Ongoing Projects

Bank governance and bailout expectations

Jacky and Asma - Research Collaboration Projects with Stockholm Business School
Dr Asma Mobarak and Dr Jacky Qi Zhang

This project in collaboration with Stockholm Business Schoolmanaged by Professor Francesco Vallascas and Professor Sabur Mollah, contributes to the stream of studies on bank governance by analyzing how the role of governance mechanisms (which are theoretically deemed to influence bank-risk taking) is moderated by bailout expectations at the bank level. Our point of departure is the general perspective adopted by studies on the risk-taking implications of bank governance structure. These studies are normally based on the different incentive structures that characterizes shareholders and managers. While the first are supposed to benefit for increasing risk taking, given the call-option features characterizing bank equity, the second are generally recognized as risk-averse that accept some safe, value-reducing projects, and reject some risky, value increasing projects. Nevertheless, we argue that the incentive structure of both shareholders and managers is influenced by the presence of bailout expectations in the banking industry given the potential negative externalities associated with bank failures. As a consequence, we argue that the influence of governance mechanisms of bank risk–taking is also affected by bailout out expectations. We test our conjectures on a large sample of international banks selected for the period 2004-2011.

The drivers of state aid in european banks during the financial crisis - in collaboration with the italian deposit insurance fund

Sabur and Francesco - Research Collaboration Projects with Stockholm Business School
Professor Sabur Mollah and Professor Francesco Vallascas

Another project in collaboration with Stockholm Business School, again managed by Professor Francesco Vallascas and Professor Sabur Mollah, analyzes the pre-crisis characteristics of European banks that have received state aid during the financial crisis that erupted in the summer of 2007. These banks differed significantly from banks passing through the crisis without any state support, being larger, more diversified, less liquid, less capitalized and characterized by a more aggressive growth. Furthermore, state aid have been mainly driven by too-big-to fail concerns and business diversification; though a diversified business focus reduces the likelihood of a state intervention when banks become extremely large. The benefits from diversification are, nevertheless, minor compared to the potential systemic costs related to an extremely large size. In contrast to this conclusion, after the peak of the financial crisis, European banks are not smaller and are more specialized than before. Our results imply that a significant reduction in bank size has to emerge with the implementation of any regulatory restriction on diversification.

Markov switching causality in international stock markets: a new approach to measure contagion

This research project in collaboration with Stockholm Business School is managed by Dr Jacky Qi Zhang and Dr Asma Mobarak.  By employing a Markov-Switching Causality model, this study provides a new approach to measure contagion effect across international stock markets. Previous studies in contagion effect mainly focus on the co-movement, which measured by correlation. However, the direction of contagion cannot be detected by such method. The important advantages of our proposed method is to identify the direction of contagion and also provide a framework to study the determinants of contagion effect.