Does Interbank Borrowing Reduce Bank Risk?

In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks which allows us to explore the impact of interbank lending when exposures are long-term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks

A microeconometric investigation into bank interest rate rigidity

Using a unique dataset of interest rates offered by a large sample of U.S. banks on various retail deposit and loan products, we explore the rigidity of bank retail interest rates. We study periods over which retail interest rates remain fixed ("spells") and document a large degree of lumpiness of retail interest rate adjustments as well as substantial variation in the duration of these spells, both across and within different products. To explore the sources of this variation we apply duration analysis and calculate the probability that a bank will change a given deposit or loan rate under various conditions. Consistent with a nonconvex adjustment costs theory, we find that the probability of a bank changing its retail rate is initially increasing with time. Then as heterogeneity of the sample overwhelms this effect, the hazard rate decreases with time. The duration of the spells is significantly affected by the accumulated change in money market interest rates since the last retail rate change, the size of the bank and its geographical scope.Interest rates ; Bank deposits

The Risk Alleviating Role of Interbank Market Lending in Central and Eastern European Countries

The banking sectors in several Central and Eastern European countries are characterized by a two-tier structure, in which a few large banks dominate the deposit market but are very inactive in the loan market with private borrowers, while many small banks engage in lending but have only small shares of the deposit market. The large banks act as net lenders in the interbank market, while small banks are net borrowers in the market. Typically, the former banks are incumbent institutions from pre-transition times, while the later are new institutions. In this paper, we ask whether this two-tier structure and the resulting interbank trade has any important risk alleviating effects on the performance of the banking sector. Specifically, we consider the effects on the lending activities of the small banks. We present a model of the credit market based on asymmetric information and moral hazard. Assuming that large banks have monitoring costs benefits compared to depositors regarding the lending activities of the other banks, we show that the two-tier structure induces small banks to engage in less risky lending activities than small banks that finance themselves predominantly in the deposit market. We test this and related hypotheses using financial statement data from banks in 10 EU accession candidate countries. This allows us to compare the financial activities of banks in countries where a two-tier structure prevails with those of small banks in markets where such a pattern is not observed. The results generally confirm the main hypothesis of the model.interbank market, bank risk, bank specialisation, transition economies

Bank mergers and the dynamics of deposit interest rates

Despite extensive research interest in the last decade, the banking literature has not reached a consensus on the impact of bank mergers on deposit rates. In particular, results on the dynamics of deposit rates surrounding bank mergers vary substantially across studies. In this paper, we aim for a comprehensive empirical analysis of a bank merger’s impact on deposit rate dynamics. We base the analysis on a unique dataset comprising deposit rates of 624 U.S. banks with a monthly frequency for the time period 1997–2006. These data are matched with individual bank and local market characteristics and the complete list of bank mergers in the United States. The data allow us to track the dynamics of bank mergers while controlling for the rigidity of the deposit rates and for a range of merger, bank, and local market features. An innovation of our work is the introduction of an econometric approach for estimating the change of the deposit rates given their rigidity.Bank mergers ; Bank deposits

Bank mergers and the dynamics of deposit interest rates

Despite extensive research interest in the last decade, the banking literature has not reached a consensus on the impact of bank mergers on deposit rates. In particular, results on the dynamics of deposit rates surrounding bank mergers vary substantially across studies. In this paper, we aim for a comprehensive empirical analysis of a bank merger's impact on deposit rate dynamics. We base the analysis on a unique dataset comprising deposit rates of 624 US banks with a monthly frequency for the time period 1997-2006. These data are matched with individual bank and local market characteristics and the complete list of bank mergers in the US. The data allow us to track the dynamics of bank mergers while controlling for the rigidity of the deposit rates and for a range of merger, bank and local market features. An innovation of our work is the introduction of an econometric approach of estimating the change of the deposit rates given their rigidity. --Deposit rate dynamics,bank mergers,deposit rate rigidity

Does Interbank Borrowing Reduce Bank Risk?

In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks which allows us to explore the impact of interbank lending when exposures are long-term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks.interbank market; bank risk; market discipline; transition countries

Deposit market competition, costs of funding and bank risk

This paper presents an empirical examination of the effects of both deposit market competition and of wholesale funding on bank risk simultaneously. The traditional view of the relation between competition and risk has focused on the disciplining role of the charter value. In this project we argue that if the structure of bank liabilities and the costs of retail and wholesale funding are jointly determined with bank risk, the omission of wholesale funding in the empirical analysis of the relation between deposit market competition and risk may give rise to a substantial bias in the estimated results. This will be especially the case where wholesale lenders “screen” their borrowers’ risk as argued by the market discipline literature. We propose a new approach to the estimation of the relation between deposit market competition and bank risk which accounts for the opportunity of banks to shift to wholesale funding when deposit market competition is intense. The analysis is based on a unique comprehensive dataset which combines retail deposit rates data with data on bank characteristics and with data on local deposit market features for a sample of 589 US banks. Our results support the notion of a risk-enhancing effect of deposit market competition.Bank competition ; Bank deposits

Are banks less likely to issue equity when they are less capitalized?

Debt overhang and moral hazard related to risk-shifting opportunities predict that low capitalized banks have a lower likelihood to issue equity. In contrast to this view, for an international sample of bank Seasoned Equity Offerings (SEOs), we show that the likelihood of issuing an SEO is generally higher in low capitalized banks. We provide a series of tests exploring the variation of capital regulation, systemic conditions and market discipline to understand the driving forces behind this result. We find that market mechanisms rather than capital regulation are the primary, key driver of the decision to issue by low capitalized banks

Banking sector (under?) development in Central and Eastern Europe

By introducing a new measure of the banking systems' size, the paper challenges the existing consensus on severe underdevelopment of the CEE banking sectors. We argue that the existing studies on the size of CEE banking systems exaggerate the real degree of underdevelopment because common measures of the size of the banking system produce downward biased results when applied to transition economies. We compare various measures of the size of the CEE banking sectors with those of several 'old' European Union (EU) member countries which are used as benchmarks. The comparison indicates that indeed the banking sectors in the CEE countries lag behind the most developed financial systems in the EU, but are very close to the levels in the financially less developed EU countries

Global Imbalances and Bank Risk-Taking

Financial crises are usually preceded by large current account deficits. However, the channel through which international capital flows affect financial stability is hardly identified, yet. In this paper, we study the impact of current account balances on bank risk-taking making use of the exogenous and huge variation in capital flows within the euro area between the years 2001 and 2012. We find that bank risk-taking is positively associated with current account deficits. We provide a series of tests showing that this is the case both because banks in countries with large external deficits substitute new investments in asset markets (e.g. sovereign debt) with loans that are typically riskier and because the average quality of bank loans deteriorates