This paper summarizes the latest update of the World Bank Bank Regulation and Supervision Survey. The paper explores and summarizes the evolution in bank capital regulations, capitalization of banks, market discipline, and supervisory power since the global financial crisis.
... Exibir mais + It shows that regulatory capital increased, but some elements of capital regulations became laxer. Market discipline may have deteriorated as the financial safety nets became more generous after the crisis. Bank supervision became stricter and more complex compared with the pre–global financial crisis period. However, supervisory capacity did not increase in proportion to the extent and complexity of new bank regulations. The paper documents the importance of defining bank regulatory capital narrowly, as the quality of capital matters in reducing bank risk. This is particularly true for large banks, because they have more discretion in the computation of risk weights and are better able to issue a variety of capital instruments.
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Documento de trabalho sobre pesquisa de políticas WPS9044 OCT 15, 2019
Short-term debt exposes firms to credit supply shocks and liquidity risk. Short-term debt can also reduce potential agency conflicts between managers and shareholders by exposing managers to more frequent monitoring by the market.
... Exibir mais + This paper examines whether internal monitoring through independent boards and stronger shareholder protections can substitute for external monitoring through the use of short-term debt. The analysis finds that the relationship between debt maturity and governance depends on shareholder rights in a given country. In countries with stronger investor protection, governance and short-term debt act as substitutes. Instrumenting the institutional environment with legal origin confirms the results.
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Documento de trabalho sobre pesquisa de políticas WPS9022 SEP 25, 2019
Deposit insurance is a widely adopted policy to promote financial stability in the banking sector. Deposit insurance helps ensure depositors' confidence in the financial system and prevents contagious bank runs, but it also comes with an unintended consequence of encouraging banks to take on excessive risk.
... Exibir mais + This paper reviews the economic costs and benefits of deposit insurance and highlights the importance of institutions and specific design features for how well deposit insurance schemes work in practice.
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Documento de trabalho sobre pesquisa de políticas WPS8589 SEP 19, 2018
Using close to 800,000 (2,000,000) transactions by 66,000 (303,000) households in the United States (in Finland), this paper shows that individual investors with longer holding periods choose to hold less liquid stocks in their portfolios, consistent with Amihud and Mendelson's (1986) theory of liquidity clienteles.
... Exibir mais + The relationship between holding periods and transaction costs is stronger among more financially sophisticated households. Households whose holding periods are positively related to transaction costs also earn higher gross returns on their investments before accounting for transaction costs, suggesting that attention to non-salient transaction costs is an indication of investing ability. The main findings are confirmed by analyzing changes in investors' holding periods around exogenous shocks to stock liquidity.
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Documento de trabalho sobre pesquisa de políticas WPS8098 JUN 09, 2017
This paper examines the association between the default risk of foreign bank subsidiaries and their parents during the global financial crisis, with the purpose of understanding what factors can help insulate affiliates from their parents.
... Exibir mais + The paper finds evidence of a significant positive correlation between parent banks' and foreign subsidiaries' default risk. This correlation is lower for subsidiaries that have higher capital, retail deposit funding, and profitability ratios and that are more independently managed from their parents. Host country regulations also influence the extent to which shocks to the parents affect the subsidiaries' default risk. In particular, the correlation between the default risk of the subsidiary and the parent is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements and tougher restrictions on bank activities.
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Documento de trabalho sobre pesquisa de políticas WPS7053 OCT 01, 2014
Anginer, Deniz; Cerutti, Eugenio; Martinez Peria, Maria SoledadDisclosed
This paper finds that shareholder-friendly corporate governance is positively associated with bank insolvency risk, as proxied by the Z-score and the Merton's distance to default measure, for an international sample of banks over the 2004-08 period.
... Exibir mais + Banks are special in that "good" corporate governance increases bank insolvency risk relatively more for banks that are large and located in countries with sound public finances, as banks aim to exploit the financial safety net. Good corporate governance is specifically associated with higher asset volatility, more nonperforming loans, and a lower tangible capital ratio. Furthermore, good corporate governance is associated with more bank risk-taking at times of rapid economic expansion. Consistent with increased risk-taking, good corporate governance is associated with a higher valuation of the implicit insurance provided by the financial safety net, especially in the case of large banks. These results underline the importance of the financial safety net and too-big-to-fail policies in encouraging excessive risk-taking by banks.
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Documento de trabalho sobre pesquisa de políticas WPS7017 SEP 01, 2014
This paper distinguishes among various types of capital and examines their effect on system-wide fragility. The analysis finds that higher quality forms of capital reduce the systemic risk contribution of banks, whereas lower quality forms can have a destabilizing impact, particularly during crisis periods.
... Exibir mais + The impact of capital on systemic risk is less pronounced for smaller banks, for banks located in countries with more generous safety nets, and in countries with institutions that allow for better public and private monitoring of financial institutions. The results show that regulatory capital is effective in reducing systemic risk and that regulatory risk weights are correlated with higher future asset volatility, but this relationship is significantly weaker for larger banks. The paper also finds that increased regulatory risk-weights not correlated with future asset volatility increase systemic fragility. Overall, the results are consistent with the theoretical literature that emphasizes capital as a potential buffer in absorbing liquidity, information, and economic shocks reducing contagious defaults.
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Documento de trabalho sobre pesquisa de políticas WPS6948 JUN 01, 2014
Since the 1990s, financial systems around the world, and especially those in developing countries, have gained in soundness, depth, and diversity, prompted in part by a series of financial sector and macroeconomic reforms aimed at fostering a market-driven economy in which finance plays a central role.
... Exibir mais + Latin America and the Caribbean (LAC) has been one of the regions at the forefront of these changes, and it serves as a good laboratory for seeing where the challenges in financial development lie. The progress in financial development in LAC no doubt reflects governments' substantial efforts to provide an enabling environment. This includes lower macroeconomic volatility, more independent and better anchored currencies, increased financial liberalization, lower currency mismatches and foreign debt exposures, enhanced effectiveness of regulation and supervision, and notable improvements in the underlying market infrastructure. This book studies the recent history of financial sector development and reforms in the LAC region and compares it to other developing and developed countries to shed light on the key obstacles to financial development, both past and future. This study is particularly timely in the wake of the global financial crisis that began in 2008, as assumptions about the underpinnings of efficient and well-functioning markets undergo close scrutiny. This book builds on and complements several overview studies on financial development both in LAC and in the developing world more broadly that have been published in the past decade, including those by the World Bank. It covers additional aspects of the financial development process and focuses on the broader set of LAC countries. The chapters in this book cover different issues related to financial development in LAC. Chapters one through five attempt to ascertain where the region's financial development lies, analyzing in detail some of the reasons and policy implications underlying its gaps in banking depth and equity liquidity, as well as the links between financial development and financial globalization. Chapters six and seven consider two themes that are central to the region's financial development: long-term finance and the role of the state in risk bearing. Chapters eight through eleven deal with regulation and supervision, first taking stock of the progress in the region and then analyzing the challenges LAC faces on three main facets of systemic oversight: macro prudential policy, micro systemic regulation, and systemic supervision.
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Publicação 83498 DEC 17, 2013
Anginer,Deniz; Auqui, Martin; Calderon,Cesar; Ceballos,Francisco; Cortes,Mariano; D'Hulster,Katia; De La Torre,Augusto; Didier Brandao,Tatiana; Dijkman,Miquel; Feyen,Erik H.B.; Gutierrez,Eva M.; Heysen Zegarra,Maria Del Socorro; Ize,Alain; Levy-Yeyati,Eduardo; Martinez Peria,Maria Soledad; Raddatz Kiefer,Claudio Enrique; Schmukler,Sergio L.; Seelig,Steven; Serven,Luis; Williams,Thomas A.Disclosed
Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks which lead to excessive risk-taking.
... Exibir mais + The authors examine the relation between deposit insurance and bank risk and systemic fragility in the years leading up to and during the recent financial crisis. The authors fined that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. Our findings suggest that the 'moral hazard effect' of deposit insurance dominates in good times while the 'stabilization effect' of deposit insurance dominates in turbulent times. The overall effect of deposit insurance over the full sample the author study remains negative since the destabilizing effect during normal times is greater in magnitude compared to the stabilizing effect during global turbulence. In addition, the authors find that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.
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This paper examines how corporate governance and executive compensation affected bank capitalization strategies for an international sample of banks in 2003-2011.
... Exibir mais + "Good" corporate governance, which favors shareholder interests, is found to give rise to lower bank capitalization. Boards of intermediate size, separation of the chief executive officer and chairman roles, and an absence of anti-takeover provisions, in particular, lead to low bank capitalization. However, executive options and stock wealth invested in the bank are associated with better capitalization except just before the crisis in 2006. In that year, stock options wealth was associated with lower capitalization, which suggests that potential gains from taking on more bank risk outweighed the prospect of additional loss. Banks' tendencies to continue payouts to shareholders after experiencing negative income shocks are shown to reflect executive risk-taking incentives.
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Documento de trabalho sobre pesquisa de políticas WPS6636 OCT 01, 2013
The global financial crisis brought government guarantees to the forefront of the debate. Based on a review of frictions that hinder financial contracting, this paper concludes that the common justifications for government guarantees - that is, principal-agent frictions or un-internalized externalities in an environment of risk neutrality are flawed.
... Exibir mais + Even where risk is purely idiosyncratic and thus diversifiable in principle government guarantees (typically granted via development banks or agencies) can be justified if private lenders are risk averse and because of the state's comparative advantage over markets in resolving the collective action frictions that hinder risk spreading. To exploit this advantage while keeping moral hazard in check, however, development banks or agencies have to price their guarantees fairly, crowd in the private sector, and reduce their excessive risk aversion. The latter requires overcoming agency frictions between managers and owner (the state), which will entail a significant reshaping of development banks' mandates, governance, and risk management systems.
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Artigo de revista 79461 FEB 01, 2013
Anginer,Deniz; Ize,Alain; De La Torre,AugustoDisclosed
Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks, which leads to excessive risk-taking.
... Exibir mais + This paper examines the relation between deposit insurance and bank risk and systemic fragility in the years leading to and during the recent financial crisis. It finds that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. The findings suggest that the "moral hazard effect" of deposit insurance dominates in good times while the "stabilization effect" of deposit insurance dominates in turbulent times. Nevertheless, the overall effect of deposit insurance over the full sample remains negative since the destabilizing effect during normal times is greater in magnitude compared with the stabilizing effect during global turbulence. In addition, the analysis finds that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.
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Documento de trabalho sobre pesquisa de políticas WPS6289 DEC 01, 2012
Using bank level measures of competition and co-dependence, the authors show a robust positive relationship between bank competition and systemic stability.
... Exibir mais + Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, in this paper we examine the correlation in the risk taking behavior of banks, hence systemic risk. The analysis finds that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on systemic stability shows that banking systems are more fragile in countries with weak supervision and private monitoring, high government ownership of banks, and in countries with public policies that restrict competition. Furthermore, lack of competition has a greater adverse effect on systemic stability in countries with generous safety nets and weak supervision.
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Documento de trabalho sobre pesquisa de políticas WPS5981 FEB 01, 2012
The global financial crisis brought public guarantees to the forefront of the policy debate. Based on a review of the theoretical foundations of public guarantees, this paper concludes that the commonly used justifications for public guarantees based solely on agency frictions (such as adverse selection or lack of collateral) and/or un-internalized externalities are flawed.
... Exibir mais + When risk is idiosyncratic, it is highly unlikely that a case for guarantees can be made without risk aversion. When risk aversion is explicitly added to the picture, public guarantees may be justified by the state's natural advantage in dealing with collective action failures (providing public goods). The state can spread risk more finely across space and time because it can coordinate and pool atomistic agents that would otherwise not organize themselves to solve monitoring or commitment problems. Public guarantees may be transitory, until financial systems mature, or permanent, when risk is fat-tailed. In the case of aggregate (non-diversifiable) risk, permanent public guarantees may also be justified, but in this case the state adds value not by spreading risk but by coordinating agents. In addition to greater transparency in justifying public guarantees, the analysis calls for exploiting the natural complementarities between the state and the markets in bearing risk.
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Documento de trabalho sobre pesquisa de políticas WPS5893 DEC 01, 2011
Anginer, Deniz; de la Torre, Augusto; Ize, AlainDisclosed
This paper examines time-series and cross-country variations in default risk co-dependence in the global banking system. The authors construct a default risk measure for all publicly traded banks using the Merton contingent claim model, and examine the evolution of the correlation structure of default risk for more than 1,800 banks in more than 60 countries.
... Exibir mais + They find that there has been a significant increase in default risk co-dependence over the three-year period leading to the financial crisis. They also find that countries that are more integrated, and that have liberalized financial systems and weak banking supervision, have higher co-dependence in their banking sector. The results support an increase in scope for international supervisory co-operation, as well as capital charges for "too-connected-to-fail" institutions that can impose significant externalities.
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Documento de trabalho sobre pesquisa de políticas WPS5849 OCT 01, 2011
Did the U.S. government's intervention in the Chrysler reorganization overturn bankruptcy law? Critics argue that the government-sponsored reorganization impermissibly elevated claims of the auto union over those of Chrysler's other creditors.
... Exibir mais + If the critics are correct, businesses might suffer an increase in their cost of debt because creditors will perceive a new risk, that organized labor might leap-frog them in bankruptcy. This paper examines the financial market where this effect would be most detectible, the market for bonds of highly unionized companies. The authors find no evidence of a negative reaction to the Chrysler bailout by bondholders of unionized firms. They thus reject the notion that investors perceived a distortion of bankruptcy priorities. To the contrary, bondholders of unionized firms reacted positively to the Chrysler bailout. This evidence suggests that bondholders interpreted the Chrysler bailout as a signal that the government will stand behind unionized firms. The results are consistent with the notion that too-big-to-fail government policies generate moral hazard in the credit markets.
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Documento de trabalho sobre pesquisa de políticas WPS5462 OCT 01, 2010
Theoretical papers link the liquidity premium to the optimal trading decisions of investors facing transaction costs. In particular, investors' holding periods determine how transaction costs are amortized and priced in asset returns.
... Exibir mais + Using a unique data set containing two million trades, this paper investigates the relationship between holding periods and transaction costs for 66,000 households from a large discount brokerage. The author finds that transaction costs are an important determinant of investors' holding periods, after controlling for household and stock characteristics. The relationship between holding periods and transaction costs is stronger among more sophisticated investors. Households with longer holding periods earn significantly higher returns after amortized transaction costs, and households that have holding periods that are positively related to transaction costs earn both higher gross and net returns. The author shows that there is correlation in the demand for liquid assets across households and, consistent with the notion of flight to liquidity, this demand increases during times of low market liquidity. Households with higher incomes and with higher wealth invested in the stock market supply liquidity when market liquidity is low.
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Documento de trabalho sobre pesquisa de políticas WPS5318 MAY 01, 2010
The standard measures of distress risk ignore the fact that firm defaults are correlated and that some defaults are more likely to occur in bad times.
... Exibir mais + The paper uses risk premium computed from corporate credit spreads to measure a firm's exposure to systematic variation in default risk. Unlike previously used measures that proxy for a firm's physical probability of default, credit spreads proxy for a risk-adjusted default probability and thereby explicitly account for the non-diversifiable component of distress risk. In contrast to prior findings in the literature, the authors find that stocks that have higher credit risk premia, that is stocks with higher systematic default risk exposures, have higher expected equity returns. Consistent with structural models of default, they show that the premium to a high-minus-low systematic default risk hedge portfolio is largely explained by the market factor. The authors confirm the robustness of these results by using an alternative systematic default risk factor for firms that do not have bonds outstanding. The results show no evidence of firms with high systematic default risk exposure delivering anomalously low returns.
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Documento de trabalho sobre pesquisa de políticas WPS5319 JAN 01, 2010