Government interventions and default risk: Does one size fit all?

We examine the effectiveness of the financial sector rescue packages provided by the national governments during the 2008 financial crisis. This study questions the implicit assumption that government interventions have an uniform effect on the default risk of individual banks. After testing the results for sensitivity, our main findings suggest that there exists a significant negative relationship between the announcement of the financial sector rescue packages and the daily change of the credit default premium. However, quantile regressions show that the effectiveness of these packages differs across banks: most interventions do not decrease the risk of intermediate to low-risk banks, while they do reduce the risk of high-risk banks. Besides, we find that interventions aimed at specific financial institutions are more effective in restraining banking risk than broad interventions taken to stabilize the financial market as a whole.     

The global financial crisis and integration in European retail banking

The aim of this paper is twofold. Firstly, to investigate the integration process within the European Union retail banking sector by analysing deposit and lending rates to the household sector during the period 2003–2011. Secondly, to assess the impact of the 2008 global financial crisis on the banking integration process, an area that is yet unexplored. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country’s transition path relative to the panel average. The empirical results point to the presence of convergence in all deposit and lending rates to the household sector up to 2007. In sharp contrast, the null of convergence is rejected in all deposit and credit markets after the onset of the 2008 financial crisis. These results show that the global crisis has had a detrimental effect on the banking integration process. We find some convergence in a few sub-clusters of countries but the rate of convergence is typically slow and several countries are identified as diverging altogether. In addition, we find that the credit market, in general, is far more heterogeneous than the savings market.     

Macro-Networks: An application to euro area financial accounts

This paper develops a financial network, designated the “Macro-Network”, that depicts the connections between the main financial and non-financial sectors of the economy in the various financial instruments of the euro area. The Macro-Network comprises of linkages across financial and non-financial sectors in each country. These country-level sector networks are then connected by the cross-border links between the individual banking sectors. Using the Macro-Network to simulate financial shocks, we find that the propagation effects depend on the underlying network structure, which evolves over time. After the financial crisis, bilateral linkages contracted sharply, reflecting the surge in counterparty risk and the de-leveraging processes. Nonetheless, our analysis suggests that even after this process, vulnerabilities remained in the euro area financial system, while a more diversified portfolio of cross-border exposures might mitigate the shock effects. We identify sectors which are most relevant for the propagation of financial shocks in the Macro-Network.     

Financial crisis,structure and reform

In this study, we examine the relationship between the structure of financial systems and financial crises. Using cross-country data on financial structures and crises, we find that there is a significant short-term reversal in development of the banking sector and the stock market during both bank crises and market crashes, with the corporate bond market moving in the same direction as bank credit. However, the results are significant for countries with market-based financial systems but not for countries with bank-based financial systems. Emerging markets have mainly bank-based financial systems, which may explain why these markets require more time to recover from economic downturns after a financial crisis. Therefore, we argue that governments should emphasize a balanced financial system structure as it helps countries to recover from financial crises more quickly compared with countries that lack such balanced structures.     

宏观审慎政策协调能否抑制国际性银行危机传染？——基于跨境金融关联视角的实证研究

本文基于跨境金融关联视角对宏观审慎政策能否抑制国际性银行危机传染这一重要的理论与实践问题进行了实证研究。选取亚洲金融危机和全球金融危机时期遭受冲击的10个代表性国家作为样本,构建Logit模型和多元回归模型探讨本国及具有金融关联的国家协调实施宏观审慎政策对本国系统性银行危机传染的影响。研究表明,具有金融关联的国家出现金融危机会显著增加本国系统性银行危机的发生概率,具有金融关联的国家实施宏观审慎政策对本国信贷的影响比对房价的影响更明显,本国及具有金融关联的国家协调实施宏观审慎政策会显著降低本国系统性银行危机的发生概率。在调整银行危机指标及考虑贸易关联和流动性风险的影响后,研究结果依然保持稳健。本文的研究结论揭示了加强宏观审慎政策协调有助于维护全球金融稳定,对于中国政策当局强化宏观审慎管理具有极其重要的政策含义。     

Information Effects During the U. S. Subprime Crisis

We investigate the impact of the U. S. subprime crisis on the stock markets of the Asia-Pacific countries on various event dates. Using data from Hong Kong, Indonesia, Malaysia, Singapore, and Taiwan, we find that the subprime crisis negatively affects these stock markets and investor behavior, especially in Hong Kong and Taiwan. In addition, the subprime crisis generally works through more financial linkages than trade linkages. However, when the subsamples are classified according to industry, this result exists only for the banking industry, but both financial and trade linkages become important to explain the impact of the crisis on the manufacturing industry.     

Financial liberalization,insurance market,and the likelihood of financial crises

This paper provides empirical evidence to investigate the direct impact of financial liberalization on the likelihood of currency/systemic banking crises, and examines the roles of insurance market, country risk, and economic conditional variables on the relationship between financial liberalization and financial crises in 39 countries. Our empirical results support that financial liberalization does have a significantly negative impact on the likelihood of currency/systemic banking crises, and that the indirect effects of insurance development and lower country risk decrease the probability of crises, but the indirect effect of economic conditional proxies is enhanced with the likelihood of a financial crisis. The policy implication is that the government or authority should strengthen the positive role of the insurance sector in order to combat financial crises.     

Financial System and Housing Price

The 2007/2008 US financial crisis is related to the securitization of mortgage loans and the housing-price boom and bust. In this article, we test the hypothesis that housing-price change is related to the development of the financial system. Using panel data for 23 countries from 1988 to 2012, we have found that the housing-price growth rate increases as the financial system moves a bank orientation to a market orientation. The policy implication is that the government should beware sudden increases in the capital market relative to the banking sector. Especially, more sophisticated financial supervision with respect to housing-price movement is required when a bank-based financial system progresses quickly to a market-oriented financial system.     

Heterogeneous market structure and systemic risk: Evidence from dual banking systems

This paper investigates how banking system stability is affected when we combine Islamic and conventional finance under the same roof. We compare systemic resilience of three types of banks in six GCC member countries with dual banking systems: fully-fledged Islamic banks (IB), purely conventional banks (CB) and conventional banks with Islamic windows (CBw). We employ market-based systemic risk measures such as MES, SRISK and CoVaR to identify which sector is more vulnerable to a systemic event. We also compute weighted average GES to determine which sector is most synchronised with the market. Moreover, we use graphical network models to determine the most interconnected banking sector that can more easily spread a systemic shock to the whole system. Using a sample of observations on 79 publicly traded banks operating over the 2005–2014 period, we find that CBw is the least resilient sector to a systemic event, it has the highest synchronicity with the market, and it is the most interconnected banking sector during crisis times.     

Financial nexus: Efficiency and soundness in banking and capital markets

Based on a modified version of the model used in Corvoisier and Gropp (2002) and De Guevara et al. (2005), we argue that banks' soundness, the structural characteristics and efficiency of the banking sector along with the development of the capital markets constitute a financial nexus. For a data set of 63 developed and developing countries, we find evidences that efficiency significantly modulates the linkages between concentration and soundness. We also find that capital markets' development supports a stable evolution in banking sector. For the relationship between capital markets and soundness, our findings appear to be robust for various measures of the considered variables as well as for different estimation techniques. Regarding the impact of the concentration upon soundness, the results obtained display a certain sensitivity about the way concentration is measured.     

Macroprudential policies,capital flows,and the structure of the banking sector

Using a large sample of advanced and emerging market economies over the period 1999–2012, we examine the effectiveness of macroprudential policies (MPPs) in managing cross-border bank flows. Conditioning on the structure of the banking sector in the MPP-implementing country, we find that higher regulatory quality and a higher credit-to-deposit ratio increase the effectiveness of MPPs, while a higher cost-to-income ratio has the opposite effect. If all three financial variables are evaluated at the median, the marginal effect of our preferred MPP measure leads to a reduction of international bank inflows in percent of GDP by around half a percentage point and is only marginally significant. However, when the more enhanced 25th (10th) percentiles of their respective distributions are considered, we observe, as a response to the same MPP measure, a reduction of bank inflows by 3.44 (5.39) percentage points that is highly statistically and economically significant. Additionally, we find that the structure of the domestic banking sector determines spillovers from MPPs across asset classes, while spillovers from MPPs across countries are a function of banking sector conditions both at home and abroad.     

A compound option approach to model the interrelation between banking crises and country defaults: The case of Hungary 2008

We analyze the Hungarian financial crisis of 2008 in a stochastic framework that advances structural credit risk models for country defaults: by applying compound option theory we consider payments for bailing-out the banking sector together with debt service payments in a joint crisis model. We estimate the model parameters by applying the time series maximum-likelihood approach of Duan (1994) on yield spreads of Hungarian Bonds. We find that difficulties in acquiring funds for debt servicing in combination with high outstanding debt triggered the crisis, rather than problems in the domestic banking sector. The estimated crisis probabilities dramatically rise during 2008.     

Bank credit risk and macro-prudential policies: Role of counter-cyclical capital buffer

This paper investigates the impact of macro-prudential policy (proxied by the counter-cyclical capital buffer (CCyB)) on bank credit risk during uncertain times, as banking sector stability is crucial in promoting financial intermediation. Using a unique daily data set consisting of 4939 credit default swaps (CDS) of 70 banks from 25 countries over the period 2010–2019, we find that CCyB tightening decreases bank-level CDS spreads, while CCyB loosening increases CDS spreads. This heterogeneous effect of CCyB arises due to its asymmetric effect on the capital ratio (i.e., the equity-to-total assets ratio) of banks. Tightening CCyB significantly increases capital, whereas loosening CCyB does not impact capital. Thus, the risks that emanate from the banking sector during periods of heightened uncertainty and financial distress can be significantly dampened when CCyB regulation is enabled. Consequently, macro-prudential policies for banks to hold higher levels of capital during good times are justified to contain financial market risks during downturns.     

Bank-based and market-based financial systems: Time-series evidence

In this paper, we reexamine the relative merits of bank-based and market-based financial systems in promoting long-run economic growth, which has been debated since the 19th century. We find that in the U.S., the U.K., and Japan, the stock market played an important role in financing economic growth, whereas the banking sector played a more important role in Germany, France, and Korea. A more detailed subsample analysis shows that for all countries, the banking sector played an important role in the early years of economic growth. Regarding the causal relation between financial systems and economic growth, except for Korea, all countries show that the financial system leads economic growth. A further analysis shows that the banking sector and the stock market in each country were complementary to each other in each country in the process of economic growth except for the U.S., where the two sectors were mildly substitutable.     

Cross-border interbank networks,banking risk and contagion

Recent events have highlighted the role of cross-border linkages between banking systems in transmitting local developments across national borders. This paper analyzes whether international linkages in interbank markets affect the stability of interconnected banking systems and channel financial distress within a network consisting of banking systems of the main advanced countries for the period 1994–2012. Methodologically, I use a spatial modeling approach to test for spillovers in cross-border interbank markets. The results suggest that foreign exposures in banking play a significant role in channeling banking risk: I find that countries that are linked through foreign borrowing or lending positions to more stable banking systems abroad are significantly affected by positive spillover effects. From a policy point of view, this implies that in stable times, linkages in the banking system can be beneficial, while they have to be taken with caution in times of financial turmoil affecting the whole system.     

Determinants of risk in the banking sector during the European Financial Crisis

Risk assessment in the banking sector has been a prominent topic in the banking literature and has gained attention especially since the recent financial crises. In particular, the European crisis, which was the first since the formation of the Eurozone, underlined a number of significant problems and increased concerns on the tail or crash risk of banks. In the present study, we seek to examine whether information asymmetry, the importance of banks in the financial system and systemic risk play significant roles in the evolution of stock crashes in the banking sector. Information asymmetry is proxied by opacity, the importance of a bank in a financial network is proxied by network centrality, and systemic risk is proxied by clustering. The research framework considers a number of regulatory, reporting and financial market factors that have also been determined to relate to stock crashes and shows that all of the above factors are related to (idiosyncratic) stock crash risk under specific conditions.     

Reaching out: Access to and use of banking services across countries

This paper is a first attempt at measuring financial sector outreach and investigating its determinants. First, we present new indicators of banking sector outreach across 99 countries, constructed from aggregate data provided by bank regulators. Second, we show that our indicators closely predict harder-to-collect micro-level statistics of household and firm use of banking services, and are associated with measures of firm financing obstacles in the expected way. Finally, we explore the association between our outreach indicators and standard determinants of financial sector depth. We find many similarities but also some differences in the determinants of outreach and depth.     

The impact of the banking sector on economic structure and growth

In this paper, we study the impact of banking sector development on changes in economic structure and growth. We argue that banking sector development has differential effects on industrial sector development and agricultural sector development. We test whether economic structure and growth foster banking sector development. To test our hypotheses, we construct a panel sample of all countries in the world during 1960–2016. We find that banking sector development has a negative effect on agricultural sector development but exerts no effect on industrial sector development. The negative effect of banking sector development on agricultural sector development is only observed for countries with high degrees of banking sector development. Our results further show that agricultural sector development exerts a negative effect on banking sector development while industrial sector development has a positive effect on banking sector development.     

How strong are the linkages between real estate and other sectors in China?

International experience points to the critical role of stable property markets in maintaining financial stability. This paper investigates the real and financial linkages between real estate sector and other sectors. The real linkage based on input–output analysis shows that the linkages have strengthened. The financial linkages in terms of credit risk spillovers across sectors are studied by using DAG method and SVAR. We find that that credit risk in the real estate sector has large-scale spillover effects onto other sectors. Consequently, shocks to the property market could have much larger impact on the Chinese economy than suggested by headline figures.     

The effect on competition of banking sector consolidation following the financial crisis of 2008

Consolidation of the Spanish banking sector after the financial crisis of 2008 raises concerns about potential negative effects on competition. I use structural econometric methods to examine these anti-competitive concerns in the Spanish mortgage market. I estimate a mixed-logit model of mortgage demand and recover bank-level cost information with a strategic model of price competition. Counterfactual experiments reveal that the observed increase in concentration is associated only with small variations in mortgage rates and market shares, staying far from collusive levels. This moderate change in industry conduct implies a small direct effect of consolidation on bank exposures to mortgage risk.