Bank valuation and accounting discretion during a financial crisis

This paper shows that banks overstate the value of distressed assets and their regulatory capital during the US mortgage crisis. Real estate-related assets are overvalued in banks' balance sheets, especially those of bigger banks, compared to the market value of these assets. Banks with large exposure to mortgage-backed securities also provision less for bad loans. Furthermore, distressed banks use discretion over the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks and provide suggestive evidence of regulatory forbearance and noncompliance with accounting rules.     

Bank capital (requirements) and credit supply: Evidence from pillar 2 decisions

We analyze how time-varying bank-specific capital requirements affect bank lending to the non-financial corporate sector as well as banks' balance sheet adjustments. To do so, we relate Pillar 2 capital requirements to a comprehensive corporate credit register coupled with bank and firm balance sheet data. Our analysis consists of three components. First, we investigate how capital requirements affect the supply of bank credit to the corporate sector, both on the intensive and extensive margin, as well as for different types of credit. Subsequently, we document how bank and firm characteristics as well as the monetary policy stance impact the relationship between bank capital requirements and the supply of credit. Finally, we examine how time-varying bank-specific capital requirements affect banks' balance sheet composition.     

Ambiguity and risk factors in bank stocks

The determinants of banks' cost of equity are not well understood. We depart from prior work assuming rational expectations and instead explore the impact of Knightian uncertainty or ambiguity on bank stocks. We test a large set of asset pricing models and find that investors' lack of confidence in both the drift and correlation structure driving bank stock returns affects banks' cost of capital. We also investigate the economic relation among ambiguity, market liquidity, and banks' capital shortfall, which reveals the transmission channels through which ambiguity may increase the probability of a systemic crisis. Our findings have implications for macroprudential policy.     

Credit Traps and Macroprudential Leverage

We construct a macroeconomic model with overlapping generations to study credit traps—prolonged periods of stagnant real activity accompanied by low productivity, financial sector undercapitalization, and credit misallocation. Shocks to bank capital tighten banks' borrowing constraints causing them to allocate credit to easily collateralizable but low productivity projects. Low productivity weakens bank capital generation, reinforcing tight borrowing constraints, sustaining the credit trap steady state. Macroprudential policy to limit bank leverage can be welfare enhancing. In the presence of a credit trap, optimal leverage policy is countercyclical.     

On the Role of Regulatory Banking Capital

In this paper the authors study the role of regulatory banking capital and analyze the incentive effects of the Basel II Accord. They argue that Basel II may become a source of systemic risk due to endogenous risk and the risk sensitivity of the capital requirements. In this context they note that financial instability may enter via the asset side of the banks' balance sheets when banks are forced to sell assets in order to maintain the capital buffer prescribed by Basel II.     

The Impact of Trust-Preferred Issuance on Bank Default Risk and Cash Flow: Evidence from the Debt and Equity Securities Markets

Trust‐preferred stock is a debt‐equity hybrid that offers the tax deductibility of dividends but is treated as equity capital by bank regulators and rating agencies. The purpose of this paper is to examine whether holders of bank debt securities benefit from trust‐preferred issuance in the form of lower default premia and whether bank shareholders benefit from the tax deductibility of trust‐preferred dividends. Using daily returns surrounding the Federal Reserve's announcement that trust‐preferred securities would be included as a component of commercial banks' Tier I equity capital, we find evidence to support both hypotheses.     

The role of securitization in bank liquidity and funding management

This paper studies the role of securitization in bank management. I propose a new index of “bank loan portfolio liquidity” which can be thought of as a weighted average of the potential to securitize loans of a given type, where the weights reflect the composition of a bank loan portfolio. I use this new index to show that by allowing banks to convert illiquid loans into liquid funds, securitization reduces banks' holdings of liquid securities and increases their lending ability. Furthermore, securitization provides banks with an additional source of funding and makes bank lending less sensitive to cost of funds shocks. By extension, the securitization weakens the ability of the monetary authority to affect banks' lending activity but makes banks more susceptible to liquidity and funding crisis when the securitization market is shut down.     

Credit and Banking in a DSGE Model of the Euro Area

This paper studies the role of credit supply factors in business cycle fluctuations using a dynamic stochastic general equilibrium (DSGE) model with financial frictions enriched with an imperfectly competitive banking sector. Banks issue collateralized loans to both households and firms, obtain funding via deposits, and accumulate capital out of retained earnings. Loan margins depend on the banks' capital‐to‐assets ratio and on the degree of interest rate stickiness. Balance‐sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the banking sector and, in particular, sticky rates attenuate the effects of monetary policy shocks, while financial intermediation increases the propagation of supply shocks. Second, shocks originating in the banking sector explain the largest share of the contraction of economic activity in 2008, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital may have substantial effects on the economy.     

利率市场化与银行资产配置选择 —基于45家商业银行的面板数据分析

本文在对商业银行资产配置进行理论分析的基础上,构建利率市场化对商业银行 资产配置影响的实证模型,利用45家商业银行2003-2014年的面板数据进行实证检验,实证结 果表明：利率市场化对信贷资产的增长没有产生激励效应,商业银行并未在利率市场化进程中 加速信贷扩张;利率市场化对商业银行资产配置结构产生了显著影响,随着利率市场化程度的 加深,信贷资产和证券资产在总资产中的占比都增大;利率市场化对信贷资产内部配置结构也 产生了显著影响,促进零售信贷资产占比提升,而对公司信贷资产占比和前十大客户信贷资产 占比的影响为负,这验证了在利率市场化的推进过程中,商业银行将信贷资源向个人客户和中 小企业客户倾斜,利率市场化发挥了一定的积极效应。     

资本管制下商业银行战略选择对绩效的影响

以我国14家上市商业银行2004～2009年的平衡面板数据为样本,通过银行关键战略资源配置来体现银行战略选择,将银行战略问题从定性向定量转化,并通过理论建模和实证分析来研究资本管制、战略选择和绩效三者的关系。结果认为,资本管制对银行的资本充足率与绩效都存在显著直接影响;资本管制通过调整商业银行资本充足率,对绩效产生间接影响;管制压力与不同的战略资源配置的交互作用分别对资本充足率、绩效有不同的影响。     

Bank size and macroeconomic shock transmission: Does the credit channel operate through large or small banks?

In this paper, I use U.S. call report data to construct a larger panel dataset with bank-level observations. I find that larger banks' lending is considerably more sensitive to the strength of their borrowers' and their own balance sheets compared to smaller banks and that the sensitivities to borrower balance sheets are larger in magnitude compared to lender balance sheets. When I incorporate various macroeconomic shocks (identified by an estimated DSGE model) into the empirical model, I similarly find that the transmission of shocks to the real economy operates mostly through large bank lending and borrower balance sheets.     

The association between fair value measurements and banks' discretionary accounting choices

This study examines the association between fair value measurements and banks' discretionary loan loss provisions using regulatory financial data from 2009 to 2016 for a sample of U.S. public bank holding companies. I find that banks recognizing larger proportions of fair value assets and liabilities based on level 2 and level 3 inputs are associated with lower discretionary loan loss provisions. However, there is no significant association between level 1 fair value assets and liabilities and discretionary loan loss provisions. When pre-managed earnings are lower, banks with larger proportions of level 2 and level 3 fair value assets and liabilities report smaller discretionary loan loss provisions to inflate earnings. Banks reporting larger proportions of level 2 and level 3 fair value assets and liabilities are more likely to use discretionary loan loss provisions to beat earnings benchmarks and manage tier one capital ratios. Overall, the results support the proposition that fair value assets and liabilities based on level 2 and level 3 inputs are less transparent and are subject to more discretion regarding loan loss provisions.     

Bank Liquidity Creation and Risk‐Taking: Does Managerial Ability Matter?

This study investigates the impact of managerial ability on banks' liquidity creation and risk‐taking behavior. We find that higher ability managers create more liquidity and take more risk. During times of financial crisis, however, higher ability bank managers reduce liquidity creation as a way to de‐leverage their balance sheets. Our findings inform recent theoretical and empirical studies that investigate determinants of liquidity creation and risk by introducing managerial ability as a prominent antecedent of the banks' intermediation and risk‐transforming service. Moreover, this study has policy‐related implications, since managerial ability can be quantified as a key performance indicator for prudential supervision of banks and could help regulators to target intervention efforts more purposefully during times of crisis.     

Government finances and bank bailouts: Evidence from European stock markets

Using a sample of European banks and a series of events affecting governments' finances, we conduct an event study to examine whether there is a relationship between governments' fiscal difficulties and banks' stock returns. We find a significant reaction of banks' stocks to news concerning governments' finances. Banks' stock returns fall in response to a deterioration of governments' financial situation. We find little difference in the reaction between large and small banks. The evidence points towards all banks being equally likely to be bailed out. Our data are consistent with a policy during the Eurozone sovereign-debt crisis in which “no bank is too small to save”.     

Safer ratios,riskier portfolios: Banks׳ response to government aid

Using novel data on bank applications to the Troubled Asset Relief Program (TARP), we study the effect of government assistance on bank risk taking. Bailed-out banks initiate riskier loans and shift assets toward riskier securities after receiving government support. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by regulatory capital ratios, which indicate improved capitalization at bailed-out banks. Consequently, these banks appear safer according to regulatory ratios, but show an increase in volatility and default risk. These findings are robust to controlling for credit demand and account for selection of TARP recipients by exploiting banks? geography-based political connections as an instrument for bailout approvals.     

M‐PRESS‐CreditRisk: Microprudential and Macroprudential Capital Requirements for Credit Risk under Systemic Stress

M‐PRESS‐CreditRisk is a novel stress testing approach that can help authorities gauge banks' capital adequacy related to credit risk. For the first time, it combines the assessment of microprudential capital requirements under Pillars 1 and 2 and macroprudential buffers in a unified, coherent framework. Its core element is an advanced credit portfolio model—SystemicCreditRisk—built upon a rich, nonlinear dependence structure for correlated bank portfolios. The model is applied to a sample of 12 systemically important German banking groups and delivers measures for systemic credit risk and the banks' contributions to it in both baseline and stress scenarios.     

Assessing banks’ resilience: A complementary approach to stress testing using fair values from banks’ financial statements

For more than a decade, supervisory banking authorities in Europe and the United States have sought to assess the resilience of banks to adverse economic episodes to safeguard the financial system's stability. They rely on regulatory capital measures like Common Equity Tier 1 (CET1) relative to risk-weighted assets in the aftermath of potential economic crises. We propose a new measure of banks' resilience based on financial statements. The fair value margin (FVM) is estimated as the difference between the fair value of assets and the book value of liabilities, scaled by the book value of equity. We find that FVM is positively associated with the surplus or shortfall of CET1 resulting from the stress testing results from 2014, 2016 and 2018. To corroborate the relevance of FVM for supervisory authorities, we compare the ability of the loan component of FVM to predict future credit losses with the capital surplus/shortfall metric derived from the stress test. The findings indicate that the fair value of loans predicts net charge-offs better than stress test outcomes. Therefore, we suggest that FVM could be used as a readily available and relatively low-cost tool to assess bank resilience, thus complementing the stress test exercises.     

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.     

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.     

A NEW APPROACH TO CAPITAL BUDGETING FOR FINANCIAL INSTITUTIONS

The classic approach to capital budgeting based on the standard Capital Asset Pricing Model (CAPM) says that the hurdle rate (or cost of capital) for any new project or investment should depend only on the riskiness of that investment. Thus, the hurdle rate, and hence the expected value of the investment, should not be affected by the financial policy of the company evaluating the project. Nor should the hurdle rate be influenced by the company's risk management policy, or by the kind of assets it already has on the balance sheet. This article argues that such a “singlefactor” model may be inappropriate for banks and other financial institutions for two main reasons:

• ? it is especially costly for banks to raise new external funds on short notice;
• ? it is costly for banks to hold a buffer stock of equity capital on the balance sheet, even if this equity is accumulated over time through retained earnings.

The single-factor CAPM ignores such costs and, in so doing, understates the true economic costs of “illiquid” bank investments. Illiquid investments require special treatment because they impose risks that, although “diversifiable” by shareholders, cannot be readily hedged by the bank and therefore require it to hold more equity capital. The authors accordingly propose a “two-factor” model for capital budgeting— one in which banks' investment decisions are linked to their capital structure and risk management decisions. One of the key implications of the two-factor model is that a bank should evaluate new investments according to both their correlation with the market portfolio and their correlation with the bank's existing portfolio of unhedgeable risks. The authors describe several potential applications of their model, including the evaluation of proprietary trading operations and the pricing of unhedgeable derivatives positions. They also compare their approach to the RAROC methodology that has been adopted by a number of banks.