COVID-19 and A-share banks' stock price volatility: From the perspective of the epidemic evolution in China and the US

With a financial market dominated by indirect financing, China's banking system played a critical role in the government's response to COVID-19, which piqued our interest in the short-term impact of COVID-19 on the risk of China's banks. Examining the stock price of A-share listed banks and the number of confirmed cases in China and the US during the short time window surrounding the COVID-19 pandemic's outbreak, this study reveals that COVID-19 increased the A-share banking price volatility in both China and the US, reflecting a strong spillover effect of the US economic and financial system. Furthermore, COVID-19 in China has a smaller impact on the stock price volatility of China's state-owned banks (SOBs) than that of medium- and small-sized (M&S) banks, reflecting the higher risk resistance capability of large SOBs. Further analysis confirms that the impact primarily reflected systematic risk rather than idiosyncratic risk, as small and micro enterprises and M&S banks received more targeted financial support from the government. In contrast, large banks took on more responsibilities in the emergency financial stimulus, narrowing the idiosyncratic risk gap between the two types of banks and allowing the banking industry to better play its core role in the recovery of real economy in China. These findings will assist us in better understanding the effectiveness of financial assistance policies during the epidemic and will provide insights for future policymaking during similar crises.     

US government TARP bailout and bank lottery behavior

Considerable debate surrounds how the US government's TARP bailout intervention has affected the risk-taking and moral hazard behavior of U.S. banks around the global financial crisis. We examine this issue with a focus on lottery behavior introducing MAX/MIN as a new measure of lotteryness in banking to capture the loss protection from bank bailout guarantees. We find that the TARP bailout increased the likelihood of bank lotteryness and risk shifting. Lottery-like bank equities are riskier after TARP and exhibit fatter right to left tails. A consistent pattern of risk taking and lottery behavior extends both before and after the 2008–2009 crisis, engulfing the largest systemic banks (SIFIs). While confirming that lottery-like bank equities have lower short-term return, we find they exhibit better cumulative long-term return performance. Our findings have important policy implications regarding government intervention in banking crises.     

How the German government responded to the financial,economic and fiscal crises

This paper explains the German government's response to the financial, economic and fiscal crises. It covers the financial crisis in 2008 when banks were supported (SoFFin), the economic crisis in 2009, and the fiscal crisis of increasing state debts and budget deficits which caused the German government to cut spending (Sparpaket) in 2010. The author looks at the contents of the government's responses, but also at the political and administrative aspects of the government's decision-making processes.     

How credible is a too-big-to-fail policy? International evidence from market discipline

This paper analyzes in an international sample of banks from 104 countries if the sensitivity of the cost of deposits to bank risk varies across banks depending on their systemic and absolute size. We analyze a period before the 2007 financial crisis and control for endogeneity of bank size, intervention policies in past banking crises, and soundness of countries’ public finances. Our results are consistent with the predominance of the too-big-to-fail hypothesis, although this effect is stronger in countries that did not impose losses on depositors in past banking crises and in countries with sounder public finances.     

Bank Earnings Management in Emerging Market Economies: The Case of Mexico

In the mid-late 1990s, developing countries in several parts of the world experienced severe currency devaluations that were accompanied by deep economic downturns. For some regions, international financial organizations have documented that deficient financial reporting standards and practices contributed to the onset and magnitude of the crises by understating banks’ problem loans and capital adequacy problems. However, little research has been conducted concerning the role of financial reporting in the post-devaluation reconstruction of financial systems. As such, this paper examines the role of financial reporting in the post-1994 devaluation restructuring of the Mexican banking system. Emphasis is placed on examining whether the country's three largest banks delayed the recognition of loan losses in the late 1990s. The results provide evidence that banks took advantage of weaknesses in financial reporting standards to delay the recognition of loan losses.     

Institutions,moral hazard and expected government support of banks

We model the expected support of banks with credit ratings from Moody's and Fitch, taking explicitly into account the capacity and willingness of governments to provide support in case of need, as well as their concerns about moral hazard (i.e., that the expected support may induce banks to assume bigger risks). Our results suggest that moral hazard concerns are relatively weak. In addition, a substantial part of the expected support can be attributed to the quality of a country's institutions. These findings have important implications for the dynamics of banking crises, the value of the ‘fair’ insurance premium banks might be called upon to pay for the expected support, as well as for ways to reduce the resulting negative externalities.     

The Eurozone banking sector in the time of COVID-19: Measuring volatility connectedness

This article investigates the volatility connectedness of the Eurozone banking system over the last 15 years (from 2005 to 2020). Applying the Diebold-Yilmaz Connectedness Index model to the daily stock return volatilities of 30 major Eurozone banks, we are able to measure the risk spillover effects and to capture the COVID-19 outbreak's impact on banking stability. The empirical findings show that the 30 banks are highly interconnected. Furthermore, we show the strong impact of the COVID-19 pandemic on the volatility dynamics, i.e., on the structure of the Eurozone banking system. Dynamically, we find that volatility connectedness increases during crises, reaching its maximum peak at the time of COVID-19. The analysis points out the critical role of volatility transmission played by large banks, highlighting the “too-big-to-fail” characteristic of this banking system. However, we find that small-medium banks are important actors of contagion, supporting the thesis that the Eurozone banking system is also “too-interconnected to fail.” Finally, we document the heterogeneity effect of the COVID-19 pandemic between Eurozone banking systems. This heterogeneity impact could be a future source of financial instability within the Eurozone.     

How does capital affect bank performance during financial crises?

This paper empirically examines how capital affects a bank’s performance (survival and market share) and how this effect varies across banking crises, market crises, and normal times that occurred in the US over the past quarter century. We have two main results. First, capital helps small banks to increase their probability of survival and market share at all times (during banking crises, market crises, and normal times). Second, capital enhances the performance of medium and large banks primarily during banking crises. Additional tests explore channels through which capital generates these effects. Numerous robustness checks and additional tests are performed.     

Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983–1991

We examine debenture yields over the period 1983–1991 to evaluate the market's sensitivity to bank-specific risks, and conclude that investors have rationally reflected changes in the government's policy toward absorbing private losses in the event of a bank failure. Although this evidence does not establish that market discipline can effectively control banking firms, it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major U.S. banking firms.     

Reputational contagion and optimal regulatory forbearance

Existing studies suggest that systemic crises may arise because banks either hold correlated assets, or are connected by interbank lending. This paper shows that common regulation is also a conduit for interbank contagion. One bank's failure may undermine confidence in the banking regulator's competence, and, hence, in other banks chartered by the same regulator. As a result, depositors withdraw funds from otherwise unconnected banks. The optimal regulatory response to this behavior can be privately to exhibit forbearance to a failing bank. We show that regulatory transparency improves confidence ex ante but impedes regulators' ability to stem panics ex post.     

银行业危机:金融泡沫视角的分析

自20世纪80年代以来,银行业危机爆发越显频繁。然而,通过对银行业危机内部形成机理分析可以发现,银行业危机的爆发其实是伴随着金融泡沫的形成与破灭这一过程的。在金融泡沫的形成过程中,银行往往会给一些高风险行业发放贷款,从而增加银行经营风险;而在金融泡沫破灭之后,这将直接或间接地导致银行产生大量的不良贷款,从而使银行业危机最终爆发。因此,我国应尽快化解国有商业银行的不良资产;完善银行微观治理结构;建立和完善金融监管机制。     

An analysis of the causes of recent banking crises

The incidence of systemic banking crises has risen over the past twenty years and the costs have been high. Although each country's experience has country-specific factors, several common elements appear in most crisis countries: (1) volatility in the macro economy; (2) the inheritance of structural weaknesses in the economy and financial system; (3) hazardous banking practices; (4) hazardous incentive structures and moral hazard within the financial system; (5) ineffective regulation; (6) weak monitoring and supervision by official agencies; (7) the absence of effective market discipline on banks, and (8) structurally unsound corporate governance mechanisms within banks and their borrowing customers. Causes of such crises are complex and a myopic focus on single factors (e. g. instability in the macro economy, weak regulation, etc.) misses the essential feature of interrelated and multidimensional causal factors. Although macro-instability has been a common feature, and may often have been the proximate cause, banking crises usually emerge because instability in the economy reveals existing weaknesses within the banking system.     

Financial Markets and Economic Growth*

In this reprinting of the Nobel Prize‐winning financial economist's classic statement about the origins of financial crises, the Southeast Asian crisis of the late 1990s is attributed “not to too much reliance on financial markets, but to too little.” Like the U.S. economy a century ago, the emerging Asian economies did not then—and do not now—have well‐developed capital markets and remain heavily dependent on their banking systems to finance growth. But for all its benefits, banking is not only basically 19th‐century technology, but disaster‐prone technology. And in the summer of 1997, a banking‐driven disaster struck in East Asia, just as it had struck so many times before in U.S. history. During the 20th century, the author argues, the U.S. economy reduced its dependence on banks by developing “dispersed and decentralized” financial markets. In so doing, it increased the efficiency of the capital allocation process and reduced the economy's vulnerability to the credit crunches that have recurred throughout U.S. history. By contrast, Japan has not reduced its economy's dependence on banks, and its efforts to deal with its banking problems during the crisis of the late'90s served only to destabilize itself as well as its neighbors. Developing countries in Asia and elsewhere are urged not to follow the Japanese example, but to take measures aimed at developing financial markets and institutions that will either substitute for or, in some cases, complement bank products and services.     

Capital Regulation and Competition as a Moderator for Banking Stability

Capital regulation forces banks to fund a substantial amount of their investments with equity. This creates a buffer against losses but also increases the cost of funding. If higher funding costs translate into higher loan interest rates, the bank's assets are also likely to become more risky, which may destabilize the lending bank. This paper argues that the level of competition in the banking sector can determine whether the buffer or cost effect prevails. The endogenous level of competition may be crucial in determining the efficiency of capital regulation in undercapitalized banking sectors, with excess capacities and correlated risks.     

Lending Booms and Lending Standards

We examine how the informational structure of loan markets interacts with banks' strategic behavior in determining lending standards, lending volume, and the aggregate allocation of credit. We show that, as banks obtain private information about borrowers and information asymmetries across banks decrease, banks may loosen their lending standards, leading to an equilibrium with deteriorated bank portfolios, lower profits, and expanded aggregate credit. These lower standards are associated with greater aggregate surplus and greater risk of financial instability. We therefore provide an explanation for the sequence of financial liberalization, lending booms, and banking crises observed in many emerging markets.     

The liquidity of bank assets and banking stability

This paper shows that an increased liquidity of bank assets, paradoxically, increases banking instability and the externalities associated with banking failures. This is because even though higher asset liquidity directly benefits stability by encouraging banks to reduce the risks on their balance sheets and by facilitating the liquidation of assets in a crisis, it also makes crises less costly for banks. As a result, banks have an incentive to take on an amount of new risk that more than offsets the positive direct impact on stability.     

Banking industry volatility and banking crises

While studies using balance sheet information of banks and macroeconomic indicators to forecast banking crises are prolific, empirical research using market information of banks is relatively sparse. We investigate whether banking industry volatility, constructed with the disaggregated approach from Campbell et al. [Campbell, J.Y., Lettau, M., Malkiel, B.G., Xu, Y., 2001. Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk? The Journal of Finance 56, 1–43] using exclusively publicly available market information of banks, is a good predictor of systemic banking crises in the analyses including data from 18 developed and 18 emerging markets. We find that banking industry volatility performs well in predicting systemic banking crises for developed markets but very poor for emerging markets, which suggest that the impact of market forces on the soundness of the banking system might be different for developed and emerging markets. We also find that those macroeconomic and banking risk management indicators have different impact on the probability of banking crises. Therefore, the traditional cross-country results of the studies on banking crises need to be interpreted cautiously.     

The use of blanket guarantees in banking crises

Policymakers often use guarantees on bank liabilities to prevent or contain bank runs during systemic banking crises, but their success has been debated. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees do help to reduce liquidity pressures on banks, but only partially since they do not stem withdrawals from non-residents. Withdrawals following the announcement of guarantees are much more pronounced for non-resident liabilities than for foreign-currency denominated deposits—which may also be held by residents—suggesting that the results on non-residents are not driven by foreign-currency risk but by concerns about the government’s ability and commitment to honor the guarantee to non-resident liability holders.     

GLOBALIZATION OF CAPITAL MARKETS AND THE ASIAN FINANCIAL CRISIS

This article has three basic aims: (1) to analyze the impact of the opening of their capital markets on the economies of host countries; (2) to investigate the causes of the Asian financial crisis; and (3) to evaluate the likely effects of the South Korean government's recent attempts to restructure its corporate sector. Although the recent Asian financial crisis has led some to question the merits of open capital markets and to call for regulatory restraints on capital flows across international borders, the scientific evidence suggests that the opening of stock markets to foreign investors has been largely beneficial for emerging economies. On average, stock market liberalization has been accompanied by increases in stock prices and reductions in stock return volatility, reductions in inflation, and reductions in the rate of currency depreciation. Much of the blame for the Asian currency crises is assigned to Asian policymakers' futile attempts to defy market forces by trying to maintain their currencies at artificially high levels. But a more fundamental cause of Asia's economic problems has been the widespread value destruction by Asian corporations, which has led to a lower value for the overall economy and weakened the banking sector. The government-directed banking systems and weak corporate governance structures (including managerial incentives to increase size and market share at the expense of shareholders) that characterize most Asian economies have resulted in systematic overinvestment, bloated payrolls, and sharp declines in corporate profitability. While applauding most of the Korean government's recent measures to reform the economy, the article expresses skepticism about the government-mandated restructuring of the chaebol known as the “big deal.” Rather than trying to direct the process of restructuring, Korean policymakers should limit their efforts to improving the market mechanism by increasing competition in the markets for capital, corporate control, and goods and services. The Korean market for corporate control transactions could be greatly improved by increasing the efficiency of bankruptcy proceedings and by allowing hostile takeovers by foreign as well as domestic investors. To increase the productivity of capital, Asian companies should seek to realign managerial with shareholder interests by tying compensation to measures of value creation like EVA.     

How the UK government responded to the fiscal crisis: an outsider's view

This article presents an outsider's view of the UK government's response to recent financial, economic and fiscal crises. The article covers the financial crisis in 2008 when the then New Labour government rescued UK banks; the economic crisis in 2009 which resulted in economic stimulus measures; and the fiscal crisis of increasing national debts and budget deficits which led the newly-elected coalition government in 2010 to take fiscal consolidation measures. The author is an administrative scientist, and unpicks government responses, focusing on the political and administrative aspects of the governmental decision-making processes. The article ends with some lessons and foreign perspectives.