Equity and Bond Market Signals as Leading Indicators of Bank Fragility
Reint E. Gropp, Jukka M. Vesala, Giuseppe Vulpes
Journal of Money, Credit and Banking,
Nr. 2,
2006
Abstract
We analyse the ability of the distance to default and subordinated bond spreads to signal bank fragility in a sample of EU banks. We find leading properties for both indicators. The distance to default exhibits lead times of 6-18 months. Spreads have signal value close to problems only. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators. We also examine the interaction of the indicators with other information and find that their additional information content may be small but not insignificant. The results suggest that market indicators reduce type II errors relative to predictions based on accounting information only.
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Neue Orientierungen für die deutsche Raumentwicklungspolitik? – Bericht über einen Workshop im IWH
Gerhard Heimpold
Wirtschaft im Wandel,
Nr. 2,
2006
Abstract
Seit kurzem ist eine intensive Diskussion zur Frage im Gange, ob es bei der Raumentwicklungspolitik, also bei Politikmaßnahmen, mit denen bestimmte Regionen gezielt unterstützt werden, eine Neuorientierung zugunsten wachstumsstarker Regionen geben sollte. Daran schließt sich dann die zweite Frage an, ob und welche Unterstützung künftig die strukturschwachen, peripher gelegenen Regionen erhalten sollten. Die knappen öffentlichen Kassen, der verschärfte Wettbewerb der Regionen in Europa und die veränderten Bedingungen für die öffentliche Daseinsvorsorge in Räumen mit dramatischen Bevölkerungsrückgängen drängen nach Antworten auf die genannten Fragen. Das IWH bearbeitet zusammen mit der Gesellschaft für Finanz- und Regionalanalysen (GEFRA), Münster, und dem Leibniz Institut für Regionalentwicklung und Strukturplanung (IRS), Erkner, im Auftrag des Bundesamtes für Bauwesen und Raumordnung ein Forschungsprojekt zum Thema „Bundesstaatliche Ordnung und Bedeutung finanzieller Ausgleichssysteme für die Raumordnung“, das empirische Fundierungen zur Beantwortung der o. g. Fragen liefern soll. In der ersten Phase der Projektbearbeitung fand am 21. Juni 2005 ein Workshop statt, der den politischen Status quo räumlicher Ausgleichspolitik und eine Bestandsaufnahme vorliegender Forschungsergebnisse zum Gegenstand hatte. Eine stärkere Orientierung auf die wachstumsstarken Räume könnte bedeuten, an dort gegebenen Agglomerationsvorteilen anzuknüpfen bzw. Agglomerationsnachteile zu mildern. Für die Unterstützung von Agglomerationseffekten, denen in modernen regionalökonomischen Theorien große Bedeutung als Entwicklungsdeterminante beigemessen wird, liefert allerdings die empirische Forschung bislang wenig Hinweise, die in konkrete regionalpolitische Maßnahmen umzusetzen wären. Es wurde grundsätzlich von den meisten Referenten und Teilnehmern betont, daß auch bei einer stärkeren Hinwendung zu einer wachstumsorientierten Raumentwicklungspolitik die strukturschwachen peripheren Räume nicht ihrem Schicksal überlassen werden dürften. Die Zentren müssten Verantwortung für die schwächere Peripherie übernehmen, den schwachen Regionen sollte Hilfe zur Selbsthilfe gewährt werden, und ein Überdenken der Daseinsvorsorge in Räumen mit starkem Bevölkerungsrückgang wird unvermeidlich sein.
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Cross-border bank mergers: What lures the rare animal?
Claudia M. Buch, G. DeLong
Journal of Banking and Finance,
Nr. 9,
2004
Abstract
Although domestic mergers and acquisitions (M&As) in the financial services industry have increased steadily over the past two decades, international M&As were until recently relatively rare. Moreover, the share of cross-border mergers in the banking industry is low compared with other industries. This paper uses a novel dataset of over 3000 mergers that took place between 1985 and 2001 to analyze the determinants of international bank mergers. We test the extent to which information costs and regulations hold back merger activity. Our results suggest that information costs significantly impede cross-border bank mergers. Regulations also influence cross-border bank merger activity. Hence, policy makers can create environments that encourage cross-border activity, but information cost barriers must be overcome even in (legally) integrated markets.
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Market Indicators, Bank Fragility, and Indirect Market Discipline
Reint E. Gropp, Jukka M. Vesala, Giuseppe Vulpes
Economic Policy Review,
Nr. 2,
2004
Abstract
A paper presented at the October 2003 conference “Beyond Pillar 3 in International Banking Regulation: Disclosure and Market Discipline of Financial Firms“ cosponsored by the Federal Reserve Bank of New York and the Jerome A. Chazen Institute of International Business at Columbia Business School.
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Why do banks hold capital in excess of regulatory requirements? A functional approach
Diemo Dietrich, Uwe Vollmer
IWH Discussion Papers,
Nr. 192,
2004
Abstract
This paper provides an explanation for the observation that banks hold on average a capital ratio in excess of regulatory requirements. We use a functional approach to banking based on Diamond and Rajan (2001) to demonstrate that banks can use capital ratios as a strategic tool for renegotiating loans with borrowers. As capital ratios affect the ability of banks to collect loans in a nonmonotonic way, a bank may be forced to exceed capital requirements. Moreover, high capital ratios may also constrain the amount a banker can borrow from investors. Consequently, the size of the banking sector may shrink.
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Exporting Financial Institutions Management via Foreign Direct Investment Mergers and Acquisitions
Allen N. Berger, Claudia M. Buch, G. DeLong
Journal of International Money and Finance,
Nr. 3,
2004
Abstract
We test the relevance of the new trade theory and the traditional theory of comparative advantage for explaining the geographic patterns of international M&As of financial institutions between 1985 and 2000. The data provide statistically significant support for both theories. We also find evidence that the U.S. has idiosyncratic comparative advantages at both exporting and importing financial institutions management.
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Measurement of Contagion in Banks' Equity Prices
Reint E. Gropp, G. Moerman
Journal of International Money and Finance,
Nr. 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,
Nr. 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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Bank Concentration and Retail Interest Rates
S. Corvoisier, Reint E. Gropp
Journal of Banking and Finance,
Nr. 11,
2002
Abstract
The recent wave of mergers in the euro area raises the question whether the increase in concentration has offset the increase in competition in European banking through deregulation. We test this question by estimating a simple Cournot model of bank pricing. We construct country and product specific measures of bank concentration and find that for loans and demand deposits increasing concentration may have resulted in less competitive pricing by banks, whereas for savings and time deposits, the model is rejected, suggesting increases in contestability and/or efficiency in these markets. Finally, the paper discusses some implications for tests of the effect of concentration on monetary policy transmission.
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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,
Nr. 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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