Banks’ equity performance and the term structure of interest rates

Using an extensive global sample, this paper investigates the impact of the term structure of interest rates on bank equity returns. Decomposing the yield curve to its three constituents (level, slope and curvature), the paper evaluates the time‐varying sensitivity of the bank's equity returns to these constituents by using a diagonal dynamic conditional correlation multivariate GARCH framework. Evidence reveals that the empirical proxies for the three factors explain the variations in equity returns above and beyond the market‐wide effect. More specifically, shocks to the long‐term (level) and short‐term (slope) factors have a statistically significant impact on equity returns, while those on the medium‐term (curvature) factor are less clear‐cut. Bank size plays an important role in the sense that exposures are higher for SIFIs and large banks compared to medium and small banks. Moreover, banks exhibit greater sensitivities to all risk factors during the crisis and post‐crisis periods compared to the pre‐crisis period; though these sensitivities do not differ for market‐oriented and bank‐oriented financial systems.     

Diversification and the cost of debt of bank holding companies

In this study, we investigate the relationship between various dimensions of diversification and the cost of debt for publicly traded bank holding companies (BHCs). We find that both domestic geographic diversification of deposits and diversification of assets lead to a lower bond yield-spread. Diversification of non-traditional banking activities leads to a lower cost of debt only when yield-spread and diversification are estimated simultaneously. In addition, we find that medium-sized BHCs experience a greater reduction in bond yield-spread than small-sized and large-sized BHCs. This is consistent with the too-big-to-fail (TBTF) effects in the banking industry. Furthermore, we document that the association between diversification and yield-spread is bidirectional with higher yield-spreads being associated with greater asset and activity diversification and lower geographic deposit dispersion. The effect of diversification on bond yield-spread is robust after accounting for cross-sectional and serial correlation, and the endogeneity of diversification.     

Institutional ownership stability and BHC performance

In this study, the association between performance of BHCs and institutional ownership stability is investigated and contrasted to those found for the less regulated utility and industrial firms in order to determine whether regulation displaces owner monitoring. We employ a simultaneous equations model treating firm performance and institutional ownership stability as endogenous variables. Several results are obtained. First, BHC performance is positively associated with institutional ownership stability. Second, this association is weaker for BHCs than for comparable utility and industrial firms, possibly because of the substitution of regulation for owner monitoring in banking. Third, this association is stronger in the recent deregulated years and for BHCs with lower likelihood of regulatory intervention.     

THE MULTIPRODUCT DEPOSITORY FIRM, INTEREST-BEARING TRANSACTION BALANCES, INTEREST-BEARING RESERVES, AND UNCERTAINTY

In this paper a model of depository firm behavior is developed in which the depository institution acts as a multiple product producer. The multi-product model is an application of the general theory of value to the particular case of depository firms. It generalizes the theory of bank behavior to include production and cost aspects of banking activity as well as its financial aspects and reconciles the rivaling intermediary and firm-theoretic views on depository institutions. By so doing, it bridges the gap between models which treat depository firms as mere portfolio holders and those which analyze the check clearance function in isolation. Risk aversion, production function constraint, jointness, and multiple sources of uncertainty are simultaneously introduced. The model is used to analyze the effects of interest payment on transaction balances, interest payment on reserves of depository institutions by the Central bank, and the Central bank policy swings.     

Federal Home Loan Bank Advances and Bank and Thrift Holding Company Risk: Evidence from the Stock Market

Using bivariate GARCH models of stock portfolio returns and risk, we find that bank and thrift holding companies that relied the most on Federal Home Loan Bank (FHLB) advances exhibited less total risk and market risk than those that relied on them the least between 2001 and 2012. When we control for differences in holding company size, stock trading volume, residential mortgage lending, and holding company type (bank vs. thrift), the most FHLB‐reliant holding companies sustain the aforesaid risk advantages except during the crisis of 2007–2009, when they exhibit greater idiosyncratic risk. The latter finding suggests that investors perceived the high reliance of the borrowing institutions on advances as a sign of distress. Portfolios that consist of only bank holding companies show qualitatively similar results.     

The comparative efficiency performance of small and large US commercial banks in the pre- and post-deregulation eras

The purposes of this paper are twofold: first, to employ a flexible non-parametric approach to contrast the productive efficiency of a sample of small and large banks in order to examine the relationship between size and productive performance in the banking industry. Second, to investigate whether the relative efficiency performance of small and large banks has changed following the changes in the banking environment in the 1980s and to contrast the rate of technological change achieved by these two groups of banks over this time period. The findings based on group-specific frontiers suggest that in the pre-deregulation environment small banks were more efficient than the large banks while in the deregulated environment small and large banks were equally efficient. Moreover, the dispersion in the efficiency measures of the small banks is found to have increased substantially while that of the large banks changed little over the sample period.     

Generalized functional forms and demand for money in an open economy: the case of the United Kingdom

The purpose of this paper are twofold:first, to apply a Box–Cox model to the UK money demand relationship within an open economy framework in order to empirically investigate the proper functional form supported by the data in this general setting. Secondly, to test for the porper scale variable in the UK money demand function within the open economy Box–Cox specification. These improvements enhance the accuracy of our measures of monetary and fiscal policy effects and our understanding of the interdependence between different economies. The empirical results derived here reject the restrictive linear and log specifications in favour of the general Box–Cox model under both income and consumption-based money demand specifications. The traditional income-based model, however,escaps unharmed from the challenge put forward by Mankiw and Summers (1986).     

Real-Estate Risk Effects on Financial Institutions’ Stock Return Distribution: a Bivariate GARCH Analysis

This paper examines two relationships using the bivariate generalized autoregressive conditionally heteroskedastic (GARCH) methodology. First, the relationship between equity returns of commercial banks, savings and loans (S&Ls) and life insurance companies (LICs), and those of the real-estate investment trusts (REITs), a proxy for the real-estate sector performance. Second, the relationship between conditional volatilities of the stock returns of these financial intermediaries (FIs) and that of REITs. The former relationship allows the spillover of returns between the real-estate and the financial intermediation sector to be analyzed. The latter allows an investigation of the prevalence, direction and strength of inter-sectoral risk transmission to be carried out. Several interesting results are obtained. First, the equity returns of the FIs considered follow a GARCH process and should be modeled accordingly. Second, as found in the literature, returns on REITs should be modeled using the Fama-French multiple factor model. However, this model has to be extended to incorporate a GARCH error structure. Third, all FI returns considered are highly sensitive to REIT returns and the effects are both statistically and economically significant. This is an indication that shocks to REITs returns spillover to the former markets. Fourth, spillover of increased volatility in the real-estate sector to S&Ls and LICs is significant but not to commercial banks.     

Distribution of institutional ownership and corporate firm performance

We investigate the association between corporate firm performance and the level and stability of institutional ownership within a simultaneous equation model. Our main ownership stability measures include ownership persistence and the time-lengths over which investors hold non-zero shares or maintain their shareholding. We find that there is a positive relationship between firm performance and institutional ownership stability, accounting for the shareholding proportion. This relationship is robust to the employment of ownership turnover measures used in the literature and consistent with the view that stable institutional investors play an effective role in monitoring. When we disaggregate institutional investors into pressure-insensitive and pressure-sensitive categories, we find that stable shareholding of each group has a positive impact on performance, with the first group exerting a larger effect. The channels of the effect include, but are not limited to, decreased information asymmetry and increased incentive-based compensation.