Senior Debt and Market Discipline: Evidence from Bank-to-bank Loans
Bill Francis, Iftekhar Hasan, Liuling Liu, Haizhi Wang
Journal of Banking and Finance,
2019
Abstract
We empirically investigate whether taking senior bank loans would enhance market discipline and control risk-taking among borrowing banks. Controlling for endogeneity concern arising from borrowing bank self-select into taking senior bank debt, we document that both the spreads and covenants in loan contracts are sensitive to bank risk variables. Our analysis also reveals that borrowing banks reduce their risk exposure after their first issuance of senior bank debt. We also find that lending banks significantly increase their collaboration with borrowing banks and increase their presence in the home markets of borrowing banks.
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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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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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Does It Pay to Get Connected? An Examination of Bank Alliance Network and Bond Spread
Iftekhar Hasan, Céline Meslier, Amine Tarazi, Mingming Zhou
Journal of Economics and Business,
im Erscheinen
Abstract
This paper examines the effects of bank alliance network on bonds issued by European banks during the period 1990–2009. We construct six measures capturing different dimensions of banks’ network characteristics. In opposition to the results obtained for non-financial firms, our findings indicate that being part of a network does not create value for bank’s bondholders, indicating a dark side effect of strategic alliances in the banking sector. While being part of a network is perceived as a risk-increasing event by market participants, this negative perception is significantly lower for the larger banks, and, to a lesser extent, for the more profitable banks. Moreover, during crisis times, the positive impact on bond spread of a bank’s higher centrality or of a bank’s higher connectedness in the network is stronger, indicating that market participants may fear spillover effects within the network during periods of banks’ heightened financial fragility.
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