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Banking and Institutions

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Marriott Philadelphia Downtown, Grand Ballroom Salon D
Hosted By: Association for Comparative Economic Studies
  • Chair: Iikka Korhonen, BOFIT, Bank of Finland

Deposit Insurance, Market Discipline and Bank Risk

Alexei Karas
,
Roosevelt Academy
William Pyle
,
Middlebury College
Koen Schoors
,
University of Gent

Abstract

Using evidence from Russia, we explore the effect of deposit insurance on multiple measures of bank risk. Drawing on bank-level variation in the ratio of deposits held by households and firms, so as to isolate the change in market discipline after the introduction of deposit insurance, we demonstrate that banks for which the decline in market discipline was relatively large were more likely to experience a greater subsequent increase in traditional measures of risk and a greater subsequent rate of failure. These results are robust to the inclusion of time-varying bank-specific controls and bank-level fixed effects. Moreover, they hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime does not change over the period of analysis, serve as a control.

Lending Relationships and the Transmission of Liquidity Shocks: Evidence From a Natural Experiment

Yiyi Bai
,
Zhongnan University of Economics and Law
Tri Vi Dang
,
Columbia University
Qing He
,
Renmin University of China
Living Lu
,
University of Amsterdam

Abstract

We exploit a liquidity crunch of 2013 in China as a negative shock to banks and analyze the wealth effects on listed firms. Our findings show that liquidity shocks to financial institutions impact borrowers’ performance negatively, especially for borrowers with outstanding loans. However, firms having long-term relationship with banks outperformed in stock market and subsequently experienced a smaller decline in investment than their peers without such relationship. This effect is the strongest for firms whose relationship banks are state-owned and foreign banks, and the weakest for firms whose relationship banks are local banks. We also document a positive correlation between firms’ stock performances and their banks’ stock performances, as well as banks’ liquidity in the interbank market. These results suggest that banks transmit liquidity shocks to their borrowing firms and that the long-term bank-firm relationship can mitigate such negative effects.

Move a Little Closer? Information Sharing and the Spatial Clustering of Bank Branches

Ralph De Haas
,
European Bank for Reconstruction and Development
Steven Ongena
,
University of Zurich
Shusen Qi
,
Xiamen University
Stefan Straetmans
,
Maastricht University

Abstract

We study how information sharing between banks influences the geographical clustering of branches. We construct a spatial oligopoly model with price competition that explains why bank branches cluster and how the introduction of information sharing impacts clustering. Dynamic data on 59,333 branches operated by 676 banks in 22 countries between 1995 and 2012 allow us to test the hypotheses derived from this model. Consistent with our model, we find that information sharing spurs banks to open branches in localities that are new to them but that are already relatively well served by other banks. Information sharing also allows firms to borrow from more distant banks.

Are Chinese Big Banks Really Inefficient? Distinguishing Persistent From Residual Inefficiency

Zuzana Fungáčová
,
BOFIT, Bank of Finland
Paul-Olivier Klein
,
University of Strasbourg
Laurent Weill
,
University of Strasbourg

Abstract

Bank efficiency is crucial for the bank-based Chinese financial system.
In this paper, we question the lower efficiency of the Big 5 banks. While state-owned banks exhibit long-run impediments to efficiency (e.g. political management, non-profit behavior) (Ariff and Can, 2008)) Big 5 banks also have a privileged access to the lending market and benefit from a political support which can help them increase their lending activity. While former works consider bank efficiency as a whole, we challenge these results with a novel methodology which helps disentangling two components of banking efficiency: persistent and residual.
Persistent efficiency accounts for the presence of structural problems in the bank which can include poor organization or weak management. On the other hand, residual efficiency is related to non-systematic management problems which only matter in the short term. When considering Chinese banks, the large state banks can suffer from poor organization, while foreign banks can benefit from higher governance standards. On the contrary, while foreign banks are newcomers in the Chinese bank industry and are not supported by the state, Big 5 banks benefit from a longer history and strong political ties. Hence, Big 5 banks can be poorly efficient in the long-run but have more flexibility to adjust to the changes in the Chinese banking market while foreign banks exhibit the opposite.
Discussant(s)
Diana Bonfim
,
Bank of Portugal
Laurent Weill
,
University of Strasbourg
Koen Schoors
,
Ghent University
Chun-Yu Ho
,
State University of New York-Albany
JEL Classifications
  • G2 - Financial Institutions and Services
  • P2 - Socialist Systems and Transitional Economies