Allen N. Berger's research while affiliated with University of South Carolina and other places
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Publications (387)
We address two key issues concerning bank bailout effects on depositor and bank behavior. The first is whether bailouts weaken or strengthen market discipline by depositors through deposit supplies. The second is if bailed‐out banks decrease or increase their deposit demands. These questions can only be adequately addressed by analyzing the effects...
While operational risk is generally perceived as idiosyncratic with limited systemic implications, we document that operational risk threatens financial stability. Using supervisory data on large U.S. Bank Holding Companies (BHCs), we find operational losses increase systemic risk through a direct channel that impairs market values of loss-experien...
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We model dynamic bank capital structure under three optimally‐designed regulatory regimes dealing with potential default – bailout, where government provides capital; bail‐in, using private‐sector funds; and no regulatory intervention, allowing failure. Only under optimally‐designed bail‐in do banks recapitalize during distress. Their pre‐commitmen...
Despite the devastating worldwide human and economic tolls of the COVID-19 crisis, it has created some positive economic and financial surprises and opportunities for research. We highlight two such favorable surprises – the shortest U.S. recession on record and the avoidance of any banking crisis – and a number of research opportunities. We tie th...
We examine the effects of geographic deregulation on banks’ cost of equity (COE) using changes in interstate bank branching laws over the post–Riegle-Neal period (1994:Q4–2016:Q4). We find strong evidence that deregulation increases banks’ COE. This is driven primarily by active acquirers, rather than those subject to increased competition from the...
Bank prudential supervision is designed to enhance financial stability, but we are unaware of extant empirical research linking this supervision to financial system risk. In particular, there are no prior findings on how supervisory enforcement actions (EAs) – major tools of supervisors – affect systemic risk. We empirically investigate relations b...
A key issue in the finance-growth nexus literature is endogeneity – economic growth may drive finance as well as finance driving growth. Some research addresses endogeneity using relatively exogenous shocks from U.S. bank geographic deregulation, often documenting favorable economic effects. We connect deregulation shocks for the first time to indi...
We examine the impact of economic policy uncertainty (EPU) on bank liquidity hoarding. We create a comprehensive measure of bank liquidity hoarding that takes into account asset-, liability-, and off-balance sheet activities. Using over one million bank-quarter observations, we find that in response to EPU, banks hoard liquidity overall and through...
We conduct the first broad-based international study on bank-level failures covering 92 countries over 2000–2014, investigating national cultural variables as failure determinants. We find individualism and masculinity are positively associated with bank failure, but they operate through different channels. Managers in individualist countries assum...
Chapter 17 summarizes the empirical research findings on bail-ins, including OLA in the US. and BRRD in the EU. We also elaborate on research on contingent convertibles (CoCos), a form of bail-in used in some European nations. The chapter also briefly discusses other historical bail-in-like tools or episodes such as the double liability on sharehol...
This chapter describes deposit insurance, discusses the theory and practice of this first line of defense around the world, and evaluates how well it operates or fails to operate through the three mechanisms to prevent and/or deter financial distress and avoid resolution. From a theoretical standpoint, deposit insurance is predicted to make individ...
This chapter introduces the topics of the book and summarizes all of the other chapters. We take the broadest possible view of what constitutes a bailout or bail-in in order to ensure that we leave no stone unturned. We also cover methods to reduce the need for such costly procedures. We place a large focus on the Troubled Asset Relief Program (TAR...
This chapter reviews the effects of Troubled Asset Relief Program (TARP) on bank credit supply. Section 11.1 examines the consequences for credit supply from the changes in bank competition associated with TARP documented in Chapter 10. Sections 11.2 and 11.3 that follow cover the research findings on the direct effects of TARP on credit supply at...
Chapter 20 discusses capital requirements, a first line of defense used around the world to keep banks from falling into financial distress that might otherwise result in bank bailouts, bail-ins, or other resolutions. The chapter describes the concepts behind capital requirements, how these requirements may or may not function through the three mec...
Chapter 18 reviews empirical research findings on several alternative resolution approaches. It covers effects of: 1) bankruptcy/failure (the BHC goes bankrupt and the systemically important bank fails), 2) reorganization using living wills as directed by the Dodd-Frank Act, 3) regulatory forbearance (keeping the banks operating with little or no c...
Chapter 21 reviews liquidity requirements, a first line of defense to reduce liquidity risk to avoid bank distress and reduce the likelihoods of bailouts, bail-ins, or other bank resolutions. Liquidity requirements are explained, international and country-specific requirements are described, and the empirical evidence on the mechanisms is reviewed....
This chapter describes bailouts and bail-ins around the world as well as the alternatives of bankruptcy/failure (the BHC goes bankrupt and the systemically important bank fails); reorganization of the BHC using living wills; forbearance; keeping the banks operating with little or no capital; and breaking up the large systemically important institut...
In this chapter, we discuss implications for both bank policymakers and bank managers. We tailor our suggestions to the stability conditions of the financial system and to the short-run versus long-run orientations of the decision makers depending on these conditions. Section 28.1 focuses on implications under different conditions for bank policyma...
Chapter 4 reviews the theory of bailouts, bail-ins, and other approaches for resolving financially distressed banks. Much of the emphasis is on the channels through which bailouts and bail-ins may or may not achieve their ultimate goals of rescuing the real economy and financial system from the potential damage to the real economy and financial sys...
Here, we briefly describe the three mechanisms through which the first lines of defense operate to reduce the chances of bank financial distress that may trigger bailouts, bail-ins, or other resolution methods. We also clarify that these mechanisms are not entirely independent of one another by describing some of the interdependencies among them.
We describe in this chapter the only three empirical research studies to our knowledge that estimate the effects of Troubled Asset Relief Program (TARP) on bank competition, and to the extent possible, investigate which of the channels are behind the results. Section 10.1 reviews the findings of Berger and Roman (2015) and Cao-Alvira and Núñez-Torr...
Chapter 24 give background information and reviews theory and empirical research findings for the prudential supervision first line of defense, which includes both microprudential and macroprudential efforts to contain risks at the bank and system levels, respectively. Prudential supervision involves assessing if banks are obeying safety and soundn...
Chapter 26 gives background information and reviews theory and empirical research findings for direct government ownership of banks, a practice in many nations around the world. A key motivation for this ownership is the safety of the financial system, and we investigate the extent to which this first line of defense accomplishes this goal through...
This chapter covers the effects of the program on systemic risk. Ideally, we would like to know if Troubled Asset Relief Program (TARP) rescued the financial system from collapse or at least prevented the system from further substantial deterioration, but events that did not occur are fundamentally unobservable. However, as we show in this chapter,...
Chapter 29 concludes the book by identifying the important unresearched and underresearched questions that need the most attention, and suggesting how future researchers might address them. The chapter gives five general suggestions for future research to help keep the financial system and real economy safe, including a focus on reducing the likeli...
This chapter reviews the research on the effects of TARP on market values of publicly listed TARP banks. Results are shown for the announcement of the TARP program, individual injections of TARP capital, announcements of non-participation or rejection of approved funds, and repayments of funds, all of which differ. The different channels behind the...
Chapter 22 reviews stress tests, a first line of defense that essentially amounts to forward-looking capital requirements. The theory and practice of the tests are described, and the empirical evidence on the mechanisms is reviewed. Similar to capital requirements, the theory is ambiguous about whether stress tests operate through the Prudential an...
This chapter addresses the research concerning which banks applied for TARP funds, which of these institutions were successful in obtaining the funds, and which banks exited the TARP program early. Section 6.1 covers determinants of applying for and receiving TARP funds. We focus on the voluntary participants only, given that involuntary participan...
Chapter 23 provides information and research findings for prudential regulatory activity restrictions – limits or outright bans on what are considered risky activities – in order to reduce the incidence of financial distress and reduce the likelihood of resolutions. The theory behind the restrictions is discussed, numerous examples of the restricti...
This chapter reviews the market discipline effects of Troubled Asset Relief Program. The existing empirical literature covers market discipline by shareholders, subordinated debt holders, and depositors (both insured and uninsured), which we review in Sections 8.1, 8.2, and 8.3, respectively. Section 8.4 provides some brief conclusions and caveats...
This chapter discusses the conditions that typically bring about bailouts, bail-ins, and other types of bank resolution. Bailouts and bail-ins are usually triggered by financial crises, but may also occur during normal times in response to the distress of too-big-to-fail (TBTF), too-important-to-fail (TITF), or too-many-to-fail (TMTF) banks.
This chapter summarizes the empirical research on a large number of bailouts other than TARP, primarily those in the U.S. and Europe during and after the Global Financial Crisis and European Sovereign Debt Crisis, all of which are described in Chapter 3. Despite the large number of different bailout programs, the empirical research regarding these...
This chapter assesses social costs and benefits of the different approaches for dealing with the financial distress and potential failure of important financial institutions. Section 27.1 briefly summarizes a few TARP research articles that are not covered above because they do not fit neatly into the topics of Part II. Section 27.2 summarizes a mo...
We begin this chapter on Troubled Asset Relief Program (TARP) and the real economy by revisiting the two paths through which the TARP program might improve the real economy. Both involve increasing credit supply, which in turn may help credit customers increase their real spending and boost the real economy. The direct path begins with the primary...
This chapter evaluates the effects of TARP on the credit customers of the recipient banks, whose expenditures may in turn have real economic effects. The effects on corporate borrowers from TARP banks as well as their expenditures are mixed, and the impacts on small businesses are missing from the research literature
This chapter reviews the methodologies employed in most of the TARP empirical research studies. Most of the studies the difference-in-difference (DID) methods as the main specification. Many also use instrumental variables (IV), propensity score matching (PSM), Heckman sample selection models and/or placebo tests to take into account potential endo...
In this chapter, we focus on the leverage risks based on common equity. Section 9.1 explains that the injections of preferred equity have no direct or mechanical effect on common equity. Nonetheless, common equity may be either increased or decreased by the Troubled Asset Relief Program (TARP) program. Thus, TARP banks may be made either safer or r...
In this chapter, we go beyond the effects of credit quantities and focus on three additional ways in which Troubled Asset Relief Program (TARP) banks may have changed their portfolio risk. Section 12.1 discusses the extent to which TARP banks may have shifted into safer versus riskier credits. Section 12.2 describes the effects on portfolio risk of...
The Oxford Handbook of Banking, 3rd Edition provides an overview and analysis of developments and research in banking written by leading researchers in the field. This Handbook will appeal to graduate students of economics, banking and finance, academics, practitioners, regulators and policy makers. Consequently, the book strikes a balance between...
We review research on the effects of banks on the real economy, including, but not limited to articles in this Special Issue of the Journal of Corporate Finance. We focus primarily on US and European policy interventions that provide quasi-natural experiments with relatively exogenous shocks to bank output. We concentrate on single-country settings...
We analyze comparative advantages/disadvantages of small and large banks in improving household financial sentiment. Matching University of Michigan Surveys of Consumers household sentiment data with local banking market data from 2000 to 2014, we find surprising results—large banks have significant comparative advantages in boosting such sentiment...
We examine how bank efficiency during normal times affects survival, risk, and profitability during subsequent financial crises using data from five U.S. financial crises and preceding normal times. We find that cost efficiency during normal times helps reduce bank failure probabilities, decrease risk, and enhance profitability during subsequent fi...
Despite the growth of Islamic banks (IBs), little is known about their liquidity creation performance and financial stability consequences relative to conventional banks (CBs). We address these issues using data from 24 countries over 2000–2014. We find IBs create more liquidity per unit of assets than CBs, primarily on the asset side of the balanc...
We formulate and test hypotheses about how lead banks of syndicated loans use private information about loan quality, the Signaling and Sophisticated Syndicate Hypotheses. We measure private information using Shared National Credit (SNC) internal loan ratings made comparable using concordance tables. As outcomes, we use proportions of loans retaine...
Theory suggests that government aid to banks may either reduce or increase systemic risk. We are the first to address this issue empirically, analyzing the Troubled Assets Relief Program (TARP). Analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for larger and safer banks, and those in better local econom...
We assess benefits and costs of the Troubled Asset Relief Program (TARP) based on theory, data, and empirical research to date. TARP was intended to attenuate systemic risk and improve the real economy, and we focus on these as the most important potential effects of the program. Evidence suggests mostly short-term social benefits in reducing syste...
We investigate benefits to business borrowers from bank bailouts – specifically the Troubled Asset Relief Program (TARP). Applying difference‐in‐difference methodology to loan‐level data, we find more favorable contract terms in five dimensions – spread, amount, maturity, collateral, and covenants –suggesting increased credit supply to borrowers of...
The U.S. bank stress tests aim to improve financial system stability. However, they may also affect bank credit supply. We formulate and test opposing hypotheses about these effects. Our findings are consistent with the Risk Management Hypothesis, under which stress-tested banks reduce credit supply-particularly to relatively risky borrowers-to dec...
We investigate whether saving Wall Street through TARP really saved Main Street during the recent financial crisis. Our difference-in-difference analysis suggests that TARP statistically and economically significantly increased net job creation and net hiring establishments and decreased business and personal bankruptcies. The results are robust, i...
Citations
... Using Y-14 M data on the largest U.S. banks (CCAR banks) that are subject to the DFAST/CCAR stress tests, Berger et al. (2021) find evidence that these largest banks also use information obtained from banking relationships to determine the terms of the credit-card lending to consumers and small businesses. While they note that credit card lending is transactions-based, they find that the two technologies complement one another. ...
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... In the first test, we randomly assign placebo adoption years to each of the affected states. We further require that each placebo year is at least two years before the actual event year so that the placebo and the actual one cannot become confounded (Berger et al. 2021). In the second falsification test, we randomly assign non-UD states to each of the adoption years for the laws. ...
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... Xu, Tan and Netessine (2021) show managerial labor decisions, such as workloads, affect banks operational loss occurrence. Berger et al. (2022) show that operational risk is not only a bank-level idiosyncratic risk, as it may be perceived, but it is a significant systematic risk threat against the stability of the financial system. This risk is driven by tail events which are more pronounced for systemically important and close-to-distress BHCs. ...
Reference: Bank Charter Values and Operational Risk
... After the financial crisis of 2008, the Financial Stability Board (FSB) and the G20 introduced a new tool called bail-in, see, e.g., Berger et al. (2022); Lambrecht and Tse (2023) and references therein, to address the failure of financial institutions and reduce the risk of financial contagion. The goal was to create a framework that would shift the cost of failure from taxpayers to shareholders and creditors, which is known as a "liberalism" strategy, see, e.g., Cayla (2022) for a discussion about it within the Digital Economy scenario. ...
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... 3 This destructive form of regulatory arbitrage could have negative consequences on source bank performance and shareholder value, but, just as importantly, 2 Bisias, et al. (2012) is an early survey of systemic risk measures. See also Benoit et al. (2017) and Berger and Sedunov (2021). 3 Ongena, Popov, and Udell (2013) find evidence that banks from tougher regulatory regimes engage in riskier lending in countries with weaker regulations, while Gao and Wang (2020) show that banks from countries with tougher capital regulations are more likely to engage in riskier syndicated loans with lead lenders from countries with less stringent capital regulations. ...
Reference: Cross-Border Bank Flows and Systemic Risk
... Recent research has documented that government guarantees determine MNBs' performance, including that of their subsidiaries in foreign host countries (Berger et al., 2020;Berger et al., 2022). Therefore, we included a dummy variable, Dep. ...
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... In times of economic recession, external finance premiums usually rise and lead to increased credit market stress [1]. In order to avoid unemployment due to COVID-19, a large number of borrowers are unable to repay their bank loans in time and depleting the banks' capital [2]. The standards of the credit market became very strict in such a period, which led to stricter requirements for borrowers to apply for loans in order to avoid low-credit borrowers. ...
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... Among them, two most prominent and highly cited ones being enhanced competition, more geographic expansion as well as diversification of active acquirers. Firstly, deregulation may enhance bank competition by permitting more potential as well as actual competitors towards local banking markets (Kroszner and Strahan, 2014;Berger et al., 2022). Increased competition can either reduce or increase the bank's cost of equity capital (COE) as it increases bank's risks and hence, puts upward pressure on bank's COE. ...
... See alsoBerger and Demirgüc-Kunt (2021) for an overview of research on banking during the COVID-19 crisis. ...
... As banks are essential for all economic sectors, any inefficiency in the banking industry will be felt throughout the entire economy [7]. At the beginning of 2020, research showed that banks faced a significant increase in demand for liquidity due to the Covid-19 crisis, as clients required more loans and credits to solve their financial problems [8]. The pressure on banks to pay loans and the disruption of debtors' ability to fulfill their credit obligations due to the pandemic has led to various problems in the banking sector, including overdue loans, liquidity problems, and reduced income. ...
