nep-ban New Economics Papers
on Banking
Issue of 2014‒10‒22
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How the Credit Cycle Affects Growth: The Role of Bank Balance Sheets By Bezemer, Dirk J.; Zhang, Lu
  2. Stress-testing banks’ corporate credit portfolio By O. de Bandt; N. Dumontaux; V. Martin; D. Médée
  3. The Real Effects of Bank Capital Requirements By M. Brun; H. Fraisse; D. Thesmar
  4. Banking Relationships and Syndicated Loans during the 2008 Financial Crisis By Herve Alexandre; Karima Bouaiss; Catherine Refait-Alexandre
  5. Credit Booms and Busts in Emerging Markets: The Role of Bank Governance and Risk Managment By Andries, Alin Marius; Brown, Martin
  6. Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters By Cortes, Kristle Romero; Strahan, Philip E.
  7. Forward looking banking stress in EMU countries By Manish K. Singh; Marta Gómez-Puig; Simón Sosvilla-Rivero
  8. Loan officers' screening with credit scores By Sergio Vicente
  9. The great mortgaging: housing finance, crises, and business cycles By Jorda, Oscar; Schularick, Moritz; Taylor, Alan M.
  10. Are Information Disclosure Mandates Effective? Evidence from the Credit Card Market By Alan Elizondo; Enrique Seira
  11. Outside Liquidity, Rollover Risk, and Government Bonds By Stephan Luck; Paul Schempp
  12. Regulatory changes and the cost of equity:evidence from French banks By 0. De Bandt; B. Camara; P. Pessarossi; M. Rose
  13. Competition in commercial banks in Poland – analysis of Panzar-Rosse H-statistics By Filip Switala; Malgorzata Olszak; Iwona Kowalska
  14. The Spatial Probit Model – An Application to the Study of Banking Crises at the End of the 90’s By Andrea Amaral; Margarida Abreu; Victor Mendes
  15. Optimal Bail-out and Bail-in policy mix: Lessons from the Banco Espírito Santo (BES) failure By Miguel Rocha de Sousa
  16. Too Rich to Let Me Fail? By Bruno Martins; Ricardo Schechtman
  17. Systemic Interbank Network Risks in Russia By A. V. Leonidov; E. L. Rumyantsev
  18. Too Correlated to Fail By Chari, V. V.; Phelan, Christopher
  19. Consumer financial protection regulations: how do they measure up? By Ritter, Dubravka
  20. Reverse mortgage loans: a quantitative analysis By Nakajima, Makoto; Telyukova, Irina A.
  21. Network Formation and Systemic Risk By Selman Erol; Rakesh Vohra
  22. Portfolio Rebalancing Following the Bank of Japan's Government Bond Purchases: A Fact Finding Analysis Using the Flow of Funds Accounts Statistics By Masashi Saito; Yoshihiko Hogen; Shusaku Nishiguchi
  23. Addressing High Household Debt in Korea By Randall S. Jones; Myungkyoo Kim
  24. Does Bank Monitoring Matter to Bondholders? By Joel F. Houston; Chen Lin; Junbo Wang

  1. By: Bezemer, Dirk J.; Zhang, Lu (Groningen University)
    Abstract: Asset market conditions affect output growth through changes in bank lending. This paper is the first to analyze how this channel changes over the credit cycle. We use newly collected data for 37 countries over 1970-2012 to construct measures for the upswing (?credit boom?) and downswing (?credit bust?) phases of the credit cycle. We find that real income grows faster during a credit boom in countries where house prices rise more and where banks have a higher share of mortgage credit in total credit. In a second analysis, we find that industries which are more dependent on external finance experience growth in value added which is significantly higher in a credit boom and significantly lower in a credit bust, when banks in their economy have a higher share of mortgage credit in total credit. Since credit cycle upswings transform bank balance sheets such that economies are more vulnerable to the credit market downturn that follows, the policy implication is that macroprudential monitoring should take place over the entire credit cycle.
    Date: 2014
  2. By: O. de Bandt; N. Dumontaux; V. Martin; D. Médée
    Abstract: The paper describes the methods used by the French Banking Supervision Authority (ACP) to run stress tests for the corporate credit portfolio, through credit migration matrices (or transition matrices). This approach is currently used for “top-down” stress tests exercises. Developed for Basel II, it is still relevant under the Basel III framework. It includes sufficient flexibility to accommodate the severe crisis period observed recently. The paper introduces the basic model underlying the approach, largely based on Merton’s model; it then describes carefully the different steps for its practical implementation, providing hints on how it can be extended to other banking sectors. Finally the paper comments a few outputs of a stress testing exercise.
    Keywords: credit risk, corporate, stress tests, migration matrices.
    JEL: G21 G28 G32 E44
    Date: 2013
  3. By: M. Brun; H. Fraisse; D. Thesmar
    Abstract: We measure the impact of bank capital requirements on corporate borrowing and business activity. We use loan-level data and take advantage of the transition from Basel 1 to Basel 2. While under Basel 1 the capital charge was the same for all firms, under Basel 2, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this two-way variation to empirically estimate the semi-elasticity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find very large effects of capital requirements on bank lending: a one percentage point increase in capital requirements leads to a reduction in lending by approximately 10%. At the firm level, borrowing is reduced, as well as total assets (mostly working capital); we provide some evidence of the impact on employment and investment. Overall, however, because Basel 2 reduced the capital requirements for the average firm, our results suggest that the transition to Basel 2 supported firm activity during the crisis period.
    Keywords: Bank capital ratios, Bank regulation, Credit supply.
    JEL: E51 G21 G28
    Date: 2013
  4. By: Herve Alexandre (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine); Karima Bouaiss (CERMAT - Centre d'Études et de Recherche en MAnagement de Touraine - Institut d'Administration des Entreprises (IAE) - Tours); Catherine Refait-Alexandre (CRESE - Centre de REcherches sur les Stratégies Economiques - Université de Franche-Comté : EA)
    Abstract: The research shows that banking relationships are important to lending. However, few studies focus on the banking relationships in syndicated loans, although these loans have became a major source of financing. The last financial crisis clearly shows the impacts of credit rationing and tightening credit conditions, even in the syndicated loans market. We investigate whether banking relationships help firms to benefit from better terms for syndicated loans in a chaotic financial environment. Using a sample of syndicated loans arranged from 2003 to 2008 in North America and Europe, we find that firms with a previously developed relationship with a lead bank obtained a lower spread and a longer maturity during the financial crisis but did not benefit from larger loan facilities.
    Keywords: Syndication Loans Banking relationship Financialcrisis
    Date: 2014–08–01
  5. By: Andries, Alin Marius; Brown, Martin
    Abstract: This paper investigates to what extent risk management and corporate governance mitigate the involvement of banks in credit boom and bust cycles. Using a unique, handcollected dataset on 156 banks from Central and Eastern Europe during 2005-2012, we assess whether banks with stronger risk management and corporate governance display more moderate credit growth in the pre-crisis credit boom as well as a smaller credit contraction and fewer credit losses in the crisis period. With respect to bank governance we document that a higher share of financial experts on the supervisory board is associated with more rapid credit growth in the pre-crisis period and a larger contraction of credit in the crisis period, but not with larger credit losses. With respect to risk management we document that a strong risk committee is associated with more moderate pre-crisis credit growth but not with fewer credit losses in the crisis. We find no evidence of an organizational learning process among crisishit banks: those banks with the largest credit losses during the crisis are least likely to improve their risk management in the aftermath of the crisis
    Keywords: Credit boom and busts, corporate governance, risk management
    JEL: G21 G32 P34
  6. By: Cortes, Kristle Romero (Federal Reserve Bank of Cleveland); Strahan, Philip E. (Boston College, NBER)
    Abstract: Multi-market banks reallocate capital when local credit demand increases after natural disasters. Following such events, credit in unaffected but connected markets declines by about 50 cents per dollar of additional lending in shocked areas, but most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans in order to lessen the impact of the demand shock on credit supply. Larger, multi-market banks appear better able than smaller ones to shield credit supplied to their core markets (those with branches) by aggressively cutting back lending outside those markets.
    Keywords: Financial Integration; Branch Banking; Securitization
    JEL: G20 G21
    Date: 2014–09–18
  7. By: Manish K. Singh (Department of Economic Theory, Universitat de Barcelona); Marta Gómez-Puig (Department of Economic Theory, Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: Based on contingent claims analysis(CCA), this paper tries to estimate the systemic risk build-up in the European Economic and Monetary Union (EMU) countries using a market based measure "distance-to-default"(DtD). It analyzes the individual and aggregated series for a comprehensive set of banks in each eurozone country over the period 2004-Q4 to 2013-Q2. Given the structural differences in financial sector and banking regulations at national level, the indices provide a useful indicator for monitoring country specific banking vulnerability and stress. We find that average DtD indicators are intuitive, forward-looking and timely risk indicators. The underlying trend, fluctuations and correlations among indices help us analyze the interdependence while cross-sectional differences in DtD prior to crisis suggest banking sector fragility in peripheral EMU countries.
    Keywords: contingent claim analysis, distance-to-default, systemic risk
    JEL: G01 G21 G28
    Date: 2014–10
  8. By: Sergio Vicente
    Abstract: This paper analyzes the effects of informational asymmetries on screening borrowers. Lenders with access to accurate credit scores offer the most valuable borrowers lower interest rates than lenders with an advantage in costly screening. This cream-skimming induces a negative externality, which reduces the value of investing in screening. This distortion translates into excessive lending with credit scores, too little screening, higher default rates than optimal and credit rationing. The model explains some patterns of loan pricing and defaults, as well as of firm selection by types of lenders, which are consistent with the received empirical evidence.
    Keywords: Credit scores, Screening, Hard and soft information
    JEL: G14 G21 G24 D82
    Date: 2014–10
  9. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (Wirtschaftswissenschaftlicher Fachbereich Rheinische Friedrich-Wilhelms-Universität Bonn); Taylor, Alan M. (University of California-Davis, Economics Dept.)
    Abstract: This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.
    Keywords: leverage; recessions; mortgage lending; financial crises; business cycles; local projections.
    JEL: C14 C38 C52 E32 E37 E44 E51 G01 G21 N10 N20
    Date: 2014–09
  10. By: Alan Elizondo; Enrique Seira
    Abstract: Consumer protection in financial markets in the form of information disclosure is high on governments agendas, despite the fact that the empirical evidence on its effectiveness is scarce. To measure the impact of Truth-in-Lending-Act-type disclosures on default and indebtedness, as well as of debiasing warning messages and social comparison information, we implement a randomized control trial in the credit card market for a large population of indebted cardholders. We find that providing salient interest rate disclosures has no effect, while social comparisons and debiasing messages have only a odest effect. Other types of disclosures discussed in the paper could have larger effects.
    Keywords: Credit cards, information disclosure, truth in lending, Mexico.
    JEL: D12 D14 D83 G02 G21 G28
    Date: 2014–08
  11. By: Stephan Luck (Max Planck Institute for Research on Collective Goods, Bonn); Paul Schempp (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper discusses whether financial intermediaries can optimally provide liquidity, or whether the government has a role in creating liquidity by supplying government securities. We discuss a model in which intermediaries optimally manage liquidity with outside rather than inside liquidity: instead of holding liquid real assets that can be used at will, banks sell claims on long-term projects to investors. While increasing efficiency, liquidity management with private outside liquidity is associated with a rollover risk. This rollover risk either keeps intermediaries from providing liquidity optimally, or it makes the economy inherently fragile. In contrast to privately produced claims, government bonds are not associated with coordination problems unless there is the prospect that the government may default. Therefore, efficiency and stability can be enhanced if liquidity management relies on public outside liquidity.
    Keywords: liquidity provision, liquidity mismatch, bank run, roll-over freeze, outside liquidity, government bonds, liquidity regulation
    JEL: G21 G28 H81 H63
    Date: 2014–09
  12. By: 0. De Bandt; B. Camara; P. Pessarossi; M. Rose
    Abstract: In the paper, we first investigate the impact of an increase in capital requirements on the equity risk (beta) of listed banks in France. We find that an increase in capital ratios reduces banks’ systematic risk. This leads to a decrease in shareholders’ required return on equity, providing evidence in favour of the Modigliani-Miller theorem: the greater cost of capital due to higher capital ratios appears to be mitigated by the decrease in shareholders’ expected return on equity. We then analyze the impact of liquidity position and find almost no evidence so far that investors take banks’ liquidity risk into account.
    Keywords: Modigliani-Miller, cost of equity, solvency ratios, liquidity ratios.
    JEL: G21 G28
    Date: 2014
  13. By: Filip Switala (University of Warsaw, Faculty of Management); Malgorzata Olszak (University of Warsaw, Faculty of Management); Iwona Kowalska (University of Warsaw, Faculty of Management)
    Abstract: This paper aims to find out how intense is the competition in Polish commercial banks loan market. Using Panzar – Rosse H-statistics and applying several estimation techniques (GLS, one-step GMM and two-step GMM) we find that this intensity is sensitive to the estimator applied. Upon analysis of results, one can conclude that competition evolves differently across years in Poland. In some years, competition was relatively high, as the H-statistics reached the level of 0.75, which is relatively close to perfect competition. In other years it gradually decreased reaching its bottom line in 2010, and took upward trend in 2011 and 2012. Generally, the values of our competitive environment measure indicate at monopolistic competition in Poland.
    Keywords: competition intensity, marginal costs, contestabily, banking industry
    JEL: G21 G28 L1 L16
    Date: 2013–12
  14. By: Andrea Amaral (ISEG, University of Lisbon); Margarida Abreu (ISEG, University of Lisbon and UECE); Victor Mendes (CMVM and CEFAGE-UE)
    Abstract: We use a spatial Probit model to study the effect of contagion between banking systems of different countries. Applied to the late 90’s banking crisis in Asia we show that the phenomena of contagion is better seized using a spatial than a traditional Probit model. Unlike the latter, the spatial Probit model allows one to consider the cascade of cross and feedback effects of contagion that result from the outbreak of one initial crisis in one country or system. These contagion effects may result either from business connections between institutions of different countries or from institutional similarities between banking systems.
    Keywords: Spatial probit; Banking crises; Contagion.
    JEL: C21 C25 G01 G21
    Date: 2014
  15. By: Miguel Rocha de Sousa (Universidade de Évora, Departamento de Economia, NICPRI-UE e CEFAGE-UE)
    Abstract: This paper evaluates the optimal bail-out and bail-in mix in the case of bankruptcy of Banco Espírito Santo (BES), SA, the second largest Portuguese private bank. The solution after the crisis of the BES, was to partition the bank into a good bank (Novo Banco (New Bank)) and keep the toxic assets and problematic ones in a bad bank, the old BES bank, which would also receive those assets and bonds which were correlated with the ESFG (Espírito Santo Financial Group). We show, in general, that the optimal policy mix parameter for the regulator’s bail-out and bail-in is contingent on the correlations between the shocks of residuals to the deposits and the shocks to the assets (equity and bonds). We develop three cases: case A, regulation under perfect information and no shocks, a kind of benchmark; case B; with subcases B1 and B2, which reflect respectively perfect positive correlation between the deposit and assets shocks, and perfect negative correlation; and finally case C, which reflect a general correlation between the deposits and assets, between -1 and 1. The conclusions, based upon simulations, tend to show that the optimal regulator problem in A was to intervene with optimal bail-out policy mix correspondence between deposit rates (r ) and assets (ra); while at B1 and B2 the optimal mix bail-out case is around 50% with deviation being derived from the correlation between deposits and assets’ residuals. The main lesson that can be derived from the BES implosion, is that market value of the Novo Banco (New Bank) can be effectively assured if the market decouples for real the Novo Banco from BES, because if the correlation is a perfect fit (+1), new problems might arise in the near future.
    Keywords: Banco Espírito Santo(BES); Bank of Portugal (BdP); Bankruptcy; Bail-in; Bail-out; ECB; Novo Banco; Optimal mix bail-out; Portuguese Banking sector; Regulators.
    JEL: C15 E02 E44 E58 F36 G11 G18 G21 G28 G33
    Date: 2014
  16. By: Bruno Martins (Banco Central do Brasil); Ricardo Schechtman (Banco Central do Brasil)
    Abstract: Due to the perception of an implicit public guarantee, Banks too-big-to-fail may charge lower loan rates for the same risk in comparison to other groups of banks. However, empirically identifying such effect is challenging because size has many other advantages to banks besides the implicit guarantee. This paper makes use of the natural experiment represented by the discovery of new and large Brazilian oil reserves to conjecture an increase in the bailout perception of some Brazilian banks (the proposed too-rich- to-let-me-fail argument). It then investigates how the difference in loan pricing behavior across banks of different sizes has changed after the discovery. Results show that the difference of loan rates between medium and large banks decreases after the discovery. One possible explanation is that the conjectured increase in the bail-out perception affects mostly medium banks, which are at the margin to become too-big-to-fail, although other explanations are also feasible.
    Keywords: too-big-to-fail; loan pricing; oil discovery
    JEL: C21 G21 G3
    Date: 2013–11
  17. By: A. V. Leonidov; E. L. Rumyantsev
    Abstract: Modelling of contagion in interbank networks is discussed. A model taking into account bow-tie structure and dissasortativity of interbank networks is developed. The model is shown to provide a good quantitative description of the Russian interbank market. Detailed arguments favoring the non-percolative nature of contagion-related risks in the Russian interbank market are given.
    Date: 2014–10
  18. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Phelan, Christopher (Federal Reserve Bank of Minneapolis)
    Abstract: In this paper, we argue that the anticipation of bailouts creates incentives for banks to herd in the sense of making similar investments. This herding behavior makes bailouts more likely and potential crises more severe. Analyses of bailouts and moral hazard problems that focus exclusively on bank size are therefore misguided in our view, and the policy conclusion that limits on bank size can effectively solve moral hazard problems is unwarranted.
    Date: 2014–07–22
  19. By: Ritter, Dubravka (Federal Reserve Bank of Philadelphia)
    Abstract: The Payment Cards Center's September 2012 policy conference advanced the discussion of targeted design and outcome measurement as central features of public policy in the area of consumer financial protections. Speakers considered regulations addressing the disclosure of credit terms; standards for assessing the unfairness, deceptiveness, and abusiveness of lending acts or practices; the management of revolving credit accounts; and the challenges of analyzing consumer complaints in the context of consumer financial protections. The concluding panel discussed unanswered questions and research priorities going forward. Discussion focused on the data and methodology required and available for assessing the contribution of consumer financial protections to the advancement of, and the challenges inherent in, measuring social welfare. Panelists also considered the intended and unintended effects of these regulations on prices, quantities, competition, innovation, and the overall business risk market participants face.
    Keywords: Measurement; Consumer financial protection; Disclosure; UDAP; Unfair Deceptive Acts and Practices; UDAAP; Unfair; Deceptive; or Abusive Acts or Practices; Account management; Mortgages; Credit Cards; Consumer complaints
    JEL: G28 K23
    Date: 2014–09–13
  20. By: Nakajima, Makoto (Federal Reserve Bank of Philadelphia); Telyukova, Irina A. (University of California–San Diego)
    Abstract: Supersedes Working Paper 13-27. Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. Despite growth in this market, only 2.1% of eligible homeowners had RMLs in 2011. In this paper, the authors analyze reverse mortgages in a calibrated life-cycle model of retirement. The average welfare gain from RMLs is $885 per homeowner. The authors’ model implies that low-income, low-wealth, and poor-health households benefit the most, consistent with empirical evidence. Bequest motives, nursing-home-move risk, house price risk, and loan costs all contribute to the low take-up. The Great Recession may lead to increased RML demand, by up to 30% for the lowest-income and oldest households.
    Keywords: Reverse Mortgage; Mortgage; Housing; Retirement; Home Equity Conversion Mortgage; HECM
    JEL: D91 E21 G21 J14
    Date: 2014–09–08
  21. By: Selman Erol (Department of Economics, University of Pennsylvania); Rakesh Vohra (Department of Economics and Department of Electrical & Systems Engineering, University of Pennsylvania)
    Abstract: This paper introduces a model of endogenous network formation and systemic risk. In it, agents form networks that efficiently trade-off the possibility of systemic risk with the benefits of trade. Second, fundamentally ‘safer’ economies generate higher interconnectedness, which in turn leads to higher systemic risk. Third, the structure of the network formed depends on whether the shocks to the system are believed to be correlated or independent of each other. In particular, when shocks are perfectly correlated, the network formed is a complete graph, i.e., a link between every pair of agents. This underlines the importance of specifying the shock structure before investigating a given network because a given network and shock structure could be incompatible.
    Keywords: Network Formation, Systemic Risk, Contagion, Rationalizability, Core
    JEL: D85 G01
    Date: 2014–08–24
  22. By: Masashi Saito (Bank of Japan); Yoshihiko Hogen (Bank of Japan); Shusaku Nishiguchi (Bank of Japan)
    Abstract: After the Bank of Japan (BOJ) introduced Quantitative and Qualitative Monetary Easing in April 2013, the BOJ's government bond purchases increased by a large amount, and entities other than the BOJ, as a group, increased loans and investment in equities, mutual funds, and corporate bonds, while reducing their holdings of government bonds. The extent of portfolio rebalancing differs across entities: we observe rebalancing for domestic banks and the overseas sector; in contrast, so far no rebalancing for insurance companies, corporate pension funds, and public pensions can be observed. In addition to changes in the balance sheet conditions of domestic banks and loan demand faced by domestic banks, purchases of government bonds with a longer remaining maturity by the BOJ likely have played a role in the increase in bank loans by domestic banks.
    Date: 2014–06–19
  23. By: Randall S. Jones; Myungkyoo Kim
    Abstract: Rising household debt has become a major policy concern in Korea. By the end of 2012, it had risen to 164% of disposable income, well above the OECD average of 133%. In addition to the economic impact and the risk to the financial sector, it raises social cohesion issues, as households with low income and credit ratings have limited access to financial markets and many are delinquent on their loans. It is essential to induce the soft-landing of household debt through a two-track approach: i) offering credit to households with low income and credit ratings and restructuring their debt, while limiting moral hazard and developing market-based lending; and ii) containing the risk caused by high household debt by strengthening prudential measures for financial institutions and improving mortgage lending by reducing the share of floating-rate and “bullet repayment” loans. This Working Paper relates to the 2014 OECD Economic Survey of Korea ( Comment faire face au fort endettement des ménages en Corée L’endettement croissant des ménages est l’un des grands sujets de préoccupation des pouvoirs publics en Corée. Fin 2012, il se montait à 164 % du revenu disponible des ménages, nettement au-dessus de la moyenne OCDE de 133 %. Outre ses conséquences économiques et les risques pour le secteur financier, il soulève des questions sur la cohésion sociale, car les ménages les plus modestes et les moins solvables n’ont guère accès au marché du crédit et leurs taux de défaillance sont élevés. Il convient de favoriser un retour ordonné à un niveau d’endettement plus faible pour les ménages en agissant sur deux leviers : i) en offrant des crédits aux ménages les plus modestes et les moins solvables et en restructurant leur dette, tout en limitant l’aléa moral et en développant le recours aux mécanismes du marché dans l’activité de prêt; et ii) en contenant le risque causé par l’endettement élevé des ménages par le renforcement des mesures prudentielles pour les institutions financières et en améliorant les prêts hypothécaires par la réduction de la part des prêts à taux variables ou à « remboursement in fine ». Ce Document de travail a trait à l’Étude économique de l’OCDE de la Corée, 2014 (
    Keywords: household debt, mortgages, banks, Miso Finance, Sunshine Loans, New Hope Seed Loans, consumer finance companies, bullet loans, delinquent borrowers, individual bankruptcy, National Happiness Fund, debt restructuring, individual workouts, emprunteurs défaillants, faillite individuelle, endettement des ménages, négociations individuelles, Fond National du Bonheur, sociétés de crédit à la consommation, préts à remboursement in fine, restructuration des dettes, Miso Finance, prêts hypothécaires, banques
    JEL: D14 D91 J21
    Date: 2014–09–16
  24. By: Joel F. Houston (University of Florida and Hong Kong Institute for Monetary Research); Chen Lin (The University of Hong Kong and Hong Kong Institute for Monetary Research); Junbo Wang (City University of Hong Kong and Hong Kong Institute for Monetary Research)
    Abstract: In this paper, we examine the existence of a cross-monitoring effect between bank debt and public debt by exploring the effects that loan defaults have on the lead arranger's perceived monitoring ability in the public debt markets. Generating a sample of major loan defaults among U.S. firms between 2002 and 2010, we empirically test the effects that these loans had on the bond returns of publicly traded firms that had existing loans made by the same lead lender as the defaulting firm. We show that the abnormal returns of these "affected firms" are negative and statistically significant. Moreover, these abnormal returns are economically significant - with a mean about -1% when measured over an eleven day window surrounding the announcement of the defaulting loan. Interestingly, we find that these results are even stronger if the defaulting firm had a strong and/or long-standing relationship with its lead lender. We also find that the negative bond market effect is particularly strong if the defaulting loan is an important deal to the lender, if it is a recently originated loan, and if the borrower has better governance, higher profitability and higher firm value in the loan origination year. In contrast, the negative bond market effect is weakened if the affected firms have more intensive analyst coverage and higher firm values. Taken together, these results strongly confirm the existence of a cross-monitoring effect between bank debt and public debt.
    JEL: G30 G33
    Date: 2014–07

This nep-ban issue is ©2014 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.