Interdependent bank runs under a collapsing fixed exchange rate regime

This paper provides a framework for simultaneous multiple bank runs in a country experiencing a currency crisis. The correlation of bank runs increases as the proportion of debts from foreign creditors (indexed to the dollar) to domestic creditors (indexed to the domestic currency) increases. Moreover, when the share of dollar debt is sufficiently high, this interlinkage is perfect; that is, runs occur in all banks or not at all. Consequently, a situation exists where even a solvent bank cannot borrow in the interbank market. These findings imply that as the domestic banking sector becomes increasingly dependent on dollar debt, there is a heightened requirement for dollar reserves and a lender-of-last-resort facility.     

Comparison of Bank Profitability in China and the USA

This paper examines and compares the profitability of banks in the USA and China. The USA has the largest market‐based banking system and the financial system of China is still bank‐based. Our analysis indicates that in terms of profitability, banks in China outperformed those in the USA during our study period (2008–2014). Real estate loans had an adverse effect on US bank profitability during the financial crisis and no effect after the crisis but consistently improved the profitability of Chinese banks. Interest margins have no effect on US bank profitability but a consistently positive effect on Chinese banks, confirming that China is a traditional bank‐based economy. Interbank loans have a positive and significant effect on Chinese bank profitability, while interbank domestic loans have a negative effect on US bank profitability. Finally, size had a positive effect on US banks after the financial crisis period, confirming the scale economies of large US banks, but a negative effect on Chinese banks, indicating diseconomies of scale.     

How the German crisis of 1931 swept across Europe: a comparative view from Stockholm†

According to conventional wisdom, the fall of the Swedish currency in September 1931 was caused by the sterling crisis. This article shows that the road towards devaluation began earlier and that financial linkages with Germany proved to be more important than Sweden's economic and monetary relations with Great Britain. It all started in late 1929 when the Swedish financier Ivar Kreuger gave a loan to the German government in exchange for the match monopoly, thus tying his business ventures to Germany's solvency. In addition, a part of this loan was financed by large US dollar credits from the two largest Swedish banks that, in turn, accumulated a sizeable foreign short‐term deficit. When in June 1931 the German fiscal crisis began to escalate, international investors ceased to consider Sweden a safe haven because they knew about the linkages between the German government, Kreuger, and the Swedish banking system. This downgrading, in combination with the foreign short‐term deficit of the banking sector, proved lethal for the reserve position of the Swedish central bank, once the international liquidity crisis in mid‐July 1931 erupted. The sterling crisis only put the final nail in the coffin.     

Internal versus external convertibility and emerging-market crises: lessons from Argentine history

Argentina’s money and banking system was hit hard by the Great Depression. Banks were awash with bad assets when gold convertibility was suspended in December 1929. We argue for an explanation of the crisis that focuses on the inside-outside money relationship in a system of fractional-reserve banking and gold-standard rules with a tension between internal and external convertibility. After financial fragility appeared in the 1914-1927 suspension, resumption in 1928 was probably unsustainable due to the problems of the financial system and a dynamic model illustrates the point well. When the state bank became insolvent, the currency board started bailing out the system using high-powered money. Thus, came about the demise of the currency board and the creation of a central bank in 1935. As one of its first substantive actions, the central bank engineered a bailout of the banking system at a massive social cost. The parallels with recent developing-country crises are remarkable and the implications for the institutional design of monetary and banking systems are considered.     

Adjustment Mechanisms in a Currency Area

Both the euro-area and the United States suffered an initially quite similar housing and financial shock in 2007/8, with several states in both regions being particularly badly affected. Yet there was never any question that the worst hit US states would need a special bail-out or leave the dollar area, whereas such concerns have worsened in the euro-area. We focus on three badly affected states, Arizona, Spain and Latvia, to examine the working of relative adjustment mechanisms within the currency region. We concentrate on four such mechanisms, relative wage adjustment, migration, net fiscal flows and bank flows. Only in Latvia was there any relative wage adjustment. Intra-EU migration has increased, but is more costly for those involved in the EU (than in the USA). Net federal financing helped Arizona and Latvia in the crisis, but not Spain. The locally focussed structure of banking amplified the crisis in Spain, whereas the role of out-of-state banks eased adjustment in Arizona and Latvia. The latter reinforces the case for an EU banking union.     

全球外汇储备、金融控制与我国的金融安全

在金融全球化时代,美国通过金融控制主宰着世界经济。美国凭借美元“中心货币”地位而攫取的国际铸币税成为弥补其经常项目逆差的稳定来源,这是全球经济不平衡的根源;作为世界头号外汇储备大国,我国面临资产价格泡沫膨胀和外汇储备稳定性下降这两大金融安全问题;美元在全球外汇储备中的比重下降将直接导致美国国际铸币税的减少,致使经常项目逆差逐步丧失稳定的弥补途径,使其容易陷入金融危机,导致后布雷顿森林体系的崩溃;我国应通过美元储备的替代来减少国际铸币税剥削,同时推进人民币的国际化以分享国际铸币税收益。     

Twin Banking and Currency Crises and Monetary Policy

Currency crises are found to be strongly associated with banking crises. This paper constructs a twin banking and currency crisis model by introducing the banking sector into the currency crisis model and examining the case in which the exchange rate risk is located in the banking system. The model shows that an unanticipated shock caused by the shift of investors’ expectations and/or a negative productivity shock can trigger a twin banking and currency crisis. To achieve both financial stability and economic stability, the central bank uses multiple monetary policy instruments. In contrast to the conventional policy recommendation in response to a currency crisis, i.e., interest rate hike, we find that when the exchange rate risk is located in the banking sector, the monetary policy option to prevent a twin crisis is to lower the policy interest rate and the reserve requirement ratio and raise the interest rate on reserves. Our results show that the location of the exchange rate risk matters for the choice of an appropriate monetary policy response during a crisis.     

Competition in Turkish Banking: Impacts of Restructuring and the Global Financial Crisis

This paper investigates the evolution of competition in the Turkish banking industry by taking into account the transformation in the sector in the aftermath of the country's financial crisis of 2000 to 2001 and the global financial crisis. The results demonstrate that the level of competition in the system did not increase despite the restructuring that was undertaken and the increased foreign bank participation. In addition, the level of competition in the sector deteriorated during the global crisis. There is also some evidence that the market power of banks with different ownership characteristics varied and did not converge over time.     

Déjà Vu: The Effect of Executives and Directors with Prior Banking Crisis Experience on Bank Outcomes around the Global Financial Crisis

We investigate the effect of executives and directors with prior banking crisis experience on bank outcomes around the global financial crisis (GFC). Executives and directors with previous experience leading banks through a bank crisis may have been uniquely able to understand the risks, recognize the warnings signs early, and thus respond more effectively to the GFC. Controlling for other executive, director, and bank‐level characteristics, we examine whether bank performance, risk taking, and accounting quality in the period immediately before and during the GFC are affected by having executives or directors who previously served as bank executives or directors during the 1980s/1990s banking crisis (80s/90s crisis). Overall, we find that banks led by these crisis‐experienced executives and directors exhibit stronger performance, lower risk taking, and higher accounting quality in the period around the GFC. These effects are strongest among bank leaders for whom the 80s/90s crisis was most salient. Results are robust to propensity‐matched samples and other analyses performed to rule out alternative explanations. Our results suggest these individuals were able to learn from prior crisis experience.     

Causes of the financial crisis and the need of monetary cooperation in East Asia

The Main causes of the East Asian financial crisis in 1997–98 can be divided into domestic and foreign ones. The domestic cause stems from structural and liquidity problems, with growing share of non‐performing loans in the financial sector, posing as the most visible manifestation of such problems. On the other side, there is the foreign cause, the sudden fall of the yen against the dollar under the region's unstable foreign exchange system and also its over‐dependency on the dollar. Unfortunately, these causes have not yet disappeared. In order to prevent another financial economic crisis from recurring and to secure the regional currency stability in the long run, an external safety device is indispensable. The purpose of the East Asian monetary cooperation device is not only to absorb the external shocks caused by abrupt changes in the dollar/yen rate and sudden flow of capital, but also to settle international liquidity problems among the regional countries. If a device for the East Asian monetary cooperation is established, transparency in both financial and physical markets will be augmented and in the process, so will be the stability of financial and physical transactions.     

An introduction to problems of economic development in the CMEA countries

Through the Asian financial crisis, many key international economic issues have come to the forefront the stability of the international financial system under the IMF, “Asian values”, the universal validity of the Asian Economic Development Model, China's leadership in the regional world economy, Japan's role in the region, and the immunity of Greater China from the current financial crisis. Currently, most Asian countries seem eager to redress structural problems involving the government sector, banking, and corporate governance. In the process of this full scale restructuring, Korea must reevaluate its economic relationship with Central Asia. This paper argues that Korean financial crisis stems basically from the system failure. Furthermore, since a small open economy carries with it intrinsic vulnerabilities, the government should be more careful in securing optimal foreign exchange, opening capital markets based on the economy's absorption capacity. In this respect, the banking industry should be run based on the profitability of capital. Once banking industries are distorted by the practice of government‐led policy loans, it is more difficult to correct those customized distortions. The banking industry should play a larger role as the “brain of the economy”, sensing abnormalities of the economy. Moreover, in today's increasingly interdependent global economic system, no single country can solve its problems without close coordination of its policy with the outside world. An early warning system to signal financial instability would help developing economies in modernizing and strengthening their domestic financial institutions and would also work as a supplement to the IMF standby fund. Also, human resource management has proven too important to be neglected. Central Asia could derive lessons from the above Asian “failure”, not the Asian “miracle”, to avoid inappropriate policies and to deepen its economic development.     

重构国际货币体系的内在力量来自何处?

这次金融危机暴露了以美元为主导的国际货币体系的根本性制度缺陷,长期来看,美元衰弱的趋势不可阻挡,但目前美国仍然是世界上最为发达的经济体,美元还是最重要的全球储备货币。短期内美元的坚挺对全世界来说是重要的,贸然采取"激进式"的改革方式只能导致国际货币体系更加混乱。最好的办法就是培育欧元、日元、人民币等多元货币的竞争力量,形成对美元的制衡和监督机制,重构一个多元化的国际货币体系。中国应该借鉴欧元、日元国际化的经验,为多元化国际货币的存在与人民币的国际化创造积极条件。     

Banks and the stability of the international financial system

Summary Does today's banking scene pose a potential threat to the stability of the international financial system? The article discusses three possible sources of vulnerability of the international banking system: a major bank failure causing a general banking crisis via the extensive interbank linkages; the systemic risks allegedly inherent in certain new (as well as traditional) financial products; and the impact of external events such as debt crises, violent swings in exchange or interest rates, deregulation and recession. The author's conclusion is twofold: systemic risks clearly exist, but the probability of a major banking crisis tends to be greatly exaggerated. Banks not only survived the various crises of the seventies and eighties; they also learned in the process. Capital and reserves have been strengthened, provisions for country risk and for general contingencies have increased, supervision has been tightened and it is exercised on a comprehensive as well as a world-wide consolidated basis (i.e. including all contingent and off-balance liabilities, and all offshore activities). Assuming reasonably intelligent policies on the part of the monetary authorities and adequate international coordination, a general banking crisis can be avoided. Official rescue operations do, however, raise difficult questions of an ethical, political and economic nature.     

How will financial liberalization change the Chinese economy? Lessons from middle-income countries

This study projects the impact of financial liberalization in China by drawing on the experiences of 60 middle-income economies over a period of four decades. Our results suggest that comprehensive financial reform could increase GDP growth per capita by up to 1.4% points and raise the real bank lending rate by up to 5.1% points. Perhaps the most unexpected result is a massive increase in net capital inflows by up to 20.1% of GDP, which could plant seeds for financial risks later. The probability of a currency crisis could increase by up to 21.7% points, but the probability of a banking crisis may rise or fall, depending on the quality of bank supervision. We also find different policy impacts of different financial reform measures. Bank ownership reform and regulatory reform are critical in supporting economic growth and financial stability. These findings offer important policy implications on how to derive maximum benefit from financial reforms while effectively mitigating potential risks.     

Bank dependence and financial constraints on investment: Evidence from the corporate bond market paralysis in Japan

This paper investigates whether firms are able to substitute bank loans for public debt when the latter become less available to firms. To do so, this paper utilizes the 2008 financial crisis and its impact on Japanese markets as a natural experiment. Because the Japanese banking sector remained functional while the corporate bond markets were paralyzed, the data from Japan during this period provide us with an ideal environment to examine this hypothesis. I specifically examined whether firms with large holdings of corporate bonds maturing in FY2008 were financially constrained, by comparing the changes in their capital investment expenditures and borrowing conditions with those of bank-dependent firms. The main empirical results indicate that (1) firms with large holdings of corporate bonds maturing in FY2008 did not reduce investment expenditures; (2) instead, they exhibited higher increments in bank loans; and (3) firms that maintained relatively close bank-firm relationships had greater access to bank loans with low borrowing costs. These findings demonstrate that Japanese firms were able to substitute bank loans for public debt during the crisis and imply that the Japanese banking sector worked efficiently to replace public debt markets during the crisis.     

Equity volatility connectedness across China’s real estate firms and financial institutions

The study investigates the dynamic equity volatility connectedness across the major real estate firms, banks, and other financial institutions in China. Based on the relative level of equity volatility connectedness, the study also examines the systemic importance of real estate firms and banks. The study shows that despite widespread worries about potential real estate bubbles in China, total directional connectedness from real estate firms to banks has decreased over the sample period. In contrast, total directional connectedness from banks to the real estate firms and to the financial institutions has become stronger over the sample period, which implies stronger risk originating from the banking sector. The study also shows that size plays an important role in determining the systemic importance of a real estate firm to the banking sector. The largest real estate firm displays the highest average systemic importance ranking. However, size does not appear to be the determinant factor of the systemic importance of a bank to the financial system. The largest bank shows the lowest average systemic importance ranking and 70% probability of being the least or second least systemically important bank in the long run.     

完善我国银行监管体制的思考

后金融危机时代需要及时完善中央银行的金融监管机制,提高我国金融体系的抗风险能力。界定银行监管的含义,针对金融危机后我国银行监管暴露的问题,提出完善金融监管制度的策略。     

银行业在中小企业融资服务领域的经验及启示——以成都市为例

本文立足银行信贷视角,结合全球金融危机以及成都市西部金融中心建设背景,分析成都市中小企业面临的金融环境;然后总结成都市银行业在中小企业融资服务领域的经验;最后,本文从政策性银行作用的发挥、信贷风险控制、金融机构市场定位、银行业发展战略等四方面提出了启示。     

Lessons from the great recession for developing countries

Many lessons can be taken from the Great Recession and the Euro crisis with respect to both pre‐crisis and post‐crisis policies. Appropriate measures can reduce the risk of crisis in individual countries, the severity of crises, and the magnitude of needed adjustments. These include an appropriate exchange rate policy (flexibility is highly desirable), ensuring the soundness of the financial system, not allowing expansion of credit at too high a rate, adopting structural fiscal budgeting policies, and avoiding dangerous sovereign debt build‐up. On the crisis resolution side, the lesson that stands out is the desirability of decisive and credible action to address the causes of the crisis. The issues that arise when the banking and financial system is weakened in the run‐up to crisis are extremely difficult, especially when sovereign debt is unsustainable. Therefore, while the important lesson is to avoid overly expansive credit build‐up during good times, in the event of a crisis, it is important that the health of the banks be restored as quickly as possible and that a viable supervision and resolution framework be put in place.     

International banking and transmission of the 1931 financial crisis

In May to July 1931, a series of financial panics shook central Europe before spreading to the rest of the world. This article explores the role of cross‐border banking linkages in propagating the central European crisis to Britain and the US. Using archival bank‐level data, the article documents US and British banks’ exposure to central European frozen credits in 1931. Central European lending was mostly done by large and diversified commercial banks in the US and by small and geographically specialized merchant banks/acceptance houses in Britain. Differences in the organization of international bank lending explain why the central European crisis disturbed few US banks but endangered many British financial institutions.