Bank liquidity creation and risk taking during distress

Liquidity creation is one of banks' raisons d'être. But what happens to liquidity creation and risk taking when a bank is identified as distressed by regulatory bodies and subjected to regulatory interventions and/or receives capital injections? What are the long-run effects of such interventions? To address these questions, we exploit a unique dataset of German universal banks for the period 1999 - 2008. Our main findings are as follows. First, regulatory interventions and capital injections are followed by lower levels of liquidity creation. The probability of a decline in liquidity creation increases to up to around 50 percent when such actions are taken. Second, bank risk taking decreases in the aftermath of regulatory interventions and capital injections. Third, while banks' liquidity creation market shares decline over the five years following such disciplinary measures, they also reduce their risk exposure over this period to become safer banks. --Liquidity creation,bank distress,regulatory interventions,capital injections

Bank liquidity creation following regulatory interventions and capital support

We study the effects of regulatory interventions and capital support (bailouts) on banks’ liquidity creation. We rely on instrumental variables to deal with possible endogeneity concerns. Our key findings, which are based on a unique supervisory German dataset, are that regulatory interventions robustly trigger decreases in liquidity creation, while capital support does not affect liquidity creation. Additional results include the effects of these actions on different components of liquidity creation, lending, and risk taking. Our findings provide new and important insights into the debates about the design of regulatory interventions and bailouts

Small worlds and board interlocking in Brazil: a longitudinal study of corporate networks, 1997-2007

Social Network Analysis (SNA) is an emerging research field in finance, above all in Brazil. This work is pioneering in that it is supported by reference to different areas of knowledge: social network analysis and corporate governance, for dealing with a similarly emerging topic in finance; interlocking boards, the purpose being to check the validity of the small-world model in the Brazilian capital market, and the existence of associations between the positioning of the firm in the network of corporate relationships and its worth. To do so official data relating to more than 400 companies listed in Brazil between 1997 and 2007 were used. The main results obtained suggest that the configuration of the networks of relationships between board members and companies reflects the small-world model. Furthermore, there seems to be a significant relationship between the firm’s centrality and its worth, described according to an “inverted U” curve, which suggests the existence of optimum values of social prominence in the corporate network

Bank capital, risk and liquidity creation.

This dissertation contains three chapters on bank capital. Chapter 1 provides a brief overview of the dissertation. Chapter 2 theoretically and empirically examines how three corporate governance mechanisms---bank capital, regulatory monitoring and large shareholder monitoring---affect an acquiring bank's post-acquisition risk taking and performance. My model predicts that regulatory monitoring will be less stringent for high-capital acquirers than for low-capital acquirers and that as a result, high-capital acquirers will engage in acquisitions that underperform those of low-capital acquirers and increase risk more. Moreover, my model predicts that the presence of a large shareholder mitigates this effect: high-capital acquirers with a large shareholder should perform better than high-capital acquirers without a large shareholder. I test these predictions by examining the increased risk taking and long-run abnormal stock and accounting performance of acquirers. The results support my model. Chapter 3 analyzes the relationship between bank capital and liquidity creation. Recent theory papers by Diamond and Rajan (2000, 2001) and others suggest that banks with higher capital ratios may create less liquidity because capital diminishes financial fragility and/or crowds out deposits. Other contributions suggest the opposite outcome: banks with higher capital ratios may create more liquidity because capital gives them greater capacity to absorb the risks associated with liquidity creation. We construct liquidity creation measures for U.S. banks from 1993--2003 and test these opposing theoretical predictions. Our calculations suggest that the industry created over $1.5 trillion in liquidity as of year-end 2003, and this amount has grown over time. For large banks, which account for most of the industry's assets, we find a statistically significant positive relationship between capital and liquidity creation. For small banks, which comprise the vast majority of the observations, the relationship is significantly negative. Simulation of 1 percentage point higher lagged capital ratios for all banks yields a predicted greater aggregate liquidity creation of 2.0$30.6 billion), as the positive effect for large banks overwhelms the negative effect for small banks. However, the positive effect at the industry level may be eliminated under alternative assumptions.Ph.D.BankingFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/125030/2/3186584.pd

Corporate Governance Propagation through Overlapping Directors

How are governance practices propagated across firms? This article proposes, and empirically verifies, that observed governance practices are partly the outcome of network effects among firms with common directors. While firms attempt to select directors whose other directorships are at firms with similar governance practices ("familiarity effect"), this matching of governance practices is imperfect because other factors also affect the director choice. This generates an "influence effect" as directors acquainted with different practices at other firms influence the firm's governance to move toward the practices of those other firms. These network effects cause governance practices to converge. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.