Browsing by Subject "G01"

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  • Drehmann, Mathias; Juselius, Mikael; Korinek, Anton (2017)
    Bank of Finland Research Discussion Papers 12/2017
    When taking on new debt, borrowers commit to a pre-specified path of future debt service. This implies a predictable lag between credit booms and peaks in debt service which, in a panel of household debt in 17 countries, is four years on average. The lag is driven by two key features of the data: (i) new borrowing is strongly auto-correlated and (ii) debt contracts are long term. The delayed increase in debt service following an impulse to new borrowing largely explains why credit booms are associated with lower future output growth and higher probability of crisis. This provides a systematic transmission channel whereby credit expansions can have adverse long-lasting real effects.
  • Ambrocio, Gene; Hasan, Iftekhar; Jokivuolle, Esa; Ristolainen, Kim (2020)
    Journal of Financial Stability October ; 2020
    Published in BoF DP 10/2020 http://urn.fi/URN:NBN:fi:bof-202006012160
    We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
  • Ambrocio, Gene; Hasan, Iftekhar; Jokivuolle, Esa; Ristolainen, Kim (2020)
    Bank of Finland Research Discussion Papers 10/2020
    Published in Journal of Financial Stability 2020 ; 50 ; October https://doi.org/10.1016/j.jfs.2020.100772
    We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
  • Kauko, Karlo (World Scientific, 2018)
    Singapore Economic Review 3
    Policy discussions are dominated by the view that governmental safety nets offered to banks cause moral hazard and encourage risk-taking. However, [Cordella, T and E Levy Yeyati (2003). Bank bailouts: moral hazard vs. value effect. Journal of Financial Intermediation, 12, 300–330.] proposed that government support offered during crises may increase bank franchise value, resulting in less risk-taking. This paper presents additional theoretical results on the franchise value effect. The franchise value effect can dominate over the moral hazard effect even when there are no specific crisis periods. The franchise value effect dominates if bank shareholders have a weak time preference and if the decision on the intensity of risk monitoring is a long-term choice.
  • Kauko, Karlo; Tölö, Eero (2019)
    BoF Economics Review 4/2019
    Published in Applied Economics Quarterly 2019 ; 65 ; 9 http://urn.fi/URN:NBN:fi:bof-202002181134
    Indicators based on the ratio of credit to GDP have been found to be highly useful predictors of banking crises. We study the difference in this ratio as an early warning indicator. We test a large number of different versions of the differenced credit-to-GDP ratio with data on Euro area members. The optimal time interval of the difference is about two years. Using the moving average of GDP instead of the latest annual data has little impact on forecasting performance. The indicator is a particularly promising choice at relatively short forecasting horizons, such as two or three years.
  • Kauko, Karlo; Tölö, Eero (2019)
    Applied Economics Quarterly 4
    Also as BoF Economics Review 4/2019 http://urn.fi/URN:NBN:fi:bof-201906061225
  • Noth, Felix; Busch, Matias Ossandon (2017)
    BOFIT Discussion Papers 11/2017
    This paper estimates the effect of a foreign funding shock to banks in Brazil after the collapse of Lehman Brothers in September 2008. Our robust results show that bank-specic shocks to Brazilian parent banks negatively affected lending by their individual branches and trigger real economic consequences in Brazilian municipalities: More affected regions face restrictions in aggregated credit and show weaker labor market performance in the aftermath which documents the transmission mechanism of the global financial crisis to local labor markets in emerging countries. The results represent relevant information for regulators concerned with the real effects of cross-border liquidity shocks.
  • Jokivuolle, Esa; Keppo, Jussi; Yuan, Xuchuan (2015)
    Bank of Finland Research Discussion Papers 5/2015
    Regulators restrict bankers’ risk-taking by bonus caps or deferrals. We derive a structural model to analyze these compensation regulations and show that for a risk-neutral banker subject to positive switching costs of reducing bank risk, a bonus deferral is impotent while a sufficiently tight bonus cap reduces risk-taking. The model suggests that a bonus cap that equals fixed salary (as in the EU) reduces risk on average by 13% under conservatively calibrated positive switching costs. Further, the bonus cap would have considerably reduced risk-taking incentives in most US banks that did poorly during the global financial crisis. We also show that the bonus deferral is effective if the banker is risk-averse and the switching costs are not too high.
  • Virtanen, Timo; Tölö, Eero; Virén, Matti; Taipalus, Katja (2018)
    Journal of Financial Stability June 2018
    We consider the effectiveness of unit root exuberance tests in predicting banking crises. Using a sample of 15 EU countries over the past three decades, our crisis dating follows the scheme of the European Systemic Risk Board. The exuberance indicators slightly outperform benchmark signaling and logit models. Variables based on credit- and debt-service are identified as better predictors than housing market variables, which in turn outperform stock market variables. The results corroborate the existing literature, which says financial crises are typically preceded by leveraged bubbles, and more specifically, that initial bubble signals from explosive growth in credit and asset prices are followed by a lift-off in debt-servicing costs as a financial crisis nears. The risk of financial crisis peaks just after the bubble bursts. Our results indicate that exuberance tests, which can be used in crisis prediction in a manner similar to conventional early warning models, may be readily incorporated into the toolkit of financial stability supervisors.
  • Toivanen, Mervi (2013)
    Bank of Finland Research Discussion Papers 19/2013
    This paper analyses the importance of individual bank-specific factors on financial stability. First, we use a novel method to model the spreading of the contagion in the interbank network by implementing an epidemiologic model. Actual data on European banks is exploited with simulated scale-free networks. The average contagion affected 70% and 40% of European banks' total assets in 2007 and in 2010, respectively. Country-level results suggest that French, British, German and Spanish banks are the most contagious ones, whereas banks from Ireland, Greece and Portugal induce only limited negative effects. Secondly, cross-sectional panel estimations are performed to disentangle the leading indicators influencing the level of contagion. Bank clustering, large in-coming interbank loans and bank reputation are more prominent explanatory variables than the size or leverage. Finally, central banks' interventions reduce contagion only slightly. Keywords: contagion, banks, Europe, interbank, epidemiology, panel regression JEL codes: G01, G21, C15
  • Westman, Hanna (2014)
    Bank of Finland Research Discussion Papers 28/2014
    Failure in bank corporate governance has been seen as a contributing factor to excessive risk-taking pre-crisis with devastating implications as risks realised during the financial crisis. Unfortunately, the empirical evidence on the impact of managerial incentives on bank crisis performance is scarce. Moreover, bank strategy has not previously been accounted for. Hence, this paper presents novel findings on drivers for risk-taking and crisis performance. Specifically, I find a positive impact of management ownership in small diversified banks and non-traditional banks, the monitoring of which is challenging due to their opacity. The impact is negative in traditional banks and large diversified banks, indicating that shareholders induce managers to take risk where the safety net creates incentives for risk-shifting to debt holders and taxpayers. These findings have implications for both academic research as well as policy making particularly in the domain of corporate governance. Keywords: banks crisis performance, management ownership, traditional vs. nontraditional banking, diversification, safety net, bank opacity and complexity
  • Schoors, Koen; Semenova, Maria; Zubanov, Andrey (2017)
    BOFIT Discussion Papers 1/2017
    We analyze whether a depositor’s familiarity with a bank affects depositor behavior during a financial crisis. Familiarity is measured by the presence of regional or local cues in the bank’s name, while depositor behavior is considered in terms of depositor sensitivity to observable bank risk (market discipline exerted by depositors). Using the 2001–2010 bank-level and region-level data for Russia, we show the evidence that depositors use quantity-based discipline on all banks in the sample. The evidence of a price-based discipline mechanism, however, is virtually absent. We find that depositors of familiar banks were less sensitive to bank risk after a financial crisis than depositors at unfamiliar banks. To assure the results are driven by familiarity bias and not implicit support of regional governments to banks with regional cues in their names, we interact the variables with measures of trust in local governments and regional affinity. We find a “flight to familiarity” effect strongly present in regions with strong regional affinity, while the effect is rejected in regions with greater trust in regional and local governments. This suggests that the results are driven by familiarity rather than implicit protection from trusted regional or local governments.
  • Taipalus, Katja (2012)
    Suomen Pankki. E 47
    To promote the financial stability, there is a need for an early warning system to signal the formation of asset price misalignments. This research provides two novel methods to accomplish this task. Results in this research shows that the conventional unit root tests in modified forms can be used to construct early warning indicators for bubbles in financial markets. More precisely, the conventional augmented Dickey-Fuller unit root test is shown to provide a basis for two novel bubble indicators. These new indicators are tested via MC simulations to analyze their ability to signal emerging unit roots in time series and to compare their power with standard stability and unit root tests. Simulation results concerning these two new stability tests are promising: they seem to be more robust and to have more power in the presence of changing persistence than the standard stability and unit root tests. When these new tests are applied to real US stock market data starting from 1871, they are able to signal most of the consensus bubbles, defined as stock market booms for example by the IMF, and they also flash warning signals far ahead of a crash. Also encouraging are the results with these methods in practical applications using equity prices in the UK, Finland and China as the methods seem to be able to signal most of the consensus bubbles from the data. Finally, these early warning indicators are applied to data for several housing markets. In most of the cases the indicators seem to work relatively well, indicating bubbles before the periods which, according to the consensus literature, are seen as periods of sizeable upward or downward movements. The scope of application of these early warning indicators could be wide. They could be used eg to help determine the right timing for the start of a monetary tightening cycle or for an increase in countercyclical capital buffers. Key words: asset prices, financial crises, bubbles, indicator, unit-root JEL classification: C15, G01, G12
  • Mäkinen, Mikko; Solanko, Laura (2017)
    BOFIT Discussion Papers 16/2017
    Published in Russian Journal of Money and Finance, 77, 2, 2018, 3–21
    This study examines whether changes in CAMEL variables matter in explaining bank closure. Using a unique set of monthly bank-specific balance sheet data from Russia, we estimate determinants of bank license withdrawals during 2013m7-2017m7. We make two key findings. First, changes in CAMEL indicators are always significantly correlated with probability of bank closure, and the magnitude of parameter estimates decreases with the lag length. Second, while the one-month lagged levels of capital, earnings, and liquidity are significantly associated with the probability of bank closure in the subsequent month, the level of liquidity is the only significant indicator for longer lags. Our key contribution that changes in CAMEL variables matter more than levels is robust to various robustness checks.
  • Bonin, John P.; Louie, Dana (2015)
    BOFIT Discussion Papers 31/2015
    Our objective is to examine empirically the behavior of foreign banks regarding real loan growth during a financial crisis for a set of countries in which these banks dominate the banking sectors due primarily to having taken over large existing former state-owned banks. The eight countries are among the most developed in Emerging Europe, their banking sectors having been modernized by the beginning of the time period.We consider a data period that includes an initial credit boom (2004 – 2007) followed by the global financial crisis (2008 & 2009) and the onset of the Eurozone crisis (2010). Our main innovations with respect to the existing literature on banking during the financial crisis are to include explicit consideration of exchange rate dynamics and to separate foreign banks into two categories, namely, subsidiaries of the Big 6 European MNBs and all other foreign-controlled banks. Our results show that bank lending was impacted adversely by the crisis but that the two types of foreign banks behaved differently. The Big 6 banks remained committed to the region in that their lending behavior was not different from that of domestic banks corroborating the notion that these countries are a “second home market” for these banks. Contrariwise, the other foreign banks were primarily responsible for fueling the credit boom prior to the crisis but then “cut and ran” by decreasing their lending appreciably during the crisis. Our results also indicate different bank behavior in countries with flexible exchange rate regimes from those in the Eurozone. Hence, we conclude that both innovations matter in empirical work on bank behavior during a crisis in the region and may, by extension, be relevant to other small countries in which banking sectors are dominated by foreign financial institutions.
  • Berglund, Tom; Mäkinen, Mikko (Elsevier, 2019)
    Research in International Business and Finance January ; 2019
    Published in Bank of Finland Research Discussion Papers 30/2016.
    Using a large panel data set of Nordic (Finland, Norway and Sweden) and European banks for the period 1994–2010, we study whether banks can retain their lessons from the experience of a severe financial crisis. Our key finding is that the Nordic banks had better returns and greater financial stability compared to other European banks during the 2008 crisis, after controlling for key bank characteristics and macroeconomic factors. Our findings are consistent with the learning hypothesis of Fahlenbrach et al. (2012), suggesting that the Nordic banks were able internalize the lessons from the Nordic systemic banking crisis of the early 1990s.
  • Tölö, Eero; Jokivuolle, Esa; Virén, Matti (2017)
    Journal of Financial Intermediation July
    We construct a measure of a bank's relative creditworthiness from the Eurosystem's proprietary inter-bank loan data: average overnight borrowing rate relative to an overnight rate index (AOR). We then investigate the dynamic relationship between AOR and the credit default swap price relative to the corresponding market index of 60 banks during 2008–2013. Price discovery mainly takes place in the CDS market, but AOR also contributes to it. The lagged daily changes of AOR help predict CDS. This indicates that AOR includes private information, which the CDS market does not immediately incorporate. We further show that the private information advantage is concentrated on days of market stress and on banks, which mainly borrow from relationship lender banks. Such borrower banks are typically smaller, have weaker ratings, and are likely to reside in crisis countries. Competent authorities can use AOR as a complementary indicator of banks’ concurrent health.
  • Francis, Bill; Hasan, Iftekhar; Wu, Qiang (2012)
    Bank of Finland Research Discussion Papers 11/2012
    Published in Review of Financial Economics, Volume 21, Issue 2, April 2012: 39-52
    This study uses the current financial crisis as a quasi-experiment to examine whether and to what extent corporate boards affect the performance of firms. Using cumulative stock returns over the crisis to measure of firm performance, we find that board independence, as traditionally defined, does not significantly affect firm performance. However, when we re-define independent directors as outside directors who are less connected with current CEOs, a measure we call true independence, there is a positive and significant relationship between this measure and firm performance. Second, outside financial experts are important for firm performance. Third, board meeting frequencies, director attendance behaviors, and director age also affect firm performance during the crisis. Overall, our results suggest that firm performance during a crisis is a function of firm-level differences in corporate boards. JEL Classification: G01; G30; G34 Keywords: Financial crisis; Boards of directors; Firm performance; True independence
  • Mäkinen, Mikko (2021)
    BOFIT Discussion Papers 8/2021
    Can a major financial crisis trigger changes in a bank’s risk-taking behavior? Using the 2008 Global Financial Crisis as a quasi-natural experiment and a difference-in-differences approach, I examine whether the worst crisis-hit Russian banks – the banks that have strong incentives to behavior-altering changes – can decrease their post-crisis exposure to risk. A shift in risk-taking behavior by these banks indicates the learning hypothesis. The findings are mixed. The evidence concerning credit risk is inconsistent with the learning hypothesis. On the other hand, the evidence concerning solvency risk is consistent with the learning hypothesis and corroborates evidence from the Nordic countries (Berglund and Mäkinen, 2019). As such, bank learning from a financial crisis may not depend on the institutional context and the level of development of national financial market. Several robustness checks with alternative regression specifications are provided.
  • Saka, Orkun (2019)
    Bank of Finland Research Discussion Papers 3/2019
    European banks have been criticized for holding excessive domestic government debt during economic downturns, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. This reallocation was only visible for banks as opposed to other domestic private agents and it cannot be explained by the banks' risk-shifting tendency. In contrast to the recent literature focusing only on sovereign debt, I show that banks' private sector exposures were (at least) equally affected by a rise in home bias. Finally, consistent with these patterns, I propose a new debt reallocation channel based on informational frictions and show that informationally closer foreign banks increase their relative exposures when sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.