Economic policy uncertainty and cross-border lending

Banks increase cross-border syndicated lending when domestic economic policy uncertainty is high, after controlling for credit demand at the borrower country or country-industry levels. The credit migration effects are strongest for banks with diverse income and when banks face fiercer competition. Using elections as a source of plausibly exogenous variation which positively affects political uncertainty, we provide causal evidence on the effects of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.     

Does it help to have friends in high places? Bank stock performance and congressional committee chairmanships

Does a politician with power in the U.S. Congress positively affect the value of firms headquartered in their home state? We investigate this question by examining the profitability and stock performance of commercial banks. Banks can be enormously influenced by the political and regulatory environment. We find that banks headquartered in states where a Senator or member of the House of Representatives serves as the chairman on their respective banking committee in Congress outperform banks headquartered in other states. In addition, we find that this “chair effect” is more pronounced when the committee chairs are strongly aligned with other politicians in Congress, when they are more experienced, and when banks are clustered in the home state, suggesting that the potential benefits generated from chairmanship are in more demand. Overall, our results suggest that there are some important value implications of a local politician’s power in Congress.     

Why government banks underperform: A political interference view

This study proposes a political interference hypothesis to explain how political considerations depress the performance of government banks. We define political interference as a situation in which government bank executives are replaced within 12 months after the country’s major elections (presidential or parliamentary elections). We classify political and non-political government banks as those that experience or do not experience political interference, respectively. The hypothesis firstly suggests that once government banks undertake political interference, their financial performance deteriorates. That is, political banks display the worst performance, followed by non-political banks and private banks have the best performance. Next, we posit that the impact of political interference is greater in developing countries than in developed countries. Finally, we hypothesize that the underperformance of government banks will be reduced if we remove political interference. By employing bank data from 65 countries from the period of 2003–2007, our hypothesis effectively explains why government banks in developed countries escape relatively unscathed, while those in developing countries suffer significantly.     

Foreign bank subsidiaries’ risk-taking behavior: Impact of home and host country national culture

This paper examines whether the risk-taking behavior of foreign affiliates of multinational banks is more influenced by the national culture of their parent banks’ home country or the national culture of foreign affiliates’ host country. The study uses a dataset of 292 foreign affiliates (i.e., subsidiaries or branch operations) operating in 66 countries having parent banks in 26 countries for empirical analysis. National culture of both home and host countries is measured with four dimensions—uncertainty avoidance, individualism, masculinity and power distance—of Hofstede's framework of national culture. Findings suggest that the national culture of parent banks’ home country has higher impact on the risk-taking behavior of foreign affiliates of multinational banks than the national culture of their host country. Specifically, foreign affiliates’ risk-taking is higher if parent banks’ home country has low uncertainty avoidance, high individualism and low power distance cultural values. This study extends our understanding that how informal institutions, such as the national culture, influence the financial decisions in multinational banks.     

Banking integration and growth: Role of banks' previous industry exposure

Using U.S. interstate banking deregulations, we identify the effect of market-entering banks’ prior industry exposures on the manufacturing sector growth in the new state that they enter. We create banking integration and industry specialization measures that consider both direct (state-pair) as well as indirect (tertiary-state) links created by expanding multi-bank holding company networks. First, consistent with the economic mechanism we have in mind, we observe that banks’ home state's industrial specialization is positively correlated with their lending specialization when participating to in-state as well as out-of-state syndicated loan markets. Then, focusing on industry value added at the state-industry-level, we find evidence consistent with the positive impact of market-entering banks’ prior exposure to a sector on the growth of that industry in the newly-entered state. The observed effect is larger when the state-pair-level discrepancy in sector-specialization is greater. Our findings are robust and hold in capital-related components of industry-level value added. We observe that the above results are more prominent in sectors that are more external finance dependent, have lower amounts of physical capital that can be pledged as collateral, generate more valuable patents, are durables-producers, and have a higher risk. Our findings suggest that a bank integration channel helps shape states’ industrial landscape.     

Information content of analyst recommendations in the banking industry

We investigate whether analyst recommendations about banks become more valuable in periods when the information environment for banks is more uncertain. The degree of uncertainty in the information environment for banks is time-varying because of time-varying changes in information asymmetry for banks and in bank regulations. Based on a sample of 23,632 analyst recommendations of 1106 banks, we find that analyst recommendations are more informative for banks that are riskier and subject to a higher degree of information asymmetry. Furthermore, regulations that reduce the information asymmetry (Sarbanes-Oxley Act) or the risk (Dodd-Frank Act) of the banking industry also reduce the information content of analyst recommendations, while regulations that increase the risk of the banking industry (Gramm-Leach-Bliley Act) increase the information content of analyst recommendations. Our results suggest the role of an analyst is more valuable when the information environment is more uncertain.     

Policy uncertainty and bank’s funding costs: The effects of the financial crisis,Covid-19 pandemic,and market discipline

This paper examines the impacts of economic policy uncertainty (EPU) on bank funding costs using the 2001–2021 data of US banks. We document consistent evidence of a negative relationship between EPU and bank funding costs, implying lower bank funding costs during a time of high EPU, consistent with the hypothesis that economic agents tend to reallocate their assets into safer investments, such as bank deposits during high uncertainty. Large banks are likely to benefit most during high EPU when experiencing lower costs of funds compared with other banks, suggesting the “too-big-to-fail” perception of depositors. Cross-sectional analysis indicates that depositors require safer banks to pay lower rates, indicating the existence of market discipline. The cost-decreasing effects of policy uncertainty are less pronounced during the global financial crisis than the Covid-19 crisis.     

Value-at-risk vs. building block regulation in banking

Existing regulatory capital requirements are often criticized for only being loosely linked to the economic risk of the banks' assets. In view of the attempts of international regulators to introduce more risk sensitive capital requirements, we theoretically examine the effect of specific regulatory capital requirements on the risk-taking behavior of banks. More precisely, we develop a continuous time framework where the banks' choice of asset risk is endogenously determined. We compare regulation based on the Basel I building block approach to value-at-risk or ‘internal model’-based capital requirements with respect to risk taking behavior, deposit insurance liability, and shareholder value. The main findings are: (i) value-at-risk-based capital regulation creates a stronger incentive to reduce asset risk when banks are solvent, (ii) solvent banks that reduce their asset risk reduce the current value of the deposit insurance liability significantly, (iii) under value-at-risk regulation the risk reduction behavior of banks is less sensitive to changes in their investment opportunity set, and (iv) banks' equityholders can benefit from risk-based capital requirements.     

Climate policy uncertainty and risks taken by the bank: Evidence from China

This paper studies the relationship between three types of risk borne by banks and climate policy uncertainty (CPU). We use panel data for 210 commercial banks in China from 2009 to 2020. This paper has the following main conclusions: Firstly, climate policy uncertainty significantly reduce the passive and active risks borne by banks and increase the insolvency risks borne by banks; Secondly, the impact of CPU on the passive risks borne by listed banks is greater than that of unlisted banks, and the impact of CPU on the active and insolvency risks borne by listed banks is less than that of unlisted banks; Thirdly, the impact of CPU on the three types of risks borne by banks is most pronounced among rural banks and state-owned banks and least pronounced among joint-stock banks. After a series of robustness tests, such as the system GMM approach, different sample periods and controlling for endogeneity, the results of this paper remain robust. We also used the difference in difference (DID) method to study the policy dynamic effects of the 2016 Paris Agreement, and we passed a parallel trend test. Our results provide insights for policy makers and investors. Policy makers should formulate visionary policies in order to minimize the adverse effects of CPU; investors should keep an eye on the implementation of climate policies and pay attention to the impact of policies on the economy, so that they can adjust their investment strategies rationally.     

经济政策不确定性与企业贷款成本

基于大样本微观银行信贷数据,本文研究经济政策不确定性对企业的银行贷款成本的影响。研究发现,经济政策不确定性升高导致企业的银行贷款成本增加,且使得在中小型银行贷款的企业成本增加更多。异质性分析表明,经济政策不确定性升高对受政策因素影响较大的企业如小微企业、私营企业等的银行贷款成本的影响更为明显。进一步,对企业的银行贷款违约风险的研究发现,随着经济政策不确定性升高,企业的银行贷款违约风险反而降低。这表明,经济政策不确定性升高使得银行选择风险评级更低的贷款,符合谨慎性动机。本文研究结论表明,经济政策不确定性升高时,银行“自我保险”动机的增强使得企业的银行贷款成本增加,这在中小型银行中表现得更加明显,同时也更多地转嫁给中小企业。本文为经济政策不确定性对企业投资、宏观经济波动等的研究提供了微观解释机制,并揭示了政府经济政策的一致性、稳定性对维护金融稳定的重要作用。     

Aggregate uncertainty and the supply of credit

This paper presents a model in which a bank can exhibit self-insurance with loan supply contracting when uncertainty increases. This prediction is tested with U.S. commercial banks, where identification is achieved by looking at differential effects according to banks’ capital-to-assets ratio (CAR). Increases in uncertainty reduce the supply of credit, more so for banks with lower levels of CAR. These results are weaker for large banks, and are robust to controlling for monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, the effect of uncertainty shocks on credit supply is about as important as that of monetary policy shocks.     

Political uncertainty and cross-border equity portfolio allocation decisions: International evidence

Political risk models highlight that political uncertainty matters for corporate investment decisions. However, how political uncertainty matters for investment allocation decisions is relatively under-explored. In this study, we examine the impact of political uncertainty associated with national elections on foreign equity portfolio in 48 countries. Our results indicate that political uncertainty reduces international equity allocations to the host country and such reduction appears more pronounced in the election year. Further analysis shows that the interaction between political uncertainty and institutional quality has a positive and significant effect on international equity portfolio flow, suggesting that the value of institutional quality outweighs the negative effects of political uncertainty. Lastly, we find equity home bias to be negative and significant; however, the interaction between political uncertainty and equity home bias appears insignificant.     

WHEN ELECTIONS FAIL TO RESOLVE UNCERTAINTY: THE CASE OF THE 2016 U.S. PRESIDENTIAL ELECTION

In this article, we examine whether certain political election outcomes create, rather than resolve, uncertainty in financial markets. We posit that the market uncertainty associated with unanticipated election outcomes is not resolved before or on the election dates. To test this claim, we use the surprise outcome of the 2016 U.S. presidential election and two previous U.S. presidential elections as benchmarks. In contrast to prior elections, we find that the 2016 U.S. presidential election outcome did not resolve market uncertainty. Specifically, we show significant increases in transactions costs, adverse selection costs, and volatility in the days following the election date. We contribute to the literature by suggesting that unexpected elections can engender, rather than resolve, market uncertainty.     

Elections,political competition and bank failure

We exploit exogenous variation in the scheduling of gubernatorial elections to study the timing of bank failure in the US. Using hazard analysis, we show that bank failure is about 45% less likely in the year leading up to an election. Political control (i.e., lack of competition) can explain all of this average election year fall in the hazard rate. In particular, we show that the reduction in hazard rate doubles in magnitude for banks operating in states where the governor has simultaneous control of the upper and lower houses of the state legislature (i.e., complete control) heading into an election.     

The pernicious effects of contaminated data in risk management

Banks hold capital to guard against unexpected surges in losses and long freezes in financial markets. The minimum level of capital is set by banking regulators as a function of the banks’ own estimates of their risk exposures. As a result, a great challenge for both banks and regulators is to validate internal risk models. We show that a large fraction of US and international banks uses contaminated data when testing their models. In particular, most banks validate their market risk model using profit-and-loss (P/L) data that include fees and commissions and intraday trading revenues. This practice is inconsistent with the definition of the employed market risk measure. Using both bank data and simulations, we find that data contamination has dramatic implications for model validation and can lead to the acceptance of misspecified risk models. Moreover, our estimates suggest that the use of contaminated data can significantly reduce (market-risk induced) regulatory capital.     

Foreign Banks: Trends and Impact

Over the past two decades, foreign banks have become much more important in domestic financial intermediation, heightening the need to understand their behavior. We introduce a new, comprehensive database, made publicly available, on bank ownership (including the home country of foreign banks) for 5,324 banks in 137 countries over the period 1995–2009. We document large increases in foreign bank presence in many countries, but with substantial heterogeneity in terms of host and banks’ home countries, bilateral investment patterns, and bank characteristics. In terms of impact, we document that the relation between private credit and foreign bank presence importantly depends on host country and banks’ characteristics. Specifically, foreign banks only seem to have a negative impact on credit in low‐income countries, in countries where they have a limited market share, where enforcing contracts is costly and where credit information is limited available, and when they come from distant home countries. This shows that accounting for heterogeneity, including bilateral ownership, is crucial to better understand the implications of foreign bank ownership.     

The effects of firm-initiated clawback provisions on bank loan contracting

Although firm-initiated clawbacks reduce accounting manipulation, they also induce managers to engage in suboptimal activities (e.g., reduce research and development (R&D) expenses) to achieve earnings targets. To assess the effectiveness of clawback provisions, we examine their impact from debtholders' point of view. We find that banks use more financial covenants and performance pricing provisions in the loan contracts and decrease interest rates after firms initiate clawbacks. Moreover, we also find that loan maturity increases and loan collateral decreases subsequent to clawback adoption. Taken together, our findings indicate that firm-initiated clawback provisions enhance financial reporting quality, thereby reducing the information uncertainty that financing providers face.     

Macroeconomic Shocks and Banks' Foreign Assets

Recent developments in international financial markets have highlighted the role of banks in the transmission of shocks across borders. We employ dynamic panel methods for a sample of OECD countries to analyze whether banks' foreign assets react to macroeconomic shocks at home and abroad. We find that banks reduce their foreign assets in response to a relative increase in domestic interest rates, and they increase their foreign assets when the growth rate of world energy prices rises. The responses are characterized by a temporal overshooting and a dynamic adjustment process that extends over several quarters.     

How Do Firms Respond to Political Uncertainty? Evidence from U.S. Gubernatorial Elections

We examine the joint response to political uncertainty along two margins: changes in real activity and voluntary disclosure. We focus on within-firm variation in exposure to ex ante competitive U.S. gubernatorial elections using data on preelection poll margins and firms’ state exposures. Despite real activity falling in the years leading up to a close election, we find that voluntary disclosure increases both in frequency and content, including mentions of risk in filings that reference states holding elections. Our tests use a decomposition of 8-K filings into real activity and voluntary disclosure to address the endogenous complementarity between these two responses. These results hold when using alternative ex ante measures of political uncertainty based on term-limited incumbents, historically competitive offices, or state legislature gridlock. Both effects of political uncertainty are stronger for firms in highly regulated industries and weaker for those least exposed to the local market, linking the real activity and disclosure responses to uncertainty.     

Do weak supervisory systems encourage bank risk-taking?

Weak bank supervision could give banks the ability to shift risk from themselves to supervisors. We use cross-border bank mergers as a natural experiment to test changes in risk and the impact of supervision. We examine cross-border bank mergers and find that the supervisory structures of the partners’ countries influence changes in post-merger total risk. An acquirer from a country with strong supervision lowers total risk after a cross-border merger. However, total risk increases when the target bank is located in a country with relatively strong supervision. This result is consistent with strong host regulators limiting the risky activities of their local banks. Foreign-owned competitors could then engage in the risky projects, especially if the foreign banks’ supervisors are not strong. An acquirer entering a country with strong supervision appears to shift risk back to its home country. The results suggest that bank supervisors can reduce total banking risk in their countries by being strong.