Showing papers by "Luc Laeven published in 2013"
TL;DR: In this article, the authors present a comprehensive database on systemic banking crises during 1970-2011 and propose a methodology to date banking crises based on policy indices, and examine the robustness of this approach.
Abstract: The paper presents a comprehensive database on systemic banking crises during 1970–2011. It proposes a methodology to date banking crises based on policy indices, and examines the robustness of this approach. The paper also presents information on the costs and policy responses associated with banking crises. The database on banking crises episodes is further complemented with dates for sovereign debt and currency crises during the same period. The paper contrasts output losses across different crises and finds that sovereign debt crises tend to be more costly than banking crises, and these in turn tend to be more costly than currency crises. The data also point to significant differences in policy responses between advanced and emerging economies.
868 citations
TL;DR: The authors assesses the impact of the geographic diversification of bank holding company assets across the United States on their market valuations and find that exogenous increases in geographic diversity reduced BHC valuations.
Abstract: This paper assesses the impact of the geographic diversification of bank holding company (BHC) assets across the United States on their market valuations. Using two new identification strategies based on the dynamic process of interstate bank deregulation, we find that exogenous increases in geographic diversity reduced BHC valuations. We also find that the geographic diversification of BHC assets increased insider lending and reduced loan quality. Taken together, these findings are consistent with theories predicting that geographic diversity intensifies agency problems.
200 citations
TL;DR: In this paper, the authors assess the importance of supply-side credit market frictions by studying the impact of bank recapitalization on firm growth in 50 countries during the recent crisis.
Abstract: We assess the importance of supply-side credit market frictions by studying the impact of bank recapitalization on firm growth in 50 countries during the recent crisis. Our identification strategy exploits the crisis as a shock to credit supply and combines an exogenous measure of firms’ dependence on external financing with policy interventions aimed at restoring bank capital. We find that the growth of financially dependent firms is disproportionately positively affected by bank recapitalization. This effect is quantitatively important and robust to controlling for other policies. These results provide new evidence of the influence of credit market frictions on economic activity.
108 citations
TL;DR: A review of the literature on the corporate governance of banks can be found in this paper, where a discussion of corporate governance and regulatory reforms to enhance the safety and soundness of banks is presented.
99 citations
TL;DR: This article found that exante risk taking by banks (as measured by the risk rating of the bank's loan portfolio) is negatively associated with increases in short-term policy interest rates and that this relationship is less pronounced for banks with relatively low capital or during periods when banks' capital erodes, such as episodes of financial and economic distress.
Abstract: We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
56 citations
TL;DR: In this paper, the authors present a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons.
Abstract: The global financial crisis of 2007-09 has led to an intensive research program analyzing a wide range of issues related to financial crises. This paper presents a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons. The book covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to crises, considers lessons on their antecedents, and analyzes their evolution and aftermath. It also provides valuable policy lessons on how to prevent, contain and manage financial crises.
50 citations
DOI•
06 Jun 2013
TL;DR: This article found that exante risk taking by banks (as measured by the risk rating of the bank's new loans) is negatively associated with increases in short-term policy interest rates and that this relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods when banks' capital erodes, such as episodes of financial and economic distress.
Abstract: We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s new loans) is negatively associated with increases in short-term policy interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally. JEL classifications: E43, E52, G21
27 citations
01 Jan 2013
TL;DR: The crisis has brought to light a number of deficiencies in financial regulation and architecture, particularly in the treatment of systemically important financial institutions, the assessments of systemic risks and vulnerabilities, and the resolution of financial institutions as mentioned in this paper.
Abstract: The crisis has brought to light a number of deficiencies in financial regulation and architecture, particularly in the treatment of systemically important financial institutions, the assessments of systemic risks and vulnerabilities, and the resolution of financial institutions. The global nature of the financial crisis has also made clear that financially integrated markets, while offering many benefits, can pose significant risks, with large real economic consequences. Deep reforms are, therefore, needed in the international financial architecture to safeguard the stability of an increasingly financially integrated world.
6 citations
01 Jan 2013
TL;DR: The global financial crisis is rooted in a combination of factors common to previous financial crises and some new factors as mentioned in this paper, such as asset price increases that turned out to be unsustainable, credit booms that led to excessive debt burdens, buildup of marginal loans and systemic risk, and failure of regulation and supervision to keep up with and get ahead of the crisis when it erupted.
Abstract: The global financial crisis is rooted in a combination of factors common to previous financial crises and some new factors. The four features in common with other crises are (1) asset price increases that turned out to be unsustainable, (2) credit booms that led to excessive debt burdens, (3) buildup of marginal loans and systemic risk, and (4) the failure of regulation and supervision to keep up with and get ahead of the crisis when it erupted. Four key new aspects were (1) the widespread use of complex and opaque financial instruments; (2) the increased interconnectedness among financial markets, nationally and internationally, with the United States at the core; (3) the high degree of leverage of financial institutions; and (4) the central role of the household sector. The chapter also describes the evolution of the crisis, including the different stages of crisis containment, and reviews the main government interventions (until mid-2009) to restore confidence in financial systems.
5 citations
Posted Content•
TL;DR: In this paper, the authors argue that financial innovations that improve risk-sharing can also harbor very large tail risks that can jeopardize individual financial intermediaries that engage in ill-managed derivatives trades and with it the entire financial system.
Abstract: There are bright and dark sides to financial innovation. On the bright side, financial innovations that improve screening and monitoring can facilitate the allocation of resources by financial intermediaries to their most productive use (Greenwood, Sanchez, and Wang, 2010; Laeven, Levine, and Michalopoulos, 2012). Notable examples of such productive forms of financial innovation in the past include credit bureaus and venture capital. Financial innovations that improve risk-sharing can, in principle, also be welfare enhancing. A good example is derivatives in their various forms and colors. However, financial innovations can be “deadly weapons” if abused, allowing financial institutions to further boost excessive leverage and contributing to systemic risk. The same derivatives that can improve risk-sharing can also harbor very large tail risks that can jeopardize individual financial intermediaries that engage in ill-managed derivatives trades and with it the entire financial system…
3 citations
Posted Content•
TL;DR: In this article, the authors present a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons.
Abstract: The global financial crisis of 2007-09 has led to an intensive research program analyzing a wide range of issues related to financial crises. This paper presents a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons. The book covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to crises, considers lessons on their antecedents, and analyzes their evolution and aftermath. It also provides valuable policy lessons on how to prevent, contain and manage financial crises.