Knowledge that Transforms

This paper studies empirically the relationship between competition in the loan market and credit risk in the Peruvian financial system. Our finding challenges the theoretical work of Martinez-Miera and Repullo (2010) that finds a U-shaped relationship between competition and risk-taking, as well as the empirical work of Jiménez et al. (2013) that provides evidence that supports this nonlinear relationship in a developed economy as Spain. In contrast, we find that in Peru the shape of the relationship between competition and credit risk is more complex and it depends on the competition measure.

The present paper estimates the impact of bureaucratic corruption on access to finance for small and medium enterprises (SMEs) in the manufacturing sectors of 79 developing countries. Corruption can make it difficult for businesses to obtain financing by reducing profits, increasing credit demand, increasing the likelihood of bankruptcy , creating uncertainty about future profits, and exacerbating the asymmetric information problem between borrowers and lenders. Consistent with this viewpoint, our findings show that corruption significantly increases the likelihood of a manufacturing SME being financially constrained. A one standard deviation increase in the prevalence of corruption leads to a 3.5–4.9% point increase in the likelihood or probability of a manufacturing SME being financially constrained. In countries with credit bureaus and more freely functioning credit markets, the increase in the likelihood of being financially constrained due to higher corruption is much smaller. We argue and provide evidence that these heterogeneities stem from the specific ways in which corruption affects SMEs’ access to finance . Thus, the heterogeneities help to raise confidence against the omitted variable bias and reverse causality concerns with our estimation. We also find that higher corruption makes it more difficult for SMEs to access finance in more competitive product markets, as well as for small compared to medium-sized firms. The findings have important policy implications for anti-corruption initiatives, financial development, and the level of competition in product markets.

We extend the literature on the sovereign-bank nexus by examining the composition effects of sovereign portfolios on banks' risk profile, unlike previous studies which generally analyzed the determinants of banks’ sovereign portfolios or the size effects of these portfolios. We also differ from previous studies with respect to the measures of risk considered and by covering a sample period that goes well beyond the Global Financial Crisis (2009–2018). Drawing on granular data from the European Banking Authority, we find that banks are riskier when their portfolio includes a higher proportion of securities that are issued by higher risk sovereigns or when they are themselves domiciled in a country with high sovereign credit risk. But we do not find concluding evidence that larger holdings of government securities of the country where the bank is incorporated increase bank risk ex-post. However, the risk profile is higher for banks that received government capital injections than for banks that did not receive capital support in the aftermath of the Global Financial Crisis. Banks that received government capital injections are less risky when their portfolio includes a higher proportion of securities that are issued by higher risk sovereigns. These results may indicate that regulatory arbitrage motives at these banks are particularly important.

We provide both a theoretical framework and empirical results for the relationship between CO2 emissions and systemic risk in the U.S. Based on a modified structural distance-to-default model that integrates physical risk effects, a theoretical framework is developed, documenting a positive link between CO2 emissions and systemic risk. Network VAR analysis, Diebold and Yilmaz variance decomposition, and conditional Granger causality provide empirical support for this positive link. Bank assets are found to be negatively related to CO2 emissions, which indicates an adjustment of the banking sector’s assets towards a lower-carbon economy. Policy implications include government-sponsored insurance support for banks facing insured losses.

Access to banking services for the poorest individuals is key to reducing their vulnerability, but are poor people likely to seek help from bank advisors? This study tests the hypothesis that poor peoples’ financial concerns affect their willingness to seek professional financial advice from banks. A survey experiment is run by performing “hard priming” (a €2000 car repair expense) on a treatment group and “soft priming” (a €200 expense) on a control group. Overall, hard priming triggers higher positive intention to consult a bank advisor. However, poverty sharply and negatively moderates this effect. For respondents below the poverty line, the priming effect is close to significantly negative and becomes such when restricting the sample to individuals who responded before their payday rather than after it. Hard priming also decreases poor people’s self-reported trust in banks, and this variable mediates the negative effect on intention to consult a bank advisor. There is no evidence that a lack of financial literacy or actual financial distress influence the priming effects.

This paper investigates the information spillover and learning by observing among countries in the sovereign debt markets. We find that the coupon rate of a bond offering by a borrower-country is positively associated with the average coupon rate of bonds issued by peer countries during the previous three-month period and this is significant among economically similar peers. Our results are stronger among investment-grade than speculative-grade ranked countries, and they are also more significant among countries without an IMF program than those under IMF program. We, however, fail to find evidence of learning among neighboring countries or those with a common language. Our findings suggest that although learning from peers is affected by borrower-countries’ quality, sovereign bond markets learn information from their economically-similar peers, which could ensure greater price stability.

This paper addresses the question, “Does lenders’ culture affect their monitoring efforts and style?”, by exploring whether lender individualism affects the loan monitoring of U.S. borrowers for a sample of 27,164 syndicated loan facilities granted between 1998 and 2017. We proxy lender individualism based on the ancestral country of origin of the lead bank's CEO. We show that lender individualism leads to a less stringent monitoring style. We find that individualist lenders resort less to covenant monitoring, impose less strict contract terms, such as performance pricing and rely more on soft information. We also provide evidence that individualist lenders retain a larger loan share and deal with a larger number of lenders. Finally, we find that some governance characteristics (board size and percentage of female directors) and other CEO features (cash compensation, tenure, and non-duality) moderate the negative association between lender individualism and loan monitoring.

This study examines whether corporate headquarters (CHQ) location influences firms’ tax avoidance practice. Our two-stage OLS regression analysis demonstrates that firms engage in less (more) tax avoidance when their CHQ are located near (farther away from) urban areas. Using recursive path analysis, we further examine the channels through which CHQ location impacts tax avoidance practice and find that the overall negative effect comprises a larger direct negative effect of CHQ location and a smaller indirect negative effect of CHQ location through financial reporting opacity and number of analysts following on firms’ tax avoidance. Furthermore, our nonrecursive path analysis shows that while CHQ location affects tax avoidance through direct and indirect channels, tax avoidance does not affect the choice of CHQ location. Finally, we find that when firms switch their CHQ from urban areas to rural areas (vice versa), their tax avoidance increases (decreases) accordingly. Our study thus provides a useful extension of tax avoidance studies and the literature on CHQ location’s effect on firms’ strategic decisions and performance.

We use a novel, household opinion-based measure – Public Confidence in a Bank – to explore the role of bank-level and industry-level determinants of retail customers’ trust in commercial banks. Our study tracks bank-month confidence measures during the 1/1/2010–1/1/2019 period in an unbalanced sample of 181 closely monitored large Russian banks that collectively account for the supermajority of the country’s banking assets. We find that contrary to common expectations, public confidence in a bank is heavily driven by the industry-level financial stability indicators, while bank-level risk measures play only a minimal – or, at best, supplementary – role. This result reveals the important role of overall banking sector stability in determining public perception of the safety and soundness of individual banks and justifies the leading role of industry-level stability in ensuring trust in banks.

Outside of financial crises, investors have little incentive to produce private information on banks’ short-term liabilities held as information-insensitive safe assets. The same does not hold during crises. We compare the information effects of different policy interventions. We measure information production using credit default swap spreads during the Global Financial Crisis and the European debt crisis. We study abnormal information production around major events and find that capital injections reduced abnormal information production while early European stress tests increased it. High levels of information production predict bank balance sheet contraction and higher government expenditures to support financial institutions.