The determinants of household’s bank switching

We investigate households’ bank switching exploiting a unique representative dataset from Bank of Italy Survey on Household Income and Wealth that follows the households and their bank(s) over time. First, we document that bank switching is quite prevalent in our sample, with almost a quarter of households changing their main bank in a biannual horizon. Next, we relate the decision to switch to the features and dynamics of household bank relationship, and to the characteristics of both households and banks. In line with the switching cost theory, we find that using more than a single bank, as well as the intensity (number of services used), and the scope (bank services used) of the relationship with the main bank play a role in shaping the households’ decision to switch. Moreover, bank switching is strongly and positively correlated with both taking out and having paid off a mortgage.     

An analysis of the consistency of banks’ internal ratings

Internal ratings-based models are used for a variety of important bank and regulatory decisions. Thus, model risk – the potential for different models to provide different probability-of-default (PD) estimates – is of crucial importance. Using a comprehensive German credit registry dataset from 40 banks and 17,000 corporate borrowers from 2008–2012, we assess the consistency of internal PD estimates across banks. We find three main results. First, the variability of PD estimates for the same borrower across banks is large. Second, bank fixed effects explain 5% of the variation in PD estimates across banks, while 95% of the variation is idiosyncratic. For the 10 largest banks in our sample, reported regulatory capital ratios would change by a maximum of ±10%, equivalent to approximately 1 percentage point, when using average risk weights from all banks instead of risk weights based on banks’ individual PD estimates. Third, we explore various bank characteristics that explain the size of bank fixed effects.     

What is the net effect of financial liberalization on bank productivity? A decomposition analysis of bank total factor productivity growth

We employ a unique framework to quantify the net effect of financial liberalization on banks’ total factor productivity (TFP) growth through a decomposition analysis of two effects: a positive direct effect of financial liberalization on bank TFP growth; and a negative indirect effect operating through a higher propensity to systemic banking crisis. The empirical decomposition is based on a sample of 1530 banks operating in 88 countries over the period 1999–2011. We find that the net effect of financial liberalization on bank TFP growth is positive: the direct positive effect outweighs the negative one. An important policy implication flows from these findings.     

How effective is central bank communication in emerging economies? An empirical analysis of the chinese money markets responses to the people’s bank of China’s policy communications

Review of Quantitative Finance and Accounting - Central banks, in both developed and developing economies, are responding to the increased demand for transparency in monetary policy formulation and...     

Did going public impair Moody׳s credit ratings?

We investigate a prominent allegation in congressional hearings that Moody?s loosened its rating standards to chase revenue after it went public in 2000. Consistent with this allegation, Moody?s ratings for both corporate bonds and structured finance products are significantly more favorable to issuers, relative to S&P?s, after Moody?s IPO. Moreover, Moody?s ratings are more favorable for clients subject to greater conflict of interest. There is little evidence that Moody?s higher ratings, post-IPO, are more informative, measured as expected default frequencies (EDFs) or as the probability of default. Our findings inform the debate on whether financial gatekeepers should be publicly traded.     

The role of accounting in bank regulation on the eve of japan’s financial crisis: a failure of the new capital adequacy regulation

In contrast to previous examinations of the role of accounting in financial crises, this paper explores the way in which accounting has been woven into a new system of banking regulations. Although the regulatory reform of the mid-1980s was intended to maintain the soundness of banking businesses, it failed to prevent banks from excessive asset expansion in the latter half of the 1980s in Japan. One of the major causes of this regulatory failure is found in the way that the regulatory capital is defined for the new capital adequacy regulation. The latent revaluation reserves are partially counted as capital. Japanese domestic regulatory reform took place in the wider context of the international standardization of capital adequacy regulations (BIS standards). Japanese regulators utilized taken-for-granted practices of accounting to creatively comply with the BIS standards.     

Does the disclosure of unsolicited sovereign rating status affect bank ratings?

This paper integrates three themes on regulation, unsolicited credit ratings, and the sovereign-bank rating ceiling. We reveal an unintended consequence of the EU rating agency disclosure rules upon rating changes, using data for S&P-rated banks in 42 countries between 2006 and 2013. The disclosure of sovereign rating solicitation status for 13 countries in February 2011 has an adverse effect on the ratings of intermediaries operating in these countries. Conversion to unsolicited sovereign rating status transmits risk to banks via the rating channel. The results suggest that banks bear a penalty if their host sovereign does not solicit its ratings.     

Central bank financial strength and inflation: Is there a robust link?

Central bank financial strength has not been a fundamental issue for a substantial period of time. However, recent theoretical and empirical studies argue that central banks need to maintain a sufficient level of financial strength to perform their functions effectively and to achieve monetary policy objectives. In this study, we examine the empirical relationship between central bank financial strength and inflation using an unbalanced panel data set for a sample of selected advanced and emerging countries. We observe a statistically significant and robust negative relationship between central bank financial strength and inflation. This relationship is robust in the presence of other determinants of inflation and for alternative estimation methods. Our results have important implications for policy makers and central bankers. Particularly, our results suggest that avoiding persistent losses and maintaining the health of the central bank balance sheet remain vital pre-conditions for desirable policy outcomes of a central bank.     

International financial services: determinants of banks’ foreign assets held by non-banks

Banks’ foreign assets held by non-banks are part of the growing volume of international trade in financial services. This paper investigates, for the first time, the determinants of banks’ assets held by non-banks for Germany, Japan, the United Kingdom and the United States. The underlying model used to measure banks’ foreign assets held by non-banks in this study, is based on those models which have measured the determinants of banks’ total foreign assets and international inter-bank activities. The empirical results of this model suggest a positive relationship with foreign direct investment in banking and banks’ foreign assets held by non-banks. Other significant factors identified include bilateral trade, the value of national income, and the real interest rate differential. Furthermore, banks’ foreign assets held by non-banks are found to be significantly related to the respective level of inter-bank dealings, such that a restriction on the overall amount of activities exists. Finally, global bank flows of opposite directions are found to be positively correlated, highlighting the fact that the perceived risk of foreign lending is reduced by simultaneous increases in banks’ foreign liabilities.     

Policy uncertainty and bank’s funding costs: The effects of the financial crisis,Covid-19 pandemic,and market discipline

This paper examines the impacts of economic policy uncertainty (EPU) on bank funding costs using the 2001–2021 data of US banks. We document consistent evidence of a negative relationship between EPU and bank funding costs, implying lower bank funding costs during a time of high EPU, consistent with the hypothesis that economic agents tend to reallocate their assets into safer investments, such as bank deposits during high uncertainty. Large banks are likely to benefit most during high EPU when experiencing lower costs of funds compared with other banks, suggesting the “too-big-to-fail” perception of depositors. Cross-sectional analysis indicates that depositors require safer banks to pay lower rates, indicating the existence of market discipline. The cost-decreasing effects of policy uncertainty are less pronounced during the global financial crisis than the Covid-19 crisis.     

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.     

A practitioner’s view of the future of futures studies

This article looks at the future of futures studies (FS) over the next 20 years from a practitioner’s viewpoint. It begins with favorable developments for FS in the organizational context. The main body covers how FS can take advantage of these more favorable developments. It then anticipates some key methodological and professional challenges and how FS might meet them. It concludes with a few comments about the prospects for a self-actualized FS.The single biggest challenge for FS over the next generation from my practitioner’s point-of-view is to get beyond the cyclicality of interest in the future and get FS firmly integrated into the organizational context. Our experience to date convinces me that we have earned “the right to practice,” and we must now focus the next few decades on sinking roots “inside”. The good news is that there are several developments suggesting that this is not just a preferable but also a probable future.     

Effects of tuition discounting on university’s financial performance

Review of Quantitative Finance and Accounting - We study how tuition discounting affects the financial decisions of universities, their student recruitment, and reputation. Using a large panel data...     

The evolution of the Federal Reserve’s Term Auction Facility and FDIC-insured bank utilization

The Term Auction Facility (TAF) was designed by the Federal Reserve during the financial crisis to inject emergency short-term funds into banks, as a supplement to the lender of last resort discount window offerings. We describe how the Federal Reserve altered the design of the Term Auction Facility (TAF) over the course of the financial crisis and examine the utilization of this stand-alone facility. Most specifically we detail the impact of the greatly increased offering amounts in all auctions after October 2008, which resulted in the facility no longer auctioning scarcely available funds. We also document significantly different usage of the facility by FDIC-insured community and non-community banks, consistent with the notion of a two-tiered banking system in the U.S. Community banks were far less likely to use the facility than larger, non-community banks.     

What’s the contingency? A proposal for bank contingent capital triggered by systemic risk

Contingent capital (coco) automatically recapitalizes the banking system during financial crises if the trigger mechanism is properly designed. We propose a dual trigger mechanism based on: (1) aggregate systemic risk in the banking system, measured using CATFIN, and (2) the individual bank’s contribution to overall systemic risk, measured using delta CoVaR. The dual trigger is highly correlated with system-wide insolvency risk and prices systemic risk. We set different triggers for banks, insurance companies and broker-dealers. Using the 99% cut-off, systemic coco issued by Lehman and Bear Stearns would have been triggered in November 2007, months prior to their actual demise.     

A note on the existence of the power investor’s optimizer

Karatzas et al. (SIAM J. Control Optim. 29:707–730, 1991) ensure the existence of the expected utility maximizer for investors with constant relative risk aversion coefficients less than one. In this note, we explain a simple trick that allows us to use this result to provide the existence of utility maximizers for arbitrary coefficients of relative risk aversion. The simplicity of our approach is to be contrasted with the general existence result provided in Kramkov and Schachermayer (Ann. Appl. Probab. 9:904–950, 1999).     

A development bank’s choice of private equity partner: a behavioural game-theoretic approach*

ABSTRACT

We develop a formal game-theoretic analysis of the economic (value-adding abilities) and behavioural factors (empathy, emotional excitement, passion) affecting a development bank’s choice of private-equity partner when investing into emerging market entrepreneurship. Triple-sided moral hazard (TSMH) problems occur in the form of effort-shirking, since the bank, the PE-manager, and the entrepreneur all contribute to value-creation. The bank’s investment choices are crucially affected by a) the relative abilities and the potential level of empathy, excitement and passion that may be generated between a PE-manager and an entrepreneur, and b) the personal emotional attachment that the bank develops towards a PE. The severity of TSMH increases inefficiencies in decision-making. Finally, we consider, in addition to political risk mitigation, an additional impact that the bank may have on PE/E value-creation: the bank may have a coaching/mentoring role. Our analysis has implications for academics and practitioners alike.     

Pricing vulnerable European options when the option’s payoff can increase the risk of financial distress

We extend the results of Johnson and Stulz (Johnson, H., Stulz, R., 1987. Journal of Finance 42, 267–280) and Klein (Klein, P.C., 1996. Journal of Banking and Finance 20, 1211–1229) for valuing European options subject to the risk of financial distress on the part of the option writer. Our model incorporates a default boundary which depends on the potential liability of the written option as in Johnson and Stulz (1987), and also on the option writer’s other liabilities as in Klein (1996). As in both of these papers, the pay-out ratio in the event of financial distress is linked to the assets of the option writer, and the correlation between the assets of the option writer and the asset underlying the option is explicitly modeled. Although no analytical solution is available, we illustrate the importance of this approach through examples, which are evaluated numerically. We also develop an approximate analytical solution, which works well in most situations.     

Latin American stock markets’ volatility spillovers during the financial crises: a multivariate FIAPARCH-DCC framework

The main purpose of this paper is to analyse the volatility spillovers in Latin American emerging stock markets. A multivariate Fractionally Integrated Asymmetric Power ARCH model with dynamic conditional correlations of Engle (1982 Engle, R. F. 1982. Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50: 987–1007. [Crossref], [Web of Science ®] , [Google Scholar]) with a Student-t distribution is employed. We examine whether considering for long memory and asymmetry in emerging stock markets behaviour may provide more insights into the volatility spillovers phenomenon. In this paper we select daily frequency stock indexes covering four emerging countries in Latin America for the period (January 1995–September 2009). Our results point out the importance of volatility spillovers in these countries. Moreover, long memory and asymmetry in emerging stock market dynamics seem to provide more insights into the transmission of volatility shocks. More interestingly, the analysis of the DCCEs behaviour over time via multivariate cointegration, vector error correction model and the Cholesky variance decomposition shows shifts behaviour around major Latin American financial crisis and recent subprime crisis. On the practical side, these results may be useful for international portfolio managers and Latin American stock market authorities.