Bank capital and the macroeconomy: Policy considerations

We develop a macroeconomic model in which the balance sheet condition of financial institutions plays an important role in the determination of asset prices and economic activity. The financial intermediaries in our model are required to make investment commitments before a complete resolution of idiosyncratic funding risk that can be addressed only by costly refinancing, forcing them to behave in a risk-averse manner. The model shows that the balance sheet condition of intermediaries can drive asset values away from their fundamentals, causing aggregate investment and output to respond to shocks to intermediaries. We use this model to evaluate several public policies designed to address balance sheet problems at financial institutions. With regard to short-run policies, we find that capital injections conditioned upon voluntary recapitalization can be a more effective tool than asset purchases. With regard to long-run policies, we demonstrate that higher capital requirements can have sizable short-run effects on economic activity, and that a long transition period helps avoid undesirable side effects. Finally, we show that the marginal effects of policies can be larger during “crises” because of the nonlinear interactions between some financial frictions and policy actions.     

Verifying the state of financing constraints: Evidence from U.S. business credit contracts

Many policymakers are concerned that tight financing constraints for small businesses are stalling the recovery from the Great Recession. This paper empirically assesses two agency problems that induce such financing constraints—one resulting in a “firm balance sheet channel” and one resulting in a “bank balance sheet channel”. Evaluating specific models of these two agency problems against a comprehensive data set of U.S. small business credit contracts, I find strong support for the firm balance sheet channel but only weak support for the bank balance sheet channel. A complementary regression analysis confirms this result. Hence, policies seeking to improve firms’ balance sheets may be desirable to support small business lending in the recovery from the Great Recession.     

Lending attitude as a financial accelerator in a credit network economy

In existing literature, commercial banks are often considered mere financial intermediaries that facilitate the flow of credit in an imperfect credit market. However, as demonstrated in the history of financial instability, the behavior of financial institutions plays an important role. This paper examines how lenders’ attitudes affect macroeconomic performance. In our analysis, the economy is composed of multiple borrowers (firms) and one lender (bank). Each borrower is directly connected to the lender through its credit contract. At the same time, each borrower is indirectly connected to all the other borrowers within the credit network. Using this model, we execute computer simulations to examine the economic consequences of lending attitudes. The results of the simulations demonstrate that the bank’s lending attitude functions as a financial accelerator; that is, it significantly affects the dynamics of the economic system through the credit network. Consequently, the same level of exogenous shock generates completely different outcomes depending on the different lending attitudes. The results also show that there exists an optimal lending attitude that leads to high economic growth and a stable growth path.     

The impact of government intervention on the stabilization of domestic financial markets and on U.S. banks’ asset composition

The 2007–2009 financial crisis that evolved from various factors including the housing boom, aggressive lending activity, financial innovation, and increased access to money and capital markets prompted unprecedented U.S. government intervention in the financial sector. We examine changes in banks’ balance sheet composition associated with U.S. government intervention during the crisis. We find that the initial round of quantitative easing positively impacts bank liquidity across all bank samples. Our results show a positive impact of repurchase agreement market rates on bank liquidity for small and medium banks. We conclude that banks have become more liquid in the post-crisis period, especially the larger banks (large and money center banks). We show that real estate loan portfolio exposures have reverted to pre-crisis levels for money center banks and remained flat for all other bank samples.     

Bank Relationships and Private Firms’ Financial Reporting Quality

Private firms with relatively high (proprietary) costs of disclosure may benefit from a close relationship with a bank. Relationship lending is based on intertemporal contracting that assumes that the bank is able to acquire private information about the firm and, moreover, to keep this information private. For both reasons, we expect and find that private firms with fewer bank relationships exhibit lower levels of financial reporting quality. Controlling for many other factors, firms with a single bank relationship disclose their financial reports about 14 days later. The size of such firms’ financial reports is also smaller, containing approximately 8% fewer words than the median report. Firms with a single bank relationship also exhibit more earnings management, exceeding the median value of the three-year sum of absolute discretionary accruals by about 20%. The results are robust to different econometric specifications, including endogeneity concerns. They indicate that private firms choose to be opaque in the presence of fewer lending relationships.     

Targeted monetary policy and agriculture business loans

This study examines the effect of a Targeted Easing (TE) policy, an unconventional monetary policy tool initiated by the Chinese central bank to reduce reserve requirement ratios of agricultural financial institutions. Utilizing a longitudinal sample of Chinese agriculture companies and a matching sample of industrial firms between 2012 and 2017, we find that the TE policy successfully achieves its intended policy goal to boost lending to the agriculture sector. Results from our difference-in-differences estimations indicate that loan levels of agriculture firms increases significantly more than that of matching nonagricultural firms under TE relative to the non-TE period. We also document heterogeneous TE effects and find that agricultural firms with smaller agency costs, larger financing constraints, and larger loan intensity levels benefit significantly more from a TE policy than their counterparts. In addition, the TE policy effect is more salient during a contractionary period than in an expansionary period.     

Financial Pressure and Balance Sheet Adjustment by Firms*

This paper examines the financial policies and balance sheet adjustment of companies. Using a large panel of UK‐listed firms we consider how companies resolve pressures on their balance sheet, estimating models for dividends, new equity issuance and investment. The results indicate that companies resolve balance sheet pressures by each of these means. Financial policies, through dividends and new equity issuance, and real investment decisions, respond to the underlying level of debt and the borrowing cost of servicing that debt. Dividends are estimated to be slow to adjust in the short run.     

Using a dual system of reasoning in small businesses: Entrepreneurial decisions and subjective risk intelligence

This study aims at introducing subjective risk intelligence (SRI) in the context of small businesses to analyze how both rationality and intuition may influence the entrepreneurial decision-making process, particularly in affecting firms’ financial equilibrium.

SRI aggregates four dimensions: two positive attitudes (imaginative capability and problem-solving self-efficacy) and two detrimental ones (emotional stress vulnerability and negative attitude towards uncertainty). In particular, we argue that imaginative capability and emotional stress vulnerability refer to Kahneman’s System 1 (the intuitive), while problem-solving self-efficacy and negative attitude towards uncertainty appertain to System 2 (the rational).

We conducted an empirical investigation collecting data from an ad hoc survey administered to owners and managers of small businesses and their balance sheets over 2013–2017. After testing the proposed constructs’ reliability, we tested the influence that both Systems 1 and 2 have on SMEs’ financial structure through a pooled OLS regression estimator.

Results show that the intuitive and the rational components of risk intelligence affect entrepreneurs’ decision-making differently. The rational component seems to stimulate the entrepreneurial orientation to risk tolerance. The intuitive component limits the entrepreneurial propensity to take financial risks due to the desire for stability attached to this cognitive process. Accordingly, we highlight the importance of enhancing a balance between the two systems of thinking. Practical implications suggest that entrepreneurs with a dominant attitude towards problem-solving self-efficacy, or a positive attitude towards uncertainty, should invest in developing imaginative capabilities or emotional control, and vice versa.

     

Corporate governance and the insolvency risk of financial institutions

We investigate whether shareholder-friendliness of corporate governance mechanisms is related to the insolvency risk of financial institutions. Using a large sample of U.S. financial institutions over the period 2005–2010, we find that corporate governance is positively related to the insolvency risk of financial institutions as proxied by Merton’s distance to default measure and credit default swap (CDS) spread. We also find that “stronger” corporate governance increases insolvency risk relatively more for larger financial institutions and during the period of the financial crisis. Lastly, our results suggest that shareholder-friendliness of corporate governance mechanisms is viewed unfavorably in the bond market.     

Conventional Monetary Policy Transmission During Financial Crises: An Empirical Analysis

This paper studies the effects of a conventional monetary policy shock in the USA during times of high financial stress. The analysis is carried out by introducing a smooth transition factor model where the transition between states (‘normal’ and high financial stress) depends on a financial conditions index. Employing a quarterly dataset over the period 1970:Q1 to 2008:Q4 containing 108 US macroeconomic and financial time series, I find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output, consumption and investment than it has during ‘normal’ times. Differences in effects among the regimes seem to originate from nonlinearities in both components of the credit channel, i.e. the balance sheet channel and the bank‐lending channel. Copyright © 2016 John Wiley & Sons, Ltd.     

Financial Intermediaries,Credit Shocks and Business Cycles

We document the cyclical properties of aggregate balance sheet variables of the US commercial banks: (i) Bank credits and deposits are less volatile than output, while net worth and leverage ratio are several times more volatile, (ii) bank credits and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical. We then present a real business cycle model with a financial sector to investigate how the dynamics of macroeconomic aggregates and balance sheet variables of the US banks are influenced by empirically disciplined shocks to bank net worth. Both calibrated and estimated versions of the model show that these financial shocks are important not only for explaining the dynamics of financial flows but also for the dynamics of macroeconomic variables. We find that the recent deterioration in aggregate net worth of the US banking sector contributed significantly to the 2007–09 recession.     

Lasting lending relationships and technical efficiency. Evidence on European SMEs

Linking the theoretical predictions of the research on lending relationships with those of the literature on managerial incentives, we investigate whether the duration of credit relationships impacts on SMEs’ technical efficiency. Our hypothesis is that the balance between costs and benefits of enduring banking relationships might have heterogeneous effects on managers’ incentives depending on the level of firms’ indebtedness. Using a large sample of European SMEs, observed in the period 2001–2008, and adopting both parametric and non-parametric measures of efficiency, we find that the positive impact of longer lending relationships on efficiency decreases as indebtedness increases, suggesting that moral hazard problems may endanger firms’ technical efficiency.     

Are offshore firms less conservative in financial reporting? International evidence

Using a large sample of multinational firms operating in offshore financial centers (offshore firms) from 1998 to 2014, this study investigates the financial reporting implications of economic activities involving offshore financial centers (OFCs). We find that offshore firms have a greater tendency to report less conservatively than non‐offshore firms. Moreover, we find that financial reporting is less conservative for firms operating in OFCs with more pronounced OFC attributes than for those with less pronounced OFC attributes. Finally, we also find that firms with their headquarters registered in OFCs (type I offshore firms) tend to adopt less conservative accounting practices than those with subsidiaries operating in OFCs (type II offshore firms). Our findings provide useful insights into how a multinational firm's operation in OFCs is associated with financial reporting practices.     

The firm under uncertainty: real and financial decisions

This paper examines the interplay between the real and financial decisions of the competitive firm under output price uncertainty. The firm faces additional sources of uncertainty that are aggregated into a background risk. We show that the firm always chooses its optimal debt–equity ratio to minimize the weighted average cost of capital, irrespective of the risk attitude of the firm and the incidence of the underlying uncertainty. We further show that the firm’s optimal input mix depends on its optimal debt–equity ratio, thereby rendering the interdependence of the real and financial decisions of the firm. When the background risk is either additive or multiplicative, we provide reasonable restrictions on the firm’s preferences so as to ensure that the firm’s optimal output is adversely affected upon the introduction of the background risk.     

Financial crises and economic growth

This paper constructs a simple yet robust model of financial crises and economic growth where financial markets affect real economic activity. Financial markets increase real output by facilitating investment through the borrowing/lending of capital. However, the borrowing of capital is risky due to randomness in the firms’ production. Financial crises occur when output and liquid capital are insufficient to meet required loan payments and systemic defaults occur. In this model, a financial crisis caused by systemic defaults can shift the economy from an equilibrium with positive borrowing/lending to an equilibrium with no borrowing/lending. In this no-lending equilibrium, neither traditional fiscal or monetary policy tools are effective in increasing output. Fiscal and monetary policy can only increase the likelihood of the equilibrium evolving to a borrowing/lending equilibrium.     

Understanding the consequences of diversification on financial stability

In this paper, we study the consequences of diversification on financial stability and social welfare using an agent based model that couples the real economy and a financial system. We validate the model against its ability to reproduce several stylized facts reported in real economies. We find that the risk of an isolated bank failure (i.e. idiosyncratic risk) is decreasing with diversification. In contrast, the probability of joint failures (i.e. systemic risk) is increasing with diversification which results in more downturns in the real sector. Additionally, we find that the system displays a “robust yet fragile” behaviour particularly for low diversification. Moreover, we study the impact of introducing preferential attachment into the lending relationships between banks and firms. Finally, we show that a regulatory policy that promotes bank–firm credit transactions that reduce similarity between banks can improve financial stability whilst permitting diversification.

     

On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis

Using a large panel of mainly unquoted euro‐area firms over the period 2003–2011, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the euro area‐crisis (2010–2011), especially for firms in the periphery compared to their counterparts in non‐periphery European economies. When we introduce firm‐level heterogeneity, we show that financial pressure appears to be both statistically and quantitatively more important for bank‐dependent, small and privately held firms operating in periphery economies during the crisis.     

Understanding the accumulation of bank and thrift reserves during the U.S. financial crisis

The level of aggregate excess reserves held by U.S. depository institutions increased significantly at the peak of the 2007–2009 financial crisis. Although the amount of aggregate reserves is determined almost entirely by the policy initiatives of the central bank that act on the asset side of its balance sheet, the motivations of individual banks in accumulating reserves differ and respond to the impact of changes in the economic environment on individual institutions. We undertake a systematic analysis of this massive accumulation of excess reserves using bank-level data for more than 7000 commercial banks and almost 1000 savings institutions during the U.S. financial crisis. We propose a testable stochastic model of reserves determination when interest is paid on reserves, which we estimate using bank-level data and censored regression methods. We find evidence primarily of a precautionary motive for reserves accumulation with some notable heterogeneity in the response of reserves accumulation to external and internal factors of the largest banks compared with smaller banks. We combine propensity score matching and a difference-in-differences approach to determine whether the beneficiaries of the Capital Purchase Program of the Troubled Asset Relief Program accumulated less cash, including reserves, than non-beneficiaries. Contrary to anecdotal evidence, we find that banks that participated in the program accumulated less cash, including reserves, than nonparticipants in the initial quarters after the capital injection.     

审计师行业专长与或有事项信息披露——基于客户重要性的调节效应研究

以企业年报中表内列报的预计负债金额与表外附注中披露的或有事项频数为考察对象，研究审计师行业专长对企业或有事项信息披露的影响以及客户重要性对上述影响的调节效应。在控制自选择等内生性影响后发现，审计师行业专长越高，被其审计的公司表内列报的预计负债金额越大、表外附注中披露的或有事项频数越高；同时，客户越重要，审计师行业专长对企业或有事项信息披露的促进作用越强。按客户重要性分组的检验结果表明，审计师行业专长对表外或有事项信息披露的促进作用仅存在于中型和大型客户中。     

Financial Constraints on German Firms after the Crisis: Evidence from Threshold Panel Estimation

This article studies the existence and magnitude of financial investment constraints in Germany between 2006 and 2012 with a special emphasis on small and medium‐sized firms. The core contention is that the sensitivity of the investment rate to the cash flow rate is a function of a firm's financial position contributing to its access to external finance. The application of a nonlinear panel threshold model reveals that the marginal effect of the cash flow rate on the investment rate is almost twice as strong for ‘high debt’ firms compared to ‘low debt’ firms. This result holds for six out of seven balance sheet threshold variables. For a single specification, the results reveal a non‐monotonic relationship between the cash flow rate and investment rate. Firm size, however, does not explain differences in the cash‐flow‐investment nexus.