Sangkyun Park

Bank failure contagion in historical perspective

Abstract Bank failures are contagious due to the lack of bank-specific information. Depositors who lack financial information on individual banks make withdrawal decisions based on the condition of the banking system as a whole. A high ratio of bank failures then signals an adverse condition within the banking sector and triggers systemwide bank runs. This paper looks at bank panics in U.S. history and shows the importance of solvency information specific to individual banks. The major empirical finding is that the government or banks stopped bank panics mainly by providing financial information on banks.

Risk-taking behavior of banks under regulation

Abstract This paper analyzes the value maximization of regulated banks within a moral-hazard framework. In the model, regulators monitor both the capital ratio and the asset portfolio, and banks simultaneously select the optimum capital ratio and asset portfolio. A key assumption is that a bank cannot expect a positive put option value once it is classified as risky by regulators. The optimum values of the two variables depend on investment opportunities and charter values, as well as regulatory parameters. The model that explicitly incorporates regulation can explain various phenomena that are seemingly inconsistent with the predictions of moral hazard models — for example, a positive relationship between the capital ratio and the riskiness of the asset portfolio. A particularly interesting result is that a larger charter value results in a higher-risk interior solution.

Are bank shareholders enemies of regulators or a potential source of market discipline

In moral hazard models, bank shareholders have incentives to transfer wealth from the deposit insurer – that is, maximize put option value – by pursuing riskier strategies. For safe banks with large charter value, however, the risk-taking incentive is outweighed by the possibility of losing charter value. Focusing on the relationship between Tobin’s q and an ex ante measure of the failure probability, this paper develops a semi-parametric model for estimating the critical level of bank risk at which put option value starts outweighing charter value. From these estimates, we infer the prevalence of moral hazard. Examining publicly held bank holding companies (BHC) during the tumultuous 1986–1992 period, we find that shareholders’ risk-taking incentives were confined to a small fraction of highly risky institutions. Furthermore, our analysis shows that the inflection point at which banks begin to tilt in favor of moral hazard increased substantially in 1993–2005. These findings are encouraging to bank regulators and legislators because they indicate that tighter capital rules and more rigorous supervision introduced by several legislative initiatives in the 1990s have helped squeeze a lot of the moral hazard incentives out of the banking system.

Effects of the affiliation of banking and commerce on the firm's investment and the bank's risk

Abstract This paper examines how the affiliation of banking and commerce affects the firm’s investment efficiency and the bank’s risk exposure. The bank’s holding of a borrowing firm’s equity reduces the agency conflict between the firm and the bank, but increases the monitoring need of uninformed debtholders. Thus, the firm’s investment efficiency is maximized when the bank’s equity share is between zero and its debt share. The bank’s risk exposure can increase in two ways. With a large equity share, the bank has more incentives to allow the firm to undertake risky projects. The firm, when it has control over the bank, may force the bank to finance its risky projects.

Effects of price competition in the credit card industry

Abstract Using a sample of major credit card issuers, this study examines the effects of credit card rates on card loan growth and delinquency rates between 1991 and 1994. Lower card rates failed to sufficiently increase card loans, and the delinquency rate was positively related to the card rate.

What Does the P-E Ratio Mean?

The P-E ratio of S&P 500 stocks is found to be fairly well explained by future (ex post) movements of corporate earnings and interest rates. Stock markets appear to foresee as far as eight years with reasonable accuracy. This finding suggests that the P-E ratio is of limited use as a measure of stock valuation.

Is Aggregate Consumer Borrowing Consistent with the Permanent Income Hypothesis

Using US data covering from 1959 to 1994, we examine the consistency of aggregate consumer borrowing with the permanent income/life-cycle hypothesis (PI/LCH) and the predictive power of consumer borrowing. The PI/LCH implies that consumer borrowing should be an increasing function of the gap between permanent and current income. In addition, if consumers accurately estimate permanent income, large borrowing should be associated with rapid income growth in the future. Our empirical results support the PI/LCH; consumer borrowing increases with the estimate of permanent income and decreases with current income. The predictive power of consumer borrowing, however, is marginal; lagged consumer borrowing explains only a small portion of income growth and does not Granger-cause income growth. Copyright 2000 by Blackwell Publishers Ltd and The Victoria University of Manchester

A triggering mechanism of economy-wide bank runs

Bank failures differ from other business failures in that failures of some banks can result in systemwide bank runs that can paralyze the entire economy. This unique feature of the banking business has attracted considerable attention in the 1980s when banking problems re-emerged. Although the financial structure of banks improved in the early 1990s, the possibility of banking instability remains as an important concern in formulating banking policies.

Why Did Thrift Goodwill Matter in 1989

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 limits thrift goodwill that can be counted as regulatory capital. This paper examines if and why the goodwill clause adversely affected the market value of thrifts. The main findings are that goodwill had a large negative effect on the stock returns of low-capital thrifts in 1989 and that the negative effect persisted in the following two years. These findings suggest that a reduced put option value accounted for a large portion of the stock-price decline. The role of asymmetric information appears to have been small.