Determinants of banking system fragility: A regional perspective.

Banking systems are fragile not only within one country but also within and across regions. We study the role of regional banking system characteristics for regional banking system fragility. We find that regional banking system fragility reduces when banks in the region jointly hold more liquid assets, are better capitalized, and when regional banking systems are more competitive. For Asia and Latin-America, a greater presence of foreign banks also reduces regional banking fragility. We further investigate the possibility of contagion within and across regions. Within region banking contagion is important in all regions but it is substantially lower in the developed regions compared to emerging market regions. For cross-regional contagion, we find that the contagion effects of Europe and the US on Asia and Latin America are significantly higher compared to the effect of Asia and Latin America among themselves. Finally, the impact of cross-regional contagion is attenuated when the host region has a more liquid and more capitalized banking sector.banking system stability; cross-regional contagion; financial integration;

Start-up financing: How credit ratings and bank concentration impact credit access

Start-ups, especially those in high-tech industries, are an important force for innovation. They contribute to the competitive success of the economy, and help to create new jobs. Bank financing is the most important source of external credit for newly established firms. In the last two decades, bank consolidation and regulatory changes such as Basel II have influenced banks' screening processes, leading to a greater reliance on hard information. Yet newly established firms do not have a financial track record. Publicly available information like credit ratings is rarely available for new firms. Especially in the high-tech sector, a large share of young firms has reported difficulties in obtaining bank loans. For this reason, policy makers are worried that bank consolidation and the increasing reliance of the banking sector on third-party credit ratings may have detrimental effects on the access of start-ups to credit, especially in high-tech industries. This, in turn, could harm the innovative capabilities and competitiveness of German industry. Yet are such worries justified? To answer this question, researchers examined how credit availability is impacted by start-ups' credit ratings as well as the size and industry expertise of their primary bank. The study relied on firm-level survey data from the ZEW/KfW Start-up Panel.Externe Kreditwürdigkeitsprüfungen durch Rating-Agenturen haben für Banken bei der Kreditvergabe an Unternehmen, aufgrund der verschärften Regulierung durch Basel II, erheblich an Bedeutung gewonnen. Die These, ungünstige oder fehlende Ratings seien der Grund dafür, dass insbesondere innovative, noch nicht etablierte Unternehmen ohne aussagekräftige Kredithistorie oft erhebliche Schwierigkeiten hätten, Bankkredite zu erhalten, bestätigt sich jedoch nicht. Eine Studie des Zentrums für Europäische Wirtschaftsforschung (ZEW) zeigt zwar, dass negative Ratings generell für Unternehmen den Zugang zu Krediten erschweren. Gerade für junge, innovative Unternehmen fällt dieser Effekt allerdings deutlich geringer aus als für andere

Political uncertainty and the geographic allocation of credit: evidence from small businesses

We investigate how banks change the geographic distribution of their small business loan portfolio when they face political uncertainty in some of the states where they operate. Using exogenous variation in gubernatorial elections with binding term limits, we show that political uncertainty causes local banks to increase out-of-state lending to small firms, especially to firms located in the wealthiest out-of-state counties. This effect follows a decrease in lending in the local market and is stronger for banks that are more capital constrained. The increase in credit availability leads to an increase in employment growth and net firm creation in sectors that need larger amounts of startup capital. Our results indicate that geographic diversification and financial integration enable banks to sidestep the negative local economic effects of political uncertainty

Political Uncertainty and the Geographic Allocation of Credit: Evidence from Small Businesses

We investigate how banks change the geographic distribution of their small business loan portfolio when they face political uncertainty in some of the states where they operate. Using exogenous variation in gubernatorial elections with binding term limits, we show that political uncertainty causes local banks to increase out-of-state lending to small firms, particularly those located in higher-income areas. This effect follows a decrease in local lending and is stronger for banks that are more capital-constrained. The increase in out-of-state credit leads to an increase in employment growth and net firm creation in sectors with larger capital needs.Este artículo se encuentra originalmente publicado en Journal of Money, Credit and Banking (e-ISSN:1538-4616

Political uncertainty and the geographic allocation of credit: evidence from small businesses

We investigate how banks change the geographic distribution of their small business loan portfolio when they face political uncertainty in some of the states where they operate. Using exogenous variation in gubernatorial elections with binding term limits, we show that political uncertainty causes local banks to increase out-of-state lending to small firms, particularly those located in higher-income areas. This effect follows a decrease in local lending and is stronger for banks that are more capital-constrained. The increase in out-of-state credit leads to an increase in employment growth and net firm creation in sectors with larger capital needs.info:eu-repo/semantics/acceptedVersio

How do banks screen innovative firms? Evidence from start-up panel data

Start-up firms often face difficulties in raising external funds. Employing a unique panel dataset covering 9,715 start-up firms over the period 2007-2009, we find that high-tech startups are less likely to use bank finance and face more difficulties in raising bank finance than low-tech start-ups. We find that external credit scores do affect the availability of credit for start-up firms, but that banks rely less on external rating information in their decision making for high-tech start-ups than low-tech start-ups. Start-ups that have their main relation with a small bank use more bank finance and report less difficulties in getting credit. By contrast, a greater expertise of the bank in the firm's industry is not associated with fewer difficulties to get bank loans. There are no differences between high-tech and low-tech start-ups regarding the impact of bank size

Bank disclosure and market assessment of financial fragility: Evidence from Turkish banks' equity prices

In this paper we explore whether Turkish banks with worsening indicators of financial fragility were subject to market monitoring during the years leading to the 2000/2001 crisis, and how the quality and timeliness of the disclosure affect market reaction. We find that shareholders reacted negatively to indicators of financial fragility such as increases in maturity mismatches, currency mismatches, and non-performing loans, showing shareholders’ concerns about the impact of financial fragility indicators on future profits. We also find that audited statements that show larger reporting lags, are not informative, pointing to the need of improving their timeliness. Finally, our study suggests that the finding that securities prices react to financial fragility indicators should not be taken as sufficient evidence of banks’ safety and soundness

How does personal bankruptcy law affect start-ups? *

Abstract We exploit state-level changes in the amount of personal wealth individuals can protect under Chapter 7 personal bankruptcy to analyze the causal effect of debtor protection on the financing structure and performance of a representative panel of U.S start-up firms. We show that a higher level of debtor protection reduces the availability of credit, employment, operating efficiency, and survival rate of firms owned by low-wealth entrepreneurs. We find no such negative effects for firms owned by high-wealth entrepreneurs, who still have large amounts of assets unprotected under the new bankruptcy regime. Our evidence actually indicates that these wealthier entrepreneurs expand their businesses by increasing employment. Our results are consistent with theories that predict that debtor-friendly bankruptcy regimes redistribute credit from the less wealthy to the more wealthy individuals. (JEL: G32, G33, K35, M13

How does personal bankruptcy law affect startups?

We exploit state-level changes in the amount of personal wealth individuals can protect under Chapter 7 to analyze the effect of debtor protection on the financing structure and performance of a representative panel of U.S. startups. The effect of increasing debtor protection depends on the entrepreneur's level of wealth. Firms owned by mid-wealth entrepreneurs whose assets become fully protected suffer a reduction in credit availability, employment, operating efficiency, and survival rates. We find no such negative effects for low-wealth and high-wealth owners. Our results are consistent with theories that predict that asset protection in bankruptcy leads to a redistribution of credit.info:eu-repo/semantics/acceptedVersio