Global network finance: Institutional innovation in the global financial market place

The global financial crisis that began in 2007 revealed a fundamental weakness in the global financial system: extensive financial interdependence of financial relations unmatched by a governance regime of similar reach. As multinational banks sought to fortify their capital base in the wake of the unfolding crisis, Sovereign Wealth Funds (SWFs) and the banks’ home governments have become mutual stakeholders in some of the largest financial intermediaries with global reach. From the multitude of individual transactions has emerged a network of equity ties that spans the globe. These ties bridge institutional practices and governance regimes that previously operated largely independently of each other. They have the potential of fostering the emergence of a new governance regime for the global financial market place that deviates from earlier prognoses that globalization entails convergence on a single governance model. Instead, the newly created ties that jointly add up to a global financial network enable institutionally and organizationally diverse players to contribute their own perspectives as joint stakeholders in selected financial intermediaries, and indirectly, in the global financial system. This is likely to have important implications for the behavior of these actors in the future and the emergence of new governance solutions for the global market place. The paper discusses two recent cases of collaborative re-capitalization events to illustrate how this regime is evolving in practice.     

Bank lending and interest on excess reserves: An empirical investigation

This paper econometrically tests for effects on bank lending of the Federal Reserve’s policy of paying interest on excess reserves (IOER). Following the 2008 financial crisis, US banks decreased their loan allocations and increased holdings of excess reserves. A model of bank asset allocation shows that when the rate of IOER is higher than other short-term rates, banks will switch from zero excess reserves to a regime with higher excess reserves and lower lending. Using a sample of panel data on US banks from 2000 through 2018, we find evidence of a switch to a positive excess reserve regime in the post-crisis period. Controlling for market interest rates, loan demand, and economic activity, we find that IOER accounts for the majority of the decline in bank lending after the financial crisis.     

Learning from Japan: The European Central Bank and the European Sovereign Debt Crisis

What shapes central banks’ learning from the policy experiments of their peers? Both economic ideas and organizational interests play important roles. Thus, New Keynesian ideas led central banks to interpret Japan's experience with quantitative easing (2001–2006) through the impact on risk spreads, although the Japanese central bank never intended such effects. In turn, scholars and policy-makers alike ignored one critical lesson: successful policy innovations depend on banks’ funding models. It is argued here that this was a crucial omission because the shift to market-based funding impairs the effectiveness of the traditional crisis toolkit. Central banks must intervene directly in asset markets of systemic importance for funding conditions, as the Bank of Japan did by buying government bonds. Hence, market-based finance engenders a trade-off between financial stability and institutional stability defined through central bank independence. During critical periods, central banks cannot preserve both. The ECB illustrates this trade-off well. Early in the crisis, it outsourced financial stability to a (largely) market-dependent banking system to protect its independence. With the introduction of Outright Monetary Transactions in September 2012, the Bank recognized that the market-based nature of European banking required outright purchases of sovereign bonds. This new instrument gave the ECB additional powers to shape national fiscal decisions in the name of an independence that no longer has theoretical justifications.     

Taming the City? Ideas,Structural Power and the Evolution of British Banking Policy Amidst the Great Financial Meltdown

We are increasingly learning more about the contingencies and independent variables that shape the structural power of business and financial interests. This paper contributes to this research by analysing factors that led to weakening in the structural power of financial interests in the City of London in the aftermath of the 2007/2008 crisis. We focus on under-researched mediators of structural power dynamics, especially the context of action and the agency and ideas of state leaders. Prior to the crisis, closed regulatory policy and a prevailing discourse premised upon the notion of market efficiency, helped to reinforce the structural power of the UK banking and financial sector. After the crisis heightened politicisation, more assertive state leadership, and especially ideational revision, has increasingly challenged the power of the City. We illustrate this through an examination of the Independent Commission on Banking's proposals in relation to the ‘ring fencing’ of investment and retail banks.     

提升国有四大商业银行竞争力的法律新思路

在市场开放的条件下,银行业的发展必定要面临很大的挑战和风险。对于正在完善改制的我国国有四大商业银行来说,则面临着更大的挑战。一方面,内部制度的不健全令其在世界银行业的范围内处于弱势地位;另一方面,肆虐全球的金融危机使其遇到了方向性选择,这主要是顾及过于开放的市场对金融安全的影响。唯有通过法律途径处理好市场开放与风险控制的关系,才能切实提高我国国有四大商业银行的国际竞争力。     

Evaluating sovereign risk spillovers on domestic banks during the European debt crisis

Using a Markov-switching model with time-varying probabilities, spillovers from sovereign to domestic bank CDS spreads during the European debt crisis for a set of 14 European countries and 30 European banks are investigated. Our model is able to capture how the increased sovereign risk observed between 2010 and 2013 throughout Europe has impacted i) the probability that banks fall into a crisis regime and ii) the probability that banks stay in the crisis regime. The latter state is characterized by a high volatility and large positive returns of CDS spreads. Different regime-dependent indicators have been computed to assess heterogeneity within the region. The evidence indicates that the intensification of sovereign risk observed during the European debt crisis has positively and significantly driven the regime shifts in volatility of the bank CDS spreads due to increased risk aversion. The results show that the increase in sovereign credit risk seems to have generated second-round effects for some banks that have experienced a deterioration in their funding conditions due to a rise in the domestic sovereign default risk. Overall, our results suggest that sovereign CDS spreads can be considered good forewarning indicators for predicting the evolution of bank CDS spreads. We also find that the effects differ depending on the country and the financial institution. This result suggests that banks are heterogeneously exposed to sovereign credit risk within the same country. One argument relates to the size of these financial institutions and the domestic exposure to sovereign debt.     

Currency crises and the real economy: The role of banks

This paper attempts to explain the divergent output effects of currency crises through a very simple and intuitive model that relates the effects of a devaluation not only to the financial fragility of banks, but also to the degree of financial market imperfection. The model shows that countries with higher degrees of financial market imperfection and/or a banking sector whose balance sheets are weak, in terms of having low net worth and high foreign currency exposure, are much more likely to suffer a contraction in the wake of a currency crisis.     

Are monetary policy shocks causal to bank health? Evidence from the euro area

Despite considerable efforts of the European Central Bank (ECB) to support bank intermediation after the 2008 financial crisis, the recovery of euro area banks remained incomplete. Although many studies indicate that central banks can influence the stock prices of firms through their policy actions and communication, a knowledge gap exists as to whether the ECB's monetary policy can influence bank health. Through a high-frequency identification approach, this study reveals that the causal effect of conventional monetary policy action and communication by the ECB on bank stock prices differed over time, whereas its influence on bank financing costs was robust. This study provides new evidence showing that information effects related to policy easing surprises in the aftermath of the 2008 financial crisis hampered the ECB efforts to improve bank health and that its Odyssean communication signals (related to forward-looking announcements of policy easing) supported bank health during this phase. Local projections suggest that the response of banks to monetary policy shocks displayed some persistence, where ECB policy surprises and communications that shifted up (down) the yield curve were normally positive (negative) for bank health. The findings solicit a new perspective when assessing the influence of the ECB's monetary policy measures on euro area banks.     

金融危机、货币政策与信贷供给*——基于公司层面银行信贷数据的经验研究

不同的银行特征会对金融危机和货币政策传导的银行信贷渠道产生异质性影响。本文运用2001-2015年公司层面银行信贷数据实证检验了我国货币政策传导的银行信贷渠道,随后进一步研究金融危机对不同特征银行信贷供给的影响差异。经验研究发现：我国货币政策银行信贷渠道主要通过非国有控股银行传导,并引起不同资产负债表特征银行信贷供给的异质性反应。银行规模越大、流动性越强、资本充足率越高,银行信贷供给对货币政策越不敏感。金融危机期间,银行信贷渠道的传导效率显著降低,高资本充足水平的银行和国有控股银行受金融危机的冲击较小,并且宽松的货币政策对国有控股银行信贷供给调控的效率更高。     

The opportunistic approach to monetary policy and financial market conditions

We test the concept of the opportunistic approach to monetary policy in South Africa post-2000 inflation targeting regime. The article contributes to the current debate on central banks having additional objectives over and above inflation and output by incorporating a measure of financial conditions in the modelling framework. Our findings support the two features of the opportunistic approach. First, we find that the models that include an intermediate target that reflects the recent history of inflation rather than simple inflation target improve the fit of the models. Second, the data supports the view that the South African Reserve Bank (SARB) behaves with some degree of nonresponsiveness when inflation is within the zone of discretion but react aggressively otherwise. Recursive estimates from our preferred model reveal that overall there has been a subdued reaction to inflation, output and financial conditions amidst the increased economic uncertainty of the 2007–2009 financial crisis.     

Too-Big-To-Fail: Why Megabanks Have Not Become Smaller Since the Global Financial Crisis?

ABSTRACT

More than ten years after the global financial crisis, what has happened to the ‘too-big-to-fail’ (TBTF) banks whose reckless behavior was among its preconditions, but which received public support and guarantees in the midst of that crisis? Insofar as this too-big-to-fail status helped create the crisis and then imposed costs on the rest of society, we would expect these banks to have shrunk. We investigate the evolution of 31 global-TBTF banks and find that their overall size has hardly recorded any substantial change. However, there is no sense of urgency in the flourishing post-crisis literature on TBTF banks about the need to contain their size; the prevalent view therein is that if properly regulated, the risks that arise from a financial system dominated by TBTF banks are manageable. This view rests on the same overly narrow theoretical underpinnings whose flaws were exposed in the crisis. We argue that too-big-to-fail banking is embedded in a set of self-reinforcing policies—consolidation, balance-sheet support through quantitative easing, favorable regulations, bank lobbying, and geo-economic and geo-political considerations—which explain why these banks have not shrunk and why they remain a threat to financial stability, well after the lessons of the crisis should have been learned.     

How financial intermediation impacts on financial stability?

The great financial crisis widened the role of financial intermediation in financial stability. This study develops a new financial intermediation variable, credit cash flow (CCF), which enables measurement of the net financial flow resulting from loan activity. An analysis provides evidence that CCF affects the capital buffer via credit gap behaviour, thus indicating the existence of a channel between the CCF and the capital buffer. Such a link offers the policy-maker the possibility to monitor the behaviour of financial intermediation carried out by banks, in order to avoid the outbreak of financial instability events.     

Central banks' voting records,the financial crisis and future monetary policy

We examine whether central banks' voting records help predict the future course of monetary policy in the Czech Republic, Hungary, Poland, Sweden and the United Kingdom, controlling for financial market expectations. Unlike previous research, we first examine the period of the global financial crisis, characterized by a high level of uncertainty, and second, examine the predictive power of voting records over longer time horizons, i.e., the next monetary policy meeting and beyond. We find that voting records predict the policy rate set at the next meeting in all central banks that are recognized as independent. In some central banks, voting records are found—before, but not during, the financial crisis—to be informative about monetary policy at even more distant time horizons.     

Information disclosure, banking development and knowledge-driven growth

In this study we develop a knowledge-driven growth model which explicitly models the banking sector as monopolistically competitive. The main mechanism through which financial intermediaries affect the real economy is through the evaluation and provision of liquidity to R&D projects. We distinguish two scenarios. In the regime with information disclosure, banks are able to use the stock of information obtained by the banking industry from evaluating R&D projects. This information externality brings about efficiency improvements, thereby leading to a positive entry of banks, more bank-funded research and in turn positive economic growth. By contrast, in the regime with no information disclosure, it is not profitable for new banks to enter the industry. This implies that no more potential R&D projects can be evaluated and hence financed, thus leading the economy to a zero-growth equilibrium.     

Performance and productivity in Islamic and conventional banks: Evidence from the global financial crisis

We assess the performance and productivity of Islamic and conventional banks using financial ratios, a two- and a four-component meta-frontier Malmquist productivity index (MPI). We focus on the relatively homogenous GCC region over the 2006–2012 period that covers the global financial crisis. We find that Islamic banks exhibit worse cost and profit performance but are on a par with regards to revenue performance compared to the conventional ones. The components of the meta-frontier MPI suggest that the technology of conventional banks improves markedly in years leading to the financial crisis and declines thereafter. Islamic banks show a similar but more muted pattern. By contrast, the pronounced within-Islamic bank group variation in technical efficiency and technology suggests that Islamic banks are quite heterogeneous as a group. Overall, the MPI analysis suggests that the two bank types are more aligned following the global financial crisis. Policy makers should be wary of the important variations within the Islamic banking industry when implementing bank regulations.     

后金融危机时代我国银行监管的博弈分析

2008年以来的全球金融危机暴露了美国等发达国家在金融监管上的不足,加强金融监管已成为国际社会的共识。在世界各国强有力的干预刺激下,全球经济开始缓慢复苏,新形势下加强银行监管势在必行。在我国,银行业在金融业中一直占主导地位,对商业银行进行合规性监管仍将是现实情况下我国银行监管的重要内容。本文针对我国银行监管现存的问题,建立监管的博弈模型,得出混合战略纳什均衡,并从完善监管的法律体系、规范商业银行信息披露制度、建立监管者的激励约束机制、加强监管的国内国际协调、完善国内银行资本监管制度等方面对我国现行银行监管制度提出了相应的政策建议。     

Beyond ‘Poverty Reduction through Good Governance’: The New Political Economy of Development in Africa

The new political economy of development, characterised by the rising powers' new resource finds in many poor countries and the financial crisis, has driven development ideas and practices towards a paradigm shift, moving it beyond the post-Washington Consensus which marked the high point of development's ‘Poverty Reduction through Good Governance’ agenda. This has important implications for the extent to which developing countries remain governed by the institutional and ideological imperatives of development. Optimists suggest that this could herald a new era of sovereignty that enables African countries to take fuller control of their governance and development priorities, including a shift towards a ‘southern consensus’ around structural transformation, whilst pessimists argue that the hegemony of orthodox development ideas has only been partially reordered and that new problems of sovereignty are now emerging. Insights from Uganda suggest that both of these scenarios are currently unfolding, leaving the outcomes uncertain and much to play for. What remains of the ‘good governance’ agenda has yet to adapt itself to this new politics of development, which requires the emergence of new forms of developmental state in Africa.     

Quantitative Easing Forever? Financialisation and the Institutional Legitimacy of the Federal Reserve’s Unconventional Monetary Policy

Scholars of financialisation have argued that the emergence of finance-led grow regimes requires new instruments for effective conduct of economic policy. In this scholarship, central banks have been seen as the most promising actors to utilise one of the most synergetic policies, the maintenance of high and stable prices of financial assets. Since the financial crisis of 2007–8, central banks of the developed world have adopted various unconventional monetary policy measures that serve this function. But will these unconventional measures become institutionally legitimate and institutionalised as conventional practice, as suggested necessary by scholars of financialisation? In this paper, we answer to this question by studying the institutional legitimation of the Federal Reserve’s Quantiative Easing (QE) programmes. We argue that the QE programmes have been legitimated successfully but with institutional legitimation strategies, which cause institutional pressures that question the potential of QE from becoming a regular policy instrument and practice.     

Regional bank efficiency and its effect on regional growth in “normal” and “bad” times

The financial crisis affected regions in Europe in a different magnitude. This is why we examine whether regions which incorporate banks with a higher intermediation quality grow faster in “normal” times and are more resilient in “bad” ones. For this purpose, we measure the intermediation quality of a bank by estimating its profit and cost efficiency while taking the changing banking environment after the financial crisis into account. Next, we aggregate the efficiencies of all banks within a NUTS 2 region to obtain a regional proxy for financial quality in twelve European countries. Our results show that relatively more profit efficient banks foster growth in their region. The link between financial quality and growth is valid in “normal” and in “bad” times. These results provide evidence to the importance of swiftly restoring bank profitability in euro area crisis countries through addressing high non-performing loans ratios and decisive actions on bank recapitalization.     

Did foreign banks stay committed to emerging Europe during recent financial crises?

Our objective is to investigate empirically the behavior of foreign banks with respect to real loan growth during periods of financial crisis for a set of countries in which foreign banks dominate the banking sectors due primarily to having taken over large existing former state-owned banks. The eight countries are among the most developed in emerging Europe, their banking sectors having been modernized by the middle of the last decade. We consider a data period that includes an initial credit boom (2005 – 2007) followed by the global financial crisis (2008 & 2009) and the onset of the Eurozone crisis (2010). Our two innovations with respect to the existing literature on banking during the financial crisis are to separate foreign banks into two categories, namely, subsidiaries of the Big 6 European multinational banks (MNBs) and all other foreign-controlled banks, and to take account of the impact of exchange rates during the period. Our results show that bank lending was impacted adversely by both crises but that the two types of foreign banks behaved differently. The Big 6 banks remained committed to the region in that their lending behavior was not different from that of domestic banks supporting the notion that these countries are treated as a “second home market” by these European MNBs. Contrariwise, the other foreign banks active in the region were involved in fueling the credit boom but then decreased their lending aggressively during the crisis periods. Our results also indicate that bank behavior in countries having flexible exchange rate regimes differs from that in those in (or effectively in) the Eurozone. Our results suggest that both innovations matter for studying bank behavior during crisis periods in the region and, by extension, to other small countries in which banking sectors are dominated by foreign financial institutions having different business models.