Accounting Quality in Banking: The Role of Regulatory Interventions
Manthos D. Delis, Iftekhar Hasan, Maria Iosifidi, Lingxiang Li
Journal of Banking and Finance,
2018
Abstract
Using the full sample of U.S. banks and hand-collected data on enforcement actions over 2000–2014, we analyze the role of these interventions in promoting several aspects of accounting quality. We find that enforcement actions issued for both risk-related and accounting-related reasons lead to significant improvements in accounting quality. This improvement is consistently found for earnings smoothing, big-bath accounting, timely recognition of future loan losses, the association of loan loss provisions with future loan charge offs, loss avoidance, and cash flow predictability and earnings persistence. Most of the effects are somewhat more potent in the crisis period and survive in several sensitivity tests. Our findings highlight the imperative role of regulatory interventions in promoting bank accounting quality.
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A Market-based Measure for Currency Risk in Managed Exchange Rate Regimes
Stefan Eichler, Ingmar Roevekamp
Journal of International Financial Markets, Institutions and Money,
November
2018
Abstract
We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using an augmented ADR pricing model, we exploit investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 807 ADRs located in 21 emerging markets over the 1994–2014 period, we find that a deterioration in the fiscal balance and higher inflation increase currency risk. Interaction models reveal that the fiscal balance and inflation drive the determination of currency risk for countries with poor sovereign rating, low foreign reserves, low capital account openness and managed float regimes.
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Information Feedback in Temporal Networks as a Predictor of Market Crashes
Stjepan Begušić, Zvonko Kostanjčar, Dejan Kovač, Boris Podobnik, H. Eugene Stanley
Complexity,
September
2018
Abstract
In complex systems, statistical dependencies between individual components are often considered one of the key mechanisms which drive the system dynamics observed on a macroscopic level. In this paper, we study cross-sectional time-lagged dependencies in financial markets, quantified by nonparametric measures from information theory, and estimate directed temporal dependency networks in financial markets. We examine the emergence of strongly connected feedback components in the estimated networks, and hypothesize that the existence of information feedback in financial networks induces strong spatiotemporal spillover effects and thus indicates systemic risk. We obtain empirical results by applying our methodology on stock market and real estate data, and demonstrate that the estimated networks exhibit strongly connected components around periods of high volatility in the markets. To further study this phenomenon, we construct a systemic risk indicator based on the proposed approach, and show that it can be used to predict future market distress. Results from both the stock market and real estate data suggest that our approach can be useful in obtaining early-warning signals for crashes in financial markets.
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Market Power and Risk: Evidence from the U.S. Mortgage Market
Carola Müller, Felix Noth
Economics Letters,
2018
Abstract
We use mortgage loan application data of the Home Mortgage Disclosure Act (HMDA) to shed light on the role of banks’ market power on their presumably insufficient risk screening activities in the U.S. mortgage market in the pre-crisis era. We find that banks with higher market power protect their charter value. The effect is stronger for banks that have more information about local markets.
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Effectiveness and (In)Efficiencies of Compensation Regulation: Evidence from the EU Banker Bonus Cap
Stefano Colonnello, Michael Koetter, Konstantin Wagner
Abstract
We investigate the (unintended) effects of bank executive compensation regulation. Capping the share of variable compensation spurred average turnover rates driven by CEOs at poorly performing banks. Other than that, banks‘ responses to raise fixed compensation sufficed to retain the vast majority of non-CEO executives and those at well performing banks. We fail to find evidence that banks with executives that are more affected by the bonus cap became less risky. In fact, numerous results indicate an increase of risk, even in its systemic dimension according to selected measures. The return component of bank performance appears to be unaffected by the bonus cap. Risk hikes are consistent with an insurance effect associated with raised the increase in fixed compensation of executives. The ability of the policy to enhance financial stability is therefore doubtful.
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Comments on “Consultation BCBS discussion paper on the regulatory treatment of sovereign exposures”
Michael Koetter, Lena Tonzer
Einzelveröffentlichungen,
2018
Abstract
The BCBS discussion paper on the regulatory treatment of sovereign exposures addresses a so far hardly touched topic as concerns capital regulation. While the regulatory framework has been changed substantially over recent years including the establishment of the European Banking Union, risk weights on sovereign exposures have remained mostly unchanged and sovereign exposures of banks benefit from a favourable capital treatment. This applies despite the fact that the recent European sovereign debt crisis has revealed the potential of a doom loop between bank and sovereign risk and demonstrated that sovereign exposures are by no means “risk-free”. The paper is thus an important proposal how to change the risk evaluation of banks’ sovereign exposures.
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Big Fish in Small Banking Ponds? Cost Advantages and Foreign Affiliate Presences
Michael Koetter, Rients Galema
Journal of International Money and Finance,
2018
Abstract
We distinguish cost advantage at home from cost advantage vis-à-vis incumbent banks in destination markets to explain the probability of foreign bank affiliate lending. We combine detailed affiliate lending data of all German banks with public bank micro data from 59 destination markets. The likelihood to operate foreign affiliates depends positively on both types of cost advantage. Only cost advantage at home is economically significant. Generally, risk, return, and unobservable bank traits explain a larger share of the variation in foreign affiliate operations. Less profitable, more risky, and larger banks are more likely to operate affiliates abroad.
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