BANK REGULATIONS,CAPITAL STRUCTURE,AND RISK

The joint influence of the Federal Reserve's (Fed) discount window credit and reserve requirements and FDIC's deposit insurance on a bank's optimal capital structure and asset risk choices is analyzed. The specific seniority of such regulatory claims, and potentially strong negative correlation between bank asset classes, significantly alters our traditional view of such regulatory influences on bank behavior. I find that the discount window's presence does not always prompt bank risk taking and leverage, but it does partially offset such incentives under certain conditions. In addition to its cost, a reserve requirement provides the bank with an indirect subsidy that may encourage deposit funding. Thus, regulatory reforms, such as the FDIC Improvement Act of 1991, which curtail banks' access to the discount window, may not always be appropriate to resolve a bank's incentive for moral hazard behavior. The Fed's presence needs to be more comprehensively examined to design effective regulatory policy.     

The bank capital channel and bank profits

This paper develops a microeconomic model of banking to highlight an endogenous loan creation process that emerges from bank profits via the capital accumulation of retained earnings and uses a simple bank capital‐loan multiplier to illustrate constraints on lending. The study also analyzes how sufficient net interest margins are important for banks to maintain lending portfolios and avoid financial fragility. The model offers support to bank capital channel (BKC) economists by illustrating how changes in interest rates may influence bank lending through the bank's internal capital accumulation growth rate and on a bank's portfolio choices.     

Implications of bank regulation for loan supply and bank stability: a dynamic perspective

ABSTRACT

We show that internal funds play a particular role in the regulation of bank capital, which has not received much attention, yet. A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and its future vulnerability to bankruptcy risks. Using a partial equilibrium model, we study how internal funds affect these intra- and intertemporal links. Moreover, our positive analysis identifies the effects of risk-weighted capital-to-asset ratios, liquidity coverage ratios and regulatory margin calls on the dynamics of internal funds and thus loan supply and bank stability. Only regulatory margin calls or large liquidity coverage ratios achieve bank stability for all risk levels, but for large risks a bank will stop credit intermediation.     

Bank governance,regulation and risk taking

This paper conducts the first empirical assessment of theories concerning risk taking by banks, their ownership structures, and national bank regulations. We focus on conflicts between bank managers and owners over risk, and we show that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we show that the relation between bank risk and capital regulations, deposit insurance policies, and restrictions on bank activities depends critically on each bank's ownership structure, such that the actual sign of the marginal effect of regulation on risk varies with ownership concentration. These findings show that the same regulation has different effects on bank risk taking depending on the bank's corporate governance structure.     

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 capital and credit market competition: Will competitive pressure lead to higher capital levels?

This paper establishes a theoretical model to study the relationship between credit market competition and bank capital. In the model, bank capital can alleviate the debt overhang problem, and the extent to which banks can enjoy the gain of holding capital is decreasing in the competitive pressure in the credit market. It is shown that credit market competition reduces banks' incentive to hold capital. Deposit insurance also induces banks to hold less capital. In addition, bank capital regulation is welfare improving, and banks may voluntarily hold capital in excess of regulatory minimums.     

THE VALUE IMPACTS OF CAPITAL ADEQUACY REGULATION AND STOCHASTIC DEPOSITS

The relationship between a bank's soundness and the set of factors evaluated by supervisory agencies is so complex that the regulation of certain factors might have unintended consequences. This paper demonstrates that, ceteris paribus, binding capital adequacy regulation in the presence of stochastic deposits both reduces the expected future value of a bank and increases the uncertainty of that bank's future value. The uncertainty conclusion is not inconsistent with the notion of a decrease in the probability of financial distress as equity is substituted for debt; it involves an altogether different uncertainty and one that has heretofore not been recognized in either the theory of the banking firm or the literature of capital adequacy.     

On the determinants of bank interest margins under credit and interest rate risks

This paper explores the determinants of optimal bank interest margins based on a simple firm-theoretical model under multiple sources of uncertainty and risk aversion. The model demonstrates how cost, regulation, credit risk and interest rate risk conditions jointly determine the optimal bank interest margin decision. We find that the bank interest margin is positively related to the bank's market power, to the operating costs, to the degree of credit risk, and to the degree of interest rate risk. An increase in the bank's equity capital has a negative effect on the spread when the bank faces little interest rate risk. The effect of rising interbank market rate on the spread is ambiguous and depends on the net position of the bank in the interbank market. Our findings provide alternative explanations for the empirical evidence concerning bank spread behavior.     

Additional evidence on the information-based contagion effects of bank failures

Recent theoretical models addressed the question of the nature of bank runs and what triggers them. Two competing hypotheses emerged: pure panic and information-based contagion. This study provides additional evidence consistent with the latter hypothesis. Three observable bank characteristics are examined as proxy measures for the interim private information used by rational depositors in assessing the riskiness of a bank's long-lived assets that may trigger bank runs. The three factors are (1) the distance of the solvent banks' headquarters from the headquarters of each failed bank; (2) the size of the solvent banks; and (3) the capital ratio as a proxy for their solvency. The analysis is conducted in the context of the five large bank failures that occurred in the Southwest region of the US during the mid-1980s. Weekly abnormal returns of 33 Southwestern BHCs, in ten critical failure-related event dates are regressed on the three observable bank characteristics. Our findings suggest that distance and capital adequacy are negatively related to the magnitude of the contagion effect, whereas size is positively related.     

金融服务实体经济的效率及影响因素研究 ——基于商业银行资产负债的实证分析

本文首先深入分析了商业银行的资产负债管理行为,构建商业银行追求利润的资产负债管理模型,从理论上分析出商业银行将资产配置到实体经济领域的影响因素。在此基础上,从金融监管的角度出发,将商业银行的资产负债项目进一步分类为杠杆类、通道类,利用25家商业银行2009到2018年的面板数据,实证分析针对商业银行的杠杆类、通道类资产负债的监管,对金融支持实体经济力度、价格的影响效果。结果显示：银行支持实体经济力度方面,银行的杠杆率对银行支持实体经济力度有显著正向效果,但是资金通道长度对银行支持实体经济力度的影响并不显著;银行支持实体经济的资金价格方面,杠杆率对银行资金价格的影响并不显著,但是通道长度则会显著增加资金成本;商业银行的国有、股份制、城商行性质对银行支持实体经济力度的影响也不显著,但是同等条件下,商业银行的国有性质会显著降低资金价格水平。     

Subordinated Debt,Market Discipline,and Bank Risk

This paper demonstrates that subordinated debt (subdebt thereafter) regulation can be an effective mechanism for disciplining banks. By reducing the chance that managers of distressed banks can take value‐destroying actions to benefit themselves, subdebt regulation may encourage banks to lower asset risk. Moreover, subdebt regulation and bank capital requirements can be complements for alleviating the banks’ moral hazard problems. To make subdebt regulation effective, regulators may need impose ceilings on the interest rates of subdebt, prohibit collusion between banks and subdebt investors, and require subdebt to convert into the issuing bank's equity when the government provides assistance to the bank.     

Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations

We investigate whether analyst behavior influenced banks' likelihood of winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings in 1993–2002. We control for the strength of the issuer's investment banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank's decision to provide analyst coverage. Although analyst behavior was influenced by economic incentives, we find no evidence that aggressive analyst behavior increased their bank's probability of winning an underwriting mandate. The main determinant of the lead‐bank choice is the strength of prior underwriting and lending relationships.     

Information reusability,competition and bank asset quality

This paper explains the recent decline m bank asset quality using the notion of information reusability. Banks are viewed as information processors; they exist because of their advantage in extracting the surplus associated with the reusability of borrower-specific information. It is shown that a bank's incentive to screen loan applicants, and hence maintain the quality of its assets, depends on the surplus this screening can produce, which in turn depends on information reusability. Two recent changes in banks' operating environment are increased competitition and greater temporal volatility in borrower credit risks. The former has directly reduced banks' informational surplus while the latter has impaired information reusability. Hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets. It is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality.     

Bank capital in the crisis: It's not just how much you have but who provides it

Bank capital is the cornerstone of bank regulation and is considered a key determinant of a bank's ability to withstand economic shocks. In the area of bank capital regulation, the general view is that more bank capital is better, irrespective of who provides it. In this paper, we investigate whether the investment horizon of bank capital providers matters for bank performance during the recent financial crisis. We observe that banks with more short-term investor ownership have worse stock returns during the crisis. Further exploration suggests that this is partially because banks with higher short-term investor ownership took more risk prior to the crisis but mainly because they experienced higher selling pressure during the crisis. Our results confirm the economic benefit of bank capital in helping banks to perform better during crises. However, when we decompose bank capital by the nature of its providers, we show that more capital is associated with worse performance when it is provided by short-term institutional investors.     

Is bank diversification a linking channel between regulatory capital and bank value?

This study investigates the interrelationship between bank regulatory capital and bank diversification. We argue that regulatory capital might act as a substitutive mechanism of diversification to alleviate a bank's default risk. As a result, regulatory capital is likely to discourage firms from excessive diversification, which might in turn indirectly improve bank value. Using a sample of listed banks in developed countries from 2011 to 2017, we find that total regulatory capital is inversely associated with bank diversification. Narrower regulatory capital ratios only have a significant association with income-based but not with asset-based diversification. Our results also reveal an indirect effect of regulatory capital on bank value mediated by bank diversification (i.e. indirect-only mediation). Overall, our study provides novel insights into the complementarity of the institutional and strategic domains so as to understand the far-reaching implications of regulation reforms for the strategic behaviour of banking companies.     

Corporate governance and recent consolidation in the banking industry

Using the universe of publicly traded banks at year-end 1993, we find that target banks' outside directors, but not inside directors, tend to own more stock than their counterparts in other banks. Having an outside blockholder is also associated with banks becoming targets. In contrast to existing research on industrial firms, board structure does not help determine which sample banks sell. Neither the fraction of outsiders on a bank's board nor having an outside-dominated board differentiate the target banks in our sample. Instead, outside directors/shareholders and blockholders appear to be primarily responsible for encouraging bank managers to accept an attractive merger offer     

Regulatory and “economic” solvency standards for internationally active banks

One of the most important policy issues for financial authorities is to decide at what level average capital charges should be set. The decision may alternatively be expressed as the choice of an appropriate survival probability for representative banks over a horizon such as a year, often termed a “solvency standard”. This article sheds light on the solvency standards implied by current and possible future G10 bank regulation and on the “economic solvency standard” that banks choose themselves by their own capital setting decisions. In particular, we employ a credit risk model to show that the survival probability implied by the 1988 Basel Accord is between 99.0% and 99.9%. We then demonstrate that if a new Basel Accord were calibrated to such a standard, it would not represent a binding constraint on banks' current operations since most banks employ a solvency standard higher than 99.9%. To show this, we employ a statistical analysis of bank ratings adjusted for the impact of official or other support as well as credit risk model calculations. Lastly, we advance a possible explanation for the conservative capital choices made by banks by showing that swap volumes are highly correlated with credit quality for given bank size. This suggests that banks' access to important credit markets like the swaps markets may provide a significant discipline in the choice of solvency standard.     

Bank CEO careers after bailouts: The effects of management turnover on bank risk

We study whether bank bailouts affect CEO turnover and its subsequent impact on bank risk. Exploiting the Troubled Asset Relief Program (TARP) of 2008, we find that TARP funds temporarily decreased the likelihood of bank CEO turnover during the crisis (2008–2010) but significantly increased CEO changes afterwards. Our results show that replacing TARP CEOs reduced individual bank's risk as well as the bank's contributions to the systemic risk. Finally, we find that TARP CEO turnover was mainly driven by a decrease in the bank's political capital. Overall we provide evidence that bank bailouts have important implications for banks’ risk-taking and systemic risk, insofar as bailouts affect bank CEO turnover.     

RAROC AT BANK OF AMERICA: FROM THEORY TO PRACTICE

In 1993, Bank of America's Risk and Capital Analysis Group was charged with the task of developing and instituting a single corporate-wide system to allocate capital to all the bank's activities. Since 1994, that system has been providing quarterly reports of risk-adjusted returns on capital (RAROC) for each of the bank's 37 major business units. By 1995, B of A had also developed the capability to calculate RAROC down to the level of individual products, transactions, and customer relationships. RAROC systems allocate capital for two basic reasons: (1) risk management and (2) performance evaluation. For risk management purposes, the overriding goal of allocating capital to individual business units is to determine the bank's optimal capital structure–the proportion of equity to assets that minimizes the bank's overall cost of funding. This process involves estimating how much the risk (or volatility) of each business unit contributes to the total risk of the bank, and hence to the bank's overall capital requirements. For performance evaluation purposes, RAROC systems assign capital to business units as part of a process of determining the risk-adjusted rate of return and, ultimately, the “economic profit” of each business unit. The objective in this case is to measure a business unit's contribution to shareholder value, and thus to provide a basis for effective planning, capital budgeting, and incentive compensation at the business unit level. Concerns about capital adequacy, along with the Basel risk-based capital requirements, have played some role in the growth of RAROC among commercial banks. But the most powerful impetus to bankers' use of more systematic risk measures is coming from increasingly activist institutional investors. Besides giving senior management an economic basis for evaluating the bank as a portfolio of businesses and for making resource allocation decisions that improve the bank's risk/reward profile, RAROC systems are also expected to produce better performance by holding managers accountable for the amount of investor capital they are putting at risk.     

The dark side of liquidity creation: Leverage and systemic risk

We consider a model in which the threat of bank liquidations by creditors as well as equity-based compensation incentives both discipline bankers, but with different consequences. Greater use of equity leads to lower ex-ante bank liquidity, whereas greater use of debt leads to a higher probability of inefficient bank liquidation. The bank's privately-optimal capital structure trades off these two costs. With uncertainty about aggregate risk, bank creditors learn from other banks’ liquidation decisions. Such inference can lead to contagious liquidations, some of which are inefficient; this is a negative externality that is ignored in privately-optimal bank capital structures. Thus, under plausible conditions, banks choose excessive leverage relative to the socially optimal level, providing a rationale for bank capital regulation. While a blanket regulatory forbearance policy can eliminate contagion, it also eliminates all market discipline. However, a regulator generating its own information about aggregate risk, rather than relying on market signals, can restore efficiency and market discipline by intervening selectively.