Corporate governance and earnings management at large U.S. bank holding companies

This paper examines whether corporate governance mechanisms affect earnings and earnings management at the largest publicly traded bank holding companies in the United States. We first find that performance, earnings management, and corporate governance are endogenously determined. Thus, OLS estimation can lead to biased coefficients and a simultaneous equations approach is used. We find that CEO pay-for-performance sensitivity (PPS), board independence, and capital are positively related to earnings and that earnings, board independence, and capital are negatively related to earnings management. We also find that PPS is positively related to earnings management. Finally, PPS and board independence are positively related and the relationship is bidirectional. While both PPS and board independence are associated with higher earnings, our results indicate that more independent boards appear to constrain the earnings management that greater PPS compels.     

Asymmetric transmission of a bank liquidity shock

We investigate whether banks that receive a positive liquidity shock make up for the reduction in the amount of credit supplied by banks that suffer a negative liquidity shock. For identification, we use the exogenous shock to the Brazilian banking system caused by the international turmoil of 2008 that sparked a run on small and medium banks toward systemically important banks. We find that a reduction in liquidity causes banks to strongly decrease their loan supply, whereas a positive liquidity shock has a small (if any) effect on the loan supply. Our evidence shows that this asymmetric effect of liquidity on the loan supply occurs both at the intensive and the extensive margins. Our findings are consistent with the theories that predict that borrowers face switching costs and that banks tend to hold on to liquidity during periods of systemic uncertainty.     

Finance and inequality: The distributional impacts of bank credit rationing

We analyze reductions in bank credit using a natural experiment where unprecedented flooding in Pakistan differentially affected banks that were more exposed to the floods. Using a unique data set that covers the universe of consumer loans in Pakistan and this exogenous shock to bank funding, we find two key results. First, following an increase in their funding costs, banks disproportionately reduce credit to borrowers with little education, little credit history, and seasonal occupations. Second, the credit reduction is not compensated by relatively more lending by less-affected banks. The empirical evidence suggests that a reduction in bank monitoring incentives caused the large relative decreases in lending to these borrowers.     

Financial stress transmission between the U.S. and the Euro Area

This paper examines financial stress transmission between the U.S. and the Euro Area. To better understand the linkages between financial stress in the two regions, we construct a financial stress index for the U.S. similar to the Composite Indicators of Systemic Stress (CISS) that has been developed for the Euro Area with a focus on systemic risk. Using weekly data from 2000 to 2021 and Granger predictability in distribution test, we analyze stress transmission in “normal” times as well as under unusually high and low stress episodes. While we document unilateral transmission from the U.S. to the Euro Area under normal conditions based on the center of the distribution, tail dependence tests and impulse response analysis show significant bilateral transmission, particularly in unusually high financial stress episodes. This holds true for aggregate indices as well as the subindicators of financial stress in various financial markets. As such, there must be global efforts to contain financial crises and ensure a strong and resilient financial system.     

The effect of credit guarantees on credit availability and delinquency rates

We use new data to examine whether credit guarantees affect economic incentives and whether they affect the credit available to small- and medium-size enterprises (SMEs). We find that firms that have both guaranteed and non-guaranteed loans are 1.67% more likely to miss payments on their guaranteed loans, but are not more likely to default on these loans. These findings suggest that guarantees affect firms’ incentives to repay loans but not their long-term performance. We also find that firms selected into the guarantee programs are 1.17% more likely to default on their loans compared with similar firms that borrow without guarantees. Since we find evidence that long-term performance is not affected by guarantees, the higher default rates among firms selected into the guarantee programs must be the consequence of adverse selection. We also find that credit guarantees increase the aggregated amount of credit; in particular, one additional dollar of guarantees increases the total credit for SMEs by US$ 0.65.     

Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence

This paper investigates how banks, as a group, react to macroeconomic risk and uncertainty; more specifically, it examines the relationship between bank systemic risk and changes and disruptions in economic conditions. Adopting the methodology of Beaudry et al. (2001), we introduce a new estimation procedure based on EGARCH to refine the framework developed by Baum et al., 2002, Baum et al., 2004, Baum et al., 2009 and Quagliariello, 2007, Quagliariello, 2009, and we analyze the relationship in the current industry context—i.e., in the context of market-based banking. Our results confirm that banks tend to behave more homogeneously vis-à-vis macroeconomic uncertainty. In particular, we find that both the cross-sectional dispersion of loans-to-assets and the cross-sectional dispersion of non-interest income share shrink during slow growth episodes, and particularly during financial crises, when the resilience of the banking system is at its lowest. More importantly, our main findings indicate that the cross-sectional dispersion of loans-to-assets has increased in the last decade, whereas the cross-sectional dispersion of non-interest income share appears to be more volatile and sensitive to macroeconomic shocks.     

Credit risk,managerial behaviour and macroeconomic equilibrium within dual banking systems: Interest-free vs. interest-based banking industries

In this paper, an attempt has been made to explore the determinants of credit risk in the banking system with a particular interest toward the Islamic banking industry. We analyze the link between credit risk and a set of bank-specific and macroeconomic along with institutional variables using two complementary approaches. First, we investigate the factors of credit risk using one-step generalized method of moments (GMM) system estimator. Then, we explore the feedback between credit risk and its determinants in a panel vector autoregressive (PVAR) model. We have used a sample of Middle Eastern, North African (MENA) and Asian countries to apply our model. The major purpose of this paper is to find factors that could explain credit risk within the interest-free banking system relative to the interest-based one.     

Failed bank takeovers and financial stability

Current discussion about the design of bank resolution frameworks suggests that the takeover of a failed bank by an incumbent one has two effects on financial stability. First, the incumbent takeover may boost financial stability by providing bankers with incentives to be solvent so as to profit from their competitors’ failure. Second, the incumbent takeover may spoil financial stability by creating “Systemically Important Financial Institutions”. The innovation of this paper is to capture these two effects in a theoretical model. We show that when incumbent bankers are impatient enough (i.e., they have high discount rates), the second effect prevails over the first one. We discuss the implications of this result for the design of bank resolution policies.     

Microfinance institutions,financial intermediation and the role of deposits

Microfinance institutions (MFIs), widely regarded as bankers to the poor, have extended their financial functions beyond lending to managing deposits. We empirically examine the influence of MFI deposit-taking on MFI financial performance. Using data of 1,301 MFIs worldwide, we find that an MFI's deposit level is an important determinant of its financial viability. However, the relationship is influenced by MFIs’ institutional type (for-profit or nonprofit) and the legal environment (common law or civil law). The results suggest that the positive financial impact of deposits has not been fully realised, reflecting the need to further improve cost management and revenue generation.     

Common ownership and bank stability: Evidence from the U.S. banking industry

We empirically test competing theoretical arguments about the impact of common ownership on bank stability: the common ownership hypothesis, where banks decrease risk-taking by internalizing risk externalities on commonly held banks, and the diversification hypothesis, where banks increase risk-taking influenced by common owners who hold diversified portfolios and are less risk averse. Using data from the U.S. banking industry from 1991 to 2016, we find that banks with more common ownership linkages undertake lower risk, as predicted by the common ownership hypothesis. This relation is statistically significant and economically sizable, which is consistent across alternative measures of common ownership and bank risk and robust to potential endogeneity. Our study adds the financial stability perspective to the ongoing discussions on common ownership and antitrust regulations.     

The price of liquidity: The effects of market conditions and bank characteristics

We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual bank-level data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes.     

The bright side of market power in Asian banking: Implications of bank capitalization and financial freedom

Using a sample of listed banks in the Asia-Pacific region from 2000 to 2016, this paper documents that higher market power reduces risk taking but increases loan growth and performance in banking. This highlights the "bright side" of bank market power in general. However, the positive effect of market power on bank stability is more pronounced for well-capitalized banks, although their performance tends to decline, and loan growth is unaffected by market power. Hence, bank capitalization plays an important role in strengthening financial stability due to an increase in bank market power. Moreover, banks with higher market power located in countries with a lower degree of financial freedom exhibit lower riskiness, higher loan growth, and better performance. Greater control by authorities in the financial sector is essential, not only to enhance financial stability, but also to boost financial intermediation and bank performance following an increase in bank market power.     

美国金融监管改革的新框架与新趋势

针对金融危机中暴露的监管缺陷,美国正在进行"大萧条"以来最为全面的金融监管改革.本文在宏观和微观审慎监管相结合的框架下介绍了美国金融监管改革的主要内容,分析了围绕改革的主要争论,并对国际金融监管改革趋势进行总结比较,认为美国这次金融监管改革将从监管标准、方法、模式和理念等方面重构美国金融监管体系,有利于形成更加稳定有序的金融市场新秩序,防范金融危机重演.     

Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries

We contribute to the current regulatory debate by examining the wealth and risk effects of the Dodd-Frank Act on U.S. financial institutions. We measure the effects of key legislative events of the Act by means of a multivariate regression model using the seemingly unrelated regression (SUR) framework. Our results indicate a mixed reaction by financial institutions during the various stages of the Act’s legislative process. Further tests reveal that any positive reactions are driven by small and/or low risk institutions, while negative ones are consistent across subsets; except for investment banks. We also find market risk increases for most financial institutions that are dominated by small and/or low risk firms. The cross-section results reveal that large institutions fare better than their smaller counterparts and that large investment banks gain value at the expense of others. Overall, the Dodd-Frank Act may have redistributed value among financial institutions, while not necessarily reducing the industry’s riskiness.     

On cross-border bank credit and the U.S. financial crisis transmission to equity markets

This paper examines the role played by cross-border equity, bond and bank credit flows versus international trade in the transmission of the U.S. financial crisis to equity markets worldwide. We estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries. The results from an eclectic methodology that includes causality tests, generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade. The results are robust to altering the exogenous versus endogenous vectors of variables, to measuring equity prices in U.S. dollars or local currency, to averaging the data across countries versus averaging the parameters from individual country estimation, and to redefining the start date of the crisis. The findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability.     

The Relevance of Varieties of Accounting Information: A U.S.A. Survey

Diverse kinds of financial information have been claimed to be relevant, for one purpose or another. A survey by mailed questionnaire over seven professional groups in five large U.S. cities sought to discover whether certain valuation rules yielded serviceable amounts in specific problem settings or in representations of financial position and income. Most of the questions were posed in the form of simple problem situations. To questions relating to wealth, spending power and financial position, large majority responses rejected conventional accounting values and endorsed market selling prices. To questions on income calculation, majorities favouring use of the same principle were smaller. Cross-tabulations of answers on financial position and income showed substantial inconsistencies; a hypothetical explanation is given. A comparison is given of responses to some questions in similar surveys in Australia and South Africa.     

French and U.S. trading of cross-listed stocks around the period of U.S. decimalization: Volume, spreads, and depth effects

We analyze how U.S. decimalization affects stocks cross-listed in France (Euronext) and the U.S. (NYSE). The French stocks examined are much larger than the non-U.S. stocks examined in prior studies of decimalization, and their U.S. trading is likely to be dominated by institutions. So, we explore whether a reduction in depths in the U.S. due to decimalization makes the U.S. market less competitive for institutions trading these French stocks. We find evidence consistent with the above. First, the average NYSE trade size for these stocks relative to that on Euronext declines substantially after decimalization. Second, we categorize individual trades by the number of shares traded. We find that mainly driven by large trades, the NYSE proportion of trading of French firms declines markedly after decimalization. Third, using regression analysis, we find that the decline in the U.S. share of institutional trading volume is significantly positively related with the decline in NYSE depths relative to Euronext, and the decline is greater for French firms. Overall, we find consistent results indicating a migration of institutional order flow in French firms to France after NYSE decimalization. Also, intraday analysis indicates that the institutional volume in both France and the U.S. is greatest when both the markets are open.     

Financial innovation,the discovery of risk,and the U.S. credit crisis

Financial innovation and overconfidence about the risk of new financial products were key factors behind the 2008 U.S. credit crisis. We show that a model with a collateral constraint in which learning about the risk of a new financial environment interacts with Fisherian amplification produces a boom–bust cycle in debt, asset prices and consumption. Early realizations of a high-borrowing-ability regime turn agents optimistic about the persistence probability of this regime. Conversely, the first realization of a low-borrowing-ability regime turns agents unduly pessimistic. The model predicts large increases in household debt, land prices and excess returns during 1998–2006 followed by a collapse.     

Economic policy uncertainty and the credit channel: Aggregate and bank level U.S. evidence over several decades

Economic policy uncertainty affects decisions of households, businesses, policy makers and financial intermediaries. We first examine the impact of economic policy uncertainty on aggregate bank credit growth. Then we analyze commercial bank entity level data to gauge the effects of policy uncertainty on financial intermediaries’ lending. We exploit the cross-sectional heterogeneity to back out indirect evidence of its effects on businesses and households. We ask (i) whether, conditional on standard macroeconomic controls, economic policy uncertainty affected bank level credit growth, and (ii) whether there is variation in the impact related to banks’ balance sheet conditions; that is, whether the effects are attributable to loan demand or, if impact varies with bank level financial constraints, loan supply. We find that policy uncertainty has a significant negative effect on bank credit growth. Since this impact varies meaningfully with some bank characteristics – particularly the overall capital-to-assets ratio and bank asset liquidity-loan supply factors at least partially (and significantly) help determine the influence of policy uncertainty. Because other studies have found important macroeconomic effects of bank lending growth on the macroeconomy, our findings are consistent with the possibility that high economic policy uncertainty may have slowed the U.S. economic recovery from the Great Recession by restraining overall credit growth through the bank lending channel.     

Determinants of bank interest margins: Impact of maturity transformation

This paper explores the extent to which interest risk exposure is priced into bank margins. Our contribution to the literature is twofold: First, we extend the Ho and Saunders (1981) model to capture interest rate risk and expected returns from maturity transformation. Banks price interest risk according to their individual exposure separately in loan and deposit intermediation fees, but reduce (increase) these charges for loans (deposits) when positive excess holding period returns from long-term exposures are expected. Second, we test the model-derived hypotheses not only for the commonly investigated net interest margin but also for interest income and expense margins separately in a sample encompassing the German universal banking sector between 2000 and 2009. Our results suggest that banks price their individual interest rate risk and corresponding expected excess holding period returns via the asset side into the net interest margin. For liabilities, we find that interest rate risk exposure is only priced in by smaller, local banks.