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CFR
Working Paper Series 2009
The CFR sponsors original research on issues associated with deposit insurance, banking performance, risk measurement and management, corporate finance, and financial policy and regulation. The results of CFR-sponsored research, FDIC staff research, and other invited papers on these CFR research lines appear in the CFR Working Paper Series.
Working Paper Series:
2009
2008
2007
2006
2005
2004
Bank Failures and the Cost of Systemic Risk: Evidence from 1900-1930
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FDIC Center for Financial Research Working Paper No. 2009-6
Paul Kupiec and Carlos Ramirez
April 2009
ABSTRACT
This paper investigates the effect of bank failures on economic growth using data from 1900 to 1930, a period that predates active government stabilization policies and includes periods of banking system distress that are not coincident with recessions. Using both VAR and a difference-in-difference methodology that exploits the reactions of the New York and Connecticut economies to the Panic of 1907, we estimate the effect of bank failures on economic activity. The results indicate that bank failures reduce subsequent economic growth. Over this period, a 0.14 percent (1 standard deviation) increase from the mean value of the liabilities of the failed depository institutions results in a reduction of 17 percentage points in the growth rate of industrial production and a 4 percentage point decline in real GNP growth. The reductions occur within three quarters of the initial bank failure shock and can be interpreted as an important component of the cost of systemic risk in the banking sector.
Keywords: bank failures; systemic risk; financial accelerator, vector auto regressions; Panic of 1907; non-bank commercial failures
JEL
Classification: N11, N21, E44, E32
Implied
Recovery - PDF 249k
(PDF Help)
FDIC Center for Financial Research Working Paper No. 2009-05
Sanjiv R. Das and Paul Hanouna
November 2008
ABSTRACT
In the absence of forward-looking models for recovery rates, market participants
tend to use exogenously assumed constant recovery rates in pricing models. We de-
velop a exible jump-to-default model that uses observables: the stock price and stock
volatility in conjunction with credit spreads to identify implied, endogenous, dynamic
functions of the recovery rate and default probability. The model in this paper is par-
simonious and requires the calibration of only three parameters, enabling the identi_-
cation of the risk-neutral term structures of forward default probabilities and recovery
rates. Empirical application of the model shows that it is consistent with stylized fea-
tures of recovery rates in the literature. The model is exible, i.e., it may be used with
di_erent state variables, alternate recovery functional forms, and calibrated to multi-
ple debt tranches of the same issuer. The model is robust, i.e., evidences parameter
stability over time, is stable to changes in inputs, and provides similar recovery term
structures for di_erent functional speci_cations. Given that the model is easy to un-
derstand and calibrate, it may be used to further the development of credit derivatives
indexed to recovery rates, such as recovery swaps and digital default swaps, as well as
provide recovery rate inputs for the implementation of Basel II.
Keywords:
JEL
Classification: G0, G1.
Can Mandated Financial Counseling Improve Mortgage Decision-Making? Evidence from a Natural Experiment - PDF 946k
(PDF Help)
FDIC
Center for Financial Research Working Paper No. 2009-04
Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Douglas D. Evanoff
ABSTRACT
We explore the effects of mandated financial counseling on terms and availability of mortgage credit. Our
study is based on a natural experiment in which the State of Illinois required ‘high-risk’ mortgage
applicants acquiring or refinancing properties in 10 specific zip codes to submit loan offers from statelicensed
lenders to third-party review. We document that as a consequence of the legislation both the
supply of and demand for credit declined, and marginal borrowers were pushed out of the market. Statelicensed
lenders disproportionately exited the affected area and sharply increased their loan application
rejection rates. Although home sales activity dropped off during the treatment period, we fail to detect a
material impact on transaction prices. Controlling for salient characteristics of remaining borrowers and
lenders, we find that mortgages originated during the legislation period were substantially less likely to
default, and that their terms improved somewhat. We attribute these improvements both to actions of
lenders responding to external review and counseled borrowers renegotiating loan terms. We also find
that some borrowers eschewed counseling by choosing less risky products. On net, the adverse effects of
reduced market activity appear to have been partially offset by the better terms and performance of loans
obtained by the counseled borrowers.
Keywords:
Financial education, Financial literacy, Subprime crisis, Household finance
JEL
classification: D14, D18, L85, R21
Pay for Performance?CEO Compensation and Acquirer Returns in BHCs - PDF 905k
(PDF Help)
FDIC
Center for Financial Research Working Paper No. 2009-03
Kristina Minnick, Haluk Unal, Liu Yang
December 2008
ABSTRACT
We examine the impact of managerial incentives on acquisitions in the banking industry. We find that banks whose CEOs have higher pay-for-performance sensitivity (PPS) are less likely to engage in value- reducing acquisitions. Conditional on engaging in acquisitions, those higher-PPS banks have significantly better announcement returns: on average these banks outperform the acquires in the lower-PPS group by 1.2% in a three-day window around the announcement. The positive market reaction can be rationalized by long-term performance. Following acquisitions, banks with high PPS experience greater improvement in their operating performance as measured by ROA.
Keywords:
Keywords: Pay-for-Performance Sensitivity, CEO Compensation, Acquirer Returns, Bank Mergers
JEL classification: G34, G21
Evidence of Improved
Monitoring and Insolvency Resolution after FDICIA - PDF 1673k (PDF
Help)
FDIC
Center for Financial Research Working Paper No. 2009- 02
Edward J. Kane, Rosalind L. Bennett, Robert C. Oshinsky
December 8, 2008
Abstract
To realign supervisory and market incentives, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) adjusts two principal features of federal banking
supervision. First, it requires regulators to examine insured institutions more frequently and
makes them accountable for exercising their supervisory powers. Second, the Act empowers
regulators to wind up the affairs of troubled institutions before their accounting net worth is
exhausted.
Using 1984–2003 data on the outcome of individual bank examinations, this paper
documents that the frequency of rating transitions and the character of insolvency resolutions
have changed substantially under FDICIA. The average interval between bank examinations has
dropped for low-rated banks in the post-FDICIA era. Examiner upgrades have become
significantly more likely in the post-FDICIA era even after controlling for the state of the
economy. However, in recessions managers are slower to correct problems that examiners
identify. As a result, during downturns upgrades become less likely and absorptions become
more likely.
Giving the FDIC authority to wind up troubled banks before their tangible net worth is
exhausted has reduced the role of government in the insolvency-resolution process. Consistent
with an hypothesis that FDICIA has improved incentives, our data show that a markedly larger
percentage of troubled banks now search for a merger partner rather than trying to stay in
business until the regulators force them to fail. This greater reliance on quasi-voluntary mergers
is observable both within and across various stages of the business cycle. These findings suggest
that supervisory interventions became more effective at banks during the post-FDICIA era.
JEL Classifications: G20, G28, G21
Keywords: FDICIA, bank supervision, bank monitoring
The
$700 Billion Bailout: A Public-Choice Interpretation 691K (Word
Help)
FDIC
Center for Financial Research Working Paper No. 2009-01
Carlos D. Ramírez
January 2009
Abstract
On September 29, 2008, the House of Representatives voted to reject HR 3997
(known as the original $700 Billion Bailout Bill). On October 3, the
House reversed course and voted to approve the Emergency Economic Stabilization
Act of 2008 (EESA). This paper applies a political voting model to these
two House votes—the rejection of the bill on September 29 and its passage
on October 3. Both economic conditions and PAC contributions matter in
explaining the two votes, but their effect is attenuated by legislator’s
power. PAC contributions from the American Bankers Association appear
to matter for explaining the legislators who switched. The role of ideology
in explaining either the September 29 or October 3 vote is limited.
Keywords:
JEL
Classification:
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