Simon Kwan, Senior Research Advisor, Federal Reserve Bank of San Francisco

Simon Kwan

Senior Research Advisor

Financial Research

Financial economics, Supervision and regulation, Financial stability

Simon.Kwan (at)

CV (pdf, 96.35 kb)

Working Papers
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The International Transmission of Shocks: Foreign Bank Branches in Hong Kong during Crises

2014-25 | With Wong and Hui | October 2014

abstract (+)
The international transmission of shocks in the global financial system has always been an important issue for policy makers. Different types of foreign shocks have different effects and policy implications. In this paper, we examine the effects of the recent U.S. financial crisis and the European sovereign debt crisis on foreign bank branches in Hong Kong. Unlike the literature on global banking that studies a global bank’s foreign operations from a home country perspective, our analysis uses foreign bank branches in Hong Kong and has a distinct host country perspective, which would seem more relevant to the host country policy makers. We find global banks using the foreign branches in Hong Kong as a funding source during the liquidity crunch in home country, suggesting that global banks manage their liquidity risk globally. After the central bank at home country introduced liquidity facility to relieve funding pressure, the effect disappeared. We also find strong evidence that foreign branches originated from crisis countries lend significantly less in Hong Kong relative to their controls, suggesting the presence of the lending channel in the transmission of shocks from the home country to the host country.
The Impact of Reserves Practices on Bank Opacity

2013-35 | With Iannotta | July 2014

abstract (+)
This paper finds that banking firms’ unexpected loan loss provisions had a significant effect of increasing bank opacity, both before and during the 2007-09 financial crisis. Furthermore, during the financial crisis, the extent to which banks delayed loan loss recognition is found to have had a significant effect on bank opacity, confirming an important concern raised by the Financial Crisis Advisory Group. Overall, banks’ practices in managing reserves seem to have a material impact on their opacity.
Financial Crisis and Bank Lending

2010-11 | May 2010

abstract (+)
This paper estimates the amount of tightening in bank commercial and industrial (C&I) loan rates during the financial crisis. After controlling for loan characteristics and bank fixed effects, as of 2010:Q1, the average C&I loan spread was 66 basis points or 23 percent above normal. From about 2005 to 2008, the loan spread averaged 23 basis points below normal. Thus, from the unusually loose lending conditions in 2007 to the much tighter conditions in 2010:Q1, the average loan spread increased by about 1 percentage point. I find that large and medium-sized banks tightened their loan rates more than small banks; while small banks tended to tighten less, they always charged more. Using loan size to proxy for bank-dependent borrowers, while small loans tend to have a higher spread than large loans, I find that small loans actually tightened less than large loans in both absolute and percentage terms. Hence, the results do not indicate that bank-dependent borrowers suffered more from bank tightening than large borrowers. The channels through which banks tightened loan rates include reducing the discounts on large loans and raising the risk premium on more risky loans. There also is evidence that noncommitment loans were priced significantly higher than commitment loans at the height of the liquidity shortfall in late 2007 and early 2008, but this premium dropped to zero following the introduction of emergency liquidity facilities by the Federal Reserve. In a cross section of banks, certain bank characteristics are found to have significant effects on loan prices, including loan portfolio quality, capital ratios, and the amount of unused loan commitments. These findings provide evidence on the supply-side effect of loan pricing.
Testing the Strong Form of Market Discipline: The Effects of Public Market Signals on Bank Risk

2004-19 | November 2004

abstract (+)
Under the strong form of market discipline, publicly traded banks that have constantly available public market signals from their stock (and bond) prices would take less risk than non-publicly traded banks because counterparties, borrowers, and regulators could react to adverse public market signals against publicly traded banks. In comparing the credit risk, earnings risk, capitalization, and failure risk between publicly traded and non-publicly traded banks, the evidence in this paper rejects the strong-form of market discipline. In fact, the findings indicate that banking organizations tend to take more risk when they were publicly traded than when they were privately owned.
Securities Activities by Commercial Banking Firms’ Section 20 Subsidiaries: Risk, Return, and Diversification Benefits

FRBSF WP1998-10 | October 1997

abstract (+)
This paper studies the implications of securities activities on bank safety and soundness by comparing the ex-post returns between banking firms’ Section 20 subsidiaries — subsidiaries that were authorized by the Federal Reserve to conduct bank-ineligible securities activities — and their commercial bank affiliates. I found that securities subsidiaries tend to be riskier but not necessary more profitable than their bank affiliates. For securities subsidiaries that are primary dealers of government securities, their higher risk partially comes from their higher leverage, whereas for those that are not primary dealers, despite having lower leverage, they tend to be riskier than their bank affiliates partly because of their aggressive trading behavior. Nevertheless, securities subsidiaries appear to provide diversification benefits to bank holding companies, as evidenced by the low return correlation between bank subsidiaries and securities subsidiaries. Within the class of securities activities, I found that securities trading tends to be more profitable and riskier than banking activities. Trading activities engaged by primary dealer securities subsidiaries tend to provide strong diversification benefits to banking activities, reducing the banking organization’s overall risk. For non-primary dealers, due to their aggressive trading behavior, their trading activities were found to increase the firm’s total risk. On the other hand, securities underwriting is found to be riskier, and in the case of non-primary dealers also less profitable, than banking activities. Nevertheless, its return exhibits low correlation with banking return and trading return, suggesting that securities underwriting provides potential diversification benefits to both banking and trading activities.
The Informativeness of Stochastic Frontier and Programming Frontier Efficiency Scores: Cost Efficiency and Other Measures of Bank Holding Company Performance

FRB Atlanta WP 1999-23 | With Eisenbeis and Ferrier | December 1999

abstract (+)
This paper examines the properties of the X-inefficiencies in U.S. bank holding companies derived from both stochastic and linear programming frontiers. This examination allows the robustness of results across methods to be compared. While we find that calculated programming inefficiency scores are two to three times larger than those estimated using a stochastic frontier, the patterns of the scores across banks and time are similar, and there is a relatively high correlation of the rankings of banks’ efficiencies under the two methods. However, when we examine the “informativeness” of the efficiency measured by the two different techniques, we find some large differences. We find evidence that the stochastic frontier scores are more closely related to risk-taking behavior, managerial competence, and bank stock returns. Based on these findings, we conclude that while both methods produce informative efficiency scores, for this data set decision makers should put more weight on the stochastic frontier efficiency estimates.
Published Articles (Refereed Journals and Volumes)
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Financial Stability and the Resolution of Federal Reserve Goal and Implementation Conflicts

Forthcoming in Journal of Financial Services Research | With Eisenbeis and Wall

abstract (+)
The Federal Reserve has been assigned the goal of fostering financial stability along with its monetary policy goals of maximum employment and stable prices. This paper considers whether the financial stability and monetary policy goals have consistent policy implications both in theory and in practice. It also considers how the implementation of monetary policy might conflict with financial stability and vice versa.
Data for Microprudential Supervision of U.S. Banks

In Handbook of Financial Data and Risk Information I: Principles and Context, ed. by Brose, Flood, Krishna, and Nichols | Cambridge University Press, 2013 | With Flood and Leonova

The 2007-2009 Financial Crisis and Bank Opaqueness

Journal of Financial Intermediation 22, January 2013, 55-84 | With Flannery and Nimalendran

abstract (+)
Doubts about the accuracy with which outside investors can assess a banking firm’s value motivate many government interventions in the banking market. Although the available empirical evidence is somewhat mixed, the recent financial crisis has reinforced a common assessment that banks are unusually opaque. This paper examines bank equity’s trading characteristics during “normal” periods and two “crisis” periods between 1993 and 2009. We find only limited (mixed) evidence that banks are unusually opaque during normal periods. However, consistent with theory, crises raise the adverse selection costs of trading bank shares relative to those of nonbank control firms. A bank’s balance sheet composition significantly affects its equity opacity, but we cannot detect specific balance sheet categories that have robust effects.
Financial Contracting and the Choice between Private Placement and Publicly Offered Bonds

Journal of Money, Credit and Banking 42(5), 2009, 907-929 | With Carleton

abstract (+)
The financial contracting in private placement bonds and publicly offered bonds are different. Our data show that private placement bonds are more likely to have restrictive covenants than public bonds. Private placement bonds are also more likely to be issued by smaller and riskier firms. For investment-grade firms that issue bonds in both markets, our analysis shows that firms select the bond type to minimize financing costs. We find significant differences in the pricing of private placement and publicly offered bonds, and some of these differences appear to be related to the different institutional features between the two markets.
The X-efficiency of Commercial Banks in Hong Kong

Journal of Banking and Finance 30(4), April 2006, 1127-1147

abstract (+)
Using the stochastic frontier approach to investigate the cost efficiency of commercial banks in Hong Kong, this paper found that the average X-efficiency of Hong Kong banks was about 16 to 30 percent of observed total costs. However, X-efficiency was found to decline over time, indicating that Hong Kong banks were operating closer to the cost frontier than before, consistent with technological innovations in the banking industry. Furthermore, the average large bank was found to be less efficient than the average small bank, but the size effect appears to be related to differences in portfolio characteristics among different size banks.
Market Evidence on the Opaqueness of Banking Firms’ Assets

Journal of Financial Economics 71(3), March 2004, 419-460 | With Flannery and Nimalendran

abstract (+)
We assess the market microstructure properties of U.S. banking firms’ equity to determine whether they exhibit more or less evidence of asset opaqueness than similar-sized nonbanking firms. The evidence indicates that large bank holding companies (BHCs), traded on the NYSE, have very similar trading properties to their matched nonfinancial firms. In contrast, smaller BHCs, traded on NASDAQ, trade much less frequently despite having very similar spreads. Analysis of IBES earnings forecasts indicates that banking assets are not unusually opaque; they are simply boring. The implications for regulatory policy and future market microstructure research are discussed.
Impact of Deposit Rate Deregulation in Hong Kong on the Market Value of Commercial Banks

Journal of Banking and Finance 27(12), December 2003, 2231-2248

abstract (+)
This paper examines the effects of a series of events leading up to the deregulation of deposit interest rates in Hong Kong on the market value of banks. All the evidence suggests that banks earned rents from deposit interest rate rules, and deregulation would lower these rents and hence bank market values. On average, the total abnormal return due to interest rate deregulation was around negative 4 percent. There is some evidence that large banks and banks with high deposit-to-asset ratios suffered a bigger drop in value, suggesting that these banks enjoyed a bigger subsidy under the interest rate rules.
Operating Performance of Banks among Asian Economies: An International and Time Series Comparison

Journal of Banking and Finance 27(3), March 2003, 471-489

abstract (+)
Per unit bank operating costs are found to vary significantly across Asian countries and over time. The strong correlation between per unit labor cost and physical capital cost suggests that there exist systematic differences in bank operating efficiency across countries. The declining operating costs between 1992 and 1997 are consistent with improving operating performance. Since 1997, the run-up in operating costs coincided with the Asian financial crisis, suggesting that banks incurred additional costs to deal with problem loans while outputs declined simultaneously. Labor cost share is also found to decline significantly between 1997 and 1999, perhaps because banks were able to cut labor force faster than physical capital. Significant differences in labor cost share across countries suggest cross-country differences in bank production functions. The positive relation between labor cost share and wage rate indicates that banks using more labor is due to labor force productivity, rather than labor being cheap.
Hidden Cost Reductions in Bank Mergers: Accounting for More Productive Banks

In Research in Finance, 19, ed. by Chen | London: Elsevier Press, 2002. 109-124 | With Wilcox

abstract (+)
The bank mergers of the 1990s often triggered upward adjustments in reported depreciation and goodwill amortization expenses, apart from any change in actual costs, due to the conventions of purchase accounting. Thus, conventional measurements underestimated the sizable and longlasting reductions in noninterest costs achieved following mergers. The largest reductions in reported post-merger bank costs occurred in labor expenses, which were not subject to accounting revaluations. Reported premises expenses fell considerably less than that of labor when buildings were revalued. Other noninterest expense rose, partly because amortization increased due to the additional goodwill generated by mergers.
Financial Modernization and Regulation

Journal of Financial Services Research 16 (2/3), September 1999, 5-10 | With Furlong

Comments on ‘Trends in Organizational Form and Their Relationship to Performance: The Case of Foreign Securities Subsidiaries of U.S. Banking Organizations’

Journal of Financial Services Research 16(2/3), September 1999, 219-221

Bank Risk, Capitalization, and Operating Efficiency

Journal of Financial Services Research 12 (2/3), October 1997, 117-131 | With Eisenbeis

Firm-Specific Information and the Correlation between Individual Stocks and Bonds

Journal of Financial Economics 40(1), January 1996, 63-80

An Analysis of Inefficiencies in Banking

Journal of Banking and Finance 19(3-4), June 1995, 733-734 | With Eisenbeis

Re-examination of Interest Rate Sensitivity of Commercial Bank Stock Returns Using a Random Coefficient Model

Journal of Financial Services Research 5(1), March 1991, 61-76

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Handbook of Financial Data and Risk Information I: Data for microprudential supervision of US banks

2014 | Cambridge University Press | Kwan Flood Leonova

Financial Modernization and Regulation

2000 | Norwell, MA: Kluwer Academic Publishers | Editors Eisenbeis Furlong Kwan

FRBSF Publications
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Assessing Expectations of Monetary Policy

Economic Letter 2014-27 | September 8, 2014 | With Christensen

Long Road to Normal for Bank Business Lending

Economic Letter 2014-23 | August 4, 2014

The Price of Stock and Bond Risk in Recoveries

Economic Letter 2013-23 | August 19, 2013

Capital Structure in Banking

Economic Letter 2009-37 | December 7, 2009

Behavior of Libor in the Current Financial Crisis

Economic Letter 2009-04 | January 23, 2009

On Forecasting Future Monetary Policy: Has Forward-Looking Language Mattered?

Economic Letter 2007-15 | June 15, 2007

Safe and Sound Banking, 20 Years Later

Economic Letter 2006-26 | October 6, 2006

Inflation Expectations: How the Market Speaks

Economic Letter 2005-25 | October 7, 2005

Gauging the Market’s Expectations about Monetary Policy

Economic Letter 2004-28 | October 8, 2004

Banking Consolidation

Economic Letter 2004-15 | June 18, 2004

The Present and Future of Pension Insurance

Economic Letter 2003-25 | August 29, 2003

Pension Accounting and Reported Earnings

Economic Letter 2003-19 | July 4, 2003

Underfunding of Private Pension Plans

Economic Letter 2003-16 | June 13, 2003

Bank Security Prices and Market Discipline

Economic Letter 2002-37 | December 20, 2002

The Promise and Limits of Market Discipline in Banking

Economic Letter 2002-36 | December 13, 2002

Deposit Insurance Reform–When Half a Loaf Is Better

Economic Letter 2002-14 | May 10, 2002 | With Furlong

Is There a Credit Crunch?

Economic Letter 2002-12 | April 26, 2002

Financial Modernization and Banking Theories

Economic Letter 2001-37 | December 21, 2001

Rising Junk Bond Yields: Liquidity or Credit Concerns?

Economic Letter 2001-33 | November 16, 2001

The Stock Market: What a Difference a Year Makes

Economic Letter 2001-17 | June 1, 2001

Has Bank Performance Peaked?

Economic Letter 2000-32 | October 27, 2000

Three Questions about New Economy Stocks

Economic Letter 2000-15 | May 12, 2000

Margin Requirements as a Policy Tool?

Economic Letter 2000-09 | March 24, 2000

FRBSF Publications Prior to 2000
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A new view on cost savings in bank mergers
Simon H. Kwan & James A. Wilcox in FRBSF Economic Letter, Federal Reserve Bank of San Francisco, 1999

The informativeness of stochastic frontier and programming frontier efficiency scores: Cost efficiency and other measures of bank holding co
Robert A. Eisenbeis & Gary D. Ferrier & Simon H. Kwan in Working Paper, Federal Reserve Bank of Atlanta, 1999

On the portfolio effects of financial convergence – a review of the literature
Simon H. Kwan & Elizabeth S. Laderman in Economic Review, Federal Reserve Bank of San Francisco, 1999

Hidden cost reductions in bank mergers: accounting for more productive banks
Simon H. Kwan & James A. Wilcox in Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco, 1999

Market evidence on the opaqueness of banking firms’ assets.
Simon H. Kwan & Mark J. Flannery & M. Nimalendran in Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco, 1999

Hidden cost reductions in bank mergers: accounting for more productive banks
Simon H. Kwan & James A. Wilcox in Proceedings, Federal Reserve Bank of Chicago, 1999

Securities activities by commercial banking firms’ section 20 subsidiaries: risk, return, and diversification benefits
Simon H. Kwan in Proceedings, Federal Reserve Bank of Chicago, 1998

Market evidence on the opaqueness of banking firms’ assets
Mark J. Flannery & Simon H. Kwan & M. Nimalendran in Proceedings, Federal Reserve Bank of Chicago, 1997

Innovations and recent developments in mortgage-backed securities
Simon H. Kwan in FRBSF Economic Letter, Federal Reserve Bank of San Francisco, 1996

An analysis of inefficiencies in banking: a stochastic cost frontier approach
Simon H. Kwan & Robert A. Eisenbeis in Economic Review, Federal Reserve Bank of San Francisco, 1996

The temporal relationship between individual stocks and individual bonds
Simon H. Kwan in Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco, 1995

An analysis of inefficiencies in banking: a stochastic cost frontier approach
Simon H. Kwan & Robert A. Eisenbeis in Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco, 1995

The role of private placement debt issues in corporate finance
Simon H. Kwan & Willard T. Carleton in Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco, 1995

An analysis of inefficiencies in banking: a stochastic cost frontier approach.
Simon H. Kwan & Robert A. Eisenbeis in Proceedings, Federal Reserve Bank of Chicago, 1995

The certification value of bank loans
Simon H. Kwan in Proceedings, Federal Reserve Bank of Chicago, 1994

Risk taking behavior of banking firms
Simon H. Kwan in Proceedings, Federal Reserve Bank of Chicago, 1991

Other Works
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Asset Valuations and Financial Stability

Sveriges Riksbank Economic Commentaries 15, 2015 | With Giordani, Grodecka, Morales, Spector, and Olcer

abstract (+)
Sweden and many other countries are in a period of low inflation. Therefore, interest rates in Sweden and globally have been trending down in recent years. This highly expansionary monetary policy could have the side effect of fostering imbalances in financial markets by inflating asset prices. This Economic Commentary examines the prices of equities, bonds, and housing in Sweden, and concludes that the current valuations in both equities and housing seem high by historical standards. After narrowing for several years, the credit spreads in both corporate bonds and covered bonds have widened somewhat in recent months. While high valuations do not necessarily lead to large falls in asset prices, they do pose risks to financial stability by increasing the probability of such an occurrence.
Financial Turmoil and the Economy

2008 FRBSF Annual Report, 2009, 6-14 | With Furlong

Safe and Sound Banking, 20 Years Later: What Was Proposed and What Has Been Adopted

FRB Atlanta Economic Review, September 2006 | With Furlong

Risk and Return of Publicly Held versus Privately Owned Banks

FRB New York Economic Policy Review 10(2), September 2004, 97-107

abstract (+)
The author divides bank holding companies (BHCs) into four size classes, then categorizes each BHC according to public or private ownership. He compares the performance and risk across publicly held and privately owned BHCs between 1986 and 2000 and in five-year windows therein. For the largest BHCs, returns on assets are lower and operating costs are higher for those that are publicly owned. Small public BHCs also hold more capital than do small private ones.
Improving Public Disclosure in Banking

Federal Reserve System Staff Study 173, March 2000 | With Furlong and et al.

Hidden Cost Reductions in Bank Mergers: Accounting for More Productive Banks

In Global Financial Crises–Implications for Banking and Regulation: Proceedings of the 35th Annual Conference on Bank Structure and Competition | Chicago: FRB Chicago, 1999. 533-547 | With Wilcox

Mergers of Publicly Traded Banking Organizations Revisited

FRB Atlanta Economic Review 84(4), 1999, 26-37 | With Eisenbeis

Securities Activities by Commercial Banking Firms’ Section 20 Subsidiaries: Risk, Return, and Diversification Benefits

In Payments Systems in the Global Economy: Proceedings of the 34th Annual Conference on Bank Structure and Competition | Chicago: FRB Chicago, 1998. 531-552

Market Evidence on the Opaqueness of Banking Firms’ Assets

In Technology: Proceedings of the 33rd Annual Conference on Bank Structure and Competition | Chicago: FRB Chicago, 1997. 470-485 | With Flannery and Nimalendran

An Analysis of Inefficiencies in Banking: A Stochastic Cost Frontier Approach

In Assessing Innovations in Banking: Proceedings of the 31st Annual Conference on Bank Structure and Competition | FRB Chicago, 1995. 369-385 | With Eisenbeis

The Certification Value of Bank Loans

In The Declining Role of Banking: Proceedings of the 30th Annual Conference on Bank Structure and Competition | Chicago: FRB Chicago, 1994. 547-562

Risk-Taking Behavior of Banking Firms

In Rebuilding Banking: Proceedings of the 27th Annual Conference on Bank Structure and Competition | Chicago: FRB Chicago, 1991. 177-198