Richard Podpiera

Progress in China's Banking Sector Reform: Has Bank Behavior Changed?

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Does Compliance with Basel Core Principles Bring Any Measurable Benefits

We explore the relationship between banking sector performance and the quality of regulation and supervision as measured by compliance with the Basel Core Principles for Effective Banking Supervision (BCP). Using BCP assessment results for 65 countries and 1998-2002 panel data for other variables, we find a significant positive impact of higher compliance with BCP on banking sector performance, as measured by nonperforming loans and net interest margin, after controlling for the level of development of the economy and the financial system and macroeconomic and structural factors.

Insurance and Issues in Financial Soundness

This paper explores insurance as a source of financial system vulnerability. It provides a brief overview of the insurance industry and reviews the risks it faces, as well as several recent failures of insurance companies that had systemic implications. Assimilation of banking-type activities by life insurers appears to be the key systemic vulnerability. Building on this experience and the experience gained under the FSAP, the paper proposes key indicators that should be compiled and used for surveillance of financial soundness of insurance companies and the insurance sector as a whole.

Is One Watchdog Better than Three?: International Experience with Integrated Financial Sector Supervision

Over the past two decades, there has been a clear trend toward integrating the regulation and supervision of banks, nonbank financial institutions, and securities markets. This paper reviews the international experience with integrated supervision. We survey the theoretical arguments for and against the integrated supervisory model, and use data on compliance with international standards to assess the validity of some of these arguments. We find that (i) full integration is associated with higher quality of supervision in insurance and securities and greater consistency of supervision across sectors, after controlling for the level of development; and (ii) fully integrated supervision is not associated with a significant reduction in supervisory staff.

The Rise of Foreign Investment in China's Banks: Taking Stock

The recent wave of foreign investment in Chinas banks and the prospects of further opening of the banking sector under the WTO agreement suggest that foreign banks are likely to play an increasingly important role in China. This paper takes stock of the involvement of foreign banks in the Chinese banking sector in the perspective of international experience. While in most other countries foreign bank entry took the form of direct takeover or majority shareholding, foreign investments in Chinas banks have been minority shareholdings with very limited management involvement. The paper concludes that China appears to be well positioned to benefit from further opening of the banking sector to foreign investors. International experience suggests that greater competition from and participation of foreign banks can in general bring important benefits if appropriate incentives and sufficient opportunities are created.

Quality of Financial Policies and Financial System Stress

In this paper, we develop multi-country indices of financial system stress and quality of financial policies and use them in regression analysis of the determinants of financial stress. We find that countries with higher quality of financial policies are better able to contain the effects of macroeconomic pressures on the overall level of stress in the financial system. They are also in a better position to ensure sustainable development of the financial system.

Informed trading and the bid-ask spread: evidence from an emerging market

The bid-ask spread affects significantly the performance of financial markets. We explore the impact of informed trading on the composition of the bid-ask spread in high frequency data from the Czech equity market, which has been plagued by informed trading due to insufficient regulation and missing institutions. Our estimates suggest that the Czech market-maker based trading system is rather efficient in dealing with informed trading. Only 17% of the bid-ask spread is explained by informed trading, which corresponds roughly to the share of the adverse-selection component in developed markets. An explanation based on the difference between the posted and traded spreads is offered.

International Cross-Listing: The Effects of Market Fragmentation and Information Flows

We investigate the effects of market fragmentation and information flows in the case of stocks cross-listed on markets in Central Europe and London. First, we test for co-movement, interaction and error correction behavior between the local and London markets. Our results suggest that strong interactions exist between these markets, with the London market being slightly more important than the local one. The two prices of cross-listed stocks are cointegrated and pricing errors are corrected over a few days. These interactions suggest partial fragmentation. Second, we extend an earlier model to examine the impact of foreign listing on the variance of local returns. The focus of previous studies has concentrated almost exclusively on the return of cross-listed securities. The variance of returns has remained mostly unnoticed, even though some studies noted an increase of variance after the cross-listing. In our model, we introduce a new factor that influences return variance: tighter interaction with foreign markets as a consequence of cross-listing. Estimation results lend support to our model.

Efficiency of Financial Markets in Transition: The Case of Macroeconomic Releases

This paper contributes to the discussion on the efficiency of newly emerged financial markets in transition economies. We use data on one of the most developed financial markets in transition, the Czech Republic, to investigate financial market efficiency by examining the reaction to macroeconomic releases. Direct measure of market expectations, that is, survey data, is used to form a proxy for market expectations. The reactions of interest rates, bond yields, exchange rates, and the stock market index are explored. We found that, despite the fact that the survey data appear to reasonably approximate rational expectations, the Czech market lacks basic efficiency properties. It reacts to the expected part of the news announcement, and the adjustment is stretched over a period of several days. In the case of CPI, we found evidence suggesting that the efficiency of the market improves over time.

How Important is Informed Trading for the Bid-Ask Spread? Evidence from an Emerging Market

The link between informed trading and the bid-ask spread has been the focus of abundant literature and some authors feared that a large amount of informed trading might lead to shutdown of markets. We explore this issue using data from the Czech Republic. Our estimates confirm that the share of informed trading and its variability is indeed high relative to developed markets, however, share of the adverse selection component is only 14% of the spread. Since the Czech Republic has been known in the financial community as being plagued by informed trading, our findings suggest that the relative importance of adverse selection as a determinant of the spread is generally low across markets.