Ž . This paper develops a model of a laissez-faire decentralized banking system in which banks are shown to both underinvest in, and undertransmit expertise in long-term industrial Ž . finance. Government support for one financial institution ‘the development bank’ can serve to reduce these problems, but unqualified government support alone is not enough. The efficiency of government sponsorshi...

By using the sources of investment and based on provincial data, this paper examines the efficiency performance of the four sources of total investment in fixed assets in China for the period 1985–1998: state budget appropriation, national bank loans, self-raised funds, and foreign investment. The result of the panel data study shows that the growth of provincial output is positively related to...

This paper investigates the effects of focus versus diversification on bank performance using data on Chinese banks during the 1996-2006 period. We construct a new measure, economies of diversification, and compare the results to those of the more conventional focus index, which is based on the sum of squares of shares in different products or regions. Diversification is captured in four dimens...

This paper investigates the effects of bank internationalization on risk-taking. We find that internationalization increases bank risk-taking: the Z-score of US banks that engage in foreign activities is lower than that of their purely domestic peers. The results are consistent with the empirical dominance of the market risk hypothesis, whereby internationalization increases banks’ risk due to ...

We analyze the risk implications of European bank consolidation on the probability of default of acquiring banks. Using the Merton distance to default model, we show that the average bank merger is risk neutral. We examine the extent to which merger motives linked to risk diversification and regulatory incentives explain the observed risk effects of M&A. However, we find only limited evidence c...

This study examines bank risk by investigating the equity and loan portfolio characteristics of publicly-traded bank holding companies. Unlike the pattern for non-financial firms, equity betas of large banks are two to five times greater than those of small banks. In explaining this, we note that regulation imposes an effective cap on banks’ equity volatility. Because the portfolios of small ba...

In May 1927, the German central bank intervened indirectly to reduce lending to equity investors. The crash that followed ended the only stock market boom during Germany’s relative stabilization 1924-28. This paper examines the factors that lead to the intervention as well as its consequences. We argue that genuine concern about the ‘exuberant’ level of the stock market, in addition to worries ...

In this paper we examine the link between stock market uncertainty and monetary policy in the US. There are strong arguments why central banks should account for stock market uncertainty in their strategy. Amongst others, they can maintain the functioning of financial markets and moderate possible economic downswings. To describe the behavior of the Federal Reserve Bank, augmented forward-looki...

This paper uses a large panel of financial flow data from banks to assess how institutions affect international lending. First, employing a time varying composite institutional quality index in a fixed-effects framework, the paper shows that institutional improvements are followed by significant increases in international finance. Second, cross-sectional models also show a strong effect of init...

We describe a behavior of a central bank when its measures of current inflation and output are subject to measurement errors, in a framework of optimizing models with nominal price stickiness. In our model, a central bank sets the interest rate equal to its current estimate of the so-called Wicksellian natural rate of interest. This is shown to imply that the interest rate responds to the centr...