|
on Corporate Finance |
| By: | Paulson, Anna L. (Federal Reserve Bank of Chicago); Rosen, Richard J. (Federal Reserve Bank of Chicago) |
| Abstract: | The 2008 financial crisis brought a focus on the potential for a large insurance firm to contribute to systemic risk. Among the concerns raised was that a negative shock to insurers could lead to a ‘fire sale’ of corporate bonds, a market where insurers are among the largest participants. This paper discusses the existing evidence on life insurance firms and systemic risk, with a focus on the investment grade corporate bond market. We provide some tentative evidence that life insurers tend to absorb liquidity risk by purchasing bonds when the bonds are less liquid than average. However, we do not find evidence that insurers increased bond purchases specifically during the financial crisis leaving open the question of whether insurers would play a stabilizing role in a future crisis. |
| Keywords: | Insurance; Bond; Over-the-Counter (OTC); Trading |
| JEL: | G12 G14 G22 G24 |
| Date: | 2016–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2016-04&r=cfn |
| By: | Lee, Seung Jung; Stebunovs, Viktors |
| Abstract: | We exploit the cross-state, cross-time variation in bank tangible capital ratios-brought about by bank branch deregulation on a state-by-state basis-to identify the effects of bank capital pressures on employment and firm dynamics during two waves of changes in bank capital regulation. We show that stronger capital pressures temporarily slowed down growth in employment in industries that depend on external finance, retarding growth in the average size of firms rather than in the number of firms. Such effects were particularly strong for smaller firms that may not have had access to national capital and bank loan markets. Our findings indicate that a tightening of capital requirements may have significant real effects, in part because of the lack of substitutes for bank loans. |
| Keywords: | Bank capital ratios ; bank capital regulation ; loan substitutability ; employment ; firm dynamics |
| JEL: | G21 G28 G30 J20 L25 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1161&r=cfn |
| By: | Armen Hovakimian (Baruch College); Edward Kane, (Boston College); Luc Laeven (European Central Bank) |
| Abstract: | This paper proposes a theoretically based and easy-to-implement way to measure the systemic risk of financial institutions using publicly available accounting and stock market data. The measure models the credit enhancement taxpayers provide to individual banks in the Merton tradition (1974) as a combination put option for the deep tail of bank losses and a knock-in stop-loss call on bank assets. This model expresses the value of taxpayer loss exposure from a string of defaults as the value of this combination option written on the portfolio of industry assets. The exercise price of the call is the face value of the debt of the entire sector. We conceive of an individual bank’s systemic risk as its contribution to the value of this sectorwide option on the financial safety net. To the extent that authorities are slow to see bank losses or reluctant to exercise the call, the government itself becomes a secondary source of systemic risk. We apply our model to quarterly data over the period 1974-2013. The model indicates that systemic risk reached unprecedented highs during the financial crisis years 2008- 2009, and that bank size, leverage, and asset risk are key drivers of systemic risk. |
| JEL: | G01 G28 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:16&r=cfn |
| By: | Chang, Andrew C. |
| Abstract: | This paper examines the effect of increased market concentration of the banking industry caused by the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) on the availability of finance for small firms engaged in research and development (R&D). I measure the financing decisions of these small firms using a balanced panel of Small Business Innovation Research (SBIR) applications. Using difference-in-differences, I find IBBEA decreased the supply of finance for small R&D firms. This effect is larger for late adopters of IBBEA, which tended to be states with stronger small banking sectors pre-IBBEA. |
| Keywords: | Banking Deregulation ; IBBEA ; Interstate Bank Branching Deregulation ; Market Concentration ; Research and Development ; Riegle-Neal ; Small Business Innovation Research |
| JEL: | G21 G28 G39 O30 |
| Date: | 2016–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-29&r=cfn |
| By: | Modeste Dayé (CRED, University of Namur); Romain Houssa (CRED, University of Namur); Paul Reding (CRED, University of Namur) |
| Abstract: | This paper presents the salient factors that characterize important aspects of firms’ access to external finance in developing countries. Cross-country data show that micro, small and medium-sized enterprises (MSMEs) face more external financing constraints in Low Income Countries than in their rich counterparts. To explain this fact we distinguish both demand and supply factors underlying external financing constraints. We then argue for a catalytic role that development cooperation can play in alleviating these constraints. We present an illustration based on the policy instruments that have been used by development cooperation. Our particular interest is to document how well the Belgium Development Cooperation support of MSMEs compares to that provided by four other European countries: France, Germany, The Netherlands, and Sweden. We conclude with a discussion on the critical policy issues as regards the effectiveness of these interventions. |
| Keywords: | MSME, external finance, DFI, information asymmetry |
| JEL: | G23 O16 Y10 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:nam:befdwp:6&r=cfn |
| By: | Pierre, Erwan; Villeneuve, Stéphane; Warin, Xavier |
| Abstract: | We consider a singular control problem with regime switching that arises in problems of optimal investment decisions of cash-constrained firms. The value function is proved to be the unique viscosity solution of the associated Hamilton-Jacobi-Bellman equation. Moreover, we give regularity properties of the value function as well as a description of the shape of the control regions. Based on these theoretical results, a numerical deterministic approximation of the related HJB variational inequality is provided. We finally show that this numerical approximation converges to the value function. This allows us to describe the investment and dividend optimal policies. |
| Keywords: | Investment, dividend policy, singular control, viscosity solution, nonlinear PDE |
| JEL: | C61 C62 G35 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:30396&r=cfn |
| By: | Pierre, Erwan; Villeneuve, Stéphane; Warin, Xavier |
| Abstract: | We consider a singular control problem with regime switching that arises in problems of optimal investment decisions of cash-constrained firms. The value function is proved to be the unique viscosity solution of the associated Hamilton-Jacobi-Bellman equation. Moreover, we give regularity properties of the value function as well as a description of the shape of the control regions. Based on these theoretical results, a numerical deterministic approximation of the related HJB variational inequality is provided. We finally show that this numerical approximation converges to the value function. This allows us to describe the investment and dividend optimal policies. |
| Keywords: | Investment, dividend policy, singular control, viscosity solution, nonlinear PDE |
| JEL: | C61 C62 G35 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:30394&r=cfn |