The Leverage Ratio as a Bank Discipline Device

International audienceThis paper investigates bank portfolio composition under Basel II where the amount of required capital is determined by bank's own risk assessment. We particularly show that in presence of asymmetric information between the bank and the supervisor, it has incentives to understate its risk taking which could be curbed by the addition of the simple leverage ratio as suggested in Basel III

Investigation on the Comparative Persistence and Convergence of Risk and Non-Risk Adjusted Bank Capital Ratios

We depart from the fact that in Europe, unlike the leverage ratio, risk-based capital ratios are formally under capital regulation with specified minimum thresholds to be respected. Building on this difference, we study their comparative persistence and convergence. For this purpose, we borrow the graphical analysis of Lemmon et al. (2008) and use the empirical partial adjustment model. Overall, consistent with the findings from the corporate finance literature, we find that bank capital structure is quite stable over long periods of time: banks that have high (low) capital ratios tend to remain as such for over eight years. Nevertheless, we find that even though all future capital ratios are influenced by initial capital ratios, this influence seems comparatively more relevant for the non risk-based (or leverage) capital ratio highlighting its high persistent phenomenon. Our findings also point to the role played by market participants in the trend and the relative rapid convergence of the risk-adjusted capital ratios compare to the simple leverage ratio. Our results are thus broadly supportive of recent policy initiatives that aim to strengthen the bank capital regulation by introducing a minimum leverage ratio and by simultaneously improving market discipline

The Role of Market Discipline on Bank Capital Buffer: Evidence from a Sample of European Banks

Using a sample of European commercial banks over the period 1993-2006, we show that market discipline significantly and positively affects banks' capital buffer. By distinguishing junior from senior debt holders, we find that both types of investors exert a pressure on banks to hold more capital but that the pressure exerted by junior debt holders is higher. Furthermore, junior debt holders exert a pressure on banks whatever the importance of their non-traditional activities. By contrast, we find that senior debt holders exert a pressure only on banks that are heavily involved in non-traditional activities that are badly taken into account in the current bank capital regulation framework. These results might help us to better understand the role of market discipline as a complement to capital regulation

Bâle 3 et la réhabilitation du ratio de levier des banques : Pourquoi et comment ?

International audienceDepuis la crise des subprimes, une grande refonte du cadre réglementaire des banques s'est engagée aboutissant, en décembre 2010, à la publication du dispositif connu sous le nom de Bâle 3. Parmi ses éléments constitutifs, il y a notamment le retour de la contrainte sur le levier des banques. Cet article expose les justifications théoriques de la nécessité de cette contrainte en complément du ratio de capital pondéré ainsi que les enseignements des expériences américaine et canadienne de coexistence de ces deux contraintes. Elle discute ensuite de la mise en œuvre de ce ratio de levier telle qu'elle est envisagée dans Bâle 3

A Note on Bank Capital Buffer: Does Bank Heterogeneity matter?

International audienceThe objective of this paper is to extend the literature on bank capital buffer by considering the role of bank heterogeneity. Using a sample of European commercial banks over 1992-2006, we show that four key determinants – risk, business cycle, market and peer discipline – have different impact on capital buffer depending on banks' financing mode, activity or size. Our results offer a framework for discussing the appropriateness of the still on-going suggestions on bank capital regulation. Whereas they support the differentiating measures undertaken in Basel 3 such as specific capital surcharges for SIFIs, they disagree with the adoption of uniform countercyclical buffers

Monetary, Financial and Fiscal Stability in the East African Community: Ready for a Monetary Union?

We examine prospects for a monetary union in the East African Community (EAC) by developing a stylized model of policymakers' decision problem that allows for uncertain benefits derived from monetary,financial and fiscal stability, and then calibrating the model for the EAC for the period 2003-2010. When policymakers properly allow for uncertainty, none of the countries wants to pursue a monetary union based on either monetary or financial stability grounds, and only Rwanda might favor it on fiscal stability grounds; we argue that robust institutional arrangements assuring substantial improvements in monetary, financial and fiscal stability are needed to compensate

After Euro Crisis, Dos and Dont’s for EAC

International audienc

Informal firms' adoption and use of mobile money under uncertain times: Evidence from Burkina Faso

This paper investigates how uncertainty driven by political instability or Covid-19 crisis affects mobile money adoption and use by the informal businesses in Burkina Faso. Notwithstanding the pervasive prevalence of informal sector in developing countries and despite the fact that mobile money has been shown to be a formidable tool for financial inclusion, there has been very little empirical work exploring the drivers of adoption and usage among unregistered businesses. Besides, most of the extant studies precede covid-19 and were conducted under stable contexts. Therefore, our study aims at filling this gap by taking into account the impact of the Covid-19 shocks as well as recent political turmoil in Burkina Faso culminating in two Coups d'Etat in 2022. We consider three waves of business survey data from a quasi-experimental opening of mobile money merchant accounts that we initiated in March 2021. Using Linear Probability and random effects models, our findings indicate that, after controlling for business owner and business level characteristics, security, is an important factor driving the adoption and usage of merchant accounts. However, we find that the temporary closure of businesses during the covid-19 affects negatively the adoption of merchant account while it has a positive impact on mobile money usage, particularly for payment reception, activities in the trade sector or allowing remote transactions. Overall, this study is in line with policymakers' agenda worldwide to improve financial inclusion among private sector businesses by using mobile technologies. While conducted in the specific context of political and covid-19 crises, our results provide policymakers and governments with a mapping of drivers of merchant account adoption and usage, thus acting as a springboard to increase financial inclusion for small and medium enterprises

A Note on Bank Capital Buffer: Does Bank Heterogeneity matter?

International audienceThe objective of this paper is to extend the literature on bank capital buffer by considering the role of bank heterogeneity. Using a sample of European commercial banks over 1992-2006, we show that four key determinants – risk, business cycle, market and peer discipline – have different impact on capital buffer depending on banks' financing mode, activity or size. Our results offer a framework for discussing the appropriateness of the still on-going suggestions on bank capital regulation. Whereas they support the differentiating measures undertaken in Basel 3 such as specific capital surcharges for SIFIs, they disagree with the adoption of uniform countercyclical buffers

Charter value and bank stability before and after the global financial crisis of 2007-2008 Charter value and bank stability before and after the global financial crisis of 2007-2008

International audienceWe investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before, during, and after the global financial crisis of 2007-2008. Prior to the crisis, bank charter value is positively associated with risk-taking and systemic risk for very large " too-big-too-fail " banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behavior before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks' business models also influence this relationship. In presence of strong diversification strategies, higher charter value increases standalone risk for very large banks. Conversely, for banks following a focus strategy, higher charter value amplifies systemic risk for very large banks and both standalone and systemic risk for large U.S. and European banks. Our findings have important policy implications and cast doubts on the relevance of the uniform more stringent capital requirements introduced by Basel III