Paola Bongini

How good is the market at assessing bank fragility? A horse race between different indicators

Abstract We explore for individual banks, active in the East Asian countries during the years 1996–1998, the performance of three sets of indicators of bank fragility that can be computed from publicly available information: accounting data, stock market prices, and credit ratings. We find significantly different patterns among the three groups of indicators in their ability of forecasting financial distress at a specific point in time and over time. More specifically, in the East Asia crisis episode the information based on stock prices or on judgmental assessments of credit rating agencies did not outpace backward looking information contained in balance sheet data. Stock market based information, though, has responded more quickly to changing financial conditions than ratings of credit risk agencies. Overall, the evidence supports the policy conclusion that, where the information processing is quite costly, as in most developing countries, it is important to use simultaneously a plurality of indicators to assess bank fragility.

Identifying and Regulating Systemically Important Financial Institutions

The current international financial crisis, which started in 2007 in the US and soon spread to the rest of the world, has revealed that the failure of an interconnected and complex financial institution, even though not necessarily large in terms of total assets, can threaten the stability of the entire financial system and have serious negative consequences for the real economy. In this study, we survey the analytical framework for identifying systemically important financial institutions (SIFIs) and discuss the various regulatory proposals that have been put forward at the national and global level to deal with SIFIs.

Emerging Banking Systems

As the process of global economic integration moves irreversibly ahead, the increasing role of emerging countries is often undervalued and/or put at risk by the weakness of their banking systems. In parallel to inefficiencies arising from the misallocation of resources, the weaknesses in the national banking systems of emerging countries have contributed to the increasingly frequent systemic crises that occurred from the mid 1990s until only a few years ago.1

Relationship Lending Through the Cycle: What Can We Learn from Three Decades of Research?

This survey on Relationship Lending (RL) reviews thirty years of literature in a new analysis framework that considers the alleged benefits of RL in all possible scenarios under which banks and firms could operate from a good time scenario to a scenario of generalized crisis affecting both firms and banks. The number of studies currently conducted on RL in a scenario of prolonged crisis is growing rapidly, confirming that RL remains a viable solution and that it helps both banks and their customers to weather the storm. We also add suggestions on additional dimensions of RL that could be investigated in empirical studies to capture the presence of RL in the credit policy of each bank more effectively and thus better measure its effects on both sides – firm and bank – of the relationship.

Financial Literacy and Undergraduates: A Question of Aptitude?

Our study tests whether differing profiles of students - measured according to standard socio-demographic characteristics and their financial aptitude - show different levels of financial literacy at the beginning of their university careers. It is widely acknowledged that financial literacy among the young is influenced by socio-demographic characteristics. Levering on the results of studies estimating the influence of genetic factors on financial behavior, we argue that along with demographics and experience there are unobservable variables, such as aptitude, that help explain a student’s financial literacy. We surveyed 366 Business Studies freshmen during their first few weeks at a large Italian university: in other words, our sample is composed of freshmen with no prior educational exposure to financial matters except, in some cases, a high school diploma in commercial studies or a personal interest in financial issues. After controlling for education, gender, work and financial experience, parents’ educational attainment, students of Finance showed a higher level of financial literacy with respect to their peers: thus confirming the role of financial aptitude

La gestione dei crediti deteriorati: un percorso a ostacoli tra soluzioni individuali e soluzioni di sistema

Il rapido e consistente deterioramento del portafoglio prestiti bancari, causato dal rallentamento dell’economia nel corso degli ultimi anni, e la conseguente elevata incidenza dei crediti deteriorati (NPL) nei bilanci delle banche europee costituisce una preoccupazione per le autorita di vigilanza, oltre che per le stesse banche. Un’elevata rischiosita del portafoglio prestiti riduce la redditivita delle banche e al limite ne compromette la stabilita e al contempo e una delle principali cause del rallentamento dell’offerta di credito, nonostante l’abbondante liquidita immessa nel sistema dalla BCE. L’articolo si propone di analizzare, con riferimento alle banche europee e in particolare a quelle italiane, il fenomeno dei NPL e le loro conseguenze, e di individuare le soluzioni adottabili dalle singole banche ovvero a livello di sistema. Se da un lato, l’implementazione da parte delle banche di pratiche gestionali piu efficaci ed efficienti puo contribuire a ridurre l’incidenza dei NPL nei bilanci bancari, restano peraltro ostacoli dovuti a fattori esogeni, quali inefficienze nelle procedure di gestione delle crisi aziendali e/o nel recupero dei crediti o ancora l’assenza di un ampio ed efficiente mercato secondario per i NPL. Questo giustifica la ricerca di soluzioni di sistema, che tuttavia - a differenza di quanto accaduto in passato in altri paesi europei - non puo contare su un consistente aiuto pubblico. Si tratta quindi di trovare un difficile bilanciamento tra costi individuali e benefici che invece quantomeno in parte sono di natura pubblica

How Difficult Is It to Raise Money in Turbulent Times

Banks finance themselves with a variety of sources, with different maturities and credit risk characteristics. Heavy reliance on short-term wholesale funding in the years preceding the financial crisis, a distinctive characteristic of the Originate to Distribute (OTD) business model in banking, turned out to be a source of subsequent problems.

Curbing the Moral Hazard of a SIFI: A Mission Impossible?

This paper addresses the issue of systemic risk in insurance and investigates how financial markets evaluate the introduction of a new regulation addressed to global systemically important insurers (G-SIIs). We analysed the stock price reactions and the evolution of the distance-to-default of a sample of 44 of the worlds largest insurers to the publication of the first list of 9 G-SIIs and the release of information regarding their new capital requirements and other policy measures. The results of our event study suggest that, overall, investors doubt the effectiveness of the new regulatory framework in reducing systemic risk in the insurance sector and curbing the moral hazard implications of a “too systemic to fail�? policy

Towards European Banking Union: Institutional Framework and Open Issues

Fiscal consolidation programs adopted by several advanced economies seem tohave gone «too far too fast» jeopardizing the feasibility of the same austerity plans.In the Eurozone, problems induced by fiscal adjustment have been magnified by theperverse links between sovereign and banking crisis. Increasing sovereign spreadshave dramatically affected the monetary policy transmission mechanism, altering thecost and availability of credit between the PIGS and core Europe. In this scenario,the institution of a single supervisory mechanism (within the ECB) for banks in theEurozone has been recently proposed. This proposal is the first crucial step in creatinga European Banking Union and strengthening the working of Economic andMonetary Union (EMU).There are several good reasons justifying this sovereignty-transfer of supervisorytasks related to financial stability. At the same time there are a number of major impediments- both of economic and political nature.The paper is a short survey of the main aspects related to the creation of a EuropeanBanking Union, with a focus on the role played by SIFIs - financial institutionsthat are too interconnected to fail. The ultimate picture is not very encouraging.Even assuming that sovereignty-transfer of supervisory tasks will take place bythe end of 2013, three big issues are still unsettled: a) which institution is going tobe the manager of banking crisis? b) when a deposit insurance mechanism inside theEurozone will be effective? c) which type of additional regulatory framework will bedefined and implemented with reference to SIFIs?