We test if interconnectedness in the interbank market is a channel through which banks affect eac... more We test if interconnectedness in the interbank market is a channel through which banks affect each others riskiness. The evidence is based on quarterly bilateral exposures of all banks active in the Dutch interbank market between 1998 and 2008. A spatial lag model, borrowed from regional science, is used to test if z -scores of other banks affect individual bank’s
Brookings-Wharton Papers on Financial Services, 2003
Financiële conglomeraten, die bank-, aandelen-en verzekeringensactiviteiten combineren, nemen in ... more Financiële conglomeraten, die bank-, aandelen-en verzekeringensactiviteiten combineren, nemen in de financiële wereld een steeds voornamere plaats in. Cross-sector consolidatie is gestimuleerd door trends zoals disintermediatie, mondialisering en deregulering. Hierdoor zijn nieuwe uitdagingen ontstaan voor zowel het management van conglomeraten alsmede voor de toezichthouders. Wij bespreken de theoretische redenen waarom toezichthouders geïnteresseerd zouden kunnen zijn in het risico van een financiële instellingen en waarom er -voor dergelijke financiële instellingen zelf -ook redenen zijn om in het risico van de bedrijfsactiviteiten geïnteresseerd te zijn, zowel vanuit het bedrijf zelf als ook vanuit de markt. Na een beschrijving van de nieuwe institutionele opzet van toezicht in Nederland, richten wij onze aandacht op de volgende vraag: hoe kan een toezichthouder een raamwerk voor toezicht ontwerpen waarin recht gedaan wordt aan de eigen verantwoordelijkheid van het conglomeraat maar dat, tegelijkertijd, het publieke belang waarborgt? Dit raamwerk zal, naar ons idee, grote gelijkenis vertonen met de "Supervisory Review", zoals voorgesteld in het nieuwe Bazelse akkoord.
ABSTRACT We assess the determinants of banks’ liquidity holdings using data for nearly 7000 banks... more ABSTRACT We assess the determinants of banks’ liquidity holdings using data for nearly 7000 banks from 25 OECD countries. We highlight the role of several bank-specific, institutional and policy variables in shaping banks’ liquidity risk management. Our main question is whether liquidity regulation neutralizes banks’ incentives to hold liquid assets. Without liquidity regulation, the determinants of banks’ liquidity buffers are a combination of bank-specific and country-specific variables. While most incentives are neutralized by liquidity regulation, a bank’s disclosure requirements remain important. The complementarity of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation.
We test if interconnectedness in the interbank market is a channel through which banks affect eac... more We test if interconnectedness in the interbank market is a channel through which banks affect each others riskiness. The evidence is based on quarterly bilateral exposures of all banks active in the Dutch interbank market between 1998 and 2008. A spatial lag model, borrowed from regional science, is used to test if z-scores of other banks affect individual bank's z-scores through the network of the interbank market. Larger dependence on interbank borrowing and lending increases bank risk. But only interbank funding exposures to other banks in the system exhibit significant spill-over coefficients. Spatial lags for lending are insignificant while borrowing from other banks reduces individual bank risk if neighbors are stable, too. Vice versa, stability shocks at interbank counterparties in the system spill over through the liability side of banks balance sheets.
The financial crisis clearly illustrated the importance of characterizing the level of 'systemic'... more The financial crisis clearly illustrated the importance of characterizing the level of 'systemic' risk associated with an entire credit network, rather than with single institutions. However, the interplay between financial distress and topological changes is still poorly understood. Here we analyze the quarterly interbank exposures among Dutch banks over the period 1998-2008, ending with the crisis. After controlling for the link density, many topological properties display an abrupt change in 2008, providing a clear -but unpredictable -signature of the crisis. By contrast, if the heterogeneity of banks' connectivity is controlled for, the same properties show a gradual transition to the crisis, starting in 2005 and preceded by an even earlier period during which anomalous debt loops presumably favoured the underestimation of counter-party risk. These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done. We discuss important implications for bank regulatory policies.
The new Basel Capital Accord will result in more risk sensitive regulatory capital for banks. Lik... more The new Basel Capital Accord will result in more risk sensitive regulatory capital for banks. Likewise, financial conglomerates' internal models will become more important in group-wide supervision. Such models are relatively well developed for market and credit risk but for others, such as operational risk, many issues remain to be resolved. An even greater challenge is the development of models that aggregate risks across risk areas and business units, in particular across bank and insurance activities. Such internal economic capital models should deliver the total amount of capital needed to cover risks, as perceived by a financial conglomerate. An important determinant of total risk, and hence capital, are the diversification effect that the combination of different activities, such as banking and insurance, might offer. Two empirical analyses investigate cross-sector correlations and diversification effects in order to find the optimal level of capital for Financial Conglomerates. The results suggest substantial diversification effects but they may be offset by contagion risk. Research Series Supervision no. 45
This paper investigates the network structure of interbank markets, which has proved to be import... more This paper investigates the network structure of interbank markets, which has proved to be important for financial stability during the crisis. First, we describe and map the interbank network in the Netherlands, an exception in the literature because of its small and open banking environment. Secondly, we follow recent analyses of interbank markets of Germany and Italy in estimating the Core Periphery model, using data for the Netherlands instead. We find a significant Core Periphery structure and discuss model selection. The overall analysis opens up new opportunities for systemic risk assessments of the interbank market, especially as more granular data is becoming available for the eurozone.
Assessing the stability of the financial sector is becoming more common in many countries. This p... more Assessing the stability of the financial sector is becoming more common in many countries. This paper presents two useful approaches, applied to the Netherlands. First we discuss the results of a contagion analysis of the Dutch interbank market. We use various ways to measure linkages between banks and find that the interbank market is fairly robust. We then turn to a network analysis of payment flows between Dutch banks. This analysis provides us with a better understanding of the network structure in this type of market. We specifically look at the effect of the recent turmoil on the payment network and find no significant changes.
Banking groups have become increasingly multinational but the institutional infrastructure to dea... more Banking groups have become increasingly multinational but the institutional infrastructure to deal with solvency or liquidity problems is still largely national. This might lead to financial instability if national authorities do not internalise externalities abroad. Recently ex-ante burden sharing agreements have been established (e.g. EFSF), but little empirical work has been done on potential costs and benefits of such agreements. We estimate the costs and benefits of financial stability support for large, internationally active banks under several proposed agreements. We show costs according to the 'national solution', where only home authorities inject capital, as our benchmark. 'Specific' sharing agreements would be redistributive at the expense of smaller and East European countries (not home to large cross-border banking groups). The 'general fund' mechanism will smooth costs across countries but may lead to unequal redistribution of costs. We also show that coordinating bank failure costs may bring about financial stability benefits.
We use data on the 48 largest multinational banking groups to compare the lending of their 199 fo... more We use data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the Great Recession with lending by a benchmark group of 202 domestic banks. Contrary to earlier, more contained crises, parent banks were not a significant source of strength to their subsidiaries during the 2008-09 crisis. As a result, multinational bank subsidiaries had to slow down credit growth about twice as fast as domestic banks. This was in particular the case for subsidiaries of banking groups that relied more on wholesale market funding. Domestic banks were better equipped to continue lending because of their greater use of deposits, a relatively stable funding source during the crisis. We conclude that while multinational banks may contribute to financial stability during local crisis episodes, they also increase the risk of 'importing' instability from abroad.
We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurer... more We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, losses could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we perform a scenario analysis to measure contagion risks. Based on current exposures, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. Next, we analyse to what extent the financial position of individual primary insurers is affected following a particular shock, considering solvency, capital and profit levels. The life insurance industry is hardly affected by reinsurance failures. The non-life industry, however, is vulnerable to a crisis in the European reinsurance market. We also find that members of smaller insurance groups are particularly exposed.
We use new panel data on the intra-group ownership structure and the balance sheets of 45 of the ... more We use new panel data on the intra-group ownership structure and the balance sheets of 45 of the largest multinational bank holdings to analyze what determines the credit growth of their subsidiaries.
We analyse foreign bank penetration in Central and Eastern Europe (CEE) and its influence on priv... more We analyse foreign bank penetration in Central and Eastern Europe (CEE) and its influence on private sector credit, taking into account both cross-border credit and credit by foreign bank subsidiaries. By combining BIS and BankScope data into a unique database we make a clear distinction between these credit categories. We show that the relative importance of foreign bank subsidiaries has increased considerably during recent years. However, in Hungary and Poland foreign banks were also important during the first transition years, as they provided substantial amounts of cross-border credit. We do not find evidence of foreign banks deserting CEE during financial crises or economic downturns. Although cross-border credit did decrease during some periods, foreign banks expanded the credit supply of their subsidiaries simultaneously. This may be an important consideration for (transition) countries that still have to decide whether to open up their markets to foreign bank subsidiaries.
We study whether foreign and domestic banks in Central and Eastern Europe have reacted differentl... more We study whether foreign and domestic banks in Central and Eastern Europe have reacted differently to business cycle conditions and host country banking crises. Our unique panel dataset comprises data of more than 300 banks for the period 1993-2000, with detailed information on bank ownership. Our analysis shows that during crisis periods domestic banks contracted their credit and deposit bases, whereas foreign banks did not. Also, home country conditions matter for foreign bank growth, as there is a significant and negative relationship between home country economic growth and host country credit by foreign banks.
There is an ongoing debate whether firm focus creates or destroys shareholder value. Earlier lite... more There is an ongoing debate whether firm focus creates or destroys shareholder value. Earlier literature has shown significant diversification discounts: firms that engage in multiple activities are valued less. Various factors are important in the size of the discount, for example crosssubsidization and agency problems. The extant literature, however, generally focuses on nonfinancial firms or traditional banking (cf Laeven and Levine (2007) and ). Our paper focuses specifically on the valuation of bank-insurance conglomerates. We find no universal diversification discount but significant variability. Size, complexity and risk seem to be important determinants.
... academic economists begin and end their formal thinking about the goals of monetary policy by... more ... academic economists begin and end their formal thinking about the goals of monetary policy by positing a periodic loss function that weights the squared deviations of unemployment and inflation from their target values, like L=(u−u*) 2 +α(π−π*) 2 In the academic literature, u*, π ...
We test if interconnectedness in the interbank market is a channel through which banks affect eac... more We test if interconnectedness in the interbank market is a channel through which banks affect each others riskiness. The evidence is based on quarterly bilateral exposures of all banks active in the Dutch interbank market between 1998 and 2008. A spatial lag model, borrowed from regional science, is used to test if z -scores of other banks affect individual bank’s
Brookings-Wharton Papers on Financial Services, 2003
Financiële conglomeraten, die bank-, aandelen-en verzekeringensactiviteiten combineren, nemen in ... more Financiële conglomeraten, die bank-, aandelen-en verzekeringensactiviteiten combineren, nemen in de financiële wereld een steeds voornamere plaats in. Cross-sector consolidatie is gestimuleerd door trends zoals disintermediatie, mondialisering en deregulering. Hierdoor zijn nieuwe uitdagingen ontstaan voor zowel het management van conglomeraten alsmede voor de toezichthouders. Wij bespreken de theoretische redenen waarom toezichthouders geïnteresseerd zouden kunnen zijn in het risico van een financiële instellingen en waarom er -voor dergelijke financiële instellingen zelf -ook redenen zijn om in het risico van de bedrijfsactiviteiten geïnteresseerd te zijn, zowel vanuit het bedrijf zelf als ook vanuit de markt. Na een beschrijving van de nieuwe institutionele opzet van toezicht in Nederland, richten wij onze aandacht op de volgende vraag: hoe kan een toezichthouder een raamwerk voor toezicht ontwerpen waarin recht gedaan wordt aan de eigen verantwoordelijkheid van het conglomeraat maar dat, tegelijkertijd, het publieke belang waarborgt? Dit raamwerk zal, naar ons idee, grote gelijkenis vertonen met de "Supervisory Review", zoals voorgesteld in het nieuwe Bazelse akkoord.
ABSTRACT We assess the determinants of banks’ liquidity holdings using data for nearly 7000 banks... more ABSTRACT We assess the determinants of banks’ liquidity holdings using data for nearly 7000 banks from 25 OECD countries. We highlight the role of several bank-specific, institutional and policy variables in shaping banks’ liquidity risk management. Our main question is whether liquidity regulation neutralizes banks’ incentives to hold liquid assets. Without liquidity regulation, the determinants of banks’ liquidity buffers are a combination of bank-specific and country-specific variables. While most incentives are neutralized by liquidity regulation, a bank’s disclosure requirements remain important. The complementarity of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation.
We test if interconnectedness in the interbank market is a channel through which banks affect eac... more We test if interconnectedness in the interbank market is a channel through which banks affect each others riskiness. The evidence is based on quarterly bilateral exposures of all banks active in the Dutch interbank market between 1998 and 2008. A spatial lag model, borrowed from regional science, is used to test if z-scores of other banks affect individual bank's z-scores through the network of the interbank market. Larger dependence on interbank borrowing and lending increases bank risk. But only interbank funding exposures to other banks in the system exhibit significant spill-over coefficients. Spatial lags for lending are insignificant while borrowing from other banks reduces individual bank risk if neighbors are stable, too. Vice versa, stability shocks at interbank counterparties in the system spill over through the liability side of banks balance sheets.
The financial crisis clearly illustrated the importance of characterizing the level of 'systemic'... more The financial crisis clearly illustrated the importance of characterizing the level of 'systemic' risk associated with an entire credit network, rather than with single institutions. However, the interplay between financial distress and topological changes is still poorly understood. Here we analyze the quarterly interbank exposures among Dutch banks over the period 1998-2008, ending with the crisis. After controlling for the link density, many topological properties display an abrupt change in 2008, providing a clear -but unpredictable -signature of the crisis. By contrast, if the heterogeneity of banks' connectivity is controlled for, the same properties show a gradual transition to the crisis, starting in 2005 and preceded by an even earlier period during which anomalous debt loops presumably favoured the underestimation of counter-party risk. These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done. We discuss important implications for bank regulatory policies.
The new Basel Capital Accord will result in more risk sensitive regulatory capital for banks. Lik... more The new Basel Capital Accord will result in more risk sensitive regulatory capital for banks. Likewise, financial conglomerates' internal models will become more important in group-wide supervision. Such models are relatively well developed for market and credit risk but for others, such as operational risk, many issues remain to be resolved. An even greater challenge is the development of models that aggregate risks across risk areas and business units, in particular across bank and insurance activities. Such internal economic capital models should deliver the total amount of capital needed to cover risks, as perceived by a financial conglomerate. An important determinant of total risk, and hence capital, are the diversification effect that the combination of different activities, such as banking and insurance, might offer. Two empirical analyses investigate cross-sector correlations and diversification effects in order to find the optimal level of capital for Financial Conglomerates. The results suggest substantial diversification effects but they may be offset by contagion risk. Research Series Supervision no. 45
This paper investigates the network structure of interbank markets, which has proved to be import... more This paper investigates the network structure of interbank markets, which has proved to be important for financial stability during the crisis. First, we describe and map the interbank network in the Netherlands, an exception in the literature because of its small and open banking environment. Secondly, we follow recent analyses of interbank markets of Germany and Italy in estimating the Core Periphery model, using data for the Netherlands instead. We find a significant Core Periphery structure and discuss model selection. The overall analysis opens up new opportunities for systemic risk assessments of the interbank market, especially as more granular data is becoming available for the eurozone.
Assessing the stability of the financial sector is becoming more common in many countries. This p... more Assessing the stability of the financial sector is becoming more common in many countries. This paper presents two useful approaches, applied to the Netherlands. First we discuss the results of a contagion analysis of the Dutch interbank market. We use various ways to measure linkages between banks and find that the interbank market is fairly robust. We then turn to a network analysis of payment flows between Dutch banks. This analysis provides us with a better understanding of the network structure in this type of market. We specifically look at the effect of the recent turmoil on the payment network and find no significant changes.
Banking groups have become increasingly multinational but the institutional infrastructure to dea... more Banking groups have become increasingly multinational but the institutional infrastructure to deal with solvency or liquidity problems is still largely national. This might lead to financial instability if national authorities do not internalise externalities abroad. Recently ex-ante burden sharing agreements have been established (e.g. EFSF), but little empirical work has been done on potential costs and benefits of such agreements. We estimate the costs and benefits of financial stability support for large, internationally active banks under several proposed agreements. We show costs according to the 'national solution', where only home authorities inject capital, as our benchmark. 'Specific' sharing agreements would be redistributive at the expense of smaller and East European countries (not home to large cross-border banking groups). The 'general fund' mechanism will smooth costs across countries but may lead to unequal redistribution of costs. We also show that coordinating bank failure costs may bring about financial stability benefits.
We use data on the 48 largest multinational banking groups to compare the lending of their 199 fo... more We use data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the Great Recession with lending by a benchmark group of 202 domestic banks. Contrary to earlier, more contained crises, parent banks were not a significant source of strength to their subsidiaries during the 2008-09 crisis. As a result, multinational bank subsidiaries had to slow down credit growth about twice as fast as domestic banks. This was in particular the case for subsidiaries of banking groups that relied more on wholesale market funding. Domestic banks were better equipped to continue lending because of their greater use of deposits, a relatively stable funding source during the crisis. We conclude that while multinational banks may contribute to financial stability during local crisis episodes, they also increase the risk of 'importing' instability from abroad.
We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurer... more We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, losses could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we perform a scenario analysis to measure contagion risks. Based on current exposures, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. Next, we analyse to what extent the financial position of individual primary insurers is affected following a particular shock, considering solvency, capital and profit levels. The life insurance industry is hardly affected by reinsurance failures. The non-life industry, however, is vulnerable to a crisis in the European reinsurance market. We also find that members of smaller insurance groups are particularly exposed.
We use new panel data on the intra-group ownership structure and the balance sheets of 45 of the ... more We use new panel data on the intra-group ownership structure and the balance sheets of 45 of the largest multinational bank holdings to analyze what determines the credit growth of their subsidiaries.
We analyse foreign bank penetration in Central and Eastern Europe (CEE) and its influence on priv... more We analyse foreign bank penetration in Central and Eastern Europe (CEE) and its influence on private sector credit, taking into account both cross-border credit and credit by foreign bank subsidiaries. By combining BIS and BankScope data into a unique database we make a clear distinction between these credit categories. We show that the relative importance of foreign bank subsidiaries has increased considerably during recent years. However, in Hungary and Poland foreign banks were also important during the first transition years, as they provided substantial amounts of cross-border credit. We do not find evidence of foreign banks deserting CEE during financial crises or economic downturns. Although cross-border credit did decrease during some periods, foreign banks expanded the credit supply of their subsidiaries simultaneously. This may be an important consideration for (transition) countries that still have to decide whether to open up their markets to foreign bank subsidiaries.
We study whether foreign and domestic banks in Central and Eastern Europe have reacted differentl... more We study whether foreign and domestic banks in Central and Eastern Europe have reacted differently to business cycle conditions and host country banking crises. Our unique panel dataset comprises data of more than 300 banks for the period 1993-2000, with detailed information on bank ownership. Our analysis shows that during crisis periods domestic banks contracted their credit and deposit bases, whereas foreign banks did not. Also, home country conditions matter for foreign bank growth, as there is a significant and negative relationship between home country economic growth and host country credit by foreign banks.
There is an ongoing debate whether firm focus creates or destroys shareholder value. Earlier lite... more There is an ongoing debate whether firm focus creates or destroys shareholder value. Earlier literature has shown significant diversification discounts: firms that engage in multiple activities are valued less. Various factors are important in the size of the discount, for example crosssubsidization and agency problems. The extant literature, however, generally focuses on nonfinancial firms or traditional banking (cf Laeven and Levine (2007) and ). Our paper focuses specifically on the valuation of bank-insurance conglomerates. We find no universal diversification discount but significant variability. Size, complexity and risk seem to be important determinants.
... academic economists begin and end their formal thinking about the goals of monetary policy by... more ... academic economists begin and end their formal thinking about the goals of monetary policy by positing a periodic loss function that weights the squared deviations of unemployment and inflation from their target values, like L=(u−u*) 2 +α(π−π*) 2 In the academic literature, u*, π ...
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Papers by I. Lelyveld