the evolving landscape of banking the structure of the financial services industry is in flux liberalization deregulation and advances in information technology have changed the financial landscape dramatically interbank competition has heated up and banks face increasing competition from nonbanking financial institutions and the financial markets the predictability of the industry with low levels of financial innovation little innovation in distribution channels and well defined and rigid institutional structures is gone product innovations new distribution channels and emerging new competitors are in abundance moreover the subprime crisis that has hit the financial sector in 2007 2008 appears to have a major impact on the structure of the industry this article emphasizes the importance of understanding the economics of banking for assessing the changes in the industry in particular we point at relationship banking as a prime source of the banks comparative advantage the proliferation of transaction oriented banking trading and financial market activities does however seriously challenge relationship banking in order to focus on these issues in a rigorous way we will evaluate the key insights from the relationship banking literature including the potential complementarities and conflicts of interest between intermediated relationship banking activities and financial market underwriting securitization etc activities we also address the issue of the optimal conglomeration of bank activities including the empirical evidence on scope and scale economies we analyze the strategic positioning of banks in the currently highly uncertain competitive arena and link this to the theory of the firm and particularly firm boundaries and learning

bank runs liquidity costs and investment distortions abstract in this paper we extend the diamond and dybvig 1983 model of intermediation to study further the conditions under which bank runs can occur and to consider how private parties might adjust to the existence of bank run equilibria we provide weaker necessary conditions for runs we then characterize how banks respond to the possibility of runs in their design of deposit contracts and investment decisions banks might choose to offer contracts that prevent runs but under some conditions the second best contracts will involve accepting some risk of runs in order to achieve higher expected returns from their investments

microcredit what can we learn from the past abstract six microcredit organizations of 19th century europe are compared to identify what institutional designs were conducive to success and sustainability organizations that depended on charitable funding were more fragile and tended to lose their focus more quickly than those that obtained funds from depositors an ability to adjust interest rates also appears important in sustainability examining historical microcredit is particularly useful since it offers an opportunity to explore the characteristics of organizations which were sustained over many decades a perspective which is rare in modern microcredit banks and programs most of which are less than 15 years old

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

the microfinance promise in the past decade microfinance programs have demonstrated that it is possible to lend to low income households while maintaining high repayment rates even without requiring collateral the programs promise a revolution in approaches to alleviating poverty and spreading financial services and millions of poor households are served globally a growing body of economic theory demonstrates how new contractual forms offer a key to microfinance success particularly the use of group lending contracts with joint liability for the most part however high repayment rates have not translated into profits and studies of impacts on poverty yield a mixed picture in describing emerging tensions the paper highlights the diversity of innovative mechanisms beyond group lending contracts the measurement of financial sustainability the estimation of economic and social impacts the costs and benefits of subsidization and the potential to reduce poverty through savings programs rather than just credit the promise of microfinance has pushed far ahead of the evidence and an agenda is put forward for addressing critical empirical gaps and sharpening the terms of policy discussion

group lending repayment incentives and social collateral abstract in this paper we investigate the impact on repayment rates of lending to groups which are made jointly liable for repayment this type of scheme especially in the guise of the grameen bank in bangladesh has received increasing attention we set up and analyze the repayment game which group lending gives rise to our analysis suggests that such schemes have both positive and negative effects on repayment rates the positive effect is that successful group members may have an incentive to repay the loans of group members whose projects have yielded insufficient return to make repayment worthwhile the negative effect arises when the whole group defaults even when some members would have repaid under individual lending we also show how group lending may harness social collateral which serves to mitigate its negative effect

introduction imperfect information and rural credit markets puzzles and policy perspectives rural credit markets have been at the center of policy intervention in developing countries over the past forty years many governments supported by multilateral and bilateral aid agencies have devoted considerable resources to supplying cheap credit to farmers in a myriad of institutional settings the results of many of these interventions have been disappointing and one explanation for this must be that they were based on an inadequate understanding of the workings of rural credit markets the articles in this symposium issue are devoted to empirical and theoretical investigations of rural credit markets in the framework of the imperfect information paradigm the authors show how this framework is useful not only in explaining puzzling features of these markets but also in providing a policy perspective to assess the successes and failures of specific interventions

environmental shocks and sustainability in microfinance evidence from the great famine of ireland i study the effects of a major environmental shock on microfinance lending by analyzing the irish loan funds during the great famine of ireland i find that funds in districts worse affected by bli

learning by doing and the introduction of new goods a dynamic general equilibrium model is developed in which goods are valued according to the characteristics they contain the set of goods produced in any period is endogenously determined and learning by doing is the force behind sustained growth it is shown that the set of produced goods changes in a systematic way over time with goods of higher quality entering each period and those of lower quality dropping out the model is then used to study the effect of introducing a traditional sector in which there is no learning

financial contagion through capital connections a model of the origin and spread of bank panics financial contagion is modeled as an equilibrium phenomenon in a dynamic setting with incomplete information and multiple banks the equilibrium probability of bank failure is uniquely determined we explore how the cross holding of deposits motivated by imperfectly correlated regional liquidity shocks can lead to contagious eects conditional on the failure of a financial institution we show that contagion is possible in the unique equilibrium of the economy and characterize exactly when it may exist at the same time we identify a direction of flow for contagious eects which provides a rationale for localized financial panics simulations identify the optimal level of interbank deposit holdings in the presence of contagion risk our results suggest that when the probability of bank failure is low maximal levels of interbank holdings are optimal when cross holding of deposits is complete we demonstrate that the intensity of contagion is increasing in the size of regionally aggregate liquidity shocks

models of banking instability a partial review of the literature abstract this paper critically examines the theoretical literature on banking instability that has followed diamond and dybvig 1983 it explores the extent to which it a explains banking instability within a theoretical context in which financial intermediaries improve on unintermediated markets and b justifies government involvement in the financial intermediation industry it suggests that the literature has yet to provide a satisfactory theoretical basis for banking instability as such since the intermediaries which arise from it are peculiar mutual funds that bear little resemblance to real world banks in addition the paper challenges the widespread belief that this literature provides a sound foundation for government involvement in the industry it suggests that arguments for government intervention are open to objection on various grounds the most important one being that they are inconsistent with the existence of properly motivated financial intermediation in these models

in which context is the option clause desirable the option clause is a contractual device from free banking experiences meant to prevent banknote redemption duels it has been used within the diamond and dybvig j pol econ 91 401 419 1983 framework to suggest that very simple contractual solutions can act as an alternative to deposit insurance this literature has however been ambiguous on whether the option clause can replace deposit insurance outside of those two contexts it will be argued that the theoretical clause does not generally affect the likelihood that a solvent bank goes bankrupt because of a bank run as empirical evidence suggests it is already near null and that the exercise of the clause will have the effect of diminishing the size of creditor claims on bank assets because it exacerbates the agency problem of bank debt it will therefore be argued that the clause is only desirable in a free banking systems that are historically devoid of bank runs in the first place and have other means of managing debt related agency problems and b under the unrealistic assumption that bank runs are self fulfilling prophecies it will be argued that the agency problem of bank debt makes the option clause undesirable outside of free banking systems

a real options approach to bankruptcy costs evidence from failed commercial banks during the 1990s literature identifies three main aspects of liquidation costs firm size asset specificity and industry concentration this paper unifies the theory behind these aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee testing the hypothesized asset price relationships on fdic failed bank liquidation data yields the appropriate results furthermore it appears that liquidation time alone can be used as an effective second order proxy for asset value growth where market value estimates are unavailable

banking a new monetarist approach we develop a model where i banks take deposits and make investments ii their liabilities facilitate third party transactions other models have i or ii not both although we argue they are intimately connected we show that they both emerge from limited commitment we describe an environment characterize desirable allocations and interpret the outcomes as banking arrangements banks are essential without them the set of feasible allocations is inferior as a technical contribution we characterize dynamically optimal credit allocations with frictions show they involve backloading and analyse how this interacts with banking we also confront the theory with economic history copyright 2013 oxford university press

deposit insurance and money market freezes in the presence of deposit insurance a rise in counterparty risk may cause a freeze in interbank money markets we show this in a general equilibrium model with regionally segmented bank based retail financial markets in which money markets facilitate the reallocation of funds across banks from different regions counterparty risk creates an asymmetry between banks in savings rich regions which remain marginally financed by the abundant regional insured deposits and in savings poor regions which have to pay large spreads in money markets this asymmetry distorts the aggregate allocation of credit and in the presence of demand externalities can cause large output losses

managerial skills acquisition and the theory of economic development micro level studies suggest managerial skills play a key role in the adoption of modern technologies in this paper we model the interactive process between on the job managerial skill acquisition and the adoption of modern technology we use the model to illustrate why some countries develop managerial skills quickly and adopt best practice technologies while others stay backwards the model also explains why managers will not migrate from rich countries to poor countries as would be needed to generate convergence finally we show why standard growth accounting exercises will incorrectly attribute a large proportion of managerial skills contribution to tfp and we quantify the importance of this bias aq2

how responsive is business capital formation to its user cost an exploration with micro data abstract the response of business capital formation to its user cost is critical to evaluating tax reform deficit reduction and monetary policy evidence for a substantial user cost elasticity however is sparse most evidence has been based on aggregate data although several recent studies with firm level data report substantial effects with a particularly rich micro dataset containing over 26 000 observations this paper explores what can be learned about the user cost elasticity while the results depend to some extent on the specification and econometric technique various diagnostics lead us to prefer a precisely estimated but small elasticity of approximately 0 25 this paper is dedicated to the memory of robert eisner who labored early and ably on uncovering the determinants of investment spending and highlighting the importance of the question found in the title of this paper

lender screening and the role of securitization evidence from prime and subprime mortgage markets this article examines the link between mortgage securitization and lender screening during the boom and bust of the u s housing market using comprehensive data on both prime and subprime securitized and bank held loans we provide evidence that securitization affected lenders screening decisions in the subprime market for low documentation loans through two channels the securitization rate and the time it takes to securitize a loan the change in decision making by subprime lenders occurs on dimensions that are unreported to investors examining the time series evolution of the securitization market further reinforces these findings we exploit heterogeneity across subprime and prime markets to illustrate that the potential for moral hazard may be reduced with greater collection of hard information and increased monitoring of lenders our results suggest that the policy debate regarding securitization and lenders underwriting standards should separately evaluate the agency and non agency markets with special attention toward the extent of soft information in assets being securitized the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the impact of contingent liability on commercial bank risk taking abstract from 1863 1935 regulators imposed contingent liability on bank shareholders to discourage risk taking using data from 1900 to 1915 i find that banks subject to stricter liability rules have lower equity and asset volatility hold a lower proportion of risky assets and are less likely to increase their investment in risky assets when their net worth declines consistent with the hypothesis that stricter liability discourages commercial bank risk taking these findings provide lessons for current bank regulatory policy and show that the shape of the residual claimant s payoff function has a significant impact on managerial incentives and firm performance

bank lending and monetary transmission in the euro area to what extent does the availability of credit depend on monetary policy and does this relationship vary with bank characteristics based on a common source of balance sheet data for the four largest economies of the eurozone over the period 1999 2011 we find that the effects of monetary policy on bank lending are significant and heterogeneous in germany and italy which are characterized by a large number of banks but are weaker and more homogeneous in spain and france whose banking industry has a higher degree of market concentration in particular monetary policy appears to exert larger effects on cooperative and savings banks with lower liquidity and lesser capital in germany and savings banks with smaller size in italy our results highlight that the transmission of monetary policy over bank lending in the eurozone is highly heterogeneous from a policy perspective the increased large number of cooperative and savings banks which have had access during the last financial crisis to the refinancing operations of the european central bank bodes well for the improvement of the monetary transmission mechanism the analysis also suggests that competition policy measures aiming at reducing entry barrier might facilitate the transmission mechanism roberto a de santis and paolo surico

microcredit and adjustment to environmental shock evidence from the great famine in ireland the great famine of ireland from 1845 to 51 ranks as one of the most lethal of all time claiming approximately one eighth of the country s population utilizing famine relief commission reports to develop a micro level dataset of blight severity i find that in the short run districts more severely infected by blight experienced larger population declines and accumulations of buffer livestock by small to medium sized farms in the medium and long runs however worse affected districts experienced greater substitutions toward other tillage crops and grazing livestock particularly by small to medium sized farms using annual reports of the irish loan funds i further find that access to microfinance credit was an important factor in non demographic adjustment to blight worse affected districts with at least one microfinance fund during the famine experienced substantially smaller relative population declines and larger relative increases in buffer livestock during and immediately after the famine and greater relative medium and long run substitutions toward other crops and grazing livestock than worse affected districts without a fund

how excessive is banks maturity transformation we quantify the gains from regulating banks maturity transformation in an infinite horizon model of banks which finance long term assets with non tradable debt banks choose the amount and maturity of their debt trading off investors preference for short maturities with the risk of systemic crises as in stein 2012 pecuniary externalities make unregulated debt maturities inefficiently short the assessment is based on the calibration of the model to eurozone banking data for 2006 lengthening the average maturity of wholesale debt from its 2 8 months to 3 3 months would produce welfare gains with a present value of euro 105 billion

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

the effects of business models on bank risk before during and after financial crisis evidence from china using chinese data from 2004 to 2016 we investigate the effects of business models on bank risk before during and after financial crisis three main results emerge first insolvency risk and roa

monetary policy transmission in the euro area new evidence from micro data on firms and banks this paper presents an overview of the results of a research project on monetary transmission pursued by the eurosystem which has analysed micro data on firms and banks in several countries of the euro area in great detail there is strong empirical support for an interest rate channel working through firm investment furthermore a credit channel can be identified with firm micro data on the bank side there is evidence that lending reacts differently to monetary policy according to bank balance sheet characteristics in particular banks that have a less liquid asset composition show a stronger loan supply response this finding may be due to banks drawing on their liquid assets to cushion the effects of monetary policy on their loan portfolio which is in line with the existence of close relationships between banks and their loan customers

vintage human capital growth and the diffusion of new technology we develop a model of vintage human capital in which each technology requires vintage specific skills we examine the properties of a stationary equilibrium for our economy the stationary equilibrium is characterized by an endogenous distribution of skilled workers across vintages the distribution is shown to be single peaked under general conditions there is a lag between the appearance of a technology and its peak usage a phenomenon known as diffusion an increase in the rate of exogenous technological change shifts the distribution of human capital to more recent vintages thereby increasing the diffusion rate

the fragile capital structure of hedge funds and the limits to arbitrage abstract during a financial crisis when investors are most in need of liquidity and accurate prices hedge funds cut their arbitrage positions and hoard cash the paper explains this phenomenon we argue that the fragile nature of the capital structure of hedge funds combined with low market liquidity creates a risk of coordination in redemptions among hedge fund investors that severely limits hedge funds arbitrage capabilities we present a model of hedge funds optimal asset allocation in the presence of coordination risk among investors we show that hedge fund managers behave conservatively and even abstain from participating in the market once coordination risk is factored into their investment decisions the model suggests a new source of limits to arbitrage

an experiment on the causes of bank run contagions abstract to understand the mechanisms behind bank run contagions we conduct bank run experiments in a modified diamond dybvig setup with two banks left and right the banks liquidity levels are either linked or independent left bank depositors see their bank s liquidity level before deciding right bank depositors only see left bank withdrawals before deciding we find that left bank depositors actions significantly affect right bank depositors behavior even when liquidities are independent furthermore a panic may be a one way street an increase in left bank withdrawals can cause a panic run on the right bank but a decrease does not calm depositors

reflections on northern rock the bank run that heralded the global financial crisis in september 2007 television viewers and newspaper readers around the world saw pictures of what looked like an old fashioned bank run that is depositors waiting in line outside the branch offices of a united kingdom bank called northern rock to withdraw their money the previous u k bank run before northern rock was in 1866 at overend gurney a london bank that overreached itself in the railway and docks boom of the 1860s bank runs were not uncommon in the united states up through the 1930s but they have been rare since the start of deposit insurance backed by the federal deposit insurance corporation in contrast deposit insurance in the united kingdom was a partial affair funded by the banking industry itself and insuring only a part of the deposits at the time of the run u k bank deposits were fully insured only up to 2 000 pounds and then only 90 percent of the deposits up to an upper limit of 35 000 pounds when faced with a run the incentive to withdraw one s deposits from a u k bank was therefore very strong for economists the run on northern rock at first seemed to offer a rare opportunity to study at close quarters all the elements involved in their theoretical models of bank runs the futility of public statements of reassurance the mutually reinforcing anxiety of depositors as well as the power of the media in galvanizing and channeling that anxiety through the power of television images however the storyline of the northern rock bank run does not fit the conventional narrative on september 13 2007 the bbc s evening television news broadcast first broke the news that northern rock had sought the bank of england s support the next morning the bank of england announced that it would provide emergency liquidity support it was only after that announcement that is after the

financial regulation and securitization evidence from subprime mortgage loans we examine the consequences of existing regulations on the quality of mortgage loans originations in the originate to distribute otd market the information asymmetries in the otd market can lead to moral hazard problems on the part of lenders we find using a plausibly exogenous source of variation in the ease of securitization that the quality of loan origination varies inversely with the amount of regulation more regulated lenders originate loans of worse quality we interpret this result as a possible evidence that the fragility of lightly regulated originators capital structure can mitigate moral hazard in addition we find that incentives which require mortgage brokers to have skin in the game and stronger risk management departments inside the bank partially alleviate the moral hazard problem in this setting finally having more lenders inside a mortgage pool is associated with higher quality loans suggesting that sharper relative performance evaluation made possible by more competition among contributing lenders can also mitigate the moral hazard problem to some extent overall our evidence suggests that market forces rather than regulation may have been more effective in mitigating moral hazard in the otd market the findings caution against policies that impose stricter lender regulations which fail to align lenders incentives with the investors of mortgage backed securities 2009 elsevier b v all rights reserved

optimal financial crises empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of sunspots panics occur when depositors perceive that the returns on bank assets are going to be unusually low we develop a simple model of this in this setting bank runs can be first best efficient they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios however if costly runs or markets for risky assets are introduced central bank intervention of the right kind can lead to a pareto improvement in welfare from the earliest times banks have been plagued by the problem of bank runs in which many or all of the bank s depositors attempt to withdraw their funds simultaneously because banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets in the form of loans they are vulnerable to runs that can lead to closure and liquidation a financial crisis or banking panic occurs when depositors at many or all of the banks in a region or a country attempt to withdraw their funds simultaneously prior to the twentieth century banking panics occurred frequently in europe and the united states panics were generally regarded as a bad thing and the development of central banks to eliminate panics and ensure financial stability has been an important feature of the history of financial systems it has been a long and involved process the first cerntral bank the bank of sweden was established more than 300 years ago the bank of england played an especially important role in the development of effective stabilization policies in the eighteenth and nineteenth centuries by the end of the nineteenth century banking panics had been eliminated in europe the last true panic in england was the overend gurney company crisis of 1866

do banks have a future abstract are banks special intermediaries do they play any unique role in the economy and if so will they retain their specialness in the ever faster changing world of finance the rapid evolution of finance over the last two decades and the breathtaking e age revolution have persuaded many that eventually banks will be indistinguishable from other financial intermediaries since all their functions can at least as efficiently be carried out by nonbanks this study re explores the issue of the specialness of banks in light of the large existing literature on the subject and presents an approach which identifies the banks specialness with their unique capacity to lend out claims on their own debt which the public accepts and uses as money the study discusses various structural and policy implications deriving from the approach and draws on it to point to the continuing relevance of banking in a world where nonbanks are taking business away from banks lending to production has become relatively less important and the use of e money may soon be dominating financial transactions

the creditor channel of liquidity crises this paper presents a model to study the transmission of liquidity shocks across financial institutions through the creditor channel in the model a borrower institution obtains funds from a large institutional lender and small investors when the large lender s asset market is hit by a liquidity shock it might decide to withdraw funding extended to the borrower the potential withdrawal by the large lender causes small investors to panic and to close positions even if the large lender does not facing funding problems the borrower has to cut its activities contributing to further shocks to the supply of market liquidity the original shock is exacerbated which reinforces withdrawals by all creditors the model helps explain how the spreading of liquidity shocks from the broker dealer sector to the hedge fund sector and the feedback contribute to a systemic crisis

money financial stability and efficiency most analyses of banking crises assume that banks use real contracts however in practice contracts are nominal and this is what is assumed here we consider a standard banking model with aggregate return risk aggregate liquidity risk and idiosyncratic liquidity shocks we show that with non contingent nominal deposit contracts the first best efficient allocation can be achieved in a decentralized banking system what is required is that the central bank accommodates the demands of the private sector for fiat money variations in the price level allow full sharing of aggregate risks an interbank market allows the sharing of idiosyncratic liquidity risk in contrast idiosyncratic bank specific return risks cannot be shared using monetary policy alone real transfers are needed

bankruptcy priority for bank deposits a contract theoretic explanation over the past decade several countries including the us have introduced or redesigned legislation that confers priority in bankruptcy upon all or some bank deposits we argue that in the presence of contracting costs such rules can increase efficiency we first show in a private information model that a borrower can reduce overall costs of finance by letting informationally heterogeneous lenders choose between junior and senior debt in particular we find that debt priorities reduce socially wasteful information gathering by investors we then argue why particularly in banking legal standardization of debt priorities may be superior to bilateral private arrangements article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

does corporate lending by banks and finance companies differ evidence on specialization in private debt contracting this paper establishes empirically the existence of specialization in private market corporate lending adding a new dimension to the public versus private debt distinctions now common in the literature comparing corporate loans made by banks and by finance companies we find that the two types of intermediaries are equally likely to finance information problematic firms however finance companies tend to serve observably riskier borrowers particularly more leveraged borrowers evidence supports both regulatory and reputation based explanations for this specialization in passing we shed light on various theories of debt contracting and intermediation and present facts about finance companies

an assessment of tarp assistance to financial institutions six years after the passage of the 2008 troubled asset relief program commonly known as tarp it remains hard to measure the total social costs and benefits of the assistance to banks provided under tarp programs tarp was not a single approach to assisting weak banks but rather a variety of changing solutions to a set of evolving problems tarp s passage was associated with significant improvements in financial markets and the health of financial intermediaries as well as an increase in the supply of lending by recipients however a full evaluation must also take into account other factors including the risks borne by taxpayers in the course of the bailouts moral hazard costs that could result in more risk taking in the future and social costs related to perceived unfairness our evaluation is organized in five parts 1 what did policymakers do 2 what are the proper objectives of interventions like tarp assistance to financial institutions 3 did tarp succeed in those economic objectives 4 were tarp funds allocated purely on an economic basis or did political favoritism play a role 5 would alternative policies either alongside or instead of tarp and alternative design features of tarp have worked better

what factors drive systemic risk during international financial crises abstract we analyze the determinants of the contribution of international banks to both global and local systemic risk during prominent financial crises we find no empirical evidence supporting conjectures that bank size leverage non interest income or the quality of the bank s credit portfolio are persistent determinants of systemic risk across financial crises in contrast our results show that global systemic risk in particular is predominantly driven by characteristics of the regulatory regime we also confirm for the subprime crisis that the banks contribution to moderately bad tail events in the past predicts the financial sector s crash risk

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

uninsured deposits as a monitoring device their impact on bond yields of banks abstract we empirically analyze the impact of uninsured deposits on a bank s cost of public debt uninsured depositors can exert market discipline over a bank and potentially reduce its agency cost of debt through informed monitoring we use a sample of public bond issues by u s bank holding companies from 1994 to 2013 and find statistically strong evidence that banks with more uninsured deposits relative to their assets issue bonds with a lower interest rate findings suggest a one standard deviation increase in uninsured deposits is associated with a 46 64 basis point decrease in bond yield in addition we find that bonds issued by banks with higher default risk or lower reputation benefit more from uninsured savers our paper contributes to the literature that explores market discipline and provides evidence that banks can benefit from it through a lower borrowing cost

demandable debts as a means of payment banknotes versus checks we examine whether transactable forms of privately issued demandable debt are better used as banknotes or checks the distinction between the two is that a check must be redeemed by the issuing bank with each use whereas a banknote can circulate we find that the answer to the question depends on the cost of early redemption if this cost is small banknotes will not circulate so the question is moot if this cost is large incentive problems may prevent the circulation of banknotes for intermediate values of the early redemption cost banknotes will be preferred over checks

delegated monitors large and small germany s banking system 1800 1914 banks play a greater role in the german financial system than in those of the united states or britain germany s large universal banks are admired by those who advocate bank deregulation in the united states others admire the universal banks for their supposed role in corporate governance and industrial finance many discussions distort the german banking system by overstressing one of several types of banks and ignore the competition and cooperation between the famous universal banks and other banking groups tracing the historical development of the german banking system from the early nineteenth century places the large universal banks in context

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

market reactions to ecb policy innovations a cross country analysis abstract regulators have been paying increasing attention to governing and steering market fluctuations with their role in shaping the economic cycle being ever more crucial the combined effect of the financial and sovereign debt crises as well as the approach to the zero lower bound has made actions even more pressing forcing the european central bank to resort to unconventional instruments to revive the economies and counter deflationary pressures by using a combined event study and panel regression methodology we investigate whether european monetary union equity markets react heterogeneously to standard and non standard european central bank policy innovations our results show that conventional policies unevenly affect financial indices in the eurozone and hence are bound to generate asymmetries that reflect on real economies while unconventional measures albeit with different intensities exercise a homogeneous pressure on all markets our evidence highlights the beneficial impact of unconventional measures and suggests that they can play a useful role even in non crisis times

bank capital and lending relationships this paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for lending relationships bank capital and the provision of credit i find that bank dependent firms borrow from well capitalized banks while firms with access to the bond market borrow from banks with less capital this matching of bank dependent firms with stable banks smooths cyclicality in aggregate credit provision and mitigates the effects of bank shocks on the real economy

thy neighbor s keeper the design of a credit cooperative with theory and a test economists now appreciate that resource allocation in less economically developed economies is profoundly influenced by non firm economic institutions however our theories of non firm institutions often suggest different answers to many questions including those of policy this paper illustrates a method for discriminating between alternative theories using data from german credit cooperatives from the nineteenth and early twentieth century germany we build a model of credit cooperatives designed to provide monitoring incentives and test this using nineteenth century data authors

the shadow costs of repos and bank liability structure making use of a structural model that allows for optimal liquidity management we study the role that repos play in a bank s financing structure in our model the bank s assets consist of illiquid loans and liquid reserves and are financed by a combination of repos long term debt deposits and equity repos are a cheap source of funding but they are subject to an exogenous rollover risk we show that the use of repos inflicts two types of indirect shadow costs on the bank s shareholders first it induces the bank to maintain higher liquid reserves in order to alleviate the additional default risk second it adds to the cost of long term debt financing these shadow costs limit the bank s appetite for cheap but unstable repo funding this effect is however weakened under poor returns on risky assets access to deposit funding and the depositor preference rule we also analyze the impact of a liquidity coverage ratio payout restrictions and a leverage ratio on the bank s financing choices and show that all these tools are able to curb the bank s reliance on repos

accounting for banks capital regulation and risk taking this paper examines risk taking incentives in banks under dierent accounting regimes with capital regulation in the model the bank s decisions of capital issuance and investment policy are jointly determined given exogenous minimum capital requirement the bank is more likely to issue equity capital in excess of the minimum required level and implement less risky investment policy under either lower of cost ormarket accounting or fair value accounting than under historical cost accounting but fair value accounting may induce more risk taking compared to lower of cost or market accounting due to short term interest in the part of the bank however the disciplining role of lower of cost or market accounting may discourage bank s incentive to exert project discovery eort

outreach sustainability and leverage in monitored and peer monitored lending abstract i study the contract design problem facing microfinance lending organizations mfos that want to maximize the impact and outreach of their lending activities to a target population of poor borrowers while remaining financially sustainable tradeoffs between outreach sustainability and financial leverage are shaped by the endogenous monitoring and delegation costs that arise within a chain of agency relationships subject to moral hazard between borrowers loan staff mfo equity owners and outside investors all else equal sustainable mfos that target poorer borrowers must charge higher interest rates have higher staff costs per dollar loaned and are less leveraged analysis of data for 72 mfos tends to support the findings

intertemporal diversification in financial intermediation abstract this paper examines the incentive problem between a bank and depositors or deposit insurer limited liability makes risk shifting lucrative we show how intertemporal diversification of lending decisions i e bank s loan portfolio consists of overlapping long term loans and is thus gradually renewed may solve the incentive problem of risk shifting a new or expanding bank sets a high equity level and acquires depositors confidence subsequently it can allow its equity to depreciate to a permanently lower level depositors can control the bank by monitoring equity and realized credit losses ex post they do not have to monitor bank s lending choices ex ante maturity mismatch illiquidity of long term loans and liquidity of deposits is optimal the analysis can be extended more generally to the borrower lender relationship

the hazards of debt rollover freezes incentives and bailouts we investigate the trade o between incentive provision an di ne ient rollover freezes for a firm financed with short term debt first debt maturity that is too short term is ine cient even with incentive provision th eo ptimal maturity is an interior solution that avoids excessive rollover risk whil ep roviding su ient incentives for the manager to avoid risk shifting when the firm is in good health second allowing the manager to risk shift during a freeze actually increase sc reditor conf idence debt policy should not prevent the manager from holding what may appear to be otherwise low mean strategies that have option value during a freeze third a limited but not perfectly reliable form of emergency financing during a freeze a bailout may improve the terms of the trade o and increase total ex ante va lue by instilling confidence in the creditor markets our conclusions highlight the endogenous interaction between risk from the asset and liability sides of the balance sheet

is financial inclusion good for bank stability international evidence abstract financial inclusion has become an important public policy priority following the recent global financial crisis yet we know very little of how it impacts soundness of the providers of financial services using an international sample of 2635 banks in 86 countries over the period 2004 12 we find that higher level of financial inclusion contributes to greater bank stability the positive association is particularly pronounced with those banks that have higher customer deposit funding share and lower marginal costs of providing banking services and also with those that operate in countries with stronger institutional quality the results are robust to instrumental variables analysis controlling for bank fixed effects alternative measures of financial inclusion among several other robustness tests our results highlight that the importance of ensuring inclusive financial system is not only a development goal but also an issue that should be prioritised by banks as such a policy drive is good for their stability

free banking and information asymmetry a traditional argument against free banking is that it will collapse because of information externalities it is impossible for depositors to tell whether a high deposit rate offered by a bank is due to its high efficiency or risky lending strategy this paper shows that in a separating equilibrium a higher quality bank offers a lower deposit rate and holds a smaller proportion of risky loans than a lower quality bank to signal its underlying quality hence free banking is not inherently unstable the empirical results for the hong kong banking system during 1964 65 are consistent with the hypothesis of a separating equilibrium

peer monitoring and credit markets a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced one partial solution is peer monitoring having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt peer monitoring is largely responsible for the successful financial performance of the grameen bank of bangladesh and of similar group lending programs elsewhere but peer monitoring has a cost it transfers risk from the bank which is in a better position to bear risk to the cosigner in a simple model of peer monitoring in a competitive credit market this article demonstrates that the transfer of risk leads to an improvement in borrowers welfare

the labor market and corporate structure abstract we analyze the impact of labor demand and labor market regulations on the corporate structure of firms higher wages are associated with lower monitoring irrespective of whether these high wages are caused by labor market regulations unions or higher labor demand we also find that the organization of firms has important macroeconomic implications in particular monitoring is a type of rent seeking activity and the decentralized equilibrium spends excessive resources on monitoring labor market regulations that reduce monitoring by pushing wages up may increase net output or reduce it only by a small amount even though they reduce employment

the role of local depositors in controlling expenses in small scale financial intermediation an empirical analysis using data on irish loan funds a nineteenth century quasi bank system we explore how the capital structure affects managerial agency to impact non interest expenses these organizations had no equity holders and were financed by deposits and capital comprising donations and accumulated profits creating problems of managerial moral hazard higher net income before non interest expenses is associated with higher salaries and other non interest expenses more surprisingly higher capital deposit ratios led to higher expenses even after controlling for net income while this institution is unique the findings suggest that depositors could assist in controlling expenses in microfinance organizations

strategic loan defaults and coordination an experimental analysis this paper experimentally studies the impact of bank and borrower fundamentals on loan repayment we find that solvent borrowers are more likely to default strategically when the bank s expected strength is low although loan repayment is a pareto dominant nash equilibrium borrowers are also less likely to repay when other borrowers expected repayment capacity is low regardless of banks fundamentals we show that changes in expectations about bank and borrower fundamentals change the risk dominance properties of the borrowers coordination problem and that these changes subsequently explain strategic defaults for the individual borrower loss aversion and negative past experiences reduce repayment suggesting that bank failure can be contagious in times of distress

building an incentive compatible safety net abstract bank safety nets originally proposed as a means of stabilizing financial systems have become an important destabilizing influence government protection of bank debts encourages banks to undertake excessive risk particularly in response to adverse shocks to asset values reforms that would remove the destabilizing moral hazard consequences of government protection are considered both from the perspective of economic desirability and political feasibility requiring banks to maintain a minimal proportion of subordinated debt finance and restricting the means by which government recapitalization of insolvent banks occurs are the central features of promising reforms to the safety net

dynamic debt maturity a firm chooses its debt maturity structure and default timing dynamically both without commitment via the fraction of newly issued short term bonds equity holders control the maturity structure which affects their endogenous default decision a shortening equilibrium with accelerated default emerges when cash flows deteriorate over time so that debt recovery is higher if default occurs earlier self enforcing shortening and lengthening equilibria may coexist with the latter possibly pareto dominating the former the inability to commit to issuance policies can worsen the leland problem of the inability to commit to a default policy a self fulfilling shortening spiral and adverse default policy may arise received april 16 2015 accepted february 20 2016 by editor itay goldstein

the role of interbank markets in monetary policy a model with rationing the empirical research on monetary transmission has reported a number of puzzles challenging extant theoretical models of the transmission mechanism in this paper we argue that asymmetric information in the interbank market may be important to have a better understanding of the mechanisms at work in the transmission process we show that asymmetric information may induce an equilibrium with rationing this in turn has two major implications first it reconciles the apparent irresponsiveness of business investment to the user cost of capital with the large impact of monetary policy magnitude puzzle and second it shows that this impact will not be limited to short term credit supply but will also affect long term lending even if the corresponding interest rate is unaffected composition puzzle

optimal bank transparency increasing transparency is recurrently offered as a centerpiece of bank regulation we study a competitive banking sector whose illiquid assets are funded by short term debt that must be refinanced we show that welfare is a nonmonotonic function of the level of transparency increasing transparency fosters efficient liquidation but has an adverse effect on rollover risk given the level of risk banks may compensate this adverse effect by taking more risk these offsetting effects render an intermediate level of transparency optimal moreover the existence of negative social externalities of bank failures calls for making banks more opaque rather than more transparent

microfinance and famine the irish loan funds during the great famine abstract what happens to microfinance organizations when faced with massive external shocks such as famines using a unique and extensive data set we analyze the impact of the great irish famine of the 1840s on the irish loan funds the funds were a large and important microfinance institution operating throughout ireland we find that the pre famine capital ratio of each fund was a strong predictor of survival of the fund through the famine among available local demographic variables the most significant is the rate of female literacy which was strongly correlated with the probability of fund survival

risk management strategies for banks abstract we analyze optimal risk management strategies of a bank financed with deposits and equity in a one period model the bank s motivation for risk management comes from deposits which can lead to bank runs in the event of such a run liquidation costs arise the hedging strategy that maximizes the value of equity is derived we identify conditions under which well known results such as complete hedging maximal speculation or irrelevance of the hedging decision are obtained the initial debt ratio the size of the liquidation costs regulatory restrictions the volatility of the risky asset and the spread between the riskless interest rate and the deposit rate are shown to be the important parameters that drive the bank s hedging decision we further extend this basic model to include counterparty risk constraints on the forward contract used for hedging

the life cycle of a microfinance institution the irish loan funds abstract ireland s loan funds were a long lived self sustaining large scale microfinance organization that made millions of loans without collateral to the poor during the first 100 years of their life cycle a period of growth ending in the 1840s they adapted constantly and obtained improvements to their legal structure because they were complementary to the banking system and seen as effective in relieving poverty in their 2nd century they became ossified in part because of competition with commercial banks the loan funds provide an example of sustainable microfinance under harsh economic conditions and illustrate how organizations change incrementally and when successful alter their institutional framework

bank runs deposit insurance and capital requirements diamond and dybvig provide a model of intermediation in which deposit insurance can avoid socially undesirable bank runs we extend the diamond dybvig model to evaluate the costs and benefits of deposit insurance in the presence of moral hazard by banks and monitoring by depositors we find that complete deposit insurance alone will not support the first best outcome depositors will not have adequate incentives for monitoring and banks will invest in excessively risky projects however an additional capital requirement for banks can restore the first best allocation

bank sovereign risk spillovers in the european debt crisis this paper investigates contagion between bank risk and sovereign risk in europe over the period 2006 2011 since this period covers various stages of the banking and sovereign crisis it oers a fertile ground to analyze bank sovereign risk spillovers we de ne contagion as excess correlation i e correlation between banks and sovereigns over and above what is explained by common factors using cds spreads at the bank and at the sovereign level moreover we investigate the determinants of contagion by analyzing bank speci c as well as country speci c variables and their interaction we provide empirical evidence that various contagion channels are at work including a strong home bias in bank bond portfolios using the eba s disclosure of sovereign exposures of banks we nd that banks with a weak capital and or funding position are particularly vulnerable to risk spillovers at the country level the debt ratio is the most important driver of contagion

microfinance in africa is it either the problem or the solution abstract this article is based on research undertaken on microenterprises in the informal sector in kenya malawi and ghana it seeks to provoke critical reflection on the uncritical enthusiasm that lies behind much proselytizing of microfinance for informal sector microenterprise it questions whether the extensive donor interest in microenterprise finance really addresses the problems of microentrepreneurs or whether it offers the illusion of a quick fix it suggests that the real problems are more profound and cannot be tackled solely by capital injections but require fundamental structural changes of the socioeconomic conditions that define informal sector activity and a fuller understanding of the psyche of informal sector entrepreneurs

securitization under asymmetric information over the business cycle l auteur etudie l efficience de la titrisation comme moyen d intermediation financiere a l aide d un modele ou sont formalises des projets d investissement heterogenes et l asymetrie de l information sur la qualite des actifs titrises il montre qu en conservant une partie du risque l emetteur des actifs titrises signale de maniere credible leur qualite

contagion of a liquidity crisis between two firms abstract this paper presents a model in which the contagion of a liquidity crisis between two nonfinancial institutions occurs because of learning activity within a common creditor pool after creditors observe what occurs in a rollover game for a firm they conjecture one another s type or attitude toward the risk associated with the firm s investment project creditors inference about one another s type then influences their decision to lend to the next firm by providing an analysis of the incidence of failure the threshold for a liquidity crisis for each firm this paper demonstrates that the risk of contagion increases sharply if it originates ex ante from a firm facing a low probability of failure in addition the paper proposes some policy measures for mitigating the severity of contagion during a liquidity crisis

brain drain or brain gain technology diffusion and learning on the job this paper studies technology transfer when technology is embodied in human capital and learning requires on the job communication between managers and workers patterns of technology diffusion depend on where high knowledge managers work and how much time they allocate to training workers managers appropriate the surplus training creates and in the open economy managers face a cross country trade off between labor costs and the value of knowledge transfer complementarity between country level efficiency and managerial knowledge makes learning more valuable in the north meaning that high knowledge managers choose to work in the north and globalization precipitates a brain drain of high knowledge southern agents to the north the brain drain reduces learning opportunities in the south and exacerbates cross country technology differences

interbank contagion at work evidence from a natural experiment this article tests financial contagion due to interbank linkages for identification we exploit an idiosyncratic sudden shock caused by a large bank failure in conjunction with detailed data on interbank exposures first we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals second the magnitude of contagion is higher for banks with weaker fundamentals third interbank linkages among surviving banks further propagate the shock finally we find results suggesting that there are real economic effects these results suggest that interbank linkages act as an important channel of contagion and hold important policy implications jel g01 g21 g28 e58 since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity this has resulted in a significant decline of trading in the interbank money markets jean claude trichet president of the european central bank december 2008

debt financing in asset markets short term debt such as overnight repurchase agreements and commercial paper was heavily used by financial institutions to fund their investment positions during the asset market boom preceding the financial crisis of 2007 2008 and later played a major role in leading to the distress of these institutions during the crisis what explains the popularity of short term debt in financing asset market investments geanakoplos 2010 presents a dynamic model of the joint equilibrium of asset markets and credit markets in which optimistic buyers of a risky asset use the asset as collateral to raise debt financing from less optimistic creditors the asset s collateral value depends on the marginal creditor s asset valuation and determines the buyers purchasing capacity to bid up the asset price geanakoplos posits that short term debt allows the asset buyers to maximize riskless leverage 1 short term debt however exposes the asset buyers to rollover risk e g acharya gale and yorulmaker 2011 and he and xiong 2012 forthcoming which is reflected in the fact that the asset buyers in geanakoplos model may not be able to obtain refinancing after a negative fundamental shock as a result they are forced to transfer their asset holdings to the

new and old models of business investment a comparison of forecasting performance previous empirical evaluations of investment models have focused on the relative in sample fit of various nonstructural models the authors evaluation extends this work along two dimensions first they augment the usual set of models with two euler equations derived explicitly from dynamic optimization under rational expectations one euler equation is typical of those found in the investment literature while the other embeds time to build lags that yield a richer dynamic structure second the authors focus on out of sample forecast performance as the primary criterion of model evaluation their results indicate that the traditional models dominate both euler equations in forecasting investment copyright 1995 by ohio state university press

who borrows from the lender of last resort understanding why banks borrow from the lender of last resort lolr during a nancial crisis is crucial to understanding the macroeconomic impact of such largescale interventions we document a strong divergence among banks take up of lolr assistance during the nancial crisis in the euro area as banks which borrowed heavily also used increasingly risky collateral we propose four explanations for this divergence

new macroeconomic evidence on monetary policy transmission in the euro area this paper presents some new macroeconomic evidence on the transmission mechanism of monetary policy in the euro area the evidence is drawn from a number of collaborative research projects undertaken by the ecb and the national central banks ncbs of the euro area and utilises a variety of national and euro area aggregate var and structural macroeconomic models a qualitatively similar pattern of results following a monetary policy shock is observed across models with the maximum output effect typically occurring after 1 2 years price effects are somewhat slower to materialise and are more persistent according to both sets of results investment is the main domestic contributor to the drop in real gdp this contrasts with findings for the us where consumption plays a dominant role in the transmission process in addition if it assumed that the exchange rate moves in line with an uncovered interest parity uip condition the short run output and price effects are largely driven by this channel in the structural macroeconomic models jel classifications c50 c52 e52 e17 e5