the resolution of banking crises and market discipline: international evidence elena cubillas...

THE RESOLUTION OF BANKING CRISES AND THE RESOLUTION OF BANKING CRISES AND MARKET DISCIPLINE: INTERNATIONAL MARKET DISCIPLINE: INTERNATIONAL

EVIDENCEEVIDENCE

Elena Cubillas MartínAna Rosa FonsecaFrancisco González

University of Oviedo

OBJECTIVEOBJECTIVE

BANKING CRISES MARKET DISCIPLINE

INSTITUTIONAL QUALITY


BANK REGULATION AND SUPERVISION


CRISIS MANAGEMENT POLICIES


MOTIVATIONMOTIVATION AND CONTRIBUTION AND CONTRIBUTION

MOTIVATIONMOTIVATION AND CONTRIBUTION AND CONTRIBUTION

MARKET DISCIPLINE AFTER BANKING CRISES ??

• Especially interesting because of the recent financial crisis

• Two possible effects:

crisis depositors more aware of the risk of losing deposits more MD

crisis depositors protected by cause of government interventions less MD

• Martinez Peria and Schmukler, 2001 (JF)

CRISES MARKET DISCIPLINEArgentina

Chile Mexico

MOTIVATION AND MOTIVATION AND CONTRIBUTIONCONTRIBUTION

• International empirical evidence

• Bank-level data

• Regulation, Supervision and Institutions

• Crises Management Policies

Countries where Regulation, Supervision, Institutions:

- favor MD larger impact of BC on MD

- not favor MD no significant impact of BC on MD

Countries where Regulation, Supervision, Institutions:

- favor MD larger impact of BC on MD

- not favor MD no significant impact of BC on MD

Control unobserved bank, country and time specific effectsControl unobserved bank, country and time specific effects

more banking crises (101)more countries (87)more banking crises (101)more countries (87)

Intensify the negative effect of BC on MDWeaken the positive effect of BC on MDIntensify the negative effect of BC on MDWeaken the positive effect of BC on MD

DATA AND DATA AND METHODOLOGYMETHODOLOGY

Dependent Variables:

COSTDEP and DEPGROWTH [Demirgüç-Kunt and Huizinga, 2004 (JME)]

Bank Risk:

EQUITY, LIQUIDITY and PROFIT [Demirgüç-Kunt and Huizinga, 2004 (JME)]

Crisis:

Costdep (Depgrowth) i, j, t = β0 + β1 Risk i, j, t -1 + β2 (Risk i, j, t -1 x Crisis j, T ) + + β3 Bank i, j, t –1 + β4 Macro j, t + β5 ∑ Country j + β6 ∑ Time t + ѵ i + ε i, j, t

Costdep (Depgrowth) i, j, t = β0 + β1 Risk i, j, t -1 + β2 (Risk i, j, t -1 x Crisis j, T ) + + β3 Bank i, j, t –1 + β4 Macro j, t + β5 ∑ Country j + β6 ∑ Time t + ѵ i + ε i, j, t

87

j=1 t=1989

2007

Pre-crisis [t1, t-1] 0Crisis [t, t+2] Post-crisis [t+3, T] 1

Pre-crisis [t1, ta-1] 0Crisis [ta, tb+2] Post-crisis [tb+3, T] 1

[Kroszner et al., 2007 (JFE)][Dell’Ariccia et al., 2008 (JFI)]

ONE CRISIS MULTIPLE CRISES

Bank-level controls:

ASSET SIZE and OVERHEAD [Demirgüç-Kunt and Huizinga, 2004 (JME)]

Macro controls:

INFLATION, real GDPpc growth and real GNPpc [Demirgüç-Kunt and Huizinga, 2004 (JME)]

101 banking crises 1989 – 2007 3,254 banks 87 countries

101 banking crises 1989 – 2007 3,254 banks 87 countries


• Standard panel data approach (fixed and random effects)

- Bank-specific effects- Country-specific effects- Time-specific effects

• Bank variables included with a lag (t -1)

[Martinez Peria and Schmukler, 2001 (JF)][Demirgüç-Kunt and Huizinga, 2004 (JME)]

RESULTSRESULTS

Dependent Variable: COSTDEP

Fixed Effects Random Effects

EQUITY -0.0202*** -0.0224***

LIQUIDITY -0.0055*** -0.0039***

PROFIT -0.1484*** -0.1668***

ASSET SIZE 0.0078*** 0.0097*** 0.0088*** 0.0005 0.0014*** 0.0015***

OVERHEAD -0.0147** -0.0189*** -0.0016 -0.0207*** -0.0273*** -0.0014

INFLATION 0.0029* 0.0038** -0.0360*** 0.0048*** 0.0057*** -0.0305***

GROWTH GDP 0.0330*** 0.0327*** 0.0204*** 0.0377*** 0.0370*** 0.0250***

GNP -0.2253*** -0.1757** -0.1438** -0.1596*** -0.1551*** -0.1394***

EQUITY x CRISIS 0.0109** 0.0119***

LIQUIDITY x CRISIS 0.0042*** 0.0026***

PROFIT x CRISIS 0.1209*** 0.1279***

Time dummies Yes Yes Yes Yes Yes Yes Country dummies No No No Yes Yes Yes R2within 11.38% 11.31% 12.07%

F-test 66.34*** 68.27*** 72.98***

R2overall 67.65% 67.55% 67.83%

Wald-test 11,525.05*** 11,579.13*** 11,417.82***

LM test 1,192.61*** 1,104.70*** 1,236.84***

# observations 15,289 15,375 15,290 15,289 15,375 15,290

# banks 2,493 2,506 2,501 2,493 2,506 2,501

# countries 77 77 77 77 77 77

RESULTSRESULTS

Dependent Variable: GROWTHD

Fixed Effects Random Effects

EQUITY 0.2477*** 0.3608***

LIQUIDITY 0.0513*** 0.0201

PROFIT 0.3774 0.7391***

ASSET SIZE -0.2151*** -0.2289*** -0.2244*** -0.0488*** -0.0617*** -0.0606***

OVERHEAD -0.0785 -0.0105 -0.0470 0.1441 0.2565*** 0.0017

INFLATION -0.0582*** -0.0545** -0.0838*** -0.0761*** -0.0656*** -0.1085***

GROWTH GDP 0.4091*** 0.4128*** 0.3860*** 0.4158*** 0.4320*** 0.3946***

GNP -0.5182 -0.6056 -0.6605 -0.4450 -0.5261* -0.5438*

EQUITY x CRISIS -0.1237* -0.2232***

LIQUIDITY x CRISIS -0.0490*** -0.0191

PROFIT x CRISIS -0.2906 -0.6561***

Time dummies Yes Yes Yes Yes Yes Yes Country dummies No No No Yes Yes Yes R2within 4.33% 4.05% 3.82% F-test 30.04*** 28.25*** 26.36*** R2overall 5.98% 5.40% 5.22% Wald-test 832.45*** 736.81*** 692.83*** LM test 28.27*** 31.99*** 28.53*** # observations 19,207 19,323 19,220 19,207 19,323 19,220 # banks 3,241 3,254 3,247 3,241 3,254 3,247 # countries 87 87 87 87 87 87


Bank Regulation and Supervision:

Institutional quality:FREEDOM (“Index of Economic Freedom” from the Heritage Foundation)LAW (“Rule of law” indicator from the International Country Risk Guide)

The crisis management policies:

ENTRY and FOREIGN ENTRYOFFICIAL and MONITORSTATE and PRIVATE

[Barth et al., 2004 (JFI)]

TOTAL INTERVENTIONS = Blanket Guarantee + Liquidity Support + Forbearance + Recapitalization + NationalizationRESOLUTION INTERVENTIONS = Forbearance + Recapitalization + NationalizationFORBEARANCERECAPITALIZATIONNATIONALIZATION

[Laeven and Valencia, 2008]

Costdep (Depgrowth) i, j, t = β0 + β1 Risk i, j, t -1 + β2 (Risk i, j, t -1 x Crisis j, T ) +

+ β3 (Risk i, j, t -1 x Crisis j, T x Regint j, t ) +

+ β4 Bank i, j, t -1 + β5 Macro j, t + β6 ∑ Country j + β7 ∑ Time t + ѵ i + ε i, j, t

Costdep (Depgrowth) i, j, t = β0 + β1 Risk i, j, t -1 + β2 (Risk i, j, t -1 x Crisis j, T ) +

+ β3 (Risk i, j, t -1 x Crisis j, T x Regint j, t ) +

+ β4 Bank i, j, t -1 + β5 Macro j, t + β6 ∑ Country j + β7 ∑ Time t + ѵ i + ε i, j, t

87

j=1

2007

t=1989

Control ENDOGENEITY using the instruments defined by

[Barth et al., 2004]:- Legal origin

- Latitude- Religion

Containment Resolution

RESULTSRESULTS


EQUITY -0.0202*** -0.0205*** -0.0198*** 0.0007 -0.0184*** -0.0225*** -0.0218*** -0.0217***

ASSET SIZE 0.0008** 0.0009*** 0.0009*** 0.0002 0.0009** 0.0002 0.0005* 0.0005*

OVERHEAD -0.0164*** -0.0167*** -0.0166*** -0.0302*** -0.0170*** -0.0107* -0.0213*** -0.0217***

INFLATION 0.0007 0.0007 0.0008 0.0103*** 0.0006 0.0023 0.0048*** 0.0049***

GROWTH GDP 0.0263*** 0.0255*** 0.0246*** 0.0127*** 0.0249*** 0.0320*** 0.0374*** 0.0373***

GNP -0.1586*** -0.1599*** -0.1621*** -0.1489*** -0.1612*** -0.1473*** -0.1637*** -0.1618***

EQUITY x CRISIS 0.0040 0.0149*** 0.0204*** -0.0335 0.0123*** 0.0049 -0.0477*** 0.0115***

EQUITY x CRISIS x ENTRY 0.0008

EQUITY x CRISIS x FOREIGNENTRY -0.0180***

EQUITY x CRISIS x OFFICIAL -0.0011**

EQUITY x CRISIS x MONITOR 0.0027

EQUITY x CRISIS x STATE -0.0002***

EQUITY x CRISIS x PRIVATE 0.0001*

EQUITY x CRISIS x FREEDOM 0.0010***

EQUITY x CRISIS x LAW 0.0058***

Time dummies Yes Yes Yes Yes Yes Yes Yes Yes

Country dummies Yes Yes Yes Yes Yes Yes Yes Yes

R2overall 66.81% 66.91% 67.42% 71.41% 66.84% 67.96% 67.70% 67.66%

Wald-test 9,987.17*** 9,555.27*** 9,753.32*** 8,497.47*** 9,841.69*** 8,629.13*** 11,460.50*** 11,442.53***

LM test 1,327.37*** 1,282.39*** 1,169.41*** 580.86*** 1,323.95*** 545.89*** 1,189.73*** 1,192.68***

# observations 14,207 13,666 13,484 9,226 13,963 11,051 15,204 15,216

# banks 2,293 2,197 2,164 1,430 2,258 1,840 2,476 2,480

# countries 62 60 60 45 56 52 74 75

RESULTSRESULTS

Dependent Variable: GROWTHD

EQUITY 0.3930*** 0.3959*** 0.3906*** 0.5823*** 0.3945*** 0.5031*** 0.3569*** 0.3570***

ASSET SIZE -0.0458*** -0.0462*** -0.0456*** -0.0579*** -0.0453*** -0.0554*** -0.0496*** -0.0500***

OVERHEAD 0.1431 0.1438 0.1416 0.5273*** 0.1424 0.0913 0.1514* 0.1548*

INFLATION -0.1027*** -0.0975*** -0.1024*** -0.3115*** -0.1018*** -0.0935*** -0.0693*** -0.0697***

GROWTH GDP 0.3921*** 0.4006*** 0.3920*** 0.2660*** 0.3882*** 0.4208*** 0.4204*** 0.4209***

GNP -0.4004 -0.4017 -0.3841 -0.4337 -0.4066 -0.6295* -0.4316 -0.4373

EQUITY x CRISIS -0.5992* -0.1680*** -0.2521** 0.8373** -0.2609*** -0.2172** 0.1618 -0.2220***

EQUITY x CRISIS x ENTRY 0.0479

EQUITY x CRISIS x FOREIGNENTRY 0.1680***

EQUITY x CRISIS x OFFICIAL 0.0004

EQUITY x CRISIS x MONITOR -0.1541***

EQUITY x CRISIS x STATE -0.0001

EQUITY x CRISIS x PRIVATE -0.0031***

EQUITY x CRISIS x FREEDOM -0.0066**

EQUITY x CRISIS x LAW -0.0488** Time dummies Yes Yes Yes Yes Yes Yes Yes Yes

Country dummies Yes Yes Yes Yes Yes Yes Yes Yes

R2overall 5.46% 5.56% 5.56% 8.86% 5.35% 6.30% 5.97% 5.95%

Wald-test 717.22*** 709.74*** 696.76*** 762.62*** 686.85*** 670.23*** 834.49*** 833.66***

LM test 25.89*** 22.11*** 26.91*** 26.60*** 24.95*** 17.65*** 29.61*** 29.79***

# observations 17,971 17,429 17,245 10,717 17,700 14,772 19,097 19,105

# banks 3,031 2,935 2,906 1,594 2,993 2,582 3,221 3,224

# countries 69 67 67 51 62 58 83 84

RESULTSRESULTS


EQUITY -0.0240*** -0.0250***

LIQUIDITY -0.0056*** -0.0057***

PROFIT -0.1993*** -0.2025***

ASSET SIZE 0.0006 0.0017*** 0.0019*** 0.0006 0.0017*** 0.0020***

OVERHEAD 0.0006 -0.0041 0.0035 0.0012 -0.0040 0.0033

INFLATION 0.0061** 0.0072*** -0.1670*** 0.0058** 0.0071*** -0.1669***

GROWTH GDP 0.0201*** 0.0210*** -0.0188*** 0.0197*** 0.0210*** -0.0186***

GNP -0.1477*** -0.1418*** -0.0574** -0.1475*** -0.1414*** -0.0583**

EQUITY x CRISIS 0.0249** -0.0179

LIQUIDITY x CRISIS 0.0049* 0.0012

PROFIT x CRISIS 0.1563** -0.0449

EQUITY x CRISIS x TOTALINT -0.0032

LIQUIDITY x CRISIS x TOTALINT -0.0003

PROFIT x CRISIS x TOTALINT 0.0024

EQUITY x CRISIS x RESOLUTION 0.0125***

LIQUIDITY x CRISIS x RESOLUTION 0.0011

PROFIT x CRISIS x RESOLUTION 0.0817***

Time dummies Yes Yes Yes Yes Yes Yes

Country dummies Yes Yes Yes Yes Yes Yes

R2overall 66.43% 66.04% 67.75% 66.46% 66.04% 67.76%

Wald-test 5,205.42*** 5,182.39*** 5,621.28*** 5,219.93*** 5,184.50*** 5,623.60***

LM test 363.23*** 367.99*** 365.80*** 365.73*** 368.95*** 368.46***

# observations 6,069 6,134 6,029 6,069 6,134 6,029

# banks 1,143 1,153 1,148 1,143 1,153 1,148

# countries 25 25 25 25 25 25

RESULTSRESULTS


EQUITY -0.0161** -0.0164** -0.0165**

LIQUIDITY -0.0036* -0.0036* -0.0036*

PROFIT -0.1750*** -0.1753*** -0.1754***

ASSET SIZE -0.0006 0.0008 0.0009* -0.0006 0.0008 0.0010* -0.0006 0.0008 0.0009*

OVERHEAD 0.0004 -0.0042 0.0031 0.0002 -0.0040 0.0030 -0.0002 -0.0042 0.0031

INFLATION 0.0062** 0.0070** -0.1726*** 0.0060** 0.0069** -0.1729*** 0.0061** 0.0070** -0.1726***

GROWTH GDP 0.0167** 0.0177*** -0.0318*** 0.0162** 0.0177*** -0.0320*** 0.0164** 0.0178*** -0.0319***

GNP -0.1382*** -0.1186*** -0.0353 -0.1244*** -0.1190*** -0.0362 -0.1260*** -0.1195*** -0.0361

EQUITY x CRISIS -0.0234** -0.0021 0.0127

LIQUID x CRISIS 0.0020 0.0008 0.0023

PROFIT x CRISIS 0.1623*** 0.0824** 0.1107**

EQUITY x CRISIS x FORB 0.0311***

LIQUIDITY x CRISIS x FORB -0.0004

PROFIT x CRISIS x FORB -0.0257

EQUITY x CRISIS x RECAP 0.0076*

LIQUIDITY x CRISIS x RECAP 0.0011

PROFIT x CRISIS x RECAP 0.0703***

EQUITY x CRISIS x NATION -0.0113

LIQUIDITY x CRISIS x NATION -0.0009

PROFIT x CRISIS x NATION 0.0376

Time dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes

Country dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes

R2overall 65.06% 64.43% 66.23% 64.98% 64.43% 66.23% 65.00% 64.42% 66.22%

Wald-test 4,353.52*** 4,299.21*** 4,642.54*** 4,333.50*** 4,290.94*** 4,640.99*** 4,354.57*** 4,288.98*** 4,638.75***

LM test 266.45*** 274.69*** 267.39*** 266.54*** 274.67*** 273.26*** 265.14*** 274.40*** 271.63***

# observations 5170 5233 5126 5170 5233 5126 5170 5233 5,126

# banks 979 990 985 979 990 985 979 990 985

# countries 24 24 24 24 24 24 24 24 24

CONCLUSIONSCONCLUSIONS BANKING CRISES MARKET DISCIPLINE







CONCLUSIONSCONCLUSIONS

• Banking crises WEAKEN market discipline










• The REDUCTION VARIES across countries:

- LARGER in environments in which regulation and institutions enhanced MD before BC:








LESS STRINGENT FOREIGN ENTRY RESTRICTIONS


LOWER OFFICIAL SUPERVISORY POWER


MORE ACCOUNTANT AND AUDIT REQUIREMENTS


MORE PRIVATE OWNERSHIP OF BANKS


BETTER-QUALITY INSTITUTIONS






- POSITIVELY related to the policies applied to resolve the crisis


















FORBEARANCEFORBEARANCE

RECAPITALIZATIONSRECAPITALIZATIONS





- POSITIVELY related to the policies applied to resolve the crisis

• POLICY IMPLICATIONS


















FORBEARANCEFORBEARANCE

RECAPITALIZATIONSRECAPITALIZATIONS

MARKET DISCIPLINE… effective after financial crises??? MARKET DISCIPLINE… effective after financial crises???

THE RESOLUTION OF BANKING CRISES AND THE RESOLUTION OF BANKING CRISES AND MARKET DISCIPLINE: INTERNATIONAL MARKET DISCIPLINE: INTERNATIONAL

EVIDENCEEVIDENCE

Elena Cubillas MartínAna Rosa FonsecaFrancisco González

University of Oviedo

the resolution of banking crises and market discipline: international evidence elena cubillas...

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