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Using supervisory data on operational losses from large U.S. bank holding companies (BHCs), we show that BHCs with socially responsible workforce policies suffer lower operational losses per dollar of total assets. The association significantly varies by the type of workforce policies and the type of operational losses. It is driven not only by small frequent losses but also by severe tail operational risk events. Further, the risk-reducing effects of the socially responsible workforce policies are stronger for larger BHCs with more employees. Our findings have important implications for banking organization performance, risk, and supervision. [ABSTRACT FROM AUTHOR]

In "Robust Financial Networks," F. Hu, D. Mitchell, and S. Tompaidis study networks of financial institutions where only aggregate information on liabilities is available. The authors introduce the robust liability network, that is, the network consistent with the available information that exhibits the worst expected losses. They provide an algorithm to identify the robust liability network and, using aggregate data provided by bank holding companies to the Federal Reserve in form FR Y-9C, determine robust liability networks for U.S. banks under various network configurations. They show that the robust liability network is sparse, with links between institutions that hold highly correlated portfolios. They illustrate the methodology in two applications. (1) They look at how robust liability networks changed around the onset of the COVID-19 pandemic. (2) They evaluate the impact of a potential regulation that limits risk-taking based on each institution's conditional value-at-risk. Their results can be used by regulators to monitor systemic risk in financial networks. We study networks of financial institutions where only aggregate information on liabilities is available. We introduce the robust liability network, that is, the network with the worst expected losses among all networks with the same aggregate liabilities and assets. We provide an algorithm to identify the robust liability network and, using aggregate data provided by bank holding companies to the Federal Reserve in form FR Y-9C, determine robust liability networks for U.S. banks under various network configurations. We find that the robust liability network is sparse, with links between institutions that hold highly correlated portfolios. We illustrate the potential of our approach in two ways: We study the evolution of robust liability networks around the onset of the COVID-19 pandemic and evaluate the importance of network structure for financial institutions that are subject to a regulation that limits risk-taking based on each institution's conditional value-at-risk. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/opre.2022.0272. [ABSTRACT FROM AUTHOR]

General-purpose financial statements prepared under GAAP are for a consolidated reporting entity--a collection of legal entities that includes the parent and any subsidiaries it controls. This reporting model results in a loss of information about the individual legal entities within the consolidated reporting entity. Our study examines the role of parent-only balance sheet information in assessing the credit risk of the parent when it is a bank holding company. We obtain evidence from three trading platforms: credit default swaps (CDS), outstanding bonds, and new bonds. We find that parent-only leverage is useful for debtholders to assess the parent's credit risk even after considering consolidated leverage. Moreover, in CDS markets, parent-only leverage is more useful for firms without downstream guarantee than for firms with guarantee and is less useful for firms with a stronger internal capital market. Our study raises the awareness of parent-only financial information for credit risk assessments. [ABSTRACT FROM AUTHOR]

The sole ownership policy in Indonesian banking is regulated in Bank Indonesia Regulation Number 14/24/PBI/2012 concerning Sole Ownership in Indonesian banking which is then supplemented by Bank Indonesia Circular Letter Number 15/2/DPNP dated 4 February 2013 concerning Sole Ownership in Indonesian Banking. This research was created to find out about the regulations and implementation of sole ownership policies in banking in Indonesia. The research uses normative juridical research methods. The research results state that the implementation of the sole ownership policy in banking in Indonesia is carried out through the merger or consolidation of controlled banks, forming a Holding Company in the Banking Sector (Bank Holding Company/BHC), forming a Holding Function. There is a need for further study regarding the implementation of the sole ownership policy in banking in Indonesia. [ABSTRACT FROM AUTHOR]

We test whether organizational risk management matters to bondholders of U.S. bank holding companies (BHCs), and find that debt financing costs increase when the BHC has lower-quality risk management. Consistent with bailouts giving rise to moral hazard among bank creditors, we find that bondholders put less emphasis on risk management in large institutions for which bailouts are expected ex-ante. BHCs that maintained strong risk management before the financial crisis had lower debt costs during and after the crisis, compared to other banks. Overall, quality risk management can curtail risk exposures at BHCs and result in lower debt costs. [ABSTRACT FROM AUTHOR]

I investigate the impact of securitization on the risk-taking by bank holding companies (BHCs). For 2001 to 2017, I find a negative relationship between securitization and the risk appetite of BHCs. I find a negative relationship between securitization and the risk appetite of BHCs that is consistent with the recourse hypothesis of securitization. I also discover that the equilibrium in this relationship changes from the pre-crisis to the crisis period (crisis effect). This crisis effect hampers BHCs' ability to engage in securitization that leads them to accumulate more risky assets on their books due to the deteriorated quality of their loan portfolios. This equilibrium then reverses after the crisis (post-crisis effect) due to policy makers' response to the excessive risk-taking that manifested during the crisis. Moreover, I find that the securitization of residential mortgages not only boosts the recourse hypothesis but also triggers the crisis effect. My findings provide novel empirical insights into the different nexuses between the securitization and risk appetite of BHCs around the financial crisis. [ABSTRACT FROM AUTHOR]

The study examines whether consolidating qualified special-purpose entities (QSPEs) under Statement of Financial Accounting Standards Nos. 166 and 167 (FAS 166/167) improves the market reaction to earnings disclosures. We use a difference-in-difference design to compare the change sample, which is defined as banks that consolidate QSPEs after FAS 166/167, with the no-effect sample, which is defined as financial institutions with no QSPEs or banks that do not consolidate QSPEs after FAS 166/167. The results show that, during a short window around earnings announcements, the change sample experiences higher market reaction to earnings surprises than the no-effect sample after the implementation of FAS 166/167. We also find that the effect is more pronounced in banks that engage in securitization and in financial institutions whose securitized loans originate primarily from consumer loans rather than mortgages. Additional analysis also finds that adopting FAS 166/167 enhances the ability of earnings to predict future earnings and future cash flows in banks. The important implication of the study for regulators is that FAS 166/167 improves bank transparency. [ABSTRACT FROM AUTHOR]

We investigate the impact of the Dodd–Frank Act (DFA) on the credit risk behavior of complex bank holding companies (BHCs). Specifically, we assess the effectiveness of the DFA in reducing the credit riskiness of complex banks. Consistent with the moral hazard hypothesis, we find that complex BHCs affected by the DFA increase their credit risk. We argue that possible explanations are that BHCs decreased their lending portfolio quality, loan monitoring, and strength and independence of the risk management function after the DFA. The results are robust to endogeneity concerns, different sample selection criteria, various model and treatment specifications, and placebo tests. [ABSTRACT FROM AUTHOR]

Research summary: How a new venture improves performance when facing both principal and agency problems is an important yet understudied question. This study examines the effectiveness of CEO duality in mitigating the principal problem and enhancing entrepreneurial success. By granting more power to CEOs, CEO duality can alleviate the principal problem; however, CEO duality may simultaneously exacerbate CEOs' agency problems. Using manually collected panel data on 1403 newly established U.S. commercial banks, we find a positive relationship between CEO duality and new venture performance. The CEO duality–new venture performance relationship strengthens when CEOs are also founders of their firms and weakens when the share of corporate ownership reflects heavy investment by incumbent firms. Our findings highlight that venture governance needs to address principal and agency problems simultaneously. Managerial summary: Large corporations typically face agency problems due to the separation of ownership and control such that managers do not act in the best interests of owners. New ventures tend to experience fewer agency problems because owners/principals are also likely to be managers/agents. New ventures often face severe principal problems due to directors' potential conflict of interests such as investments in rival companies. Our study suggests that new ventures can mitigate principal problems by appointing a CEO as the chair of the board of directors. Our longitudinal analysis of new U.S. commercial banks finds that this dual CEO‐chair structure leads to better performance. This relationship strengthens in the case of founder‐CEOs and weakens among new banks co‐founded by other large bank holding companies. [ABSTRACT FROM AUTHOR]

In 2009, the Federal Reserve subjected nonbank mortgage-originating subsidiaries of bank holding companies (BHCs), but not independent nonbank (INB) mortgage originators, to consumer compliance supervision. We examine the effects of this regulatory change on the pricing and performance of nonbank originations using a sample of conventional, first-lien, amortizing mortgages originated between 2000 and 2015. We find that subsidiary nonbank (SNB) loans, which had a higher probability of default than INB mortgages prior to the policy change, had a lower probability of default following the change. In addition, we identify small but statistically significant decreases in loan interest rates and loan-to-value ratios for SNB mortgages relative to INB mortgages. When we split our sample into prime and subprime mortgages, we find those effects hold for prime mortgages. For subprime mortgages, after the policy change SNB originations had higher interest rates and lower LTV ratios than INB mortgages, with only weakly significant differences in probabilities of default. The findings are robust to several potential confounding effects, including those due to firm entries and exits. Our findings are consistent with BHCs reducing risk shifting in mortgage lending across subsidiaries following their heightened regulatory scrutiny. [ABSTRACT FROM AUTHOR]

Guided by the extreme value theory, this study empirically investigates the impact of tail risk measures on financial distress of publicly traded bank holding companies (BHCs) in the United States. Our results show that tail risk measures namely, value‐at‐risk and expected shortfall, are significantly and positively related to banks distress risk. Implying that BHCs with more frequent extreme negative daily equity returns induce higher tail risks, thereby increasing their likelihood of experiencing financial distress. Our results also show that tail risk measures enhance the explanatory power of traditional models explaining banks distress risk based on accounting information. These results indicate that market discipline is generally beneficial in managing and regulating banks, bolstering claims of the importance of macro‐prudential supervision of financial institutions. [ABSTRACT FROM AUTHOR]

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This study investigates the impact of audit committee oversight on the financial reporting quality of US bank holding companies. To overcome identification concerns, we use Section 165 h of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which requires publicly traded bank holding companies with assets exceeding $10 billion to have separate audit and risk committees. We utilise a difference‐in‐differences framework where our treatment group comprises bank holding companies that were required to separate audit and risk oversight functions following the introduction of Section 165 h and our control group comprises counterparts that already had separate audit and risk committees prior to the passage of Section 165 h. We estimate the difference in the behavior of treated bank holding companies between the pre‐ and post‐implementation period of Section 165 h with the same difference in the behavior of control group counterparts and find that the separation of audit and risk committees leads to an improvement in financial reporting quality. We attribute the observed improvements in financial reporting quality to the increased focus of audit committees arising from a reduction in the volume and complexity of tasks undertaken following the implementation of Section 165 h. [ABSTRACT FROM AUTHOR]

Motivated by the debate about the introduction of the fair value option for (financial) liabilities (FVOL) and the requirement to recognize and separately disclose in financial statements debt valuation adjustments (DVAs), this study explores what we can learn about a firm's credit risk from DVAs. Using a sample of US bank holding companies that elect the FVOL, we show that DVAs generally cannot be explained by the same factors that explain contemporaneous changes in bank's credit quality. We further find that DVAs can explain future changes in credit risk when the fair value of liabilities is based on managerial inputs (Level 3). Overall our results suggest that managers have an information advantage in estimating credit risk and that DVAs provide inside information to the market. [ABSTRACT FROM AUTHOR]

Using a panel smooth transition regression framework on a new proxy of the business cycle (BC) index and quarterly data of US bank holding companies from 1993Q1 to 2020Q1, our results provide empirical support for the theory that the BC has a nonlinear effect on liquidity creation. We find a positive and highly significant nonlinear effect of the BC on liquidity creation, which not only supports the pro‐cyclicality of liquidity creation but also improves the liquidity creation estimation compared to previous studies. The results are robust to different proxies of the BC and model specifications. We also document that US bank holding companies create liquidity more during the expansion phase (normal times) than during the recession phase (crisis times) of the BC, suggesting an asymmetrical effect of BC changes on liquidity creation. Our findings have important implications for financial market participants by suggesting that banks should keep alternative sources of funding on hand during the BC recession phase. Insights from our study also provide policy implications for central banks and prudent supervisors to consider when incentivizing banks, for instance, by lowering regulatory requirements, adjusting the policy rate, or implementing any other quantitative easing policy during the BC recession phase to keep the financial system efficient. [ABSTRACT FROM AUTHOR]

This research aims to examine whether banks can employ interest-rate derivatives to mitigate or intensify the effects of economic policy uncertainty on bank lending. By testing two opposing hypotheses, it offers valuable insights into how the interplay between bank lending, interest-rate derivatives, and EPU can influence bank's loan growth. Using a sample of 1,285 Bank Holding Companies (BHCs) for the period from 1986 to 2017, panel regression analysis confirms a negative relationship between EPU and Commercial Industrial (C&I) loan growth. This negative association is not only statistically significant but also economically meaningful. Specifically, when EPU increases by one standard deviation, bank holding companies (BHCs) experience a decrease in loan growth rate by 91 basis points. While derivative users exhibit a significantly higher mean loan growth compared to non-users, the interaction term between interest-rate derivative usage and EPU is negative and statistically significant. This suggests that the usage of interest-rate derivatives aggravates the negative impact of EPU on bank lending. [ABSTRACT FROM AUTHOR]

Holding companies legally separate the assets and owners of a company creating a layer of liability protection. Theoretically, this feature lowers the risk attributable to holding companies, enabling them to offer lower-cost debts compared to stand-alone alternatives. However, no study has ever tested this hypothesis due to its technical and practical difficulties. Testing this hypothesis requires a separate classification of holding and stand-alone companies' outstanding debts to compare their risk spreads, controlling the bonds' risk ranking, maturities, and issue sizes. Further, a model is needed to make the callable bond spreads with unknown maturity dates comparable to non-callable bonds. This work is the first attempt to evaluate the risk spreads of stand-alone banks and bank holding companies in Spain by including all outstanding rated bonds offered by Spanish banks. In order to make callable bond spreads comparable with noncallable bond spreads, we obtained the option-adjusted spreads for the bonds using a lattice option-pricing model that treats the callable bonds as a bond with embedded options. We then regressed to option-adjusted spreads on control variables and ownership structure dummy to see if there exists a statistically and economically significant coefficient for the introduced dummy variable. We found that bank-holding company bonds have higher risk spreads compared to the stand-alone alternatives in Spain. This may be attributable to the characteristics of holding companies that introduce other risks that offset the gains obtained from the added layer of liability protection. [ABSTRACT FROM AUTHOR]

We design a novel across‐the‐curve credit spread index, AXI, a measure of the recent cost of wholesale unsecured debt funding for publicly listed US bank holding companies and commercial banks. AXI, a benchmark for bank lending and risk management, is the weighted average of credit spreads for unsecured debt instruments with maturities ranging from overnight to five years, with weights that reflect both transaction and issuance volumes. We provide illustrative output of the bond‐based component of AXI. By widening coverage to include all corporate debt issuers, we also build a financial conditions index (FXI). [ABSTRACT FROM AUTHOR]