nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒10‒23
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Stock Market and Bank Risk-Taking By Antonio Falato; David Scharfstein
  2. Market liquidity after the financial crisis By Adrian, Tobias; Fleming, Michael J.; Vogt, Erik
  3. Integrating stress tests within the Basel III capital framework: a macroprudentially coherent approach By Pierluigi Bologna; Anatoli Segura

  1. By: Antonio Falato; David Scharfstein
    Abstract: We present evidence that pressure to maximize short-term stock prices and earnings leads banks to increase risk. We start by showing that banks increase risk when they transition from private to public ownership through a public listing or an acquisition. The increase in risk is greater than for a control group of banks that intended but failed to transition from private to public ownership, a result that is robust to using a plausibly exogenous instrument for failed transitions. The increase in risk is also greater than for a control group of banks that were acquired but did not change their listing status. We establish that pressure to maximize short-term stock prices helps to explain these findings by showing that the increase in risk is larger for newly public banks that are more focused on short-term stock prices and performance.
    JEL: G01 G2 G21
    Date: 2016–09
  2. By: Adrian, Tobias (Federal Reserve Bank of New York); Fleming, Michael J. (Federal Reserve Bank of New York); Vogt, Erik (Federal Reserve Bank of New York)
    Abstract: This paper examines market liquidity in the post-crisis era, in light of concerns that regulatory changes might have reduced banks’ ability and willingness to make markets. We begin with a discussion of the broader trading environment, including a discussion of regulations and their potential effect on dealer balance sheets and market making, but also considering plausible alternative drivers of market liquidity. Using both high- and low-frequency data on U.S. Treasury securities and corporate bonds, we then investigate empirically whether liquidity has in fact deteriorated, and we review market behavior around three key post-crisis events. Overall, our findings, and those of recent papers we survey, do not suggest a significant decline in bond market liquidity. We conclude with ideas for future research, including the evaluation of additional data, methodological improvements, and closer analyses of liquidity risk and the interplay between market liquidity and funding liquidity.
    Keywords: liquidity; market making; Treasury market; corporate bonds; regulation
    JEL: G12 G21 G28
    Date: 2016–10–19
  3. By: Pierluigi Bologna (Bank of Italy); Anatoli Segura (Bank of Italy)
    Abstract: In the post-crisis era banks’ capital adequacy is established by the Basel III capital standards and, in many jurisdictions, also by supervisory stress tests. In this paper we first describe the ways in which supervisory stress tests can supplement the risk-based capital framework of Basel III and how this could be codified with a stress test buffer. We then argue that in order to ensure coherence with the macroprudential objectives of Basel III, the severity of supervisory stress tests should be procyclical. In addition, to increase the transparency and predictability of the overall capital framework, severity choices should follow a constrained discretion approach based on a simple rule. Finally, we analyze supervisory stress testing practices across some jurisdictions and find that while the United States and the UK frameworks are in line with some of the elements of our proposal, including most notably the need for procyclical severity, this is not the case in the euro area.
    Keywords: stress test, capital regulation, macroprudential policy
    JEL: G21 G28
    Date: 2016–10

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