The impact of loan prepayment risk and deposit withdrawal risk on the optimal intermediation margin

Numerous studies have analyzed how a bank's intermediation margin varies with respect to such factors as credit quality, funding risk, bank capital, deposit insurance and other factors. However, these studies ignore the potential that loans tend to prepay if interest rates decline and deposits tend to be withdrawn if interest rates rise. Taking this very fundamental fact into account, we derive optimal loan rates and deposit rates when the bank is subject to loan prepayments and deposit withdrawals. Among other things, we find that greater volatility of interest rates tends to increase the margin. The strength of the correlation between the level of interest rates and the propensity to prepay loans (withdraw deposits) also plays an interesting role.     

Youth,adolescence, and maturity of banks: Credit availability to small business in an era of banking consolidation

This paper addresses the relationship between the aging process at new and relatively young banks and the tendency of banks to make loans to small businesses. Defining small business loans as C&I loans that are under $1 million in size, we analyze a sample of banks that had assets of less than $500 million in assets for the years 1993–1996 and that were 25 years of age or younger. We find, as have earlier studies, that banks' proclivities for small business lending are negatively related to their age and to their size. We proceed much farther, however, by introducing a number of additional explanatory variables, including the start-up year of the bank. We find that small business lending is negatively related to its being part of a MBHC. Also, small business lending is positively related to higher concentration rates in urban areas but is negatively related to higher concentration in rural areas. Despite the inclusion of these additional variables and a number of alternative specifications, the negative effects of a bank's age on its small business lending persist.     

Banking and commerce: A liquidity approach

This paper looks at the advantages and disadvantages of mixing banking and commerce, using the “liquidity” approach to financial intermediation. Bringing a nonfinancial firm into a banking conglomerate may be advantageous because it makes it easier for the bank to dispose of assets seized in a loan default. The conglomerate's internal market increases the liquidity of such assets and improves the bank's ability to perform financial intermediation. More generally, owning a nonfinancial firm may act either as a substitute or a complement to commercial lending. In some cases, a bank will voluntarily refrain from making loans, choosing to become a non-bank bank in an unregulated environment.     

Bank-level stability factors and consumer confidence – A comparative study of Islamic and conventional banks’ product mix

This study examines the behaviour of key bank-level stability factors of liquidity, capital, risk-taking and consumer confidence in Islamic and conventional banks that operate in the same market. Using fixed effect for a sample of 194 banks of Gulf Cooperation Countries between 2000 and 2007, we found that liquidity is not determined by the bank's product mix but rather attributed to systematic factors. However, non-performing assets (representing loans to sub-prime borrowers) have a positive and significant relationship with liquidity, implying that during the crisis Islamic banks tend to take stringent risk strategies compared to conventional banks. Furthermore, Islamic banks generally tend to provide higher consumer confidence levels as they were more capitalized than conventional banks, although conventional banks had carried higher averages of liquidity compared to Islamic banks. Consumer confidence levels or depositors’ discipline as proxied by deposits and customer funding over liabilities generally appear to be higher in Islamic banks than conventional banks.     

Monitoring and bank loan pricing

In this paper, we examine the influence of contract costs on the pricing of bank loans. We find that the loan spread depends on a bank's screening and monitoring incentives, which varies across differentially regulated classes of banks. This leads to significant price disparities in the loan market. In particular, the US branches of Japanese banks participate in syndicated lending to US firms that charge significantly higher spreads compared to syndicated loans to US firms without Japanese participation. This pricing disparity is primarily due to regulatory differences. We also find that as specialized intermediaries, banks price loans based primarily on their own monitoring.     

Collateralization,leverage, and stressed expected loss

We describe a general equilibrium model with a banking system in which the deposit bank collects deposits from households and the merchant bank provides funds to firms. The merchant bank borrows collateralized short-term funds from the deposit bank. In an economic downturn, as the value of collateral decreases, the merchant bank must sell assets on short notice, reinforcing the crisis, and defaults if its cash buffer is insufficient. The deposit bank suffers from losses because of the depreciated assets. If the value of the deposit bank's assets is insufficient to cover deposits, it also defaults. Deposits are insured by the government, with a premium paid by the deposit bank equal to its expected loss on the deposits. We define the bank's capital shortfall in the crisis as the expected loss on deposits under stress. We calibrate the model on the U.S. economy and show how this measure of stressed expected loss behaves for different calibrations of the model. A 40% decline of the securities market would induce a loss of 12.5% in the ex-ante value of deposits.     

AGENT BANK BEHAVIOR IN BANK LOAN SYNDICATIONS

Using Shared National Credit (SNC) Program data from 1995 to 2000, we extend previous empirical work on bank loan syndications. First, we examine recent trends in the volume and examiner‐based credit quality of loans syndicated through the banking system. Second, we estimate a panel regression model to explain changes in an agent bank's retained share of a syndicated loan in terms of information asymmetries, loan credit quality, capital constraints, and loan age and maturity. We find that these variables are significant determinants of the proportion of a SNC loan retained by an agent bank for its portfolio over time.     

BANKING RELATIONSHIPS AND THE EFFECT OF MONITORING ON LOAN PRICING

In a sample of bank loans to small firms we find a positive relation between the bank's monitoring effort and the loan's interest rate. We also observe an inverse relation between the closeness of banking relationships and interest rates. Further, we see that banks less frequently monitor firms with whom they have closer relationships. We conclude that banking relationships are valuable because firms can significantly reduce their costs of capital by establishing and maintaining close ties to a particular bank. As firms successfully complete loan transactions with banks, banks monitor them less frequently and, ultimately, charge them lower interest rates.     

Intraboard heterogeneity and the role of bank-dispatched directors in Japanese firms: An empirical study

To discuss the role of bank-dispatched directors in the governance of Japanese firms, it has to be noted that the board is heterogeneous and only senior directors, including presidents and managing directors, are likely involved in major management decisions. With a panel of about 1150 firms in 1990–98, we find that, when bank loans constitute a significant portion of the firm's assets, the low industry-adjusted profitability increases the probability that a new (or additional) director is dispatched from the bank at a senior level but not at a junior level. This dispatch improves the firm's performance provided it does not merely replace the predecessor.     

A model of liquidity hoarding and term premia in inter-bank markets

Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank loans, reflected in one-month and three-month LIBOR. We explain such stress by modeling leveraged banks' precautionary demand for liquidity. Asset shocks impair a bank's ability to roll over debt because of agency problems associated with high leverage. In turn, banks hoard liquidity and decrease term lending as their rollover risk increases over the term of the loan. High levels of short-term leverage and illiquidity of assets lead to low volumes and high rates for term borrowing. In extremis, inter-bank markets can completely freeze.     

The flight home effect: Evidence from the syndicated loan market during financial crises

This paper shows that the collapse of the global market for syndicated loans during financial crises can in part be explained by a flight home effect whereby lenders rebalance their loan portfolios in favor of domestic borrowers. The home bias of lenders' loan origination increases by approximately 20% if the bank's home country experiences a banking crisis. This flight home effect is distinct from flight to quality because borrowers of different quality are equally affected. The results indicate that the home bias in capital allocation tends to increase when adverse economic shocks reduce the wealth of international investors.     

Environmental reputation and bank liquidity: Evidence from climate transition

This study empirically investigates how a bank's nonfinancial signals of environmental reputation affect its deposits and credit provision in US counties with severe climate transition risks. We find that banks with higher reputational risks associated with environmental issues tend to experience declining deposits in counties exposed to severe climate change risks. Banks with a poor environmental reputation also reduce mortgage origination in such counties and diminish liquidity creation if they have high deposit shares in counties sensitive to climate transition. This study suggests that a bank's reputation regarding environmental, social and governance practices is an important underlying cause of bank liquidity in areas sensitive to climate change.     

Information reusability,competition and bank asset quality

This paper explains the recent decline m bank asset quality using the notion of information reusability. Banks are viewed as information processors; they exist because of their advantage in extracting the surplus associated with the reusability of borrower-specific information. It is shown that a bank's incentive to screen loan applicants, and hence maintain the quality of its assets, depends on the surplus this screening can produce, which in turn depends on information reusability. Two recent changes in banks' operating environment are increased competitition and greater temporal volatility in borrower credit risks. The former has directly reduced banks' informational surplus while the latter has impaired information reusability. Hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets. It is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality.     

Bank CEO careers after bailouts: The effects of management turnover on bank risk

We study whether bank bailouts affect CEO turnover and its subsequent impact on bank risk. Exploiting the Troubled Asset Relief Program (TARP) of 2008, we find that TARP funds temporarily decreased the likelihood of bank CEO turnover during the crisis (2008–2010) but significantly increased CEO changes afterwards. Our results show that replacing TARP CEOs reduced individual bank's risk as well as the bank's contributions to the systemic risk. Finally, we find that TARP CEO turnover was mainly driven by a decrease in the bank's political capital. Overall we provide evidence that bank bailouts have important implications for banks’ risk-taking and systemic risk, insofar as bailouts affect bank CEO turnover.     

Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations

We investigate whether analyst behavior influenced banks' likelihood of winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings in 1993–2002. We control for the strength of the issuer's investment banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank's decision to provide analyst coverage. Although analyst behavior was influenced by economic incentives, we find no evidence that aggressive analyst behavior increased their bank's probability of winning an underwriting mandate. The main determinant of the lead‐bank choice is the strength of prior underwriting and lending relationships.     

Relationship Banking and Loan Syndicate Structure: The Role of Private Equity Sponsors

Using a sample of syndicated loans to private equity (PE)‐backed initial public offering companies, we examine how a third‐party bank relationship influences the syndicate structure of a loan. We find that a stronger relationship between the lead bank and the borrower's PE firm enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE‐bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank's relationship with a large equity holder of the borrower facilitates information production in lending.     

‘Too systemically important to fail’ in banking – Evidence from bank mergers and acquisitions

In this paper, we examine the systemic risk implications of banking institutions that are considered ‘Too-systemically-important-to-fail’ (TSITF). We exploit a sample of bank mergers and acquisitions (M&As) in nine EU economies between 1997 and 2007 to capture safety net subsidy effects and evaluate their ramifications for systemic risk. We find that safety net benefits derived from M&A activity have a significantly positive association with rescue probability, suggesting moral hazard in banking systems. We, however, find no evidence that gaining safety net subsidies leads to TSITF bank's increased interdependency over peer banks.     

银行设站培养博士后：为名还是为利？

设立博士后工作站或创新实践基地成为越来越多银行的战略选择,动机从“逐 名”向“逐利”演化,银行借此整合各方资源、利用博士后站的宣告效应、发挥博士后人才的 鲶鱼效应和研究创新能力、以及博士后流动制度的期权优势等,最终提升管理能力、研究能力 和创新能力,从而降本增效。利用2007至2015年的银行财务数据实证分析,也发现银行设立博 士后工作站或创新实践基地招收博士后显著提高了其净资产收益率、总资产收益率和净利率, 显著降低了管理成本。因此,有条件和需求的大中型银行应积极行动起来设站招收博士后,这 很大可能是名利双收的决策。     

Corporate Taxes and Securitization

Most banks pay corporate income taxes, but securitization vehicles do not. Our model shows that, when a bank faces strong loan demand but limited deposit market power, this tax asymmetry creates an incentive to sell loans despite less‐efficient screening and monitoring of sold loans. Moreover, loan‐selling increases as a bank's corporate income tax rate and capital requirement rise. Our empirical tests show that U.S. commercial banks sell more of their mortgages when they operate in states that impose higher corporate income taxes. A policy implication is that tax‐induced loan‐selling will rise if banks’ required equity capital increases.     

Bad Debts and the Cleaning of Banks' Balance Sheets: An Application to Transition Economies

This paper develops a framework for analyzing tradeoffs between policies for cleaning banks' balance sheets of bad debt when asymmetric information exists between banks and regulators regarding the amount of bad debt. The framework consists of a two-tier hierarchy composed of a regulator, banks, and firms. Hidden information and moral hazard are present at each tier of the hierarchy. The analysis identifies two types of effects of the regulator's policy choice: a direct effect on a bank's willingness to reveal its bad loans versus hiding them via loan rollovers, and an indirect effect on firm behavior as a function of the bank's response. The framework is applied to analyze tradeoffs between three policies: a laissez-faire policy, transfer of debt to an asset management company, and cancellation of debt inherited from a previous regime. Journal of Economic Literature Classification Numbers: G21; G28; G30; P34.