some evidence on herding behavior of u s banks the authors examine the international lending decisions of u s commercial banks of different sizes from 1977 to 1982 for evidence ofthe ex istence of herding behavior granger sims causality tests for the loans gran ted by the top nine the next fifteen and the remaining u s banks provide no c lear evidence of herding between the top nine and the next fifteen banks there is however evidence that the remaining banks mostly small ones herded behind the top twenty four banks overall the analysis presented here points to a very weak herding behavior copyright 1987 by ohio state university press

has regulatory reform had any impact on bank efficiency in indonesia a two stage analysis abstractmore than a decade following the severe economic crisis 1997 indonesia has undergone major regulatory changes in its banking industry this article examines the impact of these regulatory changes on the relative technical efficiency te of the indonesian banking industry employing data envelopment analysis dea and censored tobit regression model additionally the bootstrap approach of simar and wilson is employed to provide statistical properties to the dea efficiency score the findings show that the industry on average is inefficient over the period of analysis also state owned and foreign owned banks are found to be more efficient than any other group of banks finally the impact of regulatory reforms is generally positive and statistically significant

the maize transition in asia unlocking the controversy it is difficult to overstate the importance of maize in the global food economy maize and the other related coarse grains constitute half of global cereal production and trade maize based cropping systems provide the basic staple for consumption in much of subsaharan africa central america the andean region and many of the poorer parts of asia they also supply fodder for livestock in many developing nations and the basic energy source for the burgeoning livestock systems of middleand upper income countries it is not surprising therefore that the long run demand prospects for maize appear stronger than those for most other crops with that strength however comes a complexity that challenges analysis and complicates projections much of the resulting debate has focused on china at one end of the

do federal home loan bank membership and advances increase bank risk taking since the early 1990s commercial banks have turned to federal home loan bank fhlbank advances to plug the gap between loan and deposit growth is this trend worrisome on the one hand advances implicitly encourage risk by insulating borrowers from market discipline on the other advances give borrowers greater flexibility to managing interest rate and liquidity risk and access to fhlbank funding encourages members to reshape their balance sheets in ways that could lower credit risk using quarterly financial and supervisory data for banks from 1992 to 2005 we assess the effect of fhlbank membership and advances on risk the evidence suggests liquidity and leverage risks rose modestly but interest rate risk declined somewhat credit risk and overall failure risk were largely unaffected although the evidence suggest fhlbank membership and advances have had at best only a modest impact on bank risk we caution that our sample period constitutes one observation and that moral hazard could be pronounced if leverage ratios revert to historical norms

consequences of bank distress during the great depression the consequences of bank distress for the economy during the depression remain an area of unresolved controversy since john m keynes 1931 and irving fisher 1933 macroeconomists have argued that bank distress magnified the extent of the economic decline during the depression as the intermediaries controlling money and credit banks were in a special position to transmit their distress to other sectors but the mechanism through which banking distress mattered for the economy has been hotly contested milton friedman and anna j schwartz 1963 saw the contraction in the money multiplier driven in their view by panicked depositors withdrawals of deposits as the primary mechanism through which banking distress affected the real economy they described the mechanism transmitting banking distress to the real sector as operating at the national level through changes in the aggregate supply of money and interest rates bank distress reduced the money supply available to the public either through the closure of banks and the consequent freezing of bank deposits or the withdrawals of deposits by depositors that feared bank failure ben s bernanke 1983 building on fisher 1933 emphasized the transmission of monetary shocks via their effects on the balance sheets of borrowers and on the supply of credit by banks borrowers balance sheets were worsened by debt deflation as the result of fixed dollar debt obligations borrowers net worth and cash flow declined with the rising value of debt service costs relative to income borrowers with positive net present value projects but weak balance sheets had less internally generated retained earnings to invest and could not qualify for credit furthermore bernanke argued that the contraction of the money supply produced contraction of nominal income and prices relative to fixed debt service which weakened borrowers balance sheets and in turn weakened banks not only did firms financial distress reduce the number of qualified borrowers the contraction in banks net worth forced a reduction in the supply of bank loans to qualified borrowers many firms and individuals relied on banks for credit and as those banks suffered losses of capital due to asset value declines and contractions in deposits as depositors reacted to bank weakness by withdrawing their funds even borrowers with viable projects and strong balance sheets experienced a decrease in the effective supply of loanable funds bernanke termed the combined weakening of borrowers balance sheets and the contraction in bank credit supply a rise in the cost of credit intermediation the scarcity of perfect substitutes for the positive net present value investments of firms with weak balance sheets and for the credit supplied by existing banks implies that the weakening of firms and banks balance sheets the disappearance of banks and the contraction in surviving banks lending made it more difficult for the economy to channel funds to their best use thus what began as a contraction in aggregate demand became a contraction in aggregate supply which magnified adverse economic shocks and prolonged and deepened the depression the financial distress of firms and banks and the decline in bank lending were not only symptoms of the depression but means for magnifying the shocks that caused the depression bernanke s statistical evidence in support of this story is derived from time series analysis at the national level in calomiris graduate school of business 601 uris hall columbia university 3022 broadway new york ny 10027 and national bureau of economic research e mail cc374 columbia edu mason department of finance drexel university 3141 chestnut street philadelphia pa 19104 e mail joe mason drexel edu we thank valerie ramey david wheelock charles himmelberg steve zeldes gary gorton two referees and seminar participants at columbia university wharton northwestern university and the 2001 economic history association meetings for helpful comments on an earlier draft we gratefully acknowledge support from the national science foundation the university of illinois and the federal reserve bank of st louis

foreign bank entry deregulation and bank efficiency lessons from the australian experience abstract this study considers the impact of foreign bank entry on banking efficiency in australia during the post deregulation period 1988 2001 using data envelopment analysis malmquist indices and stochastic frontier analysis we find foreign banks more efficient than domestic banks which however did not result in superior profits major australian banks have used size as a barrier to entry to new entrants furthermore bank efficiency has increased post deregulation and the competition resulting from diversity in bank types was important to prompt efficiency improvements finally the recession of the early 1990s resulted in a distinct shift in the process of efficiency changes

why do bank runs look like panic a new explanation this paper demonstrates that even if depositors are fully rational and always choose the pareto dominant equilibrium when there are multiple equilibria a bank run may still occur when depositors expectations on the bank s fundamentals do not change more specifically a bank run may occur when depositors learn that noisy bank specific information will be revealed or when they learn that precise bank specific information will not be revealed the results in this paper are consistent with the empirical evidence about bank runs it also implies that suspension of convertibility can improve the efficiency of bank runs

on the economics of private money abstract the application of laissez faire to the monetary system is a key ingredient of important proposals for monetary reform both new and old that seek to discipline government creation of money through competition this paper provides an overview of issues to be encountered in the construction of theoretical models of private monetary economies including consideration of market imperfections that have been hypothesized to arise in these systems further some descriptive history of the less regulated monetary systems of 19th century new york is undertaken with an emphasis on discussing the nature of market generated banking and monetary institutions in light of these critiques

illinois free banking experience recent studies by a j rolnick and w e weber 1983 1984 suggest that the conventional view of wildcat banking during the free banking era misrepresents the actual experience and that the problems of th e period were linked to a restriction imposed on the free bank rather than the lack of regulation illinois free banking experience is re examined to see if the traditional account of wildcat banking accurat ely portrays the actual experience and to test the validity of the ro lnick and weber assertions the illinois evidence shows that the trad itional accounts of wildcat banking were exaggerated and that the rol nick and weber assertions are substantiated copyright 1988 by ohio state university press

how connected is the global sovereign credit risk network abstract this paper estimates the global network structure of sovereign credit risk by applying the diebold yilmaz connectedness methodology on sovereign credit default swaps scdss the level of credit risk connectedness among sovereigns which is quite high is comparable to the connectedness among stock markets and foreign exchange markets in the aftermath of the recent financial crises that originated in developed countries emerging market countries have played a crucial role in the transmission of sovereign credit risk while developed countries and debt ridden developing countries have played marginal roles secondary regressions show that both trade and capital flows are important determinants of pairwise connectedness across countries the capital flows became increasingly important after 2013 while the effect of trade flows decreased during the crisis and did not recover afterwards

systemic risk and competition revisited abstract this paper revisits the mechanism behind the relation between bank competition and systemic risk i decompose this risk into a component driven by banks commonality with the market and a component arising from other sources of interbank commonality i show that competition is negatively related to the latter this relationship is stronger for more informationally opaque banks financed with a larger share of uninsured sources and in countries with lower deposit insurance coverage the findings are consistent with herding incentives at banks when competition is low

the pricing of deposit insurance in the presence of systematic risk based on the merton 1977 put option framework we develop a deposit insurance pricing model that incorporates asset correlations a measurement for the systematic risk of a bank to account for the risk of joint bank failures estimates from our model suggest that actuarially fair risk based deposit insurance that considers only individual bank failure risk is underpriced leaving insurance providers exposed to net losses our estimates also capture the size premium where big banks are priced with higher deposit insurance than small banks this result is particularly relevant to the current regulatory concerns on big banks that are too big to fail above all our approach provides a unifying framework for integrating risk based deposit insurance with risk based basel capital requirements

technical and allocative efficiency in european banking this paper specifies an empirical framework for estimating both technical and allocative efficiency using the translog cost share system thus providing a solution to the issue known in the literature as the greene problem the model is applied to a large panel of european banks and the results are compared with those of a model that does not include an allocative inefficiency term and also with those obtained by using a consistent bayesian technique our results suggest that models which include only technical efficiency significantly overestimate it while parameter estimates from the model that includes both technical and allocative efficiency are very close to the ones obtained from the bayesian approach thus enhancing our confidence in the proposed methodology finally the fact that allocative efficiency of banks in our sample improves more than technical efficiency underlines the importance of including an allocative inefficiency component in parametric efficiency models

causality between export growth and industrial development empirical evidence from the nics a comment abstract in a recent article chow 1987 argued that his empirical evidence supports the hypothesis that export growth causes industrial development in this comment i point out several serious shortcomings of chow s analysis

the impact of macroeconomic and regulatory factors on bank efficiency a non parametric analysis of hong kong s banking system abstract this paper assesses the relative technical efficiency of institutions operating in a market that has been significantly affected by environmental and market factors in recent years the hong kong banking system these environmental factors are specifically incorporated into the efficiency analysis using the innovative slacks based second stage tobit regression approach advocated by fried et al fried h o schmidt s s yaisawarng s 1999 incorporating the operating environment into a nonparametric measure of technical efficiency journal of productivity analysis 12 249 267 a further innovation is that we also employ tone s tone k 2001 a slacks based measure of efficiency in data envelopment analysis european journal of operational research 130 498 509 slacks based model sbm to conduct the data envelopment analysis dea in addition to the more traditional approach attributable to banker charnes and cooper bcc banker r d charnes a cooper w w 1984 some models for estimating technical and scale efficiencies in data envelopment analysis management science 30 1078 1092 the results indicate high levels of technical inefficiency for many institutions considerable variations in efficiency levels and trends across size groups and banking sectors and also differential impacts of environmental factors on different size groups and financial sectors surprisingly the accession of hong kong to the people s republic of china episodes of financial deregulation and the 1997 1998 south east asian crisis do not seem to have had a significant independent impact on relative efficiency however the results suggest that the impact of the last mentioned may have come via the adverse developments in the macroeconomy and in the housing market

rational herding in financial economics abstract this paper briefly describes recent papers on the economics of rational herding in financial markets some models can predict perfect herding in which rational agents all act alike without any countervailing force such herding typically arises either from direct payoff externalities negative externalities in bank runs positive externalities in the generation of trading liquidity or in information acquisition principal agent problems based on managerial desire to protect or signal reputation or informational learning cascades the paper also provides a few pointers to related literature and suggests issues to be addressed in future research

information management in banking crises a regulator resolving a bank faces two audiences depositors who may run if they believe the regulator will not provide capital and banks which may take excess risk if they believe the regulator will provide capital when the regulator s cost of injecting capital is private information it manages expectations by using costly signals i a regulator with a low cost of injecting capital may forbear on bad banks to signal toughness and reduce risk taking and ii a regulator with a high cost of injecting capital may bail out bad banks to increase confidence and prevent runs regulators perform more informative stress tests when the market is pessimistic

free bank failures risky bonds versus undiversified portfolios almost 30 of the 872 banks established under the free banking system 1837 62 are considered failures unable to reimburse noteholders for the full value of their bank notes upon closure lacking sufficient data economists have focused on one of two general failure explanations poor regulation design or undiversified bank portfolios i test both explanations within hazard functions using warren weber s annual balance sheet data for almost every antebellum bank my results suggest that free banking s bond secured note issue was the underlying problem but individual banks could have avoided failure by diversifying their assets with loans and controlling their circulation

domestic bank runs and speculative attacks on foreign currencies abstract the paper extends the international transmission of financial crisis literature by illustrating how a domestic bank run can cause a speculative attack on foreign currencies the idea is that when domestic banks invest abroad a domestic bank run will give way to a repatriation of foreign capital if the repatriation causes a depletion of the foreign central bank s foreign exchange reserves then the foreign currency will be devalued as such a devaluation will render domestic banks insolvent in the rational equilibrium domestic bank runs will 1 cause a speculative attack on the foreign currency and 2 be self justified

spatial integration transport costs and the response of local prices to policy changes in ghana abstract this paper investigates the respective roles of spatial integration and transport costs in explaining price changes in ghana we introduce a model of price formation and market integration that incorporates the price transmission process between local and central markets and also captures the implications for volatility of local prices we explore the implications of the model for the time path of price adjustments as determined directly and indirectly through the marketing sector we show that the price adjustment process in a local market is determined by the degree of interdependence between that market and the central market in which a price shock originates and estimate the intertemporal and interspatial dynamics of the price adjustment process using data from wholesale maize markets in ghana we find that reductions in local prices and local price variance following the introduction of economic reforms in 1983 can be traced to both local and central market forces but that differences in the degree of market integration have important implications for long run changes in transport costs and the evolution of prices in outlying markets

herd behaviour by japanese banks after financial deregulation this paper investigates whether japanese banks followed herd behaviour during the 1980s and 1990s the results indicate the existence of herding during the sample period while the inefficiency of herding is concentrated in the early to mid 1980s the period immediately after financial deregulation began evidence for the inefficient herding is observed in the behaviour of banks that made loans to new borrowers and in the behaviour of banks that followed the type of banks that were more informed on lending to new borrowers on the other hand inefficient herd behaviour is rarely observed in the 1990s

distribution of cost and profit efficiency evidence from indian banking this paper uses the nonparametric dea methodology to estimate cost and profit efficiency of indian banks during the post reform period the results show considerable variation in average levels of profit efficiency across various ownership categories of banks in general state owned banks are found to be more efficient than their private counter parts further efficiency tends to be low among the small banks assets up to rs 50 billion indicating that at the existing scale of operations these banks are operating far below the efficient frontier we also examine the distribution of efficiency using nonparametric kernel density estimates the analysis reveals a rightward shift of the efficiency distribution over the years a major part of this shift comes from the state owned banks based on the conditional distribution the study finds strong evidence of ownership explaining the efficiency differential of banks additionally bank size and product mix are also found to be important although to a lesser extent

financial distress drivers in brazilian banks a dynamic slacks approach abstract this study applies the dynamic slacks based model dsbm developed by tone and tsutsui 2010 in order to assess the evolution of input saving output increasing potentials in major brazilian banks from 1996 to 2011 we propose that these potentials or slacks can be used as proxies for an eventual financial distress situation in the future the main research objective is to determine whether or not different characteristics of bank type related to ownership size and merger and acquisition processes are significantly related to inefficiency levels and by extension to an eventual financial distress situation since higher inefficiency levels also imply lower input saving output decreasing potentials based on a balanced panel model secondary data from economatica were collected and analyzed results indicate higher inefficiency levels and slacks in small public and national banks policy implications are also addressed

a dynamic stochastic frontier model to evaluate regional financial efficiency evidence from chinese county level panel data abstract studies have widely used stochastic frontier models to assess financial efficiency however traditional static approaches do not take dynamic characteristics of financial systems into account this article develops a dynamic stochastic frontier model to evaluate regional financial efficiency and provides an empirical test of the model by using panel data of 62 chinese counties during the 2001 2010 period the model measures the dynamic impact of the input output variables and environmental variables on financial efficiency and allows for the separation of technical change from the change in technical efficiency the results show that the dynamic model provides a better fit to the data than the static model in addition a gradient difference emerges in the regional financial efficiency among the six major regions of china the results offer practical implications for the development of regional financial services in china as well as other developing countries and emerging economies

information contagion and bank herding we show that the likelihood of information contagion induces profit maximizing bank owners to herd with other banks when bank loan returns have a common systematic factor the cost of borrowing for a bank increases when there is adverse news on other banks since such news conveys adverse information about the common factor the increase in a bank s cost of borrowing relative to the situation of good news about other banks is greater when bank loan returns have less commonality in addition to the systematic risk factor hence banks herd and undertake correlated investments so as to minimize the impact of such information contagion on the expected cost of borrowing competitive effects such as superior margins from lending in different industries mitigate herding incentives

dynamic effects in inefficiency evidence from the colombian banking sector firms face a continuous process of technological and environmental changes that requires them to make managerial decisions in a dynamic context however costs and constraints prevent firms from making instant adjustments towards optimal conditions and may cause inefficiency to persist in time we propose a dynamic inefficiency specification that captures differences in the adjustment costs among firms and non persistent effects of inefficiency heterogeneity the model is fitted to a ten year sample of colombian banks the new specification improves model fit and have effects on efficiency estimations overall colombian banks present high inefficiency persistence but important differences between institutions are found in particular merged banks present low adjustment costs that allow them to recover rapidly efficiency losses derived from merging processes

how does the stock market view bank regulatory capital forbearance policies during the subprime crisis the fdic has shown once again laxity in resolving and closing insolvent institutions ronn and verma 1986 call the tolerance level below which a bank closure is triggered the regulatory policy parameter we derive a model in which we make this parameter stochastic and bank specific to infer the stock market view of the regulatory capital forbearance value for 565 u s listed banks during 1990 to 2012 the countercyclical forbearance fraction in capital most substantial in recessions could represent 17 on average of the market valuation of bank equity and could go as high as 100

bank suspension of convertibility abstract a banking panic occurs when depositors at all banks seek a large reduction in their deposit holdings suspension of convertibility of demand deposits into currency was the banking system s response to a banking panic when depositors are incompletely informed about the state of bank investments a panic can occur when depositors expect capital losses conditional on having observed noisy indicators of the state of bank investments banks with superior information about the investments can signal to depositors by suspending convertibility that continuation of the long term investments is mutually beneficial

the international financial market and us interest rates abstract this paper examines the linkages between the eurodollar and us domestic financial markets it is shown that using weekly data allows the isolation of significant fluctuations being transmitted between markets in both directions in particular financial markets in the us are affected significantly by foreign events it is impossible to reach precise conclusions about the causes of historical variation in the rates however this paper provides evidence that at most 40 of the variation in eurodollar interest rates over the 1975 1978 period can be traced to domestic us sources and that between about one fifth and two thirds of the variation in domestic rates can be traced to foreign sources

incorporating equity market information into supervisory monitoring models we examine whether equity market variables such as stock returns and equity based default probabilities are useful to u s bank supervisors for assessing the condition of domestic bank holding companies we develop a model of supervisory ratings that combines supervisory and equity market information we find that the model s forecasts anticipate supervisory rating changes by up to four quarters relative to simply using supervisory variables the inclusion of equity market variables in the model does not improve forecast accuracy however we argue that equity market information should still be useful for forecasting supervisory ratings and should be incorporated into supervisory monitoring models

banking panics the role of the first come first served rule and information externalities this paper proposes that both the first come first served rule and information externalities are important in causing contagious bank runs the first come first served rule creates a negative payoff externality among depositors this payoff externality forces depositors to respond to early noisy information such as failures of other banks therefore failures of a few banks may trigger runs on other banks contagious runs may occur even if i depositors choose the pareto dominant equilibrium when there are multiple equilibria and ii the deposit contract is chosen to maximize depositor welfare the feasibility of reforming the fdic to impose market discipline is also investigated

north south the implications for multinational banking abstract international finance should be of great value to developing countries because their potential growth paths are out of step with the world economy and because the gambles they must take to develop are much more diversifiable in the context of the world economy than locally however the actual benefits of north south finance have been limited by an overreliance on non specific bank credit with the inherent limitations and by errors in judgement by both borrowers and lenders in fact the current crisis threatens to reverse many of the earlier gains while the current crisis is primarily the result of the world recession the severity of its effects on lenders and borrowers reflects three key aspects of bank credits 1 its perverse real repayment patterns 2 its specific nature which implies that risks are transferred only through generalized non performance with its attendant deadweight costs and 3 its concentration in a small but critical segment of capital markets these characteristics would be serious even with ideal behavior by lenders and borrowers but they also can lend to inappropriate and possibly erratic behavior specific suggestion for restructuring the system of north south finance are given including 1 smoothing repayment patterns 2 increasing repayment flexibility 3 increasing risk bearing non specific finance 4 increasing non recourse financing and 5 increasing project specific risk capital

on the sources of heterogeneity in banking efficiency literature one learns two main lessons from studying the great quantity of banking efficiency literature these lessons regard the heterogeneity in results and the absence of a comprehensive review aimed at understanding the reasons for this variability surprisingly although this issue is well known it has not been systematically analyzed before in order to fill this gap we perform a meta regression analysis mra by examining 1 661 efficiency scores retrieved from 120 papers published over the period 2000 2014 the meta regression is estimated by using the random effects multilevel model reml because it controls for within study and between study heterogeneity the analysis yields four main results firstly parametric methods yield lower levels of banking efficiency than nonparametric studies this holds true even after controlling for the approach used in selecting the inputs and outputs of the frontier secondly we show that banking efficiency is highest when using the value added approach followed by estimates from studies based on the intermediation method whereas those based on the hybrid approach are the lowest thirdly efficiency scores also depend on the quality of studies and on the number of observations and variables used in the primary papers as far as the effects of sample size dimension and quality of papers are concerned there are significant differences in sign and magnitude between parametric and nonparametric studies finally cost efficiency is found to be higher than profit and production efficiency interestingly mra results are robust to the potential outliers in efficiency and sample size distributions

food aid and food markets lessons from mozambique abstract a consensus has emerged on food aid policy acknowledging the importance of short run relief considerations while emphasizing that such policy must be driven by a long run developmental perspective this requires explicit attention to the effects of food aid on food markets yet it has long been clear that short and long run objectives of food aid may conflict this tension stands in high relief in mozambique one of the most food aid dependent countries in the world this paper examines the factors determining the effects of yellow maize food aid on markets for yellow maize and white maize the staple crop in mozambique the paper finds that a food aid has helped fuel the growth of a competitive small scale milling industry and informal marketing system b yellow and white maize are substitutes in consumption and c continued availability of yellow maize food aid at prices well below import parity will depress incentives for producers and traders to invest in the white maize production and marketing system this paper presents recommendations for reforming the monetized food aid program and coordinating it more effectively with emergency aid

international lending patterns of u s commercial banks the international lending behavior of the u s commercial banks depends upon economic links between countries much of the difference between the international loan portfolios of u s banks and those of the non u s banks may be explained by the patterns of trade flows and investments by nonfinancial corporations these trade flows and investment patterns explain most of the variations in the bank lending patterns for 70 80 percent of the countries the analysis points to an increasing influence of economic ties on the lending process over time

reputation risk taking and macroprudential policy abstract this paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities in our model unprofitable banks have strong incentives to invest in risky assets when macroeconomic fundamentals are good in order to avoid the stigma of being assessed as low ability by the market we show that across the system countercyclical capital requirements that deter such gambling are constrained optimal when fundamentals are neither extremely weak nor extremely strong

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

bank runs and currency run in a system without a safety net argentina and the tequila shock abstract this paper tests the random withdrawals vs informed based theories of bank runs in the context of the bank panic that took place in argentina as a consequence of the mexican devaluation of december 20 1994 this evidence is unique in several ways it is the case of a contemporary banking system with virtually no explicit safety net a currency board with no deposit insurance scheme and a case in which the bank runs were triggered by a currency run the findings of the paper provide support to the informed based theories and show that depositors are concerned with the impact of a currency run on bank solvency

turning bagehot on his head lending at penalty rates when banks can become insolvent ever since bagehot s 1873 pioneering work it is a widely accepted wisdom that in order to alleviate ex ante bank moral hazard a lender of last resort should lend at penalty rates only in a model in which banks are subject to shocks but can exert effort to affect the likelihood of these shocks we show that the validity of this argument crucially relies on banks always remaining solvent the reason is that when banks become insolvent bagehot s prescription dictates to let them fail penalty rates charged when banks are illiquid but solvent then reduce banks incentives to avoid insolvency ex ante and thus increase bank moral hazard we derive a condition which shows precisely when this effect on ex ante incentives outweighs the traditional one and show that it is fulfilled under plausible scenarios

the impact of liberalization on the productive efficiency of indian commercial banks abstract we examine the productive efficiency of 70 indian commercial banks during the early stages 1986 1991 of the ongoing period of liberalization we use data envelopment analysis to calculate radial technical efficiency scores we then use stochastic frontier analysis to attribute variation in the calculated efficiency scores to three sources a temporal component an ownership component and a random noise component we find publicly owned indian banks to have been the most efficient followed by foreign owned banks and privately owned indian banks we also find a temporal improvement in the performance of foreign owned banks virtually no trend in the performance of privately owned indian banks and a temporal decline in the performance of publicly owned indian banks we attempt to explain these patterns in terms of the government s evolving regulatory policies

determinants of bank efficiency the case of brazil abstract this paper analyzes the efficiency of the brazilian banking sector over the post privatization period of 2000 2007 we employ a bayesian stochastic frontier approach which provides exact efficiency estimates and confidence intervals and thus allows an accurate comparison across institutions and bank groups the results suggest that large banks are the most cost and profit efficient supporting the concentration process observed in recent years foreign banks have achieved a good performance through either the establishment of new affiliates and the acquisition of local banks the remaining public banks have had improvements in cost efficiency but are relatively profit inefficient finally we observe a positive impact of capitalization on efficiency

bailouts and systemic insurance abstract we revisit the link between bailouts and bank risk taking bailout expectations create moral hazard increase bank risk taking however when an individual bank s success depends on both its effort and the overall stability of the banking system bailouts that shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking this systemic insurance effect is more important when bailout rents are low while contagion risk is high the optimal policy is then to make bailouts not difficult but effective associated with lower rents we further show that besides better bank resolution a powerful means to reduce bailout rents is higher ex ante bank capital since it implies a larger bank equity cushion that can be expropriated in a resolution this highlights an important complementarity between bank capital regulation and bailouts as tools to enhance financial stability

bank runs in the free banking period free banks in the united states issued private banknotes without discretionary restriction of entry previous research suggests explanations for noteholders relatively large losses and the substantial number of banks that closed the authors examine these hypotheses and the hypothesis that contagious runs were important the evidence provides no support for the importance of wildcat banking due to par versus market valuation of bond reserves episodic but not general support for the importance of declining bond prices and support for contagion effects and contemporaries knowledge of them with little or no impact on the number of banks that closed copyright 1994 by ohio state university press

evolution of bank efficiency in brazil a dea approach abstract this paper investigates cost technical and allocative efficiencies for brazilian banks in the recent period 2000 2007 we use data envelopment analysis dea to compute efficiency scores brazilian banks were found to have low levels of economic cost efficiency compared to banks in europe and in the us for the period with high macroeconomic volatility 2000 2002 the economic inefficiency in brazilian banks can be attributed mainly to technical inefficiency rather than allocative inefficiency state owned banks are significantly more cost efficient than foreign private domestic and private with foreign participation there is no evidence of differences in economic efficiency due to type of activity and bank size these results may provide some useful guidance for financial regulators and bank managers

the central banking role of clearinghouse associations most of this clearinghouse currency was illegal but no one thought of prosecuting or interfering with its issuers as practically all of it bore the words payable only through the clearing house its holders could not demand payment for it in cash in plain language it was an inconvertible paper money issued without the sanction of law yet necessitated by conditions for which our banking laws did not provide when banks were being run upon and legal money had disappeared in hoards in default of any legal means of relief it worked effectively and doubtlessly prevented multitudes of bankruptcies which otherwise would have occurred andrew 1908b p 516

back to the future backtesting systemic risk measures during historical bank runs and the great depression abstract we evaluate the performance of two popular systemic risk measures covar and srisk during eight financial panics in the era before fdic insurance bank stock price and balance sheet data were not readily available for this period we rectify this shortcoming by constructing a novel dataset for the new york banking system before 1933 our evaluation exercise focuses on two challenges ranking systemically important financial institutions sifis and financial crisis prediction we find that covar and srisk meet the sifi ranking challenge that is they help identify systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months before panics in contrast aggregate covar and srisk are only somewhat effective at predicting financial crises

the 1985 ohio thrift crisis the fslic s solvency and rate contagion for retail cds this paper uses both an arima transfer function intervention model and a panel data analysis to examine the effect of the ohio deposit insurance crisis in 1985 on the pricing of six month retail certificates of deposit cds for federally insured ohio banks and savings and loans adjusting for pricing reactions due to changes in market rates we find a significant unanticipated rise in cd rate premiums on the initial event week of the crisis that continued for approximately seven weeks consistent with a contingent insurance guarantee hypothesis rate premiums are found to be risk based from both a regulator s and a bank manager s perspective it is important to understand the nature of depositors reactions to a depository institution crisis recent events including large real estate loan losses for major banks the rhode island deposit insurance crisis and the general accounting office s gao announcement that a large bank failure or a severe recession could jeopardize the solvency of the federal deposit insurance corporation fdic have renewed debate over the potential for a widespread loss of confidence in the banking system in particular concern has been expressed over the potential for instability in retail deposit markets in a deregulated environment see smith 1984 1

asset commonality debt maturity and systemic risk we develop a model in which asset commonality and short term debt of banks interact to generate excessive systemic risk banks swap assets to diversify their individual risk two asset structures arise in a clustered structure groups of banks hold common asset portfolios and default together in an unclustered structure defaults are more dispersed portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency when bank debt is short term creditors do not roll over in response to adverse signals and all banks are ine ciently liquidated this information contagion is more likely under clustered asset structures in contrast when bank debt is long term welfare is the same under both asset structures

the information content of bank exam ratings and subordinated debt prices do supervisory examinations of large commercial banking firms produce useful information not already reflected in market prices to investigate this question we apply a new research methodology to data on bank exam ratings and the subordinated debt risk spreads of their parent holding companies we find that government exams do produce new value relevant information that debenture prices do not immediately reflect this information and that the market prices the likely regulatory actions implied by this information these results have implications for market versus regulatory discipline at large banking firms and for proposals to make subordinated debt mandatory for these firms

uncertainty aversion and systemic risk we propose a new theory of systemic risk based on knightian uncertainty or ambiguity we show that due to uncertainty aversion beliefs on future asset returns are endogenous and bad news on one asset class induces investors to be more pessimistic about other asset classes as well this means that idiosyncratic risk can create contagion and snowball into systemic risk furthermore in a diamond and dybvig 1983 setting we show that surprisingly uncertainty aversion causes investors to be less prone to run individual banks but runs will be systemic in addition we show that bank runs are associated with stock market crashes and ight to quality finally we argue that increasing uncertainty makes the nancial system more fragile and more prone to crises we conclude with implications for the current public policy debate on the management of nancial crisis

an efficiency comparison of the non life insurance industry in the bric countries abstract we analyze the efficiency of non life insurance companies in four of the fastest growing markets in the world the bric brazil russia india china countries an innovative feature of this paper is its incorporation of uncontrollable variables in the efficiency analysis using multi stage data envelopment analysis dea this approach captures cross country differences such as the political and economic environment and allows distinguishing between managerial inefficiency and inefficiency due to environmental conditions we find that the environment affects the efficiency of non life insurers operating in the bric countries furthermore in a regression of firm characteristics on efficiency scores we identify four drives of efficiency size profitability solvency and ownership form the results further our understanding of the insurance industry in the bric countries in regard to its efficiency and the environment in which it operates

institutional uncertainty and the maturity of international loans abstract this paper shows that non economic uncertainty in foreign countries contributes to a bias toward short term maturity in international lending frequent government changes and weak institutions explain why some countries find it difficult to obtain long term financing debt maturity is also explained by the level of economic and financial development of a country the composition of loan portfolios in terms of the type of borrowers and debt restructuring programs among other variables the results are obtained using data on international lending by three groups of u s banks large medium sized and small small banks shorten the maturity of their international loans in response to uncertainty to a greater extent compared to large banks

suspension of payments bank failures and the nonbank public s losses abstract we present evidence on the effects of suspensions of payments from an episode that is close to a controlled experiment for examining those effects in 1861 about 44 of the banks in wisconsin closed 81 of the banks in illinois closed and noteholders suffered substantial losses the historical record suggests that an effective suspension of payments in wisconsin but not in illinois may explain the difference our statistical evidence indicates that the suspension of payments increased the probability of a bank remaining open by about 21 percentage points and decreased noteholders losses by about 14 cents per dollar

contagion and bank failures during the great depression the june 1932 chicago banking panic the authors examine the social costs of asymmetric information induced bank panics in an environment without government deposit insurance their case study is the chicago bank panic of june 1932 the authors compare the ex ante characteristics of panic failures and panic survivors despite temporary confusion about bank asset quality on the part of depositors during the panic which was associated with widespread depositor runs and bank stock price declines the panic did not produce significant social costs in terms of failures among solvent banks copyright 1997 by american economic association

technical scale and allocative efficiencies of turkish banking industry this paper investigates input and output efficiency in the turkish banking industry to understand the impact of size international variables ownership control and governance on profit cost allocative technical pure technical and scale efficiency measures employing a non parametric approach along with a parametric approach we estimate the efficiency of turkish banks over the 1988 1996 period this period allows us to account for the changes in the macro economy and regulatory treatment of the turkish banking industry over time our results suggest that the heterogeneous characteristics of banks have significant impact on their efficiency moreover cost and profit efficiencies of the turkish banks have exacerbated over time results also indicate that the dominant source of inefficiency in turkish banking is due to technical inefficiency rather than allocative inefficiency which is mainly attributed to diseconomies in scale to the extent that they chose an inefficient level of production bank management is responsible for scale inefficient operations however increasing demand for banking services in the nineties fueled by the state s increasing demand for funds to finance chronic budget deficits and high growth policies and the oligopolistic nature of the turkish banking market do not justify scale adjustments our policy suggestions are that the government implement financial reform packages that foster competition in the banking market and that the industry devise incentive schemes to improve managerial efficiency

loan pushing and triadic relations this paper is an attempt to define and explore the phenomenon of loan pushing in international lending in the 1970s the earliest descriptions of loan pushing are anecdotal this paper surveys the various facets that emerge from these anecdotes and suggests a possible definition that serves as the basis for a theoretical model this model inspired by the confessions of a banker explores a triadic relationship between a corporation in the lender country the lender bank and a borrower in a developing country and suggests that a rational profit maximizing commercial bank could end up pushing loans on to the borrower changes in international commercial banking in the 1970s that facilitated this type of loan pushing are discussed next to the extent that the loan pushing doctrine is valid it implies that the commercial banks were at least as responsible for the massive lending boom of the 1970s as the borrowers and should have been made to bear the cost of adjustment as well the process of sovereign lending in the 1970s appears to consist of voluntary and mutually agreeable contracts between the transnational commercial banks and credit seeking developing countries the suggestion that there could be in this process an element of aggressiveness on the part of the commercial banks that actively and systematically pushed loans on to developing country borrowers may at first sight seem inconceivable if a borrower voluntarily enters into a loan contract he is obviously doing so because the contract is beneficial if such is the case then would it be correct to characterize the process as one of loan pushing also the commercial banks are supposed to be rational profit maximizers thus the amount of lending cannot be more than optimal what then is meant by loan pushing these are a few questions that immediately come to mind it has been argued that international credit can contribute to increasing donor exports see for instance winkler 1929 hyson and strout 1968 gwynne 1983 taylor 1985 darity and horn 1988 basu 1991 basu and deshpande 1995 this is indeed one of the arguments used to explain the phenomenon of loan pushing however not the only one the aim of this paper is to explore the idea of loan pushing a little more deeply by first trying to understand the concept along with a brief review of the literature in the area section 2 the confessions of a young banker gwynne 1983 provide the basis of the theoretical model section 3 which considers a triadic relationship between a commercial bank in a creditor country a debtor nation and a corporation in the creditor country and the compulsions of loan pushing arising

financial contagion and economic development an epidemiological approach abstract we develop an epidemiological approach to analyze how financial contagion may affect and be affected by economic activity we show that according to specific parameter values the economy may converge either to a non speculative or to a speculative equilibrium in the former situation the level of per capita income is maximal while in the latter it is reduced by financial contagion the presence of economic and financial feedback effects may also give rise to macroeconomic fluctuations during the transitional path clearly showing that such economic and financial links are an important driver of the short run macroeconomic performance by extending the analysis to a spatial dimension we also show that financial contagion in some specific region may propagate quickly also in regions far away from those in which the contagion initially occurs highlighting the role of regional policy coordination to avoid interregional contagion

bank panics government guarantees and the long run size of the financial sector evidence from free banking america governments attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility confidence in these guarantees presumably alters the size of the financial sector but observing the long run consequences of failed guarantees is difficult we look to america s free banking era and compare the consequences of a broken guarantee during the indiana centered panic of 1854 to the panic of 1857 in which guarantees were honored our estimates of a model of endogenous market structure indicate substantial negative long run consequences to financial depth when panics cast doubt upon a government s ability to honor its guarantees

why bank credit policies fluctuate a theory and some evidence in a rational profit maximizing world banks should msdntain a credit policy of lending if and only if borrowers have positive net present value projects why then are changes in credit policy seemingly correlated with changes in the condition of those demanding credit this paper argues that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions this leads to a theory of low frequency business cycles driven by bank credit policies evidence from the banking crisis in new england in the early 1990s is consistent with the assumptions and predictions of the theory

bank systemic risk and macroeconomic shocks canadian and u s evidence abstract this paper investigates how banks as a group react to macroeconomic risk and uncertainty more specifically it examines the relationship between bank systemic risk and changes and disruptions in economic conditions adopting the methodology of beaudry et al 2001 we introduce a new estimation procedure based on egarch to refine the framework developed by baum et al 2002 baum et al 2004 baum et al 2009 and quagliariello 2007 quagliariello 2009 and we analyze the relationship in the current industry context i e in the context of market based banking our results confirm that banks tend to behave more homogeneously vis a vis macroeconomic uncertainty in particular we find that both the cross sectional dispersion of loans to assets and the cross sectional dispersion of non interest income share shrink during slow growth episodes and particularly during financial crises when the resilience of the banking system is at its lowest more importantly our main findings indicate that the cross sectional dispersion of loans to assets has increased in the last decade whereas the cross sectional dispersion of non interest income share appears to be more volatile and sensitive to macroeconomic shocks

why banks are not too big to fail evidence from the cds market this paper argues that bank size is not a satisfactory measure of systemic risk because it neglects aspects such as interconnectedness correlation and the economic context in order to differentiate the effect of bank size from that of systemic importance we control for systemic risk using the covar measure introduced by adrian and brunnermeier 2011 we show that a bank s contribution to systemic risk has a significant negative effect on banks credit default swap cds spreads supporting the too systemic to fail hypothesis once we control for systemic risk bank size relative to gross domestic product gdp has either no or a positive effect on banks cds spreads the effect of bank size increases in the home country s debt ratio and turns positive already at moderate debt ratios this result is consistent with the too big to save hypothesis we show further that the effect of systemic risk rises sharply at the onset of the financial crisis in august 2007 but weakens after the failure of lehman brothers reflecting changing bailout expectations taken together our results suggest that banks are not too big to fail but they may be too systemic to fail and too big to save andreas barth and isabel schnabel

the causes of free bank failures a detailed examination abstract in this paper we propose and test a new explanation of bank behavior during the free banking era 1837 1863 arguing against the conventional view that free bank failures were due to wildcat banking we claim they were caused by falling asset prices confronting both explanations with our new and detailed data set developed from state auditor reports we find that the falling asset price explanation of free bank failures explains far more failures than does the wildcatting hypothesis

on market integration and liberalisation method and application to ethiopia the article suggests further improvements in the methodology to analyse market integration it provides corrections to and methodological extensions of recent work in this journal it also presents a way of applying market integration techniques to the analysis of shocks such as market liberalisation and war the method is applied to the effects of liberalisation and the end of the civil war on food markets in ethiopia the conclusion is that liberalisation had important effects on the long run and short run integration of food markets