This study analyzes the trends in the financial sector over the past 30 years, and argues that unsupervised financial innovations and lenient government regulation are at the root of the current financial crisis and recession. Combined with a long period of economic expansion during which default rates were stable and low, deregulation and unsupervised financial innovations generated incentives to make risky financial decisions. Those decisions were taken because it was the only way for financial institutions to maintain market share and profitability. Thus, rather than putting the blame on individuals, this paper places it on an economic setup that requires the growing use of Ponzi processes during enduring economic expansion, and on a regulatory system that is unwilling to recognize (on the contrary, it contributes to) the intrinsic instability of market mechanisms. Subprime lending, greed, and speculation are merely aspects of the larger mechanisms at work. It is argued that we need to change the way we approach the regulation of financial institutions and look at what has been done in other sectors of the economy, where regulation and supervision are proactive and carefully implemented in order to guarantee the safety of society. The criterion for regulation and supervision should be neither Wall Street's nor Main Street's interests but rather the interests of the socioeconomic system. The latter requires financial stability if it's to raise, durably, the standard of living of both Wall Street and Main Street. Systemic stability, not profits or homeownership, should be the paramount criterion for financial regulation, since systemic stability is required to maintain the profitability--and ultimately, the existence--of any capitalist economic entity. The role of the government is to continually counter the Ponzi tendencies of market mechanisms, even if they are (temporarily) improving standards of living, and to encourage economic agents to develop safe and reliable financial practices. See also, Working Paper No. 573.1, "Securitization, Deregulation, Economic Stability, and Financial Crisis, Part I: The Evolution of Securitization."
{"title":"Securitization, Deregulation, Economic Stability, And Financial Crisis, Part II - Deregulation, the Financial Crisis, and Policy Implications","authors":"Éric Tymoigne","doi":"10.2139/SSRN.1458413","DOIUrl":"https://doi.org/10.2139/SSRN.1458413","url":null,"abstract":"This study analyzes the trends in the financial sector over the past 30 years, and argues that unsupervised financial innovations and lenient government regulation are at the root of the current financial crisis and recession. Combined with a long period of economic expansion during which default rates were stable and low, deregulation and unsupervised financial innovations generated incentives to make risky financial decisions. Those decisions were taken because it was the only way for financial institutions to maintain market share and profitability. Thus, rather than putting the blame on individuals, this paper places it on an economic setup that requires the growing use of Ponzi processes during enduring economic expansion, and on a regulatory system that is unwilling to recognize (on the contrary, it contributes to) the intrinsic instability of market mechanisms. Subprime lending, greed, and speculation are merely aspects of the larger mechanisms at work. It is argued that we need to change the way we approach the regulation of financial institutions and look at what has been done in other sectors of the economy, where regulation and supervision are proactive and carefully implemented in order to guarantee the safety of society. The criterion for regulation and supervision should be neither Wall Street's nor Main Street's interests but rather the interests of the socioeconomic system. The latter requires financial stability if it's to raise, durably, the standard of living of both Wall Street and Main Street. Systemic stability, not profits or homeownership, should be the paramount criterion for financial regulation, since systemic stability is required to maintain the profitability--and ultimately, the existence--of any capitalist economic entity. The role of the government is to continually counter the Ponzi tendencies of market mechanisms, even if they are (temporarily) improving standards of living, and to encourage economic agents to develop safe and reliable financial practices. See also, Working Paper No. 573.1, \"Securitization, Deregulation, Economic Stability, and Financial Crisis, Part I: The Evolution of Securitization.\"","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121104085","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examined empirically the relationship between Organizational Communication and Corporate Performance with respect to First Bank of Nigeria Plc for thee periods 1972 to 1992. Using Independent t-statistic and comparison of two means for analysis. The paper concluded that re-organization that was undertaken in 1985, significantly improved Organizational Communication within the bank and its performance in terms of bank deposits.
本文以尼日利亚第一银行(First Bank of Nigeria Plc)为研究对象，对1972年至1992年三个时期的组织沟通与公司绩效之间的关系进行了实证研究。采用独立t统计量和比较两种方法进行分析。本文的结论是，1985年进行的重组，显著改善了银行内部的组织沟通及其在银行存款方面的绩效。
{"title":"The Impact of Organizational Communication on Corporate Performance: A Study of First Bank of Nigeria Plc, (1972-1992)","authors":"E. Uwah, Bernard Enya Edu","doi":"10.2139/ssrn.1452718","DOIUrl":"https://doi.org/10.2139/ssrn.1452718","url":null,"abstract":"This paper examined empirically the relationship between Organizational Communication and Corporate Performance with respect to First Bank of Nigeria Plc for thee periods 1972 to 1992. Using Independent t-statistic and comparison of two means for analysis. The paper concluded that re-organization that was undertaken in 1985, significantly improved Organizational Communication within the bank and its performance in terms of bank deposits.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132789123","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
With falling home prices and home foreclosures currently acknowledged as a severe problem in the U.S., more attention needs to be paid to the contributing phenomenon of residential developers undergoing liquidation, which has left behind a trail of partially-completed or abandoned properties. In order to understand this phenomenon, we analyzed 222 residential developers that filed Chapter 11 bankruptcy petitions between November 2007 and December 2008. We find that only a very small proportion of these developers, as compared to previous similar large studies, confirmed a reorganization plan. Most of the cases were dismissed or converted to Chapter 7, culminating in foreclosure or liquidation sales. In the sample, 72.5% of the cases showed at least one instance where a secured lender sought lift-stay motions to pursue foreclosure. Among such cases, orders granting the lift-stay motions were granted 92.2% of the time. Investigating this liquidation preference, we develop explanations based on nuances in the creditor banks' lending functions, risk management and regulatory environment that have not been explored in the prior literature on bankruptcy. We posit that, during a severe recession, banks may prefer liquidation of the developers over reorganization because of a capital shortfall and procyclical regulatory pressure to reduce portfolio concentrations, particularly in real estate lending. This would be inconsistent with theories that secured lenders will choose economically optimal outcomes within a bankruptcy case, as they may choose outcomes that are sub-optimal within a bankruptcy so as to maximize an exogenous urgent need for capital and regulatory compliance. Pursuing this hypothesis, we find that 45.4% of the secured lenders in our sample which are driving low confirmation rates are themselves failed or undercapitalized financial institutions. Furthermore, based on multivariate regression modeling, we find that the effect of a bank’s financial distress on the probability that it will file a lift-stay motion is economically large and statistically significant, after controlling for firm size, capital structure, housing market prices and region. Together, this is strong evidence that the standard theory of creditor behavior in bankruptcy is incomplete without consideration of the economic cycle or banking regulation.
{"title":"Simultaneous Distress of Residential Developers and Their Secured Lenders: An Analysis of Bankruptcy and Bank Regulation","authors":"Sarah P. Woo","doi":"10.2139/ssrn.1440859","DOIUrl":"https://doi.org/10.2139/ssrn.1440859","url":null,"abstract":"With falling home prices and home foreclosures currently acknowledged as a severe problem in the U.S., more attention needs to be paid to the contributing phenomenon of residential developers undergoing liquidation, which has left behind a trail of partially-completed or abandoned properties. In order to understand this phenomenon, we analyzed 222 residential developers that filed Chapter 11 bankruptcy petitions between November 2007 and December 2008. We find that only a very small proportion of these developers, as compared to previous similar large studies, confirmed a reorganization plan. Most of the cases were dismissed or converted to Chapter 7, culminating in foreclosure or liquidation sales. In the sample, 72.5% of the cases showed at least one instance where a secured lender sought lift-stay motions to pursue foreclosure. Among such cases, orders granting the lift-stay motions were granted 92.2% of the time. Investigating this liquidation preference, we develop explanations based on nuances in the creditor banks' lending functions, risk management and regulatory environment that have not been explored in the prior literature on bankruptcy. We posit that, during a severe recession, banks may prefer liquidation of the developers over reorganization because of a capital shortfall and procyclical regulatory pressure to reduce portfolio concentrations, particularly in real estate lending. This would be inconsistent with theories that secured lenders will choose economically optimal outcomes within a bankruptcy case, as they may choose outcomes that are sub-optimal within a bankruptcy so as to maximize an exogenous urgent need for capital and regulatory compliance. Pursuing this hypothesis, we find that 45.4% of the secured lenders in our sample which are driving low confirmation rates are themselves failed or undercapitalized financial institutions. Furthermore, based on multivariate regression modeling, we find that the effect of a bank’s financial distress on the probability that it will file a lift-stay motion is economically large and statistically significant, after controlling for firm size, capital structure, housing market prices and region. Together, this is strong evidence that the standard theory of creditor behavior in bankruptcy is incomplete without consideration of the economic cycle or banking regulation.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121499040","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-08-01DOI: 10.5089/9781451873207.001.A001
Manmohan Singh, J. Aitken
Counterparty risk in the United States stemming from exposures to OTC derivatives payables (after netting) is now concentrated in five banks?Goldman Sachs, JPMorgan, Bank of America, Morgan Stanley and Citi. This note analyzes how such risks have shifted over the past year. We estimate that the adverse impact of counterparty risk on high-grade collateral flows and global liquidity due to decrease in rehypothecation, reduced securities lending, and hoarding of cash by major banks is at least $5 trillion. In order to mitigate counterparty risk, there have been regulatory initiatives to establish central counterparties (CCPs). From a policy perspective, counterparty risk remains large at present and recent experience has shown that OTC derivative positions are not supported by sufficient capital, constituting a major risk for participants in this market.
{"title":"Counterparty Risk, Impact on Collateral Flows and Role for Central Counterparties","authors":"Manmohan Singh, J. Aitken","doi":"10.5089/9781451873207.001.A001","DOIUrl":"https://doi.org/10.5089/9781451873207.001.A001","url":null,"abstract":"Counterparty risk in the United States stemming from exposures to OTC derivatives payables (after netting) is now concentrated in five banks?Goldman Sachs, JPMorgan, Bank of America, Morgan Stanley and Citi. This note analyzes how such risks have shifted over the past year. We estimate that the adverse impact of counterparty risk on high-grade collateral flows and global liquidity due to decrease in rehypothecation, reduced securities lending, and hoarding of cash by major banks is at least $5 trillion. In order to mitigate counterparty risk, there have been regulatory initiatives to establish central counterparties (CCPs). From a policy perspective, counterparty risk remains large at present and recent experience has shown that OTC derivative positions are not supported by sufficient capital, constituting a major risk for participants in this market.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128593495","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-08-01DOI: 10.5089/9781451873276.001.A001
P. Iossifov, M. Khamis
In this paper, we analyze credit growth in Sub-Saharan Africa over the past decade focusing on the post-2002 rapid credit growth in select countries. We develop regression models of the fundamental determinants of bank credit and use them to examine whether they can fully explain developments in rapid credit growth countries. We then argue that rapid credit expansion, whether a manifestation of a credit boom or driven by fundamentals, can give rise to prudential and macroeconomic risks. We detail these risks and discuss the choice of policies to mitigate them. We conclude by evaluating the likely impact of the ongoing global recession and financial crisis on credit growth in Sub-Saharan Africa.
{"title":"Credit Growth in Sub-Saharan Africa - Sources, Risks, and Policy Responses","authors":"P. Iossifov, M. Khamis","doi":"10.5089/9781451873276.001.A001","DOIUrl":"https://doi.org/10.5089/9781451873276.001.A001","url":null,"abstract":"In this paper, we analyze credit growth in Sub-Saharan Africa over the past decade focusing on the post-2002 rapid credit growth in select countries. We develop regression models of the fundamental determinants of bank credit and use them to examine whether they can fully explain developments in rapid credit growth countries. We then argue that rapid credit expansion, whether a manifestation of a credit boom or driven by fundamentals, can give rise to prudential and macroeconomic risks. We detail these risks and discuss the choice of policies to mitigate them. We conclude by evaluating the likely impact of the ongoing global recession and financial crisis on credit growth in Sub-Saharan Africa.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133701293","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper uses the theories of price discrimination and optimal taxation to investigate effects of underwater mortgages on foreclosures and the incentives to earn income, and the degree to which those effects are shaped by public policy. I find that the federal government's means-tested mortgage modification plan creates a massive implicit tax that may be significant even from a macroeconomic perspective. An alternative of modifying mortgages to maximize lender collections would also feature means tests, but with less effort distortion and perhaps fewer foreclosures. The paper also considers the consequences of a public policy that left mortgage modification to lenders, subject to a requirement that modification would not be conditioned on borrower income.
{"title":"Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?","authors":"C. Mulligan","doi":"10.3386/W15281","DOIUrl":"https://doi.org/10.3386/W15281","url":null,"abstract":"This paper uses the theories of price discrimination and optimal taxation to investigate effects of underwater mortgages on foreclosures and the incentives to earn income, and the degree to which those effects are shaped by public policy. I find that the federal government's means-tested mortgage modification plan creates a massive implicit tax that may be significant even from a macroeconomic perspective. An alternative of modifying mortgages to maximize lender collections would also feature means tests, but with less effort distortion and perhaps fewer foreclosures. The paper also considers the consequences of a public policy that left mortgage modification to lenders, subject to a requirement that modification would not be conditioned on borrower income.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114282849","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-08-01DOI: 10.5089/9781451873184.001.A001
Nathan E. Porter, E. Takáts, Tarhan N. Feyzioğlu
What might interest rate liberalization do to intermediation and the cost of capital in China? China's most binding interest rate control is a ceiling on the deposit rate, although lending rates are also regulated. Through case studies and model-based simulations, we find that liberalization will likely result in higher interest rates, discourage marginal investment, improve the effectiveness of intermediation and monetary transmission, and enhance the financial access of underserved sectors. This can occur without any major disruption. International experience suggests, however, that achieving these benefits without unnecessary instability, requires vigilant supervision, governance, and monetary policy, and a flexible policy toolkit.
{"title":"Interest Rate Liberalization in China","authors":"Nathan E. Porter, E. Takáts, Tarhan N. Feyzioğlu","doi":"10.5089/9781451873184.001.A001","DOIUrl":"https://doi.org/10.5089/9781451873184.001.A001","url":null,"abstract":"What might interest rate liberalization do to intermediation and the cost of capital in China? China's most binding interest rate control is a ceiling on the deposit rate, although lending rates are also regulated. Through case studies and model-based simulations, we find that liberalization will likely result in higher interest rates, discourage marginal investment, improve the effectiveness of intermediation and monetary transmission, and enhance the financial access of underserved sectors. This can occur without any major disruption. International experience suggests, however, that achieving these benefits without unnecessary instability, requires vigilant supervision, governance, and monetary policy, and a flexible policy toolkit.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130502036","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-08-01DOI: 10.5089/9781451873177.001.A001
Tarhan N. Feyzioğlu
Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001-07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.
{"title":"Does Good Financial Performance Mean Good Financial Intermediation in China?","authors":"Tarhan N. Feyzioğlu","doi":"10.5089/9781451873177.001.A001","DOIUrl":"https://doi.org/10.5089/9781451873177.001.A001","url":null,"abstract":"Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001-07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123060057","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
During the recent financial crisis, ABX.HE index credit default swaps (CDS) on baskets of mortgage-backed securities were a benchmark widely used by financial institutions to mark their subprime mortgage portfolios to market. However, we find that prices for the AAA ABX.HE index CDS during the crisis were inconsistent with any reasonable assumption for mortgage default rates, and that these price changes are only weakly correlated with observed changes in the credit performance of the underlying loans in the index, casting serious doubt on the suitability of these CDS as valuation benchmarks. We also find that the AAA ABX.HE index CDS price changes are related to short-sale activity for publicly traded investment banks with significant mortgage market exposure. This suggests that capital constraints, limiting the supply of mortgage-bond insurance, may be playing a role here similar to that identified by Froot (2001) in the market for catastrophe insurance. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
{"title":"The Bear's Lair: Indexed Credit Default Swaps and the Subprime Mortgage Crisis","authors":"Richard Stanton, N. Wallace","doi":"10.2139/ssrn.1434686","DOIUrl":"https://doi.org/10.2139/ssrn.1434686","url":null,"abstract":"During the recent financial crisis, ABX.HE index credit default swaps (CDS) on baskets of mortgage-backed securities were a benchmark widely used by financial institutions to mark their subprime mortgage portfolios to market. However, we find that prices for the AAA ABX.HE index CDS during the crisis were inconsistent with any reasonable assumption for mortgage default rates, and that these price changes are only weakly correlated with observed changes in the credit performance of the underlying loans in the index, casting serious doubt on the suitability of these CDS as valuation benchmarks. We also find that the AAA ABX.HE index CDS price changes are related to short-sale activity for publicly traded investment banks with significant mortgage market exposure. This suggests that capital constraints, limiting the supply of mortgage-bond insurance, may be playing a role here similar to that identified by Froot (2001) in the market for catastrophe insurance. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-07-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130400063","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Despite the use of VaR as a means to control risk, using VaR can have the opposite effect. VaR is used by bank and insurance regulators more than any other risk measure. A value-at-risk (VaR) constraint on the probability that future firm equity value will be less than a floor, when the floor is zero, is also a constraint on the probability of ruin. A manager who maximizes his firm's expected equity value subject to a VaR constraint, when the firm is in bad financial health, may pay a premium for financial instruments that increase his firm's volatility and does the opposite when the firm is in good financial healths, so it's use may increase banks' volatility in bad economic conditions. Hence the use of VaR may increase the instability of the global banking network when the banking system when it is more vulnerable. This paper examines the cases where risks are multivariate normal or lognormal.
{"title":"VAR, Probability-of-Ruin and their Consequences for Normal or Lognormal Risks","authors":"Larry Eisenberg","doi":"10.2139/ssrn.1433384","DOIUrl":"https://doi.org/10.2139/ssrn.1433384","url":null,"abstract":"Despite the use of VaR as a means to control risk, using VaR can have the opposite effect. VaR is used by bank and insurance regulators more than any other risk measure. A value-at-risk (VaR) constraint on the probability that future firm equity value will be less than a floor, when the floor is zero, is also a constraint on the probability of ruin. A manager who maximizes his firm's expected equity value subject to a VaR constraint, when the firm is in bad financial health, may pay a premium for financial instruments that increase his firm's volatility and does the opposite when the firm is in good financial healths, so it's use may increase banks' volatility in bad economic conditions. Hence the use of VaR may increase the instability of the global banking network when the banking system when it is more vulnerable. This paper examines the cases where risks are multivariate normal or lognormal.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-07-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128508248","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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