Financial fragility,uninsured deposits,and the cost of debt

Using annual data from 1995 to 2009, I analyze the impact of banks’ financial fragility on the costs of U.S. corporate bank loans. Diamond and Rajan (2001) hypothesize that financially fragile banks are able to raise funds at a lower cost and competition among banks result in some of these benefits being passed on to borrowers. My results provide broad support for this hypothesis, as I find that a one standard deviation increase in a bank's financial fragility lowers the cost of this bank's corporate loans by 7%. Since some types of regulation, such as deposit insurance, can decrease banks’ financial fragility, this paper also contributes to the debate on the benefits and costs of bank regulation which can be helpful for policy-making.     

A SYSTEMS APPROACH TO BANK PRUDENTIAL MANAGEMENT AND SUPERVISION: THE UTILIZATION OF FEEDFORWARD CONTROL

This paper explores the operational characteristics of a new systems approach for monitoring the prudential strength, or safety, of modern commercial banks. It exploits the principle of feedforward control through the simulated contingency analysis of a bank's planned financial and associated management positions. This approach will be shown to have operational potential for both individual bank managements and the supervisory authorities who monitor the prudential soundness of all banks. Most of the research to date in this field has been concerned with assessing the adequacy of a bank's capital funds, its capital adequacy position. The primary function of bank capital is to act as a kind of internal insurance fund in order to protect a bank against uncertainties.     

农业保险公司与政府部门之间的动态博弈分析——基于前景理论视角

运用前景理论构建政府部门监管农业保险市场保险公司经营行为的前景值矩阵,建立财政补贴条件下保险公司经营行为影响模型,推理减少保险公司不规范经营行为的条件和途径,并基于现实案例分析成因。结果表明：保险公司的规范经营成本、不规范经营收益和政府部门的处罚力度等因素均显著影响其经营行为选择;由于风险规避系数不同,保险公司对农业保险经营风险的态度存在差别,政府补贴不能完全有效减少其不规范经营行为,甚至产生负面作用;现阶段政府部门的监管强度不够、处罚力度不足是农业保险公司不规范经营行为产生的主要原因。政府可通过增加监管强度、加大处罚力度对保险公司实施监管,保险公司可通过健全基层服务体系、运用先进科技手段提升农业保险供给质效。     

Productivity changes in pre-crisis Western European banks: Does scale effect really matter?

Insofar as the completion of the Single Market for Financial Services, it has presented new challenges for European Banking industries. In this study, we use a recently developed generalized metafrontier Malmquist productivity index (gMMPI) to provide insights on productivity growth. We extend the gMMPI to broaden the index's capacity by decomposing various sources of productivity change in the metafrontier context. The sample contains commercial banks from 12 Western European countries prior to the recent financial crisis. A key advantage of our extension is that it introduces the role of scale effects. The empirical results show that an average bank's productivity growth arises mainly from technical changes and scale effects. Moreover, smaller and larger banks grow faster than medium ones. In addition, conservative banks tend to grow faster. These findings suggest that a more competitive and integrated financial market induced by financial deregulation is indeed able to improve banks’ productivity.     

A Cost System Approach to the Stochastic Directional Technology Distance Function with Undesirable Outputs: The Case of us Banks in 2001–2010

This paper offers a methodology to address the endogeneity of inputs in the directional technology distance function (DTDF)‐based formulation of banking technology which explicitly accommodates the presence of undesirable nonperforming loans—an inherent characteristic of the bank's production due to its exposure to credit risk. Specifically, we model nonperforming loans as an undesirable output in the bank's production process. Since the stochastic DTDF describing banking technology is likely to suffer from the endogeneity of inputs, we propose addressing this problem by considering a system consisting of the DTDF and the first‐order conditions from the bank's cost minimization problem. The first‐order conditions also allow us to identify the ‘cost‐optimal’ directional vector for the banking DTDF, thus eliminating the uncertainty associated with an ad hoc choice of the direction. We apply our cost system approach to the data on large US commercial banks for the 2001–2010 period, which we estimate via Bayesian Markov chain Monte Carlo methods subject to theoretical regularity conditions. We document dramatic distortions in banks' efficiency, productivity growth and scale elasticity estimates when the endogeneity of inputs is assumed away and/or the DTDF is fitted in an arbitrary direction. Copyright © 2015 John Wiley & Sons, Ltd.     

Default estimation,correlated defaults,and expert information

Capital allocation decisions are made on the basis of an assessment of creditworthiness. Default is a rare event for most segments of a bank's portfolio and data information can be minimal. Inference about default rates is essential for efficient capital allocation, for risk management and for compliance with the requirements of the Basel II rules on capital standards for banks. Expert information is crucial in inference about defaults. A Bayesian approach is proposed and illustrated using prior distributions assessed from industry experts. A maximum entropy approach is used to represent expert information. The binomial model, most common in applications, is extended to allow correlated defaults yet remain consistent with Basel II. The application shows that probabilistic information can be elicited from experts and econometric methods can be useful even when data information is sparse. Copyright © 2009 John Wiley & Sons, Ltd.     

Macroeconomic uncertainty and bank lending: The case of Ukraine

This study investigates the link between bank lending behavior and country-level instability. Our dynamic model of bank's profit maximization predicts a non-monotonic relationship between bank lending and macroeconomic uncertainty. We test this proposition using a panel of Ukrainian banks over the 2003Q2–2008Q2 period. The estimates indicate that banks decrease their lending ratio in times of substantial economic volatility, which could be explained by higher risk aversion of bank managers. Additionally, small and least profitable banks are less likely to be affected by changes in the macroeconomic environment compared to their large and most profitable peers. This outcome is robust with respect to the different measurements of macroeconomic uncertainty.     

Asymmetric information,foreign entry and multi-period credit competition in banking industry

In a credit market, a low-cost foreign entrant is likely less informed than a domestic bank with information endowments. We present a steady-state model in an infinite-period framework, and analyze how the informational asymmetry affects the lending equilibrium and the foreign banks’ entry modes. Firstly, we show that the domestic bank's initial informational advantage from its relatively large market share at the beginning of competition is not enough to hinder the entry of a low-cost foreign bank. In addition, the foreign bank is more likely to be the winner in the steady state of an infinite-period game than that in a static game. Secondly, the comparative static analysis show that the likelihood of foreign bank becoming the winning party increases with borrower quality, project payoff and the growth rate of potential new borrowers. Thirdly, when the foreign bank wins game in the steady state, its market share is decreasing in project payoff and the growth rate of new borrowers, while changes non-monotonically with borrower quality. Finally, we extend our model to characterize the domestic bank's sustainable advantage in being relatively familiar with new market, and provide valuable explanations for the observed entry modes of foreign banks in China.     

Indirect Convertibility,Equity‐Based Banking and Financial Stability

Banking reform proposals put forward in the wake of the recent financial crisis maintain that equity‐based banking would be stable and would prevent bank runs. This article argues that complementing this form of banking with an indirect convertibility monetary standard and thereby dispensing with base money would enhance financial stability further. Banks would not hold a distinctive asset (base money) that would be called upon by customers at short notice, thereby removing the possibility of bank runs. No discrepancy in value between the two sides of a bank's balance sheet would arise as its assets (securitised loans) would be marked to market. Unlike other recent contributions, the intermediation model outlined here is not ‘limited purpose’ in nature as banks would not be restricted in the form of lending activity they can pursue. Common sources of banking and financial instability – liquidity risk, solvency risk, moral hazard – would be absent.     

Deposit structure,market discipline,and ownership type: Evidence from Indonesia

In this paper, we extend the literature on the discipline imposed by depositors on banks by disentangling the impact of macro risk and micro risk. We also take advantage of a unique dataset in which depositors are split into different categories of deposit size in different types of banks (bank ownership structure). We consider the Banking Stability Index, which is used by the Indonesia Deposit Insurance Corporation as a dashboard to monitor banking stability at the country level as well as individual stability measures such as the Z-score. Using monthly data from 2005 to 2013, our findings show that both macro and micro levels of risk are considered by depositors to discipline banks. Large uninsured depositors are more effective at disciplining banks, highlighting the credibility of the insurance system that is in place. Bank ownership type also matters in explaining the difference in market discipline by depositors.     

How do changes in monetary policy affect bank lending? An analysis of Austrian bank data

Using a panel of Austrian bank data we show that the lending decisions of the smallest banks are more sensitive to interest rate changes, and that for all banks, sensitivity changes over time. We propose to estimate the groups of banks that display similar lending reactions by means of a group indicator which, after estimation, indicates each bank's classification. Additionally, we estimate a state indicator that indicates the periods during which the lending reaction differs from what we normally observe. Bayesian methods are used for estimation; a sensitivity analysis and a forecast evaluation confirm our model choice. Copyright © 2006 John Wiley & Sons, Ltd.     

Bank systemic risk and CEO overconfidence

This study examines the relationship between CEO overconfidence and banking systemic risk. We employ the CoVaR (Conditional Value-at-Risk) approach to measure a bank's contribution to systemic risk and compute its MES (Marginal Expected Shortfall) and SRISK (Systemic Risk index) to measure the exposure to banking systemic risk. We use a stock options based measure for CEO overconfidence and explore how managerial overconfidence could be associated with banking systemic risk. Using data for U.S. banks from 1995–2014, we find evidence that banks with overconfident CEOs have a higher contribution and exposure to systemic risk than banks with non-overconfident CEOs. We also show that the impact of CEO overconfidence contributed significantly more to systemic risk during the financial crisis of 2008–2009.     

THE SIZE OF HOUSING SUBSIDIES IN CHINA*

Inexhaustible, strong demand for housing, which is generated from the current low rents and the work-unit-distribution housing system, has caused permanent housing shortages in China's urban sector. It is also one of the main sources of China's cost-push inflation. The transition from public to private saving, which is included in current housing reform, is the only way to solve the housing problems facing the country. Calculation of the size of housing subsidies is the very foundation of any housing reform program. Based on my estimates, the annual housing subsidy per woker expanded 8.6 limes during the period from 1978 to 1988, increasing at an anual rate of 24.1%. Total housing subsidies expanded 12.4 times, rising at an annual rate of 28.6%. Relative to GNP, the housing subsidies grew from 1.3% to 4.2% during the period. The rapid expansion of housing subsidies has several significant policy implications for China's economy. These include the need for reappraising real worker income identifying the enlarged portion of revenue in kind, and recalculating housing consumption.     

Measuring Credit Risk of a Bank's Corporate Loan Portfolio Using Advanced Internal Ratings Base Approach

Abstract

The use of technical and advanced approaches in the measurement of credit risk of banks' portfolios has nowadays become a very hot issue. The most recent technical report issued by the Basel Committee in May 2003 has concentrated heavily on the measurement of credit risk using either foundation or advanced Internal Ratings Base (IRB) approaches. This empirical research study attempts to measure credit risk of a bank's corporate loan portfolio, including firms from 10 different Turkish sectors. The monthly observations of the total amount of corporate loans and the total amount of corporate loans at default across various sectors are downloaded from the web page of Central Bank of Turkey (CBT) in a period of 1999-2002. This period covers 47 monthly observations since CBT has captured sectoral corporate loans beginning of 1999. Therefore, the observed sectoral default rates are needed to be simulated to obtain a nicely shaped distribution. Monte Carlo simulation is applied for 1,000 times. Based on the simulated default rates, the expected sectoral default rates are computed. Next, a credit quality rating scale is fitted into sectoral default rates distributions. Finally, the sectoral weights in the whole loan portfolio are multiplied by the expected sectoral default rates matrix, considering cross-sectoral correlations to get the total amount of the bank's credit risk and capital requirement. It is assumed that sectoral monthly default rates are a good representative of the default risk of a sample bank's corporate loan portfolio since no publicly available data on any particular bank's corporate loan portfolio composition exists. Nevertheless, this research may be a good application for measuring the credit risk of banks' corporate loan portfolios using advanced IRB approach.     

Deposit insurance and banking system risk: Some empirical evidence

This paper examines the effect of federal deposit insurance on the riskiness of the commercial banking system. It is generally acknowledged that a system affixed rate deposit insurance creates incentives for banks to increase their risk-taking activities. Yet very little empirical evidence exists confirming or refuting this supposition. The coefficient of variation of bank profits and the standard deviation of profits are used as measures of bank risk. How these measures of bank risk are affected by deposit insurance coverage, and other variables thought to affect bank risk, is examined. Deposit insurance is found to have a statistically significant positive effect on bank risk. This result provides empirical support for the FDIC Improvement Act requirement of risk related deposit insurance premiums starting January 1994.     

特许权价值、最优关闭策略和存款保险定价

随着存款保险制度的推出以及金融机构退出机制的完善,国家声誉将逐渐退出银行无形资本。在激励相容的金融监管趋势下,特许权价值等市场约束力量会显著影响到商业银行的风险承担。在此逻辑基础上,以我国16家上市商业银行为研究对象,一方面探讨特许权价值影响下不同产权结构的商业银行的最优救助机制,另一方面通过最优救助临界指标,利用银行重组模型,推导合理的存款保险风险差别费率。     

Are China's subsidies for electric vehicles effective?

China has implemented high subsidy schemes to promote the adoption of electric vehicles. This study constructs an industrial organization model to theoretically analyze and numerically simulate the subsidy efficacy of battery electric vehicles in China. We find that subsidies for battery manufacturers and those for electric vehicle manufacturers are equivalent. Fixed subsidies are better for social welfare maximization than linear subsidies are. Simulation based on Chinese empirical data shows that China's subsidies for electric vehicles are effective but not optimal. It could be a better option overall to enable the vertical integration of the supply chain.     

The Glass–Steagall Act in historical perspective

Implementation of Volcker's Rule requires a historical perspective on the original Glass–Steagall Act of 1933 that separated commercial banking from investment banks in the United States. Like the Dodd-Frank legislation, the Banking Act of 1933 was passed before full analysis of the financial crisis was possible. The intended consequences of Glass–Steagall made Federal deposit insurance feasible by limiting entry of new banks while preserving unit banking. The unintended consequences, however, cut off access by small- and medium-size enterprises to external finance and also reduced the capital base for investment banks. Despite these harmful effects, the American economy did recover eventually.     

International evidence on the value of deposit insurance

The goal of this paper is to improve our understanding of the costs and benefits of explicit deposit insurance. To this end, we compare the opportunity-cost value of deposit insurance services for a large sample of banks drawn from countries with or without explicit deposit insurance. After correcting for certain bank- and country-specific factors, we find that the existence of explicit deposit insurance raises the opportunity-cost value of deposit insurance, but that the presence of a sound legal system with proper enforcement of rules reduces the adverse effects of explicit deposit insurance on the opportunity-cost value of deposit insurance services. Our findings suggest that moral hazards and other incentive problems created by existing governmental deposit insurance schemes differ in magnitude between different types of banks and among different countries, and that explicit deposit insurance should not be introduced in countries with weak institutional environments.     

An Examination of Differences Between Organizational Legitimacy and Organizational Reputation*

abstract Organizational legitimacy and organizational reputation have similar antecedents, social construction processes and consequences. Nonetheless, an improved understanding of relationships between legitimacy and reputation requires that differences between the two be specified and clarified. Our examination of past research indicates that legitimacy emphasizes the social acceptance resulting from adherence to social norms and expectations whereas reputation emphasizes comparisons among organizations. We empirically examine two antecedents of the financial, regulatory, and public dimensions of legitimacy and reputation in a population of US commercial banks. We find that isomorphism improves legitimacy, but its effects on reputation depend on the bank's reputation. Moreover, higher financial performance increases reputation, but does not increase the legitimacy of high performing banks.