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Simon Kwan

Senior Research Advisor
Financial Research
Financial economics, Supervision and regulation, Financial stability

Simon.Kwan (at) sf.frb.org

Working Papers
The Transmission of Negative Nominal Interest Rates in Finland

2023-11 | with Ulate and Voutilainen | April 2023


Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB’s changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event studies, high-frequency identification, and exposure-measure regressions. We provide robust evidence that there continues to be pass-through of a cut in the policy rate to mortgage rates even when the policy rate is in negative territory, but that this pass-through is smaller than when the policy rate is in positive territory. The evidence in this paper contrasts with some previous studies and provides moments that can be useful to discipline theoretical negative-rates models.

Complexity of Global Banks and Their Foreign Operation in Hong Kong

2019-22 | with Ho and Tan | September 2019


This paper studies the relation between the complexity of global banking organizations and their foreign banking operations (FBOs) in Hong Kong. Our empirical evidence indicates that the complexity of the parent company has significant effects on their Hong Kong branch’s business model, liquidity management, risk-taking, and profitability. The more complex the global banking organizations, their Hong Kong FBOs are more likely to derive a larger share of revenues from fee-based activities, and incur a higher cost of production despite enjoying a funding cost advantage. Notwithstanding the FBOs in Hong Kong may serve as a funding hub for its parent company, FBOs of more complex global banks tend to hold more liquid assets. While our empirical evidence suggests that the complexity of global banks has significant effects on FBOs risk-taking and profitability, the relation depends on how complexity is measured. For example, both the BCBS complexity score and the measure of geographic complexity are significant in explaining FBO profitability, but they have different signs. Likewise, geographic complexity and scope complexity are often found to have significantly different effects on FBOs performance. Taken together, the concept of global bank complexity has multiple dimensions, where different facets could have qualitatively different effects on FBOs in Hong Kong.

Tracking Financial Fragility

2019-06 | with Giordani | February 2019


In constructing an indicator of financial fragility, the choice of which filter (or transformation) to apply to the data series that appear to trend in sample is often considered a technicality, but in fact turns out to matter a great deal. The fundamental assumption about the likely nature of observed trends in the data, for example, the ratio of credit to GDP, has direct effects on the measured gap or vulnerability. We discuss shortcomings of the most common filters used in the literature and policy circle, and propose a fairly simple and intuitive alternative – the local level filter. To the extent that validation will always be a challenge when the number of observed financial crises (in the US) is small, we conduct a simulation exercise to make the case. We also conduct a cross country analysis to show how qualitatively different the estimated credit gaps were as of 2017, and hence their policy implications in 29 countries. Finally, we construct an indicator of financial fragility for the US economy based on the view that systemic fragility stems mainly from high level of debts (among households and corporations) associated with high valuations for collateral assets (real estate, stocks). An indicator based on the local level filter signals elevated financial fragility in the US financial system currently, whereas the HP filter and the ten-year moving average provide much more benign readings.

The International Transmission of Shocks through the Lens of Foreign Banks in Hong Kong

2014-25 | with Ho, Wong, and Hui | January 2023


This paper studies the international transmission of shocks through the foreign bank lending channel. We find evidence that foreign banks whose parent is headquartered in a country experiencing a financial crisis significantly reduce their lending in the host country. Our results are based on studying foreign banks in Hong Kong during the 2008 US financial crisis and the 2010 European sovereign debt crisis. However, we do not find an overall decline in bank lending during the foreign crisis. Banks from crisis country with a higher deposit ratio reduced lending less. Banks from crisis country with preference for liquidity reduced lending more, consistent with liquidity hoarding during crisis.

Financial Crisis and Bank Lending

2010-11 | May 2010


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


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


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


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)
The Impact of Reserves Practices on Bank Opacity

Journal of Financial Management, Markets, and Institutions 10(1), 2022, 1-26 | with Iannotta


This paper finds that banking firms’ unexpected loan loss provisions had a significant effect of increasing bank opacity, both before and during the 2007–2009 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 Stability and the Resolution of Federal Reserve Goal and Implementation Conflicts

Journal of Financial Services Research 53, June 2018, 163-178 | with Eisenbeis and Wall


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. Chapter 11 | 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


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


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


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


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


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


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


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

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
Financial Market Conditions during Monetary Tightening

Economic Letter 2023-03 | February 6, 2023 | with L. Liu

Minority Banks during the COVID-19 Pandemic

Economic Letter 2021-20 | August 2, 2021 | with Friesenhahn

Resilience of Community Banks in the Time of COVID-19

Economic Letter 2021-06 | March 1, 2021

Risk of Business Insolvency during Coronavirus Crisis

Economic Letter 2020-30 | October 5, 2020 | with Friesenhahn

Market Assessment of COVID-19

Economic Letter 2020-14 | May 28, 2020 | with Mertens

Banks’ Real Estate Exposure and Resilience

Economic Letter 2019-10 | April 1, 2019

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

Financial Modernization and Regulation

Economic Letter 1999-38 | December 31, 1999 | with Furlong

Rising Bank Risk?

Economic Letter 1999-32 | October 22, 1999 | with Furlong

Other Works
Asset Valuations and Financial Stability

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


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


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