Long-term bank balance sheet management: Estimation and simulation of risk-factors

We propose a dynamic framework which encompasses the main risks in balance sheets of banks in an integrated fashion. Our contributions are fourfold: (1) solving a simple one-period model that describes the optimal bank policy under credit risk; (2) estimating the long-term stochastic processes underlying the risk factors in the balance sheet, taking into account the credit and interest rate cycles; (3) simulating several scenarios for interest rates and charge-offs; and (4) describing the equations that govern the evolution of the balance sheet in the long run. The models that we use address momentum and the interaction between different rates. Our results enable simulation of bank balance sheets over time given a bank’s lending strategy and provides a basis for an optimization model to determine bank asset–liability management strategy endogenously.     

Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks

This article estimates the interest rate and exchange rate risk betas of 59 large U.S. commercial banks for the period of 1975–1992, as well as the bank-specific determinants of these betas. The estimation procedure uses a modified seemingly unrelated simultaneous method that recognizes cross-equation dependencies and adjusts for serial correlation and heteroskedasticity. Overall, the exchange rate risk betas are more significant than the interest rate risk betas. More importantly, we find a link between the scale of a bank's interest rate and currency derivative contracts and the bank's interest rate and exchange rate risks. Particularly noteworthy is the influence of currency derivatives on exchange rate betas.     

Market Interest Rates and Commercial Bank Profitability: An Empirical Investigation

The widespread notion that commercial banks “borrow short and lend long” implies that sharp market interest rate increases may induce a significant number of banking failures. This paper develops a method for estimating average asset and liability maturities for a sample of large money center banks. Regression models are tested to determine if market rate fluctuations have a significant impact on bank profitability. The conclusion is negative: large banks have effectively hedged themselves against market rate risk by assembling asset and liability portfolios with similar average maturities.     

利率变动周期与商业银行绩效的实证研究

利率风险的计量、评估、监控是银行市场风险管理的重要内容。科学分析利率波动与银行收益之间关系,进而了解银行资产负债期限特征及利率风险管理水平,对实现我国商业银行资产负债管理科学决策,提升利率风险管理水平意义重大。本文采用Flannery的部分调整模型对我国上市银行的利率风险管理进行长时间窗口实证分析,结果表明:样本银行呈“借短贷长”的资产负债期限特征,利率变动期内其资产负债管理并未为银行带来实质收益,利率风险管理水平有待提高。     

Portfolio analysis of asset and liability management in small-, medium- and large-sized banks

The paper presents an analysis of the commercial banking firm based on Markowitz portfolio analysis. A bank is treated as a portfolio of five banking assets and three banking liabilities. The average rate of return and risk of each asset and liability is estimated empirically for groups of banks categorized by size — small, medium and large. Banks' rates return on equity are defined as the weighted average of the assets' rates of return less the liabilities' rates of return. Quadratic programming is used to delineate the set of banking portfolios which have the maximum rate of return on equity at each level of risk.     

利率市场化条件下我国商业银行资产负债管理技术研究

随着货币市场的完善和利率市场化的发展,利率对我国商业银行收益水平的影响开始显现,适时引入资产负债管理技术对我国商业银行盈利水平的提高具有重要的现实意义和应用价值。本文以我国部分商业银行收益状况分析为基础,通过对目前国外主要资产负债管理技术的回顾,提出了符合我国国情的商业银行资产负债管理技术策略。     

BANKING RELATIONSHIPS AND THE EFFECT OF MONITORING ON LOAN PRICING

In a sample of bank loans to small firms we find a positive relation between the bank's monitoring effort and the loan's interest rate. We also observe an inverse relation between the closeness of banking relationships and interest rates. Further, we see that banks less frequently monitor firms with whom they have closer relationships. We conclude that banking relationships are valuable because firms can significantly reduce their costs of capital by establishing and maintaining close ties to a particular bank. As firms successfully complete loan transactions with banks, banks monitor them less frequently and, ultimately, charge them lower interest rates.     

金融新常态对中小银行资产负债管理的挑战

经济金融环境的变化对中小商业银行资产负债管理提出了挑战。在对中小银行的特征进行分析的基础上,明确其优势和劣势,并从利率市场化、存款保险制度、互联网金融、金融创新、巴塞尔协议Ⅲ五个角度,探讨金融新常态对资产负债管理的冲击。最后,提出完善中小银行资产负债管理的建议,推动中小银行从资产负债的“被动管理、分离管理、表内管理”向“主动管理、统一管理、全面管理转变”。     

商业银行资产负债期限结构的错位与债务业务创新

中国银行业长期面临的资产负债期限结构错配的问题正日趋严重。商业银行这种以短期负债支撑长期资产的所谓“短存长贷”现象,极易引发流动性风险,一旦出现储蓄存款减少或发生挤提,很容易产生支付危机。本文提出债券业务创新是解决上述问题的一个切实可行的选择,通过债券业务创新,有助于改变我国商业银行负债管理能力偏弱的状况,同时也可以提高资产的流动性,降低利率风险,增强资产管理的灵活性。     

Convergence and risk-return linkages across financial service firms

We examine the risk and return linkages across US commercial banks, securities firms, and life insurance companies during the 1991–2001 period. After controlling for changes in the broader stock market, interest rates, and foreign currency values, we find that return and risk interdependencies across these financial firms are significant and size-varying; larger institutions display stronger volatility transmission linkages, while smaller ones exhibit more prominent return-related linkages. The tighter link in risk among large financial institutions (FIs) suggests stronger convergence, employment of common models of risk measurement and risk management, and more intense inter-industry competition, particularly between large banks and large securities firms, compared to smaller institutions. Lack of risk spillover among smaller FIs confirms the intuition that they typically assume more localized and idiosyncratic risk. The co-movement of stock returns among smaller FIs has been helped by the effects of locally based factors, such as economic conditions and state regulations, on all such institutions, and a less diversified product set. Differences in spillover patterns between large and smaller institutions have implications on investment choices and mergers and acquisitions in the industry. Introduction of the Gramm-Leach-Bliley Act (1999) has had dissimilar effects on the riskiness of large versus smaller life insurance and securities firms, and an insignificant effect on commercial banks.     

Financial Networks: Contagion, Commitment, and Private Sector Bailouts

I develop a model of financial networks in which linkages not only spread contagion, but also induce private sector bailouts, where liquid banks bail out illiquid banks because of the threat of contagion. Introducing this bailout possibility, I show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible. However, in some cases (e.g., when liquidity is concentrated among a small group of banks), the whole network may collapse. I also characterize the optimal network size and apply the results to joint liability arrangements and payment systems.     

Risk and Market Segmentation in Financial Intermediaries' Returns

This study examines both the quantity and price of risk exposure for different segments of financial intermediaries. Overall, we find evidence of market segmentation in the U.S. financial services industry. Specifically, we find that securities firms, consistently over the sampling period 1974–1994, had the most market risk exposure with the lowest market risk premium. Banks' market risk fluctuated over the sampling period. Banks increased their market risk-taking after the shift in monetary target in October 1979 and the announcement of the risk-based capital requirements in July 1988. The banks' market risk became the highest and insignificantly different from securities firms'. The results are consistent with the moral hazard argument; that is, banks took on more risk to take advantage of government guarantees as their charter value declined. Banks were subject to relatively high interest rate risk premium. However, in response to increased interest rate volatility and decreased charter value after October 1979, banks (while they increased their market risk exposure) lowered their interest rate risk exposure to an insignificant level. The results suggest that the federal safety net may have been perceived by the market as covering only market risk but not interest rate risk. Overall, we find little evidence of interest rate risk exposure, suggesting the prevalence of hedging programs using interest rate derivatives. The interest rate risk premiums, unlike the risk exposure, differ across financial intermediaries.     

市场模式、政府模式与城商行流动性风险化解—一个三期博弈的分析框架

分析城商行流动性风险化解中的政府手段和市场机制,对于下一步规范城商行营商环境、化解流动性风险具有参考意义。本文首先通过银行间的博弈模型,发现政府持股比例越高会增加城商行同业负债比例,进而提高流动性风险发生的可能性;当经济处于下行周期时,全社会资金需求不足,大型银行资金投放的机会成本降低,有利于城商行获得同业负债,但却进一步积累了流动性风险。其次,通过系统GMM对2011—2018年80家城商行的非平衡面板数据进行分析,实证结果验证了理论假说。最后,结合理论与实证分析,进一步提出政府行为边界,破除隐性担保,建立城商行资金内部定价机制以及完善城商行监管体系等方面的政策建议。     

International Propagation of the Credit Crisis: Lessons for Bank Regulation*

The authors use a large sample of non‐U.S. banks to examine the origins and spread of the 2007–2009 crisis. Using both stock market and structural variables, they test whether the effects of the crisis on individual banks are better explained by crisis models or by the VaR‐type analysis of the Basel system. The latter emphasizes risk weightings for individual assets while ignoring linkages that could leave banks exposed to systemic shocks. Consistent with crisis models, the authors find that a small set of pre‐crisis measures of a bank's international linkages, leverage, and the fragility of its liability structure does a good job of discriminating between banks that suffered a large impact and those that did not. (Indeed, these measures explain almost 50% of the differences among banks' stock returns during the crisis period, and almost 40% of the changes in the variability of those returns.) The authors also provide evidence of both a direct linkage among banks' stock returns and an indirect linkage that could reflect either linkages in the real economy or common demands by investors for liquidity. The authors run a “horse race” that demonstrates that simple measures of book leverage were better predictors of bank performance than the Basel capital ratios. They find that banks with lower Basel risk weightings prior to the crisis proved, on average, to be more exposed to the crisis. The authors' explanation is that banks with lower Basel risk measures tended to operate with higher leverage and more aggressive funding strategies, which in turn exposed them to greater crisis risk (even as they conformed to the letter of the Basel system in terms of asset risk measures). Finally, the authors find no evidence that substandard governance was a separate contributing factor to crisis exposure. Banks with substantial international business that were exposed to systemic shocks had high governance scores.     

Subordinated debt,market discipline,and banks' risk taking

The present paper demonstrates the ambiguous impact of subordinated debt on the risk-taking incentives of banks. It is shown that in comparison with full deposit insurance, subordinated debt reduces risk only if banks can credibly commit to a given level of risk. If, however, banks are not able to commit, subordinated debt leads to an increase in risk. This is because due to limited liability banks always have an incentive to increase their risk after the interest rate is contracted in order to reduce the expected costs of debt. Rational debt holders anticipate this behavior and accordingly require a higher risk premium ex ante. The higher interest rates in turn further aggravate the excessive risk-taking incentives of banks.     

Should cross-border banking benefit from the financial safety net?

Using bank-level data from 84 countries, we find that a higher degree of bank internationalization is associated with higher interest expenses. Internationalization is proxied by a bank's share of foreign liabilities in total liabilities or a Herfindahl index of international liability concentration. Bank interest expenses rise relatively more with internationalization if the bank is underperforming or headquartered in a country with weak public finances, and especially at times of weak world output growth. These results suggest that liability holders of distressed internationalized banks expect less from the financial safety net since lack of an efficient recovery and resolution regime for international banks can make their insolvency very costly to deal with.     

The determinants of bank interest rate margins: an international study

This paper studies the determinants of bank net interest margins (NIMs) in six selected European countries and the US during the period 1988–1995 for a sample of 614 banks. We apply the Ho and Saunders model (Ho, T., Saunders, A., 1981. The determinants of bank interest margins: theory and empirical evidence. Journal of Financial and Quantitative Analyses 16, 581–600) to a multicountry setting and decompose bank margins into a regulatory component, a market structure component and a risk premium component. The regulatory components in the form of interest-rate restrictions on deposits, reserve requirements and capital-to-asset ratios have a significant impact on banks NIMs. The empirical results suggest an important policy trade-off between assuring bank solvency—high capital-to-asset ratios—and lowering the cost of financial services to consumers—low NIMs. The more segmented or restricted the banking system—both geographically and by activity—the larger appears to be the monopoly power of existing banks, and the higher their spreads. Macro interest-rate volatility was found to have a significant impact on bank NIMs; this suggests that macro policies consistent with reduced interest-rate volatility could have a positive effect in reducing bank margins.     

Shadow price of equity and political connectedness: A study of Chinese commercial banks

This study estimates the shadow price of equity capital applying a directional distance function for Chinese commercial banks. Using an unbalanced panel of 746 observations from 2013 to 2019, we find that the average shadow price of equity in the Chinese banking system is 2.94%. Moreover, in our sample, the price of equity of most banks is lower than that of deposits, suggesting that the majority of sampled banks are underleveraged during the study period. We also find that politically connected banks have higher prices of equity than their non-politically connected counterparts, and that the price of equity is positively related to ownership concentration. Furthermore, large politically related banks tend to have lower shadow prices of equity than large non-politically related banks, although large banks usually have higher prices of equity than small banks.     

Bailouts and the modeling of bank distress

In this article, we develop a model for predicting distress events among large banks. We show that a bailout possibility induces different behaviors among small and large banks, and the proposed failure prediction model for large banks is thus considerably different from that for small banks. Major bank-level fundamentals show opposite conjecture directions for large versus small banks. The Tier 1 capital ratio, which is under the scrutiny of regulators and investors, has almost no distress prediction power among large banks. However, banks rescued by governments tend to maintain a lower Tier 1 ratio. The cost of funding in large banks is negatively correlated with the probability of failure, reflecting the fact that lenders internalize the too-big-to-fail (TBTF) policy and demand a lower interest rate from TBTF banks.     

Assessing the FDIC's premium and examination policies using ‘Soviet’ put options

The FDIC's total liability for insuring a bank's deposits during a fixed period diminishes as the frequency of examinations increases, since a marginally solvent bank can be closed while losses are small. The paper develops a technique for pricing the insurance liability over a fixed period during which there are multiple examinations. Under current policy most banks are examined annually and reviewed every six months, at which time the fees for insurance may be adjusted. Since the current schedule of fees allows only a narrow range and a few discrete levels, the FDIC typically retains some positive or negative residual liability in each six-month period and for the entire year. We show how to estimate this net liability. The calculations of total and net liability are illustrated for a sample of large banks.