Regulation and Trust in Financial Stability
Saturday, Jan. 7, 2017 7:30 PM – 9:30 PM
- Chair: David Thesmar, Massachusetts Institute of Technology and CEPR
Which Swiss Gnomes Attract Money? Efficiency and Reputation as Performance Drivers of Wealth Management Banks
AbstractWealth management constitutes an important aspect of today's banking world, but very little is known about what explains the differences among banks in their ability to attract new assets under management. Using a unique panel database of Swiss private banks, we test the hypothesis that the performance of a bank in attracting new money depends on two input factors: skill and reputation. Relatively skilled banks -- that is, banks that are more cost-efficient than predicted by their input factors -- also perform better in attracting net new money. We also find that negative media coverage (such as in the context of fraudulent business practices related to tax evasion) strongly diminishes the future ability to attract assets under management, especially at small banks. The present value of lost profits is 3.35 (0.73) times the median annual net profit of a small (large) bank. Thus, adding to the explicit fines that many Swiss banks had to pay in the course of the U.S. Department of Justice's investigations, there are substantial implicit and reputational costs to banks of having negative media coverage. Investment performance for clients seems not to explain future net new money growth. In sum, these results underscore the importance of trust in money management.
The Invisible Hand of the Government: ”Moral Suasion” During the European Sovereign Debt Crisis
AbstractUsing proprietary data on banks’ monthly securities holdings, we show that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds during months when the government needed to roll over a relatively large amount of maturing debt. This result is stronger for state-owned and supported banks, and it cannot be explained by concurrent factors such as risk shifting, carry trading, or regulatory compliance. We also find evidence that domestic banks reduced the supply of household credit following months with high government refinancing need.
Equity is Cheap for Large Financial Institutions: The International Evidence
AbstractEquity is a cheap source of funding for large financial institutions. In a large panel of 31 developed and emerging market countries, we find that the stock returns on a country's largest financials are significantly lower than the returns on that country's small financials, after adjusting for risk exposures. In developed countries, the largest banks earn negative risk-adjusted returns, but, in emerging market countries, the anomaly is largest for other financial firms. The large-minus-small, financial-minus-nonfinancial risk-adjusted spread varies across countries with the institutional, policy, and regulatory environment consistent with stock investors pricing in the implicit government guarantees that protect shareholders of large banks. The spread is larger for banks that operate in countries with deposit insurance, backed by fiscally strong governments.
- G2 - Financial Institutions and Services