Bootstrap bias-correction procedure in estimating long-run relationships from dynamic panels, with an application to money demand in the euro area

In dynamic panel data models, which are particularly well-suited to cross-country analysis, the Mean Group estimator (Pesaran and Smith, 1995) is under certain quite strong conditions consistent, but theoretical and empirical evidence indicates that it can be biased when the number of time observations is small. Possible explanations are sample-size bias and omitted variables or measurement errors that are correlated with the regressors. I find support for both hypotheses using a Monte Carlo experiment which analyzes cointegrated systems. A possible solution for the MG estimator bias is a bootstrap bias-correction procedure, but Pesaran and Zhao (1999) show that it performs well only when the true coefficient of the lagged dependent variable is small. In this paper, I test three different bootstrap procedures and obtain an appreciable reduction in the MG estimator bias, especially when the suggestions of Li and Maddala (1997) are applied. Finally, I use bootstrap bias-corrected estimators to investigate the long-run properties of money demand in the euro area.dynamic panels, bias-corrected estimator, long-run coefficients, money demand

Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits

The general conclusion of the empirical literature is that in-market consolidation generates adverse price changes, harming consumers. Previous studies, however, look only at the short-run pricing impact of consolidation, ignoring all effects that take longer to materialize. Using a database that includes detailed information on the deposit rates of individual banks in local markets for different categories of depositors, we investigate the long-run price effects of M&As for the first time. We find strong evidence that, although consolidation does generate adverse price changes, these are temporary. In the long run efficiency gains dominate over the market power effect, leading to more favorable prices for consumers.mergers, efficiency, market power, bank mergers

Where Do Banks Expand Abroad? An Empirical Analysis

This paper investigates the determinants of the pattern of banks' foreign investment. We extended previous analyses in three directions. First, we use a unique database that includes information on 260 large banks from OECD countries and all their foreign branches and subsidiaries in each one of the other OECD countries. Second, we consider explicitly the role of institutional and regulatory characteristics. Third, we considered within a unified framework a wide set of variables that are likely to influence the pattern of bank internationalization. Consistent with previous research, we find that a high degree of integration between the home and the destination countries has an effect on the location choice of multinational banks. However, we also find that the marginal effect of integration is much lower than that of other explanatory variables. Profit opportunities resulting from a high expected economic growth and the prospect of competing with relatively less efficient banks appear to be a key factor affecting the expansion abroad, especially in the case of subsidiaries. Institutional characteristics of the destination country also play a crucial role. For example, financial centers attract branches of foreign banks, but not subsidiaries, while lower regulatory restrictions on banking activities are associated with a stronger presence of foreign subsidiaries, but not of branches.international banking, foreign direct investment.

Cross-Border M&As in the Financial Sector. Is Banking Different from Insurance?

This paper investigates what factors might help explain the internationalization strategy of banks and insurance companies, by comparing the determinants of cross-border M&As in the two sectors in a unified framework. The empirical analysis shows that between 1990 and 2003 the internationalization of banks and insurance companies followed similar patterns. Distance and economic and cultural integration are important determinants for both the banks’ and the insurance companies’ expansion abroad. Comparative advantage also has a prominent role, the more so for banks. The evidence is less supportive of the view that cross-border M&As are more frequent between similar countries, as predicted by the new trade theory. Finally, and most interestingly, we find indirect evidence consistent with the hypothesis that implicit barriers to foreign entry are more important in explaining the behavior of banks than that of insurance companies.international banking and insurance, foreign direct investment

The Determinants of Cross-Border Bank Shareholdings; an Analysis with Bank-Level Data from OECD Countries

TThis paper investigates which factors determine a bank's decision to expand its activities abroad and what determines its choice of the countries to invest in. The empirical analysis is conducted using firm-level data on foreign subsidiaries for a representative sample of nearly 2,500 OECD banks. The results show that the banks with cross-border shareholdings are larger and have headquarters in countries with a more developed and efficient banking market. They prefer to invest in countries where expected profits are larger, owing to higher expected economic growth and the prospect of reducing local banks' inefficiency. These factors are overall more important in banksÂ’ decisions than those related to the degree of openness of the origin country and its economic integration with the destination country.banks, foreign banks, foreign direct investment

The Pricing Effect of Certification on Bank Loans: Evidence from the Syndicated Credit Market

This paper provides a direct test of banks' ability to mitigate informational asymmetries. In syndicated loans, lenders' incentive to screen ex ante and monitor ex post borrowers increases with the share they retain; consequently, the higher this share, the less risky the loan is considered by investors, and the lower is the interest rate they require. We analyze a large sample of syndicated loans arranged in over 80 countries during the nineties. We find that interest rates decrease in the share of the facility retained by the arranger. This certification effect is greater for smaller, more opaque loans where screening and monitoring are more valuable.Bank lending, Syndicated loans, Certification.

Are universal banks better underwriters? Evidence from the last days of the Glass-Steagall Act

It has often been argued during the recent credit crisis that commercial banks’ involvement in investment banking activities might have had an impact on the intensity of their underwriting standards. We turn to evidence from the period prior to the complete revocation of the Glass-Steagall Act in the United States and analyze whether investment banks or – section 20 subsidiaries of – commercial banks underwrote riskier securities. We compare actual defaults of these deals for an extensive sample of about 4,000 corporate debt securities underwritten during the period of the de facto softening of the Act’s restrictions. Securities underwritten by commercial banks’ subsidiaries have a higher probability of default than those underwritten by investment houses. This evidence is stronger in the case of ex-ante riskier and more competitive issues, and during the first years of bank securities’ subsidiaries’ entry into the market. Based on our results, it is not possible to reject that the repeal of the Glass-Steagall led to looser credit screening by broad (universal) banking companies trying to gain market share and/or to the lower initial ability of these banks to correctly evaluate default risk. JEL Classification: G21, G24, N22default, Glass-Steagall Act, investment banking, securities underwriting

The demand for bank loans in Italy at national and macro-regional level (1984-96)

Bank lending expanded rapidly in Italy in the second half of the 1980s and early 1990s. By contrast, in the four years 1993-96 it rose moderately, and in real terms it diminished. The paper addresses some questions in the light of these trends: Was there a structural change in firms’ demand for credit after 1993? Are there systematic differences in the parameters of the demand for loans in the different parts of Italy? If such differences do exist, how have they influenced recent developments in credit? The evidence presented delineates a rather clear picture. At national level the demand for loans was stable during the observation period. The deceleration in lending is ascribable in small part (about 3 percentage points on an annualized basis ) to the increase in the opportunity cost of loans; it was due largely (about 10 percentage points on an annualized basis) to the sizable decrease in business investment in relation to firms’ gross margins. The demand for loans displays differing characteristics in the different parts of Italy. In particular, its elasticity to interest rates was lower and its elasticity to investment higher in the North-East than in the other parts of the country. It is possible that changes occurred in the demand function in the North-West and the Centre.bank loans, Italy, regional

Why Do Banks Merge?

The banking industry is consolidating at an accelerating pace, yet no conclusive results have emerged on the benefits of mergers and acquisitions. We analyze the Italian market, which is similar to other main European countries. By considering both acquisitions (i.e. the purchase of the majority of voting shares) and mergers we evidence the motives and results of each type of deal. Mergers seek to improve income from services, but the increase is offset by higher staff costs; return on equity improves because of a decrease in capital. Acquisitions aim to restructure the loan portfolio of the acquired bank; improved lending policies result in higher profits.banks, mergers and acquisitions, performance