IDEAS home Printed from https://ideas.repec.org/p/red/sed011/559.html
   My bibliography  Save this paper

Enhancing Bank Transparency: Risk Ineffciency as a Market Disciplining Mechanism

Author

Listed:
  • Vander Vennet Rudi

    (Ghent University)

  • De Jonghe Olivier

    (European Banking Center, Tilburg University)

  • De Bruyckere Valerie

    (Ghent University)

  • Baele Lieven

    (CentER, Netspar, Tilburg University)

Abstract

This paper develops a stochastic frontier methodology to jointly test for market monitoring and influencing in a sample of US Bank Holding Companies over the period 1991-2008. First, we confirm the existence of market monitoring by linking stock market based risk measures to business model indicators and fundamental bank characteristics (in particular, constituents of the CAMEL rating). Second, we interpret the distance from the stochastic frontier as a measure of risk inefficiency relative to the best performing peers and show that the variance of this component is predominantly related to management discretion and opaqueness and less to business complexity. Finally, we find stronger evidence for the influencing channel of market discipline compared to most of the existing literature. Poorly performing banks will act faster to contain their risk and improve their performance in response to a deteriorating risk inefficiency score.

Suggested Citation

  • Vander Vennet Rudi & De Jonghe Olivier & De Bruyckere Valerie & Baele Lieven, 2011. "Enhancing Bank Transparency: Risk Ineffciency as a Market Disciplining Mechanism," 2011 Meeting Papers 559, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:559
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2011/paper_559.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Wagner, Wolf, 2010. "Diversification at financial institutions and systemic crises," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 373-386, July.
    2. Laeven, Luc & Levine, Ross, 2007. "Is there a diversification discount in financial conglomerates?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 331-367, August.
    3. Klaus Schaeck & Martin Cihak & Andrea Maechler & Stephanie Stolz, 2011. "Who Disciplines Bank Managers?," Review of Finance, European Finance Association, vol. 16(1), pages 197-243.
    4. Laeven, Luc & Majnoni, Giovanni, 2003. "Loan loss provisioning and economic slowdowns: too much, too late?," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 178-197, April.
    5. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    6. Donald Morgan & Kevin Stiroh, 2001. "Market Discipline of Banks: The Asset Test," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 195-208, October.
    7. Mester, Loretta J., 1997. "Measuring efficiency at U.S. banks: Accounting for heterogeneity is important," European Journal of Operational Research, Elsevier, vol. 98(2), pages 230-242, April.
    8. Flannery, Mark J & Sorescu, Sorin M, 1996. " Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991," Journal of Finance, American Finance Association, vol. 51(4), pages 1347-1377, September.
    9. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, M., 2004. "Market evidence on the opaqueness of banking firms' assets," Journal of Financial Economics, Elsevier, vol. 71(3), pages 419-460, March.
    10. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-882, October.
    11. Suresh Sundaresan, 2001. "Supervisor and Market Analysts: What Should Research be Seeking?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 275-280, October.
    12. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    13. Hirtle, Beverly, 2016. "Public disclosure and risk-adjusted performance at bank holding companies," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 151-173.
    14. Demirgüç-Kunt, Asli & Huizinga, Harry, 2010. "Bank activity and funding strategies: The impact on risk and returns," Journal of Financial Economics, Elsevier, vol. 98(3), pages 626-650, December.
    15. Hirtle, Beverly J. & Stiroh, Kevin J., 2007. "The return to retail and the performance of US banks," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1101-1133, April.
    16. Mark Flannery, 2001. "The Faces of “Market Discipline”," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 107-119, October.
    17. Ashcraft, Adam B., 2008. "Does the market discipline banks? New evidence from regulatory capital mix," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 543-561, October.
    18. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series,in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174 Central Bank of Chile.
    19. Evan Gatev & Til Schuermann & Philip E. Strahan, 2009. "Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 995-1020, March.
    20. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
    21. Andrew Davenport & Kathleen McDill, 2006. "The Depositor Behind the Discipline: A Micro-Level Case Study of Hamilton Bank," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(1), pages 93-109, August.
    22. Gendreau, Brian C & Humphrey, David Burras, 1980. "Feedback Effects in the Market Regulation of Bank Leverage: A Time-Series and Cross-Section Analysis," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 276-280, May.
    23. Til Schuermann & Kevin J. Stiroh, 2006. "Visible and hidden risk factors for banks," Staff Reports 252, Federal Reserve Bank of New York.
    24. Harvey, A C, 1976. "Estimating Regression Models with Multiplicative Heteroscedasticity," Econometrica, Econometric Society, vol. 44(3), pages 461-465, May.
    25. Cornett, Marcia Millon & McNutt, Jamie John & Tehranian, Hassan, 2009. "Corporate governance and earnings management at large U.S. bank holding companies," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 412-430, September.
    26. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
    27. Victoria Geyfman & Timothy J. Yeager, 2009. "On the Riskiness of Universal Banking: Evidence from Banks in the Investment Banking Business Pre- and Post-GLBA," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1649-1669, December.
    28. Lang, Mark & Lins, Karl V. & Maffett, Mark, 2009. "Transparency, Liquidity, and Valuation: International Evidence," Working Papers 09-3, University of Pennsylvania, Wharton School, Weiss Center.
    29. Robert R. Bliss & Mark J. Flannery, 2002. "Market Discipline in the Governance of U.S. Bank Holding Companies: Monitoring vs. Influencing," Review of Finance, European Finance Association, vol. 6(3), pages 361-396.
    30. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, August.
    31. Viale, Ariel M. & Kolari, James W. & Fraser, Donald R., 2009. "Common risk factors in bank stocks," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 464-472, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed011:559. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.