Funding liquidity risk and internal market in the multi-bank holding companies: Diversification or internalization?

This study examines how a multi-bank holding company (MBHC) manages funding liquidity risk through its internal liquidity market, how its internal liquidity market works, and the benefits that its member banks enjoy. The results provide evidence that the diversification effect mostly dominates the internalization effect. A new entrant into an MBHC structure benefits from holding lower liquidity and raising deposits at lower costs than a non-MBHC structure, suggesting that MBHCs have enjoyed scant liquidity at the cost of mismatch risk. We find that other member banks also enjoy the benefits of diversified risk when a new entrant joins, suggesting that MBHCs manage liquidity in response to changes in funding liquidity risk. However, internalization is more important for MBHCs that have large numbers of subsidiaries. Whichever types of mergers/acquisitions are chosen by an MBHC, the diversification effect appears. Basel III liquidity regulations would mitigate the mismatch risk at the cost of distorted internal liquidity markets

The Basel III net stable funding ratio adjustment speed and systemic risk

The theory on the timing of liquidity trades highlights two contrasting rational expectations equilibria for the liquidity adjustment speed effect, namely an immediate-trading equilibrium (trade at the onset of the liquidity shock) and a delayed-trading equilibrium (trade at the last resort). Using a partial adjustment model and an annual data sample of US bank holding companies from 1991 to 2012, we investigate the effect of Net Stable Funding Ratio (NSFR) adjustment speeds on systemic risk. We find that banks with the immediate-trading equilibrium tend to adjust the NSFR quickly in response to the Basel III liquidity requirement, thereby, reducing systemic risk. With the same level of the NSFR, our findings suggest that only the adjustment speed exerts a negative impact on systemic risk. Our evidence shows that small banks strengthen the effects of the negative impact of the NSFR adjustment speed on systemic risk. Our study sheds light on a real-time indicator of the NSFR for Basel III revisions before its implementation in 2018

Were regulatory interventions effective in lowering systemic risk during the financial crisis in Japan?

This study investigates the effectiveness of various regulatory interventions on systemic risk during the financial crisis in Japan. Our evidence generally shows that the regulatory interventions worked effectively through the liquidity provision. That is, the public fund injection programs, the prompt corrective actions, and the blanket guarantee reduced systemic risk. The simple government intervention package to bail out distressed “too-big-to-fail” banks stabilized the banking system via the external channel whereas the massive bailout scheme suffered the “too-many-to-fail” problem in the sense that it increased systemic risk through both direct spillover and external channels. This study suggests that the effective government intervention should be restricted to a limited number of bailouts to reduce systemic risk

Who acquires whom among stand-alone commercial banks and bank holding company affiliates?

This paper presents the difference in the likelihood of being targets or acquirers among stand-alone banks, single-bank holding company (SBHC) affiliates and multi-bank holding company (MBHC) affiliates. Using a sample of U.S. commercial bank data from 1997 to 2012, we find that MBHC affiliates exhibit a greater likelihood of being targets than do stand-alone commercial banks, while stand-alone banks have a greater probability of becoming targets than do SBHC affiliates. Our findings show that MBHC affiliates tend to have a greater likelihood of being acquirers than do SBHC affiliates, which again have a greater probability of being acquirers than do stand-alone banks. Those banks that acquire another bank within the same MBHC structure tend to be smaller and more financially constrained than those banks acquiring outside the same MBHC structure, whereas targets that are acquired by another bank within the same MBHC structure tend to be smaller, higher profitability and capital than targets that are acquired by banks from outside the MBHC structure. Our results suggest that the MBHC parent attempts to discipline distressed, poorly performing and smaller affiliates by involving them in mergers and acquisitions

Can parents protect their children? Risk comparison analysis between affiliates of multi- and single-bank holding companies

We find that multi-bank holding companies (MBHCs) in the U.S. have lower insolvency risk than single-bank holding companies (SBHCs) at the parent level, but have significantly higher insolvency risk than the latter at the subsidiary level. Our results suggest that MBHC parents tend to benefit from the internal capital market while allowing for more risk-taking at the individual levels. We further find that the higher risk for MBHC affiliates is because of the organizational and geographic complexity at the MBHC parent level. Our results highlight the importance of government regulation on banks at both parent and subsidiary levels

The role of bank affiliation in bank efficiency: a fuzzy multi-objective data envelopment analysis approach

This paper examines differences in bank efficiency between banks affiliated with single-bank holding companies and those affiliated with multi-bank holding companies by applying a fuzzy multi-objective two-stage data envelopment analysis technique. Using a sample of U.S. commercial banks covering 1994-2018, the results show that banks affiliated with multi-bank holding companies are more efficient than those affiliated with single-bank holding companies, suggesting that the former takes advantage of their parents' resources to enhance their efficiency, consistent with the internal capital market theory. They also show that banks with a powerful CEO exhibit lower efficiency than others. Moreover, there is an inverted U shape relationship between multi-bank holding company structure and bank efficiency, suggesting the presence of an optimal number of multi-bank holding subsidiaries that maximizes efficiency

Future directions in international financial integration research. A crowdsourced perspective

This paper is the result of a crowdsourced effort to surface perspectives on the present and future direction of international finance. The authors are researchers in financial economics who attended the INFINITI 2017 conference in the University of Valencia in June 2017 and who participated in the crowdsourcing via the Overleaf platform. This paper highlights the actual state of scientific knowledge in a multitude of fields in finance and proposes different directions for future research

Safety and efficacy of fluoxetine on functional outcome after acute stroke (AFFINITY): a randomised, double-blind, placebo-controlled trial

Background Trials of fluoxetine for recovery after stroke report conflicting results. The Assessment oF FluoxetINe In sTroke recoverY (AFFINITY) trial aimed to show if daily oral fluoxetine for 6 months after stroke improves functional outcome in an ethnically diverse population. Methods AFFINITY was a randomised, parallel-group, double-blind, placebo-controlled trial done in 43 hospital stroke units in Australia (n=29), New Zealand (four), and Vietnam (ten). Eligible patients were adults (aged ≥18 years) with a clinical diagnosis of acute stroke in the previous 2–15 days, brain imaging consistent with ischaemic or haemorrhagic stroke, and a persisting neurological deficit that produced a modified Rankin Scale (mRS) score of 1 or more. Patients were randomly assigned 1:1 via a web-based system using a minimisation algorithm to once daily, oral fluoxetine 20 mg capsules or matching placebo for 6 months. Patients, carers, investigators, and outcome assessors were masked to the treatment allocation. The primary outcome was functional status, measured by the mRS, at 6 months. The primary analysis was an ordinal logistic regression of the mRS at 6 months, adjusted for minimisation variables. Primary and safety analyses were done according to the patient's treatment allocation. The trial is registered with the Australian New Zealand Clinical Trials Registry, ACTRN12611000774921. Findings Between Jan 11, 2013, and June 30, 2019, 1280 patients were recruited in Australia (n=532), New Zealand (n=42), and Vietnam (n=706), of whom 642 were randomly assigned to fluoxetine and 638 were randomly assigned to placebo. Mean duration of trial treatment was 167 days (SD 48·1). At 6 months, mRS data were available in 624 (97%) patients in the fluoxetine group and 632 (99%) in the placebo group. The distribution of mRS categories was similar in the fluoxetine and placebo groups (adjusted common odds ratio 0·94, 95% CI 0·76–1·15; p=0·53). Compared with patients in the placebo group, patients in the fluoxetine group had more falls (20 [3%] vs seven [1%]; p=0·018), bone fractures (19 [3%] vs six [1%]; p=0·014), and epileptic seizures (ten [2%] vs two [<1%]; p=0·038) at 6 months. Interpretation Oral fluoxetine 20 mg daily for 6 months after acute stroke did not improve functional outcome and increased the risk of falls, bone fractures, and epileptic seizures. These results do not support the use of fluoxetine to improve functional outcome after stroke

Banking activities, insolvency risk, and mergers and acquisitions: the case of different bank structures in USA

After the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the U.S. banking industry has significantly transformed its organisation structure from banks into bank holding companies (BHCs) as a result of the consolidation process, resulting in larger and more complex BHCs. Under the source-of-strength doctrine and the cross-guarantee authority, a BHC is required to inject capital into the bank subsidiary when it is financially distressed. However, these bank-failed resolutions were introduced before the deregulation; therefore, have not taken into account the increased organisational complexity of BHCs since then. Systemic importance of BHCs has recently attracted attention from policymakers and researchers. Accordingly, the complexity of BHCs will generate concerns about the risk implication of their subsidiaries as compared to the stand-alone structure. This thesis consists of three interrelated essays on stand-alone commercial banks, single-bank holding company (SBHC) affiliates and multi-bank holding company (MBHC) affiliates in the U.S. banking industry. It investigates the role that these financial intermediaries play in (i) banking business activities, (ii) insolvency risk, and (iii) mergers and acquisitions (M&As). The first essay is a qualitative analysis about on- and off-balance sheet analysis, asset securitization and derivatives of these banks which provide a thorough understanding of the difference in permissible scopes of banking business activities among stand-alone banks, SBHC affiliates and MBHC affiliates based on Bank’s Uniform Bank Performance Report. The findings show that SBHC affiliates and MBHC affiliates pursue diversification strategies by running a broad range of activities from traditional lending business to off-balance sheet, asset securitization and derivatives whereas stand-alone banks are more specialised. However, SBHC affiliates show more concentration on taking deposits, issuing loans and demonstrate the most important role in financial intermediation in the U.S. banking system as compared to MBHC affiliates and stand-alone banks. In a striking contrast, MBHC affiliates are dominant in off-balance sheet activities, asset securitization, and derivative activities. This suggests that the MBHC group performs the main role of disintermediation in the U.S. The second essay compares the differences in insolvency risk of stand-alone banks, SBHC affiliates and MBHC affiliates by using U.S. commercial bank data and BHC data from 1994 to 2012. The study’s results show that MBHCs in the U.S. have lower insolvency risk than SBHCs and stand-alone commercial banks at the parent levels, but have significant higher insolvency risk than both at the subsidiary levels. These results suggest that BHC affiliates benefit from an internal capital market and increased diversification from the BHC structure, but face risks of the increased complexity if the number of subsidiaries increases. The third essay investigates the difference in the likelihood of being targets and acquirers among stand-alone banks, SBHC affiliates and MBHC affiliates by using M&A data on U.S. commercial banks from 1997 to 2012. The reported results show that MBHC affiliates exhibit a greater likelihood of being targets than do stand-alone commercial banks, while stand-alone banks have a greater probability of becoming targets than do SBHC affiliates. The findings show that MBHC affiliates tend to have a greater likelihood of being acquirers than do SBHC affiliates. SBHC affiliates have a greater probability of being acquirers than do stand-alone banks. Those banks that acquire another bank within the same MBHC structure tend to be smaller and more financially constrained than those banks acquiring outside the same MBHC structure, whereas targets that are acquired by another bank within the same MBHC structure tend to be smaller, with higher profitability and capital than targets that are acquired by banks from outside the MBHC structure. The results suggest that the MBHC parent attempts to discipline distressed, poorly performing and smaller affiliates by involving them in M&As. To sum up, this study provides four policy implications. First, regulators should devote particular effort to regulating banks at the subsidiary levels to restrict their risk-taking behaviour. In this sense, the regulators should revise the source-of-strength doctrine cross-guarantee authority to ensure that MBHC affiliates can receive their parent’s bail-out in the future when in distress. Second, regarding complexity issues inside BHC structure, regulators should consider risk exposure between banks affiliated with SBHC and MBHC separately. Third, understanding the fact that MBHC parent attempts to hinder inherent risks of their subsidiaries by involving them in successive M&A inside the structure, the bank regulators should put more restrictions on their M&A applications and reveal their problems to the financial market. Finally, stand-alone banks should be encouraged to transform into SBHC affiliates in the future. Consequently, the Federal Reserve should make the path easier for banks to transform into SBHCs to increase their stability in the U.S. banking system