Today's big banks are enormous. By 2008, 12 banks worldwide had liabilities exceeding $1 trillion. This column, using data on banks from 80 countries over the years 1991-2009, provides new evidence on how large banks differ in terms of their risk and return outcomes and investigates how market perceptions of bank risk are affected by bank size. It concludes that policies should reward bank managers for keeping their banks safe rather than for making them big.
Harry Huizinga, Asli Demirgüç-Kunt, 18 March 2011
Biagio Bossone, 18 December 2010
How do banks and capital markets interact? This column brings together evidence to show that banks and capital markets, rather than simply being competitors, are in fact complements to each other – a finding that has implications for policy.
Fenghua Song, Anjan Thakor, 01 December 2010
Banks and capital markets are often viewed as competitors within the financial system, with some suggesting that each develops at the expense of the other. This column argues that banks and markets exhibit three forms of interaction. They compete, they complement each other, and they coevolve.
Thorvaldur Gylfason, 30 April 2010
What brought down Iceland’s banks? This column examines the revelations from the latest report from the Icelandic parliament, raising the possibility that the collapse of Iceland’s three largest banks is the result of “control fraud” where shareholders stole from their own bank in the same way as those convicted of looting from the American saving and loan banks in the late 1980s.
Jorge Ponce, 16 January 2010
What government agency should decide lender-of-last-resort policy? This column discusses the optimal allocation of decision-making authority, suggesting that the central bank decide emergency loans and the deposit insurance agency guarantee them. But providing greater liquidity assistance will also require punishment to deter moral hazard problems.
Heiko Hesse, Tigran Poghosyan, 27 October 2009
Bank balance sheets in oil-exporting economies have been hard hit recently. This column provides the first empirical evidence linking oil prices to bank performance in such economies. It suggests that easily observed oil prices could inform macro-prudential regulation in these countries and mitigate pro-cyclical bank lending.
Harry Huizinga, Luc Laeven, 07 October 2009
The financial crisis has reinvigorated a debate on the effectiveness of our accounting and regulatory frameworks. This column shows that banks, hoping to preserve their book capital, use accounting discretion to systematically understate the impairment of their real-estate-related assets. But the accounting reforms announced thus far are exacerbating the gap between book and market values.
Thorsten Beck, Maria Soledad Martinez Peria, 28 September 2009
Remittances impact development along a number of dimensions including poverty alleviation, education, and entrepreneurship. However, such transactions are expensive. This column shows that a bigger stock of migrants and more competition are associated with lower transaction costs. It says policymakers should focus on improving competition in the remittance market, as regulations have only a limited effect.
Thorsten Beck, Patrick Behr, Andre Güttler, 28 August 2009
Does gender matter in banking? This column presents evidence from an Albanian bank that it does. Female loan officers build better portfolios, such that loans to borrowers working with a female are significantly less likely to incur arrears.
Rocco Huang , Lev Ratnovski, 25 August 2009
Why have Canadian banks fared better during the crisis than their OECD peers? This column attributes their stability to their reliance on depository funding rather than more risky wholesale funding. It recommends a Pigouvian tax penalising banks using excessive short-term wholesale funding.
Marc Flandreau, Norbert Gaillard, Sebastian Nieto-Parra, Juan Flores, 21 August 2009
How would financial markets assess complicated structured products in the absence of ratings agencies? This column uses the history of emerging economies’ government debt to argue that investment banks used to win market share by building a reputation for quality products. It says that ratings agencies insulated investment banks from reputational rewards and freed them to deal in junk.
Hans Gersbach, 08 August 2009
The crisis is a brutal reminder of the fragility of banks. This column suggests that managers of large banks be obliged to act as insurers against systemic crises. This would create incentives for them to be concerned about the stability of the banking system as a whole.
Ralph De Haas, 28 May 2009
In recent months, foreign-owned banks have been accused of abandoning the emerging markets that have contributed so much to their profitability over the last decade. This column analyses a large bank-level dataset of foreign bank subsidiaries across the world, to compare lending by foreign bank subsidiaries with lending by domestic banks. Importantly, it finds that as a result of parental support, foreign bank subsidiaries do not typically rein in their lending during a financial crisis.
Jon Danielsson, Con Keating, 25 May 2009
Bank bonuses have been blamed for contributing to the crisis, and regulators and politicians are now demanding changes in compensation arrangements. Most of these calls are based on a misconception of the nature of financial risk, an inflated view of the efficacy of risk models, and an incorrect view of the incentive issues facing financial institutions. This column proposes reforms that would discipline senior managers by exposing them to the dangers of junior managers’ risk taking.
Thorsten Beck, Heiko Hesse, Thomas Kick, Natalja von Westernhagen, 09 May 2009
Issues of banking stability are currently intensively debated in Germany and elsewhere. This column looks at German banks and suggests that privately-owned banks are more profitable and better capitalised than savings and cooperative banks, but also take more risk. This higher risk taking results in higher default probability and higher “proximity to insolvency” of privately-owned banks.
Daniel Gros, 01 May 2009
Today’s general consensus is that a key factor behind the Great Depression was the breakdown of the US banking system and that we must avoid large-scale bank failures this time around at all costs. However, this column shows that commercial banks actually do relatively well during recessions. It is the financial sector outside banking – in other words, investment banking – that suffers huge losses.
Viral Acharya, Hyun Song Shin, Irvind Gujral, 31 March 2009
Banks’ corporate governance is under fire. Perhaps one of the worst failures of governance has been the continued payment of dividends throughout the financial crisis. This column says that dividends’ erosion of common equity deprived banks of capital when they most needed it. It proposes cutting dividends as the first step in the resolution of future banking crises.
Esther Duflo, 06 March 2009
This column warns against bank nationalisation without state control. Bankers will not hesitate to enrich themselves at the expense of the public good if they have the opportunity.
Thomas Gehrig, Lukas Menkhoff, 02 March 2009
Bonuses are seen as drivers of greed, irresponsibly, and short-sighted behaviour. This column discusses the research on how bonuses affect bankers’ behaviour. It argues that bonuses are a valuable tool for guiding managers to do what’s right for corporations and even society. The debate should be about performance criteria and sustainable goals, not the size of bonus payments.