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Session Overview
FIIE-11: Bank Governance
Friday, 25/Aug/2017:
10:30am - 12:00pm

Session Chair: Stijn Claessens, Bank for International Settlements
Location: O148

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Politics, Banks, and Sovereign Debt: Unholy Trinity or Divine Coincidence?

Alexander Popov1, Michael Koetter2

1European Central Bank; 2Halle Institute for Economic Research

Discussant: Nikola Anguelov Tarashev (Bank for International Settlements)

Using a security-level dataset for more than 6,000 German banks between 2005 and 2014, we investigate state-owned banks' reaction to the loss of political connections. We exploit changes in the composition of governing coalitions at the state and at the municipal level resulting from staggered elections in 16 states and 438 municipalities. We show that following an election that leads to the loss of their political connections, state-owned banks increase their funding of the state government by increasing strongly and significantly their holdings of state-government-issued bonds. Private banks and politically connected state-owned banks provide no such funding. We also find that state-owned banks which are not politically connected are more likely to be bailed out by the state government when in distress if they hold larger stocks of state sovereign debt.

EFA2017-474-FIIE-11-Popov-Politics, Banks, and Sovereign Debt.pdf

Is the Fox Guarding the Henhouse? Regulatory Connections and Public Subsidies in Banks

Ivan Lim1, Jens Hagendorff2, Seth Armitage1

1University of Edinburgh; 2Cardiff University

Discussant: Diana Bonfim (Banco de Portugal and Católica Lisbon)

Nearly one in three US banks employ at least one board member who is currently serving (or has previously served) on a regulator’s advisory council or on the board of a regulator as a form of public service. We show that connections to regulators undermine regulatory discipline by decreasing the sensitivity of bank risk to capital. Connected banks extract larger public subsidies than non-connected banks by shifting risk to the financial safety-net, resulting in wealth transfers from taxpayers to shareholders of connected banks. We employ two quasi-natural experiments to infer causality. One reason for these effects is that connected banks receive preferential treatment in supervision from regulators.

EFA2017-519-FIIE-11-Lim-Is the Fox Guarding the Henhouse Regulatory Connections and Public Subsidies.pdf

Public Service or Private Benefits? Bankers in the Governance of the Federal Reserve System

Lamont Black1, Jennifer Dlugosz2

1DePaul University; 2Washington University in St. Louis

Discussant: Diane Pierret (University of Lausanne)

Federal Reserve Banks are private corporations with boards of directors and one-third of the seats on each board are held by bankers. We investigate whether these directorships create value for banks elected between 1986 and 2013 and through what channels. The announcement of a banker’s appointment to the board of directors of a Federal Reserve Bank produces a roughly 1% cumulative abnormal return in the bank’s stock price. We find evidence consistent with value being created through certification or implicit guarantees, and access to private information about monetary policy. We do not find evidence of increased regulatory leniency.

EFA2017-1190-FIIE-11-Black-Public Service or Private Benefits Bankers in the Governance.pdf

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