|
on Corporate Finance |
| By: | Choudhary, M. Ali (State Bank of Pakistan ); jain, Anil K. (Board of Governors of the Federal Reserve System (U.S.) ) |
| Abstract: | We exploit exogenous variation in the amount of public information available to banks about a firm to empirically evaluate the importance of adverse selection in the credit market. A 2006 reform introduced by the State Bank of Pakistan (SBP) reduced the amount of public information available to Pakistani banks about a firm's creditworthiness. Prior to 2006, the SBP published credit information not only about the firm in question but also (aggregate) credit information about the firm's group (where the group was defined as the set of all firms that shared one or more director with the firm in question). After the reform, the SBP stopped providing the aggregate group-level information. We propose a model with differentially informed banks and adverse selection, which generates predictions on how this reform is expected to affect a bank's willingness to lend. The model predicts that adverse selection leads less informed banks to reduce lending compared to more informed banks. We construct a measure for the amount of information each lender has about a firm's group using the set of firm-bank lending pairs prior to the reform. We empirically show those banks with private information about a firm lent relatively more to that firm than other, less-informed banks following the reform. Remarkably, this reduction in lending by less informed banks is true even for banks that had a pre-existing relationship with the firm, suggesting that the strength of prior relationships does not eliminate the problem of imperfect information. |
| Keywords: | Information; Credit registries; Financial Intermediation |
| JEL: | G14 O16 |
| Date: | 2014–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1125&r=cfn |
| By: | Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR ); Francesco Marchionne (Nottingham Trent University, Division of Economics ) |
| Abstract: | This paper examines how banks around the world have resized and reallocated their earning assets in response to the subprime and sovereign debt crises. We also focus on the interaction between sovereign debt and the asset allocation process. We find that banks have readjusted asset shares and the overall regulatory credit risk by substituting government securities for loans. Furthermore, they have been sensitive to those variables that are of direct interest to the regulator, a result that is consistent with high-debt governments having exerting moral suasion on banks to privilege the purchase of government securities over credit to the private sector. |
| Keywords: | crisis, loans, moral suasion, regulator, securities |
| JEL: | G01 G11 G21 G28 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:103&r=cfn |
| By: | Sven Langedijk (European Commission – Joint Research Center ); Gaëtan Nicodème (European Commission ); Andrea Pagano (European Commission – Joint Research Center ); Alessandro Rossi (European Commission – Joint Research Center ) |
| Abstract: | During the period 2008-2012, EU governments incurred substantial costs bailing out banks. As corporate income taxation (CIT) in most countries still favors debt- over equityfinancing, reducing or eliminating this debt bias would complement regulatory reforms reducing costs of financial crises. To estimate this effect, we use a two-step approach. First, using panel regressions on a dataset of 32,833 bank-year observations we find sizable long-run effects of CIT on leverage in the EU. Second, we simulate the effect of tax reforms on bank losses using a Vasicek-based model with actual banks’ balance sheets to estimate costs of systemic crises for six large EU member states. Even if the tax elasticity of bank leverage is taken at the lower end of the ranges found in recent literature, eliminating the debt bias could lead to reductions of public finance losses in the range of 60 to 90%. The results hold even when considering much smaller effects for banks that are close to the regulatory minimum capital requirement of the Basel III framework. Even when asset portfolio risk is allowed to increase endogenously and considering conservative ranges of the parameter space, we conclude that tax reforms to remove the debt bias can result in very sizable reductions in risks and costs of financial crises. |
| Keywords: | Debt bias; Systemic crisis; Capital structure; Taxation; Allowance for Corporate Equity; Public finance; Bail out |
| JEL: | G01 G28 G32 H25 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:tax:taxpap:0050&r=cfn |
| By: | Yoshino, Naoyuki (Asian Development Bank Institute ); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute ); Nili, Farhad (Asian Development Bank Institute ) |
| Abstract: | Risky banks that endanger the stability of the financial system should pay higher deposit insurance premiums than healthy banks and other financial institutions that have shown good financial performance. It is necessary, therefore, to have at least a dual fair premium rate system. In this paper, we develop a model for calculating dual fair premium rates. Our definition of a fair premium rate in this paper is a rate that could cover the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default, and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, we use credit rating methods that employ two major dimensional reduction techniques. For forecasting non-performing loans (NPLs), we develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction setting. The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions some banks show negative performance or vice versa. Our final results show that stable banks should pay lower deposit insurance premium rates. |
| Keywords: | dual deposit insurance premium rates; non-performing loans; idiosyncratic shocks; fair premium rates |
| JEL: | E44 G21 G28 |
| Date: | 2015–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0510&r=cfn |