IMF bailouts, contagion effects, and bank security returns

The Asian financial crisis that started in mid-1997 led to the International Monetary Fund's (IMF) bailout of three previously high growth economies: Thailand, Indonesia, and Korea. Using data for 114 large banks from 16 countries worldwide, we study the impact of the IMF bailout announcements on bank security returns. The announcement that the IMF will provide a rescue package for a country has a positive impact on domestic bank stock prices in the countries receiving the bailouts, which supports the view that these bailouts help ameliorate systemic risk. Our results show that banks in the nonbailout countries generally experience either insignificant or negative abnormal returns, which is contrary to the view of opponents of IMF bailouts, who argue that these bailouts lead to moral hazard among international banks. Our results support the view that the reaction of investors differs from bank to bank, but consistent with the contagion and the heterogeneous creditor hypotheses, banks' stock price reactions are not proportional to their loan exposure.     

The credit crisis around the globe: Why did some banks perform better?

Though overall bank performance from July 2007 to December 2008 was the worst since the Great Depression, there is significant variation in the cross-section of stock returns of large banks across the world during that period. We use this variation to evaluate the importance of factors that have been put forth as having contributed to the poor performance of banks during the credit crisis. The evidence is supportive of theories that emphasize the fragility of banks financed with short-term capital market funding. The better-performing banks had less leverage and lower returns immediately before the crisis. Differences in banking regulations across countries are generally uncorrelated with the performance of banks during the crisis, except that large banks from countries with more restrictions on bank activities performed better and decreased loans less. Our evidence poses a substantial challenge to those who argue that poor bank governance was a major cause of the crisis because we find that banks with more shareholder-friendly boards performed significantly worse during the crisis than other banks, were not less risky before the crisis, and reduced loans more during the crisis.     

Shareholder protection and bank executive compensation after the global financial crisis

We use a hand-collected international database to analyze the change in the risk-taking incentives embedded in bank executive compensation after the onset of the global financial crisis. Our results reveal a reduction in both the risk sensitivity of stock option grants (vega) and total and cash pay-risk sensitivities in countries suffering systemic banking crises. This reduction is greater in countries with strong shareholder protection, especially in banks with good corporate governance, solvent banks, and banks that suffered a reduction in their specific investment opportunity set. The regressions control for government intervention, banking development, and crisis intensity. Our results confirm that the contracting hypothesis is more relevant in countries with stronger shareholder protection, and provide support for measures improving shareholder rights in the approval of bank executive compensation.     

Explaining bank stock performance with crisis sentiment

Using search volume data on crisis-related queries from Google Trends, we estimate three different measures of market-level and individual crisis sentiment. We find that the stock performance of international banks during the period Q1 2004 to Q4 2012 was significantly driven by investors’ irrational market-wide crisis sentiment. Our empirical analysis shows that irrational market-wide crisis sentiment leads investors to devalue bank stocks irrespective of idiosyncratic or macroeconomic fundamentals. Comparing this finding with results for a sample of non-financial companies, we find evidence in support of the notion that the effect of crisis sentiment on stock returns is strongest in the absence of implicit bailout guarantees.     

The impact of state ownership on performance differences in privately-owned versus state-owned banks: An international comparison

This paper examines how government ownership and government involvement in a country’s banking system affect bank performance from 1989 through 2004. Our study uncovers an interesting pattern of changing performance differences between state-owned and privately-owned banks around the Asian financial crisis. We find that state-owned banks operated less profitably, held less core capital, and had greater credit risk than privately-owned banks prior to 2001, and the performance differences are more significant in those countries with greater government involvement and political corruption in the banking system. In addition, from 1997 to 2000, the 4-year period after the beginning of the Asian financial crisis, the deterioration in the cash flow returns, core capital, and credit quality of state-owned banks was significantly greater than that of privately-owned banks, especially for the countries that were hardest hit by the Asian crisis. However, state-owned banks closed the gap with privately-owned banks on cash flow returns, core capital, and nonperforming loans in the post-crisis period of 2001–2004. Our findings can best be explained by Shleifer and Vishny’s [Shleifer, A., Vishny, R.W., 1997. A survey of corporate governance. J. Finance 52, 737–783] corporate governance theory on state ownership of firms and Kane’s [Kane, E.J., 2000. Capital movement, banking insolvency, and silent runs in the Asian financial crisis. Pacific-Basin Finance J. 8, 153–175] life-cycle model of a regulation-induced banking crisis.     

Effect of collateral characteristics on bank performance: Evidence from collateralized stocks in Taiwan

Taiwanese law requires directors of listed firms to disclose their stocks collateralized at banks creating the possibility of examining the characteristics of collateralized stocks and their influence on bank performance. This study demonstrates that the risk (value) attributes of collateralized stocks increase (reduce) bank efficiency yet reduce (increase) bank profits. Government-owned banks but not private banks require sufficiently high margins to prevent stock loans from non-performing. Furthermore, banks charge higher interest to cover the non-performing risk. Directors who lack funds, hold high turnover stocks, and/or have weak relationships with their banks prefer to collateralize their stocks at private banks.     

Did Good Corporate Governance Improve Bank Performance during the Financial Crisis?

This paper focuses on the effects of corporate governance on bank performance during the financial crisis of 2008. Using data on large publicly traded U.S. banks, we examine whether banks with stronger corporate governance mechanisms were associated with higher profitability and better stock market performance amidst the crisis. Our empirical findings on the effects of corporate governance on bank performance are mixed. Although the results suggest that banks with stronger corporate governance mechanisms were associated with higher profitability in 2008, our findings also indicate that strong governance may have had negative effects on stock market valuations of banks amidst the crisis. Nevertheless, we document that banks with strong corporate governance practices had substantially higher stock returns in the aftermath of the market meltdown, indicating that good governance may have mitigated the adverse influence of the crisis on bank credibility.     

Sovereign Credit Risk,Banks' Government Support,and Bank Stock Returns around the World

We explore the joint effect of expected government support to banks and changes in sovereign credit ratings on bank stock returns using data for banks in 37 countries between 1995 and 2011. We find that sovereign credit rating downgrades have a large negative effect on bank stock returns for those banks that are expected to receive stronger support from their governments. This result is stronger for banks in advanced economies where governments are better positioned to provide that support. Our results suggest that stock market investors perceive sovereigns and domestic banks as markedly interconnected, partly through government guarantees.     

Is there a bright side to government banks? Evidence from the global financial crisis

Using a sample of banks from 56 countries, this paper investigates the lending behavior of government banks during the crisis of 2008, and its association with bank performance and the economy. Contrary to the traditional wisdom, we find that government banks can play a beneficial role under certain circumstances. Government banks have higher loan growth rates than private banks during the crisis. In countries with low corruption, the increased lending by government banks is associated with better bank performance and more favorable GDP and employment growth in the crisis period. In contrast, the results for countries with high corruption are more consistent with the political view: the increased lending by government banks is associated with underperformance relative to private banks, and creates no beneficial effects on either GDP growth or employment.     

The asymmetric effect of international swap lines on banks in emerging markets

This paper investigates the effect of international swap lines on stock returns using data from banks in emerging markets. The analysis first shows that swap lines by the Swiss National Bank (SNB) had a positive impact on bank stocks in Central and Eastern Europe. It then highlights the importance of individual bank characteristics in identifying the asymmetric effect of swap lines on bank stocks. Bank-level evidence suggests that stock prices of local and less-well capitalized banks as well as banks with high foreign currency exposures and high reliance on short-term funding responded more strongly to SNB swap lines. This new evidence is consistent with the view that swap lines not only enhanced market liquidity but also reduced risks associated with micro-prudential issues.     

Reprint of: The asymmetric effect of international swap lines on banks in emerging markets

This paper investigates the effect of international swap lines on stock returns using data from banks in emerging markets. The analysis first shows that swap lines by the Swiss National Bank (SNB) had a positive impact on bank stocks in Central and Eastern Europe. It then highlights the importance of individual bank characteristics in identifying the asymmetric effect of swap lines on bank stocks. Bank-level evidence suggests that stock prices of local and less-well capitalized banks as well as banks with high foreign currency exposures and high reliance on short-term funding responded more strongly to SNB swap lines. This new evidence is consistent with the view that swap lines not only enhanced market liquidity but also reduced risks associated with micro-prudential issues.     

Bank efficiency,productivity, and convergence in EU countries: a weighted Russell directional distance model

The objective of this study is three-fold. First we estimate and analyse bank efficiency and productivity changes in the EU28 countries with the application of a novel approach, a weighted Russell directional distance model. Second, we take a disaggregated approach and analyse the contribution of the individual bank inputs on bank efficiency and productivity growth. Third, we test for convergence in EU28 bank productivity as well as in the inefficiency of individual bank inputs. We find that bank efficiency has been undermined by the financial crisis in banks notably from the EU15 countries. We also argue that bank efficiency and productivity in EU countries vary across the banking sector with banks from the ‘old’ EU showing higher efficiency levels. Nonetheless, a noticeable catching up process is observed for banks from the ‘new’ EU countries. Consequently, we do not find evidence of group convergence for bank productivity but there is evidence of convergence in bank efficiency change and technical change among the EU28 countries throughout the period 2005–2014. The driving force seems to be convergent technical change from the old EU member states’ banks. On the other hand, almost no convergence is detected for the banks’ individual inputs while the transition paths show heightened diversity during the crisis years.     

Government finances and bank bailouts: Evidence from European stock markets

Using a sample of European banks and a series of events affecting governments' finances, we conduct an event study to examine whether there is a relationship between governments' fiscal difficulties and banks' stock returns. We find a significant reaction of banks' stocks to news concerning governments' finances. Banks' stock returns fall in response to a deterioration of governments' financial situation. We find little difference in the reaction between large and small banks. The evidence points towards all banks being equally likely to be bailed out. Our data are consistent with a policy during the Eurozone sovereign-debt crisis in which “no bank is too small to save”.     

Bank stock performance and bank regulation around the globe

We analyze the effect of bank capital, regulation, and supervision on the annual stock performance of global banks during the period of 1999–2012. We study a large comprehensive panel of international banks and find that higher Tier 1 capital decreases a bank's stock performance over the whole sample period. However, during turbulent times stocks of more highly capitalized banks perform significantly better. Additionally, we find strong evidence that banks that are more likely to receive government bailout during financial distress realize smaller stock performance. In contrast, we find no convincing evidence that banks that generate higher non-interest income have a higher performance.     

Trading by bank insiders before and during the 2007–2008 financial crisis

This paper sheds new light on the role bank executives played in the financial crisis. It examines whether they foresaw the poor performance of their own bank by analyzing their insider trading patterns. Insider trading during 2006 predicts stock returns during the crisis: a portfolio strategy based on insider trading information earns a risk-adjusted return of over 40% during the crisis. Further, banks with a high exposure to the housing market and banks with a low exposure exhibit different insider trading patterns starting in mid-2006, when US housing prices first decline: insiders of high-exposure banks are 20% more likely to sell stock than insiders of low-exposure banks. This pattern is more pronounced for CEOs than other insiders. However, insider trading patterns of high- and low-exposure banks do not differ before 2006. Replacing high-exposure banks by too-big-too-fail banks yields similar results. This evidence indicates that insiders of high-exposure and too-big-too-fail banks revised their assessment of their banks’ investments following the reversal in the housing market.     

The effect of financial market development on bank risk: evidence from Southeast Asian countries

This paper examines how bank risk varies with changes in financial markets development in a broad data set of 52 publicly listed commercial banks in five Southeast Asian countries over a 23-year period between 1990 and 2012. A consequence of two financial crises (i.e. the Asian financial crisis of 1997–1998 and the global financial crisis of 2007–2009) provides a natural experiment in which linkages between financial markets development and bank risk are measured. Empirical results show that higher degrees of financial markets development are associated with weaker bank capital positions and are positively related to higher degrees of bank revenue diversification. There is also evidence for a U-shaped relationship between the degree of financial markets development and bank capital.     

Financial liberalisation,crisis, and restructuring: A comparative study of bank performance and bank governance in South East Asia

This paper examines the impact of changes in bank governance on bank performance for a sample of commercial banks operating in SE Asia between 1990 and 2003. We identify bank governance in terms of bank ownership and measure bank performance as rank order alternative profit efficiency, technical change, and productivity. The period was characterised by financial deregulation, the Asian crisis and bank restructuring programmes. To resolve financial distress, SE Asian authorities implemented inter alia bank privatisation programmes and widened access for foreign ownership. Our results tend to support bank privatisation and the repeal of state ownership on economic grounds. We suggest the potential benefits of foreign ownership may take longer to be realised. For domestic private-owned banks, the challenge is improving bank efficiency.     

Bank capital in the crisis: It's not just how much you have but who provides it

Bank capital is the cornerstone of bank regulation and is considered a key determinant of a bank's ability to withstand economic shocks. In the area of bank capital regulation, the general view is that more bank capital is better, irrespective of who provides it. In this paper, we investigate whether the investment horizon of bank capital providers matters for bank performance during the recent financial crisis. We observe that banks with more short-term investor ownership have worse stock returns during the crisis. Further exploration suggests that this is partially because banks with higher short-term investor ownership took more risk prior to the crisis but mainly because they experienced higher selling pressure during the crisis. Our results confirm the economic benefit of bank capital in helping banks to perform better during crises. However, when we decompose bank capital by the nature of its providers, we show that more capital is associated with worse performance when it is provided by short-term institutional investors.     

Unanticipated interest rates,bank stock returns and the nominal contracting hypothesis

The relationship between unexpected interest rate movements and bank stock returns is analyzed in the context of the nominal contracting hypothesis. Unanticipated changes in interest rates should influence individual bank profits and stock returns depending on the maturity characteristics of their assets relative to their liabilities. This hypothesis is investigated by constructing portfolios on the basis of the nominal contracting positions of banks. The main conclusion of this paper is that the wealth redistribution implications of the nominal contracting hypothesis is found to be unimportant in the determination of bank stock returns.     

Saving the Euro: Mitigating Financial or Trade Spillovers?

This paper analyzes through what channels the euro crisis affected firms and the efficacy of policies to mitigate the crisis. It analyzes stock price responses for 3,045 nonfinancial firms in 16 countries to four key policy events during 2010–11. Using precrisis benchmarks, it separates financial effects from trade effects and examines how bank and trade linkages propagated shocks. It finds that policy measures affected financially dependent firms more, particularly in creditor countries with greater bank exposure to peripheral euro countries, in statistically and economically significant ways. Trade linkages with peripheral countries played little role, although euro movements meant some differential effects.