On the Market Discipline of Informationally-Opaque Firms: Evidence from Bank Borrowers in the Federal Funds Market

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractUsing plausibly exogenous variation in demand for federal funds created by daily shocks to reserve balances, we identify the supply curve facing a bank borrower in the interbank market and study how access to overnight credit is affected by changes in public and private measures of borrower creditworthiness. Although there is evidence that lenders respond to adverse changes in public information about credit quality by restricting access to the market in a fashion consistent with market discipline, there is also evidence that borrowers respond to adverse changes in private information about credit quality by increasing leverage so as to offset the future impact on earnings. While the responsiveness of investors to public information is comforting, we document evidence that suggests that banks are able to manage the real information content of these disclosures. In particular, public measures of loan portfolio performance have information about future loan charge-offs, but only in quarters when the bank is examined by supervisors. However, the loan supply curve is not any more sensitive to public disclosures about nonperforming loans in an exam quarter, suggesting that investors are unaware of this information management.Key words: earnings, management, market, discipline, opaqueness, banks (2002) presents evidence that the ratings agencies disagree more about the credit ratings of banks than non-financial firms, and that disagreement increases as the share of informationally-opaque assets increases. On the other hand, Flannery, Kwan, and Nimalendran (2004) conclude that large bank stocks have similar microstructure properties and analyst coverage to matched non-financial firms, and that bank earnings forecasts are more accurate, less dispersed, and revised less frequently. While the authors conclude that banks are no more opaque than non-banks, an alternative interpretation of their results is that banks have a greater ability to manage earnings than non-banks given discretion in the timing of recognizing unrealized losses and gains.

What Drives Bank Funding Spreads?

“…Our paper also relates to the literature that tests for interbank market discipline in panel and cross-sectional bank-level data [e.g., Furfine (2001); Ashcraft and Bleakley (2006); King (2008)]. Like those studies, but using a novel dataset and approach, we demonstrate that credit risk is priced in the bank funding market, although the degree varies over time.…”

An Empirical Study of Trade Dynamics in the Fed Funds Market

“…Nonbrokered transactions represent the bulk of the volume of fed funds loans. 4 Most fed funds loans are settled through Fedwire Funds Services (Fedwire), a large-value real-time gross settlement system operated by the Federal Reserve Banks. More than 7,000 Fedwire participants can borrow and lend (or buy and sell, according to traditional terminology) in the fed funds market.…”

Evaluating the Quality of Fed Funds Lending Estimates Produced from Fedwire Payments Data

“…Specifications (2) and (4) The algorithm used to identify fed funds loans is similar to the one proposed by Furfine (1999). This technique has been used to identify uncollateralized loans in the U.S. settled over the Fedwire Funds Service in Furfine (2001Furfine ( , 2002, Demiralp, Preslopsky, and Whitesell (2004), Ashcraft and Bleakley (2006), Ashcraft and Duffie (2007), Bech and Atalay (2008), and Bartolini, Hilton, and McAndrews (2010), among others. Modified versions of this methodology are also employed by and Acharya and Merrouche (2010) to identify overnight lending activity in the U.K. CHAPS Sterling and by Hendry and Kamhi (2007) in Canada's Large Value Transfer System (LVTS).…”

“…1 See Afonso, Kovner, and Schoar (2011), Afonso (2012), Ashcraft, McAndrews, and Skeie (2011), Ashcraft and Bleakley (2006), Ashcraft and Duffie (2007), Acharya and Merrouche (2010), Bartolini, Hilton and McAndrews (2010), McAndrews (2009), Bech and Atalay (2008), Bech and Klee (2009), and Allen, Chapmanz, Echenique, and Shum (2012) 2 One exception to this is the e-MID (electronic market for interbank deposits) active in Italy. See Angelini et al (2009) for more information.…”