Tilburg University
Firms and their distressed banks Ongena, S.; Smith, D.C.; Michalsen, D.
Published in: Proceedings of the Federal Reserve Bank of Chicago Conference on Bank Structure and Competition
Publication date: 2001
Link to publication in Tilburg University Research Portal
Citation for published version (APA): Ongena, S., Smith, D. C., & Michalsen, D. (2001). Firms and their distressed banks. In D. Evanoff (Ed.), Proceedings of the Federal Reserve Bank of Chicago Conference on Bank Structure and Competition (pp. 262- 276). Unknown Publisher.
General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights.
• Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal 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.
Download date: 25. sep. 2021 n Competitio d an e Structur k Ban 2 26
N NORWEGIA E TH M FRO S LESSON S BANK D DISTRESSE R THEI D AN S FIRM BANKING CRISIS 1988-1991)
Steven Ongena* 'ilburg university
David C. Smith 'ederal Reserve Board
Dag Michalsen Norwegian School of Management
Introduction
Many economists maintain that large-scale interruptions in l rea e th o t s shock e negativ e propagat n ca s activitie g lendin k ban sector. For example, Bernanke (1983) argues that the systematic failure of banks exacerbated the decline in the U.S. economy
•The authors are affiliated with Tilburg University, the Board of Governors of the Federal Reserve System, and the Norwegian School of Management, respectively. The opinions expressed do not necessarily reflect those of the Federal Reserve Board, or ita staff. In the interests of brevity and simplicity, this working paper reports only some of the details of the research findings. A more comprehensive paper containing more details of the data, methodology, variables, and results, as well as additional references is available at http://www.federalreserve.gov/pubs/ ifdp/2000/686/default.htm. The authors thank Oyvind Bahren, Doug Breeden, Hans Degryse, Half Elsas, Karl Hermann Fisher, Mike Gibson, Jan Pieter Krahnen, Theo Hijman, Richard Priestley, Jay Ritter, Paola Sapienza, Greg Udell, Jan Pierre Zigrand, and participants at the 1999 CEPR Conference on Financial Markets (Gerzensee), 2000 European Economic Association Meetings (Bolzano), 1999 Estes Park Summer Finance Conference, 1999 New Hampshire Spring Finance Conference, 1999 Symposium on Finance, Banking, and Insurance (Karlsruhe), Norges Bank, and the Universities of Amsterdam, Antwerpen, Florida, Freibourg, Frankfurt, Leuven, North Carolina, Tilburg, and Wisconsin for comments. The authors are grateful to Bernt Arne Odegaard and 0yvind Norli for supplying Norwegian data, and Andy Naranjo for providing data from Datastream. Ongena thanks the Center for Financial Studies in Frankfurt for their hospitality and the Fund for Economic Research at Norges Bank. V. Banking Relationships 263
during the Great Depression and Slovin, Sushka and Polonchek (1993) show that firms borrowing from Continental Bank suffered large atock price declines upon its collapse in 1984. More d an , (2000) a Nakamur d an k Morc , (2000) p Kashya d an i Hoah , recently Bayoumi (19991 lay at least partial blame for Japan's current t tha g lendin k ban n i s disruption e system-wid n o e malais c economi began in the early 1990s. All of these researchers maintain that e valuabl g obtainin m fro s firm d prevente s imperfection t marke . distressed e becam s bank r thei e onc g financin A second set of economists view banks as performing l capita y b d enhance r o e substitutabl r eithe e ar t tha s function , (1975) k Blac y b d exemplifie , researchers e thes f o e Som . markets Fama (1980), and King and Plosser (1984), see nothing special y causalit e th t tha n reaso d an s bank y b d provide s service e th t abou d an m syste g bankin e th f o h healt e th n betwee n correlatio y an f o economic activity runs from the real sector to banks. Still others link the importance of banks to the structure of the ) (1999 n Greenspa , instance r Fo . general n i m syste l financia e ar s shock g bankin o t e susceptibl t mos s countrie t tha s suggest those that lack developed capital markets. He reasons that countries with well-developed capital markets insulate borrowers , Similarly . lending p sto s bank n whe s substitute d goo g providin y b m fro n competitio t sufficien t tha e argu ) (1998 s Zingale d an n a j Ra o t s fund g misallocatin m fro s bank s prevent s market l capita a f o t impac e th s mitigate d an s project t investmen e unprofitabl . sector l rea e th n o s crisi l financia e th e investigat e w , debate s thi n o t ligh w ne e som d she o T - 1988 f o s crisi g bankin n Norwegia e th g usin s distres k ban f o s coat r pape s thi r fo d compile a dat e Th . study f o y laborator r ou s a 1 199 l commercia r thei o t s bank n Norwegia k lin y directl o t s u t permi customers. Using these links, we measure the impact of bank distress announcements upon the stock price of firms related to the troubled banks. Our sample covers 90% of all commercial bank assets, and nearly all exchange-listed firms in Norway. This - near e th f o e influenc e th k trac o t y opportunit a th s u s afford collapse of a banking system on a large segment of the economy. The data also enable us to conduct a controlled test of the e th d an s bank f o h healt e th n betwee g runnin y causalit f o n directio s asset k ban n i n deterioratio e Th . customers r thei f o e performanc during the crisis resulted primarily from failures of small n i s companie d exchange-liste e th o t d unrelate e ar t tha s businesse our study, which were relatively healthy at the outset of the crisis. There are a number of reasons why the Norwegian banking crisis presents an ideal setting for studying the impact of bank distress on firm performance. First, the crisis was systemic and s bank , years s crisi e th g Durin . significant y economicall representing 95% of all commercial bank assets in Norway became insolvent, forcing the closure of one bank and the bailout of e thre s Norway' g includin , institutions l financia r othe s numerou largest commercial banks. Bank managers were fired, employees n Competitio d an e Structur k Ban 4 26 ——————————————————————————————————!•• i'n.>-**H"
II. The Norwegian Banking Crisis
-: On March 18th 1988, Sunnmersbanken, a small commercial bank? tafispt i t ? tha g warnin t repor s earning n a d issue , Norway n wester n i lost all of its equity capital. This event marked the beginninglS< 3 1 h whic n i d perio r Crisisg four-yea Bankin ^ a n Norwegia e th f o 4 1 s asset k ban l commercia l tota e th f o * 95 r ove g representin s bank Norway, either failed or were seriously impaired. The crisis unfolded along the lines of a "classic financial panic" as apl S substantia - displacement A . (1996) r Kindleberge y b d describe rapid financial deregulation in the mid-1980s - ignited " ; overtradin boofore a banth n f m i o n gki lendingmid»t"'•;-e th n I .. of the credit expansion, a sudden decline in oil prices precipitated a fall in asset values. Many weak firms went ; „ s >i Thi . firms g failin e th o t d tie s bank e th g imperilin , bankrupt o revulsiot d le n tradin i ne for th f reduce mo n gi d bank lending •'-'-; throughout the economy. Banking deregulation began in earnest in 1984. Prior to : that year, Norwegian authorities limited both the quantity and rates at which Norwegian banks could lend. In 1984, authorities L... V. Banking Relationships 265 e b o t t deb d requirementse subordinate d reserv d allowe , relaxe | m fro n competitio o t y Norwa d opene d an , capital k ban s a d counte ; t nex e th r Ove . banks n Norwegia d newly-establishe d an n 1,-bothforeig two years, the Norwegian government lifted all interest rate , requirements t investmen d bon t ou d phase , declarations r | Bankinge th r ,unde s responsibilitie t oversigh k ban d .consolidate f,;. Insurance, and Securities Commission (hereafter BISC) , and further -.relaxed restrictions on competition by permitting foreign banks to y newl e th n i e shar t marke r fo e compet o T . Norway n i s branche n ope . lending d expande y aggressivel s bank , environment d deregulate Between 1964 and 19B6, the volume of lending by financial l annua n a t a w gre y Norwa n i s household d an a firm o t s institution inflation-adjusted rate of 12%, roughly three times the average growth rate in the years prior to deregulation. A large portion d an , banks l commercia l smal , banks w ne m fro e cam h growt s thi f o . banks s saving The rapid expansion in credit ended in 1987 as bank loan a Se h Nort at e pric e th , 1986 g Durin . accumulate o t n bega s losse , barrel a 0 $14.5 o t l barre a 7 $2 m fro l fel l oi e crud d Blen t Bren t oil-dependen e th n i s value t asse n i e declin p shar a g precipitatin 8 198 n i % 3.6 o t d slowe h growt n loa k ban l Rea Norwegia . neconomy and 2.8% in 1989, Existing loans to cyclically sensitive firms also came into jeopardy. Aa indicated in Table 1, total 6 198 n i s 1,4?m fro 6establishment d increase y Norwa n i s bankruptcie e wer s bankruptcie e th f o t Hos . 4,53d 1989 an n 6i 8 198 n i 1 3,89 o t small firms concentrated in the real estate, transport, construction, retail store, fishing, hotel, and restaurant industries. Paralleling these failures, commercial loan losses, l leve a m fro e ros , assets k ban l tota f o e as percentag a d measure of 0.47% in 1986, to 1.57% in 1988, and 1.60% in 1989. The transition from a tightly regulated economy to a more competitive financial marketplace most likely accentuated these losses because n i d frau t outrigh d an , risk-taking h hig , decision-making r poo f o e announc o t t firs e th s wa n lendingk ban Sunnmarsbanke . m fro d followe s announcement r simila , 1988-89 g Durin . insolvency f o l Al . banks s saving r fou d an s bank l commercia l smal r othe e thre e th , Norway n wester r o n norther n i d locate e wer s bank e thes regions in which most business failures were occurring. d ha t governmen n Norwegia e th , crisis e th f o t outse e th t A no formal program for shoring up the capital of troubled banks, e th , Instead . insurance t deposi f o m for y an r sponso t i d di r no t I . programs e insuranc t deposi n ow s it d manage y industr g bankin was these programs - the Commercial Bank Guarantee Fund (CBGF) and Savings Bank Guarantee Fund (SBGF) - which first injected capital F CBG e th , BISC e th f o e guidanc e th r Unde . banks d trouble e th o int injected NOK 1.3 billion ($65 million) into the impaired banks and e On . banks r healthie h wit d merge e b o t m the f o t mos r fo d arrange exception was the insolvent Norion, a newly-formed commercial bank . 1989 y Ma n i d frau r fo C SIS e th y b n investigatio r unde e cam t tha The CBGP denied funding to Norion beyond the amount needed to cover liabilities of existing depositors, forcing the government n Competitio d an e Structur k Ban 6 26
to take over the stricken bank. Within six' months, the government t direc r unde s asset g remainin s it t pu d an n dow k ban e th t shu d ha administrative control. By Spring 1990, capital injections from t pu o t d appeare C BIS e th y b d propose s consolidation d an F CBG e th to rest the outbreak of bank insolvencies. Aftenpostea, the e th t tha 0 199 , 16 h Marc n o d proclaime , Norway n i r newspape t larges "Norwegian banking industry had weathered its worst difficulties" and that "the losses appear now to have flattened out." The optimism, however, was premature. Uncertainty created ; l . -< financia , weaknesse l Crisis globa f n si Gul n Persia e th y b markets, and economic downturns in Sweden and Finland diminished n bega s Newspaper . abroad w borro o t s bank n Norwegia r fo y abilit e th . n i e wer s bank l commercia t larges e thre s Norway' t tha t repor o t trouble. Early in December 1990, Norway's third largest o t y primaril e du s losse e larg d announce , Fofcus , bank l commercia d vha ^ t I . portfolio n loa g existin s it f o e performanc r poo e th recently acquired two of the original troubled commercial banks'. Later in December, Norway's second largest commercial bank, ..: Christiania Bank, announced an unexpected upward adjustment in , ' • . CBGF e th y b l capita f o n injectio n a d requeste d an , losses n loa Christiania Bank had earlier acquired Sunnmersbanken, the bank to first announce failure. Within two weeks of the Christiania Bank norskn , De . eBank bank l commercia Norway', t srelease larges s new also announced an upward revision in its loan loss estimates. All y previousl s fund t tha d recognize y publicl s bank e th f o e thre e becom r o p u d drie w no d ha s market l internationa h throug e availabl k Ban s Foku t a s losse e th f o e magnitud e Th . expensive y prohibitivel a t tha d announce F CBG e th n whe 1 199 y Februar n i t apparen e becam bailout of the bank had depleted nearly all of the remaining -: . fund e insuranc e privat e th n i l capita n i s wa m syste g bankin e entir e th , aid r furthe t Withou t parliamen n Norwegia e th , 1991 , 5 h Marc n O . collapsing f o r dange e Insuranc k Ban t Governmen e th h establis o t n billio 5 r K d allocate e availabl y immediatel e mad s wa F GBI e th n i y mone e Th . (GBIF) d Fun o t d an k Ban s Foku f o t bailou e th h finis o t F CBG e th y b e us r fo e th r afte y Shortl . Bank a Christiani o int l capita g injectin n begi d woul t i t tha d announce k Ban e norsk n De establishmen, GBIF e th f to also need a large capital infusion to sustain operations. By the Fall of 1991, it became clear that the Kr 5 billion used to start the GBIF would be inadequate for bailing out ail three of Norway's largest banks. After six months of debate on to how to resolve the worsening crisis, the Norwegian parliament increased the size of the GBIF, created a new fund called the Government Bank Investment Fund, and amended existing laws to force each ailing bank to write n Norwegia e th d allowe y effectivel s Thi . capital y equit s it n dow government to step in and take control of the three banks. In late-.1991, the total size of the government's guarantee funds GDPf o )* and-3.4 o t , l equa t amoun n (a n billio 0 2 r K o t d quadruple the Norwegian government completely took over Fokus and S c; . Bank e norsk n De f o % 55 f o l contro d gaine d an s bank a Christiani V. Banking FWaBonthlp» 267 e th n o l tol s it n take y onl t crisie no th d , sha 1992 y B Norwegian banking ayatem, but had also spread to other Nordic bankl s commercia c domesti t eigh y onl , Norway n I . countries remained in operation and 85% of the qountry' e commercial bank assets were under government control. Most large savings banks, mortgage companies, and finance companies had also experienced record losses during the period, and in 1993, Norway's largest insurance provider was forced into government stewardship. Sweden n loa k ban s a s distres f o s pattern r simila d experience d Finlan d an d an s asset k ban l tota f o % 5 r ove o t d climbe 2 losse199 n si tooy e k unprecedentecountr rescu h o t eac s n i s dstep authoritie . (1995)) u Pazarbasiogl d an s Dree e (se s bank g ailin g bankin n Norwegia e th t abou e mad e b d shoul s point e Thre crisis. First, responses to the unfolding crisia were unclear ex- e th d predicte e hav d coul s investor t tha y unlikel t i g makin , aate e th d an 3 192 e sinc y Norwa n i d faile d ha k ban o H . outcomes ex-post Norwegian government had taken a 'hands -off" approach to insuring depositors against failure. Moreover; bank representatives made n interventio e crisistat e t th f stha o g beginnin e th t a r clea t i was unnecessary, if not undesirable. ! For instance. Tor Associatios Banker n n Norwegia e Kobberstadth f o d ,hea (BanJcfbreningen) , stated in October
A bank that is poorly managed nhould not be allowed r fo t preceden d sett i ba na , forever n o e continu o t e privat a n maintai o t g goin e we'r f I . industry e th s resource h throug t i o d d shoul e w , system g bankin e b d shoul e 'On . system e th n withi s bank m fro s problem e solv o t ! trying t abou l carefu y extremel through state assistance (Oagens Neringsliv, 10/26/69) . |
Second, government intervention led to disruptive changes d steppe t governmen e th e tim t firs e Th . banks d distresse e th t a f o n injectio n a r fo e exchang n I . Bank n Norio d liquidate t i , in capital, the GBIF required ailing banks to write down their capital, replace management, cut coats, and scale back their s bank t larges e thre e $l fth contro t Subsequen . networks h branc p to d an s boarde th director f f so o l dismissa o t d le d indee t impac e th , Third . Bank a ! Christian d an e Foku h bot t a t managemen of the crisis on the banking industry has been long lasting. As of September 2000, the Norwegian Government continued to hold l commercia t larges o tw s Norway' n i s stake g controllin r o e larg banks. Moreover, the stock market value of Norwegian banks did not . 1997 f o r summe e th l unti s level s crisi - pre r thei o t r recove
ll-I. Data and Event Study Methodology
Given the history of the Norwegian banking crisis, we now f o t impac e th e analyz o t d use y methodolog d an a dat e th o t n tur n Competitio d an e Structur k Ban 8 26
bank distress announcements on the stock priQM $f firms maintaining relationships with distressed banfts,
Relationship, announcement, and stock price data s relationship k firm-ban f o s time-serie a h wit t star e W d an a Ongen , study r h (2000Jthei r Smit Fo .d an a Ongen y b d compile Smith (2000) collect annual information on the identity of bank • L>, E OS e th n o d liste s firm l non-financia y b d maintaine s relationship between, 1979 and 1995. The sample covers, on average, 95* of all , .? h Althoug . period t tha g durin E OS e th n o d liste s firm c non-ban) these firms represented less than 0.10% of the total number of ; f incorporated companies in Norway, their book equity value in 1995 accounted for 21% of total corporation equity, and their market * sampl e Th . (2000)) d P (BehreGD Odegaar f d o n an % 45 d equale e valu , banks t differen 5 5 f o l tota a h wit s relationship d maintaine s firm l internationa 5 1 , banks l commercia n Norwegia 4 2 g includin commercial banks, and 17 Norwegian savings banks. During an average year, 74% of the firms maintained a relationship with only . . . relationships k ban e mor r o r fou d maintaine % 2 y onl d an k ban e on Table 1 provides an annual overview of the turnover in bank e th n o d liste s firm f o r numbe l tota relationshipse th h wit g alon , , ' Norway n i s firm l al s acros s bankruptcie f o r numbe l tota e th , OSE m fro , year h eac E OS delistins e th firm m f o gfro r numbe e th d an 1980 to 1995. During this period the OSE listed an average of 130 firms. The number of firms going public increased markedly during. the early 1980s, a period in which substantial deregulation and 'g liftin e th g includin , market k stoc e modernizatioth n i d noccurre of prohibitions on foreign purchases of equity in 1984 and in the introduction of U.S.-styled insider trading regulations in 1985. ; • d remaine s , delistingfirm 1990 E f OS o f n so exceptio e th h Wit l tota s a n eve d perio s crisi e th t throughou t constan y relativel bankruptcies in the country rose. In fact, the net number of •'• e averag e Th . 1990 r afte r yea h eac w OSe Eth gre n o g listin s firm number of firms starting new bank relationships and ending , 1986-1988 s year e th g durin d triple s relationship g existin compared to the average turnover in prior years. Beginning in 1989, firms scaled back on the number of bank relationships they . „. l K . e rat a t a s relationship w ne d ad o t d continue t bu , terminated -f . deregulation o t r prio t tha o t e tripl ,- He match the Ongena and Smith (2000) relationship data with • a set of announcements of distress made by banks involved in the '( - .„; crisis l al f o t lis a h wit t star e W . crisis g bankin n Norwegia related bank announcements that appeared on the OSE wire service $ l "f- quasi-governmenta d an l governmenta f o s report l annua e th n i r o agencies, compiled by Kaen and Michalsen (1997). To this list we;; add announcements appearing in major Norwegian newspapers during - the crisis period- We then define an event to be the date that the first material announcement of distress by a bank appears in one of our news sources. Such an announcement commonly includes a statement about severe loan losses, inadequate reserves, or large ; a g .^s coverin s announcement n thirtee n obtai e W . losses l capita V. Banking Relationships 269 e th d ad e w e thes o T . 1991 y Januar d an 8 198 h Marc n betwee d perio announcement on June 17, 1991 that both Den norske Bank and a vi l capita f o n injectio n a d requeste d ha k Ban a Christiani government-purchased preferred equity. This request was the first indication that the magnitude of losses at Norway's two largest e guarante t governmen e th f o l capita g existin e th d outstrippe s bank fund, and was the effective atart of a series of highly publicized r fo t prospec e th g discussin s debate r newspape d an y parliamentar rescuing the banking system. In matching the bank announcements with firm-bank relationships, we require the distressed bank to be associated with at least one firm from the Ongena and Smith (2000) database. Because some of the distressed banks did not service d an s bank e fiv h wit s u s leave n criterio r ou , firms d publicly-trade six distress events. In 1990, these five banks maintained relationships with 108 OSE listed firms, representing 96% of the firms in our sample at that time. a h wit p relationshi a n maintai t tha s firm o t r refe e W distressed bank as 'related firms" and. those that maintain e H . firms* d "unrelate s a s bank d non-distresse h wit s relationship obtain a total of 217 related firm observations and 447 unrelated . events x si e th s acros s observation m fir d an l financia , ownership e requir o als e w , analysis e th r Fo stock price data. For these data we rely on JUerulf's Handbook n Informasjon,Bars o informatio Osl n y a b d supplie a dat d an subsidiary of the OSE. Our analysis requires that we have a complete stock price history for the firms in the 291 trading days surrounding the distress event and complete accounting information e w , place n i s screen e thes h Wit . event e th o t r prio r yea e th n i are left with 169 related firm observations and 267 unrelated firm observations. He report results using both a value-weighted index of all k benchmar e th f o s measure s a x inde t marke * "world a d an s stock E OS r gathe e w , index t marke d worl e th t construc o T . return t marke , Japanese , US e th m fro s return d value-weighte e th m Datastrea m fro a s receive y countr h Bac . indexes t marke k stoc n Germa d an , UK t marke r dolla S D s it o t l proportiona x inde d worl e th n i t weigh capitalization as of July 1st, 1987. Judging abnormal returns relative to a world market index sidesteps biases in the OSE e th d an y econom n Norwegia e th n betwee n correlatio e th y b d create banking crisis. For example, estimates of event-day abnormal s fall t marke k stoc n Norwegia e th f i d upwar d biase e b l wil s return on news correlated with a bank's announcement of distress.
• ; ' j - Methodology . Stud t yEven l mode t marke n ru e w , returns l abnorma f o s estimate n obtai o T o portfoli t even r fo n retur k stoc y dail d realize e th f o s regression t marke e th f o n retur y dail d realize e th f o e measur j,ra }1n ,o -r, , S» ftl k , dummies t even y dail i * T 2 f o t se a d an , H r , index e insid s day r fo e on f o e valu e th e tak h whic , r-l,r , _. , 0 , -*W,_ the event window (t = k), and zero outside the window. 270 Bank Structure and Competition
t e insid abnorma y s dail e lreturn th coefficiente e Th measur jk f s event window. For the results reported in the tables, we start , window t even e th f o t star e th o t r prio s day 0 15 n estimatio e th include up to 40 days inside the window, and end the estimation s stock f o g non-tradin e Becaus . window t pftes even e day rth 0 10 g addin y b s result r ou l al k chec e w , OSE e th n o m proble n commo a three lead and lagged values of the market index to correct for n retur l abnorma y dail e th f o non-synchronou s Sum . strading estimates y^over various windows yield cumulative abnormal ret H a g usin e significanc r fo d teste e b n ca h whic , estimates ) (CAR to impac f BanJo t c Distresg sAnnoung
This section presents the event study results by first documenting the impact of distress announcements on the banks themselves. By o t s bank d trouble e th f o n reactio e pric k stoc e th g studyin t firs the distress announcements, we can jointly gauge the informativeness of the chosen event dates and the economic magnitude of the announcements. e th h bot g usin S CAR k ban e averag d an l individua s report 2 e Tabl OSE index and the world market index over various windows s benchmark o tw e th e Becaus . distress f o s announcement g surroundin generally produce similar CAR estimates, we focus in the text on estimates measured relative to the world market index. Stock price data for Sparebanken Nord-Norge are not available before . 2 e Tabl m fro d exclude s i k ban s thi o s , 1994 t repor e w , events s acros s estimate R CA e th e summariz o T e simpl a s take t firs e Th . methods t differen o tw g usin s average t independen e ar s estimate e th t tha s CARSe th assume ,f o e averag across events, and uses a t-test-to judge significance. The second method uses a seemingly unrelated regression (SUR) framework that e th t tha g assumin s announcement e th f o l al s incorporate y jointl price impact across banks is equal. The latter method averages the individual bank estimates using weights proportional to the n Thompso e (se s term r erro c event-specifi e th f o n deviatio d standar (1985)) . From a distressed bank's perspective, the events had a substantial impact on stock price. Across the events, the po»t . significant! y statisticall d an , large , negative e ar S CAR t even suggesting that our event date choices were surprising to investors. For instance, the stock prices of Den norske Bank and Christiania Bank were increasing over the 10 days prior to their % 9 n tha e mor l fel t bu , 1991 , 17 e Jun n o t reques t bailou immediately after the announcement was made. On average, the set e th leadins o t p greturn u l zerd oabnorma earne s bank d distresse f o f o e declin y announcement-da n a d experience d an t even s distres V. Banking Relationships 271
roughly 10% that persisted beyond the 10 day post-announcement " , significant y statisticall y onl t no e ar s average e Thes . window but economically meaningful. For example, on an aggregate basis, the (-1, +1) and (-3, +3) event windows capture 38% and 56%, respectively, of the total price fall in Norwegian bank stocks over the period 1988-1991. He now turn to examining the abnormal returns of the report3 e sTabl . announcements s distres k ban d aroun s firm d relate • • d weighte y equall n upo d base s estimate R CA c event-specifi portfolios of related firms, grouped by event, and average CARS across all events. The signs and magnitude of the related firm portfolio CARs tend to be more mixed across events than the bank n Sparebanke m fro s borrower , window t even ) +1 , <-l e th r Ove . CARs Nord-Norge fell by 26%, while firms related to Sunnmarsbanken and Fokus Bank declined by 6%. However, over the longer (-3, +3) and s firm r fo s return n i d observe e b n ca * "reversals , windows ) +10 , (0 related to Sunmarsbanken and Sparebanken Nord-Norge. That is, their cumulative abnormal returns are higher over these longer event windows than for the 3-day event window. This volatility is not surprising given that only 5 firms are associated with these two banks, and customers of these smaller banks tend to be smaller n De d an k Ban a Christiani o t d relate s Firm . themselves y risk d ian Borske Bank suffered less upon their banks' first announcement of 'distress. These borrowers experienced abnormal price drops that averaged -2.5% over the short (-1, +1) window, zero over the (-3, +3) window, and slightly positive for the (0, +10) period. Moreover, these same firms experienced a relatively mild 3-day decline of -0.3% - while their banks experienced their largest s losse k ban t tha t announcemen e th n upo - e prick stoc edeclin exceeded the existing capital of the government guarantee fund. Over longer windows, related firm stock prices once again tended to bounce back. To get a consistent view of the aggregate impact of these 3 e Tabl f o m botto e th , firms d relate e th n o s distressannouncement , average e th e creat o T . firms l al s acros s CAR e averag e th s report we first estimate the market model regression on a firm-by-firm basis and calculate the mean CAR across all 169 firm estimates. Then, in order to control for the cros&-B«f:t ional dependence in CAR estimates, we generate standard errors'from bootstrapped e th n i e dependenc l cross-sectiona e th e preserv t tha s distribution market model error terms E^ for firms with event dates that overlap in time (the Appendix of the more detailed version of this . procedure) p bootstra e th f o n descriptio a s contain r pape Using the bootstrapped errors, the average 3-day CAR estimate is a statistically significant -1.4%. Assuming that this estimate represented a permanent change in the average value of an OSE firm would imply a total wealth loss of NOK 3.6 billion (measured in 1990 Norwegian Kroner) on the, OSE. Such a loss amounts to about 1/5 of the bailout paid by the Norwegian government to the depositors at Norway's two largest banks, and about 1/20 of the total estimated losses experienced by banks n Competitio d an e Structur k Ban 2 27
, return l abnorma y 3-da e negativ e th , Thus . 1992 d an 8 196 n betwee if permanent, would be economically small. But because the firm e pric k stoc e negativ e th , themselves e revers o t d ten s price reaction is temporary. Over the 7- and ID-day event windows, the . insignificant y statisticall d an % +1.4 d an % +1.7 e ar s CAR e averag At tine bottom of Table 3, we also report an estimate that. d unrelate o t e relativ s firm d relate f o e the'performanc s judge firms ove evene rth t period. Specifically construce w , tfirm'-a 1- n ca s investor t tha s assume t tha o portfoli " "difference d weighte form a zero cost portfolio before the event date that is long in e th e creat o T . firms d unrelate n i t shor d an s firm d relate portfolio,,; each firm receives a weight that is proportional to th* e differenc e Th . year t tha e sampl e th n i s firm f o r nurabfe l tota portfolio CAR estimates suggest that the stock prices of related firms fall, by more than those of unrelated firms on event dates, but that the difference is not statistically significant.
V. Conclusion
The Norwegian banking system was in deep financial trouble y man t a l capita d exhauste s losse n Loa . 1991 d an 8 19)1 n betwee g bankin e th , broke t wen s fund e insuranc t deposi e privat , banks sector nearly collapsed, and Norway's largest banks were ultimately nationalized. Nevertheless, the average firm maintaining a bank relationship with a distressed bank faced only e th n o e pric k stoc s it o t s revision d downwar y temporar d an l smal announcement of their banks' distress. In fact, stock prices of publicly-listed companies grew over the event period, outstripping the average returns on other exchanges around the world. Our results suggest that bank distress cause significano dn \ --'-z\t f o s abilitie t investmen d an g financin e th o t s interruption exchange-listed Norwegian firms despite the fact that these firms were heavily reliant on bank debt as a source of bank financing. In the more detailed version of this paper, we argue that because the Norwegian financial system leans towards protections d an g accountin t transparen d an s right r minoritr fo yshareholde g to-consistentle stron unabl disclosure; h e ar s yestablis ,bank control rights over firms in Norway like they can in Japan. g well-functionin a h throug k wor y Norwa n i s investor , Instead equity market to control firms in a way that maximizes shareholder t tha w sho e w , argument s thi r fo e evidenc t direc s A . value , amounts r greate n i d an , often e mor y equit d Norwegiaissue s nfirm t a s wa t marke k stoc e Japanes e th n whe n eve Japanesn - s tha efirm y b t argumen e th n strengthe s regression l Cross-sectiona . peak s it demonstrating that Norwegian firms with access to liquid funds or that issued equity prior to the banking crisis experienced . .- •:, . . returns l abnorma h hig y relativel V- Banking Relationships 273
References n i n Slowdow e th g Explainin : After g Mornin e Th . Bayoumi1999 , ,T. f o u Burea l Nationa . Paper g Workin . 1990s e th n i h Growt e Japanes . Research c Economi
Bemanke, B.S., 1983. Nonmonetary Effects of the Financial Criftt*, in the Propagation of the Great Depression. American Economic /-' Review 73, 257-276. ;• ,, ^
, Market t Efficien n a n i t Managemen s Fund k Ban . 1975 , P. , Black . 323-339 , 2 s Economic l Financia f o l Journa
: Crises g Pazarbasioglu, Bankin B. c , Nordi Drees e Th ,. C-1995 , Pitfalls in Financial Liberalization. Working Paper. International Monetary Fund.
Pama, E.F., 1980. Banking in the Theory of Finance. Journal of i ' 39-57. 6, s Economic y Monetar e Mad s Remark , Crisis l Globa e th m fro s Lesson . 1999 , A. , Greenspan n o d Fun y Monetar l Internationa e th d an p Grou k Ban d Worl e th e befor September 27, 1999. http://www.federalreserve.gov/boarddocs/ speeches/1999/. i
Hoshi, T., Kashyap, A., 2000. The Japanese Banking Crisis: Where Did It Come From and How Hill It End? In: Bernanke, B. and Rogoff, c Economi of u Burea l Nationa . Annual s Macroeconomic R NBE , (Ed.) . K . Forthcoming , MA e Cambridg , Research
Kaen, F.R., Michalsen, D., 1997. The Effects of the Norwegian Banking Crisis on Norwegian Bank and Non-bank Stocks. Journal of Multinational Financial Management 7, 83-111. f o y Histor A : Crashes d an s Panic , Manias . 1996 , C.P. , Kindleberger MacMillan. . Crises l ,London Financia
King, R.G., Plosser, C.I., 1984. Money, Credit, and Prices in a Real Business Cycle. American Economic Review 74, 363-380. d an e Governanc e Corporat e Japanes Nakamura. , R. 2000 , , ,M. Morck Macroeconomic Problems. Working Paper. Harvard Institute of Economic Research. s Relationship k Ban f o n 2000, Duratio e .D.C. Th , Smith , S. , Ongena Journal of Financial Economics, Forthcoming. n Competitio d an e Structur k Ban 4 27
Rajan, R.G., Zingalea, te. , 1998. Which Capitalism? Lessons frail' the East Asian Crisis. journal of Applied Corporate Finance 11, '."-•
40-48. | : . ,1;: ; • . -' ."-
Slovin, MjB., Sushka, M.S., Polonchek, J.A., 1993. The Bank Durability: Borrowers as Bank Stakeholders. Journal Finance 48, 289-302.
Thompson, !R. , 1985. Conditioning the Ret urn -Gene rat ing Process on l Journa . Methods y Stud t Even f o n Discussio A : Events c Firm-Specifi of Financial and Quantitative Analysis 20, 151-168.
TABLE 1
Annual Overview of Firms and Their Bank Relationships
Bank Bank -'": Firms relation- relation- Bankruptcies Year listed on ships ships across all Delistings the OSE started terminated firms from the OSE
1980 5 765 *% 1 810 & 4 955 5 1,236 .5.
'** 10 2,075 3,891 4,536 3,814 117 4,926 5,749 5,158 3,634 3,500
Mean 2,820 V. Banking Relationships 275
TABLE 2
Cumulative Abnormal Returns, Distressed Banks
Bank (Event Markat •mat Window Date) latex (-10, -1) , +10to ) (-3, +3) , (-1.+D
Sunmrorebanken 06B 0.057 0.073 0.067 -0,026 (03/18/88) (0.022) (0.008) (0.000) (0.001) World 0.059 0.067 0.070 -0.028 (0.019) (0.012) (0.000) (0.000) k Ban s Foku &* -0.031 -0.363 -9.173 -0.148 (12/11/90) (0.199) (0.000) (0.000) (0.000) World -0.037 -0.3B7 -0.239 -0.192 (0.129) (O.OjWJ) (0.000) (0.000) ChriBtiania OSB -0.024 -0.061 -0.082 -0.074 Bank (0.256) (0.011) (0.000) (0.000) (12/20/90) World -0.107 -0.074 -0.095 -0.115 (0.000> (0.005) (o.ooo; (0.000) Den Norske OSB -0.123 -0.040 -0.124 -O.OB5 Bank (O.OOtf) id. 075) to.ooo; (a nnni (01/04/91) World -0.134 -0.069 -0.108 -0.104 (0.0*00) (0.002) (0.000) (0.000) ChriBtiania OSB 0.29* fi.OOO -0.150 -0.064 Bank (0.000) (0.990) (0.000) (0.000) (06/17/91) world 0.260 0.028 -0.120 -O.OS3 (O.OOO) (0.316) (0.000) (0.000) Den Norske OSB 0.149 -0.102 -0.303 -0.149 Bank (0.000) (0.030) (0.000) (0.000) (06/17/91) World 0.197 -0.067 -0.259 -0.138 (a.oont (0.188) (0.000) (0.000)
Average across OSB 0.013 -0 . DBS HK10T -0,088 All Events (0,608) (0.290) (0.0*7) (0.011
worldi oo . a -0 . 096 -0.106 (6. »79) (0.277) ;(o'.»*) (0.015)
SOR Regression OSB -0.024 0.136 -0.096 acrosa All (0.561) (e!«5) 0.000] (0.000) Events World -0.1IB -0/137 -6.116 Vs.OTb) (O.OOS) (0.000) (0.000)
s arparenthesen i e -value s 276 Bank Structure and Companion
TABLE
1 Retu: Reia •me
Event Market Window Index
merBbanXe -0.070 0.088 -0.079 ia/fl8) (0.0061 10.002 ;o.oooi
Sparebanken Nord-Norge 10' 0.019 (10/08/89) 1D1
Fok Bank 0.011 038 til 1/90) 001 ooo: Horia
OirJ 3.015 05 Baal 0.001 oe: 000
014
Den Borsk* .035 939 Bank 0001 JOO (01/04/91) World
Chriationia 104 Bank and Den 86 k Ban e Horsk (06/17/9D
Average acroa* J'.OIO 005 All Related B.3«6 280
Pi mi-weight! 0.01 317 014, Difference 5*5) Portfolio
p-Vi uee are parentheses