PIERRE DURAND

What do bankrupcty prediction models tell us about banking regulation? Evidence from statistical and learning approaches

Pierre Durand, Gaëtan Le Quang

Abstract

Prudential regulation is supposed to strengthen financial stability and banks' resilience to new economic shocks. We tackle this issue by evaluating the impact of leverage, capital, and liquidity ratios on banks default probability. To this aim, we use logistic regression, random forest classification, and artificial neural networks applied on the United-States and European samples over the 2000-2018 period. Our results are based on 4707 banks in the US and 3529 banks in Europe, among which 454 and 205 defaults respectively. We show that, in the US sample, capital and equity ratios have strong negative impact on default probability. Liquidity ratio has a positive effect which can be justified by the low returns associated with liquid assets. Overall, our investigation suggests that fewer prudential rules and higher leverage ratio should reinforce the banking system's resilience. Because of the lack of official failed banks list in Europe, our findings on this sample are more delicate to interpret.

Mot(s) clé(s)

Banking regulation ; Capital requirements ; Basel III ; Logistic ; Statistical learning classification ; Bankruptcy prediction models.

Banks to basics! Why banking regulation should focus on equity

Pierre Durand, Gaëtan Le Quang

Abstract

Banking regulation faces multiple challenges that call for rethinking the way it is designed in order to tackle the specific risks associated with banking activities. In this paper, we argue that regulators should focus on designing strong equity requirements instead of implementing several complex rules. Such a constraint in equity is however opposed by the banking industry because of its presumed adverse impact on banks' performance. Resorting to Random Forest regressions on a large dataset of banks balance sheet variables, we show that the ratio of equity over total assets has a clear positive effect on banks' performance, as measured by the return on assets. On the contrary, the impact of this ratio on the shareholder value, as measured by the return on equity, is most of the time weakly negative. Strong equity requirements do not, therefore, impede banks' performance but do reduce the shareholder value. This may be the reason why the banking industry so fiercely opposes strong equity requirements.

Mot(s) clé(s)

Banking regulation ; Capital requirements ; Basel III ; Random Forest Regression

Determinants of banks' profitability: Do Basel III liquidity and capital ratios matter?

Pierre Durand

Abstract

In this paper, we investigate the role played by the TCR and LCR among determinants of banks' profitability. To this end, using Random Forest regressions and a large dataset of banks' balance sheet variables, we assess the impact and predicting power of Basel III capital and liquidity ratios. Our results confirm the trade-off theory of the capital structure: banks have an optimal capital ratio below which the relation between capital and profitability is positive. On average, this optimum falls between 15% and 20%. Furthermore, we show that LCR has a positive, but weak, effect on profitability. Overall, our findings illustrate the fact that regulatory ratios do not constitute binding conditions for banks' performance.

Mot(s) clé(s)

Basel III, Capital ratio, Liquidity ratio, Banks' profitability, Random Forest regressions.

On the impact of capital and liquidity ratios on financial stability

Pierre Durand

Abstract

In response to the 2007-2008 global financial crisis, the G20 mandated the Basel Committee to put in place prudential regulations capable of ensuring financial stability: the Basel III agreements. This paper tackles this issue by investigating the impact of capital and liquidity ratios on financial stability for a sample of 1600 banks from 23 countries over the 2005-2016 period. We pay particular attention to the nonlinear character of this potential effect through the estimation of a polynomial model with interaction terms and a panel smooth transition regression. Distinguishing between different types of banks depending on their level of systemicity, we find evidence of a nonlinear effect of prudential ratios on financial stability: a low level of capital improves financial stability, but its effect tends to diminish for higher values. Finally, we show that bank profitability is a significant determinant of financial stability.

Mot(s) clé(s)

Basel III ratios ; financial stability ; interaction effects ; Panel Smooth Transition Regression

Impact du financement par fonds de pension sur la performance des entreprises du CAC 40.

Pierre Durand

Abstract

As pension saving managers, pension funds are able to finance long term investment, R&D and innovation while assuring their role as traditional institutional investors (activism, outsourcing of internal management bias...). As such pension funds can play a crucial role in the French investment dynamic which is mostly characterized by the use of credit. However, among the studies on the influence of institutional investors, few are those specifically interested in pension funds, and none focuses on the French case. This article aims to fill this gap in the literature by studying the impact of pension fund investments of CAC 40 firms' performance. Our results, over the period 2004-2016, highlight a negative influence of pension funds' participation. We explain those findings by the weakness of pension funds' participation and their foreign origin.

Mot(s) clé(s)

Pension funds, CAC 40, Tobin's Q, Panel, GMM