Christian Rauch

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.

Determinants of Bank Liquidity Creation

This paper measures liquidity creation of German savings banks over the period of 1997-2006 and tries to detect possible influence factors thereof. Using two recently developed techniques to measure liquidity creation, the so called “BB-Measure” as developed by Berger and Bouwman in 2009 and the “Liquidity Transformation” (LT) Gap as developed by Deep and Schaefer in 2004, we are able to determine both absolute amounts of liquidity created for the economy as well as relative magnitudes of maturity transformation the observed banks perform to create liquidity. Using a multivariate dynamic panel regression framework we differentiate between two different sets of potential liquidity determinants: macroeconomic factors, such as monetary policy or economic strength indicators, as well as bank characteristic factors, such as size or business focus. We additionally account for most recent legal developments in the German banking sector by measuring the effects of the abolishment of state guarantees in the public banking sector on liquidity creation. Analyzing a proprietary dataset comprised of all 457 German savings banks containing detailed balance sheet as well as profit & loss account variables, we show that over the given period, the total amount of liquidity created by the savings banks increased by 51% (from 120.7 billion Euro in 1997 to 182.2 billion Euro in 2006). In terms of influence factors we find highly significant and robust values for economy and monetary policy indicators. It can be shown that liquidity creation seems to depend strongly negatively on monetary policy tightness: a monetary policy tightening induces a decrease in created liquidity. We do not find any bank specific factors, such as financial performance or size, to have any influence on liquidity creation.

Bank Fragility and the Financial Crisis - Evidence from the U.S. Dual Banking System

This paper compares the stability of the U.S. Dual Banking system’s two bank groups, national and state banks, in light of the global financial crisis 2007/2008. The goal of the paper is to answer three distinct questions: first, is there a difference in the (balance sheet-) fragility between the two groups and, second, to what extent has the balance sheet fragility of both groups changed after the escalation of the financial crisis beginning in August 2007? Building on that, the third question asks to whether or not the respective regulatory agencies of both bank groups are responsible for these changes in balance sheet fragility in light of the financial crisis. To answer these questions the paper uses U.S. Call Report data containing full quarterly balance sheets and P&Ls of all U.S. commercial banks over the period 2005-2008. Anecdotal evidence as well as univariate and multivariate difference-in-difference methodology focusing on the immediate pre-crisis period Q1/2005 to Q3/2007 and the crisis period Q3/2007 to Q4/2008 are applied. Highly significant and robust results show that, ceteris paribus, national banks reduced their potential balance sheet fragility after the escalation of the crisis in August 2007 by reducing lending and liquidity creation stronger than state banks. Anecdotal evidence supports the empirical findings. Although both FDIC and OCC did not anticipate the adverse effects of the crisis, the OCC publicly showed an earlier reaction to liquidity-related problems than the FDIC. The paper is the first of its kind to analyze bank fragility around the escalation of the financial crisis and the role of the regulatory agencies. The paper holds especially interesting policy implications in the light of the current discussion about the future regulation of the banking markets.

Migration and the Retail Banking Industry: An Examination of Immigrants' Bank Nationality Choice in Germany

We study the choice of bank nationality by foreign-born retail banking customers in the context of bank globalization. We argue theoretically that banks enter foreign markets to follow their non-corporate customers and thereby are able to exploit competitive advantages over domestic banks. Using detailed survey data on more than 1000 Turkish immigrants in Germany, we find that product differentiation explains the choice of a home nation bank and that ethnic origin in itself provides the strongest comparative advantage for foreign banks. We find evidence for a persistent ‘home-bias’ of customers with an immigration background even with increasing integration into the host countrys culture. This result may be surprising given that a systematic difference in the choice of bank nationality should not be observable with more integrated immigrants. Our results contribute to the existing economic research on multinational bank expansion by providing insights into bank globalization as an accompaniment to labor market internationalization.

Valuation Shocks and M&A Activities

How do singular landmark M&A deals with seemingly excessive valuation and high public visibility influence M&A markets? We analyze how M&A market activity and deal characteristics behave in the presence of these landmark deals. Our results show that both valuation levels and M&A activity are significantly influenced by these deals in the cross-section and over time: misvaluation and deal activity increase, while M&A premia decrease. Although the effect is especially strong in the short- and medium-term for the industries in which the landmark deals occur, our results also show spillover effects into other industries. The occurrence of the landmark deals itself is not driven by M&A activity, as perhaps suggested by M&A wave theories.