This paper analyzes central bank policies on the monitoring of banks in distress in which liquidity provisions are conditional on performance when a bad shock occurs. A sequential game model is used to analyze two policies: the first one in which the central bank acts with discretion and the second in which the optimal monitoring policy rule is made public. The results show that banks exert less effort and take higher risks with a discretionary monitoring policy. With public information about monitoring rules, there is more central bank monitoring and less need to provide emergency funding. Public information about monitoring resolves the multiple equilibria that arise with discretion in fact, a unique equilibrium emerges in which the probability of a banking crisis is reduced.
{"title":"Monitoring, Liquidity Provisions, and Financial Crises","authors":"G. Mundaca","doi":"10.2139/ssrn.1366151","DOIUrl":"https://doi.org/10.2139/ssrn.1366151","url":null,"abstract":"This paper analyzes central bank policies on the monitoring of banks in distress in which liquidity provisions are conditional on performance when a bad shock occurs. A sequential game model is used to analyze two policies: the first one in which the central bank acts with discretion and the second in which the optimal monitoring policy rule is made public. The results show that banks exert less effort and take higher risks with a discretionary monitoring policy. With public information about monitoring rules, there is more central bank monitoring and less need to provide emergency funding. Public information about monitoring resolves the multiple equilibria that arise with discretion in fact, a unique equilibrium emerges in which the probability of a banking crisis is reduced.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127249501","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}
Insurance companies measure and manage capital across a broad range of diverse business products. Thus there is a need for the aggregation of the losses from the various business lines whose risk distributions vary. Risk dependencies between losses from different business lines have long been recognised in the insurance industry as integral factors driving the insurer's aggregate loss process. However, in the past, there has been limited attempt at adequately modelling the dependence structure to be factored in the aggregation process for capital determination purposes. The current industry standard is to solely use linear correlations to describe the dependence structure. While being computationally convenient and straightforward to understand, linear correlations fail to capture all the dependence structure that exist between losses from multiple business lines. Other more general dependence modelling techniques such as copulas have become popular recently. In this paper, we address the issue of the aggregation of risks using copula models. Copulas can be used to construct joint multivariate distributions of the losses and provide a rather flexible and realistic model of allowing for the dependence structure, while separating the effects of peculiar characteristics of the marginal distributions such as thickness of tails. This modelling structure allows us to explore the impact of dependencies of risks on the total required economic capital. Using numerical illustrations based on Australian general insurance data, the sensitivities of the capital requirement to the choice of the copula and other modelling assumptions are investigated. The related issue of the diversification benefit from operating multiple business lines in the context of aggregation of risks by copulas is also explored. The key conclusion is that there is a large variation in the capital requirement as well as diversification benefit under different copula assumptions. The results of this paper serve as a reminder to actuaries and other industry practitioners of the significance of choosing an appropriate aggregation model for capital purposes.
{"title":"Economic Capital and the Aggregation of Risks Using Copulas","authors":"Andrew Tang, Emiliano A. Valdez","doi":"10.2139/ssrn.1347675","DOIUrl":"https://doi.org/10.2139/ssrn.1347675","url":null,"abstract":"Insurance companies measure and manage capital across a broad range of diverse business products. Thus there is a need for the aggregation of the losses from the various business lines whose risk distributions vary. Risk dependencies between losses from different business lines have long been recognised in the insurance industry as integral factors driving the insurer's aggregate loss process. However, in the past, there has been limited attempt at adequately modelling the dependence structure to be factored in the aggregation process for capital determination purposes. The current industry standard is to solely use linear correlations to describe the dependence structure. While being computationally convenient and straightforward to understand, linear correlations fail to capture all the dependence structure that exist between losses from multiple business lines. Other more general dependence modelling techniques such as copulas have become popular recently. In this paper, we address the issue of the aggregation of risks using copula models. Copulas can be used to construct joint multivariate distributions of the losses and provide a rather flexible and realistic model of allowing for the dependence structure, while separating the effects of peculiar characteristics of the marginal distributions such as thickness of tails. This modelling structure allows us to explore the impact of dependencies of risks on the total required economic capital. Using numerical illustrations based on Australian general insurance data, the sensitivities of the capital requirement to the choice of the copula and other modelling assumptions are investigated. The related issue of the diversification benefit from operating multiple business lines in the context of aggregation of risks by copulas is also explored. The key conclusion is that there is a large variation in the capital requirement as well as diversification benefit under different copula assumptions. The results of this paper serve as a reminder to actuaries and other industry practitioners of the significance of choosing an appropriate aggregation model for capital purposes.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"140 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121953431","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}
The term structure of interest rates gives the relationship between the yield on an investment and the term to maturity of the investment. Since the term structure is typically measured using default-free, continuously-compounded, annualized zero-coupon yields, it is not directly observable from the published coupon bond prices and yields. This paper focuses on how to estimate the default-free term structure of interest rates from bond data using three methods: the bootstrapping method, the McCulloch cubic-spline method, and the Nelson and Siegel method. Nelson and Siegel method is shown to be more robust than the other two methods. The results of this paper can be implemented using user-friendly Excel spreadsheets.
利率的期限结构给出了投资收益和投资到期日之间的关系。由于期限结构通常使用无违约、连续复利、年化零息债券收益率来衡量，因此无法从公布的息票债券价格和收益率中直接观察到。本文主要研究了如何利用自举法、McCulloch三次样条法和Nelson and Siegel法三种方法从债券数据中估计利率的无违约期限结构。Nelson和Siegel方法比其他两种方法具有更强的鲁棒性。本文的结果可以使用用户友好的Excel电子表格来实现。
{"title":"Term Structure Estimation","authors":"Sanjay K. Nawalkha, G. M. Soto","doi":"10.2139/ssrn.1096182","DOIUrl":"https://doi.org/10.2139/ssrn.1096182","url":null,"abstract":"The term structure of interest rates gives the relationship between the yield on an investment and the term to maturity of the investment. Since the term structure is typically measured using default-free, continuously-compounded, annualized zero-coupon yields, it is not directly observable from the published coupon bond prices and yields. This paper focuses on how to estimate the default-free term structure of interest rates from bond data using three methods: the bootstrapping method, the McCulloch cubic-spline method, and the Nelson and Siegel method. Nelson and Siegel method is shown to be more robust than the other two methods. The results of this paper can be implemented using user-friendly Excel spreadsheets.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131026530","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}
Ana Paula Matias Gama, Cesario Mateus, Andreia Teixeira
This paper examines if trade credit is as a substitute and/or a complement to bank credit in order to assess the existence of credit rationing. Using a panel dataset of 468 and 7019 Portuguese and Spanish small medium size enterprises for the period 1998-2006, and controlling for endogeneity problems by using GMM estimators, the results confirm the existence of credit rationing, since the substitution hypothesis is confirmed. This effect is particularly strong for firms that maintaining an exclusive relationship with one bank, which indicate a greater severity of adverse selection problems for those firms. Although the substitution hypothesis is confirmed, the results also indicate that the substitution and complementary hypothesis are not mutually exclusive, especially for a specific group of firms: the younger and smaller firms. In line with the theories that emphasize the informational role of trade credit, due the informative advantage of suppliers, our empirical results confirm that trade credit allow the younger and smaller firms to improve their reputation, as trade credit reveals the private information of the supplier to the bank, in turn, banks can update their beliefs about customer default risk and agree to increase bank credit.
{"title":"Does Trade Credit Facilitate Access to Bank Finance? Empirical Evidence from Portuguese and Spanish Small Medium Size Enterprises","authors":"Ana Paula Matias Gama, Cesario Mateus, Andreia Teixeira","doi":"10.2139/ssrn.1345302","DOIUrl":"https://doi.org/10.2139/ssrn.1345302","url":null,"abstract":"This paper examines if trade credit is as a substitute and/or a complement to bank credit in order to assess the existence of credit rationing. Using a panel dataset of 468 and 7019 Portuguese and Spanish small medium size enterprises for the period 1998-2006, and controlling for endogeneity problems by using GMM estimators, the results confirm the existence of credit rationing, since the substitution hypothesis is confirmed. This effect is particularly strong for firms that maintaining an exclusive relationship with one bank, which indicate a greater severity of adverse selection problems for those firms. Although the substitution hypothesis is confirmed, the results also indicate that the substitution and complementary hypothesis are not mutually exclusive, especially for a specific group of firms: the younger and smaller firms. In line with the theories that emphasize the informational role of trade credit, due the informative advantage of suppliers, our empirical results confirm that trade credit allow the younger and smaller firms to improve their reputation, as trade credit reveals the private information of the supplier to the bank, in turn, banks can update their beliefs about customer default risk and agree to increase bank credit.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"148 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123434022","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}
"Annuities and Accessibility: How the industry can empower consumers to make rational choices" was published on Thursday 16 March 2006. The report calls on the Financial Services Authority, specialist annuity advisers, trustees, and employers to respond to key recommendations that could transform the way consumers in the mass market buy their lifetime annuities from insurance companies.
{"title":"Annuities & Accessibilility: How the Industry Can Empower Consumers to Make Rational Choices","authors":"D. Harrison, Alistair Byrne, D. Blake","doi":"10.2139/SSRN.1344343","DOIUrl":"https://doi.org/10.2139/SSRN.1344343","url":null,"abstract":"\"Annuities and Accessibility: How the industry can empower consumers to make rational choices\" was published on Thursday 16 March 2006. The report calls on the Financial Services Authority, specialist annuity advisers, trustees, and employers to respond to key recommendations that could transform the way consumers in the mass market buy their lifetime annuities from insurance companies.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126828822","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}
Availability of seed, venture capital and bank finance for start ups and SMEs is one of the key factors determining the strength of the innovation system in any country. As India gears up to pass the Protection and Utilization of Public Funded IP Bill, it needs to closely study the availability of such capital to its start ups and SMEs. This article discusses the current situation and trends in relation to availability of bank (credit) and equity finance for SMEs and start ups in India.
{"title":"Financing Start-Ups and SMEs in India - Venture Capital Funds and Bank Finance","authors":"M. Kochupillai","doi":"10.2139/SSRN.1463762","DOIUrl":"https://doi.org/10.2139/SSRN.1463762","url":null,"abstract":"Availability of seed, venture capital and bank finance for start ups and SMEs is one of the key factors determining the strength of the innovation system in any country. As India gears up to pass the Protection and Utilization of Public Funded IP Bill, it needs to closely study the availability of such capital to its start ups and SMEs. This article discusses the current situation and trends in relation to availability of bank (credit) and equity finance for SMEs and start ups in India.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127921679","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}
In this paper, we quantify the degree of confusion in subprime credit crisis. It's well known that huge confusion and anarchy of financial system come to light in the subprime credit crisis. By using concept in traffic network as a source of reference, this paper originally poses financial price of anarchy (PoA), the ratio of two optimums under different financial condition (such as information transparency, mechanism), which can quantify such discrepancy and accordingly be regarded as an index of inefficiency of the financial system. We apply the financial PoA to the subprime loan process and calculate its border of degree of confusion in subprime credit crisis. With the result of PoA, we give some preliminary suggestion about improvement of the financial regulation design to reduce confusion and avoid future crises.
{"title":"The Price of Anarchy in Finance: Quantifying the Degree of Confusion of Subprime Credit Crisis","authors":"Yuan Gao","doi":"10.2139/ssrn.1343524","DOIUrl":"https://doi.org/10.2139/ssrn.1343524","url":null,"abstract":"In this paper, we quantify the degree of confusion in subprime credit crisis. It's well known that huge confusion and anarchy of financial system come to light in the subprime credit crisis. By using concept in traffic network as a source of reference, this paper originally poses financial price of anarchy (PoA), the ratio of two optimums under different financial condition (such as information transparency, mechanism), which can quantify such discrepancy and accordingly be regarded as an index of inefficiency of the financial system. We apply the financial PoA to the subprime loan process and calculate its border of degree of confusion in subprime credit crisis. With the result of PoA, we give some preliminary suggestion about improvement of the financial regulation design to reduce confusion and avoid future crises.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122636675","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 analyzes the evolution of price and non-price competition in the Spanish banking market during the period 1983-2003. Banks produce three outputs and the demand for each of them is modelled as a discrete-choice decision made by buyers. The decision variables of banks are, on the one hand, the interest rates, advertising expenditures and services (number of branches) that determine the consumer valuation of the bank's output and, on the other hand, the number of workers and IT capital, that are the variable inputs used in production. We model the profit maximizing behaviour of the representative bank and jointly estimate the parameters of the demand and supply functions under the profit-maximizing restrictions with data from Spanish banks. We compare the competitive conditions in the banking industry in the first and the second part of the time period and we simulate the predicted equilibrium values of demand, supply, prices and profits under changes of the interbank interest rate and the opportunity cost of capital.
{"title":"Market Power in Discrete-Choice Demand Functions of Banking Services - An Application to Spanish Banks","authors":"Alfredo Martín-Oliver","doi":"10.2139/ssrn.1342250","DOIUrl":"https://doi.org/10.2139/ssrn.1342250","url":null,"abstract":"This paper analyzes the evolution of price and non-price competition in the Spanish banking market during the period 1983-2003. Banks produce three outputs and the demand for each of them is modelled as a discrete-choice decision made by buyers. The decision variables of banks are, on the one hand, the interest rates, advertising expenditures and services (number of branches) that determine the consumer valuation of the bank's output and, on the other hand, the number of workers and IT capital, that are the variable inputs used in production. We model the profit maximizing behaviour of the representative bank and jointly estimate the parameters of the demand and supply functions under the profit-maximizing restrictions with data from Spanish banks. We compare the competitive conditions in the banking industry in the first and the second part of the time period and we simulate the predicted equilibrium values of demand, supply, prices and profits under changes of the interbank interest rate and the opportunity cost of capital.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"26 4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126071724","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}
Factors such as the spread of complex financial instruments, the broadening of available alternatives, have fostered more decisive public intervention in support of transparency between banks and their customers. The effectiveness of the public intervention measures depends on the actual information needs of consumers. The aim of this paper is to assess the extent and characteristics of the information needs, by analyzing the decision-making processes. High financial sacrifice, high perceived risks, considerable differences between the available alternatives, seem to justify an intense search for information. The precision with which information is searched for would be reduced as an effect of financial experience and knowledge, an perceived excessive complexity of the service and stringent time pressure.
{"title":"Transparency Between Banks and Their Customers - Information Needs and Public Intervention","authors":"M. Caratelli","doi":"10.2139/ssrn.1341547","DOIUrl":"https://doi.org/10.2139/ssrn.1341547","url":null,"abstract":"Factors such as the spread of complex financial instruments, the broadening of available alternatives, have fostered more decisive public intervention in support of transparency between banks and their customers. The effectiveness of the public intervention measures depends on the actual information needs of consumers. The aim of this paper is to assess the extent and characteristics of the information needs, by analyzing the decision-making processes. High financial sacrifice, high perceived risks, considerable differences between the available alternatives, seem to justify an intense search for information. The precision with which information is searched for would be reduced as an effect of financial experience and knowledge, an perceived excessive complexity of the service and stringent time pressure.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132156454","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}
The value premium is relatively small for investors with a material fixed-income exposure, such as insurance companies and pension funds, especially when they are downside-risk-averse. Value stocks are less attractive to these investors because they offer a relatively poor hedge against poor bond returns. This result arises for plausible, medium-term evaluation horizons of around one year. Our findings cast doubt on the practical relevance of the value premium for these investors and reiterate the importance of the choice of the relevant test portfolio, risk measure and investment horizon in empirical tests of market portfolio efficiency.
{"title":"Downside Risk Aversion, Fixed Income Exposure, and the Value Premium Puzzle","authors":"Guido Baltussen, T. Post, Pim van Vliet","doi":"10.2139/ssrn.1343018","DOIUrl":"https://doi.org/10.2139/ssrn.1343018","url":null,"abstract":"The value premium is relatively small for investors with a material fixed-income exposure, such as insurance companies and pension funds, especially when they are downside-risk-averse. Value stocks are less attractive to these investors because they offer a relatively poor hedge against poor bond returns. This result arises for plausible, medium-term evaluation horizons of around one year. Our findings cast doubt on the practical relevance of the value premium for these investors and reiterate the importance of the choice of the relevant test portfolio, risk measure and investment horizon in empirical tests of market portfolio efficiency.","PeriodicalId":315176,"journal":{"name":"Banking & Insurance","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128688922","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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