil, China, and the Eurozone are also globally significant. Recursive analysis over the period of the global financial crisis shows that shocks to global equity markets are transmitted rapidly and forcefully to real trade flows and real GDP.     

Connectedness and systemic risk spillovers analysis of Chinese sectors based on tail risk network

This paper investigates the systemic risk spillovers and connectedness in the sectoral tail risk network of Chinese stock market, and explores the transmission mechanism of systemic risk spillovers by block models. Based on conditional value at risk (CoVaR) and single index model (SIM) quantile regression technique, we analyse the tail risk connectedness and find that during market crashes, stock market exposes to more systemic risk and more connectedness. Further, the orthogonal pulse function shows that Herfindahl-Hirschman Index (HHI) of edges has a significant positive effect on systemic risk, but the impact shows a certain lagging feature. Besides, the directional connectedness of sectors shows that systemic risk receivers and transmitters vary across time, and we adopt PageRank index to identify systemically important sector released by utilities and financial sectors. Finally, by block model we find that the tail risk network of Chinese sectors can be divided into four different spillover function blocks. The role of blocks and the spatial spillover transmission path between risk blocks are time-varying. Our results provide useful and positive implications for market participants and policy makers dealing with investment diversification and tracing the paths of risk shock transmission.     

Region-wide connectedness of Asian equity and currency markets

This study systemically analyzes the dynamics of interdependence between the Asian equity and currency markets. The novelty of our study is that unlike other studies that explore either co-movements among equity markets or co-movements among currency markets, we pay particular attention to the interdependence between the two in terms of both return and volatility connectedness. We find that the contribution of crossspillovers between the Asian equities and currencies is substantial for the region-wide connectedness of both the returns and volatilities. We also find that the short-term spillovers are far more important for the return spillovers, while the long-term spillovers are far more important for the volatility spillovers, presumably reflecting the long-lasting effects of volatility shocks. All the results consistently underline the pivotal role of cross-interdependence between equity and currency markets, both as channels for integrating Asian financial markets and as sources of financial contagion across these markets. Our findings will provide useful guidance for portfolio risk management to adopt better hedging strategies for foreign exchange risks involved in the international investment of Asian equities.     

Inefficiency and heterogeneity in Turkish banking: 1990–2000

Recent studies have stressed the importance of privatization and openness to foreign competition for bank efficiency and economic growth. We study bank efficiency in Turkey, an emerging economy with great heterogeneity in bank types and ownership structures. Earlier studies of Turkish banking had three limitations: (i) excessive reliance on cost‐function frontier analyses, wherein volume of loans is a measure of banking output; (ii) pooling all banks or imposing ad hoc heterogeneity assumptions; and (iii) lack of a comprehensive panel data set for proper analysis of productivity and heterogeneity. We use an estimation–classification procedure to find likelihood‐driven classification of bank technologies in an 11‐year panel. In addition, we augment traditional cost‐frontier analysis with a labour‐efficiency analysis. We conclude that state banks are not particularly inefficient overall, but that they do utilize labour inefficiently. This partially supports recent calls for privatization. We also conclude that special finance houses (or Islamic banks) utilize the same technology as conventional domestic banks, and do so relatively efficiently. This suggests that they do not cause harm to the financial system. Finally, we conclude that foreign banks utilize a different technology from domestic ones. This suggests that one should not overstate their value to the financial sector. Copyright © 2005 John Wiley & Sons, Ltd.     

Bank equity and macroprudential policy

This paper proposes an alternative macroprudential policy in the framework of Gertler et al. (2012). In their model, the central bank subsidizes bank outside equity, where the subsidy rate is determined by the shadow cost of the deposit. We find that the alternative rule in which the subsidy rate responds to the aggregate bank outside equity ratio is welfare improving because it has a better stabilization effect on the bank asset deterioration after a financial shock. We disentangle different channels through which macroprudential policies affect the economy and demonstrate that the better stabilization in the post-crisis economy has a positive effect on the economy in normal times through security prices.     

Global Financial Transmission of Monetary Policy Shocks*

The paper analyses the transmission of US monetary policy shocks to global equity markets and the macroeconomic determinants of the underlying transmission process. We show that there is a substantial cross‐country heterogeneity in reactions across 50 equity markets worldwide, with returns falling on average around 2.7% in response to a 100 basis point tightening of US monetary policy, but ranging from a zero response in some to a reaction of 5% or more in other markets. As to the determinants of the strength of transmission to individual countries, we test the relevance of their macroeconomic policies and the role of real and financial integration. We find that in particular the degree of global integration of countries – and not a country's bilateral integration with the United States – is a key determinant for the transmission process.     

Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm‐year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under‐investment and over‐investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under‐investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over‐investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.     

Similar,but still different: how US multinational companies in Germany and Switzerland use host‐country training and skill practices

We examine in how far US subsidiaries in Germany and Switzerland display characteristics of a strategic fit with their host country and mostly find support for our predictions. Subsequently we determine each subsidiary's host‐country fit and test for within country differences in using local training and skill practices. We find the extent of continuing vocational education and training and the extent to which training on the job is important to vary with host‐country fit in Germany, while in Switzerland, as predicted, we find no such relations.     

BANK COMPETITION AND FINANCIAL STABILITY: MUCH ADO ABOUT NOTHING?

The theoretical literature gives conflicting predictions on how bank competition should affect financial stability, and dozens of researchers have attempted to evaluate the relationship empirically. We collect 598 estimates of the competition‐stability nexus reported in 31 studies and analyse the literature using meta‐analysis methods. We control for 35 aspects of study design and employ Bayesian model averaging to tackle the resulting model uncertainty. Our findings suggest that the definition of financial stability and bank competition used by researchers influences their results in a systematic way. The choice of data, estimation methodology, and control variables also affects the reported coefficient. We find evidence for moderate publication bias. Taken together, the estimates reported in the literature suggest little interplay between competition and stability, even when corrected for publication bias and potential misspecifications.     

Determinants of Capital Structure: United Kingdom Versus Continental European Countries

In this paper, we analyze how country‐specific differences influence capital structure indirectly through firm‐specific variables. We apply a system Generalized Method of Moments technique to a panel data sample of companies from five countries (France, Germany, Italy, Spain and the United Kingdom) during the period 1998–2008. As the different financial systems of European economies (bank‐oriented or market‐oriented) may influence capital structure differently through firm‐specific variables, we first examine the determinants of capital structure for each country separately and we then analyze whether the observed differences between the United Kingdom and the continental European countries are relevant. The results show that there are substantial differences in the capital structure choices of firms across five major European countries. These differences are motivated by the type of financial systems of the countries (bank‐oriented and market‐oriented) and influence the capital structure indirectly through the firm‐specific variables. Overall, our results support the relevance of the differences in the capital structure choices of firms across five major European countries, and in particular, the singularity of the United Kingdom (a market‐oriented economy) as opposed to continental European countries (bank‐oriented economies).     

On the network topology of variance decompositions: Measuring the connectedness of financial firms

We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness. We also show that variance decompositions define weighted, directed networks, so that our connectedness measures are intimately related to key measures of connectedness used in the network literature. Building on these insights, we track daily time-varying connectedness of major US financial institutions’ stock return volatilities in recent years, with emphasis on the financial crisis of 2007–2008.     

Global Credit Risk: World,Country and Industry Factors

We investigate the dynamic properties of systematic default risk conditions for firms in different countries, industries and rating groups. We use a high‐dimensional nonlinear non‐Gaussian state‐space model to estimate common components in corporate defaults in a 41 country samples between 1980:Q1 and s2014:Q4, covering both the global financial crisis and euro area sovereign debt crisis. We find that macro and default‐specific world factors are a primary source of default clustering across countries. Defaults cluster more than what shared exposures to macro factors imply, indicating that other factors also play a significant role. For all firms, deviations of systematic default risk from macro fundamentals are correlated with net tightening bank lending standards, suggesting that bank credit supply and systematic default risk are inversely related. Copyright © 2016 John Wiley & Sons, Ltd.     

The evolution of scale economies in US banking

Continued consolidation of the US banking industry and a general increase in the size of banks have prompted some policymakers to consider policies that discourage banks from getting larger, including explicit caps on bank size. However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale. This paper presents new estimates of returns to scale for US banks based on nonparametric, local‐linear estimation of bank cost, revenue, and profit functions. We report estimates for both 2006 and 2015 to compare returns to scale some 7 years after the financial crisis and 5 years after enactment of the Dodd–Frank Act with returns to scale before the crisis. We find that a high percentage of banks faced increasing returns to scale in cost in both years, including most of the 10 largest bank holding companies. Also, while returns to scale in revenue and profit vary more across banks, we find evidence that the largest four banks operate under increasing returns to scale.