In this study, we examine the impact of the European Central Bank’s (ECB) corporate sector purchase programme (CSPP) on euro area non-financial firms’ cost of borrowing and choice between bank and public debt. Using a large sample of corporate bonds and syndicated loans closed between 2000 and 2019, we find that the CSPP reduced corporate bond spreads significantly, in both announcement and implementation periods. Findings also suggest that the CSPP had a positive spillover effect into the syndicated loan market during the implementation period. Our results show that there is a substitution effect between eligible bonds and equivalent loans, with non-financial firms choosing to use more corporate bonds than syndicated loan deals after the CSPP announcement, and that this effect is more important for non-switchers, those that may have more difficulty in accessing the bond market. Finally, we provide evidence that, when controlling for the CSPP, borrowers that choose corporate bonds are larger, more profitable, and have larger growth opportunity sets; and switchers with high agency costs of debt prefer bank debt.
{"title":"The CSPP impact on non-financial firms’ cost of borrowing and debt choice","authors":"João M. Pinto, Joana Kanda, B. Silva","doi":"10.2139/ssrn.3908463","DOIUrl":"https://doi.org/10.2139/ssrn.3908463","url":null,"abstract":"In this study, we examine the impact of the European Central Bank’s (ECB) corporate sector purchase programme (CSPP) on euro area non-financial firms’ cost of borrowing and choice between bank and public debt. Using a large sample of corporate bonds and syndicated loans closed between 2000 and 2019, we find that the CSPP reduced corporate bond spreads significantly, in both announcement and implementation periods. Findings also suggest that the CSPP had a positive spillover effect into the syndicated loan market during the implementation period. Our results show that there is a substitution effect between eligible bonds and equivalent loans, with non-financial firms choosing to use more corporate bonds than syndicated loan deals after the CSPP announcement, and that this effect is more important for non-switchers, those that may have more difficulty in accessing the bond market. Finally, we provide evidence that, when controlling for the CSPP, borrowers that choose corporate bonds are larger, more profitable, and have larger growth opportunity sets; and switchers with high agency costs of debt prefer bank debt.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130586301","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}
A. Alexandrov, Thomas S. Conkling, Sergei Koulayev
Using a novel combination of mortgage datasets, we analyze the effects of two policy levers that influence the scope of Fannie Mae and Freddie Mac's (GSEs) involvement in the U.S. residential mortgage market. First, we find that small changes in mortgage guarantee fees charged by the GSEs were essentially fully passed through to consumers, with limited effects on mortgage demand. This implies that fee increases are primarily transfers from mortgage consumers to taxpayers while the GSEs remain in federal conservatorship. Second, the data suggest that marginally lowering maximum conforming loan size limits would cause most affected consumers to reduce their loan amounts to the new maximum. Our findings highlight the key role of GSE policy in mortgage availability, while additional survey data indicate that borrowers' shopping behavior and incomplete information may also influence the effects of changes in GSE policy.
{"title":"Changing the Scope of GSE Loan Guarantees: Estimating Effects on Mortgage Pricing and Availability","authors":"A. Alexandrov, Thomas S. Conkling, Sergei Koulayev","doi":"10.2139/ssrn.3904868","DOIUrl":"https://doi.org/10.2139/ssrn.3904868","url":null,"abstract":"Using a novel combination of mortgage datasets, we analyze the effects of two policy levers that influence the scope of Fannie Mae and Freddie Mac's (GSEs) involvement in the U.S. residential mortgage market. First, we find that small changes in mortgage guarantee fees charged by the GSEs were essentially fully passed through to consumers, with limited effects on mortgage demand. This implies that fee increases are primarily transfers from mortgage consumers to taxpayers while the GSEs remain in federal conservatorship. Second, the data suggest that marginally lowering maximum conforming loan size limits would cause most affected consumers to reduce their loan amounts to the new maximum. Our findings highlight the key role of GSE policy in mortgage availability, while additional survey data indicate that borrowers' shopping behavior and incomplete information may also influence the effects of changes in GSE policy.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127144326","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}
Using earnings conference calls, we investigate banks’ views of the Troubled Asset Relief Program (TARP). Most banks in our sample did not plan to lend out the funds and our regressions confirm that they did not. The evidence suggests that TARP’s price diminished its usefulness in expanding credit supply. In contrast, banks more often expressed favorable views of the program in terms of its impact on capital ratios. We find that banks often described loan demand during the sample period as weak, but lack of demand does not explain the anemic loan growth that occurred after the TARP injections.
{"title":"TARP from the Banks’ Perspective: Evidence from Conference Calls","authors":"Jean Helwege, Xin Liu","doi":"10.2139/ssrn.3904981","DOIUrl":"https://doi.org/10.2139/ssrn.3904981","url":null,"abstract":"Using earnings conference calls, we investigate banks’ views of the Troubled Asset Relief Program (TARP). Most banks in our sample did not plan to lend out the funds and our regressions confirm that they did not. The evidence suggests that TARP’s price diminished its usefulness in expanding credit supply. In contrast, banks more often expressed favorable views of the program in terms of its impact on capital ratios. We find that banks often described loan demand during the sample period as weak, but lack of demand does not explain the anemic loan growth that occurred after the TARP injections.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126297598","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}
Giovanni Cardillo, Franco Fiordelisi, Ornella Ricci
Do public supports to banks generate spillover effects and influence the financial stability during banking crises? By using a hand-collected dataset in Europe from 2007 to 2017, we adopt a dynamic difference-in-differences approach and show a spillover effect when the bailout is not associated with conditions: when rescued banks receive a bailout without any restricting condition, their competitors have incentives to worsen the quality of their loan portfolios by leading a reduction in their competitors’ margins. We also run an event study and show that these policies attract negative abnormal returns from investors.
{"title":"Spillover Effects of Bank Bailouts","authors":"Giovanni Cardillo, Franco Fiordelisi, Ornella Ricci","doi":"10.2139/ssrn.3912465","DOIUrl":"https://doi.org/10.2139/ssrn.3912465","url":null,"abstract":"Do public supports to banks generate spillover effects and influence the financial stability during banking crises? By using a hand-collected dataset in Europe from 2007 to 2017, we adopt a dynamic difference-in-differences approach and show a spillover effect when the bailout is not associated with conditions: when rescued banks receive a bailout without any restricting condition, their competitors have incentives to worsen the quality of their loan portfolios by leading a reduction in their competitors’ margins. We also run an event study and show that these policies attract negative abnormal returns from investors.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124828598","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 : 2021-08-10DOI: 10.21511/imfi.18(3).2021.11
Hussein Mohammad Salameh
Insurance firms are known to have unique financial failure characteristics that affect the financial environment of the countries. Therefore, the purpose of this study is to assess the validity of the model used in predicting the financial failures of insurance companies. The model is believed to help in stabilizing the financial environment of the countries by predicting any collapses in the insurance sector. A discriminate regression technique was used to test 28 indicators chosen from 11 financial failure model parameters. 11 parameters of the model are the following: solvency, profitability, operational capabilities, structural soundness, capital expansion capacity, capital adequacy, reinsurance and actuarial issues, management soundness, capital expansion capacity, earnings and profitability, and liquidity. The results of the study proved that 22 variables from 11 parameters were significant; the study also validated the use of the financial failure model as a stable predictor of the financial failure of ASE insurance firms. The stability of the insurance industry is interpreted through the minimum deviation between the real and measured performances. The deviation was present in 3 out of 95 observations, and it affected only 3 firms out of 19, 1 firm out of 3 turned out to be affected by the risker deviation which is the type II error distorted observation. To conclude, the study by mentioning that insurance firms are not threatened by failure or distress and the financial failure model is a valid prediction model.
{"title":"Failure Threats of Insurance Companies: A Case Study of Financial Environments of Jordan","authors":"Hussein Mohammad Salameh","doi":"10.21511/imfi.18(3).2021.11","DOIUrl":"https://doi.org/10.21511/imfi.18(3).2021.11","url":null,"abstract":"Insurance firms are known to have unique financial failure characteristics that affect the financial environment of the countries. Therefore, the purpose of this study is to assess the validity of the model used in predicting the financial failures of insurance companies. The model is believed to help in stabilizing the financial environment of the countries by predicting any collapses in the insurance sector. A discriminate regression technique was used to test 28 indicators chosen from 11 financial failure model parameters. 11 parameters of the model are the following: solvency, profitability, operational capabilities, structural soundness, capital expansion capacity, capital adequacy, reinsurance and actuarial issues, management soundness, capital expansion capacity, earnings and profitability, and liquidity. The results of the study proved that 22 variables from 11 parameters were significant; the study also validated the use of the financial failure model as a stable predictor of the financial failure of ASE insurance firms. The stability of the insurance industry is interpreted through the minimum deviation between the real and measured performances. The deviation was present in 3 out of 95 observations, and it affected only 3 firms out of 19, 1 firm out of 3 turned out to be affected by the risker deviation which is the type II error distorted observation. To conclude, the study by mentioning that insurance firms are not threatened by failure or distress and the financial failure model is a valid prediction model.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115645647","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 asks: why did innovation in securitized mortgages spike before the 2007-09 crisis? We propose that this innovation was driven by increased competition among sponsors who securitized and sold mortgages i.e., these sponsors demanded more innovative mortgages from originators who complied. We use a regulatory change in 2000 that generated plausibly exogenous variation in local sponsor competition, to empirically identify the effect of sponsor competition on loan innovation. By comparing cohorts of loans securitized during the same time, we show that sponsor-induced innovation led to riskier mortgages being packaged into Prime deals during the pre-crisis boom period. This evidence of riskier collateral backing lower-yielding MBS is consistent with the obfuscation motives of sponsors.
{"title":"Competition, Innovation and Crises: Evidence from 20 Million Securitized Loans","authors":"Peter Haslag, K. Srinivasan, A. Thakor","doi":"10.2139/ssrn.3900710","DOIUrl":"https://doi.org/10.2139/ssrn.3900710","url":null,"abstract":"This paper asks: why did innovation in securitized mortgages spike before the 2007-09 crisis? We propose that this innovation was driven by increased competition among sponsors who securitized and sold mortgages i.e., these sponsors demanded more innovative mortgages from originators who complied. We use a regulatory change in 2000 that generated plausibly exogenous variation in local sponsor competition, to empirically identify the effect of sponsor competition on loan innovation. By comparing cohorts of loans securitized during the same time, we show that sponsor-induced innovation led to riskier mortgages being packaged into Prime deals during the pre-crisis boom period. This evidence of riskier collateral backing lower-yielding MBS is consistent with the obfuscation motives of sponsors.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114277513","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 purpose of this tutorial is to discuss the LocalGLMnet architecture which is tailored to the needs of actuaries. The LocalGLMnet is a flexible network architecture for tabular data that allows for variable selection, the study of interactions, gives nice interpretations and allows to rank variable importance. We explore a LocalGLMnet on accident insurance claims data for which we also have short claim descriptions. In a second step we try to understand the predictive power of these claim descriptions by adding a recurrent neural network layer to process the claim texts into tabular data.
{"title":"LocalGLMnet: A Deep Learning Architecture for Actuaries","authors":"Jürg Schelldorfer, Mario V. Wuthrich","doi":"10.2139/ssrn.3900350","DOIUrl":"https://doi.org/10.2139/ssrn.3900350","url":null,"abstract":"The purpose of this tutorial is to discuss the LocalGLMnet architecture which is tailored to the needs of actuaries. The LocalGLMnet is a flexible network architecture for tabular data that allows for variable selection, the study of interactions, gives nice interpretations and allows to rank variable importance. We explore a LocalGLMnet on accident insurance claims data for which we also have short claim descriptions. In a second step we try to understand the predictive power of these claim descriptions by adding a recurrent neural network layer to process the claim texts into tabular data.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126835640","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 examines the role of a related bank in the investment efficiency of business-group firms. We show that a bank is associated with less investment sensitivity to investment opportunities for family group firms, especially in financially dependent industries. There is evidence of inefficient related lending in that the weakened investment sensitivity for family firms is linked to related-bank net-charge-offs. Alternatively, a bank is associated with greater investment sensitivity for family group firms in well-developed banking systems, and for non-family group firms in financially dependent industries. Ownership type and financial development seem pivotal for the role of a related bank.
{"title":"Related Banks and Investment Efficiency within Business Groups","authors":"Craig O. Brown, M. Yavuz","doi":"10.2139/ssrn.3896617","DOIUrl":"https://doi.org/10.2139/ssrn.3896617","url":null,"abstract":"This paper examines the role of a related bank in the investment efficiency of business-group firms. We show that a bank is associated with less investment sensitivity to investment opportunities for family group firms, especially in financially dependent industries. There is evidence of inefficient related lending in that the weakened investment sensitivity for family firms is linked to related-bank net-charge-offs. Alternatively, a bank is associated with greater investment sensitivity for family group firms in well-developed banking systems, and for non-family group firms in financially dependent industries. Ownership type and financial development seem pivotal for the role of a related bank.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116931929","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 US plays a key role in the global financial system. At the same time, its payments system lags behind the global frontier. The primary task of any payment system is to move value in a low cost, convenient, and timely manner. Across all of these dimensions, the US experiences substantial frictions due to legacy infrastructure, market fragmentation, and lack of competition. Low-income households end up bearing the burden of these frictions, and there are stark income and racial differences in both access and participation in the financial system. In the absence of regulatory and technical developments targeted at improving market structure, lowering barriers to entry, and facilitating collaboration between public and private sector efforts in digital payments, these dynamics are unlikely to change.
{"title":"Why is the United States Lagging Behind in Payments?","authors":"Christian Catalini, Andrew Lilley","doi":"10.2139/ssrn.3893937","DOIUrl":"https://doi.org/10.2139/ssrn.3893937","url":null,"abstract":"The US plays a key role in the global financial system. At the same time, its payments system lags behind the global frontier. The primary task of any payment system is to move value in a low cost, convenient, and timely manner. Across all of these dimensions, the US experiences substantial frictions due to legacy infrastructure, market fragmentation, and lack of competition. Low-income households end up bearing the burden of these frictions, and there are stark income and racial differences in both access and participation in the financial system. In the absence of regulatory and technical developments targeted at improving market structure, lowering barriers to entry, and facilitating collaboration between public and private sector efforts in digital payments, these dynamics are unlikely to change.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123992132","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}
We provide an overview of decentralized protocols like Compound and Aave that provide collateralized loans for cryptoasset investors. Compound and Aave are two of the most important application in the decentralized finance ecosystem (DeFi). We obtain publicly available information on rates, supply and borrow activity, and accounts to analyze different elements of the protocols. In particular, we estimate ex-post margins that give a comprehensive account of the cost of financial intermediation. We find that ex-post margins considering all markets are 1% and lower for stablecoin markets. In addition, we estimate quarterly indicators regarding solvency, asset quality, earnings and market risk similar to the ones used in traditional banking. This provides a first look at the use of these metrics and a comparison between the similarities and challenges to our understanding of financial intermediation in these protocols based on tools used for traditional banking.
{"title":"Financial intermediation and risk in decentralized lending protocols","authors":"Carlos Castro-Iragorri, J. Ramírez, S. Vélez","doi":"10.2139/ssrn.3893278","DOIUrl":"https://doi.org/10.2139/ssrn.3893278","url":null,"abstract":"We provide an overview of decentralized protocols like Compound and Aave that provide collateralized loans for cryptoasset investors. Compound and Aave are two of the most important application in the decentralized finance ecosystem (DeFi). We obtain publicly available information on rates, supply and borrow activity, and accounts to analyze different elements of the protocols. In particular, we estimate ex-post margins that give a comprehensive account of the cost of financial intermediation. We find that ex-post margins considering all markets are 1% and lower for stablecoin markets. In addition, we estimate quarterly indicators regarding solvency, asset quality, earnings and market risk similar to the ones used in traditional banking. This provides a first look at the use of these metrics and a comparison between the similarities and challenges to our understanding of financial intermediation in these protocols based on tools used for traditional banking.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120989652","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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