Using parametric and nonparametric procedures, we identify the apparent source of cost inefficiency in banking. Unexplained inefficiencies of 20 to 25% from earlier studies are reduced to 1 to 5% when, in addition to commonly specified cost function influences, variables reflecting the external business environment and common industry indicators of "productivity" are added. While these same pro...

In many domains, the combined opinion of a committee of experts provides better decisions than the judgment of a single expert. This paper shows how to implement a successful ensemble strategy for predicting recovery rates on defaulted debts. Using data from Moody’s Ultimate Recovery Database, it is shown that committees of models derived from the same regression method present better forecasts...

Risk capital is the contribution of an exposure to the default risk of a financial institution. We investigate its relationship with required shareholder returns, showing that the use of return on risk capital (RAROC) as a risk-adjusted performance measure is inconsistent with the standard theory of financial valuation and that using this one measure to represent at the same time both contribut...

The paper analyzes the information and agency cost effects of bank equity stakes in a universal banking system where banks can also be shareholders in borrowing firms. We test the agency and signaling hypotheses explaining the bank motivations for holding equity of borrowing firms in the Spanish market and we analyze the share abnormal returns around the announcements of bank equity holdings. T...

This paper discusses the incentive conflicts that arise in banking supervision in the EU in a principal-agent framework, where the regulator is the agent and the taxpayers is the principal. The regulatory agent in addition to maintaining financial stability (the objective of the principal) may pursue private interests. Incomplete information, insufficient accountability of the agent and lack of...

Does the pre-deal geographic overlap of the subsidiaries and branches of two banks affect the probability that they merge and post-merger value creation and synergies? We compile comprehensive information on U.S. bank acquisitions from 1986 through 2014, construct several measures of network overlap, and design and implement a new identification strategy. We find that greater pre-deal network o...

Government ownership of banks is very common in countries other than the United States. This paper provides cross-country, bank-level empirical evidence about political influences on these banks. It shows that government-owned banks increase their lending in election years relative to private banks. This effect is robust to controlling for country-specific macroeconomic and institutional factor...

Understanding how capital flows within rural communities in sub-Saharan Africa can provide important insights on the nature of poverty and the effectiveness of financial intermediation interventions. In this paper, we use unique individual level savings and borrowing data to study the flow of funds within a sample of 104 Ugandan savings groups. We show that poor households borrow from wealthier...

Theory predicts that information sharing among lenders attenuates adverse selection and moral hazard, and can therefore increase lending and reduce default rates. To test these predictions, we construct a new international data set on private credit bureaus and public credit registers. We find that bank lending is higher and proxies for default rates are lower in countries where lenders share i...

We adopt a systemic risk indicator measured by the price of insurance against systemic financial distress and assess individual banks’ marginal contributions to the systemic risk. The methodology is applied to the 19 bank holding companies covered by the US Supervisory Capital Assessment Program (SCAP), with the systemic risk indicator peaking around 1.1 trillion USD in March 2009. Our systemic...