Björn Imbierowicz

The Roles of Corporate Governance in Bank Failures During the Recent Financial Crisis

We analyze the roles of bank ownership, management, and compensation structures in bank failures during the recent financial crisis. Our results suggest that failures are strongly influenced by ownership structure: high shareholdings of lower‐level management and non‐chief executive officer (non‐CEO) higher‐level management increase failure risk significantly. In contrast, shareholdings of banks’ CEOs do not have a direct impact on bank failure. These findings suggest that high stakes in the bank induce non‐CEO managers to take high risks due to moral hazard incentives, which may result in bank failure. We identify tail risk in noninterest income as a primary risk‐taking channel of lower‐level managers. (This abstract was borrowed from another version of this item.)

The Relationship between Liquidity Risk and Credit Risk in Banks

This paper investigates the relationship between the two major sources of bank default risk: liquidity risk and credit risk. We use a sample of virtually all US commercial banks during the period 1998–2010 to analyze the relationship between these two risk sources on the bank institutional-level and how this relationship influences banks’ probabilities of default (PD). Our results show that both risk categories do not have an economically meaningful reciprocal contemporaneous or time-lagged relationship. However, they do influence banks’ probability of default. This effect is twofold: whereas both risks separately increase the PD, the influence of their interaction depends on the overall level of bank risk and can either aggravate or mitigate default risk. These results provide new insights into the understanding of bank risk and serve as an underpinning for recent regulatory efforts aimed at strengthening banks (joint) risk management of liquidity and credit risks.

Does Lack of Financial Stability Impair the Transmission of Monetary Policy

We investigate the transmission of central bank liquidity to bank deposit and loan spreads of European firms over the January 2006 to June 2010 period. When the European Central Bank (ECB) allocated liquidity to banks in a competitive tender at the beginning of the crisis, higher “aggregate” central bank liquidity (i.e. the total liquidity in the banking system that is held at the ECB) reduces bank deposit rates of low risk banks but has no effect on deposit rates of high risk banks or on corporate loan spreads of high or low risk banks. After the ECB started to fully allot all liquidity requested by banks via its refinancing operations on October 8, 2008, an increase in liquidity decreases deposit rates of both high and low risk banks. While loan spreads of low risk banks decrease, those of high risk banks remain unchanged also under full allotment of liquidity. We find that borrowers of high risk banks refinance term loans drawing down loan commitments. They have lower payouts, lower capital expenditures and lower asset growth compared with borrowers of low risk banks. Our results suggest a differential transmission of central bank liquidity of low versus high risk banks, and an impaired transmission to corporate borrowers of high risk banks.

Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk

We analyze more than 75,000 auctions in which banks bid for firm deposits. In each of these auctions, only the firm observes the banks and their bids and decides where to deposit its funds. Our results show that a bank’s risk is irrelevant to firms in their decision, irrespective of its measurement and the economic period. In many cases, firms simply select the highest bidding bank. Our data show that this implies on average the risk of losing €74 million for a maximum higher interest income of only €1,300, that is, 0.18 basis points, compared with the worst bid in the auction. Firms only diversify extraordinarily large deposit amounts but also in this case do not account for the individual banks’ risk. Our findings argue for moral hazard of firms, which seem to rely on government bailouts of banks and/or central bank interventions. We further observe that also in rather impersonal electronic markets, relationships are an important decision criterion for firms. A stronger deposit relationship with a firm increases a bank’s probability to be selected in an auction. Furthermore, it also increases a bank’s access to more unsecured deposits from the firm in future periods, including severe crises. Our results reveal that also in markets with high transparency and no switching costs firms base the decision of where to deposit their money on bank relationships as well as the interest rate, but largely disregard bank risk. This has important implications for banks’ access to unsecured corporate funding.