Flight from Safety: How a Change to the Deposit Insurance Limit Affects Households‘ Portfolio Allocation
H. Evren Damar, Reint E. Gropp, Adi Mordel
IWH Discussion Papers,
No. 19,
2019
Abstract
We study how an increase to the deposit insurance limit affects households‘ portfolio allocation by exogenously reducing uninsured deposit balances. Using unique data that identifies insured versus uninsured deposits, along with detailed information on Canadian households‘ portfolio holdings, we show that households respond by drawing down deposits and shifting towards mutual funds and stocks. These outflows amount to 2.8% of outstanding bank deposits. The empirical evidence, consistent with a standard portfolio choice model that is modified to accommodate uninsured deposits, indicates that more generous deposit insurance coverage results in nontrivial adjustments to household portfolios.
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The Economic Impact of Changes in Local Bank Presence
Iftekhar Hasan, Krzysztof Jackowicz, Oskar Kowalewski, Łukasz Kozłowski
Regional Studies,
No. 5,
2019
Abstract
This study analyzes the economic consequences of changes in the local bank presence. Using a unique data set of banks, firms and counties in Poland over the period 2009–14, it is shown that changes strengthening the relationship banking model are associated with local labour market improvements and easier small and medium-sized enterprise access to bank debt. However, only the appearance of new, more aggressive owners of large commercial banks stimulates new firm creation.
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National Culture and Risk-taking: Evidence from the Insurance Industry
Chrysovalantis Gaganis, Iftekhar Hasan, Panagiota Papadimitri, Menelaos Tasiou
Journal of Business Research,
April
2019
Abstract
The gravity of insurance within the financial sector is constantly increasing. Reasonably, after the events of the recent financial turmoil, the domain of research that examines the factors driving the risk-taking of this industry has been signified. The purpose of the present study is to investigate the interplay between national culture and risk of insurance firms. We quantify the cultural overtones, measuring national culture considering the dimensions outlined by the Hofstede model and risk-taking using the ‘Z-score’. In a sample consisting of 801 life and non-life insurance firms operating across 42 countries over the period 2007–2016, we find a strong and significant relationship among insurance firms' risk-taking and cultural characteristics, such as individualism, uncertainty avoidance and power distance. Results remain robust to a variety of firm and country-specific controls, alternative measures of risk, sample specifications and tests designed to alleviate endogeneity.
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The Case for a European Rating Agency: Evidence from the Eurozone Sovereign Debt Crisis
Marc Altdörfer, Carlos A. De las Salas Vega, Andre Guettler, Gunter Löffler
Journal of International Financial Markets, Institutions and Money,
2019
Abstract
Politicians frequently voice that European bond issuers would benefit from the presence of a Europe-based rating agency. We take Fitch as a prototype for such an agency. With its ownership structure and a headquarter in London, Fitch is more European than Moody’s and S&P; during the Eurozone sovereign debt crisis, it also issued more favorable ratings. Fitch’s rating actions, however, were largely ignored by the bond market. Our results thus cast doubt on the benefits of a European credit rating agency.
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The Joint Dynamics of Sovereign Ratings and Government Bond Yields
Makram El-Shagi, Gregor von Schweinitz
Journal of Banking and Finance,
2018
Abstract
Can a negative shock to sovereign ratings invoke a vicious cycle of increasing government bond yields and further downgrades, ultimately pushing a country toward default? The narratives of public and political discussions, as well as of some widely cited papers, suggest this possibility. In this paper, we will investigate the possible existence of such a vicious cycle. We find no evidence of a bad long-run equilibrium and cannot confirm a feedback loop leading into default as a transitory state for all but the very worst ratings. We use a bivariate semiparametric dynamic panel model to reproduce the joint dynamics of sovereign ratings and government bond yields. The individual equations resemble Pesaran-type cointegration models, which allow for valid interference regardless of whether the employed variables display unit-root behavior. To incorporate most of the empirical features previously documented (separately) in the literature, we allow for different long-run relationships in both equations, nonlinearities in the level effects of ratings, and asymmetric effects in changes of ratings and yields. Our finding of a single good equilibrium implies the slow convergence of ratings and yields toward this equilibrium. However, the persistence of ratings is sufficiently high that a rating shock can have substantial costs if it occurs at a highly speculative rating or lower. Rating shocks that drive the rating below this threshold can increase the interest rate sharply, and for a long time. Yet, simulation studies based on our estimations show that it is highly improbable that rating agencies can be made responsible for the most dramatic spikes in interest rates.
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SMEs and Access to Bank Credit: Evidence on the Regional Propagation of the Financial Crisis in the UK
Hans Degryse, Kent Matthews, Tianshu Zhao
Journal of Financial Stability,
2018
Abstract
We study the sensitivity of banks’ credit supply to small and medium size enterprises (SMEs) in the UK with respect to the banks’ financial condition before and during the financial crisis. Employing unique data on the geographical location of all bank branches in the UK, we connect firms’ access to bank credit to the financial condition (i.e., bank health and the use of core deposits) of all bank branches in the vicinity of the firm for the period 2004–2011. Before the crisis, banks’ local financial conditions did not influence credit availability irrespective of the functional distance (i.e., the distance between bank branch and bank headquarters). However, during the crisis, we find that SMEs with banks within their vicinity that have stronger financial conditions faced greater credit availability when the functional distance is close. Our results point to a “flight to headquarters” effect during the financial crisis.
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Differences Make a Difference: Diversity in Social Learning and Value Creation
Yiwei Fang, Bill Francis, Iftekhar Hasan
Journal of Corporate Finance,
2018
Abstract
Prior research has demonstrated that CEOs learn privileged information from their social connections. Going beyond the importance of the number of social ties in a CEO's social network, this paper studies the value generated from a diverse social environment. We construct an index of social-network heterogeneity (SNH) that captures the extent to which CEOs are connected to people of different demographic attributes and skill sets. We find that higher CEO SNH leads to greater firm value through the channels of better corporate innovation and diversified M&As. Overall, the evidence suggests that CEOs' exposure to human diversity enhances social learning and creates greater growth opportunities for firms.
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When Arm’s Length is too Far: Relationship Banking over the Credit Cycle
Thorsten Beck, Hans Degryse, Ralph De Haas, Neeltje van Horen
Journal of Financial Economics,
No. 1,
2018
Abstract
We conduct face-to-face interviews with bank CEOs to classify 397 banks across 21 countries as either relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks in the vicinity of firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, our evidence suggests that relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.
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Does It Pay to Get Connected? An Examination of Bank Alliance Network and Bond Spread
Iftekhar Hasan, Céline Meslier, Amine Tarazi, Mingming Zhou
Journal of Economics and Business,
forthcoming
Abstract
This paper examines the effects of bank alliance network on bonds issued by European banks during the period 1990–2009. We construct six measures capturing different dimensions of banks’ network characteristics. In opposition to the results obtained for non-financial firms, our findings indicate that being part of a network does not create value for bank’s bondholders, indicating a dark side effect of strategic alliances in the banking sector. While being part of a network is perceived as a risk-increasing event by market participants, this negative perception is significantly lower for the larger banks, and, to a lesser extent, for the more profitable banks. Moreover, during crisis times, the positive impact on bond spread of a bank’s higher centrality or of a bank’s higher connectedness in the network is stronger, indicating that market participants may fear spillover effects within the network during periods of banks’ heightened financial fragility.
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European versus Anglo-Saxon Credit View: Evidence from the Eurozone Sovereign Debt Crisis
Marc Altdörfer, Carlos A. De las Salas Vega, Andre Guettler, Gunter Löffler
Abstract
We analyse whether different levels of country ties to Europe among the rating agencies Moody’s, S&P, and Fitch affect the assignment of sovereign credit ratings, using the Eurozone sovereign debt crisis of 2009-2012 as a natural laboratory. We find that Fitch, the rating agency among the “Big Three” with significantly stronger ties to Europe compared to its two more US-tied peers, assigned on average more favourable ratings to Eurozone issuers during the crisis. However, Fitch’s better ratings for Eurozone issuers seem to be neglected by investors as they rather follow the rating actions of Moody’s and S&P. Our results thus doubt the often proposed need for an independent European credit rating agency.
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