Chris Tsoumas

Anxious periods and bank lending.

We examine the lending behavior of banks during anxious periods. The main characteristic of anxious periods is that the perceptions and expectations about economic conditions worsen for economic agents even though the economy is not in a recession. We identify distinct periods of anxiety for consumers, CEOs (firms) and analysts. Subsequently, we study the lending behavior of US banks during the anxious quarters from 1985 to 2010, using bank-level data. The results show that banks’ lending falls when consumers and analysts are anxious, and this effect is more pronounced when banks hold a higher level of credit risk. These effects are more pronounced in anxious periods that were followed by recessions, and in these periods loan growth also responds negatively to the anxiety of CEOs. Yet, these effects are quite less prevalent in the period after 2001.

Do Financial Systems Converge

We apply the new panel convergence methodology developed by Phillips and Sul (2007a) on 13 financial development indices from the World Banks Financial Development and Structure database, to test for financial system convergence across a large set of industrial and developing countries. Our results indicate that there is no convergence for either the financial systems as a whole or their main segments. Far from decreasing, the differences in the financial systems of the sample countries seemingly persist or even increase over time. These differences are more pronounced for the stock market segment and private credit by banks, and less so for the bond market segment and bank deposits. Moreover, the convergent clubs for most indices transcend the distinction industrial vs developing countries, as well as the distinction bank-based vs capital-market-based financial systems.

The enigma of noninterest income convergence

Over the past quarter century, the great wave of financial liberalization, together with advances in information processing technology and finance theory, created severe competitive pressures on both the asset and liability sides of bank balance sheets and, on the positive side, allowed banks to offer more products and services. Responding strategically, banks shifted away from traditional intermediation activities to fee-earning and trading activities. Yet, as we document using the panel convergence methodology developed by Phillips and Sul (2007a), this shift exceeded what one could reasonably expect. Specifically, the share of Noninterest Income (NII) has been converging in the Organization for Economic Co-operation and Development (OECD) countries, providing a strong indication that the aforementioned common competitive pressures dominated the bank-specific and country-specific factors that affect the composition of bank income. Among the policy implications, the systemic risk on a global scale is likely to be greater than that indicated by bank-level and country-level analyses.

Supervisory Enforcement Actions and Depositors’ Reaction: Monitoring, Running, or Living a Quiet Life?

Public announcement of formal enforcement actions against banks for safety and soundness reasons may enhance effective depositor monitoring or cause depositors to overreact, leading to disruptive runs. We test these competing hypotheses, using hand-collected data on enforcement actions and bank-quarter or branch-year data on deposits and other bank characteristics from 2000 through 2014. Our baseline results show that total deposits at punished banks decrease by 9.5% in the post-enforcement year, with uninsured deposits declining by 20% and insured deposits falling by 7.9%. These findings survive in a large battery of robustness tests and highlight that enforcement actions enhance rational depositor monitoring over and above punished banks’ financial condition.

Sustainable Banks - Prudent and Profitable

We explore the observable characteristics of sustainable banks, using a hand-collected dataset comprising of all public US bank holding companies, for the period 1999-2011. Our results indicate that sustainable banks are characterized by superior performance, more prudent behavior and a business model oriented towards financing industry and commerce. Specifically, they exhibit higher ROE and ROA, and have a higher market-to-book ratio which cannot be entirely accounted for by the higher ROE. They also have lower ratios of risk-weighted assets to total assets and finance more of their loans with deposits. Lastly, they have higher ratios of commercial and industrial loans to total loans. Overall, our results are consistent with the view that sustainable banks actively try to improve the risk-return profile of their whole operations, taking advantage of the benefits sustainability confers.

Asymmetric Information and the Medium of Payment in US Takeover Bids

We investigate whether asymmetric information affects the choice of the medium of payment (pure equity vs. pure cash) in U.S. takeover bids during the 1986-2008 period. To this end, we combine proxies for asymmetric information with proxies for the financial characteristics of both the bidding and the target companies in the pre-bid period. Our novel results indicate that acquirers with a high level of asymmetric information, who are either overvalued or have high growth opportunities, are more likely to make a pure equity offer. Acquirers with the opposite characteristics are more likely to make a pure cash offer. These results are largely consistent with Myers and Majluf’s hypothesis (JFE, 1984). Targets’ asymmetric information does not seem to significantly affect the mode of payment. Also, in line with the existing literature, the probability of a pure equity offer is positively related with the level of the targets’ growth opportunities and/or their overvaluation, while the probability of a pure cash offer is positively related with the profitability and liquidity of the acquirers.

Credit Rating Changes’ Impact on Banks: Evidence from the US Banking Industry

This study examines the impact of credit rating upgrades and downgrades on six comprehensive banks’ asset classes, profitability, leverage and size using data from the Federal Deposit Insurance Corporation’s call reports and Bloomberg over the period 1989-2008. In summary, the results suggest that a downgrade has a lasting and relatively more severe impact on banks than an upgrade; however, downgraded banks do not seem to effectively reduce their appetite for risk over a longer horizon. It seems that the role of credit rating agencies as an integral part of banks’ prudential supervision through market discipline is, in a longer horizon, overstated.