Three Essays in Banking: Corporate Governance, Internationalization, and Government Bailouts

This dissertation extends a growing literature on banking and finance by investigating bank corporate governance, internationalization, and bailouts. The first essay conducts the first assessment of shareholder activism in banking and its effects on risk and performance. Activism can create value and be an effective monitoring mechanism for banks, but it may also be a destabilizing mechanism, as maximizing shareholder value may cause financial instability. We focus on the conflicts among bank shareholders, managers, and creditors (e.g., regulators, deposit insurers, taxpayers, depositors). We find activism may generally be a destabilizing force, increasing bank risk-taking, but creating market value for shareholders, and leaving operating returns unchanged. This is consistent with the empirical dominance of the Shareholder-Creditor Conflict, which predicts that activist shareholders may induce managers to take higher risk to increase returns at the expense of creditors, given creditors’ difficulty in monitoring and regulatory-induced incentives. However, during financial crises, the increase in risk vanishes, suggesting activism may not be a major cause of risk during such times. From a public perspective, creditors (including the government) may lose during normal times, but not during crises. In the second essay (co-authored with Allen N. Berger, Sadok El Ghoul, and Omrane Guedhami), we document a positive relation between internationalization and bank risk. This is consistent with the empirical dominance of the market risk hypothesis – whereby internationalization increases banks’ risk due to market-specific factors in foreign vii markets – over the diversification hypothesis – whereby internationalization allows banks to reduce risk through diversification of their operations. The results continue to hold following a variety of robustness tests, including endogeneity and sample selection bias. We also find that the magnitude of this effect is more pronounced during financial crises. The results appear to be at least partially explained by agency problems related to poor corporate governance. These findings suggest that authorities might consider internationalization as an additional factor in bank supervision and regulation. In the third essay (co-authored with Allen N. Berger), we investigate whether the U.S. government bailout of banks during the recent financial crisis, the Troubled Assets Relief Program (TARP), gave recipients competitive advantages. Using a difference-indifference (DID) approach, we find that: 1) TARP recipients received competitive advantages and increased both their market shares and market power; 2) results may be driven primarily by the safety channel – TARP banks may be perceived as safer, which is partially offset by the cost disadvantage channel – TARP funds may be relatively expensive; and 3) these competitive advantages are primarily or entirely due to TARP banks that repaid early. The results of this paper may help explain other findings in the literature on TARP and yield important policy implications. The costs of the competitive distortions of bailouts should be weighed against the costs and benefits in terms of lending, risk taking, financial stability, and the overall effects on the economy

Risk-taking of the European Banks in CEECs : The role of national culture and stake vs shareholder view

The European bank system needs to consider the openness of markets of Central and Eastern European countries (CEECs) above other forces among which competition, crises and regulation. This chapter has the aims to understand the impact of national culture on risk-taking by European banks with branches and subsidiaries in CEECs as well as the ownership effects (shareholders, stakeholders). The sample is composed of 328 Eastern European banks in 13 countries and data are from Bankscope. The two measures of culture individualism and power distance affect significantly the risk-taking measured by z-score, while EBRD index records a positive relation. The results on SHV and STV suggest that banks with cooperative BHCs in CEECs have the same behaviour as commercial banks in facing cultural characteristics of a host country.fi=vertaisarvioitu|en=peerReviewed

The Dynamics between Stock Prices and Trading Volume: Evidence of Regime Dependence

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Foreign bank subsidiaries’ risk-taking behavior: Impact of home and host country national culture

This paper examines whether the risk-taking behavior of foreign affiliates of multinational banks is more influenced by the national culture of their parent banks’ home country or the national culture of foreign affiliates’ host country. The study uses a dataset of 292 foreign affiliates (i.e., subsidiaries or branch operations) operating in 66 countries having parent banks in 26 countries for empirical analysis. National culture of both home and host countries is measured with four dimensions—uncertainty avoidance, individualism, masculinity and power distance—of Hofstede's framework of national culture. Findings suggest that the national culture of parent banks’ home country has higher impact on the risk-taking behavior of foreign affiliates of multinational banks than the national culture of their host country. Specifically, foreign affiliates’ risk-taking is higher if parent banks’ home country has low uncertainty avoidance, high individualism and low power distance cultural values. This study extends our understanding that how informal institutions, such as the national culture, influence the financial decisions in multinational banks

Decentralized multinational banks and risk taking : the Spanish experience in the crisis

En este trabajo se analizan los efectos de los grupos bancarios multinacionales y descentralizados, caracterizados por la gran autonomía de sus afiliados en el exterior, sobre el riesgo del banco, utilizando información confidencial de la supervisión española. Tener actividad en el extranjero, en países cuyos negocios y ciclos financieros pueden estar menos que perfectamente correlacionados con los del país de origen, puede generar una mayor estabilidad en los resultados del grupo bancario consolidado. Tal aislamiento debería ser mayor para los bancos multinacionales y descentralizados. Por otro lado, la actividad internacional de los bancos puede estar asociada a una mayor asunción de riesgos, ya que la capacidad de la matriz para controlar sus filiales puede verse obstaculizada por la distancia o debido al conocimiento más limitado del país de acogida que tiene el grupo. Qué efecto domina es una cuestión empírica que podría tenerse en cuenta en los requisitos de capital y al realizar pruebas de estrés. Proporcionamos evidencia empírica de la relevancia del modelo de entrada en mercados extranjeros, la diversificación geográfica internacional y los movimientos conjuntos entre la economía española y la anfitriona sobre el riesgo ex post del banco. Los resultados son coherentes con la hipótesis de que la diversificación geográfica reduce el riesgoThis paper analyses the effects of decentralized multinational banks, characterized by the large autonomy of the affiliates that the banking group has abroad, on bank’s risk, using Spanish confidential supervisory data. Having activity abroad, in countries whose business and financial cycles may be less than perfectly correlated with those of the home country can generate more stability in the results of the consolidated banking group. Such isolation should be greater for multinational and decentralized banks. On the other hand, the international activity of banks may be associated to more risk taking as distance can hinder the ability of a bank’s headquarters to monitor its subsidiaries or because of the more limited knowledge of the host country that the group has. Which effect dominates is an empirical matter which could be taken into account in capital requirements and when carrying out stress-tests. We provide empirical evidence of the relevance of the model of entry into foreign markets, international geographic diversification and business co-movements between the Spanish and the host economy on bank’s ex-post risk. The results are consistent with the hypothesis that geographic diversification reduces ris

Financial Inclusion: Theory and Policy guide for fragile economies.

It empirically argued that economic development depends on increasing productivity, mitigating income inequality, reducing dependency on natural resources, improving health outcomes, enhancing environmental quality, and importantly increasing economic growth. Which is complemented by the fact that, all requires a quality financial system, which collects information to facilitate the ex-ante evaluation and ex-post monitoring of investment opportunities to ease information asymmetry as a problem, and facilitates the allocation of resources to innovative projects and further produce complex products. The above postulation derives its core factor of achievement from sustainable financial inclusion, with the paper advancing a conceptual proposition towards an effective, and efficient financial inclusion in fragile economies, and its underlying policy architecture to sustain its performance efficiency, in medium and long term purpose

External wealth of nations and systemic risk

External imbalances played a pivotal role leading to the global financial crisis and were an important cause of turmoil. While current account (flow) imbalances narrowed in the aftermath of the crisis, the net international investment position (NIIP) (stock) imbalances persisted. This study explores the implications of countries’ net foreign positions on systemic risk. Using a sample of 470 banks located in 49 advanced economies, emerging countries, and developing economies over 2000–2020, we find robust empirical evidence that banks can reduce their systemic risk exposure when the countries in which they are incorporated improve their NIIPs and maintain creditor status vis-à-vis the rest of the world. However, only the equity component of the NIIP is responsible for this outcome, whereas debt flows are not significant. Similarly, we find that the mitigating effect of an external balance sheet on systemic risk is derived from valuation gains rather than from the incremental net acquisition of assets or liabilities represented by the current account. Our findings are particularly relevant for policymakers seeking to improve banks’ resilience to adverse shocks and maintain financial stability

European banking M&As:The role of financial advisors

We investigate the puzzle of banks contracting the services of external advisors for deals they can self-manage and the role of financial advisors in mergers and acquisitions among European banking firms. We also study the determinants of the choice by bank acquirers and bank targets to either appoint external advisors or manage in-house, as well as between appointing either top or lower tier advisors. Top tier advisors are more likely to be employed in debt financed and cross-border deals. We also find that most European bank mergers are managed in-house, contrary to prior findings reporting mostly externally managed deals attributed to the certification effect. Targets fail to benefit from deals where they do not match acquirer’s decision to appoint external advisors. However, there is an overall propensity to match the counter party’s tier of advisor