Kashkari will shape 'too big to fail' US debate

2016 ◽  
Keyword(s):  
Financial Institutions ◽  
Federal Reserve ◽  
Regulatory Regime ◽  
Too Big To Fail ◽  
Crowd Sourcing ◽  
Content Type ◽  
Troubled Asset Relief Program ◽  
Policy Ideas ◽  
Relief Program

Subject A profile of Minneapolis Fed President Neel Kashkari. Significance Shortly after his appointment as President of the Federal Reserve (Fed) Bank of Minneapolis in January, Neel Kashkari delivered a speech, arguing that the largest US banks remain 'too big to fail' (TBTF), posing risks to the economy. While Kashkari is not a professional economist, his experience at the Treasury as director of the Troubled Asset Relief Program (TARP) and at major investment firms gives his views greater salience than those of less well-known Fed officials. Impacts Kashkari's willingness to speak directly could influence the debate on the restructuring of financial institutions. His recent speech will renew attention to the efficacy and scale of the Dodd-Frank regulatory regime. Kashkari will use a tech sector, crowd-sourcing approach to generate new policy ideas.

Troubled Asset Relief Program and earnings informativeness

2019 ◽  
Vol 28 (1) ◽  
pp. 48-68
Author(s):  
Jose G. Vega ◽  
Jan Smolarski ◽  
Jennifer Yin
Keyword(s):  
Firm Performance ◽  
Executive Compensation ◽  
Financial Institutions ◽  
Policy Makers ◽  
Total Compensation ◽  
Content Type ◽  
Troubled Asset Relief Program ◽  
Earnings Informativeness ◽  
Window Approach ◽  
Relief Program

Purpose The purpose of this paper is to examine restrictions placed by the Troubled Asset Relief Program (TARP) on executive compensation during the financial crisis. Since it remains unclear if TARP restored public confidence in financial institutions, the authors also analyze what effect such regulations had on investors’ confidence in the information provided by earning with respect to executive compensation during this critical period. Design/methodology/approach To test the assertions, the authors employ an Earnings Response Coefficient model, which captures the association between firms’ earnings surprise (ES) and perceived earnings informativeness. The authors implement both a long- and short-window test to obtain a better understanding of the effects of TARP on financial institutions’ earnings informativeness. The authors use the long-window approach to gather evidence about whether and how financial institutions’ ES are absorbed into security prices conditional on both their participation in TARP and their compliance with TARP’s compensation restrictions. The authors attempt to establish a stronger causal link by also using a short-window approach. Findings The authors find that firms paying their CEOs above the TARP threshold show higher earnings informativeness. Financial institutions that paid their CEOs above the TARP threshold achieved better performance during their participation in TARP. The authors also find that a decrease in total compensation while participating in TARP is associated with improved earnings informativeness. Lastly, separating total compensation into its cash and stock-based components, the authors find that firms improve earnings informativeness when they increase (decrease) cash (performance) compensation during TARP. However, overall earnings informativeness decreases during and after TARP relative to the pre-TARP period. Practical implications The research suggests that executive compensation incentives affect earnings informativeness and that tradeoffs are made between direct and indirect costs in retaining executives. The results have implications for policy makers, investors and researchers because the results allow policy makers and regulators to improve on how they design and implement accounting, market and finance regulations and reforms. Investors may potentially use the results when evaluating firm experiencing financial and, in some case, political distress. It also helps firms and offering optimal compensation contracts to create proper incentives for executives and ensure that managerial actions result in successful firm performance. Social implications The study shows how firms react to changing regulations that affect executive compensation and earning informativeness. The results of the study allow regulators to potentially design more effective regulations by targeting certain aspects of firms’ operation such excessive risk-taking behavior and rent extraction opportunities. Originality/value There are very few studies that deal with how firms react to regulation that affect executive compensation. The authors provide evidence regarding what effect TARP and its compensation restrictions had on financial institutions’ earnings informativeness. The evidence in the study will further regulators’ understanding of whether TARP improved investors’ confidence in financial institutions. The paper also contributes to the understanding in how changes in executive compensation in times of high political scrutiny affect investors’ perceptions of firm performance.

Corporate social responsibility and financial stability: evidence from the Troubled Asset Relief Program

2019 ◽  
Vol 45 (8) ◽  
pp. 1111-1128 ◽  
Author(s):  
Elizabeth Cooper ◽  
Christopher Henderson ◽  
Andrew Kish
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Financial Institutions ◽  
Financial Stability ◽  
Banking Industry ◽  
Content Type ◽  
Troubled Asset Relief Program ◽  
Corporate Social ◽  
Relief Program ◽  
The Impact

Purpose The purpose of this paper is to test the impact of corporate social responsibility (CSR) in the banking industry using Troubled Asset Relief Program (TARP) as an experimental backdrop. Design/methodology/approach The authors match banks that received TARP with CSR data on publicly available firms. Using this data set, the authors are able to perform both univariate and multivariate analyses to determine the impact of CSR on bank management behavior. Findings The authors find evidence that supports stakeholder theory as applied to a sample of large financial institutions. The authors show that banks increased their CSR involvement and intensity following TARP, evidence that CSR is not merely transitory in nature but structural and an important aspect of firm value. The authors also find that capital ratios increase to a greater degree in banks whose CSR ratings were stronger prior to TARP. Finally, while all banks in the sample repaid Treasury, it took strong CSR banks a longer time to repay than banks with weaker CSR. The authors show how CEO compensation played a role in this relationship. Research limitations/implications The findings are limited to large banks. Practical implications Practically speaking, this study helps to discern the motivations and actions of large financial institutions. This is especially important from a regulator perspective, whose function is to maintain overall national financial stability. Originality/value This is the first study to link TARP and CSR literatures. Overall, there are a limited number of studies on CSR in the banking industry, and this paper adds to this burgeoning area. It is important and valuable to managers and policymakers to understand implications of CSR in the financial sector.

Regulation of Swaps

2019 ◽  
pp. 249-286
Author(s):  
Alan N. Rechtschaffen
Keyword(s):  
Financial Crisis ◽  
Financial Institutions ◽  
Consumer Protection ◽  
Federal Reserve ◽  
Regulatory Regime ◽  
Wall Street ◽  
Regulatory Oversight ◽  
Consumer Protection Act ◽  
Reporting Requirements ◽  
Derivatives Markets

Former Federal Reserve Chairman Ben S. Bernanke classified derivatives as a “vulnerability” of the financial system that led to the financial crisis. He explained that derivatives concentrated risk within particular financial institutions and markets without sufficient regulatory oversight. The Wall Street Reform and Consumer Protection Act—Dodd-Frank—constituted a seismic shift in the regulation of financial institutions and markets in a massive effort to address regulatory shortcomings in derivatives markets. This chapter discusses the Dodd-Frank regulatory regime. Topics covered include the Dodd-Frank and derivatives trading; jurisdiction and registration; clearing, exchange, capital and margin, and reporting requirements; analysis of the provisions of Dodd-Frank on derivatives trading; rationale behind the exemptions and exclusions; the Lincoln Rule; Futures Commission Merchants; and criticisms of Dodd-Frank's derivatives trading provisions.

scholarly journals An Assessment of TARP Assistance to Financial Institutions

2015 ◽  
Vol 29 (2) ◽  
pp. 53-80 ◽  
Author(s):  
Charles W. Calomiris ◽  
Urooj Khan
Keyword(s):  
Financial Markets ◽  
Financial Institutions ◽  
Risk Taking ◽  
Social Costs ◽  
Costs And Benefits ◽  
Troubled Asset Relief Program ◽  
Social Costs And Benefits ◽  
Relief Program ◽  
Single Approach ◽  
Perceived Unfairness

Six years after the passage of the 2008 Troubled Asset Relief Program, commonly known as TARP, it remains hard to measure the total social costs and benefits of the assistance to banks provided under TARP programs. TARP was not a single approach to assisting weak banks but rather a variety of changing solutions to a set of evolving problems. TARP's passage was associated with significant improvements in financial markets and the health of financial intermediaries, as well as an increase in the supply of lending by recipients. However, a full evaluation must also take into account other factors, including the risks borne by taxpayers in the course of the bailouts; moral-hazard costs that could result in more risk-taking in the future; and social costs related to perceived unfairness. Our evaluation is organized in five parts: 1) What did policymakers do? 2) What are the proper objectives of interventions like TARP assistance to financial institutions? 3) Did TARP succeed in those economic objectives? 4) Were TARP funds allocated purely on an economic basis, or did political favoritism play a role? 5) Would alternative policies, either alongside or instead of TARP, and alternative design features of TARP, have worked better?

Discussion of Troubled Asset Relief Program and earnings informativeness

2020 ◽  
Vol 28 (2) ◽  
pp. 147-152
Author(s):  
Nan Zhou
Keyword(s):  
Capital Market ◽  
Earnings Quality ◽  
Content Type ◽  
Earnings Response Coefficient ◽  
Market Effects ◽  
Troubled Asset Relief Program ◽  
Real Effects ◽  
Earnings Informativeness ◽  
Earnings Response ◽  
Relief Program

PurposeVega et al. (2020) find that incentives in executive compensation result in higher earnings informativeness. The discussion focuses on two areas for improvement. First, the authors could look into additional measures of earnings quality. This further analysis could help us understand whether the enhanced earning informativeness stems from capital market effects or real effects. Second, the authors could consider replacing their main earnings response coefficient (ERC) model with one of the alternative ERC models in the literature. Three different ERC models are discussed.Design/methodology/approachThis paper discusses capital market effects versus real effects and illustrates different ERC models.FindingsThe discussed paper could differentiate between capital market effects and real effects and use an alternative ERC model.Originality/valueAn accounting audience could be interested in the discussion on capital market effects versus real effects and the illustration on various ERC models.

The search for an optimal RBC regulatory system

2014 ◽  
Vol 6 (1) ◽  
pp. 78-92
Author(s):  
Dror Parnes
Keyword(s):  
Design Methodology ◽  
Directed Graphs ◽  
Regulatory System ◽  
Cascading Failure ◽  
Regulatory Regime ◽  
Bank Failures ◽  
Too Big To Fail ◽  
Content Type ◽  
Proportional Allocation ◽  
Failure Models

Purpose – The author assembles three hypothetical regulatory regimes and deploys computer simulations to contrast different banking systems based on conventional strategies for appointing risk-based capital minimum thresholds. The paper aims to discuss these issues. Design/methodology/approach – The author instigates cascading failure models within numerous directed graphs and measures the inflicted costs, the accumulated bank failures, and the general robustness of the networks following various economic shocks. Findings – The author finds that a homogeneous regulatory regime is an inferior approach. However, a selected too-big-to-fail scheme portrays the best defensive banking model with the lowest number of total bank failures and the fewest banks' costs and social costs. Research limitations/implications – The author can only theoretically examine this topic. Originality/value – The author overcomes some obstacles in prior studies including the use of a large and complex network and the proportional allocation of funds upon a bank failure.

Establishing credible rules for Fed emergency lending

2017 ◽  
Vol 9 (3) ◽  
pp. 260-267 ◽  
Author(s):  
Charles W. Calomiris ◽  
Douglas Holtz-Eakin ◽  
R. Glenn Hubbard ◽  
Allan H. Meltzer ◽  
Hal S. Scott
Keyword(s):  
Financial Crisis ◽  
Moral Hazard ◽  
Empirical Evidence ◽  
Financial Institutions ◽  
Federal Reserve ◽  
Design Methodology ◽  
Costs And Benefits ◽  
Content Type ◽  
Systemic Crises ◽  
Practical Implications

Purpose The purpose of this paper is to propose reforms that would establish a credible framework of rules to constrain and guide emergency lending by the Federal Reserve and by fiscal authorities during a future financial crisis. Design/methodology/approach The authors propose a set of five overarching rules, informed by history, empirical evidence and theory, which would serve as the foundation on which detailed legislation should be constructed. Findings The authors find that the current framework governing emergency lending – including reforms to Federal Reserve lending enacted after the recent crisis – is inadequate and not credible, and that their proposed framework would constitute a credible balancing of costs and benefits. Practical implications Adequate assistance to financial institutions would be provided in systemic crises but would be limited in its form, and by the process that would govern its provision. Originality/value This framework would serve as a basis for establishing effective rules that would be credible, and that would properly balance the moral-hazard costs of emergency lending against the gains from avoiding systemic collapse of the financial system.

Bailouts Without End

2020 ◽  
pp. 265-298
Author(s):  
Arthur E. Wilmarth Jr.
Keyword(s):  
Great Recession ◽  
Small Businesses ◽  
Too Big To Fail ◽  
Troubled Asset Relief Program ◽  
The Great Recession ◽  
Fannie Mae ◽  
Lehman Brothers ◽  
The World ◽  
Relief Program ◽  
Freddie Mac

The Fed’s rescue of Bear Stearns and the Treasury Department’s nationalization of Fannie Mae and Freddie Mac in 2008 provoked widespread criticism. Consequently, the Fed and Treasury were very reluctant to approve further bailouts, and they allowed Lehman Brothers to fail in September 2008. Lehman’s collapse triggered a global panic and a meltdown of financial markets around the world. The Fed and Treasury quickly arranged a bailout of AIG, and Congress approved a $700 billion financial rescue bill. Treasury established the Troubled Asset Relief Program, which injected capital into large universal banks, while the Fed provided trillions of dollars of emergency loans and the FDIC established new guarantee programs for bank debts and deposits. In February 2009, federal regulators pledged to provide any further capital that the nineteen largest U.S. banks needed to survive, thereby cementing the “too big to fail” status of U.S. megabanks. The U.K. and other European nations arranged similar bailouts for their universal banks. Meanwhile, thousands of small banks and small businesses failed, millions of people lost their jobs, and millions of families lost their homes during the Great Recession.

The value relevance of “too-big-to-fail” guarantees

2015 ◽  
Vol 16 (5) ◽  
pp. 498-518 ◽  
Author(s):  
Armin Varmaz ◽  
Christian Fieberg ◽  
Jörg Prokop
Keyword(s):  
Financial Institutions ◽  
Stock Prices ◽  
Abnormal Returns ◽  
Spillover Effects ◽  
Control Group ◽  
Too Big To Fail ◽  
Content Type ◽  
Government Aid ◽  
Small Banks ◽  
The Impact

Purpose – This paper aims to analyze the impact of conjectural “too-big-to-fail” (TBTF) guarantees on big and small US financial institutions’ stock prices during the 2008-2009 banking crisis. Design/methodology/approach – The paper analyzes shocks to stock market investors’ expectations of government aid to banks in distress and respective spillover effects using an event study approach. We focus on three major events in late 2008, namely, the Lehman bankruptcy, the Citigroup bailout and the first announcement of the Capital Purchase Program (CPP) by the US Government. Findings – The authors found significant differences in market reactions to the respective events between small and large banks. For both the Lehman and the CPP event, abnormal returns on big banks’ stocks are negative, while small banks’ stocks tend to generate positive abnormal returns. In contrast, large banks strongly outperform small banks in the case of the Citigroup bailout. Results for a control group of non-financial firms indicate that this behavior may be specific to the banking industry. The authors observed significant spillover effects to both competitors and non-competitors of Lehman and Citigroup, and concluded that while the Lehman event shook the widely held belief in an implicit TBTF subsidy to large banks, the TBTF doctrine was reinstated shortly thereafter. Originality/value – This paper shows that conjectural TBTF guarantees are priced in by equity investors. While government aid to large banks in distress may prevent negative effects on the stability of the financial system, it may also create negative externalities by putting small banks at a competitive disadvantage. The findings suggest that US and European regulators’ recent policy measures directed at establishing reliable bank resolution schemes should be a step in the right direction to level the playing field for small and large financial institutions.

Financial institutions mergers: a strategy choice of wealth maximisation and economic value

2020 ◽  
Vol 12 (4) ◽  
pp. 495-529
Author(s):  
Mohamad Hassan ◽  
Evangelos Giouvris
Keyword(s):  
Credit Risk ◽  
Event Study ◽  
Financial Institutions ◽  
Value Creation ◽  
Economic Value ◽  
Abnormal Returns ◽  
Study Analysis ◽  
Event Window ◽  
Content Type ◽  
Merger Announcement

Purpose This study Investigates Shareholders' value adjustment in response to financial institutions (FIs) merger announcements in the immediate event window and in the extended event window. This study also investigates accounting measures performance, comparison of post-merger to pre-merger, including several cash flow measures and not just profitability measures, as the empirical literature review suggests. Finally, the authors examine FIs mergers orientations of diversification and focus create more value for shareholders (in the immediate announcement window and several months afterward) and/or generates better cash flows, profitability and less credit risk. Design/methodology/approach This study examines FIs merger effect on bidders’ shareholder’s value and on their observed performance. This examination deploys three techniques simultaneously: a) an event study analysis, to estimate and calculate abnormal returns (ARs) and cumulative abnormal returns (CARs) in the narrow windows of the merger announcement, b) buy and hold event study analysis, to estimate ARs in the wider window of the event, +50 to +230 days after the merger announcement and c) an observed performance analysis, of financial and capital efficiency measures before and after the merger announcement; return on equity, liquidity, cost to income ratio, capital to total assets ratio, net loans to total loans, credit risk, loans to deposits ratio, other expenses and total assets, economic value addition, weighted average cost of capital and return on invested capital. Deal criteria of value, mega-deals, strategic orientation (as in Ansoff (1980) growth strategies), acquiring bank size and payment method are set as individually as control variables. Findings Results show that FIs mergers destroy share value for the bidding firms pursuing a market penetration strategy. Market development and product development strategies enable shareholders’ value creation in short and long horizons. Diversification strategies do not influence bidding shareholders’ value. Local bank to bank mergers create shareholders’ value and enhance liquidity and economic value in the short run. Bank to bank cross border mergers create value for bidders’ in the long term but are associated with high costs and higher risks. Originality/value A significant advancement over the current literature is in assessing mergers, not only for bank bidders but also for the three pillars FIs of the financial sector; banks, real-estate companies and investment companies mergers. It is an improvement over current finance literature because it deploys two different strategies in the analysis. At a univariate level, shareholder value creation and market reaction to merger announcements are examined over short (−5 or +5 days) and long (+230 days) windows of the event. Followed by regressing, the resultant CARs and BHARs over financial performance variables at the multivariate level.

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