economics of leadership and hierarchy this paper explores leadership within hierarchical organizations for each hierarchy i consider a dynamic signaling game in which each player observes only the actions of his direct superiors before choosing his action at the top of the hierarchy are the leaders who learn the state from nature the hierarchy controls the flow of information and the timing of the game and determines the equilibrium output and welfare i show that the welfare optimal hierarchy is the chain because it maximizes the incentive of players to lead by example for their subordinates the chain remains optimal even in the presence of verifiable or unverifiable costly information acquisition by the leaders

market price accounting and depositor discipline the case of japanese regional banks abstract we examine the determinants of japanese regional bank pricing to market decisions and their impact on the intensity of depositor discipline in the form of the sensitivity of deposit growth to bank financial conditions to obtain consistent estimates we first model and estimate the bank pricing to market decision and then estimate the intensity of depositor discipline after conditioning for that decision we find that banks were less likely to adopt market price accounting the larger were their unrealized securities losses we also find statistically significant evidence of depositor discipline among banks that elected to price to market our results indicate that depositor discipline was more intense for the subset of banks that adopted market price accounting

bank regulation and risk taking incentives an international comparison of bank risk abstract this paper uses a panel database of 251 banks in 36 countries to analyze the impact of bank regulation on bank charter value and risk taking after controlling for deposit insurance and for the quality of a country s contracting environment the results indicate that regulatory restrictions increase banks risk taking incentives by reducing their charter value banks in countries with stricter regulation have a lower charter value which increases their incentives to follow risky policies these results corroborate a negative relation between regulatory restrictions and the stability of a banking system deposit insurance has a positive influence on bank charter value mitigating the risk shifting incentives it creates this positive influence disappears when we control for the possible endogeneity of deposit insurance

modelling the causes and manifestation of bank stress an example from the financial crisis in this study i model the predictors and manifestation of bank stress during the financial crisis using a multiple indicator multiple cause model unlike most early warning models that predict failure probabilities this article describes a framework for predicting a broader notion of bank stress that need not rely on regulatory decisions as such this method can be easily applied to large institutions and avoids the complications associated with modelling a regulatory decision such as failure or a camels downgrade using bank reliance on term auction facility funds and the out of sample incidence of failures and acquisitions i demonstrate that the measure of bank stress generated here accords with other notions of bank level distress finally this method catalogues predictors of distress during the financial crisis thus this article can help assess the validity of several recent regulatory proposals i find that those banks entering the crisis with more tier 1 capital more liquid balance sheets

the emergence of market monitoring in japanese banks evidence from the subordinated debt market abstract this paper uses a unique data set on the spreads of subordinated debts issued by japanese banks to investigate the presence of market monitoring the results show that subordinated debt investors punished weak banks by requiring higher interest rates moreover i find that the spreads and the sensitivity of spreads to moody s bank ratings both increased dramatically after the japanese government allowed a large city bank hokkaido takushoku bank to fail and passed the financial reform act and the rapid revitalization act in the late 1990s these results suggest that the decline of conjectural guarantee led to the emergence of market monitoring in addition i find the relationship between spreads and accounting measures of bank risk to be quite fragile

cross border bank m as and risk evidence from the bond market the impact of cross border bank m as on bank risk remains an open question though geographically diversifying bank m as have the potential to reduce the risk of bank insolvency they also have the potential to increase that risk due to the increase in risk taking incentives by bank managers and stockholders following these transactions this paper empirically investigates whether cross border bank m as increase or decrease the risk of acquiring banks as captured by changes in acquirers yield spreads this paper also investigates how differences in the institutional environments between bidder and target countries affect changes in yield spreads following m a announcements the study finds that bondholders in general perceive cross border bank m as as risk increasing activities unlike domestic bank mergers specifically on average yield spreads increase by 4 13 basis points following the announcement of cross border m as this study also finds that these yield spreads are significantly affected by the differences in investor protection and deposit insurance environments between the transacting countries however the study does not find that the regulatory and supervisory environment in the home countries of the transacting parties significantly affects the changes in yield spreads the overall evidence suggests that regulators should judge the relative environment in both the home and the host countries in evaluating the associated risks of an active multinational financial institution and in setting the sufficiency of the banks reserve positions

incentives and loss of control in an optimal hierarchy this paper studies incentives and loss of control in a hierarchy model which combines and generalizes the models of williamson calvo wellisz and keren levhari in our model of the hierarchy the levels of effort from managers and workers the wage scales the span of control and in particular the total number of tiers are all endogenous using optimal control techniques we show that in the optimal hierarchy the wage scales and effort levels decrease as one moves down the hierarchy as the hierarchy expands with no technological progress workers exert less effort and are paid less top managers work harder and are paid more and the wage distribution becomes increasingly skewed

real time decentralized information processing as a model of organizations with boundedly rational agents this paper studies the properties of real time decentralized information processing as a model of human information processing in organizations real time decentralized processingwhich models the computation of decision rules in a temporal decision problem by members of an organization captures both the cost of computation in terms of the members time and the constraints imposed by computational delay on the use of recent information unlike a batch processing model it has no single measure of delay because decisions are computed from data of heterogeneous lags furthermore decentralization does not unambiguously reduce delay because processing a message precludes processing current data 1 real time decentralized information processing

are bank shareholders enemies of regulators or a potential source of market discipline abstract in moral hazard models bank shareholders have incentives to transfer wealth from the deposit insurer that is maximize put option value by pursuing riskier strategies for safe banks with large charter value however the risk taking incentive is outweighed by the possibility of losing charter value focusing on the relationship between tobin s q and an ex ante measure of the failure probability this paper develops a semi parametric model for estimating the critical level of bank risk at which put option value starts outweighing charter value from these estimates we infer the prevalence of moral hazard examining publicly held bank holding companies bhc during the tumultuous 1986 1992 period we find that shareholders risk taking incentives were confined to a small fraction of highly risky institutions furthermore our analysis shows that the inflection point at which banks begin to tilt in favor of moral hazard increased substantially in 1993 2005 these findings are encouraging to bank regulators and legislators because they indicate that tighter capital rules and more rigorous supervision introduced by several legislative initiatives in the 1990s have helped squeeze a lot of the moral hazard incentives out of the banking system

do depositors punish banks for bad behavior market discipline deposit insurance and banking crises this paper empirically investigates two issues largely unexplored by the literature on market discipline we evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline we focus on the experiences of argentina chile and mexico during the 1980s and 1990s we find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates deposit insurance does not appear to diminish the extent of market discipline aggregate shocks affect deposits and interest rates during crises regardless of bank fundamentals and investors responsiveness to bank risk taking increases in the aftermath of crises

an experimental analysis of contingent capital with market price triggers we report an experiment that evaluates three market based regimes for triggering the conversion of contingent capital bonds into equity a fixed trigger regime where a price threshold triggers mandatory conversion a regulator regime where regulators make conversion decisions based on prices and a prediction market regime where regulators also observe a market that predicts conversion consistent with theory we observe inefficiencies and conversion errors in the fixed trigger and regulator regimes the prediction market somewhat improves the regulator s performance but inefficiencies and conversion errors persist the regulator regime has conversion errors over the widest range of shocks

corporate governance of banks a survey this paper reviews the empirical literature on the corporate governance of banks we start by highlighting the main differences between banks and nonfinancial firms and focus on three characteristics that make banks special i regulation ii the capital structure of banks and iii the complexity and opacity of their business and structure next we discuss the characteristics of corporate governance in banks and how they differ from the governance of nonfinancial firms we then review the evidence on three governance mechanisms i boards ii ownership structures and iii executive compensation our review suggests that some of the empirical regularities found in the literature on corporate governance of nonfinancial institutions such as the positive negative association between board independence size and performance do not hold for banks also existing work provides no conclusive results regarding the relationship between different governance mechanisms and various measures for banks performance we discuss potential explanations for these mixed results

inferring market information from the price and quantity of s l deposits abstract this paper infers market information embedded in the price and quantity of s l deposits while previous empirical research typically treats the risk premium as the key element of deposit interest spread subsidy shifting theory suggests that deposit rates also contain a subsidy shifting premium that arises from an institution s eagerness to fund loan and investment opportunities that extract deposit insurance subsidies this paper examines the existence and the nature of both premiums and shows how regulators can use this information to make regulatory oversight more effective

bank runs in emerging market economies evidence from turkey s special finance houses recent banking crises in emerging market countries have renewed debates about deposit insurance because insurance erodes banks incentives to manage risks prudently some argue that its elimination would improve bank stability yet eliminating insurance could be de stabilizing if it recreates risks of self fulfilling runs this paper examines dynamics of depositor behavior during a set of runs on turkey s special finance houses an uninsured sub sector of islamic banks detailed data on withdrawals are analyzed in a vector autoregressive framework that enables us to distinguish between informational and self fulfilling elements of runs we found that both types of dynamics were at work during the runs suggesting a role for deposit insurance judiciously used in ruling out expectational problems that fuel tendencies to run

market discipline and deposit insurance reform in japan abstract on april 1 2002 the japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits this paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline i find that the reform raised the sensitivity of interest rates on deposits and that of deposit quantity to default risk in addition the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks these results suggest that the deposit insurance reform enhanced market discipline in japan i also find however that too big to fail tbtf policy became a more important determinant of interest rates and deposit allocation after the reform thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline

bank capital structure regulatory capital and securities innovations since late 1993 nonfinancial corporations have used financial instruments that permit them to treat preferred stock dividends as tax deductible interest bank holding companies bhcs however did not issue these trust preferred securities tps until 1996 when the federal reserve qualified them as tier 1 capital we delineate and test five not mutually exclusive hypotheses by 1 analyzing the stock market s reaction to the fed s ruling and to tps filings and 2 comparing bhcs that issued tps with those that did not we find that regulatory capital requirements tax savings and uninsured sources of funds had significant positive effects on bhcs demand for capital and that the market responded favorably to tps filings our event study findings are contrary to prior empirical results in that we find a positive market reaction to equity offerings

discipline and liquidity in the interbank market using 20 years of panel data i demonstrate that high risk banks have consistently paid more than safe banks for interbank loans and have been less likely to use these loans as a source of liquidity the economic importance of this effect was relatively small until the mid 1990s when regulatory and institutional changes began to impose more of the costs of bank failure on uninsured creditors subsequently interbank market price discipline roughly doubled and risk based rationing effects increased by a factor of six in imposing this discipline lenders seem to care most about credit risk at borrowing institutions

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

the past and future of commercial banking viewed through an incomplete contract lens commercial banks emerged at a time when contracts were quite incomplete and property rights insecure they typically offered demand deposits made loans on demand and were regulated each of these aspects of the institutional structure were essential in helping the bank provide the twin functions of liquidity and safety i argue that recent theories of banking which i collectively refer to as incomplete contract theories of banking explain well the origins of banking i also claim that they can explain recent changes in banking as th e informational legal and property rights environment has improved there appear to be fewer synergies between various aspects of the traditional institutional structure of the bank it is now time to think whether there is anything special about the institutional form of the bank or whether all that is special is that it is regulated

incentive compatibility in signaling games with a continuum of types on donne deux resultats utiles pour demontrer l existence et pour caracteriser des equilibres de separation dans des jeux de signalement

learning from neighbours when payoffs from different actions are unknown agents use their own past experience as well as the experience of their neighbours to guide their decision making in this paper we develop a general framework to study the relationship between the structure of these neighbourhoods and the process of social learning we show that in a connected society local learning ensures that all agents obtain the same payoffs in the long run thus if actions have different payoffs then all agents choose the same action and social conformism obtains we develop conditions on the distribution of prior beliefs the structure of neighbourhoods and the informativeness of actions under which this action is optimal in particular we identify a property of neighbourhood structures local independencewhich greatly facilitates social learning simulations of the model generate spatial and temporal patterns of adoption that are consistent with empirical work

banks as secret keepers banks are optimally opaque institutions they produce debt for use as a transaction medium bank money which requires that information about the backing assets loans not be revealed so that bank money does not fluctuate in value reducing the efficiency of trade this need for opacity conflicts with the production of information about investment projects needed for allocative efficiency intermediaries exist to hide such information so banks select portfolios of information insensitive assets for the economy as a whole firms endogenously separate into bank finance and capital market stock market finance depending on the cost of producing information about their projects

has the financial system become safer after the crisis the changing nature of financial institution risk abstract six years after the collapse of lehman brothers the question of whether the u s financial system has become less risky remains unanswered on the one side new regulations including dodd frank and basel iii have made improvements by requiring higher bank capital and financial institutions themselves have reduced risk taking activities on the other side it has been argued that the fundamental risks remained and the efforts of regulators and politicians were simply rearranging the deckchairs on the titanic baily and elliott 2013 this paper highlights the changing nature of financial institution risk from 2005 to 2011 it finds that while these institutions have become less risky individually after the crisis the financial market has become more vulnerable to systemic contagion the causal inference that the crisis and the post crisis legislation have gradually changed the nature of financial institution risk is drawn from a quasi experimental design this finding suggests that the ever more integrated financial system might experience more synchronized contractions in future crises providing empirical support for the proposals of the inter bank collective regulation of banks by acharya 2009 in addition to the intra bank collective regulations as in froot and stein 1998 and bis 1996 1999

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

using market information in prudential bank supervision a review of the u s empirical evidence in principle market and government supervision provide alternative devices for controlling governing any type of corporation most national governments have instituted nonmarket regulatory mechanisms for banking firms on the grounds that market based mechanisms do not adequately discipline banks but what evidence supports this assessment why must governments assure bank solvency but not the solvency of other firms government oversight naturally displaces private efforts to evaluate and control financial firms moreover if the banking business changes over time as it assuredly has in the past decade or two the best combination of government and private supervision may change concurrently this paper reviews and evaluates the growing empirical literature on private investors abilities to assess the financial condition of banking firms the evidence supports the proposition that market investors and analysts could reasonably provide a greater proportion of corporate governance services for large traded u s financial firms

how much information is incorporated in financial asset prices experimental evidence we propose a new estimation method and use experimental data from multiple double auction experiments in the literature to directly estimate how much information is incorporated in financial market prices we find that public information is almost completely reflected in prices but that surprisingly little private information less than 50 is incorporated in prices our estimates therefore suggest that while semi strong informational efficiency is consistent with the data financial market prices may be very far from strong form efficiency we compare our estimates with beliefs of economists surveyed at the econometric society meetings and find that economists and finance researchers alike expect market prices to reflect considerably more private information than what we estimated

depositor behavior under macroeconomic risk evidence from bank runs in emerging economies depositor behavior has been associated with bank specific characteristics random runs or contagion episodes using evidence on the 2000 02 bank runs in argentina and uruguay this paper shows that macroeconomic risk is also important few macroeconomic shocks can quickly cause large runs macroeconomic risk affects deposits regardless of traditional bank specific characteristics furthermore bank exposure to macroeconomic factors can explain differences in deposit withdrawals during crises the evolution of bank specific characteristics is mainly driven by macroeconomic factors while the informational content of bank specific variables declines overall depositors seem responsive to risk in a broader sense than that often considered by the literature

the reaction of bank stock prices to news of derivatives losses by corporate clients abstract from march through may of 1994 several large nonfinancial firms announced millions of dollars in losses from derivatives deals especially those arranged by bankers trust accompanying these announcements and related news stories were allegations that bankers trust had either misrepresented lied or deceived its clients using sur methods we investigate how these announcements affected bankers trust and three portfolios of banks dealers nondealers and nonusers our results indicate significant cumulative abnormal returns of 12 14 bankers trust 5 56 13 dealer banks and 2 45 32 nondealer user banks the evidence suggests an intra industry information transfer effect consistent with rational pricing the replacement cost of derivative contracts is an important factor in explaining the variation in abnormal returns across banks

banks as monitors of other banks evidence from the overnight federal funds market this study provides evidence that banks are effective monitors of their peers by showing that the interest rate paid on federal funds transactions reflects differences in credit risk across borrowers in addition the size and relative importance in the funds market of the trading institutions are shown to affect the rates charged for overnight borrowing thereby providing insight into the nature of competition in the federal funds market transaction volume and size of transaction effects are uncovered as is evidence of relationship banking between banks these results are made possible by unique data identifying individual federal funds transactions copyright 2001 by university of chicago press

market discipline in property casualty insurance evidence from premium growth surrounding changes in financial strength ratings analysis of abnormal premium growth surrounding changes in financial strength ratings for a large panel of property casualty insurers generally indicates significant premium declines in the year of and the year following rating downgrades consistent with greater risk sensitivity of demand premium declines were concentrated among commercial insurance which has narrower guaranty fund protection than personal insurance premium declines were greater for firms with low pre downgrade ratings and especially pronounced for firms falling below an a rating there is no evidence of moral hazard in the form of rapid commercial or personal lines premium growth following downgrades of a or low rated insurers

the dark side of sunshine regulatory oversight and status quo bias abstract as the mortgage foreclosure crisis accelerated in the u s in the late 2000s state level policymakers implemented measures designed to protect consumers and stem the tide of foreclosures one form of policy was simply to require lenders to report on foreclosure prevention activities such policies represented a shift from the status quo for mortgage loan servicing firms operating under incomplete information doing nothing with non paying loans while waiting for more information to be revealed to either foreclosing on the borrower or offering the borrower a modification of loan terms using a difference in difference in differences empirical strategy we exploit one policy implemented in maryland for a subset of mortgage servicers and find evidence that firms perform more loan modifications as well as file more foreclosures increasing foreclosure filings was contrary to the intent of the policy suggesting that policymakers should be aware of how firms exhibit systematic biases much like individuals

valuation and systemic risk consequences of bank opacity abstract we examine the effects of opacity on bank valuation and synchronicity in bank equity returns over the years 2000 2006 prior to the 2007 financial crisis as expected investments in opaque assets are more profitable than investments in transparent assets and taking profitability into account have larger valuation discounts relative to transparent assets the valuation discounts on opaque asset investments decline over the 2000 2006 period only to be followed by a sharp reversal in 2007 the decline is coincident with a rise in bank equity share prices decrease in transparent asset holdings by banks and greater return synchronicity evidence consistent with a feedback effect

does the japanese stock market price bank risk evidence from financial firm failures the ability of the japanese stock market to appropriately price the riskiness of japanese financial firms has been frequently questioned particularly in light of japan s widespread financial distress in recent years and poor disclosure requirements this paper examines the response in equity returns of japanese banks to the failure of four commercial banks and two securities firms between 1995 and 1998 using event study methodology the analysis finds that share prices of surviving banks on the whole responded unfavorably to the failures and that financially weaker survivors were more adversely affected this suggests that despite the distress and alleged opaqueness bank shareholders were able to use available indicators of financial condition both to incorporate new information quickly into stock prices and to differentiate among banks

market based corrective actions many economic agents take corrective actions based on information inferred from market prices of firms securities examples include directors and activists intervening in the management of firms and bank supervisors taking actions to improve the health of financial institutions we provide an equilibrium analysis of such situations in light of a key problem if agents use market prices when deciding on corrective actions prices adjust to reflect this use and potentially become less revealing we show that market information and agents information are complementary and discuss measures that can increase agents ability to learn from market prices the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

contingent convertibles with stock price triggers the case of perpetuities initial proposals for contingent convertibles cocos envisioned that these bonds would convert to equity when the issuing bank s stock price declined to a prespecified trigger subsequent research has claimed that doing so causes the stock price to have multiple equilibria or no equilibrium we show that when cocos are perpetuities which characterizes most actual cocos a unique stock price equilibrium exists except under unrealistic conditions unique equilibria occur when conversion favors or disfavors coco investors when cocos convert to equity or are written down and when cocos are callable we also analyze a bank s risk choices before and after conversion received november 29 2016 editorial decision july 15 2018 by editor itay goldstein

market discipline and deposit insurance cross country evidence presented in this paper suggests that explicit deposit insurance reduces required deposit interest rates while at the same time it lowers market discipline on bank risk taking internationally deposit insurance schemes vary widely in their coverage funding and management this reflects that there are widely differing views on how deposit insurance should optimally be structured to inform this debate we use a newly constructed data set of deposit insurance design features to examine how different design features affect deposit interest rates and market discipline

sovereign risk and deposit dynamics evidence from europe abstractthe unprecedented expansion of sovereign balance sheets since the beginning of the global crisis has given a new meaning to the term sovereign risk developments in europe since early 2010 revealed new challenges for the functioning of private banks in an environment of heightened sovereign risk and may have contributed to deleveraging the article uses an innovative way of measuring the perception of sovereign risk and its impact using an extension of a common market discipline framework it shows that exposure to sovereign risk may have limited the ability of banks in europe to collect deposits potential identification issues between deposits and bank efficiency are controlled by using data envelopment analysis dea the results are robust to inclusion of conventional measures of bank performance and the sector wide holdings of foreign sovereign debt

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

the successful developmental state where does it come from abstract in this paper it is taken for granted that the state has played an important role in the industrialization of east asia accepting this the purpose of the paper is to determine why government policy was so effective in these countries while failing to a great extent in much of the rest of the developing world the key seems to reside in the ability of the state to discipline firms which in turn is dependent upon the credibility of government policy the latter depends on a large number of variables this paper argues that a crucial factor is the size of the domestic market for manufactured goods

deposit insurance and depositor discipline direct evidence on bank switching behaviour in japan as japan s financial system becomes more market oriented depositor discipline is playing a larger role in the monitoring of banks matching household survey data with banks financial data we examine households response to bank risk and different deposit insurance schemes we find that bank switching in response to risk increased between 1996 and 2001 and households choice of bank adequately reflects banks financial health we also examine the determinants of households knowledge of the deposit insurance scheme and how this affects switching behaviour the results suggest that depositor discipline works and could play an important supplementary role in bank monitoring