Banking finance

It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be guarantees of bank deposits by the Federal Deposit Insurance Corporation. As with other forms of insurance, the issuing of a guarantee imposes a liability or cost on the guarantor. In this paper, a formula is derived to evaluate this cost. The method used is to demonstrate an isomorphic correspondence between loan guarantees and common stock put options, and then to use the well developed theory of option pricing to derive the formula.

This paper presents recent research on access to finance by small and medium-size enterprises (SMEs). SMEs form a large part of private sector in many developed and developing countries. While cross-country research sheds doubt on a causal link between SMEs and economic development, there is substantial evidence that small firms face larger growth constraints and have less access to formal sources of external finance, potentially explaining the lack of SMEs' contribution to growth. Financial and institutional development helps alleviate SMEs' growth constraints and increase their access to external finance and thus levels the playing field between firms of different sizes. Specific financing tools such as leasing and factoring can be useful in facilitating greater access to finance even in the absence of well-developed institutions, as can systems of credit information sharing and a more competitive banking structure.

Using 7900 bank observations from 80 countries for the 1988±1995 period, this paper examines the extent and eect of foreign presence in domestic banking markets. We investigate how net interest margins, overhead, taxes paid, and pro®tability dier between foreign and domestic banks. We ®nd that foreign banks have higher pro®ts than domestic banks in developing countries, but the opposite is the case for developed countries. Estimation results suggest that an increased presence of foreign banks is associated with a reduction in pro®tability and margins for domestic banks. Ó 2001 Elsevier Science B.V. All rights reserved. JEL classi®cation: E44; G21

Recent years have seen a considerable increase in the literatures concerning the separate areas of corporate social responsibility and corporate tax aggressiveness. However, comparatively little scholarly attention has been paid to the link between the two. This paper examines how the different activities of corporate social responsibility affect corporate tax aggressiveness. A structural model was tested using partial least squares regression to determine whether the relationships between corporate social responsibility dimensions and tax aggressiveness are positive or negative. The results indicate that a firm's tax aggressiveness depends on the nature of its corporate social responsibility activities. Notably, the study demonstrates that greater the activity in the social dimension of corporate social responsibility, the lower the level of corporate tax aggressiveness will be, whereas high activity in the economic dimension is associated with a high level of tax aggressiveness. These results extend the prior literature concerning the relationship between corporate social responsibility and tax aggressiveness and suggest that the nature of the relationship, whether negative or positive, tends to differ across the corporate social responsibility dimensions. Overall, the paper strongly supports the current literature and argues that the dimensions of corporate social responsibility should not be aggregated into a single measure because interesting and explanatory information is lost when such a method is used, especially with regard to an issue like corporate tax aggressiveness.

This paper surveys the empirical and theoretical literature on the mechanisms of corporate governance. We focus on the internal mechanisms of corporate governance (e.g., corporate board of directors) and their role in ameliorating various classes of agency problems arising from con¯icts of interests between managers and equityholders, equityholders and creditors, and capital contributors and other stakeholders to the corporate ®rm. We also examine the substitution eect between internal mechanisms of corporate governance and external mechanisms, particularly markets for corporate control. Directions for future research are provided. Ó 1998 Elsevier Science B.V. All rights reserved. JEL classi®cation: G30; G32

GDP per capita is in constant dollars, averaged over the entire sample period. Crisis period denotes the years in which each country experienced a systemic banking crisis and the duration of said crisis. Concentration is calculated as the fraction of assets held by the three largest banks in each country, averaged over the sample period. Crisis Definition is coded 1 for crises wherein non-performing loans exceeded 10%, 2 for cost of crisis greater than 2% of GDP, 3 for crises where the majority of the banks were insolvent and emergency measures were taken and 4 for crises where large-scale nationalization took place. Detailed variable definitions and sources are given in the data appendix.

Using data from 1996 to 2000, we investigate the effect of extensive foreign ownership on the banking sectors in general and bank efficiency in particular for eleven transition countries. Our unbalanced panel consists of 220 banks and 830 observations.

This note examines the determinants of bank performances across eighteen European countries between 1986 and 1989. The study replicates Bourke's methodology and finds that the results do conform to the traditional US concentration and bank profitability studies. Support is found for the expense preference expenditure theories, yet no support is found for the Edwards-Heggestad-Mingo risk avoidance hypothesis.

This paper addresses a little examined intersection between the problem loan literature and the bank efficiency literature. We employ Granger-causality techniques to test four hypotheses regarding the relationships among loan quality, cost efficiency, and bank capital. The data suggest that problem loans precede reductions in measured cost efficiency; that measured cost efficiency precedes reductions in problem loans; and that reductions in capital at thinly capitalized banks precede increases in problem loans. Hence, cost efficiency may be an important indicator of future problem loans and problem banks. Our results are ambiguous concerning whether or not researchers should control for problem loans in efficiency estimation.

A company's credit default swap spread is the cost per annum for protection against a default by the company. In this paper we analyze data on credit default swap spreads collected by a credit derivatives broker. We first examine the relationship between credit default spreads and bond yields and reach conclusions on the benchmark risk-free rate used by participants in the credit derivatives market. We then carry out a series of tests to explore the extent to which credit rating announcements by Moody's are anticipated by participants in the credit default swap market.

This study reviews the performance of banks in twelve countries or territories in Europe, North America and Aus~ra!ia and examines the internal and external determination of profitability. To circumvent some of the difficulties in making comparisons between banks in different countries, the concept of 'value added' is introduced. Results parallel those in domestic U.S. studies and provide some support for the Edwards-Heggestad-Mingo hypothesis of risk avoidance by banks with a high degree of market power.

The new BIS 1998 capital requirements for market risks allows banks to use internal models to assess regulatory capital related to both general market risk and credit risk for their trading book. This paper reviews the current proposed industry sponsored Credit Value-at-Risk methodologies. First, the credit migration approach, as proposed by JP Morgan with CreditMetrics, is based on the probability of moving from one credit quality to another, including default, within a given time horizon. Second, the option pricing, or structural approach, as initiated by KMV and which is based on the asset value model originally proposed by Merton (Merton, R., 1974. Journal of Finance 28, 449±470). In this model the default process is endogenous, and relates to the capital structure of the ®rm. Default occurs when the value of the ®rmÕs assets falls below some critical level. Third, the actuarial approach as proposed by Credit Suisse Financial Products (CSFP) with CreditRisk+ and which only focuses on default. Default for individual bonds or loans is assumed to follow an exogenous Poisson process. Finally, McKinsey proposes CreditPortfolioView which is a discrete time multi-period model where default probabilities are conditional on the macro-variables like unemployment, the level of interest rates, the growth rate in the economy, F F F which to a large extent drive the credit cycle in the economy.

This study analyses the interest margin in the principal European banking sectors (Germany, France, the United Kingdom, Italy and Spain) in the period 1993–2000 using a panel of 15,888 observations, identifying the fundamental elements affecting this margin. Our starting point is the methodology developed in the original study by Ho and Saunders [Journal of Financial and Quantitative Analysis XVI (1981) 581–600] and later extensions, but widened to take banks' operating costs explicitly into account. Also, unlike the usual practice in the literature, a direct measure of the degree of competition (Lerner index) in the different markets is used. The results show that the fall of margins in the European banking system is compatible with a relaxation of the competitive conditions (increase in market power and concentration), as this effect has been counteracted by a reduction of interest rate risk, credit risk, and operating costs.

China is reforming its banking system, partially privatizing and taking on minority foreign ownership of three of its dominant ''Big Four" state-owned banks. This paper helps predict the effects by analyzing the efficiency of Chinese banks over 1994-2003. Findings suggest that Big Four banks are by far the least efficient; foreign banks are most efficient; and minority foreign ownership is associated with significantly improved efficiency. We present corroborating robustness checks and offer several credible mechanisms through which minority foreign owners may increase Chinese bank efficiency. These findings suggest that minority foreign ownership of the Big Four will likely improve performance significantly.

We analyze the importance of firm-specific and country-specific factors in the leverage choice of firms from 42 countries around the world. Our analysis yields two new results. First, we find that firm-specific determinants of leverage differ across countries, while prior studies implicitly assume equal impact of firm-specific factors. Second, although we concur with the conventional direct impact of country-specific factors on the capital structure of firms, we show that there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage.

Keywords: Non-performing loans Greek banking system Macroeconomic determinants Bank specific determinants Dynamic panel data a b s t r a c t This paper uses dynamic panel data methods to examine the determinants of non-performing loans (NPLs) in the Greek banking sector, separately for each loan category (consumer loans, business loans and mortgages). The study is motivated by the hypothesis that both macroeconomic and bank-specific variables have an effect on loan quality and that these effects vary between different loan categories. The results show that, for all loan categories, NPLs in the Greek banking system can be explained mainly by macroeconomic variables (GDP, unemployment, interest rates, public debt) and management quality. Differences in the quantitative impact of macroeconomic factors among loan categories are evident, with non-performing mortgages being the least responsive to changes in the macroeconomic conditions.

In this article, I examine the effect of pre-existing relationships between a firm and its potential lender on the potential lender's decision whether or not to extend credit to the firm. I find that a potential lender is more likely to extend credit to a firm with which it has a pre-existing relationship as a source of financial services, but

The rapid expansion of organized equity exchanges in both emerging and developed markets has prompted policymakers to raise important questions about their macroeconomic impact, yet the need to focus on recent data poses implementation diculties for econometric studies of dynamic interactions between stock markets and economic performance in individual countries. This paper overcomes some of these diculties by applying recent developments in the analysis of panels with a small time dimension to estimate vector autoregressions for a set of 47 countries with annual data for 1980±1995. After describing recent theories on the role of stock markets in growth and considering a pure cross-sectional empirical approach, our panel VARs show leading roles for stock market liquidity and the intensity of activity in traditional ®nancial intermediaries on per capita output. The ®ndings underscore the potential gains associated with developing deep and liquid ®nancial markets in an increasingly global economy. Ó

The German financial market is often characterized as a bank-based system with strong bank-customer relationships. The corresponding notion of a housebank is closely related to the theoretical idea of relationship lending. It is the objective of this paper to provide a direct comparison between housebanks and "normal" banks as to their credit policy. Therefore, we analyze a new data set, representing a random sample of borrowers drawn from the credit portfolios of five leading German banks over a period of five years. We use credit-file data rather than industry survey data and, thus, focus the analysis on information that is directly related to actual credit decisions. In particular, we use bank-internal borrower rating data to evaluate borrower quality, and the bank's own assessment of its housebank status to control for informationintensive relationships.

This paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976-98 and applying recent GMM techniques developed for dynamic panels. On balance, we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity, omitted variables or unobserved country-specific effects.

This paper analyzes the response of stock and credit default swap (CDS) markets to rating announcements made by the three major rating agencies during the period 2000–2002. Applying event study methodology, we examine whether and how strongly these markets respond to rating ...

The historical frequency of banking crises is quite similar in high-and middle-to-lowincome countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark's financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States.

When the CEO is also chairman of the board, principal-agent conflicts may be exacerbated because of the consolidation of the decision management and the decision control processes. Our results suggest that cost efficiency and return on assets are (1) lower for Chairman-CEO banks, (2) positively (negatively or not) related to Nonchairman-CEO (Chairman-CEO) ownership, and (3) unrelated to institutional and large blockholders ownership, and the proportion of inside (outside) directors. These results suggest top management team structure affects performance and internal monitoring devices may not be as effective as envisioned in the literature.

We test hypotheses about the effects of bank size, foreign ownership, and distress on lending to informationally opaque small firms using a rich new data set on Argentinean banks, firms, and loans. We also test hypotheses about borrowing from a single bank versus multiple banks. Our results suggest that large and foreign-owned institutions may have difficulty extending relationship loans to opaque small firms. Bank distress appears to have no greater effect on small borrowers than on large borrowers, although even small firms may react to bank distress by borrowing from multiple banks, raising borrowing costs and destroying some relationship benefits. JEL Classification Numbers: G21, G15, G28, G34, E58

In this paper, we present a new strategy for pricing average value options, ie options whose payoff depends on the average price of the underlying asset over a fixed period leading up to the maturity date. Such options are of particular interest and ...

This paper examines the relationship between institutional investor involvement in and the operating performance of large firms. We confirm a significant relationship between a firm's operating cash flow returns and both the percent of institutional stock ownership and the number of institutional stockholders. However, the positive relationship between the number of institutional investors holding stock and operating cash flow returns is found only for pressure-insensitive institutional investors (those with no business relationship with the firm). The number of pressure-sensitive institutional investors (those with an existing or potential business relationship with the firm) has no impact on performance. These results suggest that institutional investors that need to protect actual or promote potential business relationships with firms in which they invest are compromised as monitors of the firm, and lend credence to calls for greater independence of board members from firms.

We jointly analyze the static, selection, and dynamic effects of domestic, foreign, and state ownership on bank performance. We argue that it is important to include indicators of all the relevant governance effects in the same model. "Nonrobustness" checks (which purposely exclude some indicators) support this argument. Using data from Argentina in the 1990s, our strongest and most robust results concern state ownership. State-owned banks have poor long-term performance (static effect), those undergoing privatization had particularly poor performance beforehand (selection effect), and these banks dramatically improved following privatization (dynamic effect). However, much of the measured improvement is likely due to placing nonperforming loans into residual entities, leaving "good" privatized banks.

in the theory of cointegration to provide new methods of testing the linkage and dynamic interactions among stock market movements. Our findings are in sharp contrast with previous research which discovered strong interdependence among national stock markets prior to October 1987. For the post-October 1987 period. however, our results show that the degree of international co-movements among stock price indices has increased substantially,

This paper traces developments in the credit risk measurement literature over the last 20 years. The paper is essentially divided into two parts. In the ®rst part the evolution of the literature on the credit-risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the Journal of Banking and Finance and other publications. In the second part, a new approach built around a mortality risk framework to measuring the risk and returns on loans and bonds is presented. This model is shown to oer some promise in analyzing the risk-return structures of portfolios of credit-risk exposed debt instruments.

The distribution of ratings changes plays a crucial role in many credit risk models. As is well-known, these distributions vary across time and dierent issuer types. Ignoring such dependencies may lead to inaccurate assessments of credit risk. In this paper, we quantify the dependence of rating transition probabilities on the industry and domicile of the obligor, and on the stage of the business cycle. Employing ordered probit models, we identify the incremental impact of these factors. Our approach gives a clearer picture of which conditioning factors are important than comparing transition matrices estimated from dierent sub-samples.

Significant difficulties in commercial banking in the late 1980s raise questions about bank performance and efficiency. With the use of data envelopment analysis (DEA), we consider the relative technical efficiency of 201 large banks from 1984 to 1990. Bank technical inefficiency averages just over 5 percent, much lower than found in existing estimates. Larger and more profitable banks have higher levels of technical efficiency. At the same time, however, larger banks are more likely to operate under decreasing returns to scale. JEL classification: L21; E44

This paper investigates how different degrees of market power across developing economies affect cost and profit efficiency levels and overall bank stability. It sheds light on the competition-stability nexus by documenting and analyzing the complex interactions between a tripod of variables that are central for regulators: the degree of market power, bank cost and profit efficiency, and overall bank stability. The results show that an increase in the degree of market power leads to greater bank stability and enhanced profit efficiency, despite significant cost efficiency losses. The findings lend empirical justification to the traditional view that increased competition may undermine bank stability, and may bear significant implications for stressed banking systems in developing economies. JEL Classification Numbers: D4, D61, G15, G21, L11, N24, N25, O16

In this paper, we analyze the investment patterns of a large number of clients of a major Israeli brokerage house during 1994. We compare the behavior of clients making independent investment decisions to that of investors whose accounts were managed by brokerage professionals. Our main objective is to investigate whether the disposition eect (i.e., the tendency to sell winners quicker than losers), demonstrated in the US only for individual investors, also holds for professional investors. This analysis is important, as accepted ®nancial theory predicts that prices are determined mainly by decisions made by professionals. We show that both professional and independent investors exhibit the disposition eect, although the eect is stronger for independent investors. The second objective of our study is the comparison of trade frequency, volume and pro®tability between independent and professionally managed accounts. We believe that these comparisons not only provide insights of their own, but also help to put the dierences in the disposition eect in a wider perspective. We demonstrate that professionally managed accounts were more diversi®ed and that round trips were both less correlated with the market and slightly more pro®table than those of independent accounts.

By tracing the identity of large shareholders, we group China's listed companies into those controlled by state asset management bureaus (SAMBs), state owned enterprises (SOEs) affiliated to the central government (SOECGs), SOEs affiliated to the local government (SOELGs), and Private investors. We argue that these distinct types of owners have different objectives and motivations and this will affect how they exercise their control rights over the firms they invest in. In particular, we contend that private ownership of listed firms in China is not necessarily superior to certain types of state ownership. To test our arguments we investigate the relative efficiency of state versus private ownership of listed firms and the efficiency of various forms of state ownership. The empirical results indicate that the operating efficiency of Chinese listed companies varies across the type of controlling shareholder. SOECG controlled firms perform best and SAMB and Private controlled firms perform worst. SOELG controlled firms are in the middle. The results are consistent with our predictions.

In recent years, securitization and other ®nancial innovations have provided unprecedented opportunities for banks to reduce substantially their regulatory capital requirements with little or no corresponding reduction in their overall economic risks ± a process termed``regulatory capital arbitrage''. These methods are used routinely to lower the eective risk-based capital requirements against certain portfolios to levels well below the Basel Capital AccordÕs nominal 8% total risk-based capital standard. This paper discusses the principal techniques used to undertake capital arbitrage and the diculties faced by bank supervisors in attempting to deal with these activities under the current capital framework. Ó

This study investigates whether corporate social responsibility (CSR) mitigates or contributes to stock price crash risk. Crash risk, defined as the conditional skewness of return distribution, captures asymmetry in risk and is important for investment decisions and risk management. If socially responsible firms commit to a high standard of transparency and engage in less bad news hoarding, they would have lower crash risk. However, if managers engage in CSR to cover up bad news and divert shareholder scrutiny, CSR would be associated with higher crash risk. Our findings support the mitigating effect of CSR on crash risk. We find that firms' CSR performance is negatively associated with future crash risk after controlling for other predictors of crash risk. The result holds after we account for potential endogeneity. Moreover, the mitigating effect of CSR on crash risk is more pronounced when firms have less effective corporate governance or a lower level of institutional ownership. The results are consistent with the notion that firms that actively engage in CSR also refrain from bad news hoarding behavior and thus reducing crash risk. This role of CSR is particularly important when governance mechanisms, such as monitoring by boards or institutional investors, are weak.

This paper presents estimates, for more than 160 countries, of the fraction of the adult population using formal financial intermediaries. The estimates are constructed by combining information on banking and MFI account numbers (together with banking depth and GDP data) with estimates from household surveys for a smaller set of countries. The resulting data are compared econometrically with information on poverty and inequality. There is some econometric evidence that better household access to finance may be associated with lower inequality as measured by the Gini coefficient, but less evidence that access is causally related to a lower poverty headcount.

Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. We estimate the extent to which interconnections increase expected losses, with minimal information about network topology, under a wide range of shock distributions. Expected losses from network effects are small without substantial heterogeneity in bank sizes and a high degree of reliance on interbank funding. They are also small unless shocks are magnified by some mechanism beyond simple spillover effects; these include bankruptcy costs, fire sales, and mark-to-market revaluations of assets. We illustrate the results with data on the European banking system.

This paper investigates the in¯uence the environmental conditions have on the costeciency of French and Spanish banking industries. We propose a new methodology for crosscountry comparisons of eciency using a parametric approach. In particular, the speci®c environmental conditions of each country play an important role in the de®nition and speci®cation of the common frontier of dierent countries. Our results suggest that, without environmental variables, the cost-eciency scores of Spanish banks are quite low compared to those of the French banks. However, when environmental variables are included in the model, the dierences between both banking industries are reduced substantially. Overall, our results demonstrate that environmental variables contribute signi®cantly to the dierence in eciency scores between the two countries.

This paper investigates the impact of risk and quality factors on banksÕ cost by using the stochastic cost frontier methodology to evaluate scale and X-ineciencies, as well as technical change for a sample of Japanese commercial banks between 1993 and 1996. Loan-loss provisions are included in the cost frontier model to control for output quality, with a ®nancial capital and a liquidity ratio included to control risk. Following the approach suggested in we show that if risk and quality factors are not taken into account optimal bank size tends to be overstated. That is, optimal bank size is considerably smaller when risk and quality factors are taken into account when modelling the cost characteristics of Japanese banks. We also ®nd that the level of ®nancial capital has the biggest in¯uence on the scale eciency estimates. X-ineciency estimates, in contrast, appear less sensitive to risk and quality factors. Our results also suggest that scale ineciencies dominate X-ineciencies. These are important ®ndings because they contrast with the results of previous studies on Japanese banking. In particular, the results indicate an alternative policy prescription, namely, that the largest banks should

In the 1990s, Latin American banking sectors experienced an accelerated process of concentration and foreign penetration that prompted diverse views regarding its implications for the competitive behavior of banks and the financial stability of the system. In this paper, we examine these issues exploiting a rich bank-level database for eight Latin American countries. We find that, while increased concentration did not weaken banking competition within the region, foreign penetration appears to have led to a less competitive industry. Moreover, we find that bank risk has been negatively associated with competition which, coupled with the previous finding, explains the positive link between banking sector stability and foreign penetration revealed by the data.