Are all financial crises created equal? Wholesale funding and two financial crises

We use financial information on banks from Asia, Europe, North America and Oceania to examine the role of wholesale funding on the transmission of financial crises to bank lending, as well as to study the response of financial institutions in different regions during the crises. We consider the role of wholesale funding during the Global Financial Crisis (GFC) and Asian Financial Crisis (AFC). Our results suggest that during the GFC, wholesale funding dependence had a negative effect on loans growth across regions, but with substantial regional heterogeneity. The growth of loans from financial institutions in Asia and Europe was consistently sensitive to wholesale funding dependence. Although wholesale funding did not play a significant role in the transmission mechanism of the AFC, a subsample of financial institutions in Asia, who depended more heavily on wholesale funding, experienced a faster loan growth and may have been able to better withstand the crisis.     

Currency crises and foreign credit in emerging markets: Credit crunch or demand effect?

Currency crises of the past decade highlighted the importance of balance-sheet effects of large devaluations. Currency crisis literature identified a decline in credit as one of the channels through which such crises affect real economic activity. We find empirical evidence of the existence of this channel and quantify its extent and persistence: controlling for a host of fundamentals, we find a decline in foreign credit to emerging market private firms of about 25 percent in the first year following large depreciations. This decline is especially large in the first five months, is less pronounced in the second year, and disappears entirely by the third year. We show that only about a quarter of the initial decline in credit could be attributed to the “credit crunch,” while the rest of the decline is due to contracting demand. After six months, however, most of the credit decline could be attributed to supply effects.     

Did financial deregulation help consumers? Access to market-yield instruments

The maturity effect (ME) of futures prices postulated by Samuelson (1965) is re-examined using three nonparametric tests. The consistent entropy asymmetry test by Racine and Maasoumi (2007) indicates that variance is an appropriate risk or uncertainty measure for ME, and value-at-risk and expected shortfall are also adopted. The Kolmogorov–Smirnov dominance test and Wilcoxon rank sum and signed rank test are employed to rank the estimates of the three risk measures under a moving-window framework. The testing outcomes are contingent on futures type, testing method and risk measures. The testing outcomes show mild support for ME.     

Did Baltic stock markets offer diversification benefits during the recent financial turmoil? Novel evidence from a nonparametric causality-in-quantiles test

Motivated by financial liberalization investors seek for new investment opportunities through international portfolio diversification. To this end we explore any asymmetric causal relationship between developed European stock markets (Germany, France and UK) and emerging Baltic markets namely; Estonia, Latvia and Lithuania. Our analysis focuses on the period before and after countries’ EU accession and pre- and post the global financial crisis. For this purpose, both the standard parametric test for causality and a novel nonparametric test for causality-in-quantiles are employed. The results of both the parametric and nonparametric Granger causality test support a causal relationship in mean that runs from all of the major markets to the Baltic markets across both samples. The results imply the existence of significant nonlinear return and volatility spillover from European markets to Baltic markets. Policy implications for international investors are also discussed.     

Averting crisis? Assessing measures to manage financial integration in emerging economies

The Asian crisis provides heterodox economists with the opportunityto investigate counterfactually whether the financial policiesthey have proposed would have averted the crisis. The paperargues that neo-liberal financial integration introduces distinctrisks to emerging economies—currency, flight, fragility,contagion and sovereignty risks. The paper presents the financialpolicies endorsed by the heterodoxy—transactions taxes,trip wires and/or speed bumps, convertibility restrictions,the Chilean model and a publicly managed mutual fund. The paperconsiders whether these policies mitigate risks, and whetherthey could have prevented the Asian crisis (and the transmissionthereof). The paper concludes with policies to avert futurecrises.     

Distance and beyond: What drives financial flows to emerging economies?

A major theme in the empirical literature is whether country-specific ‘pull’ or external ‘push’ factors drive international capital flows. In this paper we show that pull-push interactions matter: the response of international investors to country-specific developments depends on global volatility/liquidity stress conditions. We model asset-trade behaviour of investors: with limited information, strong institutional quality ‘pulls’ asset demand; mounting tensions in global markets amplify portfolio adjustments. We derive an empirically testable equation for cross-border bank flows to emerging economies (EMEs) and focus on pull-push interactions that trigger financial vulnerabilities. We find that global volatility amplifies demand for institutional quality, prior to the recent crisis, implying that EMEs with weak institutional settings are exposed to sharp capital retrenchments. In the aftermath of the crisis, the liquidity easing in advanced economies drives down concerns for EMEs' developments, boosting flows and challenging EMEs' ability to use capital controls to mitigate unbridled flows.     

Are banks public utilities? Evidence from Europe

The regulatory response to the global financial crisis has been to instal a myriad of new rules in order to improve bank capital and liquidity, as well as to reduce systemic risks through structural reform. All these new rules place a straightjacket around banker’s activities and inhibit their operational freedom. This new environment has made European banks look less like private free-wheeling profit-maximising firms and more like public utilities. The utility services banks provide to society means that they should be overseen even more heavily. This includes greater regulatory oversight of bank pricing, profitability and service provision.     

Did established Early Warning Signals predict the 2008 crises?

Over the past 60 years, a voluminous literature has painstakingly developed crises theories and their associated Early Warning Signals. The hallmark of this literature is the consistency with which selected Early Warning Signals, such as the level of reserves and exchange rate appreciations, are presumed to predict different types of crises across countries and time. The diversity of crises theories that motivate Early Warning Signals presents, however, a challenge to empirical implementations. Given that the true model of Early Warning Signals is unknown, omitted variable bias contaminates estimates and confidence levels when the uncertainty surrounding a particular theory has been ignored. After addressing model uncertainty in Early Warning Signal regressions, using an extended version of Frankel and Saravelos (2012. J. Int. Econ. 87, 216–231) dataset, we do not find a single Early Warning Signal that alerts to all dimensions of the 2008 crisis. Instead, distinct sets of Early Warning Signals identify different dimensions of the crisis: banking, balance of payments, exchange rate pressure, and recession.     

Misled and mis-sold: financial misbehaviour in retail banks?

We use an audit methodology where auditors ask for tax saving instruments from banks and document the disclosures made on product features at the time of sale. In private sector banks with high sales incentives, the high commission product is recommended. In public sector banks, where there are deposit mobilisation targets, fixed deposits are recommended. Banks rarely make voluntary disclosures on product features. When specifically requested, information provided is inaccurate or incomplete. Our results demonstrate the challenges of mandating disclosures when buyers have little understanding of the relevance of product characteristics, and distributors are themselves ignorant or influenced by incentives. They also raise concerns regarding private sector banking without regulatory capacity.     

Islamic financial markets and global crises: Contagion or decoupling?

This paper investigates the contagion effects of the global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Using a sample of Islamic stock indices from various developed and emerging markets and the global Islamic stock and bond (sukuk) indices, we explore asymmetric conditional correlation dynamics across stable and crisis periods and across the two crises. The results fail to provide strong contagion evidence between conventional and Islamic equity and bond indices, supporting the decoupling hypothesis of the Islamic securities. Our findings imply that Islamic equities and bonds may provide a cushion against risk and instability, particularly in periods of turmoil. The small number of contagion cases mostly relates to the ESDC and developed Islamic stock indices. The findings also show that the Islamic emerging stock indices in the BRICS provide the most effective international portfolio diversification benefits compared to the Islamic developed indices.     

Withstanding financial crises: would trade partners help or hurt?

This article provides new empirical evidence on the losses of real activity caused by various financial shocks. Spillover effects due to foreign trade linkages deserve special attention. To this end, we estimate a modify auto-regressive process and a Seemingly Unrelated Regression Equations estimator is used to account for the dependency of one’s country growth on its trade-weighted partners growth. We run estimations on a set of currency collapses, banking crises and sovereign defaults in 49 advanced and developing countries from 1978 to 2011. The trade-weighted foreign demand effect mitigated the economic downturn following a banking or a sovereign debt crisis in all countries, while only the advanced ones benefited from it after a currency collapse. Trade-based spillover effects make banking crises more costly in the developing countries, in those that liberalize their financial account. It contrasts with what is observed during currency or sovereign debt crises.     

Predatory cells and puzzling financial crises: Are toxic products good for the financial markets?

We advance the idea that the predator-prey dynamics that take place among key market agents play an important role in explaining financial crises. As such, we posit that financial markets evolve through fault lines involving toxic behaviors (such as deceit), toxic products (such as predatory mortgages) and inefficient regulations. We provide data to show that the puzzle of the lack of congruence between the market behaviors and what some economic models predict at times of financial crises may be the result of predator-prey interplays, and of so-called “predatory cells”, which are under the influence of financial accelerators.     

Do financial distress and liquidity crises affect value and size premiums?

This study investigates the impact of liquidity crises on the relationship between stock (value and size) premiums and default risk in the US market. It first examines whether financial distress can explain value and size premiums, and then, subsequently, aims to determine whether liquidity crises increase the risk of value and size premium investment strategies. The study employs a time-varying approach and a sample of US stock returns for the period between January 1982 and March 2011, a period which includes the current liquidity crisis, so as to examine the relationship between default risk, liquidity crises and value and size premiums. The findings indicate that the default premium has explanatory power for value and size premiums, which affect firms with different characteristics. We also find that liquidity crises may actually increase the risks related to size and value premium strategies.     

Global banking,global crises? The role of the bank balance-sheet channel for the transmission of financial crises

We examine whether shocks to leveraged creditors with cross border holdings have an incidence on debtor countries׳ risk of suffering financial turmoil. We construct a new proxy of shocks to international banks׳ balance-sheets using credit ratings and the structure of their international assets. This allows us investigating the effect of (foreign) bank balance-sheet shocks on domestic financial turmoil in a large sample of 146 developed and emerging economies from 1984 to 2011. Our proxies of shocks towards bank balance-sheets are strong predictors of systemic banking crises in their debtor countries. Confirming these results, bilateral bank flows significantly decrease when creditor banks׳ assets are hit by negative shocks, as measured by credit rating downgrades from third-party countries. Short-term liabilities towards global banks appear to increase roll-over and funding risks, thereby amplifying the impact of shocks to foreign lenders’ balance-sheets. Domestic banking sectors vulnerabilities, such as illiquid assets and a low deposit-asset ratio, are found to increase crisis contagion risk. In contrast, a high level of global liquidity attenuates the transmission of shocks to international banks׳ assets to debtor countries.     

Effects of the US monetary policy shocks during financial crises – a threshold vector autoregression approach

This article analyzes the impact of monetary policy during periods of low and high financial stress in the US economy using a threshold vector autoregression model. There is evidence that expansionary monetary policy is effective during periods of high financial stress with larger responses having a higher proportionate effect on output. The existence of a cost channel effect during periods of high financial stress implies the existence of a short run output-inflation trade off during financial crises. Large expansionary monetary shocks also increase the likelihood of moving the economy out of a high financial stress regime.     

Did efficiency of Indian public sector banks converge with banking reforms?

This paper examines the issue of convergence of efficiency levels among Indian public sector banks (PSBs) during the post-reforms period spanning from 1992/1993 to 2005/2006. The empirical results indicate that the majority of PSBs have observed an ascent in technical efficiency during the post-reforms years. Further, the inefficient PSBs have been noted to be catching up with the efficient ones. That is, the banks with low level of efficiency at the beginning of the period are growing more rapidly than the highly efficient banks. In sum, the study confirms a presence of convergence phenomenon in the Indian public sector banking industry.

Portugal’s banking and financial crises: unexpected consequences of monetary integration?

Portugal’s current financial crisis might be related to a banking crisis resulting from joining the Euro. The new-currency eliminated the exchange rate risk, but not the credit or liquidity risks within the Euroarea. However, Portuguese banks acted as if all of these risks had disappeared. They began pumping money in Portugal, by borrowing intensively in Euros abroad at low interest rates. The ensuing liquidity generated a capital-flow bonanza boom that culminated in a bust phase. Private and sovereign debt dramatically increased, which further soared when the government rescued banks. Portugal was then compelled to take extreme measures to address extraordinary debt-levels.     

Why don't banks lend to Egypt's private sector?

Bank credit to Egypt's private sector decreased over the last decade, despite a recapitalized banking system and high rates of economic growth. Recent macro-economic turmoil has reinforced the trend. This paper explains the decrease based on credit supply and demand considerations by 1) presenting stylized facts regarding the evolution of the banks' sources and fund use in 2005 to 2011, noting two different cycles of external capital flows, and 2) estimating private credit supply and demand equations using quarterly data from 1998 to 2011. The system of simultaneous equations is estimated both assuming continuous market clearing and allowing for transitory price rigidity entailing market disequilibrium. The main results are robust to the market clearing assumption. During the global financial crisis, a significant capital outflow stalled bank deposit growth, which in turn affected the private sector's credit supply. At the same time, the banking sector increased credit to the government. Both factors reduced the private sector's credit supply during the period under study. After the trough of the global crisis, capital flowed back into Egypt and deposit growth stopped being a drag on the supply side, but bank credit to the government continued to drive the decrease in the private sector's credit supply. Beginning in the final quarter of 2010, capital flows reversed in tandem with global capital markets, and in January 2011 the popular uprising that ousted President Hosni Mubarak added an Egypt-specific shock that accentuated the outflow. Lending capacity dragged again, accounting for 10% of the estimated fall in private credit. Credit to the government continued to drain resources, accounting for 70–80% of the estimated total decline. Reduced economic activity contributed around 15% of the total fall in credit. The relative importance of these factors contrasts with that of the preceding capital inflow period, when credit to the government accounted for 54% of the estimated fall, while demand factors accounted for a similar percentage.     

Does a foreign degree pay? The return to foreign education in China

A large body of literature is devoted to estimating causal effects of schooling; however, few studies have addressed the returns on education overseas. In this paper, we focus on the causal impact of holding a foreign education degree on one's performance in the homeland labor market in the context of China, the world's leading source of students pursuing education overseas. To address the issue of endogeneity, we construct an instrumental variable based on the exchange rate when the individual is about to make further education plans to isolate the arguably exogenous cost‐side shocks to one's education decision. Utilizing data from the China Household Financial Survey, we find that holding a foreign education degree has no effect on one's propensity to join the labor market but leads to a 108.95% increase in one's wage upon employment. Moreover, such effects display significant heterogeneity among returnees regarding their background. Specifically, returnees earn less if they went abroad after China joined the WTO, work in public sectors or have rich family resources.     

Were the peseta exchange rate crises forecastable during target zone period?

During the 1990s several fixed or quasi-fixed exchange rate systems collapsed. Currency crises have happened in both developed and emerging countries so it is necessary to forecast and avoid them. However, financial market crises have been extremely difficult to forecast. Economic agents' expectations are nonobservable variables that cannot be ignored in the models. In addition, if it is required to study the European case during the 1990s, the censored disposition of the exchange rate cannot be ignored either. A discrete time target zones model is proposed where these aspects are taken into account. It will be tested in a peseta/deutsche mark exchange rate framework, from June 1989 to December 1998. The results indicate differences between before and after the shift in band widths in August 1993.