Negative shocks to bank balance sheets are problematic not just for financial markets, but for employment and economic growth more widely. This column uses evidence on a bank liquidity shock in Italy in 2007-10 to show the impact on firms’ production, investment, and employment. Firms borrowing from banks with a high exposure to the shock experienced a more intense fall both in credit flows and in investment expenditure. While the credit cut has been homogeneous across borrowers, firms with easier access to external finance were able to contain the negative consequences of the drop in credit for investment.
Federico Cingano, Francesco Manaresi, Enrico Sette, 24 June 2016
Banking is one of the most complex areas of modern economies. Flawed understanding, mismanagement, and bad regulation of banks have caused the Great Financial Crisis of 2007-2010 and the worst economic crisis in Europe in decades. This course will shed some light on the theory of banking and recent empirical insights into the functioning of banks. Starting from a thorough discussion of basic conceptual frameworks it will discuss elements of shadow banking, financial stability, and bank regulation.
The course provides an introduction to the conceptual foundations of banking and explores the workings of banks in modern economies, by looking at problems of credit intermediation, liquidity provision, maturity transformation, relationship lending, and bank competition.
Thomas Eisenbach, David Lucca, Robert Townsend, 17 June 2016
The two main elements of bank industry oversight are regulation and supervision. This column provides a framework for thinking about supervision in relation to regulation. Using US data on supervisory hours spent, it finds evidence of economies of scale for bank size. Additionally, less risky banks receive substantially lower amounts of supervisory hours. The findings highlight that supervisors face resource constraints and trade-offs.
Efraim Benmelech, Ralf R Meisenzahl, Rodney Ramcharan, 11 June 2016
The US government’s ‘bailout of bankers’ in 2008-09 remains a highly controversial moment in economic policy. Many critics suggest that intervention to relieve household debt may have been more effective in stimulating economic recovery. This column suggests that without federal intervention to stabilise financial markets and recapitalise some non-bank lenders, the magnitude of the economic collapse might have been much worse. While household debt was incredibly important in reducing demand, the financial sector dislocations and the lack of credit also played a critical role.
Ross Levine, Chen Lin, Wensi Xie, 03 June 2016
There has been much research on the effects of banking crises, but corporate resilience to systemic crises is less well understood. This column uses data from 34 countries from 1990 to 2011 to analyse the role of social trust – societal expectations that people will behave honestly and cooperatively – in building corporate resilience. It finds that social trust facilitates access to trade credit, and dampens the harmful effects of crises on corporate profits and employment.
Charles W Calomiris, Matthew Jaremski, 01 June 2016
Liability insurance is a fundamental part of banking regulation of today, but despite being accepted as best practice now, it did not expand out of the US until the second half of the 20th century. This column discusses economic and political explanations for the spread of liability insurance availability, and finds that a political explanation reflects the empirical evidence well. Liability insurance was preferable to other policies despite being inefficient, due to its use as political leverage.
Liangliang Jiang, Ross Levine, Chen Lin, 20 May 2016
By creating liquidity, banks improve the allocation of capital and accelerate economic growth. This column uses evidence from US banks between 1984 and 2006 to evaluate the impact of competition amongst banks on their liquidity creation. It finds that an intensification of competition in the banking industry materially reduces liquidity creation. Furthermore, the evidence suggests that more profitable banks experience a smaller reduction in liquidity creation because of their ability to better absorb risk. Similarly, an intensification of competition reduces liquidity creation more among small banks, who are more engaged in relationship lending.
We are pleased to inform you that UECE - Research Unit on Complexity and Economics and the Instituto Superior de Economia e Gestão da Universidade de Lisboa will host the eighth edition of the UECE LISBON MEETINGS, which will take place on November 3rd-5th, 2016.
The conference will include Prof. Drew Fudenberg (Harvard University), Prof. Michael Katz (University of California at Berkeley), and Prof. Shmuel Zamir (University of Exeter) as keynote speakers, as well as contributed sessions on all topics, and from all perspectives, of game theory, including applications and experimental work.
Submission of papers within the areas of theoretical, applied and experimental game theory and related fields is encouraged. Papers can only be submitted electronically through the conference website. Complete submissions must be received by July 31st, 2016.
Stijn Claessens, Nicholas Coleman, Michael Donnelly, 18 May 2016
Since the Global Crisis, interest rates in many advanced economies have been low and, in many cases, are expected to remain low for some time. Low interest rates help economies recover and can enhance banks’ balance sheets and performance, but persistently low rates may also erode the profitability of banks if they are associated with lower net interest margins. This column uses new cross-country evidence to confirm that decreases in interest rates do indeed contribute to weaker net interest margins, with a greater adverse effect when rates are already low.
Jean-Pierre Danthine, 04 May 2016
Since the Eurozone Crisis a host of monetary and fiscal instruments have been used to try to reinvigorate growth and achieve financial stability, with mixed results. Basel III’s counter-cyclical capital buffer (CCB) is one such instrument which was met with scepticism. This column uses evidence from the Swiss economy to show that given the right circumstances and political will, the CCB can achieve financial stability.
Eric Monnet, Damien Puy, 02 May 2016
Business cycles are generally viewed as having been less correlated during the Bretton Woods period, 1950-1971. This column discusses findings from a new database of quarterly industrial production for 21 countries from 1950 to 2014 based on IMF archival data. As it turns out, business cycle synchronisation was as strong before 1971 as it was after (up till the Global Crisis began in 2007). Moreover, deeper financial integration tends to de-synchronise national outputs from the world cycle, at least in non-crisis periods.
Dennis Bams, Magdalena Pisa, Christian C. P. Wolff, 02 May 2016
In the absence of full information about small businesses’ risk of loan default, banks are unable to accurately calculate counterparty risk. This column suggests that banks can use industry and linked-industry data to better establish counterparty risk, because distress from one industry is transmitted to supplier and customer industries. A reliable and easily available signal for such distress is any failure reported by S&P.
The U.S. Great Recession has pointed to the importance of the banking sector in originating, amplifying, and propagating financial shocks to the real side of the economy. In response to the downturn, there has been a great deal of new regulation to mitigate the effects of future financial crises. Quantitative structural models of the banking sector that avoid the Lucas critique are critical to conduct counterfactual policy to evaluate the effects of new regulation. One important factor in the effects of policy is banking industry market structure and competition among banks of different sizes. Regulation itself may effect market structure and the distribution of bank size. Understanding regulatory arbitrage and how competitiveness of the banking sector varies with changes in regulation is critical to understand the health of the financial system.
Anya Kleymenova, Andrew K Rose, Tomasz Wieladek, 05 April 2016
Post-crisis banking is in trouble, with cross-border bank lending significantly slower than before. Many economists think that this is down to complications from government ownership. This column argues that although government ownership is not the only possible friction or reason for cross-border bank lending, it is an inhibitor of cross-border bank activity in both the UK and the US. If the same mechanism applies to other countries around the world, then global banking intermediation may rebound once again, once banks are privatised.
Jaap Bos, Ralph De Haas, Matteo Millone, 22 March 2016
Screening loan applicants is a key principle of sound banking, but it can be challenging when trustworthy information about applicants is not available. Many countries have therefore introduced credit registries that require banks to share borrower information. This column examines how the introduction of a new registry affected the functioning of the credit market in Bosnia and Herzegovina. Mandatory information sharing allowed loan officers to lend more conservatively at both the extensive and intensive margins. The improved credit allocation improved loan quality and lender profitability.
Di Gong, Harry Huizinga, Luc Laeven, 18 February 2016
Prior to the Global Crisis, banks could easily use off-balance sheet structures to lower their effective capitalisation rates. This column examines another way that US banks circumvented capital regulations – by maintaining minority-owned, non-consolidated subsidiaries. Had these subsidiaries been consolidated, average reported equity-to-assets ratios would have been 3.5% lower. These findings suggest that some US banks were actively misrepresenting the riskiness of their assets prior to the crisis.
Philippe Bacchetta, Ouarda Merrouche, 16 January 2016
Economists now tend to stress the role of global banks in the transmission of the Global Crisis. This column argues that the retrenchment of Eurozone banks opened regulatory arbitrage opportunities for US banks. The fact that US banks, and in particular the most risky US banks, fully exploited these opportunities had a salubrious effect on credit-constrained corporates and employment. It seems the move from Basel I to Basel II with risk-sensitive capital requirements amplifies the credit cycle.
The Cambridge Endowment for Research in Finance (CERF) welcomes submissions for its 2016 Corporate Finance Theory Symposium to be held in Cambridge UK, Cambridge Judge Business School, 16-17 September 2016.
The symposium covers all areas of theoretical corporate finance, including theory papers that combine corporate finance theory with a related area such as banking, market micro-structure, asset pricing, and financial accounting.
We expect to have about 9 papers (each with a discussant) and one keynote speech. This year’s keynote speaker will be Anjan Thakor, John E. Simon Professor of Finance,Director of the PhD Programme, and Director of the WFA Center for Finance and Accounting Research.
Cristina Arellano, Andy Atkeson, Mark L. J. Wright, 10 January 2016
In the recent crisis in Southern Europe both sovereign governments and private citizens faced increased borrowing costs on their external debt. By contrast, no spillover to private borrowers occurred from the recent US state government debt crisis. This column argues that this different experience stems from much weaker European protections from government interference – the risk that governments will encumber private debt contracts by redenominating the currency of the contract, imposing capital controls, or passing debtor relief legislation.
Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, Johannes Stroebel, 09 January 2016
During the Great Recession, governments famously (and in some cases, infamously) provided banks with lower-cost capital and liquidity so that they would lend, expanding economic activity. This column assesses the efficacy of these policies, estimating marginal propensities to consume and borrow between 2008-2012.