Does cooperation among women enhance or impede firm performance?

Based on the notion that women cooperate more with women than with men, we investigate whether women managers work more effectively when monitored by women directors. We find that when a firm has women as its top managers, its accounting profitability increases with the proportion of women on the board of directors. However, the improvement in profitability is associated with earnings management. We show that women are likely to be appointed to precarious leadership positions, which puts pressure on them to ameliorate the weak earnings performance. Finally, consistent with the interaction between women resulting in an unfavourable response from investors, we document a negative stock market reaction to the appointment of female top managers in the presence of women on the board.     

Does better capitalization enhance bank efficiency and limit risk taking? Evidence from ASEAN commercial banks

This paper assesses the dynamic causal relationships among bank risk, capital, and efficiency. Using a panel dataset of commercial banks in five ASEAN countries from 2005 to 2015, we employ panel vector autoregression analysis to take into account the endogeneity and interdependencies of these three variables while holding other shocks constant. We find that in general, better capitalized banks in ASEAN countries are more efficient and take less credit risk. However, high-efficiency banks tend to maintain low levels of capital, whereas low-efficiency banks have higher capital ratios. We also analyze the sensitivity of the relationships among capital, risk, and efficiency to ownership structure, bank size, and the periods before and after the 2008 crisis.     

Bank regulation and supervision: what works best?

This paper uses our new database on bank regulation and supervision in 107 countries to assess the relationship between specific regulatory and supervisory practices and banking-sector development, efficiency, and fragility. The paper examines: (i) regulatory restrictions on bank activities and the mixing of banking and commerce; (ii) regulations on domestic and foreign bank entry; (iii) regulations on capital adequacy; (iv) deposit insurance system design features; (v) supervisory power, independence, and resources; (vi) loan classification stringency, provisioning standards, and diversification guidelines; (vii) regulations fostering information disclosure and private-sector monitoring of banks; and (viii) government ownership.The results, albeit tentative, raise a cautionary flag regarding government policies that rely excessively on direct government supervision and regulation of bank activities. The findings instead suggest that policies that rely on guidelines that (1) force accurate information disclosure, (2) empower private-sector corporate control of banks, and (3) foster incentives for private agents to exert corporate control work best to promote bank development, performance and stability.     

Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking

We propose a framework for testing the effects of changes in bank resolution regimes on bank behavior. By exploiting the differential relevance of recent changes in U.S. bank resolution (i.e., the introduction of the Orderly Liquidation Authority, OLA) for different types of banks, we are able to simulate a quasi-natural experiment using a difference-in-difference framework. We find that banks that are more affected by the introduction of the OLA (1) significantly decrease their overall risk-taking and (2) shift their loan origination toward lower risk, indicating the general effectiveness of the regime change. This effect, however, does (3) not hold for the largest and most systemically important banks. Hence, the introduction of the OLA in the U.S. alone does not appear to have solved the too-big-to-fail problem and might need to be complemented with other measures to limit financial institutions’ risk-taking.     

Should bank capital regulation be risk sensitive?

We present a screening model of the risk sensitivity of bank capital regulation. A banker funds a project with uninsured deposits and costly capital. Capital resolves a moral hazard problem in the choice of the probability of default (PD). The project’s loss given default (LGD) is the banker’s private information. The regulator receives a noisy signal about the LGD and imposes a minimum capital requirement. We show that the optimal sensitivity of capital regulation is non-monotonic in the accuracy of risk assessment. If the signal is inaccurate, the regulator should use risk-insensitive capital requirements. Given sufficient accuracy, the regulator should separate types via risk-sensitive capital requirements, reducing the risk-sensitivity of bank capital as accuracy improves.     

Geopolitical,economic uncertainty and bank risk: Do CEO power and board strength matter?

This study examines whether economic and geopolitical uncertainties affect bank risk. Using a sample of 574 banks from 19 countries for 2009–2020, our findings show that increasing economic and geopolitical uncertainty significantly constrain the bank risk and worsens its stability. Furthermore, we explore whether CEO power and board strength have played a moderate role in mitigating the adverse impact of economic and geopolitical uncertainty on bank risk. The finding shows that CEOs' power and strong boards improve the bank's performance and minimize the adverse effects of economic and geopolitical uncertainty on bank risk. The results are robust to alternative bank risk, economic uncertainty, and geopolitical uncertainty measures and address endogeneity. Additional analyses on bank heterogeneity show that the bank stability of listed, domestic and private-owned banks is more immune to such uncertainty.     

Do time deposits prevent bank runs?

In this paper the Diamond and Dybvig (J. Politic. Econ. 91 (1983) 401) model is extended by small consumption shocks; that is, an agent may encounter either a small shock or a big (full) shock. We show that a bank can issue liquid demand deposits and still avoid panics, if it also issues time deposits, which have a low liquidation value. Each agent splits his endowment between the two deposit types. If an agent later encounters a small, common consumption shock he withdraws demand deposits, whereas a big, rare shock requires that time deposits are also liquidated. Agents who withdraw only demand deposits benefit from liquidity.     

Risk-shifting and the regulation of bank CEOs’ compensation

This paper analyzes the effects of two regulatory mechanisms, namely a regulation of the structure of bank CEOs incentive pay and sanctions for the CEOs of failed banks, on bank risk shifting. We extend a standard model of CEO compensation by incorporating leverage and an investment decision. To the extent that bank depositors and creditors are even partially protected by public guarantees, we show that it is in the interests of bank shareholders to choose more risky investments than would be socially optimal, and therefore to design a CEO contract with excessive risk taking incentives. Thus, we argue that current corporate governance arrangements in the banking sector are not efficient. In this setting, we show that putting in place one of the aforementioned mechanisms could yield the socially optimal outcome at no cost. We also identify some limitations and potential perverse effects of these mechanisms.     

Does banking system transparency enhance bank competition? Cross-country evidence

There seems to be a consensus among regulators and scholars that in order to improve the functioning of a banking system it is necessary to raise the level of bank information disclosure. However, its influence on bank competition – which is an important factor affecting the efficiency and stability of the banking system – is left out of consideration. To test whether greater bank information disclosure is associated with both lower market power and lower concentration in the banking markets, we use country-level data covering the years 1998, 2001, 2005 and 2010. Our findings show that countries with higher levels of bank transparency have lower levels of bank concentration, while the link between transparency and market power is less pronounced. We also show that the reduction of competition due to stricter disclosure requirements depends on bank credit risks and the relationship is U-shaped.     

Basel Faulty Simpler rules for bank regulation,please

The intense scrutiny undergone by the financial sector will reach a hiatus in 2004. Regulators will have learnt that they cannot, by prescribing ever more complex or draconian rules, prevent financial companies from taking disastrous risks, or form exploiting privileged information and diddling their customers. Those two dangers, which have preoccupied bank supervisors since the collapses of Long-Term Capital Management in 1998dan Enron in 2001, are inherent in the financial business and cannot be magicked away.     

Investment bank monitoring and bonding of security analysts’ research

We assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.     

Politicians and financial supervision unification outside the central bank: Why do they do it?

An increasing number of countries show a trend towards a certain degree of consolidation of powers in financial supervision, which has resulted in the establishment of unified regulators, that are different from the national central banks. By contrast a high involvement of the central bank in supervision seems to be correlated with a multi-authorities regime (central bank fragmentation effect). This paper, using a simple application of a general common agency game, sheds light on which conditions the politicians prefer when implementing an unified sector supervision outside the central bank. From a theoretical point of view the quality of public sector governance plays a crucial role in determining the supervision unification. Focusing on the behaviour of the “good” policymaker (helping hand type), it will prefer a unified financial authority that is different from the central bank if the correspondent welfare gains-linked to at least one of the three effects: moral hazard, conflict of interest, bureaucracy—are considered higher respect to the information losses. The “bad” policymaker (grabbing hand type) will choose the single financial authority if the financial industry likes it, and the central bank is not a captured one. On the other hand, the paper tests the model, confirming the robustness of the institutional position of the central bank in explaining the recent trend in supervision consolidation, with an empirical analysis performed with ordered functions on an updated dataset.     

How do bank competition,regulation, and institutions shape the real effect of banking crises? International evidence

This paper studies the influence of bank competition on the real effect of 36 systemic banking crises in 30 countries over the 1980–2000 period and how this influence varies across countries depending on bank regulation and institutions. We find that bank market power is not on average useful for mitigating the negative real effect of a systemic banking crisis. Market power promotes higher growth during normal times in industries that are more dependent on external finance but induces a bigger reduction in growth during systemic banking crises. We also find a country-specific effect depending on bank regulation and institutions. Stringent capital requirements and poor protection of creditor rights increase the benefits of bank market power for mitigating the negative real effect of a systemic banking crisis because bank market power has a positive effect on economic growth during both crisis and non-crisis periods in these environments.     

Bank efficiency and foreign ownership: Do good institutions matter?

This paper contributes to the literature on foreign ownership and bank efficiency by examining whether the efficiency of foreign banks depends on the institutional quality of the host country and on institutional differences between the home and host country. Using stochastic frontier analysis for a sample of 2095 commercial banks in 105 countries for the years 1998–2003, we find that foreign ownership negatively affects bank efficiency. However, in countries with good governance this negative effect is less pronounced. We also find that higher quality of the institutions in the home country and higher similarity between home and host country institutional quality reduce foreign bank inefficiency.     

What determines differences in foreign bank efficiency? Australian evidence

This study examines the factors that determine differences in efficiency of foreign banks in the host market (Australia). The impact of home market, host market and parent bank characteristics are considered within the frameworks offered by comparative advantage and new trade theories. Parametric distance functions are used to estimate the efficiency of foreign banks in Australia, and the robustness of model specification is tested using both general-to-specific modelling and extreme bounds analysis. It is found that following clients reduces the efficiency of profit creation. Incumbent bank's market share acts as a barrier to entry, while parent bank profits do not improve host nation efficiency. The limited global advantage hypothesis was found to be relevant for banks from the United Kingdom, while banks from the United States were generally less efficient.     

Do stress tests affect bank liquidity creation?

We examine the impact of Federal Reserve stress tests from 2009 to 2016 on U.S. bank liquidity creation. Empirical results show that regulatory stress tests have a negative effect on both on-and off-balance sheet bank liquidity creation and asset-side liquidity creation. As banks enter the stress tests, they reduce their liquidity creation to avoid failing the stress tests. These results are consistent with the hypothesis that banks manage their risk exposures to meet higher capital requirements. The negative effect of stress testing on liquidity creation continues to persist in the quarters after the stress tests. Finally, stress test banks appear to increase liability-side liquidity creation. These findings highlight that the enhanced financial stability from greater regulatory scrutiny may be achieved at the expense of financial intermediation.     

Do negative interest rates affect bank risk-taking?

We offer early evidence on the impact of negative interest rate policy (NIRP) on banks’ risk-taking. Our primary result shows banks in NIRP-adopter countries reduce holdings of risky assets by around 10 percentage points following implementation of NIRP in comparison to banks in non-adopter countries. We augment this result by identifying NIRP’s impact on other aspects of banks’ risk-taking behaviour; NIRP is associated with reductions in banks’ loan growth and average loan price (by 3.7 percentage points and 59 basis points) and a rebalancing of asset portfolios towards safer assets. Secondly, we find the NIRP-effect is heterogeneous; post-NIRP risk-taking increases at strongly capitalised banks and at banks operating in less competitive markets that exploit market power to insulate net interest margins and profitability. Our robust empirical evidence supports the “de-leverage” hypothesis which suggests that banks acquire safer, liquid assets to bolster their capital positions rather than searching for value by acquiring riskier assets. We base our evidence on a sample of 2,584 banks from 33 OECD countries across 2012 to 2016, and from models that employ a difference-in-differences framework.     

Did capital infusions enhance bank recovery from the great recession?

This paper investigates the long-run recovery experience of US banks that received capital infusions under the Capital Purchase Program (CPP), a part of the Troubled Asset Relief Program (TARP). Based on a dynamic recovery model, our results show that recovering CPP banks tended to be in better financial condition than other CPP banks. Long-run event study analyses of common stock prices reveal that, in the quarter after repayment of TARP funds, CPP banks experienced economically large and significant buy-and-hold wealth gains of 14%, equivalent to approximately $329 billion. We conclude that TARP was successful in fostering bank financial and stock price recovery.     

Do gender diverse boards enhance managerial ability?

We examine the link between board gender diversity and managerial ability to transform corporate resources into revenue. Drawing on a sample of U.S firms during the period 2001–2016, we find a positive and economically meaningful association between female directors on boards and managerial ability, particularly when female directors are in monitoring roles on the board. The documented effect is stronger when using a tenure weighted measure of female representation on boards; and more pronounced for firms that have three or more women on the board of directors, in line with the critical mass hypothesis. We uncover that critical mass of female directors in monitoring roles is particularly conducive to enhancing managerial ability. Our channel analysis tests further reveal a distinctive tendency of firms with more gender diverse boards to shape the human capital of the firm by promoting managers with more generalist managerial skills. We find consistent results when we employ propensity score matching estimates and difference-in-differences using sudden deaths of female directors as a potential shock to address endogeneity concerns. We discuss implications for theory and policy.     

Do bank managers signal through cash flow statements?

We empirically examine the cash flow statements for Japanese banks and whether their managers engage in classification shifting to temper concerns about risk exposure. To create a buffer against liquidity shocks, they shift cash flows from investing and/or financing activities to operating activities. We also find robust evidence that classification shifting intensifies in higher risk situations. Although prior research on managerial discretion focuses on earning management, we are the first to show cash flow management to avoid sequential negative changes in operating cash flows. We show that these activities convey valuable information about changes in banks' risk exposure.