Shadow banking,insurance and financial sector stability

Motivated by the recent financial crisis and the near collapse of the insurance giant American International Group (AIG), we empirically study the link between the insurance sector, the size of the shadow system and financial stability across countries. Using the Z-score as a measure of financial stability and the ratio of insurance assets to GDP for 26 countries during the period 1998–2011, this paper shows that: (i) the insurance sector is negatively and significantly related to financial stability, and that (ii) using the shadow banking system as a channel, the insurance sector is detrimental to financial stability for countries with a high level of shadow banking assets.     

Auditor choice and bank risk taking

We investigate the importance of auditor choice on bank risk-taking in a cross-country setting for 5498 banks from 116 emerging and developed countries. Using the Z-score as our main proxy for bank risk, we report evidence that hiring a Big Four auditing firm reduces bank-risk even after controlling for bank and country variables. The reported evidence is valid for banks outside the United States and is robust to concerns relating to endogeneity and alternative banking risk measures. The results are economically meaningful. All else constant, the Z-score of a bank audited by a Big Four firm is 10.4% higher than a similar bank with a non-BIG Four auditor. Moreover, consistent with the view that Big Four auditors serve a corporate governance mechanism in emerging markets, we find that Big Four auditors maintain the ability to curb bank risk in countries characterized by weak institutions. Finally, our results suggest that while audit quality is associated with bank safety, its impact is reduced in countries that require audit-oversight.     

Common ownership and bank stability: Evidence from the U.S. banking industry

We empirically test competing theoretical arguments about the impact of common ownership on bank stability: the common ownership hypothesis, where banks decrease risk-taking by internalizing risk externalities on commonly held banks, and the diversification hypothesis, where banks increase risk-taking influenced by common owners who hold diversified portfolios and are less risk averse. Using data from the U.S. banking industry from 1991 to 2016, we find that banks with more common ownership linkages undertake lower risk, as predicted by the common ownership hypothesis. This relation is statistically significant and economically sizable, which is consistent across alternative measures of common ownership and bank risk and robust to potential endogeneity. Our study adds the financial stability perspective to the ongoing discussions on common ownership and antitrust regulations.     

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。     

资产价格波动与银行系统稳定

有关金融危机的理论研究表明,资产价格波动与银行脆弱性之间存在很强的相关性。资产价格波动主要通过信贷风险渠道、市场风险渠道、经纪业务收入渠道、为附属机构注资的风险渠道及“第二回合”渠道等传导渠道影响到银行系统的稳定。发生在斯堪的纳维亚和日本的银行危机证明,资产价格剧烈波动确实会造成严重的银行问题,所以为维持银行系统的稳定,监管当局应该密切关注资产价格可能出现的剧烈下跌对银行部门可能产生的风险并采取应对方法。     

The market’s view on the probability of banking sector failure: cross-country comparisons

Hall and Miles (1990) suggest an approach of estimating default probabilities of banks using stock market information, and in this paper we apply an aggregated version of their approach to banking sectors around the world in both developed and emerging economies. We study the market’s assessment of the probability of systemic banking crises world wide over the last decade, including the Asian crisis 1997–1998. In addition, we investigate whether there is a relationship between the failure probability and institutional features of the actual banking sector. The quality of governance and the degree of law and order in a country is found to be significantly negatively related to the market based failure probabilities as is an explicit deposit insurance during periods of crisis.     

The concentration–stability controversy in banking: New evidence from the EU-25

This study explores whether the concentration–stability relation is affected by the level of analysis; i.e., bank-level versus country-level stability. The diverging results in the literature suggest that we may indeed expect differences between the two levels. With the z-score as the measure of financial stability, our theoretical analysis confirms that we may find such differences. Yet our empirical analysis for the EU-25 during the 1998–2014 period finds no economically significant effect of concentration on either the bank-level or the country-level z-score. The finding that concentration hardly affects stability at both levels of analysis is an indication of robustness in the empirical concentration–stability relation not previously established in the literature. This finding further suggests that neither supervisory restructuring, nor normal market-driven mergers, are likely to be substantially harmful to financial stability.     

Financial markets development,business cycles,and bank risk in South America

In this paper, we examine whether banking crises or business cycles affect the influence of financial markets development on bank risk in a sample of 37 publicly listed commercial banks in seven South American countries over a 22-year period between 1991 and 2012. Banking crises in this region offer a natural setting in which the impact of financial markets development on bank risk is examined. We find that financial markets development improves banks’ capitalization ratio and reduces their exposure to non-traditional banking activities, suggesting that financial markets development on average reduces bank risk. In addition, banking crises and business cycles appear to moderate the impact of financial markets development on bank risk. In the aftermath of banking crises, banks appear to concentrate more on their core traditional banking activities.     

How do European banks portray the effect of policy interest rates and prudential behavior on profitability?

European policy interest rates have been low and trending downwards for almost a decade now and expectations do not seem to change. Hence, in such an environment, this paper investigates whether and how banks’ prudential behavior has influenced profitability across the European banking sector from 1999 to 2015. Using a dynamic panel model, we clearly find that banks’ financial resilience, proxied by the asymmetric Z-score and two financial ratios, affects profits: more cautious banks record higher profits. This result is confirmed by the two overall measures of profitability, namely the Return on Average Assets and Equity, but not for the Net Interest Margins. Furthermore, our analysis suggests that monetary policy's main instrument adversely affects bank income. Nevertheless, when policy interest rates are particularly low, the effect on Net Interest Margin is still positive, while the effect on the overall profitability becomes negative. These results induce that European banks succeed in increasing their profitability despite a compression of their net interest income.     

How resilient is the German banking system to macroeconomic shocks?

Macroeconomic stress testing studies often rely on rather short sample periods due to the limited availability of banking data. They may fail to appropriately account for the cyclicality in the interaction between the banking system and macroeconomic developments. In this paper, we use a newly constructed data set on German banks’ income and loss statements over the past 39 years to model the interaction between the banking sector and the macroeconomy. Our VAR analysis indicates that the level of stress in the banking sector is strongly affected by monetary policy shocks. The results rationalize the active behavior of central banks observed during periods of financial market crises.     

Development and efficiency of the banking sector in a transitional economy: Hungarian experience

The paper analyzes the experiences and developments of Hungarian banking sector during the transitional process from a centralized economy to a market-oriented system. The paper identifies that early reorganization initiatives, flexible approaches to privatization, and liberal policies towards foreign banks’ involvement with the domestic institutions helped to build a relatively stable and increasingly efficient banking system. Foreign banks and banks with higher foreign bank ownership involvement were associated with lower inefficiency.     

Consolidation in banking and financial stability in Europe: Empirical evidence

Using aggregate balance sheet data from banks across the EU-25 over the period from 1997 to 2005 we provide empirical evidence that national banking market concentration has a negative impact on European banks’ financial soundness as measured by the Z-score technique while controlling for macroeconomic, bank-specific, regulatory, and institutional factors. Furthermore, our analysis reveals that Eastern European banking markets exhibiting a lower level of competitive pressure, fewer diversification opportunities and a higher fraction of government-owned banks are more prone to financial fragility whereas capital regulations have supported financial stability across the entire European Union.     

Contagion and banking crisis – International evidence for 2007–2009

Policy makers aim to avoid banking crises, and although they can to some extent control domestic conditions, internationally transmitted crises are difficult to tackle. This paper identifies international contagion in banking during the 2007–2009 crisis for 54 economies. We identify three channels of contagion – systematic, idiosyncratic and volatility – and find evidence for these in 45 countries. Banking crises are overwhelmingly associated with the presence of both systematic and idiosyncratic contagion. The results reveal that crisis shocks transmitted from a foreign jurisdiction via idiosyncratic contagion increase the likelihood of a systemic crisis in the domestic banking system by almost 37 percent, whereas increased exposure via systematic contagion does not necessarily destabilize the domestic banking system. Thus while policy makers and regulatory authorities are rightly concerned with the systematic transmission of banking crises, reducing the potential for idiosyncratic contagion can importantly reduce the consequences for the domestic economy.     

Larger crises cost more: Impact of banking sector instability on output growth

We propose a method for calculating the macroeconomic costs of banking crises that controls for the downward impact of recessions on banking activity. This method uses an event-study approach and a multiple-equation identification and estimation technique. In contrast to earlier research, we estimate the cost of crises based on the size of banking crises. The extent of a crisis is measured using banking sector aggregates. The results, based on our method and data from over 100 banking crises, suggest that it is the size of the crisis that matters for economic growth. Lower credit and money growth during crises cause GDP growth to decline.     

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.     

Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets

In this paper we examine the impact of foreign bank penetration on the competitive structure of domestic banking sectors in host emerging economies. We focus our analysis on Asia and Latin America during the period 1997-2008. Using bank-level panel data to identify foreign banks and to estimate measures of banking competition, we are able to provide robust empirical evidence that an increase in foreign bank penetration enhances competition in these host countries’ banking sectors. We find that this positive foreign bank penetration and banking competition link is associated with a spillover effect from foreign banks to their domestic counterparts. This spillover effect becomes stronger when more efficient and less risky foreign banks enter into less concentrated host country markets. We also find that the spillover effect is greater when foreign banks enter in the form of ‘de novo penetration’ than through mergers or acquisitions of domestic banks (‘M&A penetration’).     

How does banking sector globalization affect banking crisis?

A key feature of financial services liberalization is increasing banking-sector globalization.Using different measures to capture this phenomenon, the present study examines its impact on banking crisis for a dataset of 138 nations spanning the period 1998–2013, while controlling for other banking-industry specific, macroeconomic and external factors. Employing different econometric models and several robustness checks, I find greater banking sector globalization to reduce the occurrence of banking crisis. Moreover, greater bank asset concentration, diversification, credit flows, real interest rates, inflation rates, M2-to-foreign exchange reserves and nominal exchange rate depreciations significantly increase the likelihood of banking crisis, while higher bank profits, real GDP growth, economic development and economic freedom lower such chances. The results are further examined for nations across different levels of economic development and with different degrees of foreign bank penetration. The findings underscore that foreign bank presence provides greater financial stability in the banking industry of host nations.     

Bank globalization and efficiency: Host- and home-country effects

Analyzing 126 countries for 1995–2013, we investigate the link between bank globalization and efficiency from the perspective of both host and home countries. We find strong and consistent evidence that foreign bank entry is associated with lower efficiency in host countries (host-country effect), while foreign expansion in the banking sector improves the efficiency of banks at home (home-country effect). We further observe that the effect of bank globalization is dependent on the regulatory and institutional regimes of the respective host (home) countries. Specifically, stringent activity restrictions, tight supervision, fewer limitations on foreign banks, lower market entry barriers, and less government interference all help mitigate the efficiency loss from foreign bank entry. Less supervision power, multiple supervisors, more restrictions on foreign banks, and a competitive banking market are all conducive to the higher efficiency gain of incumbent domestic banks from the respective country’s outward investments in the banking sector. Moreover, we find that the adverse impact on efficiency from foreign bank presence is less pronounced for less risky, more profitable, and larger banks, while banks that are more efficient, more profitable, taking on more risk, and/or smaller gain more efficiency from their country’s foreign expansion.     

境外战略投资者对中东欧8国银行产业转型与发展的影响

中东欧8国银行产业转型最重要的步骤之一是引进外资银行,形成了外资银行在该地区银行市场占有巨大市场份额的基本格局。从目前的情况来看,外资银行对中东欧8国银行产业的影响是正面的积极的,既改善了中东欧8国的宏观经济金融环境,也带动了本土银行的发展。     

Foreign Bank Behavior during Financial Crises

This paper studies whether lending by foreign banks is affected by financial crises. We pair a bank‐level data set of foreign ownership with information on banking crises and examine whether the credit supply of majority foreign‐owned banks that underwent home‐country crises differ systematically from those of other foreign banks. In contrast to the literature, our broad global coverage allows us to exploit variations between foreign banks; this enables us to identify an average treatment effect directly attributable to crises. Our baseline results show that banks exposed to home‐country crises between 2007–08 exhibit changes in lending patterns that are lower by between 13% and 42% than their noncrisis counterparts. This finding is robust to potential alternative explanations, and also holds, though less strongly, for the 1997/98 Asian crisis.