Targeted transfers and the fiscal response to the great recession

Between 2007 and 2009, government expenditures increased rapidly across the OECD countries. While economic research on the impact of government purchases has flourished, in the data, most of the increase in expenditures was in government transfers. After documenting this fact, we argue that future research should focus on the positive impact of transfers. Towards this, we present a model in which there is no representative agent and Ricardian equivalence does not hold because of uncertainty, imperfect credit markets, and nominal rigidities. Targeted lump-sum transfers are expansionary both because of a neoclassical wealth effect and because of a Keynesian aggregate demand effect.     

Safety-net benefits conferred on difficult-to-fail-and-unwind banks in the US and EU before and during the great recession

This paper investigates the links between regulatory arbitrage, financial instability, and taxpayer loss exposures. We model and estimate ex ante safety-net benefits from increased leverage and asset volatility at a sample of large banks in US and Europe during 2003–2008. Hypothesis tests indicate that, in both crisis and precrisis years, difficult-to-fail-and-unwind (DFU) banks enjoyed substantially higher ex ante benefits than other institutions. Compared to the US sample, safety-net benefits prove significantly larger for DFU firms in Europe and bailout decisions are less driven by asset size. Introducing a proxy for differences in government susceptibility to regulatory capture helps to explain bailout decisions in Europe. Our findings suggest that authorities in both venues could better contain safety-net benefits if they refocused their information systems on monitoring volatility as well as capital.     

Regulation,recession, and bank lending behavior: The 1990 credit crunch

This article utilizes a pooled time-series and cross-section sample of banks to investigate the causes of the credit contraction which occurred during the 1990–1991 period. The methodology involves an econometric model which recognizes that banks' decisions regarding lending and capital are simultaneously determined. Bank lending behavior is modeled as being determined by a combination of economic conditions, loan quality problems, and capital growth. The results of the econometric tests are consistent with a multiplicity of factors contributing to the reduction in lending. The evidence suggests that the credit contraction of 1990–1991 cannot be explained solely as a result of recession and low capital levels. Changes in the supervisory climate and in bank capital regulation, perhaps coupled with independent changes in bankers' assessments of the risk climate, were likely responsible for a substantial part of the credit contraction.     

Private equity portfolio company performance during the global recession

We assess the recent economic and financial performance of U.K. private equity (PE) backed buyouts. Our empirical evidence, which is based on thousands of transactions, reveals that PE-backed buyouts achieved superior economic and financial performance in the period before and during the recent global recession, relative to comparable firms that did not experience such transactions. Our regression results imply positive differentials of 5–15% in productivity and approximately 3–5% in profitability for buyout firms, relative to non-buyout firms. Another key finding is that revenue and employment growth for PE- backed firms were positive during the sample period.     

Credit risk,owner liability,and bank loan maturities during the global financial crisis

We relate credit risk and owners’ personal guarantees to bank loan maturities during the global financial crisis. The findings, which remain robust to reverse causality, show that firms rated as low risk, with a strong relationship with the bank, whose owners provided personal guarantees and with large loan sizes obtained longer maturities. Banks with larger nonperforming loans provided loans with shorter maturities. Firms with low‐ and high‐risk ratings that provided owners’ personal guarantees obtained longer maturities. These findings shed additional light on the relationship between risk and loan maturities and the role of personal guarantees in reducing information asymmetries.     

Impaired bank health and default risk

Empirical studies in corporate finance have long been focused on the role of banks in reducing the costs of financial distress. The environment and events in Japan provide a “natural experiment” that allows such empirical studies. The number of bankruptcies steadily increased throughout the 1990s, and peaked in 2000. During this period, Japan's banking sector, in contrast, faced considerable problems regarding the disposal of their bad loans. The purpose of this paper is to investigate how various measures of bank health and how defaults of major trading partners affected the probability of bankruptcy among medium-size firms in Japan. Using probit models, we examine the causes of bankruptcy for unlisted Japanese companies in the late 1990s and early 2000s. We find that several measures of bank-specific financial health have had significant impacts on a borrower's probability of bankruptcy, even when observable characteristics relating to these borrower's financial variables are controlled. In particular, a close bank–firm relationship—which usually reduces the probability of bankruptcy—exacerbates the impacts of a financial crisis, which substantially damages other bank health measures as well.     

Auditor choice and bank risk taking

We investigate the importance of auditor choice on bank risk-taking in a cross-country setting for 5498 banks from 116 emerging and developed countries. Using the Z-score as our main proxy for bank risk, we report evidence that hiring a Big Four auditing firm reduces bank-risk even after controlling for bank and country variables. The reported evidence is valid for banks outside the United States and is robust to concerns relating to endogeneity and alternative banking risk measures. The results are economically meaningful. All else constant, the Z-score of a bank audited by a Big Four firm is 10.4% higher than a similar bank with a non-BIG Four auditor. Moreover, consistent with the view that Big Four auditors serve a corporate governance mechanism in emerging markets, we find that Big Four auditors maintain the ability to curb bank risk in countries characterized by weak institutions. Finally, our results suggest that while audit quality is associated with bank safety, its impact is reduced in countries that require audit-oversight.     

Measuring bank risk: Forward-looking z-score

While the z-score has been widely used to evaluate bank risk, it is criticized as a backward-looking measure. We propose a forward-looking method to construct the z-score by incorporating analyst forecasts. Empirical results show that the forward-looking z-score can predict the movement of the standard z-score one quarter ahead of time, and its predictive ability on banks' downward risk is better than the standard z-score. Moreover, we find that the predictive ability of the forward-looking z-score improves after the Dodd-Frank Act of 2010, especially for large banks, showing the consequences of strengthened regulation and transparency. The forward-looking z-score is also significantly associated with the probability of default and market-based risk measures and can provide predictive signals for banks' future profitability. Overall, our findings suggest that the forward-looking z-score mitigates the shortcomings of the standard z-score and provides a reliable early warning signal for banks' future risk and performance.     

Credit risk transfer and bank competition

We present a banking model with imperfect competition in which borrowers’ access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans that are then transferred to other parties, leading to an increase in aggregate risk. Higher competition increases welfare in the presence of CRT with public information. In contrast, welfare eventually decreases for high levels of competition in the presence CRT with private information due to the expansion of unprofitable loans. This finding coincides with the decrease in credit quality observed during the late years of the credit boom preceding the subprime crisis.     

Common risk factors in bank stocks

This paper provides evidence on the risk factors that are priced in bank equities. Alternative empirical models with precedent in the nonfinancial asset pricing literature are tested, including the single-factor CAPM, three-factor Fama–French model, and ICAPM. Our empirical results indicate that an unconditional two-factor ICAPM model that includes the stock market excess return and shocks to the slope of the yield curve is useful in explaining the cross-section of bank stock returns. However, we find no evidence that firm specific factors such as size and book-to-market ratios are priced in bank stock returns. These results have a number of important implications for the estimation of the banks’ cost of capital as well as regulatory initiatives to utilize market discipline to evaluate bank risk under Basel II.     

An evaluation of bank measures for market risk before,during and after the financial crisis

We study the performance and behavior of Value at Risk measures used by a number of large U.S. banks before, during and after the financial crisis. Alternative benchmark VaR measures, including GARCH-based measures, are estimated directly from the banks’ trading revenues to explain the bank VaR performance results. While overly conservative in both the pre-crisis and post-crisis periods, bank VaR exceedances were excessive and clustered in the crisis period. This contrasted with mostly unbiased benchmark HS and GARCH VaRs in the pre-crisis and post-crisis periods, and vastly superior GARCH-based VaR performance in the crisis period with lower exceedance rates and no exceedance clustering. Our results document the bank VaRs very slow adjustment to changing market conditions and their systematic bias in all studied periods. Our results indicate that bank VaRs could be improved by the use of models with time-varying volatility, and built on banks’ knowledge of their current positions.     

Climate transition risk and bank lending

We investigate whether and how banks in the global syndicated loan market adjusted the pricing and supply of credit to account for higher climate transition risk (CTR) in the years following the 2015 Paris Agreement. We measure CTR by considering the pollution levels of borrowers and the engagement of countries where borrowers are headquartered in addressing climate change issues. The evidence is mixed and points to nonlinear relations between lending variables and CO2 emissions. Policy events such as the Paris Agreement and government environmental awareness are significant climate risk drivers that, when combined, may amplify banks' perception of CTR.     

Structural changes in Australian bank risk

There have been substantial changes in banking industries throughout the world in the last two decades. While many of the effects of these changes in the US have been documented, the increasingly global nature of regulation in recent years makes understanding the effects of these changes in other countries imperative. This paper examines Australian bank returns during the period 1981–1993, employing a switching-regression methodology. We find that several structural changes have occurred, coinciding with (i) the release of deregulatory initiatives by the Australian government in the early 1980s, (ii) the flotation of the Australian dollar and the licensing of foreign banks, and (iii) the implementation of the Basle accord risk-based capital measures. Moreover, we report important differences in the relations between bank returns and both interest rates and exchange rates relative to those reported in US studies.     

Financial statements based bank risk aggregation

One of the major challenges involved in risk aggregation is the lack of risk data. Recently, researchers have found that mapping financial statements into risk types is a satisfactory way to resolve the problem of data shortage and inconsistency. Nevertheless, ignoring off-balance sheet (OBS) items has so far been regarded as the usual practice in risk aggregation, which may lead to deviations in conclusions. Hence, we improve the financial statements based risk aggregation framework by mapping OBS items into risk types. Based on 487 quarterly financial statements from all 16 listed Chinese commercial banks over the period 2007–2014, we empirically study whether the overall impact of OBS activities and the individual impact of each of the OBS risk types on total risk depend on bank size. Moreover, this research divides the sample into two subsets, during and after the subprime crisis, to find out how the subprime crisis affects risks of Chinese banks. Our empirical results show that although OBS credit risk is positively linked to total risk while OBS operational risk is negatively linked to total risk for both large and small banks, the overall impact of OBS activities on total risk depends on bank size. The overall OBS activities are positively related to the large bank’s total risk while they are negatively related to the small bank’s total risk. Besides, we also found that it is the increase of liquidity risk and market risk that leads to the larger total risk of Chinese banks during the subprime crisis.     

Multiple bank regulators and risk taking

The potential for banks to arbitrage between regulators exists both in the US, with its multiple federal banking regulators, and in Europe, due to multinational banking. This paper models multiple regulators that have an agency bias, which can give rise to a “race to the bottom”. The model is used to analyze the interaction between the regulatory equilibrium and several salient pre-crisis features: rising bank leverage; wholesale funding with asymmetric information; and increasing supervisional costs to disentangling bank asset exposures. Each of these raises bank risk taking on its own, but regulatory competition is shown to be an amplification mechanism.     

Funding liquidity and bank risk taking

This study examines the relationship between funding liquidity and bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014, we find evidence that banks having lower funding liquidity risk as proxied by higher deposit ratios, take more risk. A reduction in banks’ funding liquidity risk increases bank risk as evidenced by higher risk-weighted assets, greater liquidity creation and lower Z-scores. However, our results show that bank size and capital buffers usually limit banks from taking more risk when they have lower funding liquidity risk. Moreover, during the Global Financial Crisis banks with lower funding liquidity risk took less risk. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III.     

Commercial bank mutual fund activities: Implications for bank risk and profitability

This paper examines the risk structure of bank holding companies and the effect of mutual fund activities on bank risk and profitability over the period 1987–1994. Findings from structural change tests indicate a significant decline in bank risk occurred near the mid-point of the study. Results from a confirmatory factor analytic model employed to examine the impact of mutual fund activities on banks suggest that mutual fund activities moderated bank industry systematic risk during the sample period. Mutual fund activities also increased the profitability of banks. These results suggest that mutual funds represent a productive avenue of expansion for bank holding companies.     

谏言商业银行风险管理

由于合规风险管理机制缺失，商业银行无法通过政策和程序的持续修订去传承许多有益的风险管理经验，制约了商业银行风险管理水平的进一步提升。     

Sovereign risk and the bank lending channel in Europe

The main purpose of this article is to analyze how sovereign risk influences the loan supply reaction of banks to monetary policy through the bank lending channel. Additionally, we aim to test whether this reaction differs in easy and tight monetary regimes. Using a sample of 3125 banks from the euro zone between 1999 and 2012, we find that sovereign risk plays an important role in determining loan supply from banks during tight monetary regimes. Banks in higher sovereign risk countries reduce lending more during tight regimes. However, we find little evidence to support any relationship between sovereign risk and loan supply reaction to monetary policy expansions. These results are very interesting for the way monetary policy is conducted in Europe. Banking union, banking system strength, and the budget control of governments would be necessary measures to reduce the heterogeneous transmission of the monetary policy in the euro zone.     

National politics and bank default risk in the eurozone

We study the impact of national politics on default risk of eurozone banks as measured by the stock market-based Distance to Default. We find that national electoral cycles, the power of the government as well as the government’s party ideological alignment significantly affect the stability of banks in the eurozone member countries. Moreover, we show that the impact of national politics on bank default risk is more pronounced for large as well as weakly capitalized banks.