Pub Date : 2024-08-23DOI: 10.1016/j.jbankfin.2024.107286
Michael F. Connolly , Ethan Struby
We document spillover effects of the 2000–2002 Treasury Buyback program on Treasury returns and the composition of the Federal Reserve’s System Open Market Account (SOMA) portfolio. The reduction in bond supply due to the buybacks contributed an average of 95 basis points to the yields of bonds bought back and bonds of similar maturity over the course of the program. Each $10 billion of purchases corresponded with an average yield increase of 7.8 basis points. At a higher frequency, prices of purchased and near substitute bonds increased on settlement dates. Changes to the SOMA portfolio were smaller for securities exposed to the buybacks and tended to occur outside of auction weeks, consistent with the Federal Reserve attempting to avoid exacerbating Treasury supply shortages. We relate our findings to the theoretical literature on asset supply in preferred habitats models of the term structure. Our results suggest that the proposed reintroduction of the Treasury buyback program will have limited effects due to its size and proposed composition.
{"title":"Treasury buybacks, the Federal Reserve’s portfolio, and changes in local supply","authors":"Michael F. Connolly , Ethan Struby","doi":"10.1016/j.jbankfin.2024.107286","DOIUrl":"10.1016/j.jbankfin.2024.107286","url":null,"abstract":"<div><p>We document spillover effects of the 2000–2002 Treasury Buyback program on Treasury returns and the composition of the Federal Reserve’s System Open Market Account (SOMA) portfolio. The reduction in bond supply due to the buybacks contributed an average of 95 basis points to the yields of bonds bought back and bonds of similar maturity over the course of the program. Each $10 billion of purchases corresponded with an average yield increase of 7.8 basis points. At a higher frequency, prices of purchased and near substitute bonds increased on settlement dates. Changes to the SOMA portfolio were smaller for securities exposed to the buybacks and tended to occur outside of auction weeks, consistent with the Federal Reserve attempting to avoid exacerbating Treasury supply shortages. We relate our findings to the theoretical literature on asset supply in preferred habitats models of the term structure. Our results suggest that the proposed reintroduction of the Treasury buyback program will have limited effects due to its size and proposed composition.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107286"},"PeriodicalIF":3.6,"publicationDate":"2024-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142089392","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-22DOI: 10.1016/j.jbankfin.2024.107295
Dominik Schmidt , Thomas Stöckl , Stefan Palan
Capital markets often regulate insider trading, but whether such regulation aligns with traders’ preferences is an open question. This study examined traders’ regulation preferences conditional on their prospects of becoming informed. Of 64 referenda, traders decided 41 (64%) against regulation. Moreover, traders’ prospects of becoming informed significantly impacted the outcomes of the referenda. In markets in which a group of traders has no chance of receiving inside information, 47% of the referenda are decided against regulation. When all traders could get such information, 81% are. Individual votes reveal that traders who know they will remain uninformed support regulation in 69.27% of the cases, while informed traders do so only 8.33% of the time. Traders who may or may not become informed support regulation 33.33% of the time.
{"title":"Voting for insider trading regulation. An experimental study of informed and uninformed traders’ preferences","authors":"Dominik Schmidt , Thomas Stöckl , Stefan Palan","doi":"10.1016/j.jbankfin.2024.107295","DOIUrl":"10.1016/j.jbankfin.2024.107295","url":null,"abstract":"<div><p>Capital markets often regulate insider trading, but whether such regulation aligns with traders’ preferences is an open question. This study examined traders’ regulation preferences conditional on their prospects of becoming informed. Of 64 referenda, traders decided 41 (64%) against regulation. Moreover, traders’ prospects of becoming informed significantly impacted the outcomes of the referenda. In markets in which a group of traders has no chance of receiving inside information, 47% of the referenda are decided against regulation. When all traders could get such information, 81% are. Individual votes reveal that traders who know they will remain uninformed support regulation in 69.27% of the cases, while informed traders do so only 8.33% of the time. Traders who may or may not become informed support regulation 33.33% of the time.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"169 ","pages":"Article 107295"},"PeriodicalIF":3.6,"publicationDate":"2024-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0378426624002097/pdfft?md5=908e3eb33f21387fbe887fd9f9d2a6ff&pid=1-s2.0-S0378426624002097-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142158089","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-21DOI: 10.1016/j.jbankfin.2024.107292
Pascal Büsing , Hannes Mohrschladt , Susanne Siedhoff
We split up the standard momentum return over months to at the highest stock price within this formation period. Of the overall momentum profits in month , 84% can be attributed to the return prior to this peak price although research has exclusively focused on the post-peak return so far. The return predictability of the forgotten component is consistent with investor underreaction as underlying mechanism. Contrary to standard momentum strategies, the corresponding long-short returns are positively skewed, avoid momentum crashes, show no market state dependence, and yield consistent return premiums in both the US and international stock markets.
我们将 t-12 月至 t-2 月的标准动量收益率按该形成期内的最高股价进行拆分。在第 t 个月的整体动量利润中,84% 可归因于最高价之前的回报,尽管迄今为止的研究都只关注最高价之后的回报。被遗忘部分的收益可预测性与投资者反应不足的内在机制是一致的。与标准的动量策略相反,相应的多空回报是正偏斜的,避免了动量崩溃,没有显示出市场状态依赖性,并且在美国和国际股票市场上都产生了一致的回报溢价。
{"title":"Decomposing momentum: The forgotten component","authors":"Pascal Büsing , Hannes Mohrschladt , Susanne Siedhoff","doi":"10.1016/j.jbankfin.2024.107292","DOIUrl":"10.1016/j.jbankfin.2024.107292","url":null,"abstract":"<div><p>We split up the standard momentum return over months <span><math><mrow><mi>t</mi><mo>−</mo><mn>12</mn></mrow></math></span> to <span><math><mrow><mi>t</mi><mo>−</mo><mn>2</mn></mrow></math></span> at the highest stock price within this formation period. Of the overall momentum profits in month <span><math><mi>t</mi></math></span>, 84% can be attributed to the return prior to this peak price although research has exclusively focused on the post-peak return so far. The return predictability of the forgotten component is consistent with investor underreaction as underlying mechanism. Contrary to standard momentum strategies, the corresponding long-short returns are positively skewed, avoid momentum crashes, show no market state dependence, and yield consistent return premiums in both the US and international stock markets.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107292"},"PeriodicalIF":3.6,"publicationDate":"2024-08-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142129570","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-17DOI: 10.1016/j.jbankfin.2024.107294
Lu Chen , Bingqing Li , Wenyuan Zheng
This study develops a theoretical model to analyze the asset substitution problem over insurance decisions. We find that agency conflict is related to a firm’s risk level and capital structure. In particular, at the optimal leverage, agency conflict occurs only when the risk level is relatively high, which explains why insurance covenants are typically for significant pure risks. Moreover, when the risk level is specified, agency conflict over insurance decisions occurs within a specific leverage range. This is consistent with the findings of some research on the asset substitution problem over speculative risk choices. In addition, we consider premium loadings and conclude that full hedging is not a firm’s optimal risk management strategy, contributing to the literature on optimal hedging decisions with transaction frictions. Our framework with premium loadings can also explain many insurance phenomena, such as risk retention for small losses and subsidies for catastrophe insurance.
{"title":"Pure risk, agency conflict, and hedging","authors":"Lu Chen , Bingqing Li , Wenyuan Zheng","doi":"10.1016/j.jbankfin.2024.107294","DOIUrl":"10.1016/j.jbankfin.2024.107294","url":null,"abstract":"<div><p>This study develops a theoretical model to analyze the asset substitution problem over insurance decisions. We find that agency conflict is related to a firm’s risk level and capital structure. In particular, at the optimal leverage, agency conflict occurs only when the risk level is relatively high, which explains why insurance covenants are typically for significant pure risks. Moreover, when the risk level is specified, agency conflict over insurance decisions occurs within a specific leverage range. This is consistent with the findings of some research on the asset substitution problem over speculative risk choices. In addition, we consider premium loadings and conclude that full hedging is not a firm’s optimal risk management strategy, contributing to the literature on optimal hedging decisions with transaction frictions. Our framework with premium loadings can also explain many insurance phenomena, such as risk retention for small losses and subsidies for catastrophe insurance.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107294"},"PeriodicalIF":3.6,"publicationDate":"2024-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142021239","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-17DOI: 10.1016/j.jbankfin.2024.107287
Mamiza Haq , Steven Ongena , Juying Pu , Eric K.M. Tan
We investigate the impact of dividend policy on earnings quality and opportunistic earnings management for individual banks across 45 developed and developing countries between 1996 and 2019. Our estimates show that high dividend payments reduce earnings management, hence mitigate agency problems. This mitigation is especially prevalent among well-capitalised and non-listed banks. Greater investor protection and government regulation appear to strengthen the negative association between dividend policy and earnings management. Our results hold robustly across many different specifications.
{"title":"Do banks engage in earnings management? The role of dividends and institutional factors","authors":"Mamiza Haq , Steven Ongena , Juying Pu , Eric K.M. Tan","doi":"10.1016/j.jbankfin.2024.107287","DOIUrl":"10.1016/j.jbankfin.2024.107287","url":null,"abstract":"<div><p>We investigate the impact of dividend policy on earnings quality and opportunistic earnings management for individual banks across 45 developed and developing countries between 1996 and 2019. Our estimates show that high dividend payments reduce earnings management, hence mitigate agency problems. This mitigation is especially prevalent among well-capitalised and non-listed banks. Greater investor protection and government regulation appear to strengthen the negative association between dividend policy and earnings management. Our results hold robustly across many different specifications.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107287"},"PeriodicalIF":3.6,"publicationDate":"2024-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0378426624002012/pdfft?md5=bc018284e30c2b402ce883605780b94f&pid=1-s2.0-S0378426624002012-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142049437","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-16DOI: 10.1016/j.jbankfin.2024.107293
Dennie van Dolder , Jurgen Vandenbroucke
Loss aversion has been shown to be a key driver of people's investment decisions. Encouraged by regulators, financial institutions are seeking ways to integrate this behavioral factor into client risk classifications. A critical obstacle is the lack of a valid measurement method for loss aversion that can be straightforwardly incorporated into existing processes. This paper reports on two large-scale implementations of such a method within the risk-profiling application of an established financial institution. We elicit loss aversion for 1,040 employees and 3,740 clients, observing distributions that align with existing findings. Importantly, our results demonstrate that loss aversion is largely independent of the risk-return preferences commonly used for investor classification. Furthermore, the correlations we observe between these two preferences and individuals’ background characteristics align with previous research: loss aversion is strongly correlated with education—higher educated individuals exhibit greater loss aversion—whereas risk aversion is related to gender, age, and financial status—women, older individuals, and those less financially secure are more risk averse. These findings support the conjecture that risk and loss aversion are complementary in capturing investor intent.
{"title":"Behavioral risk profiling: Measuring loss aversion of individual investors","authors":"Dennie van Dolder , Jurgen Vandenbroucke","doi":"10.1016/j.jbankfin.2024.107293","DOIUrl":"10.1016/j.jbankfin.2024.107293","url":null,"abstract":"<div><p>Loss aversion has been shown to be a key driver of people's investment decisions. Encouraged by regulators, financial institutions are seeking ways to integrate this behavioral factor into client risk classifications. A critical obstacle is the lack of a valid measurement method for loss aversion that can be straightforwardly incorporated into existing processes. This paper reports on two large-scale implementations of such a method within the risk-profiling application of an established financial institution. We elicit loss aversion for 1,040 employees and 3,740 clients, observing distributions that align with existing findings. Importantly, our results demonstrate that loss aversion is largely independent of the risk-return preferences commonly used for investor classification. Furthermore, the correlations we observe between these two preferences and individuals’ background characteristics align with previous research: loss aversion is strongly correlated with education—higher educated individuals exhibit greater loss aversion—whereas risk aversion is related to gender, age, and financial status—women, older individuals, and those less financially secure are more risk averse. These findings support the conjecture that risk and loss aversion are complementary in capturing investor intent.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107293"},"PeriodicalIF":3.6,"publicationDate":"2024-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0378426624002073/pdfft?md5=3fb7ca45cb8de53f22bc85ace7ba5f4a&pid=1-s2.0-S0378426624002073-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142049436","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-12DOI: 10.1016/j.jbankfin.2024.107288
Amedeo De Cesari , Nicoletta Marinelli , Rohit Sonika
Using a sample of daily repurchase transactions, we find that CEOs with extensive professional networks execute buybacks at higher prices relative to their less-connected peers. This finding survives a large battery of robustness tests and is unlikely to be the product of endogeneity biases. Monitoring by institutional investors, blockholders, and independent directors, as well as low levels of board busyness mitigate the detrimental effect of a well-connected CEO on repurchase timing. Moreover, better-connected CEOs are more associated with insider net sales around repurchase transactions. Overall, our evidence is consistent with CEO-shareholder agency conflict explanations and CEO power mechanisms.
{"title":"The timing of stock repurchases: Do well-connected CEOs help or harm?","authors":"Amedeo De Cesari , Nicoletta Marinelli , Rohit Sonika","doi":"10.1016/j.jbankfin.2024.107288","DOIUrl":"10.1016/j.jbankfin.2024.107288","url":null,"abstract":"<div><p>Using a sample of daily repurchase transactions, we find that CEOs with extensive professional networks execute buybacks at higher prices relative to their less-connected peers. This finding survives a large battery of robustness tests and is unlikely to be the product of endogeneity biases. Monitoring by institutional investors, blockholders, and independent directors, as well as low levels of board busyness mitigate the detrimental effect of a well-connected CEO on repurchase timing. Moreover, better-connected CEOs are more associated with insider net sales around repurchase transactions. Overall, our evidence is consistent with CEO-shareholder agency conflict explanations and CEO power mechanisms.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107288"},"PeriodicalIF":3.6,"publicationDate":"2024-08-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0378426624002024/pdfft?md5=ee5b25470eead49e4cc40b756091b5cf&pid=1-s2.0-S0378426624002024-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142099061","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-10DOI: 10.1016/j.jbankfin.2024.107272
Hidenori Takahashi , Yuji Honjo , Masatoshi Kato
We investigate the gender gap in equity splits among members of founding teams using proprietary survey data on Japanese startups. The results reveal that, on average, female founder chief executive officers (CEOs) own 12 percentage points less equity than male founder CEOs. The gender equity gap is more pronounced in founding teams in which the founder CEO is a woman and the other founding members are men. However, the results vary depending on the founding teams’ characteristics. Notably, the gender equity gap is observed only in teams with individuals belonging to older generations and in teams from regions (prefectures) with great gender inequality. The findings indicate that gender norms influence the gender equity gap.
{"title":"The gender gap in the first deal: Equity split among founding teams","authors":"Hidenori Takahashi , Yuji Honjo , Masatoshi Kato","doi":"10.1016/j.jbankfin.2024.107272","DOIUrl":"10.1016/j.jbankfin.2024.107272","url":null,"abstract":"<div><p>We investigate the gender gap in equity splits among members of founding teams using proprietary survey data on Japanese startups. The results reveal that, on average, female founder chief executive officers (CEOs) own 12 percentage points less equity than male founder CEOs. The gender equity gap is more pronounced in founding teams in which the founder CEO is a woman and the other founding members are men. However, the results vary depending on the founding teams’ characteristics. Notably, the gender equity gap is observed only in teams with individuals belonging to older generations and in teams from regions (prefectures) with great gender inequality. The findings indicate that gender norms influence the gender equity gap.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107272"},"PeriodicalIF":3.6,"publicationDate":"2024-08-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0378426624001869/pdfft?md5=2106f2ff11423be507ad584c8af21e84&pid=1-s2.0-S0378426624001869-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141963932","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-08DOI: 10.1016/j.jbankfin.2024.107276
Lei Lei , Weijie Lu , Geng Niu , Yang Zhou
Financial distress is a prevalent issue among the youth. An influential stream of literature has argued that religion wields significant influence over human life. Using a representative sample of U.S. young people, we explore whether religiosity matters for financial distress. To deal with endogeneity issue, we exploit arguably exogeneous within-school variation in adolescents’ peers. By instrumenting an adolescent's own religiosity with the religiosity of their school peer group, we find that higher levels of religiosity causally and significantly reduce the likelihood of financial distress at young adulthood. Our results withstand a variety of robustness checks. To shed light on the mechanisms, we explore the impact of religiosity on an individual's sociability and various psychological attributes. We find that more religious individuals hold higher levels of self-control, a crucial attribute that aids in averting financial distress. Our study contributes to the literature by providing rigorous causal evidence that identifies religiosity as a meaningful predictor of reduced financial distress among young adults.
{"title":"Religiosity and financial distress of the young","authors":"Lei Lei , Weijie Lu , Geng Niu , Yang Zhou","doi":"10.1016/j.jbankfin.2024.107276","DOIUrl":"10.1016/j.jbankfin.2024.107276","url":null,"abstract":"<div><p>Financial distress is a prevalent issue among the youth. An influential stream of literature has argued that religion wields significant influence over human life. Using a representative sample of U.S. young people, we explore whether religiosity matters for financial distress. To deal with endogeneity issue, we exploit arguably exogeneous within-school variation in adolescents’ peers. By instrumenting an adolescent's own religiosity with the religiosity of their school peer group, we find that higher levels of religiosity causally and significantly reduce the likelihood of financial distress at young adulthood. Our results withstand a variety of robustness checks. To shed light on the mechanisms, we explore the impact of religiosity on an individual's sociability and various psychological attributes. We find that more religious individuals hold higher levels of self-control, a crucial attribute that aids in averting financial distress. Our study contributes to the literature by providing rigorous causal evidence that identifies religiosity as a meaningful predictor of reduced financial distress among young adults.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107276"},"PeriodicalIF":3.6,"publicationDate":"2024-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141978216","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-08-08DOI: 10.1016/j.jbankfin.2024.107285
Mikhail Mamonov , Christopher F. Parmeter , Artem B. Prokhorov
We study the impact of exchange rate volatility on cost efficiency and market structure in a cross-section of banks that have non-trivial exposures to foreign currency (FX) operations. We use unique data on quarterly revaluations of FX assets and liabilities (Revals) that Russian banks were reporting between 2004 Q1 and 2020 Q2. First, we document that Revals constitute the largest part of the banks’ total costs, 26.5% on average, with considerable variation across banks. Second, we find that stochastic estimates of cost efficiency are both severely downward biased – by 30% on average – and generally not rank preserving when Revals are ignored, except for the tails, as our nonparametric copulas reveal. To ensure generalizability to other emerging market economies, we suggest a two-stage approach that does not rely on Revals but is able to shrink the downward bias in cost efficiency estimates by two-thirds. Third, we show that Revals are triggered by the mismatch in the banks’ FX operations, which, in turn, is driven by household FX deposits and the instability of Ruble’s exchange rate. Fourth, we find that the failure to account for Revals leads to the erroneous conclusion that the credit market is inefficient, which is driven by the upper quartile of the banks’ distribution by total assets. Revals have considerable negative implications for financial stability which can be attenuated by the cross-border diversification of bank assets.
{"title":"Bank cost efficiency and credit market structure under a volatile exchange rate","authors":"Mikhail Mamonov , Christopher F. Parmeter , Artem B. Prokhorov","doi":"10.1016/j.jbankfin.2024.107285","DOIUrl":"10.1016/j.jbankfin.2024.107285","url":null,"abstract":"<div><p>We study the impact of exchange rate volatility on cost efficiency and market structure in a cross-section of banks that have non-trivial exposures to foreign currency (FX) operations. We use unique data on quarterly revaluations of FX assets and liabilities (Revals) that Russian banks were reporting between 2004 Q1 and 2020 Q2. <em>First</em>, we document that Revals constitute the largest part of the banks’ total costs, 26.5% on average, with considerable variation across banks. <em>Second</em>, we find that stochastic estimates of cost efficiency are both severely downward biased – by 30% on average – and generally not rank preserving when Revals are ignored, except for the tails, as our nonparametric copulas reveal. To ensure generalizability to other emerging market economies, we suggest a two-stage approach that does not rely on Revals but is able to shrink the downward bias in cost efficiency estimates by two-thirds. <em>Third</em>, we show that Revals are triggered by the mismatch in the banks’ FX operations, which, in turn, is driven by household FX deposits and the instability of Ruble’s exchange rate. <em>Fourth</em>, we find that the failure to account for Revals leads to the erroneous conclusion that the credit market is inefficient, which is driven by the upper quartile of the banks’ distribution by total assets. Revals have considerable negative implications for financial stability which can be attenuated by the cross-border diversification of bank assets.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107285"},"PeriodicalIF":3.6,"publicationDate":"2024-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141992759","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}