We examine the effects of structural change in the U.S. banking industry, as well as key regulatory changes, including recently enacted deposit insurance reform legislation, on the resiliency of the FDIC-administered bank insurance fund (BIF) by estimating and comparing the probability of BIF insolvency over time. We do this using a Markov-switching model that relies on historical patterns of BIF disbursements to define the probability of switching among three “states” of the banking industry's financial health. Monte Carlo simulations are then performed to project the financial condition of the BIF over a 50-year period. Our results indicate that the insolvency risk to the bank insurance fund has increased significantly due to industry consolidation, and is mainly due to the concentration of deposits in the 10 largest U.S. banking companies. We also find that recent deposit insurance reforms will cause only a marginal reduction in the risk of BIF insolvency. The increased risk associated with a more concentrated industry structure simply dominates the reform effect.

A fair level of provisions on bad and doubtful loans is an essential input in mark-to-market accounting, and in the calculation of bank profitability, capital and solvency. Loan-loss provisioning is directly related to estimates of loan-loss given default (LGD). A literature on LGD on bank loans is developing but, surprisingly, it has not been exploited to address, at the micro level, the issue of provisioning at the time of default, and after the default date. For example, in Portugal, the central bank imposes a mandatory provisioning schedule based on the time period since a loan is declared ‘non-performing’. The dynamic schedule is ‘ad hoc’, not based on empirical studies. The purpose of the paper is to present an empirical methodology to calculate a fair level of loan-loss provisions, at the time of default and after the default date. To illustrate, a dynamic provisioning schedule is estimated with micro-data provided by a Portuguese bank on recoveries on non-performing loans. This schedule is then compared to the regulatory provisioning schedule imposed by the central bank.

Limited coverage is a standard feature in deposit insurance schemes. It is used to limit moral hazard, and achieves this objective by reinforcing market discipline: depositors have more incentives to monitor banks’ risk-taking if they have skin in the game. In this paper, I study market discipline and coverage levels by analyzing the relationship of funding costs and deposit growth with banks’ risk. I use a database of Colombian banks’ balance sheets and take advantage of a sudden, significant, and exogenous increase in the coverage level that occurred in April 2017. I find evidence of market discipline throughout the period of analysis and most results are consistent with it not being reduced by the change in the coverage level. The results are nuanced, however. Two variables are impacted: one in the quantity and the other in the price dimension. Furthermore, results also vary when I look at specific groups of banks separately. Market discipline is not present in big banks. Too big-to-fail perceptions seem to limit it. This is also the case for banks concentrated in fully insured deposits, where limited coverage has a less prevalent role.

Using a large sample of accounting data for non-financial companies in France, this paper studies the interactions between macroeconomic shocks and companies’ financial fragility. We consider links in both directions, namely whether firms’ bankruptcies are affected by macroeconomic variables, and whether bankruptcies determine the business cycle. We estimate forecasting equations for firms’ bankruptcy using Shumway's (2001) approach and study the joint dynamics of bankruptcies and macroeconomic variables within an exogenous VAR type model estimated at the sector level. We find evidence of reciprocal links between the bankruptcy rate and the output gap and highlight significant “second round effects” of shocks to the output gap on bankruptcies. We show how taking into account the dynamic transmission of macroeconomic shocks matters in stress testing exercises.

We analyse the role of house prices in the monetary policy transmission mechanism in Norway, Sweden and the UK, using structural VARs. A solution is proposed to the endogeneity problem of identifying shocks to interest rates and house prices by using a combination of short-run and long-run (neutrality) restrictions. By allowing the interest rate and house prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, house prices react immediately and strongly to a monetary policy shock. Furthermore, the fall in house prices enhances the negative response in output and consumer price inflation that has traditionally been found in the conventional literature. Moreover, we find that the interest rate responds systematically to a change in house prices. However, the strength and timing of response varies between the countries, suggesting that housing may play a different role in the monetary policy setting.

We study the impact of the tournament-like competition in the mutual fund industry by examining the Active Share choices of funds. Funds with relatively poor performance by the end of the third quarter in a calendar year tend to increase their Active Share during the last quarter. The increase in the trailing funds’ Active Share is accompanied by an increase in the funds’ downside risk exposure. The evidence suggests that the strategic shifts in Active Share we document are not information/skill motivated.

Central Bank supervision is one of the pillars of capital regulation. Based on a unique database built using supervision data from the Central Bank of Brazil, we evaluate the effectiveness of the Central Bank's supervision over banks given the Central Bank's proprietary credit rating and signaling requests for higher capital buffers. We also examine the main determinants of capital buffer management in addition to supervision. We find evidence that (i) Brazilian Central Bank supervision imposes excess capital buffer needs on banks, especially small and midsize banks; (ii) market discipline may play no role in driving capital ratios; and (iii) the business cycle has a negative influence on bank capital cushions, suggesting pro-cyclical capital management. We conclude that supervision plays a major role in markets where market discipline is weak and for smaller banks which act on pro-cyclical way.

The China Accounting and Finance Review (CAFR) was jointly established in 1999 by the Hong Kong Polytechnic University and Tsinghua University. Over the past 22 years, CAFR has published original papers in accounting and finance with a focus on China-related research. In this article, we review the journal’s publishing patterns and the impactful articles it has published, with the aim of better understanding past research on China-related issues and recent publication patterns and trends as well as developing new insight that may inspire future submissions. We divide past CAFR articles by topic into six groups: (i) information disclosure; (ii) auditing; (iii) corporate governance; (iv) market efficiency; (v) corporate finance; and (vi) miscellaneous. We use these categories as the basis of our review for articles published before 2020. We also summarize articles by their regional setting, research methodology, and authors’ university affiliation. We then highlight the contributions of a few impactful CAFR articles that are actively cited in both the Chinese and English literature. We complement the literature review by going over China’s financial stability research in JFS. We also compare CAFR with other major accounting and finance journals in the Asia-Pacific region. CAFR stands out by welcoming research using a diversity of regional settings and research topics. Finally, we discuss the new editorial strategies that began in 2020. Under the new editorial policy, CAFR now publishes more non-China and more cross-disciplinary studies than it used to. We review several recent publications to demonstrate the change. Going forward, we intend to call for the publication of more high-quality papers in accounting and finance that are not restricted to a region, area, or methodology providing new insights into accounting and finance.

Abstract We analyze whether banking supervision responsibilities should be concentrated in the hands of a single supervisor. We find that splitting supervisory powers among different supervisors is a superior arrangement in terms of social welfare to concentrating them in a single supervisor when the capture of supervisors by bankers is a concern. This result has implications for the design of banking supervisory architecture and informs current reform efforts in this field.