Bank Market Discipline and Indicators of Banking System Risk: The European Evidence
Reint E. Gropp
Market Discipline Across Countries and Industries,
2004
Abstract
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Measurement of Contagion in Banks' Equity Prices
Reint E. Gropp, G. Moerman
Journal of International Money and Finance,
No. 3,
2004
Abstract
This paper uses the co-incidence of extreme shocks to banks’ risk to examine within-country and across country contagion among large EU banks. Banks’ risk is measured by the first difference of weekly distances to default and abnormal returns. Using Monte Carlo simulations, the paper examines whether the observed frequency of large shocks experienced by two or more banks simultaneously is consistent with the assumption of a multivariate normal or a student t distribution. Further, the paper proposes a simple metric, which is used to identify contagion from one bank to another and identify “systemically important” banks in the EU.
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Why do we have an interbank money market?
Jürgen Wiemers, Ulrike Neyer
IWH Discussion Papers,
No. 182,
2003
Abstract
The interbank money market plays a key role in the execution of monetary policy. Hence, it is important to know the functioning of this market and the determinants of the interbank money market rate. In this paper, we develop an interbank money market model with a heterogeneous banking sector. We show that besides for balancing daily liquidity fluctuations banks participate in the interbank market because they have different marginal costs of obtaining funds from the central bank. In the euro area, which we refer to, these cost differences occur because banks have different marginal cost of collateral which they need to hold to obtain funds from the central bank. Banks with relatively low marginal costs act as intermediaries between the central bank and banks with relatively high marginal costs. The necessary positive spread between the interbank market rate and the central bank rate is determined by transaction costs and credit risk in the interbank market, total liquidity needs of the banking sector, costs of obtaining funds from the central bank, and the distribution of the latter across banks.
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Markets for Bank Subordinated Debt and Equity in Basel Committee Member Countries
Reint E. Gropp, Jukka M. Vesala
BCBS Working Papers, No. 12,
No. 12,
2003
Abstract
This Basel Committee working paper is a study of the markets for banks' securities in ten countries (Belgium, France, Germany, Japan, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States). It aims at contributing to the assessment of the potential effectiveness of direct and indirect market discipline. This is achieved through collecting a rich set of data on the detailed characteristics of the instruments used by banks to tap capital markets, the frequency and size of their issuance activity, and the share of issuing banks in national banking systems. Further, information is collected on the amounts of debt and equity outstanding and about trading volumes and liquidity. Developments over the period from 1990-2001 are evaluated.
The paper focuses on subordinated bonds among banks' debt instruments, because they are the prime class of uninsured instruments suited to generate market discipline and have been proposed by some observers as a mandatory requirement for banks.
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Recent Developments and Risks in the Euro Area Banking Sector
Reint E. Gropp, Jukka M. Vesala
ECB Monthly Bulletin,
2002
Abstract
This article provides an overview of euro area banks’ exposure to risk and examines the effects of the cyclical downturn in 2001. It describes the extent to which euro area banks’ risk profile has changed as a result of recent structural developments, such as an increase in investment banking, mergers, securitisation and more sophisticated risk management techniques. The article stresses that the environment in which banks operated in 2001 was fairly complex due to the relatively weak economic performance of all major economies as well as the events of 11 September in the United States. It evaluates the effects of these adverse circumstances on banks’ stability and overall performance. The article provides bank balance sheet information as well as financial market prices, arguing that the latter may be useful when assessing the soundness of the banking sector in a forward-looking manner. It concludes with a review of the overall stability of euro area banks, pointing to robustness in the face of the adverse developments in 2001 and the somewhat improved forward-looking indicators of banks’ financial strength in early 2002.
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Are the Central and Eastern European Transition Countries still vullnerable to an Financial Crisis? Results from the Signals Approach
Axel Brüggemann, Thomas Linne
IWH Discussion Papers,
No. 157,
2002
Abstract
The aim of the paper is to analyse the vulnerability of the Central and Eastern European accession countries to the EU as well as that of Turkey and Russia to a financial crisis. Our methodology is an extension of the signals approach. We develop a composite indicator to measure the evolution of the risk potential in each country. Our findings show that crises in Central and Eastern Europe are caused by much the usual suspects as in others emerging markets. In particular an overvalued exchange rate, weak exports and dwindling currency reserves have good predictive power for assessing crisis vulnerabilities.
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Rating Agency Actions and the Pricing of Debt and Equity of European Banks: What Can we Infer About Private Sector Monitoring of Bank Soundness?
Reint E. Gropp, A. J. Richards
Economic Notes,
No. 3,
2001
Abstract
The recent consultative papers by the Basel Committee on Banking Supervision has raised the possibility of an explicit role for external rating agencies in the assessment of the credit risk of banks’ assets, including interbank claims. Any judgement on the merits of this proposal calls for an assessment of the information contained in credit ratings and its relationship to other publicly available information on the financial health of banks and borrowers. We assess this issue via an event study of rating change announcements by leading international rating agencies, focusing on rating changes for European banks for which data on bond and equity prices are available. We find little evidence of announcement effects on bond prices, which may reflect the lack of liquidity in bond markets in Europe during much of our sample period. For equity prices, we find strong effects of ratings changes, although some of our results may suffer from contamination by contemporaneous news events. We also test for pre-announcement and post-announcement effects, but find little evidence of either. Overall, our results suggest that ratings agencies may perform a useful role in summarizing and obtaining non-public information on banks and that monitoring of banks’ risk through bond holders appears to be relatively limited in Europe. The relatively weak monitoring by bondholders casts some doubt on the effectiveness of a subordinated debt requirement as a supervisory tool in the European context, at least until bond markets are more developed.
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The Total Cost of Trading Belgian Shares: Brussels versus London
Hans Degryse
Journal of Banking and Finance,
No. 9,
1999
Abstract
Since 1990, London’s SEAQ International (SEAQ-I) has attracted considerable trading volume in Belgian equities. This paper investigates competition between the Brussels CATS market and London’s SEAQ-I. Toward this end, we gathered extensive limit order book data as well as transactions and quotation information. With regard to liquidity (indirect costs), measured by the quoted and effective bid–ask spread, the paper concludes that CATS outperforms SEAQ International for both measures. The effective spread is of course substantially smaller than the quoted spread, with the CATS effective spread showing a U-shaped form. This paper, unique in employing an extensive data set that includes all hidden orders and the whole limit order book, produces results in line with the different market microstructure models. Total trading costs on CATS are lower (higher) for small (large) trade sizes.
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The Integration of the Central and East European Equity Markets into the International Capital Markets: A Kalman Filter Approach
Thomas Linne
Externe Publikationen,
1999
Abstract
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The integration of the Central and East European equity markets into international capital markets
Thomas Linne
Forschungsreihe,
No. 1,
1998
Abstract
In dem Artikel wird die Hypothese untersucht, inwieweit die mittel- und osteuropäischen Aktienmärkte bereits in die internationalen Kapitalmärkte integriert sind. Dabei wird angenommen, daß die Märkte integriert sind, wenn langfristige Gleichgewichtsbeziehungen zwischen den Aktienindizes der jeweiligen Börsen vorliegen. Die Anlyse stützt sich auf bivariate und multivariate Kointegrationsverfahren, um das Verhalten der Aktienmarktindizes von fünf mittel- und osteuropäischen und sieben westlichen Börsen für den Zeitraum von 1990 bis 1997 zu untersuchen. Die Ergebnisse der empirischen Analyse deuten darauf hin, daß die mittel- und osteuropäischen Aktienmärkte noch nicht so weit in die internationalen Kapitalmärkte integriert sind, wie dies hätte erwartet werden können.
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