Photo Gaëtan Le Quang

Gaëtan Le Quang

Maître de conférences
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  • Research group

      Macroéconomie Internationale, Banque et Econométrie Financière

2021-2 "What do bankrupcty prediction models tell us about banking regulation? Evidence from statistical and learning approaches"

Pierre Durand, Gaëtan Le Quang

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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.
Classification-JEL
C44, G21, G28
Mot(s) clé(s)
Banking regulation ; Capital requirements ; Basel III ; Logistic ; Statistical learning classification ; Bankruptcy prediction models.
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2020-2 "Banks to basics! Why banking regulation should focus on equity"

Pierre Durand, Gaëtan Le Quang

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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.
Classification-JEL
C44, G21, G28
Mot(s) clé(s)
Banking regulation ; Capital requirements ; Basel III ; Random Forest Regression
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2019-5 "Mind the Conversion Risk: a Theoretical Assessment of Contingent Convertible Bonds"

Gaëtan Le Quang

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Abstract
We develop a theoretical model to assess the merits of principal-write down contingent convertible (CoCo) bonds. The conversion risk is the key feature of CoCo bonds. Because of this conversion risk, CoCo bonds are hard to price and an equilibrium price does not necessarily exist. In our model, for such a price to exist, the bank needs to hold a minimum amount of equity and/or the expected return associated with its asset portfolio needs to be large enough. When an equilibrium price exists, it is a decreasing function in the amount of equity held by the bank. Well-capitalized banks can thus issue CoCo bonds at a lower price than least-capitalized banks. This is the reason why CoCo bonds are to be thought of more as a complement to equity than as a substitute. In addition, because of the conversion risk, self-fulfilling panics may occur in the CoCo bonds' market. We indeed define a game between CoCo bonds' holders and the Central Bank that allows us to exhibit situations where a panic occurs in the CoCo bonds' market. Using the global game technique, we show that the probability of crisis can be expressed as a function of the return associated with the asset portfolio of the bank. The probability of crisis is shown to be sensitive to the precision of the information available to CoCo bonds' holders. Taken together, our results call for cautiousness when assessing the relevance of regulatory requirements in CoCo bonds, especially concerning their systemic impact.
Classification-JEL
G13; G21; G28; G32; G33
Mot(s) clé(s)
convertible contingent bonds; conversion risk; equity; banks; systemic risk
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2018-28 ""Taking Diversity into Account": Real Effects of Accounting Measurement on Asset Allocation"

Gaëtan Le Quang

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Abstract
Following a request made by the G20, the IASB begins to work in 2009 on a new accounting standard meant to replace IAS 39: IFRS 9. Among other things, IFRS 9 puts forward a new way of classifying financial instruments that rests on a two-step procedure: a business model assessment and a contractual cash flow characteristics test. We develop a theoretical model that assesses the relevance of this procedure, specifically that of the business model assessment. We show that a mixed accounting regime where financial institutions whose time horizon is short resort to fair value accounting while those whose time horizon is longer resort to historical cost accounting provides a better asset allocation than a pure accounting regime where all FIs resort to the same accounting rule. In other words, business models are worth being taken into consideration when deciding whether an asset should be evaluated at its fair value or at its historical cost, which is in line with the framework presented in IFRS 9.
Classification-JEL
G11; G21; G22; M41
Mot(s) clé(s)
IFRS 9; Fair Value Accounting, Historical Cost Accounting; Asset Allocation; Real Effects of Accounting; Banks; Insurers
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2017-10 "Taking Diversity into Account: the Diversity of Financial Institutions and Accounting Regulation"

Gaëtan Le Quang

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Abstract
The global financial crisis and what followed point out at least two major failures of the financial system: its inability to contain liquidity risk and its inability to fund long term investments. We think that these two problems come from the setting up of rules and practices that tend to homogenize market participants’ incentives and behaviors. Fair value accounting is one element of this set of practices and rules. If the rationale behind fair value accounting – that is enhancing transparency in order to limit unreported losses and manipulations – can justify its use in the case of short-term financial institutions (meaning institutions whose time horizon is short because of the maturity of their liabilities) that constantly face the risk of a sudden liquidity need, it seems totally irrelevant when it comes to long-term financial institutions that will not face liquidity needs before ten or twenty years. In this perspective, we develop a model that shows that an accounting regulation that takes the diversity of financial institutions into account offers better results both in terms of liquidity and in terms of efficiency than a regulation that ignores this diversity.
Classification-JEL
G21, G22, M41
Mot(s) clé(s)
Fair value; Banks; Insurers; Diversity
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