Reprint of: Stopping contagion with bailouts: Micro-evidence from Pennsylvania bank networks during the panic of 1884

Using a newly constructed historical dataset on the Pennsylvania state banking system, detailing the amounts of “due-froms” on a debtor bank-by-debtor bank basis, we investigate the effects of the Panic of 1884 and subsequent private sector-orchestrated bailout of systemically important banks (SIBs) on the broader banking sector. We find evidence that Pennsylvania banks with larger direct interbank exposures to New York City changed the composition of their asset holdings, shifting from loans to more liquid assets and reducing their New York City correspondent deposits in the near-term. Over the long-term though, only the lower correspondent deposits effect persisted. Our findings show that the banking turmoil in New York City impacted more exposed interior banks, but that bailouts of SIBs by the New York Clearing House likely short-circuited a full-scale banking panic.     

The real effects of bank distress: Evidence from bank bailouts in Germany

How does bank distress impact their customers' probability of default and trade credit availability? We address this question by looking at a unique sample of German firms from 2000 to 2011. We follow their firm-bank relationships through times of distress and crisis, featuring the different transmission of bank distress shocks into already weakened firm balance sheets. We find that a distressed bank bailout, which is subject to restructuring and deleveraging conditions, leads to a bank-induced increase of firms' probabilities of default. Moreover, bailouts tend to reduce trade credit availability and ultimately firms' sales. We further find that the direction and magnitude of the effects depends on firm quality and the relationship orientation of banks.     

Government finances and bank bailouts: Evidence from European stock markets

Using a sample of European banks and a series of events affecting governments' finances, we conduct an event study to examine whether there is a relationship between governments' fiscal difficulties and banks' stock returns. We find a significant reaction of banks' stocks to news concerning governments' finances. Banks' stock returns fall in response to a deterioration of governments' financial situation. We find little difference in the reaction between large and small banks. The evidence points towards all banks being equally likely to be bailed out. Our data are consistent with a policy during the Eurozone sovereign-debt crisis in which “no bank is too small to save”.     

Do bank bailouts affect the provision of trade credit?

We document that borrowers of banks that received capital support under TARP/CPP significantly increased their quarterly provision of trade credit (accounts receivable) during the crisis by 5.2%, while borrowers of other banks did not. The effect is strongest in 2008Q4, and larger for pre-crisis riskier, growth-oriented and bank-dependent firms and for firms that borrow from pre-crisis smaller, less profitable and better capitalized CPP banks. Our difference-in-differences analysis shows that the effect is caused by CPP and not by heterogeneity between firms, banks and time periods. Our study provides novel evidence that suggests a beneficial multiplier effect of bank bailouts.     

Financial contagion and the role of the central bank

We investigate the role of a central bank (CB) in preventing and avoiding financial contagion. The CB, by imposing reserve requirements on the banking system, trades off the cost of reducing the resources available for long-term investment with the benefit of raising liquidity to face an adverse shock that could cause contagious crises. We argue that contagion is not due to the structure of the interbank deposit market, but to the impossibility to sign contracts contingent on unforeseen contingencies. As long as incomplete contracts are present, the CB may have a useful role in curbing contagion. Moreover, the CB allows the banking system to reach first-best allocation in all the states of the world when the notion of incentive-efficiency is considered. If the analysis is restricted to constrained-efficiency, the CB still avoids contagion without, however, reaching first-best consumption allocation. The model provides a rationale for reserve requirements without the presence of fiat money or asymmetric information.     

Additional evidence on the information-based contagion effects of bank failures

Recent theoretical models addressed the question of the nature of bank runs and what triggers them. Two competing hypotheses emerged: pure panic and information-based contagion. This study provides additional evidence consistent with the latter hypothesis. Three observable bank characteristics are examined as proxy measures for the interim private information used by rational depositors in assessing the riskiness of a bank's long-lived assets that may trigger bank runs. The three factors are (1) the distance of the solvent banks' headquarters from the headquarters of each failed bank; (2) the size of the solvent banks; and (3) the capital ratio as a proxy for their solvency. The analysis is conducted in the context of the five large bank failures that occurred in the Southwest region of the US during the mid-1980s. Weekly abnormal returns of 33 Southwestern BHCs, in ten critical failure-related event dates are regressed on the three observable bank characteristics. Our findings suggest that distance and capital adequacy are negatively related to the magnitude of the contagion effect, whereas size is positively related.     

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.     

Diversification of geographic risk in retail bank networks: evidence from bank expansion after the Riegle‐Neal Act

The 1994 Riegle‐Neal Act (RN) removed restrictions on branch‐network expansion for banks in the United States. An important motivation was to facilitate geographic risk diversification (GRD). Using a factor model to measure banks' geographic risk, we show that RN expanded GRD possibilities in small states, but only some large banks took advantage. Using our measure of geographic risk and an empirical model of branch‐network choice, we identify preferences toward GRD separately from other factors possibly limiting network expansion. Counterfactuals show that risk negatively affected bank value but was counterbalanced by economies of density/scale, reallocation/merging costs, and local market power concerns.     

Thawing frozen capital markets and backdoor bailouts: Evidence from the Fed's liquidity programs

During the subprime crisis, the Federal Reserve introduced several emergency liquidity programs as supplements to the discount window (DW): TAF, PDCF, and TSLF. Using data on loans to large commercial banks and primary dealers, we find that the programs were used by relatively few institutions and thus provided limited relief to banks that relied on short-term debt markets. Although usage increased after Lehman's bankruptcy, most commercial banks avoided the DW and TAF. We also find that the programs were more often used by failed European banks than by healthy US banks, likely because these loans are expensive relative to private market funds. Our results also show that usage of PDCF and TSLF programs, while higher, was more often used by primary dealers in weaker financial position.     

Financial contagion intensity during the COVID-19 outbreak: A copula approach

The sudden and rapid spread of the novel coronavirus (COVID-19) has had a severe impact on financial markets and economic activities all over the world. The purpose of this paper is to investigate the existence and intensity of financial contagion during the COVID-19 outbreak. We use daily series of stock indexes of 10 Asian countries (Taiwan, Hong Kong, Singapore, India, Indonesia, Malaysia, South Korea, Vietnam, Australia and China) and 4 American countries (the United-States, Brazil, Mexico, and Argentina) over the period starting from January 1st, 2014 to June 30th, 2021. Based on a copula approach, the results show that all studied markets are affected by the COVID-19 outbreak and the presence of financial contagion for all American and Asian countries. The results also show that contagion is more intense for American countries than Asian ones. These findings have practical implications, especially for investors, risk managers, and policy makers. The latter should continue to provide liquidity to the international market during this pandemic.     

Reprint of: Thawing frozen capital markets and backdoor bailouts: Evidence from the Fed's liquidity programs

During the subprime crisis, the Federal Reserve introduced several emergency liquidity programs as supplements to the discount window (DW): TAF, PDCF, and TSLF. Using data on loans to large commercial banks and primary dealers, we find that the programs were used by relatively few institutions and thus provided limited relief to banks that relied on short-term debt markets. Although usage increased after Lehman's bankruptcy, most commercial banks avoided the DW and TAF. We also find that the programs were more often used by failed European banks than by healthy US banks, likely because these loans are expensive relative to private market funds. Our results also show that usage of PDCF and TSLF programs, while higher, was more often used by primary dealers in weaker financial position.     

Bank bailouts and corporate insider trading during the financial crisis of 2007–2009

Jagolinzer et al. (The information content of insider trades around government intervention during the financial crisis. Working paper, 2014) examine insider trading at banks that were bailed out by the U.S. taxpayers. They provide evidence that insiders of bailed-out banks profitably purchased their banks’ shares over a 9 month period after the Troubled Assets Relief Program (TARP) was announced in October 2008. They find that the purchases were profitable for up to 12 months after the purchases. However, Liu et al. (J Bank Finance 37:5048–5061, 2013) find that shareholder gains at the bailed out banks occurred only after the banks paid back the TARP funds, which in most cases occurred after 2010. In this paper we extend Jagolinzer et al.’s (2014) analysis to financial institutions that did not receive TARP funding as well as to non-financial firms. We find that insiders of the non-TARP financial and the non-financial firms traded their shares profitably after the TARP program was announced. Insider share purchases at these firms were highly profitable for up to 12 months after the purchases. However, insider purchases at the bailed-out banks were slightly profitable only for a month after the purchases, after which the shares that were bought declined in value. Our results for the TARP banks do not corroborate Jagolinzer et al.’s (2014) results, but are consistent with the evidence in Liu et al. (2013) and several other papers that examine the wealth effects of TARP program announcements and fund repayments.

     

Global contagion of market sentiment during the US subprime crisis

This paper investigates how global market sentiment propagates among the markets and how the interdependency through the propagation changes during the course of the US subprime crisis. We adopt a bivariate generalized autoregressive conditional heteroskedasticity (GARCH) model, and use a sample of eight global markets: Japan, Korea, Taiwan, Belgium, Germany, Netherlands, UK, and the Eurozone in our investigation. Our results identify that: (1) a long-run equilibrium relationship existed between market sentiment in the US and other major global markets during the subprime crisis period; (2) a global contagion of market sentiment occurred from the US market on September 15, 2008 to Japan, Korea, Belgium, Germany, Netherlands, and the Eurozone; and (3) the major global markets are all interrelated.     

Market discipline during crisis: Evidence from bank depositors in transition countries

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in a worse financial condition than their subsidiaries. This situation created a unique opportunity to study new aspects of market discipline exercised by non-financial depositors. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were more strongly influenced by negative press rumors concerning parent companies than by fundamentals. The impact of rumors was especially perceptible when rumors turned out ex post to be founded. Additionally, we document that public aid announcements were primarily interpreted by depositors as confirmation of a parent company’s financial distress. Our results indicate that depositors react rationally to sources of information other than financial statements; this discovery has policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies.     

Determinants of bank efficiency during unstable macroeconomic environment: Empirical evidence from Malaysia

The present study investigates for the first time the efficiency of Malaysian banking sector around the Asian financial crisis 1997. The efficiency estimates of individual banks are evaluated by using the Data Envelopment Analysis (DEA) approach. To examine the robustness of the estimated efficiency scores under various alternatives and to differentiate how efficiency scores vary with changes in inputs and outputs, the present study focuses on three major approaches viz., intermediation approach, value added approach, and operating approach. The analysis further links the variation in calculated efficiencies to a set of explanatory variables, i.e. bank size, profitability, and ownership. The empirical findings clearly bring forth the high degree of inefficiency in the Malaysian banking sector, particularly a year after the East Asian crisis. The results suggest that the decline in technical efficiency is more abrupt under the intermediation approach relative to the value added approach and operating approach. The regression results focusing on bank efficiency and other bank specific traits suggest that efficiency is negatively related to expense preference behavior and economic conditions, while bank efficiency is positively related to loans intensity.     

Pandemic-driven financial contagion and investor behavior: Evidence from the COVID-19

This paper studies the pandemic-driven financial contagion during the COVID-19 period and the impact of investor behavior on it by constructing three types of direct behavior measurements based on Google search volumes. More specifically, using a sample of 26 major stock markets around the world during the COVID-19 pandemic, we construct a non-linear financial contagion network via a dynamic mixture copula-EVT (extreme value theory) model to quantitatively detect and measure the complex nature of pandemic-driven financial contagion. Furthermore, through constructing direct investor behavior measurements including investor attention, sentiment, and fear, we find investor behavior plays an important role in explaining pandemic-driven financial contagion. We also find that the impacts of investor behavior on the pandemic-driven financial contagion are heterogeneous under several different settings, including market conditions, market development levels, regional subsets, and contagion directions.     

央行干预效应之日本证据:1991-2004

本文利用日本央行的外汇实际干预数据对1991-2004年央行干预日元/美元汇率的效应进行了分析。实证结果表明,买入干预的绝对数量对汇率水平影响显著,当干预为日美央行联合买入时,干预对汇率水平的影响更为明显,而单边卖出干预和央行联合卖出干预对汇率水平均不产生显著性影响。同时,日本央行参与入市干预这一举措本身会导致汇率波动的下降,但当干预数量较大时,日本央行的干预将会增大汇率的条件方差。     

Measuring common cyclical features during financial turmoil: Evidence of interdependence not contagion

This paper develops a test of contagion in financial markets by considering a measure of co-movement based on the notion of common cycles to detect short-run co-movements between a set of time series. We apply our methodology to the international effects of the 1994 Mexican peso crisis and the 1997 Asian crisis. Our results can be interpreted as evidence of a high level of market co-movement during all states of the world and, therefore, question the hypothesis of shift-contagion in the transmission of financial shocks during the 1997 Asian crisis, and to a lesser extent, the 1994 Mexican crisis.     

Foreign bank entry,deregulation and bank efficiency: Lessons from the Australian experience

This study considers the impact of foreign bank entry on banking efficiency in Australia during the post-deregulation period 1988–2001. Using Data Envelopment Analysis, Malmquist Indices and stochastic frontier analysis, we find foreign banks more efficient than domestic banks, which however did not result in superior profits. Major Australian banks have used size as a barrier to entry to new entrants. Furthermore, bank efficiency has increased post-deregulation and the competition resulting from diversity in bank types was important to prompt efficiency improvements. Finally, the recession of the early 1990s resulted in a distinct shift in the process of efficiency changes.     

Anticipating bailouts: The incentive-conflict model and the collapse of the Ohio deposit guarantee fund

The collapse of the Ohio Deposit Guarantee Fund in March 1985 provides a laboratory for examining the financial market's belief in the incentive-conflict model proposed by Kane (1989). Research in this area has yet to examine the stock returns of federally insured institutions during that period in the context of this model. Thus, it has not addressed the question of whether financial market participants recognize the implications of the model; that is, whether they anticipate the bailouts it implies. This paper fills that void.We find that on average, stocks of firms insured by the poorly capitalized FSLIC do reasonably well during the 41-day event window centered on the ODGF's Bank Holiday, while stocks of firms insured by the relatively well-capitalized FDIC do not. More important, differences in abnormal returns of FDIC and FSLIC firms are consistent with a reaffirmation of the incentive-conflict model.