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.     

Examining bank SEOs: Are offers made by undercapitalized banks different?

Despite extensive monitoring, banking operations are often considered opaque, and despite explicit capital adequacy regulation, banks may have substantial discretion in their financing. Both monitoring and capital regulation have changed substantially over time, with the adoption of FDICIA being one important breakpoint. This article empirically studies seasoned equity offerings (SEOs) by banks to understand how opacity and capital regulation interact to determine the timing of bank SEOs and their market valuation. SEOs both by banks that are undercapitalized relative to regulatory standards and also well-capitalized banks are fully discretionary when it comes to SEOs, even before FDICIA. Both undercapitalized and well-capitalized banks experience similar and significantly negative stock price reactions to SEO announcements, and also have similar prior patterns of insider trading and similar economic drivers of the issuance decision. Moreover, post-SEO abnormal stock returns are similar to benchmark returns for both types of issuers in the long run, suggesting that, contrary to the well-documented evidence for industrial SEOs, investors understand the value implications of bank SEOs upon announcement. The evidence implies that undercapitalized banks' SEOs are more discretionary and that all bank SEOs are less opaque than implied by earlier studies.     

Who acquires whom among stand-alone commercial banks and bank holding company affiliates?

This paper presents the difference in the likelihood of being targets or acquirers among stand-alone banks, single-bank holding company (SBHC) affiliates and multi-bank holding company (MBHC) affiliates. Using a sample of U.S. commercial bank data from 1997 to 2012, we find that MBHC affiliates exhibit a greater likelihood of being targets than do stand-alone commercial banks, while stand-alone banks have a greater probability of becoming targets than do SBHC affiliates. Our findings show that MBHC affiliates tend to have a greater likelihood of being acquirers than do SBHC affiliates, which again have a greater probability of being acquirers than do stand-alone banks. Those banks that acquire another bank within the same MBHC structure tend to be smaller and more financially constrained than those banks acquiring outside the same MBHC structure, whereas targets that are acquired by another bank within the same MBHC structure tend to be smaller, higher profitability and capital than targets that are acquired by banks from outside the MBHC structure. Our results suggest that the MBHC parent attempts to discipline distressed, poorly performing and smaller affiliates by involving them in mergers and acquisitions.     

Average pay in banks: do agency problems and bank performance matter?

Review of Quantitative Finance and Accounting - We study the determinants of average pay across all levels of staff seniority for UK banks between 2003 and 2012. We show that pay is affected by...     

What makes a bank risky? Insights from the optimal capital structure of banks

Assessing the risk of bank failures is the paramount concern of bank regulation. This paper argues that in order to assess the default risk of a bank, it is important to consider its financing decisions as an endogenous dynamic process. We provide a continuous-time model, where banks choose the deposit volume in order to trade off the benefits of earning deposit premiums against the costs that occur at future capital structure adjustments. The bank’s asset value may suffer from shocks and follows a jump-diffusion process.     

What drives the liquidity of sovereign bonds when markets are under stress? An assessment of the new Basel 3 rules on bank liquid assets

The new rules on bank liquidity set by the Basel Committee require banks to hold high-quality liquid assets (HQLAs) against future cash outflows in periods of market stress. Domestic government bonds are considered to be HQLAs. To assess the appropriateness of this rule, we investigate the liquidity of European government bonds in ordinary times and in periods of market turmoil. We find that the effect of adverse market conditions on liquidity strongly depends on individual bond’s characteristics. Our evidence argues for rules on HQLAs that should constrain the eligibility of government bonds depending on their characteristics (primarily, duration and rating).     

Are regulatory capital adequacy ratios good indicators of bank failure? Evidence from US banks

Motivated by massive bank failures during the financial crisis, this paper examines whether capital adequacy ratios required by regulators are associated with bank failure. It investigates whether the association is affected by the bank's proximity to the minimum required capital ratios. If results show a significant association between regulatory capital and failure of banks falling below the minimum capital ratios, then the ratios are set at an adequate level. Examining a sample of 560 US bank holding companies for the period 2003–2009, results reveal that the association between the core (Tier 1) capital ratio and bank failure becomes significant only if the bank holding company has a Tier 1 capital ratio of less than 6%. This is the level below which US bank regulators do not regard banks as being well capitalized. During the financial crisis period of 2007–2009, there is a significant association only when the criterion is set at or above 8%. Market-based probability of default is more significantly associated with failure relative to Tier 1 capital ratio. The findings of this paper are relevant to regulatory policy discussions and Basel III deliberations on capital adequacy at times of financial turmoil.     

Does foreign bank penetration affect the risk of domestic banks? Evidence from emerging economies

We investigate whether foreign bank penetration affects the risk of domestic banks in emerging economies. By using bank-level data from 35 markets during the period of 2000–2014, we find significant evidence that the risk of domestic banks increases with the presence of foreign banks in the host economy, and this finding is shown to be consistent in a series of robustness tests. We also find that the incidence of such effects is more pronounced for domestic banks which are less efficient and less based on traditional activities. Foreign banks exert more pronounced impacts on domestic banks’ risk when they enter the host market via M&A, as opposed to greenfield investments, and when they belong to foreign conglomerates which provide strong internal support.     

Does central bank governors term in office matter for macroprudential policies? Evidence from MENA banks

Using a comprehensive dataset on MENA banks, we examine whether CB governors use of macroprudential instruments affect bank risk. The findings indicate that the CB governors’ use of such instruments does not significantly reduce bank risk. We propose two hypotheses as to why CB governor are inclined to employ such instruments. Based on the findings, it appears that the decision to use such instruments is dictated more by macroeconomic considerations as opposed to peer pressure concerns.     

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.     

Market discipline of banks: Why are yield spreads on bank-issued subordinated notes and debentures not sensitive to bank risks?

The default risk sensitivity of yield spreads on bank-issued subordinated notes and debentures (SNDs) decreased after banks started issuing trust-preferred securities (TPS). The too-big-to-fail (TBTF) discount on yield spreads is absent prior to the LTCM bailout, but the size discount doubles after the LTCM bailout. Prior to TPS issuance and the LTCM bailout, SND yield spreads are sensitive to conventional firm-specific default risk measures, but not after the bailout. We find paradigm shift in determinants of yield spreads after the LTCM bailout. Yield spreads on TPS are sensitive to default risks and can provide an additional source of market discipline.