Frank Strobel

Bank Income Smoothing, Ownership Concentration and the Regulatory Environment

We empirically examine whether the way a bank might use loan loss provisions to smooth its income is influenced by its ownership concentration and the regulatory environment. Using a panel of European commercial banks, we find evidence that banks with more concentrated ownership use discretionary loan loss provisions to smooth their income. This behavior is less pronounced in countries with stronger supervisory regimes or higher external audit quality. Banks with low levels of ownership concentration do not display such discretionary income smoothing behavior. This suggests the need to improve existing or implement new corporate governance mechanisms.

Bank Equity Involvement in Industrial Firms and Bank Risk

The regulatory framework in Europe does not prevent banks from taking large or controlling equity stakes in non-financial firms, potentially contributing to higher levels of bank risk and financial instability. Using a panel of European commercial banks for the period 2004-2008, we find that higher levels of equity positions in industrial firms and higher proportions of industrial firms where the bank is the majority shareholder lead to higher bank activity and insolvency risk. At low levels of shareholder protection, these risk measures are reduced when equity investments are held for longer, an effect attenuated at higher levels of shareholder protection.

Bank insolvency risk and Z-score measures with unimodal returns

We specialize the established justification for using Z-scores as a risk measure reflecting a banks probability of insolvency to the case where the banks distribution of returns is unimodal, obtaining a refined upper bound of the probability of insolvency for this potentially useful special case.

Bank insolvency risk and different approaches to aggregate Z-score measures: a note

We discuss to what extent existing approaches to the construction of aggregate Z-score measures capture the notion of systemic soundness, propose some alternative ones that could be just as informative and have potential complementary value, and illustrate how these different approaches compare using a data set of Organisation for Economic Co-operation and Development (OECD) commercial, cooperative and savings banks for the period 1994–2008.

Monetary Integration and the Value of Waiting

When countries have differing preferences over inflation, conventional wisdom suggests that any one of them will generally benefit from giving up monetary independence in favour of monetary integration if the resulting supranational preferences are at least as inflation averse as its own.1 This simplistic view is, however, at odds with the rapidly growing literature on irreversible investment under uncertainty, which has shown that the decision to invest in an irreversible project with uncertain payoffs can be profoundly affected when that investment can be delayed, as the option of waiting then typically has positive value and needs to be accounted for.2 Applying this particular methodology to a country’s decision of whether or not to proceed with monetary integration, thus interpreted as largely irreversible with uncertain benefits, should therefore allow a more rigorous understanding of the importance of relative inflation preferences in this context.

Bank ownership structure, lending corruption and the regulatory environment

We empirically examine whether bank lending corruption is influenced by the ownership structure of banks, a country’s regulatory environment and its level of economic development. We find that corruption in lending is higher when state-owned banks or family-owned banks provide a higher proportion of credit to the economy, in both developed and developing countries. A stronger regulatory environment, either through a stronger supervisory regime or a higher quality of external audits, helps to curtail bank lending corruption if induced by family-controlled ownership, but not if induced by state-controlled ownership. We further find that controlled-ownership of banks by other banks contributes to reduce corruption in lending; the same applies to widely-held ownership of banks, but only for developed countries.

International tax arbitrage, financial parity conditions and preferential capital gains taxation

Using a finite-horizon general equilibrium model with uncertainty and money, we characterize situations where tax arbitrage opportunities may arise for international portfolio investors in an economy with heterogeneous capital income taxation when interest income and capital gains/losses are taxed differentially for some agents. We derive tax-modified uncovered interest parity conditions, Fisher conditions and forward prices similar to the no-tax ones, but augmented by tax-induced ‘risk-premium’ terms; covered interest parity and Fisher conditions remain unaffected by the introduction of capital income taxes as we bound tax-based arbitrage without restricting arbitrage per se.

Southeast Asian monetary integration: a real options perspective

We examine the real option implicit in countries’ decisions of whether to join a monetary union and calibrate our theoretical model for the core ASEAN/AFTA group of Indonesia, Malaysia, Philippines, Singapore and Thailand. None of the countries would be prepared to join a monetary union amongst them at present, and most have low to negligible probabilities of ever wanting to do so.

Bank Insolvency Risk and Z-Score Measures: Caveats and Best Practice

We highlight caveats arising in the application of traditional ROA-based Z-scores for the measurement of bank insolvency risk, develop alternative Z-score measures to resolve these issues , and make recommendations for best practice for the US/Europe based on the experience of the …nancial crisis of 2007-2008. Using a probabilistic approach (i) our novel regulatory capital Z-score dominates traditional Z-score measures for both US/Europe; (ii) Z-scores computed with exponentially weighted moments dominate those with moving moments for the US sample, but not for Europe. For both US/Europe, using a multivariate logit approach (i) allows computation of augmented Z-scores that provide probabilities of distress that better discriminate between distressed/surviving banks than the probabilistic approach; (ii) suggests that the ROA-based Z-score using current values of the capital-asset ratio is best, calculated either with moving or exponentially weighted moments.