The Impact of Social Capital on Economic Attitudes and Outcomes
Iftekhar Hasan, Qing He, Haitian Lu
Journal of International Money and Finance,
November
2020
Abstract
This article traces the extant literature on the impact of social capital on economic attitudes and outcomes. Special attention is paid to clarify conceptual ambiguities, measurement techniques, channels of influence, and identification strategies. Insights derived from the literature are then used to analyze the marketplace lending industry in China, where the size of the peer-to-peer (P2P) lending market is larger than that of the rest of the world combined. Ironically, approximately two-thirds of these online P2P lending platforms have failed. Empirical evidence from the monthly operating data of 735 lending platforms and transaction level data from one prominent platform (Renrendai) shows that platforms in provinces with high social capital have low risk of failure, and borrowers in provinces with high social capital can borrow at low interest rate and are less likely to default. We also provide observations to guide future economic research on social capital.
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Marginal Returns to Talent for Material Risk Takers in Banking
Moritz Stieglitz, Konstantin Wagner
IWH Discussion Papers,
No. 20,
2020
Abstract
Economies of scale can explain compensation differentials over time, across firms of different size, different hierarchy-levels, and different industries. Consequently, the most talented individuals tend to match with the largest firms in industries where marginal returns to their talent are greatest. We explore a new dimension of this size-pay nexus by showing that marginal returns also differ across activities within firms and industries. Using hand-collected data on managers in European banks well below the level of executive directors, we find that the size-pay nexus is strongest for investment banking business units and for banks with a market-based business model. Thus, managerial compensation is most sensitive to size increases for activities that can easily be scaled up.
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Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views
Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle, Kim Ristolainen
Journal of Financial Stability,
October
2020
Abstract
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.
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The Economic Record of the Government and Sovereign Bond and Stock Returns Around National Elections
Stefan Eichler, Timo Plaga
Journal of Banking and Finance,
September
2020
Abstract
This paper investigates the role of the fiscal and economic record of the incumbent government in shaping the price response of sovereign bonds and stocks to the election outcome in emerging markets and developed countries. For sovereign bonds in emerging markets, we find robust evidence for higher cumulative abnormal returns (CARs) if a government associated with a relatively low primary fiscal balance is voted out of office compared to elections where the fiscal balance was relatively high. This effect of the incumbent government's fiscal record is significantly more pronounced in the presence of high sovereign default risk and strong political veto players, whereas the quality of institutions does not explain differences in effects for different events. We do not find robust effects of the government's fiscal record for developed countries and stocks.
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Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending
Michael Koetter, Felix Noth, Oliver Rehbein
Journal of Financial Intermediation,
July
2020
Abstract
We show that local banks provide corporate recovery lending to firms affected by adverse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital.
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To Securitise or to Price Credit Default Risk?
Huyen Nguyen, Danny McGowan
Abstract
We evaluate if lenders price or securitise mortgages to mitigate credit risk. Exploiting exogenous variation in regional credit risk created by differences in foreclosure law along US state borders, we find that financial institutions respond to the law in heterogeneous ways. In the agency market where Government Sponsored Enterprises (GSEs) provide implicit loan guarantees, lenders transfer credit risk using securitisation and do not price credit risk into mortgage contracts. In the non-agency market, where there is no such guarantee, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate about the design of loan guarantees, the common interest rate policy, and show that underpricing regional credit risk leads to an increase in the GSEs‘ debt holdings by $79.5 billion per annum, exposing taxpayers to preventable losses in the housing market.
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Why are some Chinese Firms Failing in the US Capital Markets? A Machine Learning Approach
Gonul Colak, Mengchuan Fu, Iftekhar Hasan
Pacific-Basin Finance Journal,
June
2020
Abstract
We study the market performance of Chinese companies listed in the U.S. stock exchanges using machine learning methods. Predicting the market performance of U.S. listed Chinese firms is a challenging task due to the scarcity of data and the large set of unknown predictors involved in the process. We examine the market performance from three different angles: the underpricing (or short-term market phenomena), the post-issuance stock underperformance (or long-term market phenomena), and the regulatory delistings (IPO failure risk). Using machine learning techniques that can better handle various data problems, we improve on the predictive power of traditional estimations, such as OLS and logit. Our predictive model highlights some novel findings: failed Chinese companies have chosen unreliable U.S. intermediaries when going public, and they tend to suffer from more severe owners-related agency problems.
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Banks’ Equity Performance and the Term Structure of Interest Rates
Elyas Elyasiani, Iftekhar Hasan, Elena Kalotychou, Panos K. Pouliasis, Sotiris Staikouras
Financial Markets, Institutions and Instruments,
No. 2,
2020
Abstract
Using an extensive global sample, this paper investigates the impact of the term structure of interest rates on bank equity returns. Decomposing the yield curve to its three constituents (level, slope and curvature), the paper evaluates the time-varying sensitivity of the bank’s equity returns to these constituents by using a diagonal dynamic conditional correlation multivariate GARCH framework. Evidence reveals that the empirical proxies for the three factors explain the variations in equity returns above and beyond the market-wide effect. More specifically, shocks to the long-term (level) and short-term (slope) factors have a statistically significant impact on equity returns, while those on the medium-term (curvature) factor are less clear-cut. Bank size plays an important role in the sense that exposures are higher for SIFIs and large banks compared to medium and small banks. Moreover, banks exhibit greater sensitivities to all risk factors during the crisis and postcrisis periods compared to the pre-crisis period; though these sensitivities do not differ for market-oriented and bank-oriented financial systems.
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Stress Tests and Small Business Lending
Kristle R. Cortés, Yuliya Demyanyk, Lei Li, Elena Loutskina, Philip E. Strahan
Journal of Financial Economics,
No. 1,
2020
Abstract
Post-crisis stress tests have altered banks’ credit supply to small business. Banks most affected by stress tests reallocate credit away from riskier markets and toward safer ones. They also raise interest rates on small loans. Quantities fall most in high-risk markets where stress-tested banks own no branches, and prices rise mainly where they do. The results suggest that banks price the stress-test induced increase in capital requirements where they have local knowledge, and exit where they do not. Stress tests do not, however, reduce aggregate credit. Small banks seem to increase their share in geographies formerly reliant on stress-tested lenders.
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What Drives the Commodity-Sovereign-Risk-Dependence in Emerging Market Economies?
Hannes Böhm, Stefan Eichler, Stefan Gießler
Abstract
Using daily data for 34 emerging markets in the period 1994-2016, we find robust evidence that higher export commodity prices are associated with higher sovereign bond returns (indicating lower sovereign risk). The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find, first, that commodity-dependence is higher for countries that export large volumes of volatile commodities and that the effect increases in times of recessions, high inflation, and expansionary U.S. monetary policy. Second, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Third, the concentration of commodities within a country’s portfolio, its government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity-dependence.
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