The Seeds of a Crisis: A Theory of Bank Liquidity and Risk-Taking Over the Business Cycle

Acharya, Viral V.; Naqvi, Hassan

doi:10.2139/ssrn.1360974

Cited by 122 publications

(169 citation statements)

References 42 publications

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“…Within the second strand of the literature, Distinguin et al (2013) and Pierret (2014) Acharya and Naqvi (2012) and Acharya and Skeie (2011), limits the access of the firm to short-term funding but a firm with more liquidity risk exposure has a higher risk of insolvency in a crisis. On the one hand, a unit increase in the expected capital shortfall ratio reduces its short-term debt ratio by 1.1 percentage points, suggesting that riskier banks find their access to wholesale markets limited.…”

Section: The Effect Of Funding Cost On Solvency and The Two-way Intmentioning

confidence: 99%

The interaction between bank solvency and funding costs: A crucial effect in stress tests

2019

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This paper presents new evidence on the empirical relationship between bank solvency and funding costs. Building on a newly constructed data set drawing on the supervisory data of 54 large banks from six advanced countries over 2004–2013, we use a simultaneous equation approach with panel data to estimate the contemporaneous interaction between solvency and funding costs. Our results and test statistics show that these two are (a) determined simultaneously and (b) more pronounced than suggested by the existing empirical literature. A 100‐bps increase in regulatory capital ratios is associated with a decrease of bank funding costs of about 113 bps. A 100‐bps increase in funding costs reduces regulatory capital buffers by 48 bps. Applying our estimation results to the 2014 EU‐wide stress test reveals that neglecting the solvency‐funding cost nexus leads to the systematical and significant underestimation of the impact of shocks on bank capital ratios.

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Section: The Effect Of Funding Cost On Solvency and The Two-way Intmentioning

confidence: 99%

The interaction between bank solvency and funding costs: A crucial effect in stress tests

2019

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“…Given that liquid assets usually offer null or very small remunerations, in a low interest rate environment banks with more liquid assets may divert some of these resources to grant riskier loans, in a search for yield strategy. Furthermore, banks with more liquidity may show a riskier behavior because managers' incentives to monitor risks decrease (Altunbas, Gambacorta, andMarquez-Ibanez 2010, Acharya andNaqvi 2012).…”

Section: Are Riskier Firms More Likely Than Other Firms To Obtain a Lmentioning

confidence: 99%

The Risk‐Taking Channel of Monetary Policy: Exploring All Avenues

Bonfim¹,

Soares²

2018

J of Money Credit Banking

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The literature on the risk‐taking channel of monetary policy grew quickly, leading to scattered evidence. We examine this channel through different angles, exploring detailed information on loan origination and performance. Ex ante riskier borrowers receive more funding at the extensive margin when interest rates are lower. Ex post performance is independent of the level of interest rates at origination. Still, loans granted in periods of very low and stable interest rates show higher default rates once interest rates start to increase. Risk‐taking is stronger among banks with lower capital ratios, suggesting that this channel may be linked to managerial incentives for risk‐shifting.

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“…Such high leverage can amplify agency problems in banks and prevent the NPV rule (Q -theory) from working well. Acharya and Naqvi (2012) and Chen and Manso (2016) show how excessive leverage and liquidity amplifies agency problems and can sometimes distort the investment decisions of banks, and lead to a positive correlation between credit growth and future macroeconomic risk. In Acharya and Naqvi (2012), macroeconomic risk varies over time.…”

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confidence: 99%

The relation between bank credit growth and the expected returns of bank stocks

Gandhi

2018

Euro Fin Management

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Higher bank credit growth implies that excess returns of bank stocks over the next one year are lower by nearly 3%. Credit growth tracks bank stock returns over the business cycle and explains nearly 14% of the variation in bank stock returns over a 1‐year horizon. I argue that the predictive variation in returns reflects investors' rational response to a small time‐varying probability of a tail event that impacts banks and bank‐dependent firms. Consistent with this hypothesis, the predictive power, as measured by the absolute magnitude of the coefficient on credit growth and the adjusted‐R2 at the 1‐year horizon, depend systematically on variables that regulate exposure to tail risk.

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The Seeds of a Crisis: A Theory of Bank Liquidity and Risk-Taking Over the Business Cycle

Cited by 122 publications

References 42 publications

The interaction between bank solvency and funding costs: A crucial effect in stress tests

The interaction between bank solvency and funding costs: A crucial effect in stress tests

The Risk‐Taking Channel of Monetary Policy: Exploring All Avenues

The relation between bank credit growth and the expected returns of bank stocks

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