University of Groningen
Systemic risk and financial regulation
Huang, Qiubin
IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite from it. Please check the document version below.
Document Version
Publisher's PDF, also known as Version of record
Publication date: 2019
Link to publication in University of Groningen/UMCG research database
Citation for published version (APA):
Huang, Q. (2019). Systemic risk and financial regulation. University of Groningen, SOM research school.
Copyright
Other than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons).
Take-down policy
If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim.
Downloaded from the University of Groningen/UMCG research database (Pure): http://www.rug.nl/research/portal. For technical reasons the number of authors shown on this cover page is limited to 10 maximum.
Systemic Risk and Financial Regulation
Publisher: University of Groningen, Groningen, The Netherlands
Printed by: Ipskamp Printing P.O. Box 333 7500 AH Enschede The Netherlands
ISBN: 978-94-034-1716-5 (Printed book) eISBN: 978-94-034-1715-8 (eBook)
c
2019 Qiubin Huang
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system of any nature, or transmitted in any form or by any means, electronic, mechanical, now known or hereafter invented, including photocopying or recoding, without prior written permission of the author.
Systemic Risk and Financial Regulation
PhD thesis
to obtain the degree of PhD at the University of Groningen
on the authority of the Rector Magnificus Prof. E. Sterken
and in accordance with the decision by the College of Deans. This thesis will be defended in public on
Thursday 27 June 2019 at 12:45 hours
by
Qiubin Huang born on 28 May 1988 in Guangdong, China
Supervisors Prof. J. de Haan Prof. L.J.R. Scholtens
Assessment committee Prof. C.H.S. Bouwman Prof. I.P.P. van Lelyveld Prof. R.M. Salomons
Acknowledgments
Time flies! I have studied and lived in Groningen for nearly five years in the blink of an eye. Without the support of my master supervisor Prof. Haizhen Yang, I cannot imagine that I would have had the chance in my life to study abroad. Without the effective guidance and constant encouragement of my PhD supervisors Prof. Jakob de Haan and Prof. Bert Scholtens, I cannot imagine that I would have become confident in academic research and writing in English. Without the backup of my parents and the help of my friends and colleagues, I cannot imagine that I would have gone this far to hold a PhD degree soon.
This thesis is a product of joint efforts of many others. First of all, I would like to express my sincere gratitude to my supervisors, Jakob de Haan and Bert Scholtens. I am truly grateful to Jakob, who not only guided my research with constructive suggestions and constant support as an academic advisor, but also inspired me tremendously as a mentor in life. I learned from Jakob to think critically, work effectively and present confidently. These are invaluable lessons for a lifetime. I am deeply grateful to Bert for his indispensable guidance and insightful comments on my writing throughout my PhD study. His helpful dis-cussions and challenging questions pushed me to critically reflect on my research from different perspectives. I was always touched and motivated by their quick feedback and meticulousness on my writing. It was an incredible fortune to have Jakob and Bert as my supervisors. Without them, I would have never made it to this point.
Besides, I would like to thank the assessment committee: Prof. Christa Bouwman, Prof. Iman van Lelyveld and Prof. Roelof Salomons, not only for their insightful comments and constructive suggestions, but also for their chal-lenging questions which stimulated me to further improve the thesis. I also thank the members of the GEM Department (including the secretaries) and of SOM (such as Ellen, Rina and Taco) for hosting me as a PhD student and for
providing a fascinating research environment. The good working environment really matters for my work performance. My heartfelt appreciation also goes to Jakob de Haan for providing me an opportunity to join his department at the Dutch Central Bank (DNB) as an intern. Without his permission and introduc-tion, I would have never had the chance to meet and talk with the enthusiastic colleagues at the DNB, including Robert Vermeulen, Wilko Bolt, Mark Mink, Marco Hoeberichts, Irma Hindrayanto, Jon Frost, Kostas Mavromatis, Cenkhan Sahin, Jasper de Jong, Chen Zhou, and Yue Li, and the prestigious visitors to DNB, such as Viral Acharya and Luc Laeven. These persons also contributed their insightful opinions to my research when I worked at DNB.
For various reasons, I would like to thank the following persons: Prof. Meryem Duygun, who is the President of the IFABS; Francesco Zanetti, who is an associate professor at the University of Oxford; Zhongbo Jing, who is an associate professor at the Central University of Finance and Economics; Prof. Haizhen Yang, Prof. Xiaoguang Yang, Prof. Jichang Dong, Prof. Hong Zhao and Sha Zhang, who work at the University of Chinese Academy of Sciences; and Mingting Kou, Ya Wen and Prof. Ming Xiao, who work at the University of Science and Technology Beijing. They played important roles at different stages of my PhD study.
I also treasure the happy time spending with the following friends: Yang Jiang, Chenglong Deng, Yuan Zeng, Ziyue Ma, Suxiao Li, Bingqian Yan, Yuwan Duan, Kailan Tian, Ye Liu, Huan Liu, Kenan Qiao, Shili Chen and Bingqi Tang, Yan Shao and Fan Wang, Yan Yan and Jingjing Zhang, Chenming Peng, Suqing Wu, Jiyuan Wang, Chengyong Xiao, Feng Hu, Wen Chen, Lu Zhang, Ning Ding, Junyu Zhang, Hao Tian, Hataitip Tasena, Yingdan Cai, Abdi Oumer, Aobo Jiang, Gary Lipeng Ge, my neighbor Lan Wang’s family, and my officemates Kristiana Rozite and Pieter Ytsma. They were indispensable seasoning to make my journey in Groningen taste much more delicious.
Last but not least, I would like to express my profound gratitude to my parents and sister for their continuous and unselfish support in my life. I also thank my parents-in-law and sisters-in-law for treating me as a family member. I especially thank my partner Jennie Ong for her wit to be my girlfriend and for her courage and trust to have a kid with me when I had neither a car nor a house and even worse, I had no income and stayed in the job market. We both knew what kind of pressure we would have in the final year of our PhD studies and what kind of difficulties we needed to overcome for raising a kid in this year, but what we did not know was when and where we would get a job.
Nevertheless, she still trusted me and followed my plans about having a kid and our future. I would like to share with her the sentence: confidence and trust make things happen; and repeat my words: the problem is not a problem, the problem is that there will not a problem. Finally, I would like to show my love to my adorable daughter Olivia. She is my angel who brings me so much fun and makes my world so colorful and vibrant!
In the past years, I met more difficulties but delivered a better performance than expected, thanks to so many accommodating people around me. In the future, I will continue to forge ahead and make further progress with a thankful attitude.
Qiubin Huang De Kaai 4, Groningen Thursday 2nd May, 2019
Contents
1 Introduction 1
1.1 Background and motivation . . . 1
1.2 Outline, methodologies and main findings . . . 4
1.3 Contributions . . . 6
2 Systemic Risk in the Chinese Banking System 9 2.1 Introduction . . . 10
2.2 A brief review of the Chinese banking system . . . 12
2.3 Methodology and data . . . 14
2.3.1 CoVaR: Definition and estimation . . . 16
2.3.2 MES: Definition and estimation . . . 18
2.3.3 SII and VI: Definition and estimation . . . 20
2.3.4 Sample and data summary . . . 21
2.3.5 Reflections on the application of systemic risk measures . 23 2.4 Results and analyses . . . 26
2.4.1 Results for ∆CoVaR . . . 26
2.4.2 Results for MES . . . 29
2.4.3 Results for SII . . . 31
2.4.4 Results for VI . . . 33
2.4.5 Comparing rankings under the four systemic risk measures 34 2.5 Conclusion . . . 36
Appendix 2.A Application of the SRISK measure . . . 37
2.A.1 SRISK: Definition and estimation . . . 37
2.A.2 Results for SRISK . . . 38 v
Appendix 2.B Market liquidity of bank stocks . . . 40
3 Bank Capitalization and Bank Stock Returns 43 3.1 Introduction . . . 44
3.2 US bank capitalization during 1985–2014 . . . 50
3.2.1 Bank capital ratios . . . 50
3.2.2 Bank sample and descriptive statistics . . . 52
3.2.3 Evolution of bank capitalization . . . 54
3.3 Capital ratios and the cross-section of bank stock returns . . . . 60
3.3.1 Portfolio sorting analysis . . . 60
3.3.2 Fama-MacBeth regression analysis . . . 65
3.4 Risk-adjusted returns of portfolios formed on bank capital ratios 68 3.4.1 Risk-adjusted returns during the tranquil period . . . 69
3.4.2 Risk-adjusted returns during the turbulent period . . . . 71
3.5 Robustness checks . . . 73
3.5.1 Alternative definitions of the tranquil period . . . 73
3.5.2 Survivorship bias . . . 74
3.5.3 Alternative risk factor model . . . 75
3.5.4 Controlling for bank size . . . 76
3.5.5 Results of value-weighted portfolios . . . 79
3.6 Conclusion . . . 80
Appendix 3.A The stressed capital ratio: Derivation and estimation . 81 4 Impact of the Dodd-Frank Act on Systemic Risk 85 4.1 Introduction . . . 86
4.2 Review of the DFA and related literature . . . 91
4.2.1 The DFA and its implementation . . . 91
4.2.2 Related literature and our contributions . . . 93
4.3 Research design . . . 95
4.3.1 The treatment and control groups . . . 96
4.3.2 Systemic risk measures . . . 99
4.3.3 Methodology for evaluating the DFA’s effect . . . 101
4.4 Main results . . . 107
4.4.1 Systemic risk in the US banking system . . . 107 vi
Contents
4.4.2 Constructing the synthetic control group . . . 108
4.4.3 Evaluating the treatment effect of the DFA . . . 112
4.5 Additional analyses and discussions . . . 114
4.5.1 Predictive power of the synthetic control group . . . 114
4.5.2 Endogeneity concerns and anticipation effect . . . 116
4.5.3 Did the DFA have greater impact on the six biggest BHCs?118 4.6 Conclusion . . . 120
5 Conclusions 123 5.1 Main findings and policy implications . . . 123
5.2 Limitations and future research . . . 126
6 Samenvatting (Summary in Dutch) 129
References 133
List of Figures
2.1 Assets and liabilities of the Chinese banking system . . . 14
2.2 Profits of the Chinese banking system . . . 14
2.3 Distribution of banking assets in 2013 . . . 15
2.4 Distribution of banking profits after taxes in 2013 . . . 16
2.5 Average ∆CoVaR and average MES of all banks . . . 36
2.A.1 SRISK and leverage of ICBC . . . 39
2.A.2 Aggregate SRISK and average leverage across banks . . . 39
2.B.3 Illiquidity of bank stocks . . . 40
3.1 Number of US listed banks in each year . . . 53
3.2 Monthly cross-sectional correlations between banks’ BCRs, MCRs and SCRs . . . 55
3.3 Bank capitalization during 1985–2014 . . . 56
3.4 Average capital ratios of size-sorted decile portfolios . . . 59
3.5 Portfolio average and median excess returns: 1985–2014 . . . 62
3.6 Portfolio average excess returns during the tranquil and turbulent periods . . . 64
3.7 Cross-sectional coefficients on the capital ratio variables . . . 67
4.1 Systemic risk in the US banking system . . . 108
4.2 Systemic risk in the US banking system and the SCG . . . 109
4.3 ∆CoVaR of US and other groups in the pre-DFA period . . . 111
4.4 The synthetic control group’s out-of-sample predictive performance115 4.5 Anticipation effect tests . . . 118 4.6 ∆CoVaR and MES of the six biggest BHCs and the other BHCs 119
List of Tables
2.1 Descriptive statistics of daily log-returns of 16 Chinese banks
dur-ing 9/25/2007–12/31/2014 . . . 22
2.2 Descriptive statistics of ∆CoVaR, DCC and VaR . . . 27
2.3 Ranking of banks based on yearly average ∆CoVaR of each bank 28 2.4 Yearly average ∆CoVaR of different bank groups . . . 28
2.5 Descriptive statistics of MES, DCC and VaR . . . 30
2.6 Ranking of banks based on yearly average of MES . . . 31
2.7 Yearly average MES of different bank groups . . . 31
2.8 Results for SII . . . 32
2.9 Results for VI . . . 33
2.10 Systemically important banks’ rankings in the full sample period 34 2.11 Pearson correlations among rankings of systemically important banks . . . 35
3.1 Descriptive statistics of banks between 1985 and 2014 . . . 54
3.2 Coefficients of the capital ratio variables obtained from Fama-MacBeth regressions . . . 66
3.3 Risk-adjusted returns during 1994–2007 . . . 70
3.4 Risk-adjusted returns during 2008–2014 . . . 72
3.5 Cross-sectional relationship between bank capitalization and stock returns . . . 74
3.6 Risk-adjusted returns taking into account survivorship bias . . . 75
3.7 Risk-adjusted returns obtained through the FF5 model augmented by two bond risk factors . . . 76 3.8 Risk-adjusted returns of portfolios sorted on size and capital ratios 78
3.9 Risk-adjusted returns obtained through the FF5 model augmented
by Gandhi and Lustig’s (2015) bank-specific size factor . . . 78
3.10 Risk-adjusted returns of value-weighted portfolios . . . 79
4.1 Recent studies on effects of new financial regulations . . . 90
4.2 US BHCs in the treatment group . . . 96
4.3 EU BHCs in the candidate control group . . . 98
4.4 Summary of control variables . . . 106
4.5 Weights assigned to candidate control banks . . . 109
4.6 DFA’s effect on systemic risk in the US banking system . . . 113
