CFR
Working Paper Series 2012
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:
2012
2011
2010
2009
2008
2007
2006
2005
2004
Inside Debt, Bank Default Risk and Performance during the Crisis - PDF
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FDIC Center for Financial Research Working Paper No. 2012-3
Rosalind L. Bennett, Levent Güntay, and Haluk Unal
May 2012
ABSTRACT
In this paper, we examine whether the structure of the chief executive officer's (CEO) compensation package can explain default risk and performance in bank holding companies (BHCs) during the recent credit crisis. Using a sample of 371 BHCs, we show that in 2006 lower holdings of inside debt relative to equity by a CEO has an association with higher default risk and worse performance during the crisis period. We also show that inside debt is a better signal of the BHCs' performance and default risk than inside equity measures. Finally, we provide evidence that supervisors issued favorable ratings to the lead bank in BHCs that paid their CEOs relatively higher inside debt.
Keywords: Executive compensation, financial crises, bank risk
JEL Classifications: G01, G21, G28, G32
On the Real Effects of Bank Bailouts: Micro-Evidence from Japan
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FDIC Center for Financial Research Working Paper No. 2012-02
Mariassunta Giannetti, Andrei Simonov
September 2011
ABSTRACT
Exploiting the Japanese banking crisis of the 1990s as a laboratory, we investigate the
effects of bank bailouts on the supply of credit and on the valuations and the real performance of
banks' clients. Consistent with recent theories, our findings indicate that the size of the capital
injections relative to the banks' initial financial conditions is crucial for the success of bank
bailouts. Capital injections that are sufficiently large to reestablish bank capital requirements
increase the supply of credit and spur investment. In contrast, not only do capital injections that
are too small fail to increase the supply of credit, but they also encourage the evergreening of
non-performing loans and favor investment by unviable "zombie" firms.
Keywords: Recapitalization; merger; banking crisis
JEL Classifications: G21; G34
The Supply-Side Determinants of Loan Contract Strictness - PDF
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FDIC Center for Financial Research Working Paper No. 2012-01
Justin Murfin
November 7, 2011
ABSTRACT
Using a novel measure of contract strictness based on the ex-ante probability of a covenant violation, I
investigate how lender-specific shocks impact the strictness of the loan contract that a borrower receives.
Exploiting between-bank variation in recent portfolio performance, I find evidence that banks write tighter
contracts than their peers after suffering payment defaults to their own loan portfolios, even when defaulting
borrowers are in different industries and geographic regions than the current borrower. The effects of
recent defaults persist after controlling for bank capitalization, although compression in bank equity is also
strongly associated with tighter contracts. The evidence is most consistent with lenders using their default
experience to make inference about their screening ability and adjusting contracts accordingly. Finally,
contract tightening is most pronounced for borrowers who are dependent on a relatively small circle of lenders,
with a one standard deviation increase in lender defaults implying covenant tightening nearly equivalent to
that of a two-notch downgrade in the borrower's own credit rating.
Keywords: Covenants, Control Rights, Bank Loans, Financial Contracting, and Defaults
JEL Codes: G21
