Determinants of bank efficiency: Evidence from a semi-parametric methodology

In this paper, we use a semi-parametric two-stage model to examine the effect of bank-specific, industry-specific and macroeconomic determinants of bank efficiency. This method, proposed by Simar and Wilson (2007), relaxes several deficiencies of previous two-stage analyses, which regress non-parametric estimates of bank efficiency on exogenous determinants. In particular, we propose a bootstrap procedure to be used in the second stage and we compare the results obtained to the equivalents of a Tobit model. We suggest that the Tobit regressions inaccurately provide insignificant estimates for the effect of bank size, industry concentration and economic investment on bank efficiency, a fact that illustrates the power of the new method. Since the effect of these determinants has been ambiguous in previous literature, this may be a desideratum for future research.Bank efficiency; semi-parametric models

The risk-taking channel of monetary policy in the USA: Evidence from micro-level data

There is a growing consensus that a prolonged period of low interest rates can exert a negative impact on financial stability through the risk-taking incentives of banks. Using micro-level datasets from the US banking sector, this paper finds evidence of a highly significant negative relationship between monetary policy rates and bank-risk taking. This finding remains robust across various specifications, sub-periods and subsamples, thereby confirming the presence of an active risk-taking channel of monetary policy since the 1990s. The results, therefore, support the new responsibilities of the Fed on macro-prudential supervision to monitor systemic risks.Bank risk; monetary policy; US commercial banks; Total loans; New loans

Exploring the Nexus between Banking Sector Reform and Performance: Evidence from Newly Acceded EU Countries

The aim of this study is to examine the relationship between banking sector reform and bank performance – measured in terms of efficiency, total factor productivity growth and net interest margin – accounting for the effects through competition and bank risk-taking. To this end, we develop an empirical model of bank performance and draw on recent econometric advances to consistently estimate it. The model is applied to bank panel data from ten newly acceded EU countries. The results indicate that both banking sector reform and competition exert a positive impact on bank efficiency, while the effect of reform on total factor productivity growth is significant only toward the end of the reform process. Finally, the effect of capital and credit risk on bank performance is in most cases negative, while it seems that higher liquid assets reduce the efficiency and productivity of banks.Bank performance; Banking sector reform; Competition; Risk-taking

Industry Heterogeneity in the Risk-Taking Channel

We examine the transmission of the risk-taking channel to different industries using syndicated loans to U.S. borrowers from 1984 to 2018. We find that a one percentage point decrease in the shadow rate increases loan spreads by more than 30 basis points in the mining & construction and manufacturing sectors. The equivalent effect is lower in the services and trade industries, whereas the effect on the transportation & utilities and finance industries is less pronounced. Our results survive in several sensitivity tests and are immune to time-varying demand-side explanations. The identified differences in the potency of the risk-taking channel explain a significant part of the inferior performance of highly affected sectors compared to less-affected sectors in the year after a loan origination

Industry Heterogeneity in the Risk-Taking Channel

We examine the transmission of the risk-taking channel to different industries using syndicated loans to U.S. borrowers from 1984 to 2018. We find that a one percentage point decrease in the shadow rate increases loan spreads by more than 30 basis points in the mining & construction and manufacturing sectors. The equivalent effect is lower in the services and trade industries, whereas the effect on the transportation & utilities and finance industries is less pronounced. Our results survive in several sensitivity tests and are immune to time-varying demand-side explanations. The identified differences in the potency of the risk-taking channel explain a significant part of the inferior performance of highly affected sectors compared to less-affected sectors in the year after a loan origination

Determinants of bank efficiency: evidence from a semi-parametric mathodology

Purpose 13 This paper aims to analyze bank efficiency into a number of bank-specific, industryspecific and macroeconomic determinants. Design/methodology/approach 13 The authors follow a semi-parametric two-stage methodology, where productive efficiency is derived via a non-parametric technique in the first stage and then the scores obtained are linked to a series of determinants of bank efficiency, using a double bootstrapping procedure. Findings 13 Overall, it is found that the banking sectors of almost all the sample countries show a gradual improvement in their efficiency levels. The model used shows that a number of determinants like bank size, industry concentration and the investment environment have a positive impact on bank efficiency, which is not the case when standard Tobit models are employed. Research limitations/implications 13 The findings have important implications for the relevance of well-known hypotheses that refer to the performance of the banking sectors, like the structure conduct-performance and the efficient structure hypotheses. These implications are not necessarily verified when past conventional econometric methodologies are used. Practical implications 13 The paper offers new insights to policy makers, bank managers and practitioners on the relevance of a number of driving factors of bank efficiency that might help them to improve the performance of the banking system and enhance the quality of services provided. Originality/value 13 This is the first paper in the bank efficiency literature that employs a semiparametric two-stage model, which relaxes several deficiencies of previous two-stage empirical approaches thus, offering a solution to the many problematic features of standard censored regression

Trust, happiness, and households’ financial decisions

A recent line of research highlights trust as an important element guiding the decision of households to invest into risky financial assets and insurance products. This paper contributes to this literature by identifying happiness as another key driver of the same decision. Using detailed survey data from a sample of Dutch households, we show that the impact of happiness on households’ financial decisions works in the opposite direction and is more economically important compared to trust. Specifically, happiness leads to a lower probability of investing into risky financial assets and having insurance, while trust has the usual positive effect found in the literature. Furthermore, the negative effect of happiness on the ownership of risky financial assets is about 6% higher compared to the positive equivalent of trust. Similarly, the negative effect of happiness on the ownership of insurance is 3% higher than the positive effect of trust

Trust, happiness, and households’ financial decisions

A recent line of research highlights trust as an important element guiding the decision of households to invest into risky financial assets and insurance products. This paper contributes to this literature by identifying happiness as another key driver of the same decision. Using detailed survey data from a sample of Dutch households, we show that the impact of happiness on households’ financial decisions works in the opposite direction and is more economically important compared to trust. Specifically, happiness leads to a lower probability of investing into risky financial assets and having insurance, while trust has the usual positive effect found in the literature. Furthermore, the negative effect of happiness on the ownership of risky financial assets is about 6% higher compared to the positive equivalent of trust. Similarly, the negative effect of happiness on the ownership of insurance is 3% higher than the positive effect of trust

The chicken or the egg? A note on the dynamic interrelation between government bond spreads and credit default swaps

This note provides the first empirical assessment of the dynamic interrelation between government bond spreads and their associated credit default swaps (CDS). We use data for the Southern European countries (Greece, Italy, Portugal and Spain) that found themselves with a problematic public sector in the dawn of the recent financial distress. We find that CDS prices Granger-cause government bond spreads after the eruption of the 2007 subprime crisis. Feedback causality is detected during periods of financial and economic turmoil, thereby indicating that high risk aversion tends to perplex the transmission mechanism between CDS prices and government bond spreads

The chicken or the egg? A note on the dynamic interrelation between government bond spreads and credit default swaps

This note provides the first empirical assessment of the dynamic interrelation between government bond spreads and their associated credit default swaps (CDS). We use data for the Southern European countries (Greece, Italy, Portugal and Spain) that found themselves with a problematic public sector in the dawn of the recent financial distress. We find that CDS prices Granger-cause government bond spreads after the eruption of the 2007 subprime crisis. Feedback causality is detected during periods of financial and economic turmoil, thereby indicating that high risk aversion tends to perplex the transmission mechanism between CDS prices and government bond spreads