This paper provides a two steps investigation of the literature on banking corporate governance. We firstly perform a systematic literature review on the academics papers focused on risk management, compensation and ownership structure of banks. Then we run a meta-analysis investigation over more than 2,500 observations to clarify the understanding of the relationship with performance and risk in banks. The sub-group analysis related with bank performance shows a clear and significant finding: Board ownership, CEO ownership and Controlling shareholder enhance the performance of banks. Conversely, State ownership is negatively associated with bank performance. Results of the whole investigation and directions for scholars are also discussed.
{"title":"Corporate Governance in Banks: Systematic Literature Review and Meta-analysis","authors":"Valentina Lagasio","doi":"10.22495/COCV16I1C1ART1","DOIUrl":"https://doi.org/10.22495/COCV16I1C1ART1","url":null,"abstract":"This paper provides a two steps investigation of the literature on banking corporate governance. We firstly perform a systematic literature review on the academics papers focused on risk management, compensation and ownership structure of banks. Then we run a meta-analysis investigation over more than 2,500 observations to clarify the understanding of the relationship with performance and risk in banks. The sub-group analysis related with bank performance shows a clear and significant finding: Board ownership, CEO ownership and Controlling shareholder enhance the performance of banks. Conversely, State ownership is negatively associated with bank performance. Results of the whole investigation and directions for scholars are also discussed.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"4 1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-12-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78286447","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyzes the competitive effects of government bailout expectations on bank risk using a sample of banks in Organisation for Economic Co-operation and Development countries from 2005 to 2015. We verify that, ordinarily, the bailout expectations of a given bank increase its competitors’ risk. During a crisis, however, this effect is mitigated, ie, banks with more protected competitors reduce their risk in relation to banks with less protected competitors. We also show that in countries with higher sovereign risk (a lower capacity to bail out banks), the effect of competitors’ protection on bank risk during a crisis is smaller, which is consistent with the idea that bailing out protected banks becomes less credible in these countries during turbulent times. Taken together, these results suggest that the bailout expectations of competing banks put pressure on bank margins and lead to more risk in normal times, whereas market-disciplining forces become stronger for banks with protected competitors during a crisis, forcing them to reduce risks.
{"title":"Bank Risk, Bank Bailouts and Sovereign Capacity During a Financial Crisis: A Cross-Country Analysis","authors":"R. Schiozer, F. Mourad, R. S. Vilarins","doi":"10.21314/JCR.2018.246","DOIUrl":"https://doi.org/10.21314/JCR.2018.246","url":null,"abstract":"This paper analyzes the competitive effects of government bailout expectations on bank risk using a sample of banks in Organisation for Economic Co-operation and Development countries from 2005 to 2015. We verify that, ordinarily, the bailout expectations of a given bank increase its competitors’ risk. During a crisis, however, this effect is mitigated, ie, banks with more protected competitors reduce their risk in relation to banks with less protected competitors. We also show that in countries with higher sovereign risk (a lower capacity to bail out banks), the effect of competitors’ protection on bank risk during a crisis is smaller, which is consistent with the idea that bailing out protected banks becomes less credible in these countries during turbulent times. Taken together, these results suggest that the bailout expectations of competing banks put pressure on bank margins and lead to more risk in normal times, whereas market-disciplining forces become stronger for banks with protected competitors during a crisis, forcing them to reduce risks.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88193355","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Our third integrated reporting experiment focused on the financial sector. We wanted to determine whether we could replicate our earlier work to construct an integrated report based on information that a company had provided in the public domain and whether the task would be more or less difficult and time consuming than our previous work. We also wanted to evaluate the extent to which this report would reflect the guidance in the International Integrated Reporting Council’s integrated reporting framework, capture FCLTGlobal’s 10 elements of a long-term strategy, and respond to the questions raised by the Strategic Investor Initiative in their February 2018 letter to CEOs regarding long-term plans. We selected a company in the banking and financial services sector — Bank of America Corporation. We constructed a “decent” first integrated report in about 40 hours. The report was good in its discussion of values, culture, and purpose; stakeholder engagement; human capital; governance; and risk management. Major flaws related to the depth of disclosure about long-term strategy and the absence of medium- and long-term metrics.
{"title":"Constructing Bank of America's 2017 Mock Integrated Report: Experiment No. 3","authors":"R. Eccles, Michael P. Krzus","doi":"10.2139/SSRN.3226953","DOIUrl":"https://doi.org/10.2139/SSRN.3226953","url":null,"abstract":"Our third integrated reporting experiment focused on the financial sector. We wanted to determine whether we could replicate our earlier work to construct an integrated report based on information that a company had provided in the public domain and whether the task would be more or less difficult and time consuming than our previous work. We also wanted to evaluate the extent to which this report would reflect the guidance in the International Integrated Reporting Council’s integrated reporting framework, capture FCLTGlobal’s 10 elements of a long-term strategy, and respond to the questions raised by the Strategic Investor Initiative in their February 2018 letter to CEOs regarding long-term plans. We selected a company in the banking and financial services sector — Bank of America Corporation. We constructed a “decent” first integrated report in about 40 hours. The report was good in its discussion of values, culture, and purpose; stakeholder engagement; human capital; governance; and risk management. Major flaws related to the depth of disclosure about long-term strategy and the absence of medium- and long-term metrics.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"30 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85529598","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Vincenzo Chiorazzo, Vincenzo D’Apice, Robert DeYoung, Pierluigi Morelli
We test whether small US commercial banks that use a traditional business model are more likely to survive than nontraditional banks during both good and bad economic climates. Our concept of bank survival is derived from Stigler (1958) and includes any bank that does not fail or is not acquired. We define traditional banking by four hallmark characteristics: relationship loans, core deposit funding, revenue streams from traditional banking services, and physical bank branches. Banks that adhered more closely to this business strategy were an estimated 8 to 13 percentage points more likely to survive from 1997 to 2012 compared to other small banks using less traditional business strategies. This survival advantage approximately doubled during the financial crisis period.
{"title":"Is the Traditional Banking Model a Survivor?","authors":"Vincenzo Chiorazzo, Vincenzo D’Apice, Robert DeYoung, Pierluigi Morelli","doi":"10.2139/ssrn.2758544","DOIUrl":"https://doi.org/10.2139/ssrn.2758544","url":null,"abstract":"We test whether small US commercial banks that use a traditional business model are more likely to survive than nontraditional banks during both good and bad economic climates. Our concept of bank survival is derived from Stigler (1958) and includes any bank that does not fail or is not acquired. We define traditional banking by four hallmark characteristics: relationship loans, core deposit funding, revenue streams from traditional banking services, and physical bank branches. Banks that adhered more closely to this business strategy were an estimated 8 to 13 percentage points more likely to survive from 1997 to 2012 compared to other small banks using less traditional business strategies. This survival advantage approximately doubled during the financial crisis period.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"39 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-08-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82271011","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the reason that there have coexisted the two opposing views on distressed banks' lending behavior in Japan's post-bubble period: the one is the stagnant lending in a capital crunch and the other is the forbearance lending to low-quality borrowers. To this end, we address the measurement problem for bank balance sheet risk. We identify the credit supply and allocation effects of bank capital in the bank loan equation specified at loan level, thereby finding that the ``parallel worlds'', or the two opposing views, emerge because the regulatory capital does not reflect the actual condition of increased risk on bank balance sheet, while the market value of capital does. By uncovering banks' engagement in patching-up of the regulatory capital in the Japan's post-bubble period, we show that lowly market capitalized banks that had difficulty in building up adequate equity capital for their risk exposure decreased the overall supply of credits. The parallels world can emerge whenever banks are allowed to overvalue assets with their discretion, as in Japan' post-bubble period.
{"title":"The Emergence of a Parallel World: The Misperception Problem for Bank Balance Sheet Risk and Lending Behavior","authors":"Hitoshi Inoue, Kiyotaka Nakashima, Koji Takahashi","doi":"10.2139/ssrn.3284379","DOIUrl":"https://doi.org/10.2139/ssrn.3284379","url":null,"abstract":"We examine the reason that there have coexisted the two opposing views on distressed banks' lending behavior in Japan's post-bubble period: the one is the stagnant lending in a capital crunch and the other is the forbearance lending to low-quality borrowers. To this end, we address the measurement problem for bank balance sheet risk. We identify the credit supply and allocation effects of bank capital in the bank loan equation specified at loan level, thereby finding that the ``parallel worlds'', or the two opposing views, emerge because the regulatory capital does not reflect the actual condition of increased risk on bank balance sheet, while the market value of capital does. By uncovering banks' engagement in patching-up of the regulatory capital in the Japan's post-bubble period, we show that lowly market capitalized banks that had difficulty in building up adequate equity capital for their risk exposure decreased the overall supply of credits. The parallels world can emerge whenever banks are allowed to overvalue assets with their discretion, as in Japan' post-bubble period.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"18 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-07-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88380036","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a large panel of US bank holding companies from 2001 to 2015, we investigate the association between functional diversification and bank earnings management. We document a positive relationship between bank earnings management and bank diversification. Our findings are consistent with the hypothesis that diversification increases the asymmetric information of banks, leading to greater discretionary power by bank managers. This effect is most prevalent in smaller banks and non-dividend paying banks. The impact of diversification on earnings management is less pronounced during the crisis. Our study is of interest to regulators and other stakeholders who examine factors which affect behavior of bank managers.
{"title":"Activity Strategies, Information Asymmetry, and Bank Opacity","authors":"D. Tran, M. Hassan, R. Houston","doi":"10.2139/ssrn.3218337","DOIUrl":"https://doi.org/10.2139/ssrn.3218337","url":null,"abstract":"Using a large panel of US bank holding companies from 2001 to 2015, we investigate the association between functional diversification and bank earnings management. We document a positive relationship between bank earnings management and bank diversification. Our findings are consistent with the hypothesis that diversification increases the asymmetric information of banks, leading to greater discretionary power by bank managers. This effect is most prevalent in smaller banks and non-dividend paying banks. The impact of diversification on earnings management is less pronounced during the crisis. Our study is of interest to regulators and other stakeholders who examine factors which affect behavior of bank managers.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"137 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-07-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73919671","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use a labor-search model to explain why the worst employment slumps often follow expansions of household debt. We find that households protected by limited liability suffer from a household-debt-overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy-posting effect implies that household debt leads to high unemployment. Even though households borrow from banks via bilaterally optimal contracts, the equilibrium level of household debt is inefficiently high due to a household-debt externality. We analyze the role that a financial regulator can play in mitigating this externality.
{"title":"Household Debt and Unemployment","authors":"J. Donaldson, Giorgia Piacentino, A. Thakor","doi":"10.2139/ssrn.3203809","DOIUrl":"https://doi.org/10.2139/ssrn.3203809","url":null,"abstract":"We use a labor-search model to explain why the worst employment slumps often follow expansions of household debt. We find that households protected by limited liability suffer from a household-debt-overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy-posting effect implies that household debt leads to high unemployment. Even though households borrow from banks via bilaterally optimal contracts, the equilibrium level of household debt is inefficiently high due to a household-debt externality. We analyze the role that a financial regulator can play in mitigating this externality.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"58 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-06-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89728446","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In emerging countries, deposits play an important role in banks’ total funding; hence depositor discipline may impact significantly banking performance and the financial system’s stability. My paper investigates the reaction of bank depositors to interest rates as well as signs of banks’ risk, before and after the recent banking crisis in Vietnam. I demonstrate that before the crisis, the level of deposit financing in banks depended on the interest rates offered, but also on measures of the banks' risk-taking. After the crisis, the second relationship wanes: Bank customers still react actively to interest rates but not to risk, presumably because they have learned that their deposits are safe, whatever risk the bank is taking.
{"title":"Making Depositors Greedy and Careless: Government Safety Nets and the Degradation of Depositor Discipline","authors":"Giang Phung","doi":"10.2139/ssrn.3190281","DOIUrl":"https://doi.org/10.2139/ssrn.3190281","url":null,"abstract":"In emerging countries, deposits play an important role in banks’ total funding; hence depositor discipline may impact significantly banking performance and the financial system’s stability. My paper investigates the reaction of bank depositors to interest rates as well as signs of banks’ risk, before and after the recent banking crisis in Vietnam. I demonstrate that before the crisis, the level of deposit financing in banks depended on the interest rates offered, but also on measures of the banks' risk-taking. After the crisis, the second relationship wanes: Bank customers still react actively to interest rates but not to risk, presumably because they have learned that their deposits are safe, whatever risk the bank is taking.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"65 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-06-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88280566","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Following the 2008 crisis, Basel III has imposed higher banking capital requirements. To comply with this, banks will have to issue new equity and/or sell some of their assets, which will put pressure on financial markets. To ease such pressure, banks and regulators are wondering whether capital might be raised in other forms such as Contingent Convertible (CoCo) bonds, which are basically bonds that can be converted into equity when triggered by a specified event. This article examines the capital structure of a bank financed by equity, traditional bonds, and two tranches of debt-to-equity CoCo bonds. The Junior Tranche aims to prevent risk when the bank is still in good health, while the Senior Tranche aims to rescue the bank when it is already in crisis. The choice of triggers is decisive to ensure that the two tranches of CoCo bonds fulfil their missions of prevention and rescue.
{"title":"Reinforcing the Capital of a Bank with Two Tranches of Coco Bonds","authors":"Jian Wu","doi":"10.2139/ssrn.3186500","DOIUrl":"https://doi.org/10.2139/ssrn.3186500","url":null,"abstract":"Following the 2008 crisis, Basel III has imposed higher banking capital requirements. To comply with this, banks will have to issue new equity and/or sell some of their assets, which will put pressure on financial markets. To ease such pressure, banks and regulators are wondering whether capital might be raised in other forms such as Contingent Convertible (CoCo) bonds, which are basically bonds that can be converted into equity when triggered by a specified event. This article examines the capital structure of a bank financed by equity, traditional bonds, and two tranches of debt-to-equity CoCo bonds. The Junior Tranche aims to prevent risk when the bank is still in good health, while the Senior Tranche aims to rescue the bank when it is already in crisis. The choice of triggers is decisive to ensure that the two tranches of CoCo bonds fulfil their missions of prevention and rescue.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"59 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-05-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90437516","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Mergers and acquisitions (M&A) in the banking industry pose serious threat to the post-crisis recovery amid the increasing interconnectedness of credit institutions. Yet M&A remain one of the least manageable contributors to minimization of systemic risk, should post-M&A process run short of objectives and synergy. Financial markets externalities and adverse scenarios of macro-level dynamics put additional challenges to post-M&A integration, while shortage of macroprudential policy tools fails to empower regulators in designing a roadmap towards minimization of systemic risks built in the M&A processes. Guided by the objectives of the international banking regulation reform (Basel III) we pioneer a principally new idea extending risk-centered regulation over M&A specifics aiming at integrity of banking consolidations that is highly relevant and material for resilience of the banking sector, mitigation of financial markets volatility and ultimately for financial stability. We also propose a single conceptual platform of an M&A-related rulebook as well as an M&A risk matrix that would further shape the mechanism of systemic risk alarmism.
{"title":"Perspectives of Macrofinance Regulation of Banking M&A in the Context of the International Reform of Banking Regulation","authors":"Eduard Dzhagityan","doi":"10.2139/ssrn.3195823","DOIUrl":"https://doi.org/10.2139/ssrn.3195823","url":null,"abstract":"Mergers and acquisitions (M&A) in the banking industry pose serious threat to the post-crisis recovery amid the increasing interconnectedness of credit institutions. Yet M&A remain one of the least manageable contributors to minimization of systemic risk, should post-M&A process run short of objectives and synergy. Financial markets externalities and adverse scenarios of macro-level dynamics put additional challenges to post-M&A integration, while shortage of macroprudential policy tools fails to empower regulators in designing a roadmap towards minimization of systemic risks built in the M&A processes. Guided by the objectives of the international banking regulation reform (Basel III) we pioneer a principally new idea extending risk-centered regulation over M&A specifics aiming at integrity of banking consolidations that is highly relevant and material for resilience of the banking sector, mitigation of financial markets volatility and ultimately for financial stability. We also propose a single conceptual platform of an M&A-related rulebook as well as an M&A risk matrix that would further shape the mechanism of systemic risk alarmism.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"95 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-05-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85853819","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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