Liquidity matters: Evidence from the Russian interbank market

We suggest a new transmission channel of contagion on the interbank market, namely the liquidity channel. We apply this idea to the Russian banking sector and .nd that the liquidity channel contributes signi.cantly to a better understanding and prediction of actual interbank market crises. Interbank market stability Granger causes the interbank market struc- ture, while the opposite causality is rejected. This emboldens the case for viewing the interbank market structure as endogenous. The results corroborate the thesis that prudential regulation at individual bank level is insu¢ cient to prevent systemic crises. We demonstrate that liquidity injections of a classical LOLR can e¤ectively mitigate coordination fail- ures on the interbank market not only in theory, but also in practice. In short: liquidity matters.interbank market stability, contagion, liquidity channel, lender of last resort, Russia

Microeconomic determinants of acquisitions of Eastern European banks by Western European banks

A considerable number of Western European banks have acquired banks in Central and Eastern Europe from the mid-1990s onwards. The question is whether or not this will improve the efficiency and profitability of the Central and Eastern European banking sectors. We test the relative strength of the efficiency versus the market power hypotheses by investigating the bank-specific characteristics of the banks involved in the cross-border acquisitions. We also examine the determinants of the post-acquisition target banks’ performance. Our results indicate that large Western European banks have targeted relatively large and efficient CEEC banks with an established presence in their local retail banking markets. We find no evidence that cross-border bank acquisitions in the CEEC are driven by efficiency motivations. The evidence supports the market power hypothesis, raising concerns about the optimal balance between foreign ownership and competition.Mergers and acquisitions, cross-border acquisitions, bank efficiency, transition economies, Central and Eastern Europe

Failure prediction in the Russian bank sector with logit and trait recognition models

The Russian banking sector experienced considerable turmoil in the late 1990s, especially around the Russian banking crisis in 1998. The question is what types of banks are vulnerable to shocks and whether or not bank-specific characteristics can be used to predict vulnerability to failures. In this study we employ a parametric logit model and a nonparametric trait recognition approach to predict failures among Russian commercial banks. We test the predictive power of both models based on their prediction accuracy using holdout samples. Both models performed better than the benchmark; the trait recognition approach outperformed logit in both the original and the holdout samples. As expected liquidity plays an important role in bank failure prediction, but also asset quality and capital adequacy turn out to be important determinants of failure.Russian banks, bank failure prediction, logit model, trait recognition, forecasting accuracy

Bank Supervision Russian Style: Rules vs Enforcement and Tacit Objectives

We focus on the conflict between two central bank objectives, namely individual bank stability and systemic stability. We study the licensing policy of the Central Bank of Russia (CBR) in 1999-2002. Banks in poorly banked regions, banks that are too big to be disciplined adequately and banks that are active on the interbank market enjoy protection from license withdrawal, showing a tacit concern for systemic stability. The CBR is also reluctant to withdraw licenses from banks that violate the individuals’ deposits to capital ratio, because this conflicts with the tacit CBR objective to secure depositor trust and systemic stability.Bank supervision, bank crisis, Russia