HOW DID THE FINANCIAL CRISIS AFFECT SMALL-BUSINESS LENDING IN THE UNITED STATES?

We analyze changes in lending by U.S. banks to businesses from 1994 to 2011. We find that lending to businesses, and in particular to small businesses, declined precipitously following onset of the financial crisis. We also examine the relative changes in business lending by banks that did, and did not, receive Troubled Asset Relief Program (TARP) funds from the U.S. Treasury, and find that banks receiving capital injections from the TARP failed to increase their small-business lending. Finally, we find strong and significant positive relations of both bank capital adequacy and profitability with small-business lending.     

EFFECT OF FEDERAL RESERVE POLICIES ON BANK EQUITY RETURNS

We investigate the reaction of bank equity returns to changes in the relevant Federal Reserve (Fed) policy tool, which is the federal funds rate during periods of interest rate targeting and the discount rate during periods of reserves targeting. Three policy periods from 1974 to 1996 are investigated. We find that bank equity returns are inversely related to changes in the relevant Fed policy tool and that the degree of sensitivity of bank equity returns is conditioned on the direction of the change in the Fed policy tool. Also, we find that values of larger commercial banks and low‐capital‐ratio commercial banks are more exposed to changes in the relevant Fed policy tool. JEL classification: G11, G12, G14.     

Firm balance sheets and monetary policy transmission

The functioning of internal capital markets in financial conglomerates facilitates a novel identification strategy of the balance sheet channel of monetary policy. We look at small subsidiary banks that are affiliated with the same holding company but operate in different geographical areas. These banks face the same marginal cost of funds due to internal capital markets, but face different borrowers as they concentrate their lending with small local businesses. Exploring cross-sectional variation in local economic conditions across these subsidiaries, we investigate whether borrower creditworthiness influences the response of bank lending to monetary policy. Our results are consistent with a demand-driven transmission mechanism that works through firm balance sheets and is independent from the bank lending channel.     

Financial liberalization and banking crises: The role of capital inflows and lack of transparency

This paper shows that the liberalization of capital inflows may undermine bank stability in emerging markets. After financial liberalization, uninformed international investors rationally provide large amounts of funds at low cost. This enables insolvent banks to accumulate bad loans. In equilibrium, when a substantial amount of losses may have been accumulated, solvent banks do not find it any longer optimal to issue debt at the interest rate that would compensate investors for risk. Investors anticipate this and stop holding bank debt. When the market for bank liabilities breaks down, insolvent banks default. I show that, because of wasteful investment, the liberalization of capital inflows may decrease aggregate welfare.     

Banking Competition and Capital Ratios

Empirical studies provide evidence that bank capital ratios exceed regulatory requirements. But why do banks maintain capital levels above regulatory requirements? We use data for more than 2,600 banks from 10 European countries to test recent theories suggesting that competition incentivises banks to maintain higher capital ratios. These theories also predict that banks that engage in arm's length lending have lower capital ratios, and that shareholder rights and deposit insurance characteristics affect capital ratios. Consistent with these theories, our evidence robustly indicates that competition increases capital holdings. Banks that lend at arm's length exhibit lower capital ratios, whereas banks in countries with strong shareholder rights operate with higher capital ratios. We also show some evidence that generous deposit protection schemes that exclude non‐deposit creditors are associated with higher capital ratios. Our results have important policy implications. First, while the traditional view suggests imposing restrictions on bank activities in order to restrain competition, our analysis indicates the opposite, even after adjusting the regressions for risk‐taking. Second, weak shareholder rights undermine market forces that would otherwise encourage banks to hold higher capital ratios.     

Crises,Liquidity Shocks,and Fire Sales at Commercial Banks

If liquidity shortages cause financial crises, a lender of last resort can provide funds to banks facing potential fire sales. However, if funding problems primarily occur at banks with existing solvency problems, then government liquidity programs may not spur bank lending. We find that commercial bank funding does not typically dry up in a crisis, not even during the subprime crisis. Rather, weak banks are more likely to borrow less. Furthermore, banks rely more on deposits and newly issued equity than fire sales. When they do sell assets, they cherry pick assets in order to alleviate pressure from capital regulations.     

我国商业银行信贷投放亲周期性实证研究及缓释对策

为有效地规避和防范银行信贷亲周期性及其对宏观经济周期性波动和货币政策调控的负面影响,本文从外部监管和商业银行内部管理提出了缓释我国商业银行信贷投放的亲周期效应的具体对策.如结合我国国情修改并积极实施新资本协议,加强银监会和央行的沟通与协调,构建有差异的资本充足率监管框架,建立反周期资本充足率监管框架和引入动态风险拨备机制等.     

How Does the Stock Market View Bank Regulatory Capital Forbearance Policies?

During the subprime crisis, the Federal Deposit Insurance Corporation (FDIC) has shown, once again, laxity in resolving and closing insolvent institutions. Ronn and Verma (1986) call the tolerance level below which a bank closure is triggered the regulatory policy parameter. We derive a model in which we make this parameter stochastic and bank specific to infer the stock market view of the regulatory capital forbearance value. For 565 U.S. listed banks during 1990 to 2012, the countercyclical forbearance fraction in capital, most substantial in recessions, could represent 17%, on average, of the market valuation of bank equity and could go as high as 100%.     

Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments

The 1980 Depository Institution Deregulation and Monetary Control Act (DIDMCA) mandates that Regulation Q be phased out by 1986. With deregulation of interest rate ceilings, the cost of raising capital funds for commercial banks would become more volatile and more closely related with interest rates in the money and capital markets. Thus, value-maximizing bank managers would need to be concerned not only with the internal risk, but also with the external risk in bank portfolio management decisions. Based upon the cash flow version of the capital asset pricing model, this paper analyzes the joint impact of interest rate deregulation and capital requirements on the portfolio behavior of a banking firm.     

Regulatory and “economic” solvency standards for internationally active banks

One of the most important policy issues for financial authorities is to decide at what level average capital charges should be set. The decision may alternatively be expressed as the choice of an appropriate survival probability for representative banks over a horizon such as a year, often termed a “solvency standard”. This article sheds light on the solvency standards implied by current and possible future G10 bank regulation and on the “economic solvency standard” that banks choose themselves by their own capital setting decisions. In particular, we employ a credit risk model to show that the survival probability implied by the 1988 Basel Accord is between 99.0% and 99.9%. We then demonstrate that if a new Basel Accord were calibrated to such a standard, it would not represent a binding constraint on banks' current operations since most banks employ a solvency standard higher than 99.9%. To show this, we employ a statistical analysis of bank ratings adjusted for the impact of official or other support as well as credit risk model calculations. Lastly, we advance a possible explanation for the conservative capital choices made by banks by showing that swap volumes are highly correlated with credit quality for given bank size. This suggests that banks' access to important credit markets like the swaps markets may provide a significant discipline in the choice of solvency standard.     

The positive side of bank wealth management products: Evidence from bank lending rate

The systemic risk and negative social impacts from bank-issued wealth management products (WMPs) are well studied by scholars and practitioners in China. Using hand-collected bank data, we find that WMPs help reduce banks’ cost of funds, which is then passed on to their borrowers as lower borrowing cost. This finding shows an upside of this controversial but increasingly popular bank product. We propose four mechanisms through which WMPs can lower banks’ cost of funds: structural change in deposits, cross-subsidization, liquidity effect, and related-party transactions. We find supporting evidence for those mechanisms, and their effects vary across state-owned, joint-stock, and city commercial banks. Those variations are consistent with the unique characteristics of each bank group. We further explore the competition for capital between state-owned and non-state-owned banks. The results suggest that state-owned banks offer significantly higher interest rates for deposits as non-state-owned banks expand in the same region. WMP issuance is likely a differentiation strategy in response to the competition for deposits.     

Time‐Varying Capital Requirements and Disclosure Rules: Effects on Capitalization and Lending Decisions

We investigate how banks’ capital and lending decisions respond to changes in bank‐specific capital and disclosure requirements. We find that an increase in the bank‐specific regulatory capital requirement results in a higher bank capital ratio, brought about via less asset risk. A decrease in the requirement implies more lending to firms but also less Tier 1 capital and higher bank leverage. We do not observe differences between confidential and public disclosure of capital requirements. Our results empirically illustrate a tradeoff between bank resilience and a fostering of the economy through more bank lending using banks’ capital requirement as policy instrument.     

An Analysis of Bank Charter Value and Its Risk-Constraining Incentives

Valuable bank charters have been hypothesized to provide bank managers self-regulatory incentives to constrain their risk taking. However, this paper presents evidence that charter value itself may derive from high-risk activities, indicating that minimizing risk taking also would limit the value of the charter. During economic expansions, bank charter values increase to reflect growth opportunities. In turn, high-charter-value banks gain easier access to equity capital sources for expansion. The result is a positive relationship between charter value and capital ratios during expansions. However, this relationship may invert during economic contractions. Panel regressions demonstrate that the charter value and bank leverage relationship is sensitive to market conditions.     

Chinese write-down bonds and bank capital structure

In this paper, we use a structural model to investigate a bank capital structure that contains deposits, straight bonds, Write-Down (WD) bonds and equity. We first explicitly give the default boundaries and the values of a deposit, straight bond, WD bond, equity and bank asset, and then use a numerical example to demonstrate the relations among leverage, deposits, WD bonds and bank value. Our results show that value-maximizing banks select the ratio of deposit, straight bond and WD debt so that endogenous default is consistent with exogenous bank closure. The bank increases its leverage by swapping both deposits and straight bonds for WD bonds. And the issuance of WD bonds not only reduces the expected bankruptcy loss and credit spread of straight bonds, but also improves the bank value. This indicates that WD bonds do help to stabilize banks. We also study the role of deposit insurance and the Chinese Financial Stability Bureau (FSB), and give a closed-form expression for the fair insurance premium. Lastly, to check the robustness of our results, we do the sensitivity analysis and investigate the effect of three sets of exogenous parameters on bank capital structure: WD parameters, bank business features, closure rules and insurance subsidy, and obtain some practically significant implications.     

Universal Banking Under Bilateral Information Asymmetry

The Gramm–Leach–Bliley (GLB) Act of 1999 repealed many provisions of the Glass–Steagall Act that curtailed competition between banks and commercial firms. Significantly, however, the GLB Act did not repeal the constraint on banks from owning equity in commercial firms (“universal banking”). Should banks be allowed to hold equity in corporate borrowers? If allowed, would banks optimally choose to do so? Despite its relevance from a policy perspective, there are surprisingly few theoretical analyses of this issue of “universal banking”. We develop a model in which the bank's advisory role as an “inside” shareholder hinges on its equity stake. The optimal capital structure and the bank's and entrepreneur's equity stakes are endogenously determined in a world with potential double-sided moral hazard. In certain scenarios, the bank may prefer not to hold any equity. Our analysis indicates that allowing optimal bank equity participation may foster improved corporate performance. This benefit of universal banking should be considered in policy debates.     

Why European Banks Are Undercapitalized and What Should Be Done About It

Major European banks are significantly undercapitalized as compared to large American banks, and, more importantly, as compared to the capital levels they would need to survive another severe financial crisis. Bank capital shortfalls in Italy, Spain, Germany, France and the United Kingdom, in particular, are largely the consequence of European bank regulations that: (1) apply static risk weights to assets like mortgages and sovereign debt; (2) fail to require an overall market‐based capital ratio that is high enough to enable banks to survive a severe financial crisis; (3) fail to get banks to promptly write down their impaired assets to market value; (4) subject banks to weak stress tests that can create a false impression of capital adequacy; and (5) fail to compel banks to retain sufficient earnings and to raise sufficient capital externally to eliminate capital shortfalls promptly, all apparently out of fear that being tougher might cause investors and customers to lose confidence in the banks. This article summarizes important recent independent bank stress testing that has quantified the capital shortfalls in European banks. The recent highly publicized regulatory interventions to resolve failing European banks were inevitable due to these shortfalls. The authors recommend steps European bank regulators should take to address the problem and to eliminate the risk of serious capital shortfalls. In the absence of such steps, bank depositors, customers, and security holders should be prepared to expect further unwelcome surprises as the risks inherent in allowing undercapitalized banks to operate will continue to materialize in more bank failures.     

Bond market development and bank stability: Evidence from emerging markets

We investigate how bond market development shapes banks’ risk taking in terms of portfolio structure, liquidity risk, and overall bank risk. Exploiting a bank-level database of 26 emerging markets, we find that larger bond markets are associated with stronger bank liquidity positions, lower portfolio risk of banks, and higher overall stability of banks. The effect of bond market development on bank risk taking remains robust across different levels of bank size and capital sufficiency. Overall, we find new evidence of a complementary relationship between bond market development and bank soundness.     

货币政策操作需要考虑银行资本监管吗

持续宽松的货币政策与巴塞尔协议下银行资本监管的共同作用,可能是本次美国次贷危机产生和经济持续波动的主因之一。巴塞尔协议下的银行资本监管,较大地改变了信贷资金的流向和经济运行规律,从而必然影响到货币政策发挥作用的基础条件与传导途径。本文结合经济周期对银行资本约束下的IS-LM模型进行了扩展分析,发现银行资本约束会通过影响银行信贷渠道使货币政策产生非对称性效果,从理论上论证了货币政策的操作必须考虑银行资本监管。本文还运用随机前沿分析(SFA)方法检验了2000～2009年我国货币政策与银行资本监管联合效率,表明在引入银行资本监管后货币政策实现经济目标的联合效率下降。因此,为了达到稳定物价与产出的总体目标,在货币政策反应函数中必须考虑银行资本及其监管状况。     

THE PERFORMANCE OF BANK‐MANAGED MUTUAL FUNDS

The ability of banks to offer proprietary mutual funds has expanded over recent years, and the mutual fund industry has been a significant growth area for banks. I examine the growth and performance of bank proprietary bond mutual funds. The empirical results show no evidence that bank‐managed mutual funds underperform nonbank funds. I find some evidence that bank managers are more conservative than nonbank managers in terms of investment strategy and that banks appear more likely to target individual rather than institutional investors. Also, I find that abnormal fund performance does not appear to be a significant determinant of the net asset flows into and out of bank‐managed mutual funds. Rather, the results suggest bank investors rely mainly on past marketing information and the general reputation of the bank. JEL classification: G11, G21     

The Impact of SFAS No. 114 on the Linear Information Dynamic for Commercial Banks

Increase (decrease) in loan loss provisions would decrease (increases) bank earnings, but increase (decreases) regulatory capital. Previous studies have separately documented earnings and capital management behavior via loan loss provisions by commercial banks. However, it is difficult to isolate a bank's demand for increasing earnings from its demand for regulatory capital because earnings is a source of capital. Based on the objective bank function, this study investigates the impact of SFAS No. 114 on the information content of loan loss provisions in relation to both earnings quality and capital adequacy in a linear information dynamic framework. Test results show that the association between market value with loan loss provisions became significantly stronger for commercial banks in the post- than in the pre-adoption period. As a result, SFAS No. 114 is also found to positively affect the association of market value with both bank earnings and regulatory capital through the clean surplus relation because of the higher value relevance of loan loss provisions. The findings thus provide empirical evidence that SFAS No. 114 has significantly complemented banking regulations in enhancing (reducing) the (dispersion from the) accounting measurement construct of loan loss provisions.