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.     

Portfolio diversification and value at risk under thick-tailedness†

This paper focuses on the study of portfolio diversification and value at risk analysis under heavy-tailedness. We use a notion of diversification based on majorization theory that will be explained in the text. The paper shows that the stylized fact that portfolio diversification is preferable is reversed for extremely heavy-tailed risks or returns. However, the stylized facts on diversification are robust to heavy-tailedness of risks or returns as long as their distributions are moderately heavy-tailed. Extensions of the results to the case of dependence, including convolutions of α-symmetric distributions and models with common shocks are provided.     

The determinants of firm–bank relationships in Italy: bank ownership type,diversification and multiple banking relationships

This paper investigates the main features of the relationships between banks and non-financial firms in Italy. Based on detailed firm-level data, we analyse the role of firm-level characteristics, decision-making factors and local credit market indicators in shaping various aspects of corporate banking choices. Empirical results show that young and small firms have a higher probability of relationships with local banks, confirming the advantage of local credit institutions in dealing with informationally opaque firms. Large and internationally active firms tend to establish relationships with national and foreign banks, as they are able to provide more complex banking services that are crucial to access foreign markets. Moreover, firms that are more dependent on external financing are more likely to use multiple and differentiated banking relationships, as a way to diversify external financing sources and alleviate credit constraints.     

The wolves of Wall Street? Managerial attributes and bank risk

We find that chief executive officers and chief financial officers exert significant individual effects on bank risk. Manager transitions, including transitions generated by plausibly exogenous manager departures, lead to abnormally large changes in bank risk. We demonstrate that the effects of managers on bank risk are sizable and manager-specific. The effects are also partly anticipated by the board because they are reflected in managers’ pay. However, wide-ranging personal attributes, including biographical, experience, and compensation data, only explain a small share of managers’ impact on bank risk. This implies that attempts to rein in bank risk-taking by targeting manager characteristics will be challenging for investors and regulators.     

Is managerial ability a moderator? The effect of credit risk and liquidity risk on the likelihood of bank default

This study investigates the effect of credit and liquidity risks as well as the moderating role of managerial ability on the likelihood of European commercial bank default during the period 2006 to 2017. We employ data envelopment analysis and a tobit model to measure banks' efficiency, the z-score to measure the likelihood of their default, and perform endogeneity and model specification robustness tests. Our results reveal that both risks significantly affect the likelihood of bank default and that the high skill of managers does not attenuate this effect. Rather, in the case of credit risk, managerial ability extenuates this effect. Managerial overconfidence and narcissism may explain the latter result. Another plausible explanation is that highly skilled managers who are likely to be rewarded with performance-based compensation schemes may be incentivized to hide bad news for an extended period of time. Such a scenario would increase the likelihood of bank default.     

The impact of central bank transparency on systemic risk—Evidence from Central and Eastern Europe

The aim of this paper is to analyze the impact of central bank transparency on systemic risk in emerging banking markets using a sample composed of 34 banks from Central and Eastern Europe for a period spanning from 2005 through 2012. Results indicate a positive and significant relationship between central bank transparency and financial institutions’ contribution to systemic risk. On the other side, increased central bank transparency significantly reduces the idiosyncratic risk of banks. The relationship is influenced by the restrictiveness of regulatory framework. We argue that a more transparent central bank is beneficial for the banking sector from a microprudential perspective. However, it may create incentives for financial institutions to engage in risky activities and through herd behavior may increase individual contribution to the risk of the banking system.     

The 2007–2009 financial crisis and bank opaqueness

Doubts about the accuracy with which outside investors can assess a banking firm’s value motivate many government interventions in the banking market. Although the available empirical evidence is somewhat mixed, the recent financial crisis has reinforced a common assessment that banks are unusually opaque. This paper examines bank equity’s trading characteristics during “normal” periods and two “crisis” periods between 1993 and 2009. We find only limited (mixed) evidence that banks are unusually opaque during normal periods. However, consistent with theory, crises raise the adverse selection costs of trading bank shares relative to those of nonbank control firms. A bank’s balance sheet composition significantly affects its equity opacity, but we cannot detect specific balance sheet categories that have robust effects.     

Unexpected inflation and bank stock returns: The case of France 1977–1991

This paper evaluates the impact of unexpected inflation on the stock returns of a sample of French banks. It offers an empirical test of theories that have predicted an impact of inflation on the stock returns of banks. The paper complements a large literature that has focused exclusively on the impact of unexpected interest rates. The analysis provides empirical support to the hypothesis that, in periods of volatile inflation, there exists an inflation risk factor which is independent of the well-documented interest rate factor.     

Does market discipline impact bank charter value? The case for Australia and Canada

This study analyses the relation between market discipline and bank charter value using a panel data set of publicly listed domestic banks in Australia and Canada over the period of 1995–2011, with a focus on the 2007–2008 global financial crisis (GFC). Overall, the results show a positive relation between market discipline and bank charter value, but this relation is weaker in the post‐GFC period. Our findings reveal that in the presence of market discipline, bank capital, contingent liabilities and non‐interest income are important sources of charter value. These findings have important policy implications related to bank stability. The results are robust to several model specifications.     

The impacts of emotions and personality on borrowers’ abilities to manage their debts

This paper examines the impacts of retail borrowers’ emotions and personality traits on their abilities to engage in appropriate responses when things unexpectedly go wrong and they get into debt repayment difficulties. We establish several scenarios where borrowers are hit with unforeseen circumstances that affect their abilities to make their loan payments and we classify and evaluate the riskiness of the strategies they state that they would adopt in those situations. Via an extensive on-line survey conducted in the UK, we show that borrowers who were most comfortable about taking on debts in the first place, those who show neurotic tendencies, and those who believe that they have control over events rather than being controlled by them, are more likely to undertake high risk strategies when faced with unforeseen issues that affect their ability to meet their debt interest and repayment costs. We also find that respondents who identify as feeling excited, alert or guilty, as well as younger borrowers and those who are single or renters, are more likely to opt for risky approaches. Our findings have potentially important implications for lenders, regulators and debt counselling services regarding the types of people who are most likely to get into debt troubles.     

What drives investment bank performance? The role of risk,liquidity and fees prior to and during the crisis

This paper examines factors that affect the performance of investment banks in the G7 and Switzerland. In particular, we focus on the role of risk, liquidity and investment banking fees. Panel analysis shows that those variables significantly impact upon performance as derived from Stochastic Frontier Analysis (SFA). Given our sample also comprises the financial crisis, we further test for regime switches using dynamic panel threshold analysis. Results show different underlying regimes, in particular over the financial crisis. In addition, a strong positive effect of Z-Score on performance for banks in the regime of low default risk is reported, while fee-income ratio has also a positive impact for banks with low level of fees. On the other hand, liquidity exerts a negative impact. Notably, there is a clear trend of mobility of banks across the two identified threshold regimes with regard to risk a year before the financial crisis. Our results provide evidence that recent regulation reforms regarding capital adequacy and liquidity requirements are on the right track and could enhance performance.     

The effects of risk‐taking tendency on risk choice and pre‐ and post‐decisional information selection

Ideally, people seek and select information about unfamiliar risks with which they are confronted, before they make a risk choice. This study investigated what happens when people do not have this opportunity. The main question was how risk‐taking tendency influences intuitive risk decisions and how this impacts subsequent information search and subsequent choices. In the present study, participants had to make a choice about an unfamiliar risk, either before or after they had had the opportunity to search for (risk‐promoting or risk‐averse) information. In the condition where they could only seek for information after they had made a choice, they had to reconsider their first choice and make a second risk choice. We expected that (1) risk‐taking tendency would impact people's risk choices, but only in the situation where they have little information. On the basis of cognitive dissonance theory, it was furthermore predicted that (2) risk‐taking tendency and (3) initial risk choice would affect risk information selection. Furthermore, we predicted that (4) the first risk choice and (5) the risk information selected would influence the subsequent risk choice. The results suggest that if people make a first, intuitive decision about an unknown risk, risk‐taking tendency has an effect on the choice, but that this does not happen when people can first select information. Risk‐taking tendency did not influence information selection, but initial choice did (although in another way than we expected). Furthermore, both the first risk choice and the risk information selected affected subsequent risk choices. These findings suggest that people often make initial intuitive decisions that are influenced by personality characteristics, and that are subsequently difficult to change.     

The short-term effects of foreign bank entry on domestic bank behaviour: Does economic development matter?

This paper investigates the short-term effects of foreign bank entry on the behaviour of the domestic banking sector. We hypothesise that these effects are dependent on the level of economic development of the host country. Our investigation shows that at lower levels of economic development foreign bank entry is generally associated with higher costs and margins for domestic banks. At higher levels of economic development the effects appear to be less clear: foreign bank entry is either associated with a fall of costs, profits and margins of domestic banks, or is not associated with changes in these domestic bank variables.     

The EONIA spread before and during the crisis of 2007–2009: The role of liquidity and credit risk

This paper provides an empirical assessment of the factors affecting the spread between the Euro Overnight Index Average (EONIA) and the main policy rate of the European Central Bank (ECB). Up until the period when Lehman Brothers collapsed in mid-September 2008, the spread was small and positive. After this point, the liquidity surplus that developed from the fixed rate full allotment tendering arrangement in refinancing operations drove the widening of EONIA spread (trading below the ECB policy rate), although other factors also played a significant role. This paper explains the drivers of spread across alternative non-crisis/crisis regimes. In addition, the paper examines how the EONIA spread reacts to shocks imposed on a range of liquidity and credit risk factors in alternative crisis/non-crisis regimes. The results have implications for factors that should be monitored closely across both regimes, and also the implications that this may have for steering an unsecured overnight rate in crisis times.     

Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk

Based on a sample of U.S. commercial banks from 2002 to 2012, this paper shows that bank loan securitization has a significant and positive impact on both Z-scores and the likelihood of bank failure, indicating a short-term risk reduction and a long-term risk increase effect. We also find disparate impacts between mortgage and non-mortgage securitization. Loan sale activities are found to have a similar impact to securitization.     

The effect of bank capital on lending: Does liquidity matter?

This paper uses a sample of quarterly observations of insured US commercial banks to examine whether the effect of bank capital on lending differs depending upon the level of bank liquidity. We find that the effect of an increase in bank capital on credit growth, defined as growth rate of net loans and unused commitments, is positively associated with the level of bank liquidity only for large banks and that this positive relationship has been more substantial during the recent financial crisis period. This result suggests that bank capital exerts a significantly positive effect on lending only after large banks retain sufficient liquid assets.     

The effect of communication design and recipients’ numeracy on responses to UXO risk

Risk communications aim to affect recipients’ understanding of specific risks, their trust and liking of the materials, affective responses, and associated behaviors. We developed communications about the number of construction workers expected to get hurt if building were permitted at the former Fort Ord weapons training site in California, despite its contamination with unexploded ordnance (UXO). We created eight versions, which presented text only or bar graph with text, the numerator of the risk (the number of workers expected to be hurt) with or without emphasis on the denominator (the total number of workers), and uncertainty information (the probability that different numbers of workers would be hurt) or not. Recipients varied in numeracy. We examined the effect of these communication features on recipients’ (1) understanding, (2) trust and liking of the materials, (3) affective responses, and (4) support for construction and for construction workers if construction were to be implemented. Low-numerate individuals showed less understanding across all versions of the communication, yet preferred graph-with-text displays relatively more than text-only displays as compared to high-numerate individuals. Emphasizing the denominator increased understanding of text-only displays but decreased support for construction and construction workers for all communication versions. Moreover, recipients were more supportive of construction and construction workers after receiving text-only displays without uncertainty information or graph-with-text displays with uncertainty information, seemingly due to communications with those features being trusted and liked more. We discuss the implications for communicating risks in general and for communicating UXO-related risks to the community surrounding Fort Ord.     

Political–security risk in the oil and gas industry: the impact of terrorism on risk management and mitigation

Oil and gas companies are experiencing an increase in terrorist attacks. The industry became a legitimate target for terrorist groups in the 1990s and the number of attacks have increased yearly, with a spike after the 9/11 attacks. In today’s interconnected world, political risk is not only about the relationship between the host government and the company. Oil and gas companies may experience risks on a transnational, national and human security level. The success of new investments often depends on the successful utilization of risk management strategies. This study focuses on the importance of political–security risk in the oil and gas industry. In January 2013, the oil and gas industry experienced one of its deadliest attacks at the In Amenas gas facility in Algeria, forcing firms to reconsider its focus on security management. Statoil undertook a thorough analysis of security at the site as well as of the company′s corporate security risk management. The report revealed a lack of focus on political–security risk. This study argues that political–security risk has not been used to its full potential in the oil and gas industry. The oil and gas industry has always focused on site security, but a broader more holistic approach to risk management has been lacking. As a result of the In Amenas incident, the industry has become more willing to have a new discussion on security and this has resulted in changes in the way companies operate.