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Week 10 - Applied Microeconometrics

1) The document discusses whether creditors discipline banks through monitoring activities. Creditors holding bank debt have incentives to monitor banks to reduce their risk of large losses from bankruptcy. 2) It presents a study analyzing the introduction of depositor preference laws (DPL) in some US states between 1983-1993. DPL subordinates non-depositors' claims below depositors' claims in bankruptcy, increasing non-depositors' risk. 3) The study finds banks subjected to DPL (treatment group) saw significantly better financial results like higher z-scores and profits, lower non-performing loans, than similar banks not subjected (control group), indicating increased creditor monitoring influenced safer bank behavior.

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Muhibbuddin Noor
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25 views

Week 10 - Applied Microeconometrics

1) The document discusses whether creditors discipline banks through monitoring activities. Creditors holding bank debt have incentives to monitor banks to reduce their risk of large losses from bankruptcy. 2) It presents a study analyzing the introduction of depositor preference laws (DPL) in some US states between 1983-1993. DPL subordinates non-depositors' claims below depositors' claims in bankruptcy, increasing non-depositors' risk. 3) The study finds banks subjected to DPL (treatment group) saw significantly better financial results like higher z-scores and profits, lower non-performing loans, than similar banks not subjected (control group), indicating increased creditor monitoring influenced safer bank behavior.

Uploaded by

Muhibbuddin Noor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Financial Econometrics

Week 10
Dr Arisyi Raz

Email: [email protected]
Do Creditors Discipline Banks?
 Regulators wish to constrain bank risk taking

 One way is to impose market discipline

 Creditors holding bank debt are exposed to large losses in


the event of bankruptcy

 They therefore have incentives to monitor the bank

 And force changes in bank behavior that make them


sounder
Do Creditors Discipline Banks?
 The European Union introduced depositor preference
law in 2014

 Idea:

 Subordinate nondepositors’ claims below uninsured


depositors’ claims

 Nondepositors face greater losses in bankruptcy

 Leads to more market discipline, less risk taking


Do Creditors Discipline Banks?
Payout order in bankruptcy Payout order in bankruptcy
with out depositor with depositor preference
preference

1. Receiver 1. Receiver
2. Insured depositors 2. Insured depositors
3. Uninsured depositors & 3. Uninsured depositors
nondepositors 4. Nondepositors
4. Shareholders 5. Shareholders
Monitoring Matters
Danisewicz, McGowan, Onali and Schaeck (2017) ‘Debt
Priority Structure, Market Discipline, and Bank
Conduct’, Review of Financial Studies, forthcoming.

 Investigate whether this is the case using a natural


experiment in the United States

 Between 1983 and 1993 several US states randomly


introduced DPL

 But only for state chartered, not national chartered


banks
Monitoring Matters
 Introduction of the law is exogenous

 Due to lawmakers failing to recognize they did not have a


priority order

 Well defined treatment and control groups

 TG: state chartered banks


 CG: national chartered banks

 Groups are similar and operate within the same state


– economic conditions are identical for both
Similarity of the Groups
Diff-in-Diff Evidence of Monitoring

Creditors whose
claims become
junior demand
higher
compensation i.e.
more monitoring

Creditors whose
claims become
senior demand
less compensation
Diff-in-Diff Evidence of Influencing
Diff-in-Diff Evidence of Influencing
 An exogenous change in the law leads to significant
improvements in conduct with the TG relative to the
CG

 Higher Z-scores (move further from default)


 Improve profitability (ROA), reduce the variance of
profitability (ROASD) and improve capital ratio

 Lower non-performing loans rates

 Reductions in leverage

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