The Impact Of The Financial Crisis On Bank Capital Strucutre

Master's Thesis from the year 2016 in the subject Business economics - Investment and Finance, grade: 1.3, University of Frankfurt (Main) (Chair of Banking and Finance, Faculty of Economics and Business Administration), language: English, abstract: As the last global financial crisis has shown, macroeconomic shocks have huge impacts on numerous economic sectors. The distortions caused by the crisis led to world-wide declines in trade, output and employment. This paper takes special emphasis on bank leverage ratios. Our longitudinal sample ranges from 2004 to 2015, including 5,069 observations of 483 banks in the United States and Europe. Our investigations are based on a modified Gropp and Heider (2010) style linear two-way error component model that uses leverage determinants of non-financial firms to describe bank capital structure. It is investigated how bank capital structure and its determinants respond to the financial crisis. The results show that the financial crisis had strong impacts.

What causes a financial crisis? Can financial crises be anticipated or even avoided? What can be done to lessen their impact? Should governments and international institutions intervene? Or should financial crises be left to run their course? In the aftermath of the Asian financial crisis, many blamed international institutions, corruption, governments, and flawed macro and microeconomic policies not only for causing the crisis but also unnecessarily lengthening and deepening it. Based on ten years of research, the authors develop a theoretical approach to analyzing financial crises. Beginning with a review of the history of financial crises and providing readers with the basic economic tools needed to understand the literature, the authors construct a series of increasingly sophisticated models. Throughout, the authors guide the reader through the existing theoretical and empirical literature while also building on their own theoretical approach. The text presents the modern theory of intermediation, introduces asset markets and the causes of asset price volatility, and discusses the interaction of banks and markets. The book also deals with more specialized topics, including optimal financial regulation, bubbles, and financial contagion.

This paper constructs a theoretical framework that rationalizes banks’ short- and long-run adjustment dynamics—in portfolio composition and in the capital structure—following a period of financial distress. The model captures stylized facts about banks’ behavior following a shock to the capital base—namely, the rush to liquidity and credit crunch. Bank panel data show that Argentine domestic retail banks underwent a period of adjustment of six quarters following the Mexican devaluation crisis, reducing their risk-exposure since, owing to bank capital scarcity, depositors became less prone to tolerate bank default risk. Foreign-owned banks suffered a milder shock and adjusted immediately.

We collect new data to assess the importance of supply-side credit market frictions by studying the impact of financial sector recapitalization packages on the growth performance of firms in a large cross-section of 50 countries during the recent crisis. We develop an identification strategy that uses the financial crisis as a shock to credit supply and exploits exogenous variation in the degree to which firms depend on external financing for investment needs, and focus on policy interventions aimed at alleviating the bank capital crunch. We find that the growth of firms dependent on external financing is disproportionately positively affected by bank recapitalization policies, and that this effect is quantitatively important and robust to controlling for other financial sector support policies. We also find that fiscal policy disproportionately boosted growth of firms more dependent on external financing. These results provide new evidence of a quantitatively important role of credit market frictions in influencing real economic activity.

We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the balance of three forces: interest rate pass-through, risk shifting, and leverage. When banks can adjust their capital structures, a monetary easing leads to greater leverage and lower monitoring. However, if a bank's capital structure is fixed, the balance depends on the degree of bank capitalization: when facing a policy rate cut, well capitalized banks decrease monitoring, while highly levered banks increase it. Further, the balance of these effects depends on the structure and contestability of the banking industry, and is therefore likely to vary across countries and over time.

Using a multi-country panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk-adjusted ratio; the leverage ratio; the Tier I and Tier II ratios; and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio; (iv) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.

This text comprises a selection of papers that provide state of the art insights into bank performance, risk and firm financing post crisis that were presented at the European Association of University Teachers of Banking and Finance Conference (otherwise known as the Wolpertinger Conference) held at Bangor University, Wales, 2010.

Based on the recent subprime crisis, the authors analyze the mechanisms of a financial market crisis. In order to highlight the basic transmission mechanisms and drivers of a financial market crisis they discuss the relevant players & strategies, explain the principles of the financial instruments that were involved in the crisis and analyze how bubbles emerge, how they burst and what the economic impact might be. The authors address the following key questions: * Why do financial markets run into crises over and over again? * Where do risks for financial crises come from? * Who are the players in the game? * Which instruments and strategies can drive a crisis? * What are the transmission mechanisms onto other markets and the real economy? * When is it all finally over? * How to best weather the storm? Hence, in the prologue the authors highlight the basic framework for a financial crisis based on the subprime crisis. Here, they will also introduce the important topics and drivers of the crisis, i.e. the relevant players (banks, investment banks, hedge funds, real money investors, regulators and rating agencies), the involved instruments (ABS/RMBS, CDOs, SIV, leveraged loans, Leveraged Super Senior tranches, etc.), the strategies which caused the crisis or were affected by the meltdown (leveraged exposure to highly correlated risks), and risks that were underestimated (investors ignored the market risk that was involved with the leveraged bets). In the subsequent chapter -- which is split into three parts -- they will explain these important topics in more detail and highlight the infection and transmission mechanisms. As an example, they introduce the business and investment concepts of investment banks and hedge funds and how they were involved in the crisis. Moreover, they explain how structured credit products (such as ABS, CDOs and SIVs) work and how they were used in order to implement leveraged bets in the markets. Finally, they highlight how a financial crisis evolves and why certain financial institutions failed. In the epilogue, they conclude how markets manage a crisis and why the crisis may also be healthy for the stability of financial markets.