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Die Finanzkrise hat gezeigt, dass das Eigenkapital vieler Banken zu gering war. Ulrich van Suntum und Cordelius Ilgmann, Universität Münster, weisen darauf hin, dass zwar die bilanziellen Eigenkapitalquoten der Banken mittlerweile sogar höher sind als vor der Finanzkrise, aber dennoch könne von Entwarnung keine Rede sein, denn die vor der Finanzkrise üblichen Eigenkapitalquoten hätten sich als deutlich zu gering erwiesen, um systemische Zusammenbrüche zu verhindern. Das deutsche Bad-Bank-Modell habe seinen Fehler vor allem in der Freiwilligkeit der Teilnahme. Man solte bei der Bad-Bank-Lösung an dem in Deutschland bereits früher verwendeten Instrument der Ausgleichsforderungen anknüpfen. Nach Ansicht von Wolfgang Hönig, ehemals Commerzbank AG, Frankfurt, sollte zum einen die Qualität der Ratingagenturen verbessert werden. Zum anderen sollte der Staat die systemrelevanten deutschen Banken durch Stresstests daraufhin untersuchen, ob sie sanierungsbedürftig und -fähig sind. Die hierbei identifizierten B-Banken seien von Amts wegen zu sanieren. Auch Stephan Götzl, Genossenschaftsverband Bayern, möchte die staatlichen Hilfsmaßnahmen für angeschlagene Banken verpflichtend machen. Zusätzlich sollte man in Zukunft die Rahmenbedingungen so setzen, dass Banken nicht mehr zu »systemisch« – also zu groß, komplex, undurchschaubar oder international – sein können, um pleite zu gehen: Eine Bank müsse auch aus dem Markt ausscheiden können.

Überlegungen, wie Wirtschaftskrisen in der EU künftig wirksamer bekämpft und die wirtschaftspolitische Steuerung im Eurogebiet verbessert werden könnten, kreisen oft um die Idee einer Lastenteilung: Wenn die Ressourcen aller Mitgliedstaaten zusammengelegt würden, nähme die Belastung der krisengeschüttelten Mitglieder ab. Die Schaffung einer europäischen Bankenunion ist Ausdruck dieses Denkmusters. Die EU-Kommission argumentiert, dass damit der "Teufelskreis" der gegenseitigen Abhängigkeit von Banken und Staaten durchbrochen werde. Eine einheitlich organisierte Bankenabwicklung, so ihr Versprechen, werde auch den EU-Steuerzahler nicht belasten. Bei näherem Hinsehen wird jedoch deutlich, dass die Bankenunion diese Erwartungen bestenfalls nur teilweise wird einlösen können. In ihrer jetzigen Ausgestaltung kann sie die wechselseitige Abhängigkeit von Staaten und Banken nicht wirksam verringern. Auch die Nichtbeteiligung des Steuerzahlers an den Kosten von Bankenrettungen ist nur bei Abwicklungen von kleinen Instituten realistisch. Zugleich ist es irreführend zu glauben, dass die Vergemeinschaftung von Abwicklungsausgaben und die Harmonisierung der Einlagensicherung den EU-Bankensektor stabiler machen. Die Kosten von Bankenrettungen dürfen nicht auf die gesunden Banken bzw. finanzstabilen Mitgliedstaaten verteilt werden. Der Ort, an dem es besonders darauf ankommt, dass die Bankenunion funktioniert, ist die Wirtschafts- und Währungsunion, wo die Rückkehr zum wirtschaftlichen Gleichgewicht Priorität genießen sollte. Nur wenn die Staaten im Eurogebiet dauerhaft ausgeglichene Leistungsbilanzsalden (und öffentliche Haushalte) vorlegen können, wird die Abhängigkeit zwischen Banken und ihren Schuldnern wirksam gebannt sein und werden kostspielige Bankenrettungen überflüssig werden. (SWP-Studien)

In this paper we 'update' the option implied probability of default (option iPoD) approach recently suggested in the literature. First, a numerically more stable objective function for the estimation of the risk neutral density is derived whose integrals can be solved analytically. Second, it is reasoned that the originally proposed approach for the estimation of the PoD produces arbitrary results and hence an alternative procedure is suggested that is based on the Lagrange multipliers. Based on numerical evaluations and an illustrative empirical application we conclude that the framework provides very promising results.

As the basis for a European regime for resolving failing and failed banks, the European Commission has proposed the Bank Resolution and Recovery Directive (BRRD) and a regulation establishing a European Single Resolution Mechanism (SRM) and a Single Bank Resolution Fund (SBRF). There is a debate about which parts of the proposed SRM-SBRF to add to the BRRD. The BRRD sets out a resolution toolkit that can be used by national resolution authorities. The SRM would involve European institutions more at the expense of national resolution authorities. This change could affect resolution outcomes. Domestic resolution authorities might be more generous than supranational authorities in providing assistance to banks. A supranational approach might be more effective in minimising costs for taxpayers. But regardless of the final design, more attention is needed to ensure that resolution authorities are politically independent from governments. When public support is provided to failed institutions it should come from a bankfunded resolution fund. This would reduce taxpayers' direct costs, and would make banks less likely to take risks and advocate for bailouts.

Basel II Pillar 3 reports provide information about banks' exposure towards a number of risk factors, such as corporate credit risk and interest rate risk. Previous studies find that the quality of such information is likely to be weak. We analyze the marginal contribution of pillar 3 exposure data to the quality of equity volatility forecasts for individual banks. Our method uses (local in time) measures of risk factor risk using a multivariate stochastic volatility model for five risk factors, and uses measures of bank sensitivity with respect to these risk factors. We use two sets of sensitivity measures. One takes into account pillar 3 information, and the other one does not. Generally, we generate volatility forecasts as if no market prices of equity were available for the bank the forecast is made for. We do this for banks for which such data is, in fact, available so that we can conduct ex post - tests of the quality of volatility forecasts. We find that (1) pillar 3 information allows for a better-than-random ranking of banks according to their risk, but (2) pillar 3 exposure data does not help reduce volatility forecast error magnitude.

This paper focuses on the need for a lex specialis for resolution of insolvent banks and other financial institutions serving similar functions, and on requirements for making resolution procedures effective. After a review of the objectives of general insolvency law and the special characteristics of banks and the financial system, approaches to resolution procedures in a few “model countries” are described. The issues that require attention in legislation for resolution procedures are identified as the contagion issue, the valuation issue, the predictability issue, the information issue, the coverage issue, the funding issue and the cross-border issue. Complementary reforms of the financial architecture that would enhance the effectiveness of legislation for resolution procedures are discussed as well

We estimate time series of option implied Probabilities of Default (PoDs) for 19 major US financial institutions from 2002 to 2012. These PoDs are estimated as mass points of entropy based risk neutral densities and subsequently corrected for maturity dependence. The obtained time series are evaluated with regard to their consistency and predictive power and their properties are compared to Credit Default Swap Spreads (CDS). Moreover, we also derive an indicator for the systemic risk in the US financial sector. We find that the PoDs are superior to CDS in identifying the high risk banks prior to the Lehman crisis.

This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price of bank assets on the secondary market is endogenous in the model, thereby relating funding liquidity to expected solvency - an important stylized fact of banking crises. Based on the concept of a system value at risk, Shapley values are used to define the systemic risk charge levied upon individual banks. Using a parallelized simulated annealing algorithm the properties of an optimal charge are derived. Among other things we find that there is not necessarily a correspondence between a bank's contribution to systemic risk - which determines its risk charge - and the capital that is optimally injected into it to make the financial system more resilient to systemic risk. The analysis has policy implications for the design of optimal bank levies.

Stress in the interbank market has increased dramatically since July and bank stock market valuation has fallen by 22 percent on average for 60 of the most important banks tested in the EBA stress tests. I find evidence that bank stock valuation is significantly and economically meaningfully affected by the bank's exposure to Greek debt. Greek banks are particularly affected. Holdings of debt of the other four periphery countries does not however appear to be a strong determinant of stock price movements. Policy announcements of 21 July of no haircut on any sovereign but Greece appear to be perceived as credible. The exposure to Greece cannot explain the general and large decline in euro area banks' market cap. Instead, a general confidence crisis of the euro area banking system, or more deeply the euro area construction, might be driving the fall in stock prices. The summit of 23 October should focus on restoring confidence in euro-area policymakers' ability and determination to put the euro area on a sound footing. Recapitalisation of banks can only be only one aspect. A credible solution to Greece and a way forward for the larger institutional set-up, including a federal fiscal back-stop of the banking system, are of at least equal importance.

This paper assesses the impact of a certain structure of interbank exposures on the stability of a stylized financial system. Given a certain balance sheet structure of financial institutions, a large number of valid matrices of interbank exposures is created by a random generator. Assuming a certain loss given default, domino effects are simulated. The main results are, first, that financial stability depends not only on the completeness and interconnectedness of the network but also on the distribution of interbank exposures within the system (measured by entropy). Second, looking at random graphs, the sign of the correlation between the degree of equality of the distribution of claims and financial stability depends on the connectivity of the financial system as well as on additional parameters that affect the vulnerability of the system to interbank contagion. Third, the more concentrated assets are within a money center model, the less stable it is. Fourth, a money center model with asset concentration among core banks is less stable than a random graph with banks of homogeneous size. Results obtained in this paper extend existing theoretical literature that exclusively focuses on completeness and interconnectedness of the network as well as empirical literature that exclusively focuses on one particular financial network.

Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank's failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banks' asset portfolios.

This paper employs an Extreme Value Theory framework to investigate the existence of contagion between European and US banks. The fact that many regulators have no detailed data sets about interbank cross-exposures raises the necessity of finding market-based indicators in order to analyze the effects of crises and to quantify the risk of contagion. The Distance-to-default (DD) measure is being employed as an indicator of banks' soundness. Focusing on the negative tail of the daily percentage changes of the DD, a country-specific indicator variable labeled Coexceedances is built measuring the number of banks simultaneously experiencing a large shock on a given day. Based on a multinomial logit model, for each country the probability of observing several banks in the tail is estimated. Controlling for common factors and including foreign countries' lagged coexceedances allows to interpret significant coefficients of foreign lagged coexceedances as contagion. The main finding is that there is significant bi-lateral contagion between European and US banks. Furthermore the existence of contagion between European banks is verified by the underlying data set.

Liquidity creation is one of banks' raisons d'être. But what happens to liquidity creation and risk taking when a bank is identified as distressed by regulatory bodies and subjected to regulatory interventions and/or receives capital injections? What are the long-run effects of such interventions? To address these questions, we exploit a unique dataset of German universal banks for the period 1999 - 2008. Our main findings are as follows. First, regulatory interventions and capital injections are followed by lower levels of liquidity creation. The probability of a decline in liquidity creation increases to up to around 50 percent when such actions are taken. Second, bank risk taking decreases in the aftermath of regulatory interventions and capital injections. Third, while banks' liquidity creation market shares decline over the five years following such disciplinary measures, they also reduce their risk exposure over this period to become safer banks.

Recent funding problems experienced by European sovereigns and the subsequent policy actions taken by European authorities have renewed interest in the international Lender of Last Resort (LLR). This paper constructs a global game LLR model applicable to both domestic and international contexts, and revisits Bagehot's classical statements about the LLR. Compared with the existing literature, our model can be characterized by the following assumptions: (1) the (domestic or international) LLR authority is an explicit player whose preference is based on the soundness of its own balance sheet as well as on whether commercial banks fail, (2) the authority cannot distinguish solvency and insolvency of the LLR user ex ante, (3) LLR lending rates are endogenously determined, and (4) the authority's decision making is set after observing depositors' aggregate behaviors. With this setup, we show that: (1) depositors' aggregate behavior of withdrawing their deposits operates as a perfect signal to the LLR authority about solvency, (2) the authority's optimal policy is to help only illiquid but solvent banks, (3) whenever the LLR facility is utilized, optimal lending rates are strictly positive, and (4) this optimal lending rates are punitive in the sense that they take the highest level possible under the restriction that the rates enable solvent but illiquid banks to survive. These results generally support Bagehot's statements as well as historical and current operations of LLR taken by international institutions and central banks.

Im vorliegenden Beitrag werden wesentlichen Merkmale eines Too Big To Fail (TBTF) Regimes diskutiert. Hierunter wird ein politisches Umfeld verstanden, in dem grosse, systemrelevante Finanzinstitute durch staatliche Massnahmen vor der Insolvenz gerettet werden. Das TBTF Regime rechtfertigt sich aus den hohen und gesellschaftlich nicht akzeptierten Kosten des Marktaustritts dieser Institutionen. Gleichzeitig rührt das TBTF Regime an den Grundfesten marktwirtschaftlicher Ordnung, indem die Selektionsfunktion des Marktes ausgeschaltet wird. Dauer-haft können Marktwirtschaften auf diese Funktion jedoch nicht verzichten. Die mit dem TBTF verbundene implizite Staatsgarantie für grosse systemrelevante Finanzinstitute führt zu negativen Wohlfahrtseffekten und schafft Anreize für Finanzinstitute, über die optimale Betriebsgrösse hinaus zu wachsen. Dazu kommt das soziale Risiko, dass die finanziellen Probleme kollabierender Grossbanken die Rettungskapazitäten der öffentlichen Haushalte und der Zentralbanken über-steigen. Der Zusammenbruch einer Grossbank kann dann die monetäre und finanzpolitische Autonomie einer Volkswirtschaft gefährden. Die Erfahrungen aus der Finanzkrise 2007/08 haben deutlich gemacht, dass es an der Zeit ist, die Vogelstrausspolitik im Umgang mit TBTF aufzugeben.

This study is an empirical investigation of theoretical predictions concerning the impact of bank competition on bank risk and asset allocations. Recent work (Boyd, De Nicolò and Jalal, 2009, BDNJ henceforth) predicts that as competition in banking increases, the loan-to-asset ratio will rise (under reasonable assumptions), but the probability of bank failure can either increase or decrease. However, the probability of bank failure will fall if and only if borrowers' response to take on less risk as loan rates decline is sufficiently strong. We test these predictions using two samples with radically different attributes. With both, we find that banks' probability of failure is negatively and significantly related to measures of competition. We also find that as competition intensifies, borrower risk decreases and the loan-to-asset ratio increases. These results are consistent with the predictions of the BDNJ model.

Based on detailed regulatory intervention data among German banks during 1994-2008, we test if supervisory measures affect the likelihood and the timing of bank recovery. Severe regulatory measures increase both the likelihood of recovery and its duration while weak measures are insignificant. Results seem not to be driven by regulators directing measures to particularly bad banks. That is, our results remain intact when we exclude banks that eventually exit the market due to restructuring mergers or moratoria. More transparent publication requirements of public incorporation that indicate more exposure to market discipline are barely or not at all significant. Increasing earnings and cleaning credit portfolios are consistently of importance to increase recovery likelihood, whereas earnings growth accelerates the timing of recovery. Macroeconomic conditions also matter for bank recovery. Hence, concerted micro- and macro-prudential policies are key to facilitate distressed bank recovery.

The report provides an analysis of the financial crisis of 2007/2008 and draws some conclusions about the need for regulatory reform. The analysis ascribes the crisis not only to problems in subprime mortgage lending and securitization, but also to excessive maturity transformation and overindebtedness of financial institutions and to flaws in financial system architecture. Because of these flaws, the initial shocks of August 2007 induced a self-supporting downward spiral in financial markets and financial institutions, which only ended in October 2008 when taxpayers were forced to provide guarantees for financial institutions. The first part of the paper provides an in-depth analysis of developments in subprime mortgage lending and securitization, focusing on problems of security design and governance, and lack of external discipline from rating agencies or investors. The second part discusses maturity transformation and excessive indebtedness and their implications for the fragility of individual institutions as well as the system as a whole. Systemic fragility is seen as a result of the interplay of price declines in malfunctioning markets, fair value accounting, an insufficiency of bank equity, and regulation induced or market induced deleveraging, putting further pressure on markets and prices. The third part of the paper goes through the different causes of adverse developments, with a distinction between individual misbehavior and systemic flaws. Among systemic flaws, the paper discusses governance problems in mortgage origination and securitization as well as banking and shortcomings of regulation, in particular, capital regulation under the model-based approach. Reform proposals concern capital regulation, liability and remuneration of bank management, procedures for dealing with banks in difficulties, and insolvency law. The latter two subjects are introduced in order to reduce the scope for submitting government to blackmail by banks in difficulties.

This paper tests financial contagion due to interbank linkages. For identification we exploit an idiosyncratic, sudden shock caused by a large-bank failure in conjunction with detailed data on interbank exposures. First, we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals. Second, the magnitude of contagion is higher for banks with weaker fundamentals. Third, interbank linkages among surviving banks further propagate the shock. Finally, we find results suggesting that there are real economic effects. These results suggest that interbank linkages act as an important channel of contagion and hold important policy implications.

We use a compound option-based structural credit risk model to infer a term structure of banking crisis risk from market data on bank stocks in daily frequency. Considering debt service payments with different maturities this term structure assigns a separate estimator for short- and long-term default risk to each maturity. Applying the Duan (1994) maximum likelihood approach, we find for Kazakhstan that the overall crisis probability was mainly driven by short-term risk, which increased from 25% in March 2007 to 80% in December 2008. Concurrently, the long-term default risk increased from 20% to only 25% during the same period.

With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a work publicly sponsored work out units, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value - assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets' current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank's losses, while profits would be distributed to the distressed bank's current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.

In August 2007 the United Kingdom experienced its first bank run in over 140 years. Although Northern Rock was not a particularly large bank (it was at the time ranked 7th in terms of assets) it was nevertheless a significant retail bank and a substantial mortgage lender. In fact, ten years earlier it had converted from a mutual building society whose activities were limited by regulation largely to retail deposits and mortgages. Graphic television news pictures showed very long queues outside the bank as depositors rushed to withdraw their deposits. There was always a fear that this could spark a systemic run on bank deposits. After failed attempts to secure a buyer in the private sector, the government nationalised the bank and, for the first time, in effect socialised the credit risk of the bank. It is now a fully state-owned bank...

This paper examines the potential distortion of prices in the CDS market caused by too-big-to-fail. Overall, we find evidence for market discipline in the CDS market. However, CDS prices are distorted due to a size effect which arises when investors expect a public bail-out as a result of too-big-to-fail. A one percentage point increase in size reduces the CDS spread of a bank by about two basis points. We further find that some banks have already reached a size that makes them too-big-to-be-rescued. While the price distortion for these banks decreases the existence of banks that are considered to be toobig-to-rescue raises important new issues for banking supervisors.

Angesichts der ausbleibenden Stabilisierung des Bankensektors in Deutschland konzentriert sich die öffentliche Diskussion immer mehr auf die Möglichkeiten zur Auslagerung der Problemaktiva in Bad Banks. Dazu wird hier ein Modell vorgestellt. Kernpunkte sind eine Wertberichtigung der Problemaktiva auf den gegenwärtigen Marktwert. Dieser liegt für unverkäufliche Aktiva bei null. Die Wertberichtigung reduziert das Eigenkapital. Der Staat übernimmt die weitere Verwertung der Problemaktiva auf eigene Kosten und rekapitalisiert die Banken mittels Anteilserwerb. Im Extremfall bedeutet dies die Übernahme der Good Bank. Die Beteiligungsrisiken sind jedoch nach der Auslagerung der Problemaktiva für den Steuerzahler tragbar. Es bedarf einer klaren Reprivatisierungsperspektive. Defizite der Bad Bank gehen zu Lasten des Staates, Überschüsse werden an die Altaktionäre ausgeschüttet. Unter den Bedingungen des DIW-Modells sind Bad Banks und (Teil-)Verstaatlichung keine Alternativen, sondern zwei Seiten ein und derselben Medaille. Der Ansatz wird drei zentralen Herausforderungen gerecht. Er erlaubt eine transparente Befreiung von den Problemaktiva und eröffnet den Banken einen aussichtsreichen Neustart. Gleichzeitig bietet er die Chance, die Kosten für den Steuerzahler gering zu halten. Schließlich schränkt er die Anreize für zukünftiges, opportunistisches Verhalten seitens der Banken ein.

We examine evidence for a systematic underperformance of Germany's state-owned banks in the current financial crisis and study if the bank losses can be traced to the quality of bank governance. For this purpose, we examine the biographical background of 593 supervisory board members in the 29 largest banks and find a pronounced difference in the finance and management experience of board representatives across private and state-owned banks. Measures of boardroom competence” are then related directly to the magnitude of bank losses in the recent financial crisis. Our data confirms that supervisory board (in-)competence in finance is related to losses in the financial crisis. Improved bank governance is therefore a suitable policy objective to reduce bank fragility.

Russian banks have been strongly influenced by the worldwide financial crisis which started in the second half of 2008. This was caused by a combination of domestic, regional and international factors. We estimate an early warning model for the Russian crisis. We identified 47 Russian banks which failed after September 2008. Using the Bankscope data set, we show that balance sheet indicators were informative about possible failures of these banks as early as 2006. The early predictive indicators include especially equity, net interest revenues, return on average equity, net loans, and loan loss reserves.

This paper is reviewing the foundation of the 'Bankgesellschaft Berlin' in 1994 that consisted in a merger of three publicly owned banking institutes in Berlin. The financial crisis of the banking group in 2001 resulted in one of the biggest public scandals in Germanbanking history. The paper is analyzing the case of the 'Bankgesellschaft' in relation to possible interdependencies between its foundation and the financial crisis in 2001. In spite of evidence for inefficiencies in the structure of the 'Bankgesellschaft' it cannot be stated that the merger in 1994 directly resulted in the financial crisis of the banking group.

During the last decades a consensus has emerged that it is impossible to disentangle liquidity shocks from solvency shocks. As a consequence the classical lender of last resort rules, as defined by Thornton and Bagehot, based on lending to solvent illiquid institutions appear ill-suited to this environment. We summarize here the main contributions that have developed considering this new paradigm and discuss how institutional features relating to bank closure policy influences lender of last resort and other safety net issues. We devote particular emphasis to the analysis of systemic risk and contagion in banking and the role of the lender of last resort to prevent it.

Using count data on the number of bank failures in US states during the 1960 to 2006 period, this paper endeavors to establish how far sources of economic risk (recessions, high interest rates, inflation) or differences in solvency and branching regulation can explain some of the fragility in banking. Assuming that variables are predetermined, lagged values provide instruments to absorb potential endogeneity between the number of bank failures and economic and regulatory conditions. Results suggest that bank failures are not merely self-fulfilling prophecies but relate systematically to inflation as well as to policy changes in banking regulation. Furthermore, in terms of statistical and economic significance, the distribution and development of bankruptcies across US states depends crucially on past bank failures suggesting that contagion provides an important channel through which banking crises emerge.

Outright bank failures without prior indication of financial instability are very rare. Supervisory authorities monitor banks constantly. Thus, they usually obtain early warning signals that precede ultimate failure and, in fact, banks can be regarded as troubled to varying degrees before outright closure. But to our knowledge virtually all studies that predict bank failures neglect the ordinal nature of bank distress. Exploiting the distress database of the Deutsche Bundesbank we distinguish four different distress events that banks experience. Only the worst entails a bank to exit the market. Weaker orders of distress are, first, compulsory notifications of the authorities about potential problems, second, corrective actions such as warnings and hearings and, third, actions by banking pillar's insurance schemes. Since the four categories of hazard functions are not proportional, we specify a generalized ordered logit model to estimate the respective probabilities of distress simultaneously. Our model estimates each set of probabilities with high accuracy and confirms, first, the necessity to account for different kinds of distress events and, second, the violation of the proportional odds assumption implicit in most limited dependent analyses of bank failure.

We study the role of commitment in a version of the Diamond and Dybvig (JPE, 1983) model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however, that in an environment without commitment, the banking authority will choose to only partially suspend payments during a run. In some cases, the reduction in early payouts under this partial suspension is insufficient to dissuade depositors from participating in the run. Bank runs can then occur with positive probability in equilibrium. The fraction of depositors participating in such a run is stochastic and can be arbitrarily close to one.

The paper examines the effects of ambiguity in regulation on the equilibrium allocation. Under ambiguous bailout policy, agents’ suffer from a lack of information with regards to the insolvency resolution method, which would be chosen by the regulator if a financial institution fails. In this case, beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors. The beliefs may be asymmetric even if bankers and depositors possess absolutely symmetric information about the policy of the regulator. It is shown that such asymmetry in beliefs can generate an allocative inefficiency of the bank based economy.

This paper discusses the institutional changes needed in Europe if prompt corrective action (PCA) is to be effective in supervising and resolving cross-border banking groups. The paper identifies these changes starting with enhancements in the availability of information on banking groups’ financial condition to prudential supervisors. Next, the paper considers the collective decision making by prudential supervisors with authority to make discretionary decisions within the PCA framework as soon as a bank in a cross-border banking group falls below the minimum capital standard. Finally, the paper analyzes the coordination measures that should be implemented if PCA requires the bank to be resolved.

Banking regulators often practice forbearance and ambiguity in insolvency resolutions. The paper examines the effects of regulatory forbearance and ambiguity in a context of allocational efficiency. Bailouts, liquidations and their stochastic policy mix lead to suboptimal allocations if banks do not internalize insolvency costs. The policy of forbearance may make banks internalizing such costs and improves the efficiency of intermediation.

Banking reform has proved to be one of the most problematic elements of economic transition in central and Eastern Europe. Therefore the paper considers the development of the Estonian banking sector and derives individual banks´ fragility scores during transition. To this end we use option-based tools and equity prices to estimate distance-to-default measures of banks´ distress probabilities. Overall, the results suggest that market indicators are moderately useful for anticipating future financial distress and rating changes in transition economies. The implication for an effective supervisory framework is to use a plurality of risk scores when assessing bank vulnerability.

We show how the interbank payment system can become illiquid following wide-scale disruptions. Two forces are at play in such disruptions—operational problems and changes in participants’ behavior. We model the interbank payment system as an n-player game and utilize the concept of a potential function to describe the process by which one of multiple equilibria emerges after a wide-scale disruption. If the disruption is large enough, hits a key geographic area, or hits a “too-big-to-fail” participant, then the coordination of payment processing can break down, and central bank intervention might be required to reestablish the socially efficient equilibrium. We also explore how the network topology of the underlying payment flow among banks affects the resiliency of coordination. The paper provides a theoretical framework to analyze the effects of events such as the September 11 attacks.

The paper analyses the consequences of an isolated, sudden and unexpected failure of a bank in alternative interbank payment system designs. We assess the exposures and the contagion by a counterfactual analysis assuming that payments currently settled by the pan-European large-value payment system, TARGET, are settled in alternative payment systems: an unsecured end-of-day net settlement system and a secured net settlement system with limits on intraday credit, with collateral and loss-sharing. The results indicate that systemic consequences of one bank's failure on the solvency of other banks can be rather low. If risk management techniques such as legal certainty for multilateral netting, limits on exposures, collateralisation and loss sharing are introduced, the systemic consequences can be mitigated to a high degree. How, and under which circumstances the analyzed failures would render other banks illiquid to meet their payment obligations is outside the scope of the paper.

This paper empirically investigates the causes of bank failures in Japan and Indonesia. Using logistic regression analysis of financial ratios, we explore the usefulness of domestic bank failure prediction models with a cross-country model that allows for cross-correlation of the error terms. Our results suggest that loans, both as a ratio to total assets, deposits and in some cases the ratio of non-performing loans, are the most significant predictors of bank failure in both Japan and Indonesia. Regulatory capital ratios, on the contrary, do not seem to be significant indicators of failure. In addition to the domestic models, we explore the usefulness of a cross-country model of bank failure prediction and find that this model outperforms the domestic models on several diagnostic tests.

The inability of most bank merger studies to control for hidden bailouts may lead to biased results. In this study, we employ a unique data set of approximately 1,000 mergers to analyze the determinants of bank mergers. We use data on the regulatory intervention history to distinguish between distressed and non-distressed mergers. We find that, among merging banks, distressed banks had the worst profiles and acquirers perform somewhat better than targets. However, both distressed and non-distressed mergers have worse CAMEL profiles than our control group. In fact, non-distressed mergers may be motivated by the desire to forestall serious future financial distress and prevent regulatory intervention.

The naming of eleven banks as “too big to fail (TBTF)” in 1984 led bond raters to raise their ratings on new bond issues of TBTF banks about a notch relative to those of other, unnamed banks. The relationship between bond spreads and ratings for the TBTF banks tended to flatten after that event, suggesting that investors were even more optimistic than raters about the probability of support for those banks. The spread-rating relationship in the 1990s remained flatter for TBTF banks (or their descendants) even after the passage of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), suggesting that investors still see those banks as TBTF. Until investors are disabused of such beliefs, investor discipline of big banks will be less than complete.

A healthy banking system is a fundamental condition for financial stability. When assessing the riskiness of the banking system, analysts often restrict their focus to large banks. This may create a distorted picture in countries like Germany with fragmented banking systems. In Germany, savings banks and cooperative banks taken together are important players in the market. However, little is known about their default risk. The reason is that these banks usually resolve financial distress within their own organisations, which means defaults are not observable from the outside. In this paper we use a new dataset which contains information about financial distress and financial strength of all German savings banks and cooperative banks. The data have been gathered by the Deutsche Bundesbank for microprudential supervision and have never before been exploited for macroprudential purposes. We use the data to identify the main risk drivers. To this end we estimate a default prediction model (hazard model). A second goal of the paper is to analyse the impact of macroeconomic information for forecasting banks' defaults. Recent findings for the USA have cast some doubt on the usefulness of macroeconomic information for banks' risk assessment. Contrary to recent literature, we find that macroeconomic information significantly improves default forecasts.

This paper examines the policy issues with respect to resolving the possible failure of housing enterprises Fannie Mae or Freddie Mac. The authors compare and contrast these issues with those raised in the context of large bank failures and also identify important differences in the extant supervisory authorities. Based on these discussions, they offer a number of policy suggestions designed to minimize the cost of resolution and protect taxpayers from loss should a large bank or housing enterprise fail.

The FDIC used cross-guarantees to close thirty-eight subsidiaries of First RepublicBank Corporation in 1988 and eighteen subsidiaries of First City Bancorporation in 1992 when lead banks from each of these Texas-based bank holding companies were declared insolvent. I use this exogenous failure of otherwise healthy subsidiary banks as a natural experiment for studying the impact of bank failure on local-area real economic activity. I find that the closings of the subsidiaries were associated with a significant decline in bank lending that led to a permanent reduction in real county income of about 3 percent.

Con el objetivo de generar un modelo predictor de situaciones de crisis en base a los ratios de capital, se aplicaron las técnicas de Discriminante y Regresión Logística a los ratios de capital de los bancos del sistema bancario boliviano, llegando a la conclusión que los ratios mencionados no permiten generar un modelo predictor que permita antelar situaciones de crisis para el caso boliviano.

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 book value, market value, and a risk measure, this paper develops a semi-parametric model for estimating the critical level of bank risk at which put option value starts to dominate charter value. From these estimates, we infer the extent to which the risk-taking incentive prevailed during 1986-92, a period characterized by serious banking problems and financial turmoil. We find that despite the difficult financial environment, shareholders' risk-taking incentive was confined primarily to a small fraction of highly risky banks.