Drew Dahl

Discretionary accounting and the behavior of Japanese banks under financial duress

This paper investigates utilization of discretionary accounting practices in the context of international bank regulation under the Basle Accord. Specifically, we explore implications of earnings management as a means of regulatory-capital arbitrage by Japanese banks during a period of financial duress, 1989-1996. Using a sample of 607 pooled time series and cross-sectional observations, we find evidence that Japanese banks’ lending was capital constrained, and that banks set gains on securities sales and loan-loss provisions in such a way as to smooth reported income and replenish regulatory capital. Our results support the hypothesis that the form of earnings management examined may have been instrumental in enabling some Japanese banks to comply with international capital regulation. We contend that this behavior is otherwise inexplicable on the basis of significant informational, tax or economic motivations.

The extension of international credit by US banks: a disaggregated analysis, 1988-1994

We use simultaneous equation estimation techniques to analyze decisions made by 35 US banks with respect to credit extended domestically and to credit extended within 16 foreign countries, 1988-1994. Our results indicate that foreign credit extension by US banks follows the commercial expansion of US businesses abroad and is greater in countries with expanding economies. They are inconsistent with the notion that banks trade off credit activities undertaken domestically and abroad.

Prompt corrective action and bank efforts to recover from undercapitalization

Abstract This study empirically examines the likelihood and timing of bank recoveries from positions of undercapitalization. Our findings indicate that: (1) There appears to be only a limited capacity for banks to ‘correct’ positions of undercapitalization by growth limitations or dividend restrictions; (2) the impact of profitability on recovery is greater the longer a bank remains undercapitalized; and (3) equity infusions are the primary mechanism by which banks can recapitalize quickly. This evidence is relevant to regulators in their implementation of the FDIC Improvement Act of 1991, which requires that undercapitalized banks take ‘prompt corrective actions’ to recapitalize quickly under threat of early closure.

Financing Loan Growth at Banks

We analyze investment and financing decisions for a broad sample of affiliated and independent banks during the 1994–1998 period. Our results indicate that growth in lending at affiliated banks is supported by net equity financing flows from parent holding companies. We also provide evidence that loan growth at affiliated banks, relative to independent banks, is less constrained by capital availability. Both findings appear relevant to understanding the diminishing role of independent banks in aggregate lending.

Ownership changes and lending at minority banks: A note

Abstract This paper examines the lending patterns of 34 commercial banks during alternate periods of minority and non-minority ownership in the 1980s and early 1990s. The principal finding, obtained using a partial adjustment analysis of bank lending and bank capital, is that loan growth is slower when banks are owned by minorities compared to when they are owned by non-minorities.

The Timing and Persistence of CRA Compliance Ratings

We evaluate supervisory practices in enforcing the Community Reinvestment Act (CRA) by examining whether or not supervisors consider observable, bank-specific characteristics in (1) scheduling CRA compliance examinations and (2) determining whether, and for how long, a given CRA rating persists. Failure to confirm such a relationship would be consistent with criticism that the evaluation criteria are so vague that supervisors can essentially assign “any rating they want” for compliance purposes. Analysis of a sample of several thousand commercial banks, observed over a relatively stable regulatory regime, indicates that both examination scheduling and the persistence of examination ratings are associated with residential loan levels, a presumed cornerstone of the CRA, as well as other financial, regulatory and market factors. We conclude that CRA enforcement during this period reflected, at least in part, objective evaluation criteria.

Regulatory reforms and convergence of the banking sector: evidence from China

Purpose - – The purpose of this paper is to examine the effect of regulatory reform on the asset allocation and capitalization of Chinese banks from 2002 to 2007, a period following Chinas entry into the World Trade Organization (WTO). Design/methodology/approach - – The evidence rejects a hypothesis that the four categories of banks operating in China – the Big Four, Majority State, Majority Private, and Majority Foreign banks have converged toward common targets. Supplemental analysis indicates that domestic banks, but not foreign banks, adjust equally to their targets. Findings - – The paper concludes that, although Chinese banking remained segmented during this unique transitional period, a more uniform pattern has emerged for those Chinese banks that are domestically owned. Originality/value - – The authors employ a methodology that is explicitly designed to determine if banks have converged toward common approaches to asset allocation and capitalization, which has not been studies previously.

Community Reinvestment Act Enforcement and Changes in Targeted Lending

The Community Reinvestment Act (CRA) encourages banks and savings and loan associations to meet the credit needs of local communities. Controversies surrounding implementation of the CRA, however, have challenged its effectiveness as a tool for increasing loan activity. To determine whether the CRA influences lending, the authors compare the low-income mortgage loans of banks that experience CRA downgrades to those of other banks that are not downgraded. The authors find no evidence consistent with the hypothesis that downgraded banks, in an attempt to reestablish an acceptable rating, increase lending.

Successor origin, initiating force, and managerial tenure in banking

Abstract Empirical tests on 150 commercial banks that experienced managerial succession in the 1980s offer evidence that successor origin (whether the incoming manager was promoted from within the firm or hired from outside the firm) and initiating force (whether or not the predecessors departure was initiated by the board of directors) interact to influence the length of managerial tenure. Specifically, managers who are appointed from outside the organization following board-initiated succession have shorter tenures than other managers. This finding supports the contention of Fredrickson, Hambrick, and Baumrin (1988) that outside successors, relative to inside successors, have less board allegiance and higher expectations. It also supports their contention that successors who follow board-initiated departures of predecessors are more apt to fall victim to board infighting and associated political turmoil.

Does flexibility hinder financial regulation? The case of CRA enforcement in the USA

Purpose - The purpose of this paper is to determine whether lending qualifying for credit under the Community Reinvestment Act (CRA) is associated with how broadly banks define the assessment areas (AAs) within which they operate. Both are identified as components of performance for purposes of compliance with the CRA. Design/methodology/approach - Regression analysis using a sample of 212 banks, observed in 2006. Findings - Qualifying lending and AA lending are found to be unrelated. This is inconsistent with an ability of banks to gerrymander their AAs in order to tradeoff one regulatory standard against another. Practical implications - Subjectivity inherent in AA delineation does not necessarily mitigate the achievement of regulatory objectives on qualifying lending. This is relevant to the ongoing debate concerning the role of flexibility in financial regulation. Originality/value - This is believed to be the first empirical study on bank-specific factors associated with AA lending under the CRA.