Banking crises and government intervention

Intervention has taken different forms in different countries and periods of time. Moreover, recent episodes showed that in front of an imminent crisis, the promise of no interventions made by governments is barely credible. In this paper we address the problem of resolving banking crises from the government perspective, taking into account the fact that preventing banking crises is crucial for the government. In addition, we introduce the moral hazard problem, inherent in the banking system, and consider the interaction between regulation, policy measures and banks’ behavior. To the best of our knowledge, this is the first paper that compares different policy plans to resolve banking crises in an environment where insufficiently capitalized banks have incentives to take risk, and the government has to decide whether to provide public services or impede crises. We show that when individuals highly value public services then the best policy in terms of welfare is to apply the tax on early withdrawals, as the government can transfer those taxes to the whole population by investing in public services (although at some cost). Conversely, when individuals assign a low value to consuming public services, recapitalization is the dominant policy. Finally, when the probability of a crisis is sufficiently high, capital requirements should be used

Improving the Success of Wetland Mitigation Banking: Lessons Learned in Monitoring and Compliance

Wetlands that are lost to development are not effectively compensated by the current wetland mitigation banking regulatory program due to inadequate monitoring and compliance. Based on a critical investigation of two wetland mitigation banks in Colorado described herein, recommendations are given to improve the effectiveness of the wetland mitigation banking program. The recommendations to improve mitigation banking are to specify and follow comprehensive monitoring and reporting plans, develop solid contingency and adaptive management plans, utilize specially developed checklists and templates, and impose enforcement when compliance is not met. Implementing these recommendations will assist regulators and bankers in achieving more effective wetland mitigation and will help the United States reach its no net loss of wetlands goal.

Third-party complaints and firm performance: an application in Spanish banking

This article focuses on the impact of third-party complaints on firm performance. We propose two research hypotheses, which are developed from the literature of dissatisfaction, emotions, and economics. The methodology is based on an event study to estimate variation in firm share returns in the stock market due to the publication of the Annual Complaints Service Report by the Bank of Spain; as well as a regression analysis to examine the impact of the number of complaints per branch on the variation obtained. The empirical focus is on a sample of eleven banks to which complaints were made and which were quoted on the Spanish Stock Exchange between 1992 and 2001. The results show a negative impact of the publication of these annual complaint reports on the share returns of the banks concerned. Additionally, these returns have a negative relationship with the number of complaints per branch.

Docket and fees book / 1791-1797

Records of cases heard in the Massachusetts Court of Common Pleas (Middlesex Co.) in Cambridge, Mass., and the New Hampshire Inferior Court of Common Pleas (Hillsborough Co.) in Amherst, N.H and matters brought before justices of the peace. Records identify the litigants, with some notes on fees and settlements; many of the cases concern debts. Justices of the peace include: Israel Atherton (Lancaster, Mass.); Samuel Dana (Amherst, N.H.); Joshua Longley (Shirley, Mass.); Nathaniel Paine (Worcester, Mass.); James Prescott (Westford, Mass.); Jeremiah Stiles (Keene, N.H.); William Swan (Groton, Mass.); Sampson Tuttle (Littleton, Mass.); and Henry Woods (Pepperell, Mass.).

From supervision to resolution: next steps on the road to European Banking Union. Bruegel Policy Contribution 2013/04, February 2012

The European Council has outlined the creation of a Single Resolution Mechanism (SRM), complementing the Single Supervisory Mechanism. The thinking on the SRM’s legal basis, design and mission is still preliminary and depends on other major initiatives, including the European Stability Mechanism’s involvement in bank recapitalisations and the Bank Recovery and Resolution (BRR) Directive. The SRM should also not be seen as the final step creating Europe’s future banking union. Both the BRR Directive and the SRM should be designed to enable the substantial financial participation of existing creditors in future bank restructurings. To be effective, the SRM should empower a central body. However, in the absence of Treaty change and of further fiscal integration, SRM decisions will need to be implemented through national resolution regimes. The central body of the SRM should be either the European Commission, or a new authority. This legislative effort should not be taken as an excuse to delay decisive action on the management and resolution of the current European banking fragility, which imposes a major drag on Europe’s growth and employment.

The changing landscape of financial markets in Europe, the United States and Japan. Bruegel Working Paper 2013/02, 18 March 2013

We compare the structure of the financial sectors of the EU27, Japan and the United States, looking at a set of 23 indicators. We find a large variation within the European Union in the structure of the financial sector. Using principal components analysis, we identify robust groups of EU countries. One group consists of the eastern European members that entered the EU more recently.These have substantially smaller financial sectors than the old member states. A second group can be classified as market-based (MBEU) and the third group is more bank-based (BBEU). We compare US, MBEU, BBEU, Eastern EU and Japan with the following main results. First, the groups within Europe are geographically related. Second, in many indicators, MBEU countries are closer to the (market-based) US, while BBEU countries more closely resemble Japan. Paradoxically, however, market-based EU countries also have large banking sectors. Banks in market-based countries have larger cross-border assets and liabilities, and derive a larger fraction of their income from fees, rather than interest income, than banks in bank-based countries. Finally, for most indicators, the ordering of groups of countries is quite stable over time, but while the crisis has had no impact on the relative ordering of the groups, it has slightly widened the gap between the US and all EU regions insome respects. We also find that during the crisis, substitution between market-based and bank-based sources of finance occurred in the US, and to a lesser extent in MBEU and BBEU countries.

Cyprus ... A Test Case for Future European Banking Policy. CEPS Commentary, 21 March 2013

In this CEPS Commentary, the former Irish Prime Minister calls the precedents being set in the Cypriot banking case “troubling” and reflective of a lack of clarity and consistency of thought by both the eurozone Finance Ministers and the European Commission. He welcomes the rejection of the deal by the Cypriot Parliament as it now gives eurozone policy-makers a chance to think again about the underlying philosophy of their approach to the financial crisis.

The meaning of Cyprus; moving toward banking union. CEPS Commentary, 8 April 2013

While acknowledging that Cyprus is too small to matter for global financial markets, this Commentary finds that its case could turn out to become a very important precedent for the way European policy-makers deal with future banking problems and the plans for a ‘banking union’.